<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1997
REGISTRATION NO. 333-36377
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FIDELITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-1416811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3490 PIEDMONT ROAD, ATLANTA GEORGIA 30305, (404) 240-1504
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
M. HOWARD GRIFFITH, JR.
CHIEF FINANCIAL OFFICER
FIDELITY NATIONAL CORPORATION
3490 PIEDMONT ROAD
SUITE 1550
ATLANTA, GEORGIA 30305
(404) 639-6921
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<C> <C>
UGO F. IPPOLITO, ESQ. ALAN J. PRINCE, ESQ.
GLASS, MCCULLOUGH, SHERRILL & HARROLD, LLP KING & SPALDING
1409 PEACHTREE STREET, N.E. 191 PEACHTREE STREET
ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30303
(404) 885-6705 (404) 572-5100
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this
Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1993 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED NOVEMBER 5, 1997
PROSPECTUS
3,000,000 SHARES
[LOGO]
FIDELITY NATIONAL CORPORATION
COMMON STOCK
------------------------
All of the 3,000,000 shares of Common Stock offered hereby (the "Offering")
are being issued and sold by Fidelity National Corporation, a Georgia
corporation (the "Company" or "FNC"). The Common Stock is listed on the Nasdaq
National Market under the symbol "LION." It is currently estimated that the
offering price will be between $7 and $8 per share. On November 4, 1997, the
last reported sale price of the Common Stock on the Nasdaq National Market was
$9 1/4 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSIT ACCOUNTS OR
OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................... $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $
==================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $275,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock on the same terms and
conditions as the securities offered hereby, solely to cover
over-allotments, if any. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as, and if delivered to and accepted by them, and subject
to certain other conditions including the right of the Underwriters to withdraw,
cancel, modify or reject any order in whole or in part. It is expected that
delivery of the shares will be made on or about , 1997 at the
offices of Raymond James & Associates, Inc., St. Petersburg, Florida.
------------------------
RAYMOND JAMES & ASSOCIATES, INC.
The date of this Prospectus is , 1997
<PAGE> 3
[MAP OF THE ATLANTA METROPOLITAN AREA SHOWING THE
LOCATION OF EACH OF THE 16 LOCATIONS OF THE COMPANY]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT AND STABILIZING TRANSACTIONS, THE PURCHASE OF
SUCH SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus or incorporated by reference in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes no exercise of the Underwriters' overallotment option. Investors should
carefully consider the information set forth under the heading "Risk Factors."
Per share data has been adjusted for the 10% stock dividend to shareholders of
record on September 28, 1995. As used herein, the term the "Company" refers to
Fidelity National Corporation or Fidelity National Corporation and its
subsidiaries.
THE COMPANY
Fidelity National Corporation is a bank holding company headquartered in
Atlanta, Georgia. The Company, which commenced operations as Fidelity National
Bank ("FNB" or the "Bank") in 1973, provides traditional deposit, lending,
mortgage, securities brokerage, international trade services and trust products
and services to its commercial and retail customers through its subsidiaries.
FNB is a full-service banking operation; Fidelity National Mortgage Corporation
("FNMC") is a full-service residential mortgage banking operation; and Fidelity
National Capital Investors, Inc. ("FNCI") is a securities brokerage operation.
The Company currently conducts full-service banking and residential mortgage
lending businesses through 16 locations in the metropolitan Atlanta area. The
Company conducts indirect automobile lending (the purchase of consumer
automobile installment sales contracts from automobile dealers), residential
mortgage lending and residential construction lending through certain of its
Atlanta offices and its Jacksonville, Florida location. Indirect automobile
lending is also conducted at the Tampa, Florida location which was opened in
1995. At September 30, 1997, the Company had total assets of $605 million, total
loans of $459 million, total deposits of $547 million and shareholders' equity
of $28 million.
From 1992 to 1995, the Company experienced substantial growth. Total assets
increased from $238 million at December 31, 1991 to $525 million at December 31,
1995, a four-year compound annual growth rate of 21.9%. Total assets increased
to $605 million at December 31, 1996, an increase of 15.2% from December 31,
1995. Net income increased from $1.6 million for the year ended December 31,
1991 to $4.6 million for the year ended December 31, 1995, a four-year compound
annual growth rate of 30.1%. For the year ended December 31, 1996, the Company
had a net loss of $5.7 million. The major factor contributing to the Company's
1996 loss was higher loan loss provisions on credit cards resulting from higher
delinquencies and charge-offs during the third and fourth quarters of 1996.
Management has undertaken several initiatives to improve the profitability of
the Company, especially its credit card lending operations. Net income for the
nine months ended September 30, 1997 was $1.2 million.
As a result of the 1996 loss and FNB's significant growth, the Company and
the Bank did not meet minimum capital levels established for an adequately
capitalized bank holding company and bank in accordance with regulations
promulgated by the Federal Reserve Bank ("FRB") and the Office of the
Comptroller of the Currency ("OCC") at December 31, 1996. On November 14, 1996,
the Bank and the OCC entered into an agreement ("OCC Agreement") pursuant to
which the Bank was required to achieve capital levels of at least a well
capitalized bank by April 30, 1997 and is required to achieve capital levels in
excess of a well capitalized bank by November 30, 1997. The Bank did not meet
the capital levels required by the OCC Agreement as of April 30, 1997. The
Company and the Bank have restored the capital levels to adequately capitalized
as defined in the regulations through the issuance by the Company of $4.7
million of Non-Cumulative 8% Convertible Preferred Stock, Series A ("Preferred
Stock") in June 1997. The net proceeds were invested by the Company in 8%
preferred stock of the Bank. The Company estimates that approximately $13
million in additional equity is currently required by the Bank to achieve the
capital levels required to meet the November 30, 1997 requirements of the OCC
Agreement. The purpose of the Offering is to raise additional capital to improve
the Bank's capital ratios in order to meet the capital requirements of the OCC
Agreement and to grow the businesses of the Company. See "Regulatory
Matters -- OCC Agreement."
The Company was incorporated in Georgia in 1979 and at that time acquired
all of the common stock of FNB, which was organized as a national bank in 1973.
In August 1995, the Company changed its name from Fidelity Southern Corporation
to Fidelity National Corporation. The Company's principal offices are located at
3490 Piedmont Road, Suite 1550, Atlanta, Georgia 30305, and its telephone number
is (404) 240-1504.
3
<PAGE> 5
STRATEGY
The Company's long-term strategy is to (i) continue to grow its
full-service banking operations, primarily in the metropolitan Atlanta area, by
fully utilizing its current branch capacity and by opening additional bank
branches; (ii) capitalize on the consolidating metropolitan Atlanta banking
market by increasing commercial and real estate loans and other banking
services, primarily to small and medium sized companies; (iii) strengthen its
credit card lending operations and processes; (iv) enhance operating
efficiencies; and (v) further strengthen the Company's senior management team.
Continue to grow banking operations. The Company is focused on growing its
full-service banking operations by leveraging its current branch capacity
resulting from the Company's recent opening of four branch offices and the move
of one branch into a significantly improved facility. These branches are not yet
mature and they continue to experience steady deposit and loan growth. In
addition, the Company has acquired and equipped three additional branches, which
it intends to open following the Offering subject to OCC approval. The Company
is currently incurring the fixed costs associated with these new and unopened
branches. Upon successful capitalization, the Company expects to be able to grow
the deposits of these new and unopened branches, thereby improving the return
realized on the Bank's operating cost structure. During the past twelve months,
the Company added six automated teller machines ("ATMs"), bringing the total
number of ATMs in its network to 27 at September 30, 1997. The Company expects
to add ten additional ATMs during the next twelve months.
Capitalize on the consolidating metropolitan Atlanta banking market. The
Company is positioning itself as the financial institution alternative to the
larger commercial banks headquartered outside of metropolitan Atlanta that have
been acquiring Atlanta commercial banks and thrifts. Management seeks to
capitalize on markets which it believes are being underserved as a result of
these acquisitions by increasing commercial loans and other banking services,
primarily to small and medium sized companies. The Company believes there is
still value to be added by providing the opportunity for greater personalized
banking relationships than exist with the larger commercial banks in its target
markets and will continue to emphasize personalized service by a locally
headquartered financial institution in order to differentiate itself from its
larger competitors. FNB's asset size of $605 million at September 30, 1997 and
legal lending limit per borrower of approximately $7.5 million position it to
work more effectively with middle-market customers than many smaller community
banks in the Atlanta metropolitan area.
Strengthen credit card lending activities. Management of the Company has
recently undertaken several initiatives to improve and return to profitability
its credit card lending activities. The Company has discontinued the issuance of
preapproved credit cards, increased the rates and fees on a significant portion
of its credit card accounts to appropriately reflect the risk levels and
strengthened the collection and recovery processes on credit card accounts. The
Company continues to implement new procedures and technologies to enhance its
ability to monitor and manage the exposures inherent in its credit card
portfolio. The Company currently does not plan to issue new affinity credit
cards or aggressively market new credit cards. As a result, the Company expects
its credit card loans to diminish as a percentage of its total loan portfolio.
Over time, and in conjunction with an increase in commercial loans and retained
indirect automobile loans, the reduction in credit card loans is expected to
result in an increase in the percentage of secured loans in the Company's loan
portfolio.
Enhance operating efficiencies. During the fourth quarter of 1996, the
Company consolidated its data processing, deposit and loan operations and its
collection and consumer product operations into a centrally located office. In
connection with this consolidation, the Company has upgraded and is continuing
to upgrade its software and management information systems designed to improve
marketing and operating efficiencies. Specifically, the Company has implemented
automated dialers for marketing products and collection, telephone banking
software, delinquency analysis software, collection software and enhanced
accounting systems software. The Company continues to analyze its infrastructure
and technological developments in the banking industry for opportunities to
improve the efficiency of its operations.
Further Strengthen Senior Management. On September 15, 1997, FNB hired
Larry D. Peterson as its President and Chief Executive Officer. In addition,
during the past two years the Company has hired a senior
4
<PAGE> 6
consumer credit officer, a manager of credit cards and a manager of indirect
automobile lending. The Company intends to continue to strengthen senior
management. See "Management."
THE OFFERING
Common Stock Offered Hereby..... 3,000,000 shares
Common Stock to be Outstanding
after the Offering(1)......... 7,662,590 shares
Use of Proceeds................. To provide funds to the Company to invest in
preferred and common stock of FNB so that FNB
will meet the capital levels set forth in the
OCC Agreement and for general corporate
purposes. See "Risk Factors," "Regulatory
Matters" and "Use of Proceeds."
Nasdaq National Market Symbol... LION
- ---------------
(1) Does not include (i) 500,000 shares of Common Stock reserved for issuance
pursuant to stock options under the Company's 1997 Stock Option Plan
("Plan"), of which 250,000 shares of Common Stock are reserved for issuance
pursuant to outstanding stock options; (ii) 855,351 shares of Common Stock
reserved for issuance upon the conversion of the Preferred Stock; and (iii)
150,000 shares of Common Stock reserved for issuance upon the exercise of
the Representative's Warrants. See "Underwriting."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1)
Interest income................................... $ 35,887 $ 48,080 $ 59,800 $ 44,325 $ 46,809
Interest expense.................................. 11,765 18,871 26,727 19,764 19,600
Net interest income............................... 24,122 29,209 33,073 24,561 27,209
Provision for loan losses......................... 4,125 8,090 25,127 11,100 11,670
Noninterest income, including securities gains.... 8,769 11,679 18,305 12,612 12,988
Securities gains, net (realized).................. 124 853 604 361 -
Noninterest expense............................... 22,375 25,583 35,489 26,147 26,734
Net income (loss)................................. 4,299 4,649 (5,742) 4 1,188
Dividends paid.................................... 628 644 693 518 -
PER SHARE DATA
Net income (loss)................................. .93 1.01 (1.24) .00 .23
Book value........................................ 4.65 6.02 4.53 5.65 4.74
Dividends paid.................................... .14 .14 .15 .0750 -
Dividend payout ratio............................. 14.62% 13.85% * - -
Average shares outstanding........................ 4,608,383 4,608,383 4,619,530 4,609,026 4,658,284
PERFORMANCE RATIOS
Return on average assets.......................... 1.15% 1.01% * .00% .26%
Return on average equity.......................... 20.40 18.91 * .02 6.61
Net interest margin............................... 6.95 6.87 5.97 6.01 6.62
Efficiency ratio.................................. 68.03 62.57 69.07 70.34 69.58
ASSET QUALITY RATIOS
Net charge-offs to average loans.................. 1.54% 2.37% 3.00% 2.82% 3.80%
Allowance to period-end loans..................... 1.31 1.54 3.85 1.53 3.52
Nonperforming assets to total loans and OREO...... .87 1.24 .82 .93 .84
Allowance to nonperforming loans.................. 3.65x 1.80x 5.62x 2.33x 9.92x
Allowance to nonperforming assets................. 1.50 1.25 4.71 1.64 4.18
CAPITAL RATIOS
Leverage.......................................... 5.51% 5.42% 2.67% 3.51% 4.05%
Risk-based capital
Tier 1.......................................... 6.49 6.15 3.40 4.59 4.89
Total........................................... 8.25 10.47 6.38 8.13 8.60
Average equity to average assets.................. 5.64 5.35 4.50 4.56 4.05
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA
Assets...................................................... $605,435 $627,435
Total loans, net............................................ 459,053 459,053
Total deposits.............................................. 547,020 547,020
Long-term debt.............................................. 15,800 15,800
Shareholders' equity........................................ 28,241 50,241
Realized shareholders' equity............................... 27,997 49,997
</TABLE>
- ---------------
* Given the Company's net loss for the year ended December 31, 1996, this data
is not meaningful.
(1) Beginning January 1, 1996 and consistent with industry practice, the Company
commenced reversing current period accrued interest and rate-related income
on credit card charge-offs to interest income. This amount totaled $1.4
million and $1.9 million for the nine months ended September 30, 1996 and
1997, respectively, and $2.0 million for the year ended December 31, 1996.
Such amounts were previously charged against the allowance for loan losses.
Such reclassifications have not been made in prior period financial
statements.
(2) As adjusted balance sheet data gives effect to the sale of 3,000,000 shares
of the Common Stock offered hereby (assuming an offering price of $8.00 per
share and the application of the net proceeds as described herein).
6
<PAGE> 8
RISK FACTORS
Information contained or incorporated by reference in this Prospectus
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended. These statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "intention" or "continue" or the negative
thereof or other comparable terminology. The following matters and certain other
factors noted throughout this Prospectus and any documents incorporated by
reference herein or therein and exhibits hereto and thereto constitute
cautionary statements that identify important factors with respect to any such
forward-looking statements, including certain risks and uncertainties, that
could cause the Company's actual results to differ materially from those
contained in any such forward-looking statements.
An investment in the Company involves a high degree of risk. In addition to
the other information contained in this Prospectus, the following risk factors
should be considered carefully in evaluating an investment in the Common Stock
offered hereby.
RESTRICTIONS UNDER REGULATORY AGREEMENTS; CAPITAL ADEQUACY
The OCC Agreement requires the Bank to maintain capital levels of at least
a well capitalized bank commencing April 30, 1997 and in excess of a well
capitalized bank commencing November 30, 1997. The Bank currently is adequately
capitalized as defined in the OCC's regulations but has not met the capital
levels required under the OCC Agreement as of April 30, 1997. Under the OCC
Agreement, the Bank may not declare a dividend (i) on its preferred stock owned
by the Company unless the Bank is adequately capitalized as defined in the
regulations and (ii) on its common stock owned by the Company unless the Bank
meets the capital levels required under the OCC Agreement and such dividend is
approved by the OCC. The failure of the Bank to maintain the capital levels set
forth in the OCC Agreement or its breach of any other provision thereof may
result in civil fines and other regulatory supervisory actions which may have a
material adverse effect on the results of operations and financial condition of
the Company. Such regulatory supervisory action may include growth limitations,
prohibitions on dividend payments, increased supervisory monitoring, limitations
on executive compensation, restrictions on deposit interest rates, mandatory
merger or sale, and regulatory seizure. No civil fines have been levied and no
such regulatory supervisory actions have been taken.
The Company intends to invest at least $17 million of the net proceeds of
the Offering in preferred and common stock of the Bank. Upon the application of
such proceeds, the Bank expects to exceed the capital levels required to be met
on November 30, 1997 under the OCC Agreement. The application of the proceeds
from the Offering will enable the Bank to meet the capital requirements imposed
by the OCC Agreement. However, given the risk profile of the Bank's loan
portfolio, there can be no assurance that the Bank will be able to (i) maintain
thereafter the higher capital levels required under the OCC Agreement or (ii)
obtain the written approval of the OCC for the payment of dividends on its
common stock even if it meets the required higher capital levels. Failure of the
Bank to pay the dividends on its preferred and common stock to the Company, in
whole or in part, will materially adversely affect the Company's ability to pay
interest on its 8.5% Subordinated Notes ("Notes") and other subordinated debt
and dividends on its Preferred Stock and Common Stock. Failure of the Company to
pay interest on the Notes or a dividend on the Preferred Stock will restrict the
Company's right to pay a dividend on the Common Stock. There can be no assurance
that FNB will be able to pay any dividend on its capital stock to the Company in
the future or pay dividends in amounts sufficient for the Company to pay
interest in full on the Notes and to pay dividends on the Preferred Stock and
Common Stock. See "Regulatory Matters -- OCC Agreement," "Dividend Policy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Capital Stock."
In addition, on February 13, 1997, the Board of Directors of the Company
adopted certain resolutions ("FRB Agreement") at the direction of the Federal
Reserve Board ("FRB"). The FRB Agreement prohibits the FNC from incurring
additional debt or declaring dividends on the Common Stock without the prior
approval of the FRB. The failure to obtain the approval of the FRB will limit
FNC's ability to access
7
<PAGE> 9
funds, including funds to be loaned to the Bank to assist it in meeting its
liquidity needs. See "Regulatory Matters -- FRB Agreement."
GOING CONCERN QUALIFICATIONS IN REPORT OF INDEPENDENT AUDITORS
The independent auditors' report on the Company's Consolidated Financial
Statements for the year ended December 31, 1996 includes an explanatory
paragraph indicating that the Company's and the Bank's ability to continue as a
going concern is dependent upon its ability to increase the capital ratios of
the Bank in accordance with the OCC Agreement. Failure to increase its capital
ratios could subject the Bank to regulatory sanctions that may include
restrictions on operations and growth, mandatory asset dispositions and seizure.
The purpose of the Offering is to raise capital so that the Bank will meet the
capital requirements of the OCC Agreement. There can be no assurance that the
Company and the Bank will be able to increase or maintain the Bank's capital
ratios in accordance with the OCC Agreement. The consolidated financial
statements do not include the adjustments, if any, that might have been required
had the outcome of the above-mentioned uncertainties been known, or any
adjustments relating to the recoverability of recorded asset amounts or the
amount of liabilities that may be necessary should the Company be unable to
continue as a going concern.
LIQUIDITY
Because of the losses the Company experienced in 1996, the Bank's liquidity
position deteriorated. Liquidity is the ability of the Bank to meet anticipated
customer demands for funds under credit commitments and deposit withdrawals at a
reasonable cost and on a timely basis. The Company's and the Bank's liquidity
sources are limited. In addition, pursuant to the FRB Agreement, the Company
cannot incur any additional indebtedness without the approval of the FRB. Thus,
the Company will not be in a position to borrow funds and loan the funds to or
invest the funds in the Bank without the prior approval of the FRB. Failure to
maintain a sufficient level of liquidity can limit loan growth and adversely
affect the Bank's ability to meet significant withdrawal demands. Management of
the Bank meets liquidity needs by managing loan growth production and through
the sale of indirect automobile loans and through lines of credit with the FRB,
the Federal Home Loan Bank and federal fund lines with other banks. Failure of
management to accurately forecast liquidity needs or to properly assess capital
needs could have a material adverse effect on the Bank's and the Company's
financial position.
RISK OF FUTURE LOSSES
The Company reported a net loss of $5.7 million or $1.24 per share for the
year ended December 31, 1996. The major factor contributing to the losses in the
third and fourth quarters of 1996 was the higher loan loss provision on credit
cards resulting from higher delinquencies and charge-offs. For 1996, the
provision for loan losses was $25.1 million compared to $8.1 million for 1995.
In 1996, the Company also had higher expenses attributable to corporate
expansion and consolidation of its back office operations. While the Company has
taken several actions to return the credit card business to profitability, there
can be no assurance that credit card losses will not continue at current levels
or higher levels. In 1996, the Bank implemented strategies to increase its
capital, which included the sale of certain mortgage servicing rights, to
generate short-term income. These strategies could adversely affect future
earnings. Although the Company reported a profit for the first six months of
1997, there can be no assurance that the Company will continue to be profitable.
CREDIT CARD LOAN LOSS TRENDS; SEASONING RISKS OF CREDIT CARD PORTFOLIO
During 1996 and 1997, the Company experienced higher than historical levels
of loan losses on its credit card loans. Total net charge-offs in the credit
card loan portfolio were $12.6 million for the year ended December 31, 1996 and
$10.9 million for the nine months ended September 30, 1997, compared to $6.9
million for the year ended December 31, 1995 and $8.6 million for the nine
months ended September 30, 1996. The net charge-off ratio for the credit card
portfolio was 8.35% for the year ended December 31, 1996 and 10.97% for the nine
months ended September 30, 1997 on an annualized basis, compared to 5.82% and
7.83%, respectively, during 1995 and the nine months ended September 30, 1996 on
an annualized basis.
8
<PAGE> 10
There can be no assurance that future credit card losses will not continue at
higher than historical levels in the future. Continued credit card loan losses
exceeding the Company's historical rate could have a material adverse affect on
the results of operations and financial condition of the Company and its ability
to comply with the capital requirements of the OCC Agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Provision for Loan Losses."
The delinquency and loss levels of a credit card portfolio do not stabilize
until many months after its origination. As a newly created credit card
portfolio ages, the delinquency and loss levels typically become more
predictable (referred to as "seasoning"). The less seasoned a credit card
portfolio is, the less predictable are the delinquencies and losses. A portfolio
consisting of older accounts generally behaves more predictably than a newly
originated portfolio. There is, however, no established time period after which
credit card portfolios are considered to be stabilized or by which delinquencies
and losses peak. It may be as long as three years before loans in a credit card
portfolio are considered stabilized. As of September 30, 1997, the Company had
97,508 credit card accounts of which 10,734 cards were issued within the last 18
months. In view of the limited seasoning of these accounts, the credit card
loans to these accounts may experience higher levels of delinquencies and losses
hereafter, which could have a material adverse effect on the results of
operations and financial condition of the Company.
CREDIT RISK AND LOAN CONCENTRATION
A major risk facing lenders is the risk of losing principal and interest as
a result of a borrower's failure to perform according to the terms of the loan
agreement, or "credit risk." As of September 30, 1997, the Company's total loan
portfolio was $459 million, or 75.9% of total assets, consisting primarily of
consumer loans (62.7% of total loans, including indirect automobile loans (36.2%
of total loans) and credit card loans (26.5% of total loans)) and real estate
loans (25.9% of total loans). Real estate loans include residential mortgages
and construction and commercial loans secured by real estate. In addition, other
commercial loans make up 11.4% of total loans. The Company's credit risk with
respect to its real estate loans relates principally to the value of the
underlying collateral. The Company's credit risk with respect to its indirect
automobile loans and commercial loans relates principally to the general
creditworthiness of the borrowers who primarily are individuals and small and
medium-sized businesses in the metropolitan areas of Atlanta, Georgia and
Jacksonville and Tampa, Florida. While indirect automobile loans are secured,
they are characterized by loan to value ratios that could result in the Bank not
recovering the full value of an outstanding loan upon default by the borrower.
The Company's credit risk with respect to its credit card portfolio relates
principally to the general creditworthiness of individuals in light of the
unsecured nature of credit card loans. During the last six months of 1996 and
the first three months of 1997, the Company experienced significant increases in
the amount and rate of delinquencies and charge-offs in its credit card loan
portfolio. In addition, the Company is experiencing higher loan losses in its
indirect automobile loan portfolio in 1997. Management believes that the
allowance for loan losses is adequate. However, there can be no assurance that
the allowance for loan losses will be adequate to cover future losses in the
existing loan portfolios. Loan losses exceeding the Company's historical rates
could have a material adverse affect on the results of operations and financial
condition of the Company. See "-- Credit Card Loan Loss Trends," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Provision for Loan Losses," "Business -- Products and Services --
Lending -- Significant Operating Policies" and Note 3 to the Consolidated
Financial Statements.
MANAGEMENT INFORMATION SYSTEMS
The sophistication and level of risk of FNB's business requires the
utilization of thorough and accurate management information systems. Failure of
management to effectively implement, maintain, update and utilize updated
management information systems could prevent management from recognizing in a
timely manner deterioration in the performance of its business, particularly its
credit card and indirect automobile loan portfolios. Such failure to effectively
implement, maintain, update and utilize comprehensive management information
systems could have a material adverse effect on the results of operations and
financial condition of the Company.
9
<PAGE> 11
ADVERSE ECONOMIC CONDITIONS
The Company's major lending activities are indirect automobile, credit
card, and real estate and commercial loans. Indirect automobile loans and
residential mortgage loans are also produced for resale with servicing rights
retained. An increase in interest rates could have a material adverse effect on
the housing and automobile industries and consumer spending generally. In
addition, an increase in interest rates could cause a decline in the value of
residential mortgages and indirect automobile loans held-for-sale by the
Company. These events could adversely affect the results of operations and
financial condition of the Company. As of June 30, 1997, residential mortgages
held-for-sale by the Company were principally on real property located in the
metropolitan areas of Atlanta, Georgia and Jacksonville, Florida. The Company's
indirect automobile loans have been obtained principally from automobile dealers
located in the metropolitan areas of Jacksonville and Tampa, Florida, and
Atlanta, Georgia. As of September 30, 1997, credit card loans were concentrated
with borrowers in Georgia (21.9%), California (9.3%), Texas (9.4%) and Florida
(6.8%). Adverse national, regional and local economic conditions may adversely
affect the results of operations and financial condition of the Company. See
"Business."
RESTRICTIONS ON DIVIDEND PAYMENTS
The indenture relating to the Notes (the "Indenture") issued in December
1995 provides that the Company may not pay cash dividends on its capital stock
or redeem any shares of its capital stock if the cumulative dividends and
redemptions would exceed cumulative consolidated net income of the Company for
the three-year period ending on the dividend declaration date or redemption
date. In addition, no dividend can be declared on capital stock if an event of
default has occurred and is continuing under the Notes and the Indenture,
including the failure to pay interest on such indebtedness or default on other
indebtedness exceeding $1 million. See Note 7 to the Consolidated Financial
Statements. The Articles of Incorporation of the Company, as amended, prohibit
the payment of dividends on shares of Common Stock during any calendar quarter
unless a full dividend has been paid during that calender quarter on the
Preferred Stock. There can be no assurance that the restrictions contained in
the Indenture and the Articles of Incorporation will not limit or restrict the
payment in the future of dividends on the capital stock of the Company. See
"Dividend Policy."
In addition, the FRB Agreement prohibits the declaration and payment of
dividends on the Common Stock without the prior approval of the FRB. There can
be no assurance that the FRB will approve the payment of dividends on the Common
Stock, when, as and if declared by the Board of Directors of the Company. See
"Regulatory Matters -- FRB Agreement."
LIMITED SOURCES OF PAYMENTS OF DIVIDENDS ON COMMON STOCK
The Company's primary source of funds to pay interest on the Notes and
other subordinated debt and dividends on the Preferred Stock and Common Stock is
from interest paid on subordinated notes of FNB and dividends paid to the
Company by FNB on its preferred stock and common stock. In 1995, the Company
sold $15 million aggregate principal amount of the Notes and, of the net
proceeds, loaned $10 million principal amount to FNB pursuant to subordinated
notes of FNB. The Company receives interest from FNB to cover the interest on
$10 million of the Notes and the balance of the interest is paid out of other
income and assets of the Company, including dividends on the preferred and
common stock of FNB. The ability of FNB to pay dividends is restricted by (i)
statutory and regulatory restrictions and (ii) the OCC Agreement. As of June 30,
1997, FNB could not pay any dividend under the applicable statutes and
regulations, without giving effect to the restrictions contained in the OCC
Agreement. The OCC Agreement permits FNB to pay dividends on its preferred stock
as long as FNB is adequately capitalized. FNB was adequately capitalized on
September 30, 1997. However, no dividends can be paid on FNB's common stock
unless FNB is in compliance with the capital ratios required commencing April
30, 1997 and November 30, 1997. Since FNB has not met the capital levels
required as of April 30, 1997, it can not declare a dividend on its common
stock. Even if FNB were in compliance with the required applicable capital
levels, FNB could not declare a dividend on its common stock without the
approval of the OCC. There can be no assurance that FNB will be able to pay any
dividends to the Company in the future or pay dividends in amounts sufficient to
pay the interest on the Notes
10
<PAGE> 12
in full and to pay dividends on the Preferred Stock and Common Stock. At
September 30, 1997, the Company had available $1.6 million of cash and other
liquid assets for the payment of the Company's obligations, including interest
on the Notes and dividends on the Preferred Stock and Common Stock. See
"Regulatory Matters -- OCC Agreement," "Capitalization," "Dividend Policy," and
"Business -- Supervision and Regulation."
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The profitability of FNB depends to a large extent upon its net interest
income, which is the difference between interest income on interest-earning
assets, such as loans and investments, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. The net interest income of FNB
would be adversely affected if changes in market interest rates resulted in the
cost of interest-bearing liabilities increasing faster than the increase in the
yield on the interest-earning assets of FNB. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Interest Rate
Sensitivity."
DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL PERSONNEL
The success of the Company is dependent upon the services of certain senior
executive officers and the ability of the Company to strengthen senior
management. The loss of the services of one or more key individuals or the
inability to strengthen senior management could have a material adverse affect
on the results of operations and the financial condition of the Company. The
Company's success will also depend on the Company's ability to supplement
current management by hiring and retaining additional highly qualified personnel
with substantive expertise in the lines of business in which the Company and the
Bank are engaged, particularly credit cards and indirect automobile lending. In
addition, as the Company expands, it will be necessary for the Company to
continue to be able to attract and retain additional qualified senior
executives. The unexpected loss of James B. Miller, Jr., Chairman of the Board
of Directors, President and Chief Executive Officer of the Company, or any other
key executive of the Company or the inability to attract and retain qualified
personnel could have a material adverse effect on the results of operations and
financial condition of the Company. Mr. Miller and Mr. Peterson, President and
Chief Executive Officer of FNB, have entered into employment agreements with the
Company which contain confidentiality and non-compete provisions. The Company
does not maintain key man life insurance on any executive officers. See
"Business -- Strategy."
GOVERNMENTAL REGULATION -- BANKING
The Company and the Bank are subject to extensive supervision, regulation
and control by several federal and state governmental agencies, including the
FRB, OCC, Federal Deposit Insurance Corporation ("FDIC"), Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
and Governmental National Mortgage Association ("GNMA"), and future legislation
and government policy could adversely affect the Company and the financial
institutions industry as a whole, including the cost of doing business. Certain
recently enacted or proposed legislation or regulation, and future legislation
or regulation, could have an adverse effect on both the costs of doing business
and the competitive factors facing the financial institutions industry. Although
the impact of such legislation and regulation cannot be predicted, future
changes may alter the structure of and competitive relationships among financial
institutions and the cost of doing business. In addition, federal regulatory
authorities have the power in certain circumstances to prohibit dividends and
other payments from FNB. See "Regulatory Matters" and "Business -- Supervision
and Regulation."
GOVERNMENTAL REGULATION -- MORTGAGE BANKING
The mortgage banking operations of the Company are subject to extensive
regulation by federal and state governmental authorities and agencies, including
FNMA, FHLMC, GNMA, the Federal Housing Authority, and the Veterans
Administration. Consequently, the Company is subject to various laws, rules and
regulations and judicial and administrative decisions that, among other things,
regulate credit-granting activities, govern secured transactions, and establish
collection, repossession and claims-handling procedures and other trade
11
<PAGE> 13
practices. Failure to comply with regulatory requirements can lead to loss of
approved status, termination of servicing contracts without compensation to the
servicer, demands for indemnification or mortgage loan repurchases, class action
lawsuits and administrative enforcement actions. Although the Company believes
that it is in compliance in all material respects with applicable federal, state
and agency laws, rules and regulations, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future which
could make compliance more difficult or expensive, restrict the Company's
ability to originate, purchase or sell mortgage loans, further limit or restrict
the amount of interest and other fees that may be earned or charged on mortgage
loans originated, purchased or serviced by the Company or otherwise adversely
affect the results of operations and financial condition of the Company. See
"Business -- Supervision and Regulation."
GOVERNMENTAL REGULATION -- SECURITIES
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Broker-dealers are subject to
regulations covering all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of customers'
funds and securities, capital structure, record keeping and the conduct of
directors, officers and employees. FNCI is required to comply with many complex
laws and rules as a broker-dealer, including rules relating to possession and
control of customer funds and securities, margin lending and execution and
settlement of transactions.
Additional legislation, changes in rules promulgated by the Securities and
Exchange Commission ("Commission"), the National Association of Securities
Dealers ("NASD"), the FRB, the various stock exchange and other self-regulatory
organizations, or changes in the interpretation or enforcement of existing laws
and rules, may directly affect the mode of operation and profitability of
broker-dealers. The Commission, the NASD, and other self-regulatory
organizations and state securities commissions may conduct administrative
proceedings regarding alleged violations of their rules, which can result in
censure, fine, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer or any of its officers or employees. FNCI's ability
to comply with all applicable laws and rules is dependent in large part upon the
establishment and maintenance of a compliance system reasonably designed to
ensure such compliance, as well as FNCI's ability to attract and retain
qualified compliance personnel. The principal purpose of regulation and
discipline of broker-dealers is the protection of customers and the securities
markets, rather than protection of creditors and stockholders of broker-dealers.
FNCI could in the future be subject to disciplinary or other actions due to
claimed noncompliance, which could have a material adverse effect on the results
of operations and financial condition of the Company. See
"Business -- Supervision and Regulation."
CONSUMER AND DEBTOR PROTECTION LAWS
The Company and the Bank are subject to numerous federal and state consumer
protection laws that impose requirements related to offering and extending
credit. The United States Congress and state governments may enact laws and
amend existing laws to regulate further the consumer industry or to reduce
finance charges or other fees or charges applicable to credit card and other
consumer revolving loan accounts. Such laws, as well as any new laws or rulings
which may be adopted, may adversely affect the Company's ability to collect on
account balances or maintain previous levels of finance charges and other fees
and charges with respect to the accounts. Any failure by the Company or Bank to
comply with such legal requirements also could adversely affect its ability to
collect the full amount of the account balances. Changes in federal and state
bankruptcy and debtor relief laws could adversely affect the results of
operations and financial condition of the Company and Bank if such changes
result in, among other things, additional administrative expenses and accounts
being written off as uncollectible.
COMPOSITION OF REAL ESTATE LOAN PORTFOLIO
The real estate loan portfolio includes residential mortgages and
construction and commercial loans secured by real estate. The Company generates
all of its real estate mortgage loans in Georgia and Florida. Therefore,
conditions of these real estate markets could strongly influence the level of
the Company's non-performing mortgage loans and the results of operations and
financial condition of the Company. Real estate
12
<PAGE> 14
values and the demand for mortgages and construction loans are affected by,
among other things, changes in general or local economic conditions, changes in
governmental rules or policies, the availability of loans to potential
purchasers, and acts of nature. Although the Company's underwriting standards
are intended to protect the Company against adverse general and local real
estate trends, declines in real estate markets could adversely impact the demand
for new real estate loans, the value of the collateral securing the Company's
loans and the results of operations and financial condition of the Company.
MONETARY POLICY
The operating results of FNB are affected by credit policies of monetary
authorities, particularly the Federal Reserve. The instruments of monetary
policy employed by the Federal Reserve include open market operations in U.S.
Government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels and loan demand on the results of operations and business
of the Company.
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS
The banking business is highly competitive. The Company's primary market
area, other than for indirect automobile loans, residential mortgages and credit
cards, consists of Fulton, DeKalb, Gwinnett and Cobb counties, Georgia. FNB
competes for traditional bank business with numerous other commercial banks and
thrift institutions with offices in the Company's primary trade area, many of
which have greater financial resources than FNB. The Company also competes for
loans with insurance companies, regulated small loan companies, credit unions
and certain governmental agencies. FNCI competes with independent brokerage and
investment companies as well as state and national banks and their affiliates
and other financial companies.
The indirect automobile lending, credit card and mortgage banking
industries are also highly competitive. The Company competes with banks and
special purpose credit card banks and companies throughout the United States as
well as entities such as AT&T and General Motors Corporation for credit card
customers. In the indirect automobile lending area, the Company competes with
specialty consumer finance companies in addition to banks. FNMC competes with
independent mortgage banking companies, state and national banks and their
subsidiaries as well as thrift institutions and insurance companies. There can
be no assurance that other companies will not offer products and services that
are competitive with those offered by the Company and its subsidiaries. The
emergence of such competitors could have a material adverse effect on the
results of operations and financial condition of the Company. See
"Business -- Competition."
RELATIONSHIP WITH DEALERS
The Company's indirect automobile lending operation depends in large part
upon its ability to maintain and service its relationships with automobile
dealers. There can be no assurance the Company will be successful in maintaining
such relationships or increasing the number of dealers with which it does
business or that its existing dealer base will continue to generate a volume of
finance contracts comparable to the volume historically generated by such
dealers.
VOTING CONTROL; ANTI-TAKEOVER EFFECTS
James B. Miller, Jr., Chairman of the Board of Directors, President and
Chief Executive Officer of the Company, beneficially owns Common Stock and
Preferred Stock representing 48.6% of the voting power of the outstanding
capital stock of the Company. Upon the issuance of the Common Stock offered
hereby, the Common Stock and Preferred Stock beneficially owned by Mr. Miller
will represent 31.5% of the voting power of the outstanding capital stock of the
Company (29.9% if the Underwriters' over-allotment option is exercised in full).
Mr. Miller will have the power to influence significantly the outcome of
substantially all matters submitted to the shareholders for approval, including
the election of directors, and may be deemed to have control over management and
affairs of the Company. In view of Mr. Miller's significant equity interests,
13
<PAGE> 15
approval of certain corporate actions that could provide shareholders the
opportunity to realize a premium over the then-prevailing market price for their
Common Stock would be more difficult to obtain without Mr. Miller's support.
Mergers, liquidation, dissolution and sale of all or substantially all of the
assets of the Company require the affirmative vote of two-thirds of the
outstanding shares of capital stock. See "Principal Shareholders."
SUBSTANTIAL SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
7,662,590 shares of Common Stock. Of these shares, 4,651,319 shares, including
the 3,000,000 shares of Common Stock sold in the Offering (5,101,319 shares if
the Underwriters' over-allotment option of 450,000 shares is exercised in full),
will be freely tradeable by persons other than affiliates of the Company without
restriction under the Securities Act except as set forth below. The remaining
3,011,271 shares of Common Stock may be considered to be "restricted" securities
within the meaning of Rule 144 promulgated under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available. All shares of Common Stock
beneficially owned by persons who are affiliates of the Company would be
eligible for public sale subject to the volume and other limitations of Rule
144. However, the Company's directors, executive officers and certain
shareholders, who own an aggregate of 3,143,179 shares of Common Stock have
agreed not to sell, contract to sell, offer, or otherwise dispose of or transfer
any shares of Common Stock or securities convertible into or exchangeable or
exercisable for shares of Common Stock or any rights to purchase any of the
foregoing for a period of 180 days after the date of this Prospectus without the
prior written consent of Raymond James & Associates, Inc. Of these shares,
1,717,480 shares of Common Stock, which were pledged as collateral by a director
and officer of the Company prior to the Offering, will not be subject to such
restrictions upon the sale of the pledged shares in the event of a default by
the pledgor. The sale of a substantial number of shares of Common Stock could
adversely affect the market price of the Common Stock. See "Shares Eligible for
Future Sale."
14
<PAGE> 16
REGULATORY MATTERS
OCC AGREEMENT
The OCC advised the Bank in the fourth quarter of 1996 that it will be
required to achieve higher capital levels. On November 14, 1996, the Bank
entered into the OCC Agreement which provides that the Bank (i) will appoint an
"Oversight Committee"; (ii) will achieve and maintain specified higher capital
levels; (iii) will develop a three-year capital program which will include,
among other things, certain restrictions on dividend payments by the Bank; and
(iv) will revise and amend its strategic plan. While the Bank, at September 30,
1997, was an adequately capitalized bank as defined in the OCC regulations, it
was not an adequately capitalized bank at December 31, 1996 and until the
Preferred Stock was issued in June 1997. The OCC Agreement continues in effect
until modified or terminated by the OCC.
The Bank is required to submit reports monthly to the OCC evidencing
compliance with the OCC Agreement. The OCC Agreement continues in effect until
it is amended or terminated. Failure to comply with the terms of the OCC
Agreement may result in civil fines and other administrative actions.
As part of the Company's plan to comply with the November 30, 1997 capital
requirements of the OCC Agreement, the Company intends to acquire additional
capital through the Offering and to manage the Bank's asset growth in concert
with its capital growth. In managing asset growth, the Company intends to
continue to periodically sell indirect automobile loans with servicing rights
retained to enhance noninterest income. Capital growth is also expected to come
from earnings retention.
Oversight Committee. The Oversight Committee is comprised of three members
of the board of directors of the Bank, a majority of whom are not employees of
the Company. The Oversight Committee, which meets and reports monthly to the
Board of Directors, is responsible for monitoring and coordinating compliance by
the Bank with the OCC Agreement. The Oversight Committee was formed on November
14, 1996 and its members are Messrs. Anderson, Miller and Ward.
Capital Requirements. The OCC Agreement establishes higher capital
requirements for the Bank. Specified capital levels were to be achieved by the
Bank by April 30, 1997 and maintained until November 30, 1997. At November 30,
1997, higher capital levels become effective and are applicable thereafter.
While the Bank at September 30, 1997 was adequately capitalized as defined in
the OCC regulations, it did not attain the higher capital levels which were to
be achieved by April 30, 1997. The following table sets forth (i) the capital
requirements for the Bank under the OCC regulations and under the OCC Agreement
and (ii) the Bank's capital ratios at September 30, 1997, and (iii) as adjusted
capital ratios to give effect to the investment of $17 million of the net
proceeds of the Offering in Tier 1 risk-based capital of the Bank:
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT
------------------------- ------------------------ SEPTEMBER 30, 1997
ADEQUATELY WELL APRIL 30, NOVEMBER 30, -----------------------
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 ACTUAL AS ADJUSTED(1)
- -------------- ----------- ----------- --------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Leverage(2)............... 4.00% 5.00% 5.00% 6.00% 4.57% 7.18%
Risk-Based Capital:
Tier 1(3)............... 4.00 6.00 6.00 7.00 5.52 8.61
Total................... 8.00 10.00 10.00 11.00 8.78 11.81
</TABLE>
- ---------------
(1) Assumes that the Company invests $17 million of the net proceeds of the
Offering in common stock of the Bank and the Bank invests the net proceeds
in assets carrying a risk-weight that is equivalent to the Company and the
Bank's average risk-weight at September 30, 1997. See "Use of Proceeds."
(2) Leverage ratio is defined as Tier 1 capital as a percent of total average
assets.
(3) Tier 1 capital is comprised of common shareholder's equity and, subject to
certain limitations and qualifications, noncumulative perpetual preferred
stock.
The OCC Agreement permits the Bank to declare dividends on its preferred
stock held by the Company only when the Bank is adequately capitalized under the
regulations. The Bank may also declare dividends on its common stock held by the
Company only when the Bank is in compliance with its approved capital program
and with the prior written approval of the OCC.
15
<PAGE> 17
During June 1997, the Company sold in a private placement 752,000 shares of
Preferred Stock for aggregate consideration of $4.4 million paid in cash and
$300,000 represented by subordinated notes of the Company surrendered by the
purchasers. During July 1997, the Company sold in a private placement 232,000
additional shares of Preferred Stock for aggregate consideration of $1.2 million
paid in cash and $250,000 represented by subordinated notes of the Company
surrendered by the purchasers. The net cash proceeds of the offerings were
invested in preferred stock of the Bank. See "Capital Stock -- Preferred Stock."
It is contemplated that approximately $17 million of the proceeds of the
Offering will be used to purchase preferred stock and/or common stock of the
Bank. This additional investment is expected to cause the Bank to exceed the
capital requirements commencing on November 30, 1997 as set forth in the OCC
Agreement. See "Use of Proceeds" and "Capitalization."
Capital Program. The Board of Directors of the Bank submitted to the OCC a
three-year capital program which was approved as modified. The capital program
includes specific plans for the maintenance of adequate capital levels as
required by the OCC Agreement, projections for growth and capital requirements,
projections of the sources and timing of additional capital to meet the current
and future capital needs of the Bank and contingency plans in the event the
primary sources of capital projected are not available.
Strategic Plan. The Board of Directors of the Bank is revising its
strategic plan in light of the revised levels of capital required and its growth
plans. The revised strategic plan will include objectives for earnings
performance, growth, balance sheet mix, off-balance sheet activities, liability
structure, capital adequacy, product line development and market segments which
the Bank intends to promote or develop together with strategies to achieve these
objectives. The strategic plan, when revised, will be submitted to the OCC for
approval.
FRB AGREEMENT
The FRB Agreement prohibits the Company from incurring additional debt or
declaring dividends on the Common Stock without the prior approval of the FRB.
As of the date of the FRB Agreement, the Company did not meet the capital levels
established by the FRB for an adequately capitalized bank holding company. Upon
the issuance of the Preferred Stock in June 1997, the Company became adequately
capitalized as defined in the regulations issued by the FRB. However, the FRB
Agreement continues in effect until modified or terminated by the FRB.
FDIC INSURANCE ASSESSMENTS
FNB is subject to FDIC deposit insurance assessments for the Bank Insurance
Fund ("BIF"). The FDIC has implemented a risk-based assessment system whereby
banks are assessed on a sliding scale depending on their placement in nine
separate supervisory categories. Prior to June 1, 1995, the assessment scale
ranged from $.23 per $100 of deposits for the healthiest banks (those with the
highest capital to assets ratios, best management and best overall condition) to
as much as $.31 per $100 of deposits for the less healthy institutions. However,
effective June 1, 1995, the BIF reached the designated reserve ratio of 1.25% of
total estimated insured deposits and the FDIC lowered the assessment rate
schedule for BIF members. Currently the deposit insurance premium is zero for
the healthiest banks and the premium is $.27 per $100 of deposits for less
healthy institutions. Prior to June 1, 1995, FNB's BIF assessment was $.26 per
$100 of deposits and after such date, the rate was reduced to $.07 per $100 of
deposits through June 30, 1997. Commencing July 1, 1997, FNB's BIF assessment is
$.28 per $100 of deposits.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company (after deducting underwriting discounts and
estimated offering expenses) from the sale of the 3,000,000 shares of Common
Stock offered hereby (assuming an offering price of $8.00 per share), are
estimated to be approximately $22.0 million ($25.3 million if the Underwriters'
over-allotment option is exercised in full). The Company estimates that as of
September 30, 1997, approximately $13.0 million in additional equity was
required for the Bank to meet the capital levels set forth in the OCC Agreement
for November 30, 1997. The purpose of this Offering is to provide the additional
capital required by the Bank to meet and exceed the capital levels set forth in
the OCC Agreement. Initially, the Company intends to invest $17.0 million of the
net proceeds in Tier 1 capital of the Bank and use the balance of the net
proceeds for general corporate purposes. The Bank intends to use such proceeds
for general corporate purposes. See "Risk Factors -- OCC Agreement," "Regulatory
Matters" and "Capitalization."
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company (i) as of September 30, 1997 and (ii) as adjusted basis to give effect
to such issuance of the Preferred Stock and to the sale of 3,000,000 shares of
the Common Stock offered hereby (assuming an offering price of $8.00 per share)
and the application of the net proceeds thereof:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT(1):
Long-term debt (subordinated)............................... $ 800 $ 800
8.5% Subordinated Notes due 2006............................ 15,000 15,000
------- -------
Total long-term debt.............................. 15,800 15,800
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value. Authorized 10,000,000 shares;
issued and outstanding 984,000 shares and as adjusted of
Non-Cumulative 8% Convertible Preferred Stock, Series A,
stated value $6.25........................................ 6,150 6,150
Common Stock, no par value. Authorized 50,000,000 shares;
4,672,744 shares issued and 4,661,682 outstanding actual;
7,672,744 shares issued and 7,661,682 outstanding as
adjusted(2)............................................... 11,452 33,452
Treasury shares, at cost (11,092 shares).................... (69) (69)
Net unrealized gains on investment securities
available-for-sale........................................ 244 244
Retained earnings........................................... 10,464 10,464
------- -------
Total shareholders' equity........................ 28,241 50,241
------- -------
Total capitalization.............................. $44,041 $66,041
======= =======
</TABLE>
- ---------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity," "-- Interest Rate Sensitivity."
(2) Does not include (i) 500,000 shares of Common Stock reserved for issuance
pursuant to stock options under the Company's 1997 Stock Option Plan
("Plan"), of which 250,000 shares of Common Stock are reserved for issuance
pursuant to outstanding stock options; (ii) 855,351 shares of Common Stock
reserved for issuance upon the conversion of the Preferred Stock; and (iii)
150,000 shares of Common Stock reserved for issuance upon the exercise of
the Representative's Warrants. See "Underwriting."
17
<PAGE> 19
PRICE RANGE OF COMMON STOCK
Since October 31, 1994, the Common Stock has been listed on the Nasdaq
National Market under the Symbol "LION." The following table sets forth for the
periods indicated the high and low sales prices for the Common Stock on the
Nasdaq National Market and the dividends paid on the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
------- ------- ------------
<S> <C> <C> <C> <C> <C>
1995
First Quarter............................................... $10 1/2 $ 9 1/4 $.0341
Second Quarter.............................................. 10 3/4 9 3/4 .0341
Third Quarter............................................... 15 1/4 10 3/4 .0341
Fourth Quarter.............................................. 17 1/2 14 3/4 .0375
1996
First Quarter............................................... 16 3/4 14 1/2 .0375
Second Quarter.............................................. 16 1/4 13 7/8 .0375
Third Quarter............................................... 14 3/4 11 7/8 .0375
Fourth Quarter.............................................. 12 3/8 9 3/4 .0375
1997
First Quarter............................................... 13 8 1/2 -
Second Quarter.............................................. 9 5/8 7 -
Third Quarter............................................... 9 3/8 8 3/4 -
Fourth Quarter (through November 4)......................... 9 1/4 8 3/4 -
</TABLE>
On November 4, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $9 1/4 per share. As of November 3, 1997, there
were approximately 375 holders of record of Common Stock.
DIVIDEND POLICY
Company Policy. During the first quarter of 1997, the Board of Directors
of the Company suspended payment of cash dividends on the Common Stock for the
foreseeable future. All earnings are being retained by the Company in order to
meet the capital levels required by the OCC Agreement and to fund future growth.
The Company is a legal entity separate and distinct from FNB and the Company's
other subsidiaries. Most of the revenues of the Company result from dividends
and interest paid to it by FNB. There are statutory and regulatory requirements
applicable to the payment of dividends by FNB as well as by the Company to its
shareholders.
Restrictions on Dividends -- Indenture. The Indenture provides that the
Company may not pay cash dividends on its capital stock or redeem any shares of
its capital stock if the cumulative dividends and redemptions would exceed
cumulative consolidated net income of the Company for the three-year period
ending on the dividend declaration date or redemption date. In addition, no
dividend can be declared on the capital stock if an event of default has
occurred and is continuing under the Notes, including the failure to pay
interest on such indebtedness or default on other indebtedness exceeding $1
million. There can be no assurance that the restrictions contained in the
Indenture will not limit or restrict the payment in the future of dividends on
the Common Stock. See Note 7 to the Consolidated Financial Statements.
Restriction on Dividends -- FRB Agreement. The FRB Agreement provides that
no dividends are to be declared or paid on the Common Stock without the prior
written approval of the FRB. See "Regulatory Matters -- FRB Agreement" and "Risk
Factors -- Restrictions on Dividend Payments."
Restrictions on Dividends by FNB -- Regulations. Under the regulations of
the OCC, dividends of FNB may be declared out of net profits of FNB. The
approval of the OCC is required if the total of all dividends declared by FNB
exceeds the total of its net profits for the year, combined with its retained
net profits for the preceding two years. The payment of dividends by FNB may
also be affected or limited by other factors, such as the requirement to
maintain capital above regulatory guidelines. At September 30, 1997, total
shareholders'
18
<PAGE> 20
equity of FNB was $31.2 million, none of which was available for the payment of
dividends to FNC. 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 preclude the payment of dividends), such authority may require,
after notice and hearing, that such bank cease and desist from such practice.
Restrictions on Dividends by FNB -- OCC Agreement. The OCC Agreement
permits FNB to pay dividends on its preferred stock as long as FNB is
"adequately capitalized," which it was on September 30, 1997. However, no
dividends can be paid on FNB's common stock unless FNB is in compliance with the
capital ratios required commencing April 30, 1997 and November 30, 1997. Since
FNB did not meet the capital levels required as of April 30, 1997, it cannot
declare a dividend on its common stock. Even if it were in compliance with the
required applicable levels, FNB could not declare a dividend on its common stock
without the approval of the OCC. See "Regulatory Matters -- OCC Agreement."
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected financial data for the Company for
each of the five years ended December 31, 1996 and for the nine months ended
September 30, 1996 and 1997. This financial data is derived in part from, and
should be read in conjunction with, the Consolidated Financial Statements and
the related notes thereto presented elsewhere in the Prospectus. The financial
information as of September 30, 1997 and for the nine months ended September 30,
1996 and 1997 is unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such interim data and periods have been
included and such adjustments are of a normal recurring nature. The results of
operations and other data for the nine months ended September 30, 1997 are not
necessarily indicative of the results of operations which may be expected for
the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1)
Interest income...................... $25,486 $29,399 $35,887 $48,080 $59,800 $44,325 $46,809
Net interest income.................. 14,915 19,709 24,122 29,209 33,073 24,561 27,209
Provision for loan losses............ 4,325 4,200 4,125 8,090 25,127 11,100 11,670
Noninterest income, including
securities gains................... 8,126 9,620 8,769 11,679 18,305 12,612 12,988
Securities gains, net................ 72 44 124 853 604 361 -
Noninterest expense.................. 14,308 18,641 22,375 25,583 35,489 26,147 26,734
Income (loss) before cumulative
effect of change in accounting
principle.......................... 2,838 4,271 4,299 4,649 (5,742) 4 1,188
Net income (loss).................... 2,838 4,545 4,299 4,649 (5,742) 4 1,188
Dividends paid....................... 420 472 628 644 693 518 -
PER SHARE DATA
Net income (loss) before cumulative
effect of change in accounting
principle.......................... $ .61 $ .92 $ .93 $1.01 $(1.24) $.00 $.23
Net income (loss).................... .61 .98 .93 1.01 (1.24) .00 .23
Book value........................... 3.33 4.58 4.65 6.02 4.53 5.65 4.74
Dividends paid....................... .09 .10 .14 .14 .15 .0750 -
Dividend payout ratio................ 14.80% 10.39% 14.62% 13.85% *
Average shares outstanding........... 4,620,660 4,613,775 4,608,383 4,608,383 4,619,530 4,609,026 4,658,284
PERFORMANCE RATIOS
Return on average assets............. 1.08% 1.50% 1.15% 1.01% * .00% .26%
Return on average equity............. 20.80 26.26 20.40 18.91 * .02 6.61
Net interest margin.................. 6.14 6.49 6.95 6.87 5.97 6.01 6.62
Efficiency ratio..................... 62.10 63.56 68.03 62.57 69.07 70.34 69.58
ASSET QUALITY RATIOS
Net charge-offs to average loans..... 2.23% 1.65% 1.54% 2.37% 3.00% 2.82% 3.80%
Allowance to period-end loans........ 2.15 1.97 1.31 1.54 3.85 1.53 3.52
Nonperforming assets to total loans
and OREO........................... 2.54 1.14 .87 1.24 .82 .93 .84
Allowance to nonperforming loans..... 1.55x 7.20x 3.65x 1.80x 5.62x 2.33x 9.92x
Allowance to nonperforming assets.... .84 1.72 1.50 1.25 4.71 1.64 4.18
CAPITAL RATIOS
Leverage............................. 5.28% 5.73% 5.51% 5.42% 2.67% 3.51% 4.05%
Risk-based capital:
Tier 1............................. 6.99 7.39 6.49 6.15 3.40 4.59 4.89
Total.............................. 8.75 9.06 8.25 10.47 6.38 8.13 8.60
Average equity to average assets..... 5.21 5.73 5.64 5.35 4.50
BALANCE SHEET DATA (AT END OF PERIOD)
Assets............................... $283,240 $331,956 $429,927 $524,822 $605,420 $606,676 $605,435
Total loans, net..................... 202,447 249,989 333,786 407,289 467,389 460,205 459,053
Total deposits....................... 260,907 303,297 383,016 466,507 544,713 541,632 547,020
Long-term debt....................... 2,065 1,815 2,491 16,750 16,500 16,500 15,800
Shareholders' equity................. 15,393 21,131 21,430 27,762 21,073 26,268 28,241
Realized shareholders' equity........ 15,393 19,396 23,067 27,073 21,213 27,113 27,997
DAILY AVERAGES
Assets............................... $261,645 $302,267 $373,869 $459,251 $611,517 $602,442 $606,052
Earning Assets....................... 244,198 281,237 348,312 426,525 554,354 548,444 558,612
Total loans.......................... 194,247 221,745 280,593 360,915 471,200 469,323 470,482
Total deposits....................... 240,209 276,882 336,462 411,147 542,107 532,302 547,744
Long-term debt....................... 1,898 1,857 1,684 3,439 16,500 16,500 16,396
Shareholders' equity................. 13,642 17,310 21,077 24,589 27,484 27,465 23,950
</TABLE>
- ---------------
* Given the Company's net loss for the year ended December 31, 1996, this data
is not meaningful.
(1) Beginning January 1, 1996 and consistent with industry practice, the Company
commenced reversing current period accrued interest and rate-related income
on credit card charge-offs to interest income. This amount totaled $1.4
million and $1.9 million for the nine months ended September 30, 1996 and
1997, respectively, and $2.0 million for the year ended December 31, 1996.
Such amounts were previously charged against the allowance for loan losses.
Such reclassification has not been made in prior period financial
statements.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis reviews important
factors affecting the results of operations and financial condition of the
Company for the periods shown. The Consolidated Financial Statements and related
notes should be read in conjunction with this review. In the discussion, net
interest income and net interest margin are presented on a fully
taxable-equivalent basis.
OVERVIEW
Fidelity National Corporation is a bank holding company headquartered in
Atlanta, Georgia. The Company, which commenced operations as FNB in 1973,
provides traditional deposit, lending, mortgage, securities brokerage,
international trade services and trust products and services to its commercial
and retail customers through its subsidiaries. FNB is a full-service banking
operation; FNMC is a full-service residential mortgage banking operation; and
FNCI is a securities brokerage operation. The Company currently conducts
full-service banking and residential mortgage lending businesses through 16
locations in the metropolitan Atlanta area. The Company conducts indirect
automobile lending (the purchase of consumer automobile installment sales
contracts from automobile dealers), residential mortgage lending and residential
construction lending through certain of its Atlanta offices and its
Jacksonville, Florida location. Indirect automobile lending is also conducted at
the Tampa, Florida location which was opened in 1995. At September 30, 1997, the
Company had total assets of $605 million, total loans of $459 million, total
deposits of $547 million and shareholders' equity of $28 million.
As of September 30, 1997, the Company had consumer (including indirect
automobile and credit card loans), real estate (including residential mortgage,
construction and commercial loans secured by real estate), and commercial loans
of $288 million, $119 million and $52 million, representing approximately 62.7%,
25.9% and 11.4%, respectively, of the Company's total loan portfolio. The real
estate loans included $48 million in construction loans, $44 million in
residential real estate loans and $27 million in commercial loans secured by
real estate. As of September 30, 1997, commercial loans of the Company,
including those commercial loans secured by real estate, totaled $79 million.
Commercial loans not secured by real estate totaled $52 million, or 11.4% of the
total loan portfolio of the Company. For the nine months ended September 30,
1997, the Company's net interest margin was 6.51% compared to 5.97% for the year
ended December 31, 1996.
Historically, credit card loans have been an important part of the
Company's total loan portfolio. At December 31, 1992, credit card loans
represented 53.8% of the Company's loan portfolio of $186 million. During 1992
and 1993, the outstanding balance of credit card loans remained relatively flat
and declined as a percentage of total loans to 33.4% at December 31, 1994. In
1994, as a result of additional affinity programs and the introduction of the
Company's Olympic card, credit card loans outstanding increased. The Company's
affinity programs include colleges, associations and other entities which
contract to assist the Company in marketing the Company's credit cards in return
for issuance and transaction fee income. This growth continued through 1995 and
into 1996, and at December 31, 1996, credit card loans totaled $144 million.
During late 1996 and early 1997, the Company's net losses on its credit card
loan portfolio increased significantly, reflecting a national trend and credit
quality issues related to an affinity program introduced in the middle of 1995
which was subsequently discontinued in May 1996. During the first nine months of
1997, credit card loans declined to $121 million or 26.4% of total loans due to
the discontinuance of new programs, the lack of any new credit card marketing
initiatives and credit card balance seasonality.
The Company has experienced significant growth in indirect automobile
lending since it implemented a strategy in 1993 to expand this activity. At
September 30, 1997, indirect automobile loans, including $35 million
held-for-sale, totaled $166 million compared to $12 million at December 31,
1992. During the first nine months of 1997 and during 1996, the Company sold,
either through whole loan sales or securitization, approximately $48 million and
$137 million, respectively, of indirect automobile loans with servicing retained
to take advantage of its ability to produce indirect automobile loans and to
enhance other non-interest income. In addition, during 1997 and 1996, the
Company sold $33 million and $38 million, respectively, of indirect automobile
loans, servicing released. The Company anticipates that it will continue to sell
periodically, either
21
<PAGE> 23
through whole loan sales or securitization, a substantial portion of its
indirect automobile loan production to enhance fee income and manage the
relative level of indirect automobile loans in the Company's loan portfolio.
Going Concern. The independent auditors' report on the Company's
Consolidated Financial Statements for the year ended December 31, 1996 includes
an explanatory paragraph indicating that the Company's and the Bank's ability to
continue as a going concern is dependent upon its ability to increase the
capital ratios of the Bank in accordance with the OCC Agreement. See
"-- Regulatory Agreements."
The accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred a net loss of $5.7 million during the year ended December 31, 1996. At
December 31, 1996, Fidelity and the Bank were not in compliance with the minimum
capital requirements prescribed by the FRB and the OCC and were considered
"undercapitalized" under the provisions of the Federal Deposit Insurance
Improvement Act of 1991. In addition, Fidelity and the Bank entered into
agreements with the FRB and OCC, respectively. If Fidelity and the Bank are
unable to meet the minimum capital requirements of the agreements, one or more
regulatory sanctions may result. These sanctions include such operating
restrictions as growth limitations, prohibitions on dividend payments, increased
supervisory monitoring, limitations on executive compensation, restrictions on
deposit interest rates, and regulatory seizure. No such regulatory sanctions
have been imposed. Management's plans concerning these matters and a description
of Fidelity's and the Bank's capital plan which was submitted to the FRB and
OCC, including plans to raise additional capital, are described below.
These factors, among others, may indicate that the Company will be unable
to continue as a going concern. The consolidated financial statements do not
include the adjustments, if any, that might have been required had the outcome
of the above-mentioned uncertainties been known, or any adjustments relating to
the recoverability of recorded asset amounts or the amount of liabilities that
may be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent on its ability to
comply with the terms of the agreements, maintain sufficient liquidity, and
operate profitably. See "-- Regulatory Agreements" and "-- Liquidity."
Management's Plans. The Company incurred significant losses which have
eroded capital. Accordingly, management's primary focus is to obtain additional
capital and to return the Company to profitability. In the fourth quarter of
1996, the Bank increased rates charged on credit card products demonstrating
higher loss exposure, brought credit card collections in-house, and strengthened
its credit card management team while consolidating and downsizing in selected
areas.
Fidelity has neither adequate cash flow nor the financial flexibility to
enable it to act as a source of financial strength to the Bank. The Company is
pursuing the Offering to raise additional capital, which will enable the Company
and the Bank to exceed all minimum capital requirements and the ratio levels
required under the OCC Agreement. A capital plan, subject to amendment, was
filed with the OCC as required under the OCC Agreement.
As discussed previously, the Company's net loss for 1996 and the overall
growth of the Company, the capital ratios of the Company and its primary
operating subsidiary, the Bank, declined significantly and were not in
compliance with the minimum capital requirements prescribed by the FRB and the
OCC at December 31, 1996. On September 30, 1997, the Company's and the Bank's
capital ratios met the minimum capital requirements for an adequately
capitalized bank holding company and bank. The improvement was primarily due to
the issuance of $6.2 million of Preferred Stock in June and July 1997 and
earnings retention.
RESULTS OF OPERATIONS
Net Income
The Company's net income was $1.2 million, or $.23 per share, for the nine
months ended September 30, 1997, compared to net income of $4,000 for the nine
months ended September 30, 1996. The major factor contributing to the increase
in earnings in 1997 was the $2.6 million increase in net interest income
partially
22
<PAGE> 24
offset by a $570,000 increase in loss provisions due to credit card
delinquencies and charge-offs. Additional factors affecting earnings have been
additional expenses attributable to recent corporate consolidation of operations
into a centrally-located facility and the upgrade of its systems.
The Company's net loss was $5.7 million for the year ended December 31,
1996, compared to net income of $4.6 million for 1995. The net loss per share
was $1.24 for 1996, compared to net income per share of $1.01 for 1995. The
major factor contributing to the loss for 1996 was the higher loan loss
provision resulting from higher levels of delinquencies and charge-offs in the
Company's credit card loan portfolio. During 1996, earnings were also adversely
affected by expenses attributable to recent corporate consolidation and systems
upgrade.
The Company's net income for 1995 was $4.6 million, or $1.01 per share, an
increase of $350,000 from 1994, or $.08 per share. During 1995, increases in net
interest income and noninterest income were partially offset by increases in the
provision for loan losses and noninterest expense.
Net Interest Income/Margin
For the nine months ended September 30, 1997, net interest income increased
$2.6 million to $27.2 million, or 10.8% over the nine months ended September 30,
1996. This increase was primarily a result of a $10 million increase in average
earning assets to $559 million, combined with a 64 basis point increase in the
yield on average interest-earning assets. The yield realized on average
interest-earning assets for the first nine months of 1997 was 11.19% as compared
to 10.55% for the same period of 1996. The net interest margins for the
comparable periods were 6.51% and 5.93%, respectively.
Taxable-equivalent net interest income increased $3.9 million, or 13.2%, in
1996, to $33.1 million from $29.2 million in 1995. This increase resulted from a
$128 million increase in average interest-earning assets to $554 million
partially offset by a decrease in the yield on interest earning assets to 10.79%
from 11.29%. Average total loans increased $110 million or 30.6% over average
total loans in 1995. While the increase in loan volume was primarily
attributable to indirect automobile and real estate construction loan growth,
increased loan volume occurred in all major loan categories as the economy
continued to grow.
Interest expense for the nine months ended September 30, 1997 and 1996 was
$19.6 million and $19.8 million, respectively.
The $7.9 million increase in total interest expense in 1996 over 1995 was
attributable primarily to an increase in the volume of interest-bearing
liabilities, as rates paid on average total interest-bearing liabilities only
increased 15 basis points.
The average balance of noninterest bearing demand deposits increased 16.5%
to $70 million during 1996. Interest on earning assets benefited from a 5 basis
point higher yield realized on investment securities and a 22.2% increase in the
average balance of investment securities to $73 million for 1996.
In summary, the increase in volume of every significant category of earning
assets in 1996 provided a $14.0 million increase in income on interest-earning
assets, which was partially offset by a $2.3 million decrease due to declining
yields. This provided a net $11.7 million increase in income from interest
earning assets.
Average interest-bearing liabilities grew 37.7%, or $139 million, to $507
million in 1996. This growth primarily occurred in deposits. The rates paid on
average interest-bearing liabilities increased 15 basis points in 1996 to 5.27%,
as market rates on deposits were fairly stable during the year.
23
<PAGE> 25
Taxable-equivalent net interest income was $29.3 million in 1995, an
increase of 21.0% over the $24.2 million in 1994. This was primarily the result
of a $78.2 million, or 22.5%, increase in average interest earning assets,
offset slightly by an 8 basis point decrease in net interest margin.
AVERAGE BALANCES, INTEREST AND YIELDS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1994 1995 1996
--------------------------- --------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned
income(1)(2)
Taxable......................... $277,933 $31,953 11.50% $358,685 $43,572 12.15% $469,846 $54,206 11.54%
Tax-exempt(3)................... 2,660 253 9.51 2,230 227 10.18 1,355 127 9.36
-------- ------- -------- ------- -------- -------
Total loans............... 280,593 32,206 11.48 360,915 43,799 12.14 471,201 54,333 11.53
Investment securities
Taxable......................... 58,433 3,424 5.86 60,060 4,025 6.70 73,433 4,956 6.75
Tax-exempt(3)................... 133 9 6.77 10 1 5.62 - - -
-------- ------- -------- ------- -------- -------
Total investment
securities.............. 58,566 3,433 5.86 60,070 4,026 6.70 73,433 4,956 6.75
Interest-bearing deposits......... 350 13 3.71 129 9 6.98 1,431 74 5.17
Federal funds sold................ 8,803 323 3.67 5,411 324 5.99 8,289 437 5.27
-------- ------- -------- ------- -------- -------
Total interest-earning
assets.................. 348,312 35,975 10.33 426,525 48,158 11.29 554,354 59,800 10.79
Cash and due from banks........... 13,614 14,645 22,011
Allowance for loan losses......... (4,384) (4,487) (6,856)
Premises and equipment............ 8,104 9,259 14,164
Other real estate owned........... 1,705 1,458 1,246
Other assets...................... 6,518 11,851 26,598
-------- -------- --------
Total assets.............. $373,869 $459,251 $611,517
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Demand deposits................. $ 88,530 $2,386 2.70% $ 92,107 $ 3,148 3.42% $100,966 $ 3,542 3.51%
Savings deposits................ 20,914 630 3.01 15,292 520 3.40 26,516 1,058 3.99
Time deposits................... 176,381 8,152 4.62 243,617 14,260 5.85 344,551 19,933 5.79
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits................ 285,825 11,168 3.91 351,016 17,928 5.11 472,033 24,533 5.20
Federal funds purchased........... 1,357 73 5.38 1,786 106 5.94 2,306 144 6.24
Securities sold under agreements
to repurchase................... 4,725 129 2.73 8,053 236 2.93 13,305 390 2.93
Other short-term borrowings....... 4,923 264 5.36 4,349 247 5.68 3,296 159 4.83
Long-term debt.................... 1,684 131 7.78 3,439 354 10.29 16,500 1,501 9.10
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............. 298,514 11,765 3.94 368,643 18,871 5.12 507,440 26,727 5.27
------- ------- -------
Noninterest-bearing demand
deposits........................ 50,637 60,131 70,073
Other liabilities................. 3,641 5,888 6,520
Shareholders' equity.............. 21,077 24,589 27,484
-------- -------- --------
Total liabilities and
shareholders' equity.... $373,869 $459,251 $611,517
======== ======== ========
Net interest income/spread........ $ 24,210 6.39 $29,287 6.17 $33,121 5.52
======== ======= =======
Net interest rate margin.......... 6.95 6.87 5.97
</TABLE>
- ---------------
(1) Fee income relating to loans of $2,710 in 1994, $3,854 in 1995, and $3,720
in 1996, is included in interest income.
(2) Nonaccrual loans are included in average balances and income on such loans,
if recognized, is recognized on cash basis.
(3) Interest income includes the effects of taxable-equivalent adjustments of
$89, $77 and $48, respectively, for each of the three years ended December
31, 1996, using a federal tax rate of 34%.
24
<PAGE> 26
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1996 COMPARED TO 1995
VARIANCE ATTRIBUTED TO(1) VARIANCE ATTRIBUTED TO(1)
------------------------- ---------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net loans:
Taxable.................................. $9,724 $1,895 $11,619 $12,927 $(2,245) $10,682
Tax-exempt(2)............................ (43) 17 (26) (83) (17) (100)
Investment securities:
Taxable.................................. 98 503 601 902 29 931
Tax-exempt(2)............................ (7) (1) (8) (1) - (1)
Federal funds sold......................... (154) 155 1 156 (43) 113
Interest bearing deposits.................. (11) 7 (4) 68 (3) 65
------ ------ ------- ------- ------- -------
Total interest-earning assets.... $9,607 $2,576 $12,183 $13,969 $(2,279) $11,690
====== ====== ======= ======= ======= =======
Interest-bearing deposits:
Demand................................... $ 100 $ 62 $ 762 $ 309 $ 85 $ 394
Savings.................................. (184) 74 (110) 435 103 538
Time..................................... 3,595 2,513 6,108 5,841 (168) 5,673
------ ------ ------- ------- ------- -------
Total interest-bearing
deposits....................... 3,511 3,249 6,760 6,585 20 6,605
Federal funds purchased.................... 25 8 33 33 5 38
Securities sold under agreements to
repurchase............................... 97 10 107 154 - 154
Other short-term borrowings................ (32) 15 (17) (54) (34) (88)
Long-term debt............................. 170 53 223 1,192 (45) 1,147
------ ------ ------- ------- ------- -------
Total interest-bearing
liabilities.................... $3,771 $3,335 $ 7,106 $ 7,910 $ (54) $ 7,856
====== ====== ======= ======= ======= =======
</TABLE>
- ---------------
(1) The change in interest due to both rate and volume has been allocated to the
components in proportion to the relationship of the dollar amounts of the
change in each.
(2) Reflects fully taxable equivalent adjustments using a Federal tax rate of
34%.
Provision for Loan Losses
Management's policy is to maintain the allowance for loan losses at a level
sufficient to absorb estimated losses inherent in the loan portfolio. The
allowance is increased by the provision for loan losses and decreased by
charge-offs, net of recoveries. In determining inherent losses, management
considers financial services industry trends, conditions of individual
borrowers, historical loan loss experience and the general economic environment.
As these factors change, the level of loan loss provision changes.
For the nine months ended September 30, 1997, the provision for loan losses
was $11.7 million compared to $11.1 million for the same period in 1996, an
increase of 5.4%. The major factors adversely affecting 1997 and 1996 earnings
were the increase in the provision for loan losses related to credit card and
indirect automobile loans due to the higher delinquencies and charge-offs. Net
charge-offs to average loans for the nine months ended September 30, 1997, were
3.80% compared to 2.13% for the same period in 1996.
For the year ended December 31, 1996, the provision for loan losses was
$25.1 million compared to $8.1 million in 1995, an increase of 209.9%. The
increase in the provision for loan losses was the most significant factor
contributing to the decline in earnings of the Company. Net charge-offs were
$14.2 million in 1996 compared to $6.9 million in 1995. Net charge-offs to
average loans for 1996 were 3.00% compared to 2.37% in 1995. Approximately 88.8%
of the loan charge-offs in 1996 were attributable to credit card loans. This
significant increase in credit card losses in 1996 was due to several factors.
Nationally, credit card charge-offs reached record highs as consumers found
themselves unable to meet their credit card obligations. Many of these consumers
filed bankruptcy and bankruptcies hit record levels. Moreover, a significant
portion of the Company's credit card portfolio's charge-offs were attributable
to one specific program. Under this program,
25
<PAGE> 27
which the Company initiated in the middle of 1995 and discontinued in May 1996,
the Company issued to recent home buyers credit cards with a $3,000 credit
limit, no annual fee in the first year, a $30 annual fee thereafter and an
interest rate of 14.9%. While it was, and continues to be, the Company's policy
not to issue credit cards without first conducting a credit review, the Company
initially issued preapproved credit cards under this specific program without
such a review. The reason for this policy exception was that these customers had
recently completed a credit review necessary to secure residential mortgages
from unrelated third-party lenders. There have been no other changes to the
Company's credit card issuance policy and no changes to the Company's credit
card non-accrual and charge-off policies. In May 1996, the Company ceased
issuing preapproved credit cards under this program. A substantial portion of
the additional provision for loan losses recorded in 1996 was to provide for
losses deemed inherent in this portfolio as of year end. As a result of the
higher risk inherent in the preapproved program, the rate on those cards was
increased to 17.9% in November 1996.
In 1995 the provision for loan losses was $8.1 million compared to $4.1
million in 1994. The increase in the provision for loan losses in 1995 over 1994
was due primarily to credit card loan growth and increases in credit card
delinquencies and charge-offs during 1995. Net charge-offs were $6.9 million for
1995 compared to $4.3 million in 1994.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period....... $4,011 $4,007 $4,550 $4,344 $ 5,537 $5,537 $16,511
Charge-offs:
Commercial, financial and
agricultural.................... 68 18 226 60 3 3 155
Real estate-construction........... 13 - - - - - -
Real estate-mortgage............... 341 34 - - - - -
Consumer installment............... 80 36 88 328 1,657 1,226 2,588
Credit cards....................... 4,345 4,091 4,466 7,051 13,156 8,953 11,850
------ ------ ------ ------ ------- ------ -------
Total charge-offs.......... 4,847 4,179 4,780 7,439 14,816 10,182 14,593
Recoveries:
Commercial, financial and
agricultural.................... 89 122 29 42 31 18 103
Real estate-construction........... - - - - - - -
Real estate-mortgage............... 88 35 2 - - - -
Consumer installment............... 21 11 24 38 64 34 153
Credit cards....................... 320 354 394 462 568 390 915
------ ------ ------ ------ ------- ------ -------
Total recoveries........... 518 522 449 542 663 442 1,171
------ ------ ------ ------ ------- ------ -------
Net charge-offs...................... 4,329 3,657 4,331 6,897 14,153 9,740 13,422
Provision for loan losses............ 4,325 4,200 4,125 8,090 25,127 11,100 11,670
------ ------ ------ ------ ------- ------ -------
Balance at end of period............. $4,007 $4,550 $4,344 $5,537 $16,511 $6,897 $14,759
====== ====== ====== ====== ======= ====== =======
Ratio of net charge-offs during
period to average loans
outstanding, net................... 2.23% 1.65% 1.54% 1.91% 3.00% 2.77% 3.80%
Allowance for loan losses as a
percentage of loans................ 2.15 1.97 1.31 1.54 3.85 1.53 3.52
</TABLE>
Noninterest Income
For the nine months ended September 30, 1997, noninterest income increased
$376,000 to $13.0 million, or 3.0%, over the same period in 1996. During 1997
and 1996, the Company sold mortgage servicing rights, in part, to reduce the
Company's interest rate risk exposure to mortgage loan prepayments. As a result
of this initiative, noninterest income for the nine months ended September 30,
1996 and 1997 benefited from $1.1
26
<PAGE> 28
and $1.5 million gains on the sale of $135 million and $328 million in mortgage
servicing rights, respectively. Fee income from mortgage servicing declined
$846,000 to $843,000 for the nine months ended September 30, 1997 as a result of
this strategy. There were no gains on securities transactions during the first
nine months of 1997 compared to gains of $361,000 for the same period of 1996.
Noninterest income for 1996 was $18.3 million compared to $11.7 million in
1995. This increase resulted primarily from growth in residential mortgage
banking activities, brokerage activities, gains on loan sales and a loan
securitization, sales of mortgage servicing rights and increased fee income from
servicing indirect automobile loans. For 1996, noninterest income benefited from
a $2.1 million gain on sales of $286 million in mortgage servicing rights and a
$672,000 gain on sales of $195 million of indirect automobile and credit card
loans. There were no such sales in 1995. The profits from the sales of mortgage
servicing rights in 1996 partially offset the losses in the mortgage business
due to declining loan production and reduced the Company's exposure to mortgage
servicing rights impairment due to mortgage loan prepayments. Noninterest income
in 1996 also benefited from a $1.0 million increase in brokerage fee income, a
$402,000 increase in mortgage servicing fee income, and a $707,000 increase in
indirect automobile loan servicing fees.
Noninterest income for 1995 was $11.7 million compared to $8.8 million in
1994. This increase resulted primarily from growth in residential mortgage
banking activities, brokerage operations and net gains from securities
transactions. During 1995, income from residential mortgage banking activities
increased 91.8% to $3.3 million and income from brokerage activities increased
to $2.2 million in 1995 from $1.6 million in 1994. Reflecting the Company's
commitment to increase noninterest fee income, late in 1994, the Company began
to make bulk purchases of mortgage servicing rights to increase noninterest
income from mortgage banking activities. As noted above, beginning in 1996, the
Company began selling portions of its mortgage servicing rights portfolio.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
122, "Accounting for Mortgage Servicing Rights" effective January 1, 1995.
Accordingly, the Company capitalized the cost of originated mortgage servicing
rights beginning in 1995. The adoption of this new accounting standard had a
significant favorable impact on 1996 and 1995 noninterest income. During 1996
and 1995, the Company capitalized originated mortgage servicing rights and
recorded related amortization of $900,000 and $1.0 million and $573,000 and
$247,000, respectively. The Company measures the value of mortgage servicing
rights for impairment based on loan type and rate structure. At September 30,
1997, December 31, 1996 and 1995, the fair value of these rights approximated
net book value.
Noninterest Expense
Noninterest expense increased 2.3%, from $26.7 million for the nine months
ended September 30, 1997 compared to $26.1 million for the comparable period of
1996.
Salaries and benefit expenses increased $591,000, or 4.9%, in the first
nine months of 1997 over the comparable period of 1996. The number of full-time
equivalent employees declined to 385 on September 30, 1997 from 406 at September
30, 1996.
Expenses, other than salaries, benefits and amortization of mortgage
servicing rights, for the nine months ended September 30, 1997 increased
$915,000 compared to the nine months ended September 30, 1996. These increases
were due primarily to the Company's opening of four additional bank branches in
the greater Atlanta metropolitan area and two loan production offices in
Florida, the consolidation of operations to the Company's new operations center
and the upgrading of its systems. Amortization of mortgage servicing rights,
including amortization relating to loan repayments, declined $919,000 to
$610,000 for the nine months ended September 30, 1997.
27
<PAGE> 29
The following schedule summarizes the change in mortgage servicing rights
for the three years ended December 31, 1996, and for the nine months ended
September 30, 1996 and 1997:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1994 1995 1996 1996 1997
---- ---- ---- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Beginning balance.................................. $ .7 $3.0 $7.8 $7.8 $5.5
Add:
Purchased loans.................................. 1.3 - - - -
Bulk purchases................................... 1.3 4.9 - - -
Originated servicing rights...................... - 1.0 .9 .5 .2
---- ---- ---- ---- ----
3.3 8.9 8.7 8.3 5.7
Less:
Amortization..................................... .2 .7 .8 .7 .6
Loan payoff...................................... .1 .4 .8 .7 .5
Bulk sale........................................ - - 1.6 - 2.6
---- ---- ---- ---- ----
Ending balance..................................... $3.0 $7.8 $5.5 $6.9 $2.2
==== ==== ==== ==== ====
</TABLE>
Noninterest expense increased $9.9 million, or 38.7%, in 1996 to $35.5
million from $25.6 million in 1995. Salaries and employee benefits, which
accounted for 46.2% of the total increase in noninterest expense, increased
39.1% to $16.4 million in 1996 from $11.8 million in 1995. The number of full
time equivalent employees at December 31, 1996 was 436 compared to 311 at
December 31, 1995. The increase in salaries and employee benefits during 1996
was primarily attributable to expansion in traditional banking activities and
general corporate growth.
Expenses related to the amortization of mortgage servicing rights were $1.9
million in 1996 compared to $1.1 million and $364,000 in 1995 and 1994,
respectively. Excluding mortgage servicing, expenses related to mortgage banking
activities were $4.5 million in 1996 compared to $2.8 million in 1995. Expenses
related to securities brokerage activities were $3.1 million in 1996 compared to
$2.4 million in 1995.
Furniture and equipment expense and net occupancy costs increased during
1996 due to general corporate growth including branch bank expansion, the
opening of a new operations center and the opening of loan production offices.
Noninterest expense for 1995 was $25.6 million compared to $22.4 million
for 1994, a 14.3% increase. The increase in salaries and benefits accounted for
59.5% of the total increase in noninterest expense. The increase in noninterest
expense was primarily attributable to general corporate growth in traditional
banking activities, requiring an increase in full-time equivalent employees.
Provision for Income Taxes
The provision for income taxes consists of provisions for federal and state
income taxes. The provision for income taxes for the nine months ended September
30, 1997 was $605,000, compared to tax benefit of $78,000 for the same period in
1996. These changes were due to changes in taxable income.
In 1996, a tax benefit of $3.5 million was recorded by the Company compared
to a $2.6 million provision for income taxes for 1995. The provision for income
taxes for 1995 was $2.6 million compared to $2.1 million for the same period in
1994. The Company's effective tax rate approximated statutory rates for all
periods.
FINANCIAL CONDITION
The Company manages its assets and liabilities to maximize long-term
earnings opportunities while maintaining the integrity of its financial position
and the quality of earnings. To accomplish this objective, management strives to
effect 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
28
<PAGE> 30
interest margin and to manage exposure to risk while maintaining net interest
income at acceptable levels. Liquidity is provided by carefully structuring the
balance sheet. The decline in capital ratios to below statutory minimums at
December 31, 1996 (see "-- Shareholders' Equity -- Regulatory Capital
Requirements") reduced the Company's liquidity position and funding
alternatives. At September 30, 1997, as a result of the issuance of 984,000
shares of Preferred Stock, the Company was adequately capitalized in accordance
with FRB regulations.
The Company's Asset Liability Committee meets regularly to review both the
Company's interest rate sensitivity positions and liquidity.
Loans
During the nine months ended September 30, 1997, total loans, which include
loans held-for-sale, declined $8 million, or 1.7%, to $459 million, compared to
$467 million at December 31, 1996. This decline was primarily attributable to
the 16.0% decline in the Company's credit card loans to $121 million and the
10.5% decline in real estate loans which were mostly offset by increases in
commercial and consumer installment loans.
During 1996 and 1995, the Company experienced increases in every major loan
category. At December 31, 1996, total loans outstanding, including loans held
for sale, were $467 million, compared to $407 million at year end 1995, a 14.8%
increase. Average total loans during 1996 increased $110 million, or 30.6%, to
$471 million. The most significant increases in 1996 occurred in consumer
installment loans which increased $25 million, or 21.7%, to $139 million; real
estate mortgage loans which increased $10 million, or 17.1%, to $72 million; and
residential real estate construction loans which increased $15 million, or
37.5%, to $56 million.
Total loans at December 31, 1995 were $407 million, an increase of 22.1%
over total loans at December 31, 1994. This increase was attributable primarily
to significant increases in credit card and indirect automobile, residential
construction and commercial loans.
29
<PAGE> 31
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial:
Commercial, financial and
agricultural............... $ 15,817 $ 19,732 $ 29,831 $ 37,778 $ 43,247 $ 50,890
Tax exempt.................... 1,584 2,435 2,091 1,518 698 1,532
-------- -------- -------- -------- -------- --------
Total commercial...... 17,401 22,167 31,922 39,296 43,945 52,422
Real estate - construction...... 10,687 20,012 32,355 40,955 56,325 48,227
Real estate - mortgage.......... 45,722 47,064 66,707 61,247 71,719 66,362
Consumer installment............ 12,323 43,115 89,595 78,806 113,513 131,353
Credit cards.................... 100,153 98,135 110,870 139,873 143,782 121,375
-------- -------- -------- -------- -------- --------
Loans........................... 186,286 230,493 331,449 360,177 429,284 419,739
Allowance for loan losses....... 4,007 4,550 4,344 5,537 16,511 14,759
-------- -------- -------- -------- -------- --------
Loans, net...................... $182,279 $225,943 $327,105 $354,640 $412,773 $404,980
======== ======== ======== ======== ======== ========
TOTAL LOANS
Loans (net of unearned
income)....................... $186,286 $230,493 $331,449 $360,177 $429,284 $419,739
Loans held-for-sale:
Mortgage loans................ 16,271 19,419 2,225 12,113 13,106 4,355
Consumer installment.......... - - - 35,000 25,000 34,959
-------- -------- -------- -------- -------- --------
Total loans
held-for-sale....... 16,271 19,419 2,225 47,113 38,106 39,314
-------- -------- -------- -------- -------- --------
Total loans........... $202,557 $249,912 $333,674 $407,290 $467,390 $459,053
======== ======== ======== ======== ======== ========
</TABLE>
The following table shows the maturity distribution and interest rate
sensitivity of the Company's loan portfolio at December 31, 1996:
LOAN MATURITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
WITHIN ONE THROUGH OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Maturity
Commercial, financial and agricultural .... $12,576 $45,215 $1,692 $ 59,483
Real estate - construction................. 17,204 18,804 4,673 40,681
------- ------- ------ --------
Total.............................. $29,780 $64,019 $6,365 $100,164
======= ======= ====== ========
Interest Rate Sensitivity
Selected loans with:
Predetermined interest rates:
Commercial, financial and agricultural..... $ 13 $ 468 $ 69 $ 550
Real estate - construction................. 1,463 4,514 2,721 8,698
Floating or adjustable interest rates:
Commercial, financial and agricultural..... 12,563 44,747 1,623 58,933
Real estate - construction................... 15,741 14,290 1,952 31,983
------- ------- ------ --------
Total.............................. $29,780 $64,019 $6,365 $100,164
======= ======= ====== ========
</TABLE>
30
<PAGE> 32
Nonperforming Assets
Nonperforming assets consist of nonaccrual and restructured loans and other
real estate owned. Nonaccrual loans are loans on which the interest accruals
have been discontinued when it appears that future collection of principal or
interest according to the contractual terms may be doubtful. Interest on these
loans is reported on the cash basis as received when the full recovery of
principal is anticipated or after full principal has been recovered when
collection of interest is in question. Restructured loans are those loans whose
terms have been modified, because of economic or legal reasons related to the
debtor's financial difficulties, to provide for a reduction in principal, change
in terms, or modification of interest rates to below market levels. Other real
estate owned is real property acquired by foreclosure or directly by title or
deed transfer in settlement of debt.
Nonperforming assets at September 30, 1997 and December 31, 1996 were $3.5
million. Since December 31, 1995, nonperforming assets have declined $914,000,
or 20.6%. During 1996, other real estate owned declined $772,000 to $567,000. At
December 31, 1996 and 1995, there were no restructured loans. Nonperforming
assets increased $1.5 million in 1995 from $2.9 million at December 31, 1994.
The ratio of loans past due 90 days and still accruing to total loans
declined to 1.45% at September 30, 1997 compared to 1.60% at December 31, 1996.
This ratio was .87% and .64% at December 31, 1995 and 1994, respectively.
When a loan is classified as nonaccrual, previously accrued interest is
reversed and interest income is decreased to the extent of all interest accrued
in the current year. If any portion of the accrued interest had been accrued in
the previous year, accrued interest is decreased and a charge for that amount is
made to the allowance for loan losses. For 1996, the gross amount of interest
income that would have been recorded on nonaccrual and restructured loans, if
all such loans had been accruing interest at the original contract rate, was
$278,000.
Credit card accounts are sampled on a quarterly basis and reviewed to
assure compliance with the Bank's credit policy. Review procedures include
determination that the appropriate verification processes have been completed,
recalculation of the borrower's debt ratio, and analysis of the borrower's
credit history to determine if the borrower meets established Bank criteria.
Policy exceptions are analyzed monthly. Delinquent accounts are monitored daily
and charged off after 180 days, which is the industry standard. Prior to
charge-off, interest on credit card loans continues to accrue. Upon charge-off,
all current period interest income and related fees are charged against interest
income.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans.............. $2,314 $ 632 $1,189 $3,105 $2,940 $1,488
Restructured loans............ 267 - - - - -
Other real estate owned....... 2,213 2,016 1,714 1,339 567 2,042
------ ------ ------ ------ ------ ------
Total nonperforming
assets............ $4,794 $2,648 $2,903 $4,444 $3,507 $3,530
====== ====== ====== ====== ====== ======
Loans past due 90 days or more
and still accruing.......... $1,297 $1,422 $2,134 $3,091 $6,890 $6,106
====== ====== ====== ====== ====== ======
Ratio of past due loans to
total loans................. .70% .62% .64% .87% 1.60% 1.45%
Ratio of nonperforming assets
to total loans and other
real estate owned........... 2.54 1.14 .87 1.24 .82 .84
</TABLE>
31
<PAGE> 33
Management is not aware of any potential problem loans other than those
disclosed in the table above, which includes all loans recommended for such
classification by regulators, which would have a material impact on asset
quality. The adverse trends impacting the consumer portfolio, primarily credit
cards and indirect auto loans, have been discussed elsewhere herein.
Allocation of Allowance for Loan Losses
Allocation of the allowance for loan losses is based primarily on
historical loan loss experience, utilizing loss migration analysis where
appropriate, adjusted for changes in the risk characteristics of each loan
category. Additional amounts are allocated based on the evaluation of the loss
potential of individual troubled loans and the anticipated effect of economic
conditions on both individual loans and loan categories. Since the allocation is
based on estimates and subjective judgment, it is not necessarily indicative of
the specific amounts or loan categories in which losses may ultimately occur.
At September 30, 1997, credit card loans had declined $23 million to $121
million, or 28.8% of loans. This 16.0% decline in credit card loans outstanding
and the 18.6% decline in credit card delinquencies since peaking on January 31,
1997 are the primary causes of the $2.7 million decline in the allowance for
loan losses allocated to credit cards. At September 30, 1997, $11.0 million of
the allowance for loan losses was allocated to credit card loans, which
represents 9.1% of such loans outstanding.
At December 31, 1996, credit card loans totaled $144 million, or 33.5% of
loans, compared to $140 million, or 38.8%, at December 31, 1995. The amount of
the allowance for loan losses allocated to credit cards decreased 5.46% during
1996. See "-- Provision for Loan Losses."
At December 31, 1996 and 1995, the Company increased the allowance for loan
losses as a percentage of loans to 3.85% and 1.54%, respectively, compared to
1.31% at December 31, 1994. The increases were due primarily to unfavorable
delinquency and charge-off trends related to credit card loans. Although credit
card balances increased nominally in 1996, this ratio was significantly
increased in 1996, as credit card delinquencies and net charge-offs increased.
Management believes the allowance for loan losses is adequate to provide for
losses inherent in the loan portfolio.
The table below presents an allocation of the allowance for loan losses by
category as of December 31 for each of the last five years and as of September
30, 1997. The allocation is based on a number of qualitative factors, and the
amounts presented are not necessarily indicative of actual amounts which will be
charged to any particular category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31, 1992 DECEMBER 31, 1993 DECEMBER 31, 1994
-------------------- -------------------- --------------------
% OF % OF % OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN ALLOWANCE LOANS IN
BREAKDOWN CATEGORY BREAKDOWN CATEGORY BREAKDOWN CATEGORY
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................... $ 80 9.29% $ 52 8.86% $ 54 9.64%
Real estate - construction....... 50 5.74 17 8.04 26 9.85
Real estate - mortgage........... 180 24.56 24 26.59 16 20.10
Consumer installment............. 60 6.62 270 17.25 402 26.96
Credit cards..................... 3,249 53.79 3,252 39.26 3,750 33.45
Unallocated...................... 388 - 935 - 96 -
------ ------- ------ ------- ------ -------
Total.................. $4,007 100.00% $4,550 100.00% $4,344 100.0%
====== ======= ====== ======= ====== =======
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997
-------------------- -------------------- --------------------
% OF % OF % OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN ALLOWANCE LOANS IN
BREAKDOWN CATEGORY BREAKDOWN CATEGORY BREAKDOWN CATEGORY
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................... $ 97 10.91% $ 98 10.24% $ 53 12.49%
Real estate - construction....... 30 11.37 35 13.12 51 11.49
Real estate - mortgage........... 8 17.00 350 16.71 106 15.81
Consumer installment............. 357 21.88 2,282 26.44 2,714 31.29
Credit cards..................... 4,875 38.84 13,746 33.49 11,013 28.92
Unallocated...................... 169 - - - 822 -
------ ------- ------- ------- ------- -------
Total.................. $5,536 100.00% $16,511 100.00% $14,759 100.00%
====== ======= ======= ======= ======= =======
</TABLE>
The following table summarizes data related to the Company's preapproved
and other credit card activities:
SUMMARY CREDIT CARD DATA
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1994 1995 1996 1997
-------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans outstanding:
Preapproved.............................. $ - $ 30,690 $ 57,980 $ 48,363
Other.................................... 110,870 109,183 85,802 72,844
-------- -------- -------- --------
Total............................ $110,870 $139,873 $143,782 $121,207
======== ======== ======== ========
Delinquencies:
Preapproved.............................. $ - $1,724 $ 8,665 $ 7,652
Other.................................... 5,553 6,055 6,715 5,050
-------- -------- -------- --------
Total............................ $ 5,553 $7,779 $15,380 $ 12,702
======== ======== ======== ========
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------ SEPTEMBER 30,
1994 1995 1996 1997
-------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net charge-offs:
Preapproved.............................. $ - $ 52 $ 5,078 $ 6,330
Other.................................... 4,072 6,537 7,510 4,605
-------- -------- -------- --------
Total............................ $4,072 $6,589 $12,588 $10,935
======== ======== ======== ========
</TABLE>
33
<PAGE> 35
The following table depicts credit card delinquencies 30 days or greater
past due by quarter:
CREDIT CARD DELINQUENCIES
<TABLE>
<CAPTION>
QUARTER ENDED PREAPPROVED OTHER TOTAL
- ------------- ----------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
March 31, 1994........................................... $ - $3,928 $ 3,928
June 30, 1994............................................ - 3,707 3,707
September 30, 1994....................................... - 4,256 4,256
December 31, 1994........................................ - 5,553 5,553
March 31, 1995........................................... - 5,946 5,946
June 30, 1995............................................ - 5,208 5,208
September 30, 1995....................................... 107 5,440 5,547
December 31, 1995........................................ 1,724 6,055 7,779
March 31, 1996........................................... 3,596 6,334 9,930
June 30, 1996............................................ 5,052 6,597 11,649
September 30, 1996....................................... 6,430 6,111 12,541
December 31, 1996........................................ 8,665 6,715 15,380
March 31, 1997........................................... 7,752 5,770 13,522
June 30, 1997............................................ 6,693 4,965 11,658
September 30, 1997....................................... 7,652 5,050 12,702
</TABLE>
At September 30, 1997, total credit card delinquencies were $12.7 million
compared to $15.8 million at January 31, 1997, when delinquencies peaked. Credit
card net charge-offs averaged $1 million per month during the third quarter of
1997 after peaking at $1.5 million in March 1997.
As shown in the chart above, credit card delinquencies rose significantly
during the fourth quarter of 1996. As a result, the provision for loan losses
associated with losses inherent in that portfolio increased significantly in the
fourth quarter of 1996.
Investment Securities
The levels of taxable and tax-exempt securities and short-term investments
reflect the Company's strategy of maximizing portfolio yields while providing
for liquidity needs. Investment securities totaled $74 million, $78 million and
$58 million at September 30, 1997 and December 31, 1996 and 1995, respectively.
The majority of the holdings are backed by U.S. Government or federal agency
guarantees limiting the credit risks associated with these securities. The
increase at December 31, 1996 compared to December 31, 1995 was primarily
attributable to an $18 million short-term investment in U.S. Treasury Bills at
December 31, 1996. Excluding these bills, the average maturity of the Company's
securities portfolio was 6.4 years at December 31, 1996. Including these bills,
the average maturity was 4.8 years. At year end 1996, approximately $71 million
of investment securities were classified as available-for-sale, compared to $53
million at December 31, 1995. The net unrealized loss on these securities at
December 31, 1996 was $226,000 before taxes compared to an unrealized gain of
$1.1 million before taxes at December 31, 1995.
There were no investments and no obligations of any one state or
municipality that exceeded 10% of the Company's shareholders' equity at
September 30, 1997 or December 31, 1996 or 1995.
As of September 30, 1997, the Company included all but $6 million of its
U.S. Treasury securities and obligations of U.S. Government corporations and
federal agencies, as available-for-sale. The Company maintains a relatively high
percentage of its investment portfolio as available-for-sale as a result of
possible liquidity needs required by loan production and credit card activities.
34
<PAGE> 36
The following table shows the distribution of investment securities for the
three years ended December 31, 1996 and the nine months ended September 30,
1997.
DISTRIBUTION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------------------- ------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies..... $29,830 $29,202 $30,950 $31,623 $54,128 $53,798 $46,390 $46,261
State and municipal........... 60 60 - - - - - -
Mortgage-backed securities...... 31,299 29,286 24,780 25,248 21,754 21,740 24,784 25,126
Other investments............... 1,539 1,539 1,588 1,588 1,854 1,854 2,116 2,116
------- ------- ------- ------- ------- ------- ------- -------
Total.................. $62,728 $60,087 $57,318 $58,459 $77,736 $77,392 $73,290 $73,503
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table shows the maturity distribution of investment
securities and average yields for the two years ended December 31, 1996 and the
nine months ended September 30, 1997.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AND AVERAGE YIELDS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997
--------------------------------- ------------------------------ ------------------------------
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD(2) COST VALUE YIELD(2) COST COST YIELD(2)
--------- ---------- -------- --------- ------- -------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies:
Due in less than one
year................... $ - $ - -% $17,993 $17,993 4.87% $ - $ - -%
Due in one year through
five years............. 1,987 2,147 5.35 - - - - - -
Due after five years
through ten years...... 15,973 16,457 6.27 17,436 17,362 6.96 27,440 27,521 6.74
Due after ten years...... 8,000 8,000 7.34 12,721 12,583 7.54 12,970 12,942 9.18
Mortgage-backed
securities............... 24,780 25,248 6.31 21,754 21,740 5.73 24,784 25,126 6.17
------- ------- ------- ------- ------- -------
Total............. $50,740 $51,852 $69,904 $69,678 $65,194 $65,589
======= ======= ======= ======= ======= =======
HELD-TO-MATURITY
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies:
Due in one year or
less................... $ 4,990 $ 5,019 7.23% $ - $ - -% - - -%
Due after ten years...... - - - 5,979 5,860 7.19 5,980 5,798 7.20
------- ------- ------- ------- ------- -------
Total............. $ 4,990 $ 5,019 $ 5,979 $ 5,860 $ 5,980 $ 5,798
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) This table excludes equity investments which have no maturity date.
(2) Weighted average yields are calculated on the basis of the carrying value of
the security. The weighted average yields on tax-exempt obligations are
computed on a fully taxable-equivalent basis assuming a federal tax rate of
34%.
Deposits and Funds Purchased
Total deposits as of September 30, 1997 were $547 million compared to $545
million as of December 31, 1996. Total deposits as of December 31, 1996
increased $78 million, or 16.7%, from $467 million as of December 31, 1995. On
an average balance basis, all categories of deposits reflected volume increases.
Core
35
<PAGE> 37
deposits, the Company's largest source of funding, consist of all
interest-bearing and noninterest-bearing deposits except time deposits over
$100,000. Core deposits are obtained from a broad range of customers. Average
interest-bearing core deposits were $398 million as of September 30, 1997,
compared to $438 million on December 31, 1996. Average interest-bearing core
deposits grew 36.9% to $438 million in 1996.
Noninterest-bearing deposits are comprised of certain business accounts,
including correspondent bank accounts, escrow deposits, as well as individual
accounts. Average noninterest-bearing demand deposits represented 15.4% of
average core deposits in 1996 compared to 17.2% in 1995. The average amount of,
and average rate paid on, deposits by category for the periods shown are
presented below:
SELECTED STATISTICAL INFORMATION FOR DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits.................. $ 50,637 -% $ 60,131 -% $ 70,074 -% $ 72,921 -%
Interest-bearing demand
deposits.................. 88,530 2.70 92,107 3.42 100,966 3.51 82,488 2.85
Savings deposits............ 20,914 3.01 15,292 4.30 26,516 3.99 31,272 3.64
Time deposits............... 176,381 4.62 243,617 5.85 344,551 5.79 361,063 5.73
-------- -------- -------- --------
Total average
deposits......... $336,462 3.32 $411,147 4.36 $542,107 4.53 $474,823 5.09
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
MATURITY DISTRIBUTION OF TIME DEPOSITS $100,000 OR MORE 1996 1997
- ------------------------------------------------------- ------------ -------------
<S> <C> <C>
Three months or less........................................ $37,943 $32,785
Over three through six months............................... 16,213 14,713
Over six through twelve months.............................. 23,270 20,508
Over twelve months.......................................... 9,202 8,490
------- -------
Total............................................. $86,630 $76,496
======= =======
</TABLE>
The following table shows the maximum amount of short-term borrowings and
the average and year-end amount of borrowings, as well as average interest rates
at year-end for the last three years:
SCHEDULE OF SHORT-TERM BORROWINGS(1)
<TABLE>
<CAPTION>
MAXIMUM WEIGHTED
OUTSTANDING AVERAGE AVERAGE
YEAR ENDED AT ANY AVERAGE INTEREST RATE ENDING INTEREST RATE
DECEMBER 31, MONTH-END BALANCE DURING YEAR BALANCE AT YEAR-END
------------ ----------- ------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1994.............................. $33,093 $11,005 4.23% $18,940 5.00%
1995.............................. 23,939 14,188 4.15 8,245 2.96
1996.............................. 25,760 18,907 3.67 17,184 3.06
Period Ended
September 30, 1997(1)........... 29,020 15,574 3.52 8,606 2.96
</TABLE>
- ---------------
(1) Consists of federal funds purchased, securities sold under agreements to
repurchase, and borrowings from the Federal Home Loan Bank that mature
either overnight or on a fixed maturity not to exceed three months.
Except for securities sold under agreements to repurchase, which were 30.4%
of shareholders' equity as of September 30, 1997, no other category of
short-term borrowings exceeded 30% of shareholders' equity for any period shown.
36
<PAGE> 38
Long-Term Debt
On December 12, 1995, the Company issued $15 million in Notes. The Company
loaned $7 million in 1995 and an additional $3 million in 1996 of the proceeds
to the Bank to enhance the Bank's total capital ratio. The balance of the
proceeds was used to retire certain previously issued subordinated notes and for
general corporate purposes.
The provisions of the Notes and Indenture prohibit the Company from
declaring or paying any dividend on its capital stock, including any preferred
stock, or from redeeming any of its capital stock if the cumulative amounts of
the dividends paid and amounts paid upon redemption for the three-year period
ending on the dividend declaration date or redemption date exceeds the
cumulative consolidated net income of the Company for the three-year period
ending on such date. The cumulative consolidated net income of the Company for
the three-year period ended September 30, 1997 was $1.3 million and the
dividends paid during such period were $1.5 million. In addition, no dividend
can be declared on the capital stock if an event of default has occurred and is
continuing under the Notes, including the failure to pay interest on such
indebtedness or default on other indebtedness exceeding $1 million.
Shareholders' Equity
Shareholders' equity as of September 30, 1997 was $28.2 million, an
increase of $7.1 million, or 34.0%, from December 31, 1996. This increase in
shareholders' equity is primarily attributable to the issuance of $6.2 million
of Preferred Stock. Shareholders' equity at December 31, 1996 was $21.1 million,
a decrease of $6.7 million, or 24.1%, from $27.8 million at December 31, 1995.
Realized shareholders' equity (shareholders' equity excluding unrealized gains
or losses on investment securities available-for-sale) at June 30, 1997, and
December 31, 1996, and 1995, was $26.2 million, $21.2 million and $27.1 million,
respectively.
The 1996 decline in shareholders' equity was primarily attributable to the
$5.7 million decrease in retained earnings from the net loss for 1996 and the
$830,000 decrease in the unrealized gain on investment securities
available-for-sale, net of tax.
In 1996, the Company's Common Stock dividend payout was $693,000 compared
to $644,000 and $628,000 in 1995 and 1994, respectively. In addition, on October
9, 1995, the Company paid a 10% Common Stock dividend to shareholders of record
on September 28, 1995. The following table reflects the Company's Common Stock
dividend payout for the past three years and for 1997, restated to reflect the
10% Common Stock dividend.
<TABLE>
<CAPTION>
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter............................................... $.0341 $.0341 $.0375 -
Second Quarter.............................................. .0341 .0341 .0375 -
Third Quarter............................................... .0341 .0341 .0375 -
Fourth Quarter.............................................. .0341 .0375 .0375 -
------ ------ ------
Total............................................. .1364 .1398 .1500
====== ====== ======
</TABLE>
Regulatory Capital Requirements
The Bank is a national banking association and is subject to Federal and
state statutes applicable to banks chartered under the banking laws of the
United States, to members of the Federal Reserve System and to banks whose
deposits are insured by the Federal Deposit Insurance Corporation. The FRB and
the OCC have established capital adequacy guidelines for bank holding companies
and national banks.
In 1991, Congress adopted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("1991 Act"). Additional supervisory powers and
regulations mandated by the 1991 Act include a "prompt corrective action"
program based upon five regulatory zones for banks 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
37
<PAGE> 39
another depository institution when a bank's capital leverage ratio reaches 2%.
Better capitalized institutions are subject to less onerous regulation and
supervision than banks with lesser amounts of capital.
To implement the prompt corrective action provisions of the 1991 Act, the
OCC adopted regulations which became effective on December 19, 1992, placing
financial institutions in the following five categories based upon
capitalization ratios: (i) 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%; (ii) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based
ratio of at least 4% and a leverage ratio of at least 3%; (iii) an
"undercapitalized" institution has a total risk-based ratio of under 8%, a Tier
1 risk-based ratio of under 4% or a leverage ratio of under 3%; (iv) a
"significantly undercapitalized" institution has a total risk-based ratio of
under 6%, a Tier 1 risk-based ratio of under 3% or a leverage ratio of under 3%;
and (v) a "critically undercapitalized" institution has a leverage ratio of 2%
or less. Institutions in any of the three undercapitalized categories are
prohibited from declaring dividends or making capital distributions. The
regulations also establish procedures for "downgrading" an institution to a
lower capital category based on supervisory factors other than capital. See
"Regulatory Matters -- OCC Agreement."
Capital leverage ratio standards require a minimum ratio of capital to
adjusted average assets ("leverage ratio") for the Bank of 4.0%. Institutions
experiencing or anticipating significant growth or those with other than minimum
risk profiles may be expected to maintain capital above the minimum levels.
The FRB establishes capital requirements for the Company as a function of
its oversight of bank holding companies. Each bank holding company must maintain
(i) a minimum ratio of Tier 1 capital ("Tier 1 Capital") to total risk-weighted
assets of 4.0% and (ii) a minimum ratio of total qualifying capital to total
qualifying assets ("total risk-based capital ratio") of 8.0% with the amount of
the allowance for credit losses that may be included in supplementary capital
("Tier 2 Capital") limited to 1.25% of total risk-weighted assets. The leverage
ratio established for a bank holding company is 3.0%.
The following table depicts the Company's capital ratios at December 31,
1995 and 1996 and at September 30, 1997 in relation to the minimum capital
ratios established by the regulations of the FRB:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ----------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital:
Actual........................ $26,606 6.15% $17,052 3.40% $24,590 4.89%
Minimum....................... 17,309 4.00 20,059 4.00 20,119 4.00
------- ------ ------- ------ ------- -----
Excess (Deficiency)........... $ 9,297 2.15% $(3,007) (.60)% $ 4,471 .89%
======= ====== ======= ====== ======= =====
Total risk-based capital:
Actual........................ $45,323 10.47% $31,976 6.38% $43,280 8.60%
Minimum....................... 34,619 8.00 40,118 8.00 40,237 8.00
------- ------ ------- ------ ------- -----
Excess (Deficiency)........... $10,704 2.47% $(8,142) (1.62)% $ 3,043 .60%
======= ====== ======= ====== ======= =====
Tier 1 Capital Leverage Ratio:
Actual........................ 5.42% 2.67% 4.05%
Minimum....................... 3.00 3.00 3.00
------ ------ -----
Excess (Deficiency)........... 2.42% (.33)% 1.05%
====== ====== =====
</TABLE>
The risk-based capital ratios of the Company and the Bank are calculated
under the guidelines by dividing their respective qualifying total capital by
their respective total risk-weighted assets. The Company's qualifying total
capital and total risk-weighted assets are determined on a fully consolidated
basis. Total qualifying capital is comprised of the sum of core capital elements
and supplementary capital elements. Tier 1 capital excludes any net unrealized
gains or losses resulting from the implementation of SFAS No. 115. Tier 2
capital includes the allowance for credit losses, subject to limitations.
38
<PAGE> 40
Under the guidelines, total risk-weighted assets of the Company and the
Bank are determined by assigning balance sheet assets and credit equivalent
amounts of off-balance sheet financial instruments to one of four broad risk
categories having risk weights ranging from zero % to 100%. The aggregate dollar
amount of each category is multiplied by the risk weight associated with that
category and the resulting weighted values from each category are summed to
determine total risk-weighted assets.
Regulatory Agreements
The Company and the Bank are principally regulated by the FRB and the OCC,
respectively. At periodic intervals, the OCC examines and evaluates the
financial condition, operations, policies and procedures of nationally chartered
banks, such as the Bank, as part of its legally prescribed oversight
responsibilities.
On November 14, 1996, the Bank entered into an agreement with the OCC ("OCC
Agreement") which provides that the Bank will (i) appoint an "Oversight
Committee"; (ii) achieve and maintain specified higher capital levels; (iii)
develop a three-year capital program which will include, among other things,
certain restrictions on dividend payments by the Bank and (iv) revise and amend
its strategic plan. On April 3, 1997, the OCC notified the Bank that since it
did not meet the minimum capital levels established for an "adequately
capitalized" bank as of December 31, 1996, the Bank was deemed to be
"undercapitalized" and was subject to prompt corrective action pursuant to 12
U.S.C. Sec. 1831o. As a result, the Bank was subject to restrictions on its
ability to pay dividends and management fees and to restrictions on asset growth
and expansion. The Bank was required to file a capital restoration plan with the
OCC before May 19, 1997, which was submitted and approved by the OCC. On June
24, 1997, the Company issued $4.7 million in Preferred Stock, the net cash
proceeds of which were invested in preferred stock of the Bank. As a result of
the issuance of the Preferred Stock and subsequent investment in the Bank, on
September 30, 1997, the Company and the Bank were adequately capitalized and no
longer subject to such prompt corrective action.
The Oversight Committee is comprised of three members of the board of
directors of the Bank, a majority of whom are not employees of the Company. The
Oversight Committee, which meets and reports monthly to the Board of Directors,
is responsible for monitoring and coordinating compliance by the Bank with the
OCC Agreement.
The Board of Directors of the Bank submitted to the OCC a three-year
capital program, which was approved as modified. The capital program includes
projections for growth and capital requirements, projections of the sources and
timing of additional capital to meet the current and future capital needs of the
Bank and contingency plans in the event the primary sources of capital projected
are not available. The OCC Agreement permits the Bank to declare dividends on
preferred stock held by the Company only when the Bank is "adequately
capitalized." The Bank may also declare dividends on its common stock held by
the Company only when the Bank is in compliance with its approved capital
program and with the prior written approval of the OCC.
The Board of Directors of the Bank is revising its strategic plan in light
of the revised levels of capital required and its growth plans. The revised
strategic plan will include objectives for earnings performance, growth, balance
sheet mix, off-balance sheet activities, liability structure, capital adequacy,
product line development and market segments which the Bank intends to promote
or develop together with strategies to achieve these objectives. The strategic
plan, when revised, will be submitted to the OCC for approval.
The Bank periodically submits reports to the OCC evidencing compliance with
the OCC Agreement. The OCC Agreement continues in effect until it is amended or
terminated. If the Bank continues to fail to meet its required capital levels,
the operations and future prospects of the Bank will depend principally on
regulatory attitudes and actions at the time, within applicable legal
constraints. Such failure could result in such operating restrictions as growth
limitations, prohibitions on dividend payments, increased supervisory
monitoring, limitations on executive compensation, restrictions on deposit
interest rates, forced merger, or regulatory seizure.
The OCC Agreement establishes higher capital requirements than those
applicable to an adequately capitalized Bank under the OCC regulations.
Specified capital levels were to be achieved by the Bank by
39
<PAGE> 41
April 30, 1997 and are to be maintained until November 30, 1997. At November 30,
1997, higher capital levels become effective and are applicable thereafter. The
table below sets forth the capital requirements for the Bank under the OCC
regulations and under the OCC Agreement and the Bank's actual capital ratios at
December 31, 1996 and September 30, 1997.
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT ACTUAL
------------------------- ------------------------ ----------------------------
ADEQUATELY WELL APRIL 30, NOVEMBER 30, DECEMBER 31, SEPTEMBER 30,
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 1996 1997
- -------------- ----------- ----------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Leverage...................... 4.00% 5.00% 5.00% 6.00% 3.27% 4.57%
Risk-Based Capital:
Tier 1...................... 4.00 6.00 6.00 7.00 4.16 5.52
Total....................... 8.00 10.00 10.00 11.00 7.43 8.78
</TABLE>
Set forth below are pertinent capital ratios for the Company as of December
31, 1996, and September 30, 1997, under the FRB regulations:
<TABLE>
<CAPTION>
ACTUAL
----------------------------
MINIMUM CAPITAL DECEMBER 31, SEPTEMBER 30,
CAPITAL RATIOS REQUIREMENT 1996 1997
- -------------- --------------- ------------ -------------
<S> <C> <C> <C>
Leverage...................................... 3.00% 2.67% 4.05%
Risk-Based Capital:
Tier 1...................................... 4.00 3.40 4.89
Total....................................... 8.00 6.38 8.60
</TABLE>
Generally, dividends that may be paid by the Bank to the Company are
subject to certain regulatory limitations. Under Federal banking law, the
approval of the OCC will be required if the total of all dividends declared in
any calendar year by the Bank exceeds the Bank's net profits to date for that
year combined with its retained net profits for the preceding two years, subject
to the maintenance of minimum required regulatory capital. At September 30, 1997
and December 31, 1996, total shareholders' equity of the Bank was $31 million
and $25 million, respectively. At December 31, 1996, payment of future dividends
on the common stock of the Bank was precluded by the OCC Agreement until the
Bank is in compliance with its approved capital program and it has received
written approval from the OCC.
Absent sales of equity securities or subordinated debt by the Company,
capital will increase only through the retention of earnings. To meet the
capital requirements in the OCC Agreement, management has estimated that as of
September 30, 1977, an additional $12 million of capital will be needed to reach
the requirements.
The Board of Directors of the Company adopted resolutions ("FRB Agreement")
on February 13, 1997, as requested by the Federal Reserve Bank of Atlanta, that
prohibits the Company from paying dividends and incurring debt without prior
approval of the FRB.
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 pattern of
assets and liabilities. It is the Company's policy not to invest in derivatives
in the ordinary course of business. The Company performs a monthly 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 residential mortgage loans are
included based on scheduled payments and credit card loans with a fixed rate are
spread based on historical run-off experience over an eight month period.
Through such analysis, the Company monitors and manages its interest rate
sensitivity gap to minimize the effects of changing interest rates.
The interest rate sensitivity structure within the Company's balance sheet
at September 30, 1997 has a cumulative net interest sensitive liability gap of
19.29% when projecting out one year. In the near term, defined as 90 days, the
Company has a cumulative net interest sensitivity asset gap of 17.49% as of
September 30, 1997. The interest rate sensitivity structure within the Company's
balance sheet at December 31, 1996
40
<PAGE> 42
indicated a cumulative net interest sensitive liability gap of 14.20% when
projecting out one year. In the near term, defined as 90 days, the Company had a
cumulative net interest sensitivity asset gap of 20.61% as of December 31, 1996.
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. 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.
At December 31, 1996 and September 30, 1997, the 90 day and 0-30 day
windows included $25 million and $35 million of indirect automobile loans
classified as held-for-sale. By selling these loans the Bank becomes less
interest sensitive. The Company's policy states that the cumulative gap at the
six month and one year period should not exceed 10%. The Company interest rate
shock analysis indicates that the Company is relatively insensitive to an
interest rate shock of plus or minus 200 basis points.
The following table illustrates the Company's interest rate sensitivity at
December 31, 1996 as well as the cumulative position at December 31, 1996 and
September 30, 1997:
INTEREST RATE SENSITIVITY ANALYSIS(1)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------
REPRICING WITHIN
-------------------------------------------------------------------------------------------------
0-30 31-60 61-90 91-120 121-150 151-180 OVER
DAYS DAYS DAYS DAYS DAYS DAYS ONE YEAR ONE YEAR TOTAL
-------- -------- -------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities
available-for-sale....... $ 17,993 $ - $ - $ - $ - $ - $ - $ 53,238 $ 71,231
Investment securities
held-to-maturity......... - - - - - - 301 5,979 6,280
Loans...................... 184,918 5,902 5,145 4,905 4,712 4,630 29,216 189,395 428,823
Loans held for sale........ 13,106 - 25,000 - - - - - 38,106
Federal funds sold......... 343 - - - - - - - 343
Due from banks - interest
earning.................. 3,301 - - - - - - - 3,301
-------- -------- -------- -------- -------- -------- --------- -------- --------
Total
interest-earning
assets........... 219,661 5,902 30,145 4,905 4,712 4,630 29,517 248,612 548,084
INTEREST-BEARING
LIABILITIES
Demand deposit accounts.... 3,694 3,694 3,694 3,694 3,694 3,694 22,164 29,549 73,877
Savings and NOW accounts... 1,258 1,258 1,258 1,258 1,258 1,258 7,557 60,404 75,509
Money market............... 2,090 2,090 2,090 2,090 2,090 2,090 12,543 16,727 41,810
Time Deposits>$100,000..... 21,892 8,102 8,376 5,919 6,691 3,179 22,906 9,565 86,630
Time Deposits<$100,000..... 19,931 17,389 27,262 25,746 17,602 12,411 76,694 64,852 266,887
Long-term debt............. 1,500 - - - - - - 15,000 16,500
Short-term borrowings...... 17,184 - - - - - - - 17,184
-------- -------- -------- -------- -------- -------- --------- -------- --------
Total
interest-bearing
liabilities...... 67,549 32,533 42,680 38,707 31,335 22,632 141,864 201,097 578,397
-------- -------- -------- -------- -------- -------- --------- -------- --------
Interest-sensitivity gap... $152,112 $(26,631) $(12,535) $(33,802) $(26,623) $(18,002) $(112,347) $ 47,515 $(30,313)
======== ======== ======== ======== ======== ======== ========= ======== ========
Cumulative gap at
12/31/96................. $152,112 $125,481 $112,946 $ 79,144 $ 52,521 $ 34,519 $ (77,828) $(30,313)
======== ======== ======== ======== ======== ======== ========= ========
Ratio of cumulative gap to
total interest-earning
assets................... 27.75% 22.89% 20.61% 14.44% 9.58% 6.30% (14.20)% (5.53)%
Ratio of interest-sensitive
assets to
interest-sensitive
liabilities (12/31/96)... 325.19 18.14 70.63 12.67 15.04 20.46 20.81 123.63
Cumulative gap at
9/30/97.................. $147,150 $123,213 $ 99,256 $ 77,921 $ 52,522 $ 22,074 $(109,470) $ (5,845)
</TABLE>
- ---------------
(1) The Company follows FDIC guidelines for non-maturity deposit accounts across
multiple time bands. Savings and NOW accounts are equally distributed over
60 months with a limit of 40% of the total balance in the three to five year
time frame. Demand deposits and money market accounts are distributed over
36 months with a limit of 40% of the total balance in the one-to-three year
time frame.
41
<PAGE> 43
LIQUIDITY
Market and public confidence in the financial strength of the Bank and
financial institutions in general will largely determine the Bank's access to
appropriate levels of liquidity. This confidence is significantly dependent on
the Bank's ability to maintain sound asset credit quality and appropriate levels
of capital resources.
Liquidity is defined as the ability of the Bank to meet anticipated
customer demands for funds under credit commitments and deposit withdrawals at a
reasonable cost and on a timely basis. Management measures the Bank's liquidity
position by giving consideration to both on-and off-balance sheet sources of and
demands for funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities; investment
securities eligible for pledging to secure borrowings from dealers and customers
pursuant to securities sold under agreements to repurchase ("repurchase
agreements"); loan repayments; loan sales; deposits and certain interest
rate-sensitive deposits; and borrowings under overnight federal fund lines
available from correspondent banks. During 1996 and the nine month period ended
September 30, 1997, the Company sold or securitized $195 million and $81
million, respectively, in indirect automobile and credit card loans. In addition
to interest rate-sensitive deposits, the Bank's principal demand for liquidity
is anticipated fundings under credit commitments to customers.
Maintaining appropriate levels of capital is an important factor in
determining the availability of critical sources of liquidity. At December 31,
1996, capital ratios had declined below regulatory minimums. This decline
tightened the Company's liquidity position and reduced the availability of
traditional funding sources, including warehouse borrowing from the Federal Home
Loan Bank (FHLB), the ability to acquire brokered deposits, and unsecured
federal funds lines. At September 30, 1997, as a result of the issuance of
Preferred Stock, capital ratios have been restored to above regulatory minimums
and the Company's liquidity sources have expanded to again include the FHLB. At
September 30, 1997, the Bank had a $50 million credit availability with the
FHLB. In addition the restriction on brokered deposits no longer applies and the
Bank is negotiating to obtain unsecured federal funds lines.
Management of the Bank seeks to maintain a stable net liquidity position
while optimizing operating results, as reflected in net interest income, the net
yield on earning assets and the cost of interest-bearing liabilities in
particular. Key management meets regularly to review the Bank's current and
projected net liquidity position and to review actions taken by management to
achieve this liquidity objective.
The Company's Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements present certain information about cash flows
from operating, investing and financing activities. The Company's principal cash
flows relate to investing and financing activities of the Bank, rather than
operating activities. While the statement presents the periods' net cash flows
from lending and deposit activities, it does not reflect certain important
aspects of the Bank's liquidity described above, including (i) anticipated
liquidity requirements under outstanding credit commitments to customers, (ii)
intraperiod volatility of deposits, particularly fluctuations in the volume of
commercial customers' noninterest-bearing demand deposits and (iii) unused
borrowings available under federal funds lines, repurchase agreements, and other
arrangements. The Bank's principal source of operating cash flows is net
interest income.
FNC's liquidity sources are limited, and it primarily relies on equity
sales, borrowings, interest income, management fees and dividends from the Bank
as sources of liquidity. Interest and dividends from subsidiaries ordinarily
provide a source of liquidity to a bank holding company. Currently the Bank can
pay interest on its subordinated debt and cash dividends on its preferred stock
without the prior written consent of the OCC. As discussed previously, FNC and
the Bank have entered into agreements which also impact their overall liquidity
position. See "-- Regulatory Agreements." In accordance with those agreements,
dividends on the common stock of the Bank can only be paid when the Bank is in
compliance with the OCC Agreement and with the prior written consent of the OCC.
In addition, FNC is prohibited from incurring additional debt without the prior
approval of the FRB.
42
<PAGE> 44
Net cash from operating activities primarily results from net income or
loss adjusted for the following noncash items: the provision for loan losses and
depreciation and amortization. Net cash provided by operations was negatively
impacted in 1995 by the increase in indirect automobile loans held for sale of
$35 million. This followed an increase in net cash provided by operations of $19
million in 1994 when loans held for sale declined, due primarily to a decrease
in mortgage loan production. Cash was available during 1996 to increase earning
assets and to pay dividends of $692,909.
Significant financing activities include growth in core deposits,
short-term borrowings, and long-term debt. In 1995 the Company sold $16.2
million in subordinated notes and retired $1.5 million in subordinated debt. The
resulting increase in subordinated notes enhanced the Company's total risk-based
capital ratio. The Company plans to meet immediate capital needs from the
anticipated issuance of equity securities. In addition, the Company anticipates
that additional capital will be provided by growth in retained earnings and, if
appropriate, from the issuance of additional subordinated debt.
Cash flows from time deposits, which increased to $84 million in 1996 and
$16 million during the nine months ended September 30, 1997, were primarily used
to support loan growth. In addition, during the year ended December 31, 1996 the
Company routinely utilized brokered deposits to fund interim period loan growth
for loan sales and a securitization. No such deposits were outstanding as of
year end. Due to its capital ratios at year-end, the Company no longer meets the
requirements to utilize such deposits. The Company had unused sources of
liquidity in the form of unused unsecured federal funds lines of $20 million at
December 31, 1996. As stated above, such lines now require security. The Company
manages asset and liability growth through pricing strategies within regulatory
capital constraints.
Except for the possible adverse effects arising out of the FRB and OCC
Agreements discussed in "-- Regulatory Capital Requirements" and "-- Regulatory
Agreements," and the level of the Company's credit card and indirect automobile
loan delinquencies and charge-offs, there are no known trends, events, or
uncertainties of which the Company is aware that will have or that are likely to
have a material adverse effect on the Company's liquidity, capital resources or
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The adoption did not have a material impact on the financial position or
results of operations of the Company.
Beginning on January 1, 1997, the Company adopted the provisions of
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," SFAS No. 125, which provides new accounting and reporting
standards for sales, securitizations and servicing of receivables and other
financial assets and extinguishments of liabilities and supersedes SFAS 122.
SFAS No. 125 is effective for transactions occurring after December 31, 1996,
except those provisions relating to repurchase agreements, securities lending
and other similar transactions and pledged collateral, which have been delayed
until after December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of Statement No. 125, an amendment of FASB Statement No.
125."
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." The statement revises standards for computing and
presenting net income per share by (a) replacing primary net income per share
with basic net income per share, (b) requiring dual presentation of basic and
diluted net income per share for entities with complex capital structures, and
(c) requiring a reconciliation of the basic net income per share computation to
diluted net income per share. Basic net income per share is calculated by
dividing net income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted net income per share
includes the effect of potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
shares. The adoption of SFAS No. 128 will not have a material effect on the
Company's earnings per share calculations.
43
<PAGE> 45
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
is effective for annual and interim periods ending after December 15, 1997. This
statement requires that all items that are required to be recognized under
accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for annual and interim
periods ending after December 15, 1997. This statement establishes standards for
the method that public entities are to use to report information about operating
segments in annual financial statements and requires that those enterprise
reports be issued to shareholders. It also establishes standards for related
disclosures about products and services, geographical areas and major customers.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, certain
consolidated quarterly financial information of the Company. This information is
derived from unaudited consolidated financial statements which include, in the
opinion of management, all normal recurring adjustments which management
considers necessary for a fair presentation of the results for such periods.
This information should be read in conjunction with the Company's consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus. The results for any quarter are not necessarily indicative of
results for any future period.
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------------------------------- -----------------
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest income...................... $10,928 $11,650 $12,322 $13,180 $13,718 $14,963
Interest expense..................... 3,989 4,682 5,019 5,181 5,837 6,776
------- ------- ------- ------- ------- -------
Net interest income.................. 6,939 6,968 7,303 7,999 7,881 8,187
Provision for loan losses............ 1,380 1,710 2,000 3,000 2,400 3,000
Noninterest income before securities
gain................................ 1,882 2,484 2,876 3,582 3,368 4,830
Securities gains..................... 102 139 206 408 87 195
------- ------- ------- ------- ------- -------
Total noninterest income............. 1,984 2,623 3,082 3,990 3,455 5,025
Noninterest expense.................. 5,874 6,193 6,458 7,058 8,005 8,621
------- ------- ------- ------- ------- -------
Income (loss) before income taxes.... 1,669 1,688 1,927 1,931 931 1,591
Income tax (benefit) expense......... 596 599 691 680 328 586
------- ------- ------- ------- ------- -------
Net income (loss).................... $ 1,073 $ 1,089 $ 1,236 $ 1,251 $ 603 $ 1,005
======= ======= ======= ======= ======= =======
Net income (loss) per share.......... $ .23 $ .24 $ .27 $ .27 $ .13 $ .22
======= ======= ======= ======= ======= =======
<CAPTION>
1996 1997
----------------- ---------------------------
THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income...................... $15,644 $15,475 $15,246 $15,611 $15,953
Interest expense..................... 7,151 6,963 6,521 6,429 6,650
------- ------- ------- ------- -------
Net interest income.................. 8,493 8,512 8,725 9,182 9,303
Provision for loan losses............ 5,700 14,027 4,770 3,500 3,400
Noninterest income before securities
gain................................ 4,053 5,450 5,234 3,581 4,173
Securities gains..................... 79 243 - - -
------- ------- ------- ------- -------
Total noninterest income............. 4,132 5,693 5,234 3,581 4,173
Noninterest expense.................. 9,521 9,341 8,717 8,771 9,247
------- ------- ------- ------- -------
Income (loss) before income taxes.... (2,596) (9,163) 472 492 829
Income tax (benefit) expense......... (992) (3,417) 163 154 288
------- ------- ------- ------- -------
Net income (loss).................... $(1,604) $(5,746) $ 309 $ 338 $ 541
======= ======= ======= ======= =======
Net income (loss) per share.......... $ (.35) $ (1.24) $ .07 $ .07 $ .09
======= ======= ======= ======= =======
</TABLE>
44
<PAGE> 46
BUSINESS
GENERAL
Fidelity National Corporation is a bank holding company headquartered in
Atlanta, Georgia. The Company, which commenced operations as Fidelity National
Bank in 1973, provides traditional deposit, lending, mortgage, securities
brokerage, international trade services and trust products and services to its
commercial and retail customers through its subsidiaries. FNB is a full-service
banking operation; FNMC is a full-service residential mortgage banking
operation; and FNCI is a securities brokerage operation. The Company currently
conducts its full-service banking and residential mortgage lending businesses
through 16 locations in the metropolitan Atlanta area. Indirect automobile
lending (the purchase of consumer automobile installment sales contracts from
automobile dealers), residential mortgage lending and residential construction
lending are conducted through certain of its Atlanta offices and the Company's
Jacksonville, Florida location. Indirect automobile lending is also conducted at
the Tampa, Florida location which was opened in 1995. At September 30, 1997, the
Company had total assets of $605 million, total loans of $459 million, total
deposits of $547 million and shareholders' equity of $28 million.
STRATEGY
The Company's long-term strategy is to (i) continue to grow its
full-service banking operations, primarily in the metropolitan Atlanta area, by
fully utilizing its current branch capacity and by opening additional bank
branches; (ii) capitalize on the consolidating metropolitan Atlanta banking
market by increasing commercial and real estate loans and other banking
services, primarily to small and medium sized companies; (iii) strengthen its
credit card lending operations and processes; (iv) enhance operating
efficiencies; and (v) further strengthen the Company's senior management team.
Continue to grow banking operations. The Company is focused on growing its
full-service banking operations by leveraging its current branch capacity
resulting from the Company's recent opening of four branch offices and the move
of one branch into a significantly improved facility. These branches are not yet
mature and they continue to experience steady deposit and loan growth. In
addition, the Company has acquired and equipped three additional branches, which
it intends to open following the Offering subject to OCC approval. The Company
is currently incurring the fixed costs associated with these new and unopened
branches. Upon successful capitalization, the Company expects to be able to grow
the deposits of these new and unopened branches, thereby improving the return
realized on the Bank's operating cost structure. During the past twelve months,
the Company added six automated teller machines ("ATMs"), bringing the total
number of ATMs in its network to 27 at September 30, 1997. The Company expects
to add ten additional ATMs during the next twelve months.
Capitalize on the consolidating metropolitan Atlanta banking market. The
Company is positioning itself as the financial institution alternative to the
larger commercial banks headquartered outside of metropolitan Atlanta that have
been acquiring Atlanta commercial banks and thrifts. Management seeks to
capitalize on markets which it believes are being underserved as a result of
these acquisitions by increasing commercial loans and other banking services,
primarily to small and medium sized companies. The Company believes there is
still value to be added by providing the opportunity for greater personalized
banking relationships than exist with the larger commercial banks in its target
markets and will continue to emphasize personalized service by a locally
headquartered financial institution in order to differentiate itself from its
larger competitors. FNB's asset size of $604 million at September 30, 1997 and
legal lending limit per borrower of approximately $7.8 million position it to
work more effectively with middle-market customers than many smaller community
banks in the Atlanta metropolitan area.
Strengthen credit card lending activities. Management of the Company has
recently undertaken several initiatives to improve and return to profitability
its credit card lending activities. The Company has discontinued the issuance of
preapproved credit cards under affinity programs, increased the rates and fees
on a significant portion of its credit card accounts to appropriately reflect
the risk levels and strengthened the collection and recovery processes on credit
card accounts. The Company continues to implement new
45
<PAGE> 47
procedures and technologies to enhance its ability to monitor and manage the
exposures inherent in its credit card portfolio. The Company currently does not
plan to issue new affinity credit cards or aggressively market new credit cards.
As a result, the Company expects its credit card loans to diminish as a
percentage of its total loan portfolio. Over time, and in conjunction with an
increase in commercial loans and retained indirect automobile loans, the
reduction in credit card loans is expected to result in an increase in the
percentage of secured loans in the Company's loan portfolio.
Enhance operating efficiencies. During the fourth quarter of 1996, the
Company consolidated its data processing, deposit and loan operations and its
collection and consumer product operations into a centrally located office. In
connection with this consolidation, the Company has and is continuing to upgrade
its software and management information systems designed to improve marketing
and operating efficiencies. Specifically, the Company has implemented automated
dialers for marketing products and collection, telephone banking software,
delinquency analysis software, collection software and enhanced accounting
systems software. The Company continues to analyze its infrastructure and
technological developments in the banking industry for opportunities to improve
the efficiency of its operations.
Further Strengthen Senior Management. On September 15, 1997, FNB hired
Larry D. Peterson as its President and Chief Executive Officer. In addition,
during the past two years the Company has hired a senior consumer credit
officer, a manager of credit cards and a manager of indirect automobile lending.
The Company intends to continue to strengthen senior management. See
"Management."
MARKET AREA
The Atlanta metropolitan area has been, and is expected to continue to be,
one of the fastest growing metropolitan areas in the country. The population in
the Atlanta metropolitan area grew from 2,977,000 in 1990 to 3,514,000 in 1996,
an average annual growth rate of 3%. The Atlanta metropolitan area has also
experienced substantial job growth. According to the Georgia Department of
Labor, the Atlanta economy created over 80,000 new jobs in each year from 1993
through 1996, while the local unemployment rate dropped during that period from
5.2% to 3.8%. The May 1997 "Forecast of Georgia & Atlanta" issued by the Georgia
State University Economic Forecasting Center, has estimated that population
growth in the Atlanta metropolitan area will continue at annual rates of at
least 2.6% through 1999. The Economic Forecasting Center also expects job growth
to continue, with 52,300, 40,800 and 35,000 new jobs created in 1997, 1998 and
1999, respectively, during which periods it projects the national economy will
be slowing.
FNB conducts banking activities primarily through 16 branches in Fulton,
DeKalb, Cobb and Gwinnett counties, Georgia. Four of these branches were opened
in 1996 and the Company intends to open three additional branches in the Atlanta
metropolitan area following the Offering. Customers of FNB are primarily small
and medium sized businesses and individuals. FNB's customer base for its credit
card portfolio is national in scope, with customers in all 50 states. FNB also
conducts indirect automobile lending and residential construction lending from
its Jacksonville, Florida office in addition to its offices in Georgia. FNB also
conducts indirect automobile lending from its Tampa, Florida office. Customers
of its other services are located almost exclusively in Georgia.
PRODUCTS AND SERVICES
The Company's products and services include (i) depository accounts, (ii)
indirect automobile lending, (iii) credit card loans, (iv) construction and
residential real estate loans, (v) commercial loans, including commercial loans
secured by real estate, (vi) securities brokerage services, (vii) trust products
and services and (viii) international trading services.
Deposits
FNB offers a full range of depository accounts and services to both
individuals and businesses. As of September 30, 1997, the Company's deposit
base, totaling approximately $547 million, consisted of approximately $79
million in noninterest-bearing demand deposits (14.4% of total deposits),
approximately $80 million in interest-bearing demand deposits and money market
accounts (14.6% of total deposits),
46
<PAGE> 48
approximately $22 million in savings deposits (4.0% of total deposits),
approximately $291 million in time deposits in amounts less than $100,000 (53.2%
of total deposits), and approximately $77 million in time deposits of $100,000
or more (14.0% of total deposits). There were no brokered deposits on June 30,
1997.
Lending
FNB's primary lending activities include consumer loans (indirect
automobile and credit card loans), real estate loans and commercial loans to
small and medium sized businesses. FNB also makes secured construction loans to
home builders and residential mortgagees in the Atlanta, Georgia and
Jacksonville, Florida metropolitan areas. The loans are often secured by first
and second real estate mortgages. FNB offers direct installment loans to
consumers on both a secured and unsecured basis. Commercial lending includes the
extension of credit to a company directly or to individuals for business
purposes.
As of September 30, 1997, the Company had consumer (including installment
and credit card loans), real estate (including residential mortgage,
construction and commercial loans secured by real estate), and commercial loans
of $288 million, $119 million and $52 million, representing approximately 62.7%,
25.9% and 11.4%, respectively, of the Company's total loan portfolio. As of
September 30, 1997, real estate loans of the Company totaled $119 million. These
loans included $48 million in construction loans, $44 million in residential
real estate loans and $27 million in commercial loans secured by real estate. As
of September 30, 1997, commercial loans of the Company, including those
commercial loans secured by real estate, totaled $79 million. Commercial loans
not secured by real estate totaled $52 million, or 11.4% of the total loan
portfolio of the Company.
Indirect Automobile Lending
FNB acquires, on a non-recourse basis, consumer installment contracts
secured by new and used vehicles purchased by consumers from motor vehicle
dealers located primarily in Atlanta, Georgia, Jacksonville and Tampa, Florida.
As of September 30, 1997, the aggregate amount of indirect automobile loans
outstanding was $150 million, 36.2% of FNB's total loan portfolio. Approximately
62.7%, 16.3% and 14.8% of the outstanding indirect automobile loans at September
30, 1997 were originated in the Atlanta and Jacksonville and Tampa offices,
respectively. An additional $134 million of indirect automobile loans originated
and sold by the Company are being serviced for others. This business has grown
significantly and origination volume for the quarter ended September 30, 1997
was approximately $59 million. Each potential sales finance contract is reviewed
for creditworthiness and collateral value by FNB, which notifies the dealer as
to the terms (including interest rate and length of contract) on which the loan
will be made to the dealer's customer. Since the sales finance contracts are
purchased by FNB on a nonrecourse basis, no credit is being extended to the
dealers and the dealers have no liability for the sales finance contracts
purchased from them, except to the extent of the dealer reserve discussed below.
Once the loan has been documented, the dealer assigns the contract to FNB.
The interest rate quoted by a dealer on a sales finance contract may exceed
the interest charged by FNB on the particular contract. That interest
differential or flat fee, depending on dealer arrangement, accrues in a prepaid
asset account. Usually 75% to 100% of the interest differential or flat fee is
immediately paid to the dealer as compensation for originating and documenting
the loan. The unpaid portion is retained in the dealer holdback account and FNB
may deduct from this account potential prepayments, rebates, charge-offs and any
rebates of interest charges due FNB on sales finance contracts purchased from
the dealer. If any amount is remaining in the holdback account at the time all
sales finance contracts purchased by FNB from the dealer have been paid in full,
such amount is paid to the dealer. As of September 30, 1997, the balance in the
holdback account was $189,000. The Company's potential charge-offs in excess of
the holdback are provided for in the allowance for loan losses. As of September
30, 1997, the aggregate amount of indirect automobile financing loans
outstanding was approximately $166 million. Net charge-offs on indirect
automobile loans for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997 were $303,000, $1.6 million and $2.4 million,
respectively.
47
<PAGE> 49
Credit Card Loans
FNB offers Visa, MasterCard, Visa Gold, ConsumerCard Visa, affinity Visa
programs and sponsored FNB Visa/MasterCard programs on a nationwide basis to
persons, businesses, partnerships and associations who meet FNB's established
underwriting standards with respect to income, credit rating, established
residence or domicile and employment. Credit card loans are subject to seasonal
fluctuations based on consumer spending habits, with the outstanding balances of
such credit card loans rising at the end of each calendar year. As of September
30, 1997, credit card loans were approximately $121 million, or 26.4% of the
Company's total loan portfolio. The credit card portfolio was built
substantially through affinity programs. The Company's affinity programs include
colleges, associations and other entities which contract to assist the Company
in marketing the Company's credit cards in return for issuance and transaction
fee income
Residential Mortgage Banking
FNMC is engaged in the residential mortgage banking business, focusing on
one-to-four family properties. FNMC offers FHA, VA, conventional and
non-conforming loans (those with balances over $203,150). In addition, FNMC
purchases loans from independent mortgage companies located in the Southeast.
FNMC operates from the Company's office in Corporate Square, Atlanta, Georgia as
well as three other locations in the Atlanta metropolitan area and also has a
loan origination office in Jacksonville, Florida. FNMC is an approved originator
and servicer for Freddie Mac and Fannie Mae and is an approved originator for
loans insured by HUD.
Mortgage loans held-for-sale fluctuate due to economic conditions, interest
rates, the level of real estate activity and seasonal factors. During 1996, FNMC
originated approximately $7 million in loans to be held in FNB's portfolio. FNMC
typically retains the right to service mortgages sold to investors, but from
time to time sells servicing rights to other mortgage loan servicers. Servicing
activities include the collection of principal and interest payments,
maintenance of escrow balances and remittance of insurance and tax payments on
behalf of mortgagees and the offer of insurance products to borrowers. In return
for servicing mortgages, FNMC is entitled to a servicing fee, generally .25% to
.50% per annum of the outstanding principal balance of a mortgage serviced. Due
to normal amortization of the principal balance, the dollar amount of the fee
earned on a particular mortgage declines over time and no further fee will be
earned if the mortgage is prepaid or goes into default. During 1996 and the nine
months ended September 30, 1997, the Company closed $176 million and $79 million
of residential mortgage loans, respectively. All servicing rights were retained,
except for government and non-conforming loans. As of September 30, 1997, FNMC
serviced residential mortgage loans totaling $254 million, of which $13 million
were held by FNB and $241 million were serviced for others. See "-- Supervision
and Regulation -- Regulation of Mortgage Banking."
Securities Brokerage Services
FNCI commenced business as a full-service broker in late 1992, after
registration as a broker-dealer with the Commission in October 1992 and with the
State of Georgia on May 15, 1992. In October 1992, FNCI registered as an
investment advisor with the Commission, received approval from the Federal
Reserve to operate as a fully disclosed introducing broker and became a member
of the NASD. FNCI operates from its headquarters in Atlanta and from three other
offices in FNB's banking facilities in the Atlanta metropolitan area.
Trust Products and Services
FNB provides investment products and services to individuals and
organizations under trust and agency agreements. Currently, FNB services
approximately $282 million in assets, with the majority of accounts in custodial
and self-directed IRAs. Other services include personal trusts, employee benefit
trusts, guardianships, estate settlement accounts, management agency accounts
and corporate trusts.
International Trade Services
FNB provides services to individuals and company clients in meeting their
international business requirements. Letters of credit, foreign currency drafts,
foreign clean and documentary collections, export finance and international wire
transfers are some of the services provided.
48
<PAGE> 50
SIGNIFICANT OPERATING POLICIES
Lending Policy
Lending authority is delegated by the Board of Directors of FNB to loan
officers, each of whom is limited as to the amount of secured and unsecured
loans that he or she can make to a single borrower or related group of
borrowers. All loans in excess of $100,000 (new relationships) or $250,000
(existing relationships) must be approved by a committee of officers of the
Bank. All loans over $500,000 must be approved by the President and Chief
Executive Officer of the Bank or the Vice Chairman of the Bank. All loans in
excess of $1,000,000 must be approved by the Loan and Discount Committee of the
Board of Directors of the Bank.
FNB provides written guidelines for lending activities. Secured loans,
except indirect installment loans which are generally secured by the vehicle
purchased, are made to persons who are well-established and have net worth,
collateral and cash flow to support the loan. Real estate loans are made only
when such loans are secured by real property located in Georgia or the
Jacksonville, Florida area. Unsecured loans, except credit card loans, are
normally made by FNB only to persons who maintain depository relationships with
FNB. The Company does not have a rollover policy. Any loan renewal request is
reviewed in the same manner as an application for a new loan.
Under certain circumstances, FNB takes investment securities as collateral
for loans. If the purpose of the loan is to purchase or carry margin stock, FNB
will not advance loan proceeds of more than 50% of the market value of the stock
serving as collateral. If the loan proceeds will be used for purposes other than
purchasing or carrying margin stock, FNB generally will lend up to 70% of the
current market value of the stock serving as collateral.
Making loans to businesses for working capital is a traditional function of
commercial banks. Such loans are expected to be repaid out of the current
earnings of the commercial entity and the ability of the borrower to service its
debt is dependent upon the success of the commercial enterprise. It is FNB's
policy to require security for these loans.
For loans that are collateralized by inventory, furniture, fixtures and
equipment of a small business, FNB does not generally advance loan proceeds of
more than 60% of the inventory value and more than 50% of the furniture,
fixtures and equipment value serving as collateral. When inventory serves as
primary collateral, accounts receivable generally will also be taken as
collateral. Maximum collateral values for accounts receivable are recognized as
follows: 75% for receivables outstanding 60 days or less; 50% for receivables
outstanding 61 to 90 days; and no collateral value will be assigned for accounts
receivable outstanding past 90 days.
Many of FNB's commercial loans are secured by real estate (and thus are
categorized as real estate mortgage loans) because such collateral may be
superior to other types of collateral owned by small businesses. Loans secured
by commercial real estate, however, are subject to certain inherent risks.
Commercial real estate may be substantially illiquid, and commercial real estate
values are difficult to ascertain and are subject to wide fluctuations depending
upon economic conditions. FNB requires that qualified independent appraisers
determine the value of any commercial real estate taken as collateral, and FNB
will generally lend 75% of the appraised value or the purchase price of the real
estate, whichever is less.
FNB originates short-term residential construction loans for detached
housing and a limited number of residential acquisition and development loans in
the Atlanta and Jacksonville metropolitan areas. Residential construction loans
are made through the use of officer guidance lines, which are approved by FNB's
Loan and Discount Committee. Specific maximum loan commitment and numbers of
unsold houses allowed are clearly identified for each of the approximately 75
builders' officer guidance lines. Each loan is individually reviewed and
approved by the loan officer and is subject to an appraisal and a maximum 75%
loan-to-value ratio.
These guidelines are approved for established builders 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. As of September 30, 1997, approximately $48 million (10.5% of total
loans) was outstanding on total residential construction loans, of which
approximately $10 million was for acquisition and development loans. Acquisition
and development loans generally have 18 month or shorter maturities and are
49
<PAGE> 51
for the purpose of developing lots for a builder's own building program usage or
are generally pre-sold to an established builder or builders.
Inter-agency guidelines adopted by federal bank regulators, including the
OCC, require that financial institutions establish real estate lending policies.
The guidelines also established certain maximum allowable real estate
loan-to-value standards. FNB has adopted the federal standards as its maximum
allowable standards, but has had in the past and now has in place loan policies
which are, in some cases, more conservative than the OCC guidelines. The FNB and
OCC guidelines require maximum allowable loan-to-value ratios for various types
of real estate loans as set forth below.
<TABLE>
<CAPTION>
MAXIMUM ALLOWABLE
LOAN-TO-VALUE RATIO
-------------------
<S> <C> <C>
LOAN CATEGORY
Land....................................................... 65%
Land development........................................... 75
Construction:
Commercial, multifamily(1) and other nonresidential...... 80
One-to-four family residential........................... 85
Improved property.......................................... 85
Owner-occupied one-to-four family and home equity(2)....... -
</TABLE>
- ---------------
(1) Multifamily construction includes condominiums and cooperatives.
(2) A loan-to-value limit has not been established for permanent mortgage or
home equity loans on owner-occupied, one-to-four family residential
property. However, for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, appropriate credit enhancement in the form of
either mortgage insurance or readily marketable collateral should be
required.
Potential specific risk elements associated with each of FNB's lending
categories include the following:
<TABLE>
<S> <C>
Credit cards......................... Employment status, changes in local economy,
unsecured credit risks
Installment loans to individuals..... Employment status, changes in local economy,
difficulty in monitoring collateral (vehicle, boat,
mobile home) and limited personal contact as a result
of indirect lending through dealers
Commercial, financial and
agricultural....................... Industry concentrations, difficulty in monitoring the
valuation of collateral (inventory, accounts
receivable and vehicles), borrower management
expertise, increased competition and specialized or
obsolete equipment as collateral
Real estate - construction........... Inadequate collateral and long-term financing
agreements
Real estate - residential mortgage... Changes in local economy and caps on variable rate
loans
</TABLE>
Management believes that the outstanding loans included in each of these
categories do not represent more than the normal risks associated with these
categories, as described above. FNB's underwriting and asset quality monitoring
systems focus on minimizing the risks outlined above.
Loan Review and Nonperforming Assets
FNB's credit administration department reviews its loan portfolio to
determine deficiencies and appropriate corrective action. The credit
administration department attempts to review 30% to 45% of FNB's loan portfolio
annually, excluding credit cards and consumer installment loans secured by new
and used vehicles. The results of the reviews are presented to FNB's Board of
Directors on a monthly basis. Loan reviews are performed on credits that are
selected according to their risk. Past due loans are reviewed weekly by each
lending officer and by the credit administration department. A summary report is
reviewed monthly by
50
<PAGE> 52
FNB's Board of Directors. The Loan Committee of the Board of Directors of FNB
annually reviews all loans over $1.0 million.
Credit card accounts are reviewed on a quarterly basis for compliance with
FNB credit policy. Review procedures include a determination of whether the
appropriate review of employment, residence and other information has been
completed, recalculation of the borrower's debt coverage ratio, and analysis of
the borrower's credit history to determine if it meets established FNB criteria.
Policy exceptions are analyzed monthly. Delinquencies are monitored daily.
Accounts are charged off after they are 180 days past due in accordance with
industry practice.
A provision for loan losses and a corresponding increase in the allowance
for loan losses are recorded monthly, taking into consideration the historical
charge-off experience, delinquency and current economic conditions.
Asset/Liability Management
FNB's asset/liability committee (the "Committee") is comprised of officers
of the Company and FNB who are charged with managing the assets and liabilities
of the Company and FNB. The Committee attempts to manage asset growth, liquidity
and capital in order to maximize income and reduce interest rate risk. The
Committee directs the Company's and FNB's overall acquisition and allocation of
funds. At its monthly meetings, the Committee reviews and discusses the monthly
asset and liability funds budget in relation to the actual flow of funds. The
Committee also reviews and discusses peer group comparisons, the ratio of the
amount of rate-sensitive assets to the amount of rate-sensitive liabilities, the
ratio of allowance for loan losses to outstanding and nonperforming loans, and
other variables, such as expected loan demand, investment opportunities, core
deposit growth within specified categories, regulatory changes, monetary policy
adjustments and the overall state of the economy.
Investment Policy
FNB's investment portfolio policy is to maximize income consistent with
liquidity, asset quality, regulatory constraints and asset/liability objectives.
The policy is reviewed at least annually by FNB's Board of Directors. The Board
of Directors of FNB is provided information monthly concerning sales, purchases,
resulting gains or losses, average maturity, federal taxable equivalent yields
and appreciation or depreciation by investment categories.
SUPERVISION AND REGULATION
Holding Company Regulation
The Company is a registered bank holding company subject to regulation by
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
("Holding Company Act"). The Company is required to file financial information
with the Federal Reserve periodically and is subject to periodic examination by
the Federal Reserve.
The Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve (i) before it may acquire direct or
indirect ownership or control of more than 5% of the voting shares of any bank
that is not already controlled; (ii) before it or any of its subsidiaries, other
than a bank, may acquire all or substantially all of the assets of a bank; and
(iii) before it may merge or consolidate with any other bank holding company. In
addition, a bank holding company is generally prohibited from engaging in
non-banking activities, or acquiring direct or indirect control of voting shares
of any company engaged in such activities. This prohibition does not apply to
activities found by the Federal Reserve, by order or regulation, to be so
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 discount
brokerage services; and making investments in corporations or projects designed
primarily to promote community welfare.
51
<PAGE> 53
The Company must also register with the Georgia Department of Banking and
Finance ("DBF"). Such registration filing includes information with respect to
the financial condition, operations, management and intercompany relationships
of the Company, FNB and the Company's other subsidiaries, and related matters.
The DBF may also require such other information as is necessary to keep itself
informed as to whether the provisions of Georgia law and the regulations and
orders issued thereunder by the DBF have been complied with, and the DBF may
make examinations of the Company.
The Company, FNMC and FNCI are "affiliates" of FNB under the Federal
Reserve Act, which imposes certain restrictions on (i) loans by FNB to the
Company, (ii) investments in the stock or securities of the Company by FNB,
(iii) FNB accepting the stock or securities of one of its affiliates from a
borrower as collateral for loans and (iv) the purchase of assets from the
Company by FNB. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
exercise of credit, lease or sale of property or furnishing of services.
Bank Regulation
FNB is a national bank chartered under the National Bank Act. FNB and its
wholly-owned subsidiaries are subject to the supervision of, and are regularly
examined by, the OCC. The OCC regulates and monitors all areas of FNB's and
FNMC's operations and activities, including reserves, loans, mergers, issuances
of securities, payments of dividends, interest rates, mortgage servicing,
accounting and establishment of branches. Interest and certain other charges
collected or contracted for by FNB are also subject to state usury laws or
certain federal laws concerning interest rates. See "Regulatory Matters -- OCC
Agreement."
FNB is insured by the FDIC. The major functions of the FDIC with respect to
insured banks include paying depositors to the extent provided by law if an
insured bank is closed without adequate provision having been made to pay claims
of depositors, acting as a receiver of state banks placed in receivership when
appointed receiver by state authorities and preventing the development or
continuance of unsound and unsafe banking practices. The FDIC also has the
authority to recommend to the appropriate federal agency supervising an insured
bank that the agency take informal action against such institution and to act to
implement the enforcement action itself if the agency fails to follow the FDIC's
recommendation. The FDIC also has the authority to examine all insured banks.
In 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991
("1991 Act") was adopted, the principal initial effect of which was to permit
the Bank Insurance Fund ("BIF") to borrow up to $30 billion from the U.S.
Treasury (to be repaid through deposit insurance premiums over 15 years) and to
permit the BIF to borrow working capital from the Federal Financing Bank in an
amount up to 90% of the value of the assets the FDIC has acquired from failed
banks.
Various other sections of the 1991 Act impose substantial new auditing and
reporting requirements and increase the role of independent accountants and
outside directors on banks having assets of $500 million or more, and regulators
may encourage smaller banks to comply with such requirements. The 1991 Act also
provides for a ban on the acceptance of brokered deposits except by well
capitalized institutions and by adequately capitalized institutions with the
permission of the FDIC, and for restrictions on the activities engaged in by
state banks and their subsidiaries as principal, including insurance
underwriting, to the same activities permissible for national banks and their
subsidiaries, unless the state bank is well capitalized and a determination is
made by the FDIC that the activities do not pose a significant risk to the
insurance fund. The effect on the Company of these measures contained in the
bill will be to a great extent dependent upon the manner in which bank
regulatory authorities interpret and enforce regulations that have been issued
pursuant to the 1991 Act.
Capital Requirements
The additional supervisory powers and regulations mandated by the 1991 Act
include a "prompt corrective action" program based upon five regulatory zones
for banks 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
52
<PAGE> 54
another depository institution when a bank's capital leverage ratio reaches 2%.
Better capitalized institutions are subject to less onerous regulation and
supervision than banks with lesser amounts of capital.
To implement the prompt corrective action provisions of the 1991 Act, the
OCC adopted regulations, which became effective on December 19, 1992, placing
financial institutions in the following five categories based upon
capitalization ratios: (i) 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%; (ii) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based
ratio of at least 4% and a leverage ratio of at least 3%; (iii) an
"undercapitalized" institution has a total risk-based ratio of under 8%, a Tier
1 risk-based ratio of under 4% or a leverage ratio of under 3%; (iv) a
"significantly undercapitalized" institution has a total risk-based ratio of
under 6%, a Tier 1 risk-based ratio of under 4% or a leverage ratio of under 3%
and (v) a "critically undercapitalized" institution has a leverage ratio of 2%
or less. Institutions in any of the three undercapitalized categories are
prohibited from declaring dividends or making capital distributions. The
regulations also establish procedures for "downgrading" an institution to a
lower capital category based on supervisory factors other than capital.
In the fourth quarter of 1996, the OCC advised the Bank that it will be
required to achieve capital levels higher than "adequately capitalized" as
defined in the OCC regulations. On November 14, 1996, the Bank entered into the
OCC Agreement which provides that the Bank (i) will appoint an "Oversight
Committee"; (ii) will achieve and maintain specified higher capital levels;
(iii) will develop a three-year capital program which will include, among other
things, certain restrictions on dividend payments by the Bank and (iv) will
revise and amend its strategic plan.
The Oversight Committee is comprised of three members of the board of
directors of the Bank, a majority of whom are not employees of the Company. The
Oversight Committee, which meets and reports monthly to the Board of Directors,
is responsible for monitoring and coordinating compliance by the Bank with the
OCC Agreement.
The OCC Agreement establishes higher capital requirements than those
applicable under the OCC regulations. Specified capital levels were to be
achieved by the Bank by April 30, 1997 and maintained until November 30, 1997.
At November 30, 1997, higher capital levels become effective and are applicable
thereafter. While the Bank at September 30, 1997 was adequately capitalized as
defined in the regulations, it has not attained the higher capital level which
was to be achieved by April 30, 1997. The following table sets forth (i) the
capital requirements for the Bank under the OCC regulations and under the OCC
Agreement, (ii) the Bank's capital ratios at September 30, 1997 and (iii) as
adjusted capital ratios to give effect to the investment thereof and the
investment of $17 million of the net proceeds of this Offering in Tier 1
risk-based capital of the Bank:
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT
------------------------- ------------------------ SEPTEMBER 30, 1997
ADEQUATELY WELL APRIL 30, NOVEMBER 30, -----------------------
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 ACTUAL AS ADJUSTED(1)
- -------------- ----------- ----------- --------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Leverage(2)..................... 4.00% 5.00% 5.00% 6.00% 4.57% 7.18%
Risk-Based Capital:
Tier 1(3)..................... 4.00 6.00 6.00 7.00 5.52 8.61
Total......................... 8.00 10.00 10.00 11.00 8.78 11.81
</TABLE>
- ---------------
(1) Assumes that the Company invests approximately $17 million of the net
proceeds of the Offering in Tier 1 capital of the Bank and the Bank invests
the net proceeds in assets carrying a risk-weight that is equivalent to the
Company and the Bank's average risk-weight at September 30, 1997. See "Use
of Proceeds."
(2) Leverage ratio is defined as Tier 1 capital as a percent of total average
assets.
(3) Tier 1 capital is comprised of common shareholder's equity and, subject to
certain limitations and qualifications, non-cumulative perpetual preferred
stock.
53
<PAGE> 55
Set forth below are (i) the capital requirements for the Company under the
FRB regulations, (ii) the capital ratios for the Company as of September 30,
1997, and (iii) as adjusted ratios to give effect to the issuance of Common
Stock pursuant to this Offering (assuming an offering price of $8.00 per share):
<TABLE>
<CAPTION>
FRB REGULATIONS
--------------- SEPTEMBER 30, 1997
MINIMUM CAPITAL -----------------------
CAPITAL RATIOS REQUIREMENT ACTUAL AS ADJUSTED(1)
- -------------- --------------- ------ --------------
<S> <C> <C> <C>
Leverage (Tier 1 capital to total assets)......... 3.00% 4.05% 7.41%
Risk-Based Capital:
Tier 1 capital to risk-based assets............. 4.00 4.89 8.87
Total capital to risk-based assets.............. 8.00 8.60 13.14
</TABLE>
- ---------------
(1) Assumes that the net proceeds from the Offering are approximately $22.0
million.
The FRB Agreement entered into in February 1997 provides that the Company
will not incur any additional debt, redeem its capital stock or declare or pay
dividends to the holders of Common Stock without the prior approval of the FRB.
As of the date of the FRB Agreement, the Company did not meet the minimum
capital requirements of a bank holding company in accordance with regulations
promulgated by the FRB. While the Company met the minimum capital requirements
as of September 30, 1997, these restrictions continue until terminated or
modified by the FRB.
Interstate Banking Act
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act") became law. The Interstate
Banking Act has two major provisions regarding the merger, acquisition and
operation of banks across state lines. First it provides that effective
September 29, 1995, adequately capitalized and managed bank holding companies
will be permitted to acquire banks in any state. State laws prohibiting
interstate banking or discriminating against out-of-state banks will be
preempted as of the effective date. States cannot enact laws opting out of this
provision; however, states may adopt a minimum restriction requiring that target
banks located within the state be in existence for a period of years, up to a
maximum of five years, before such bank may be subject to the Interstate Banking
Act. The Interstate Banking Act establishes deposit caps which prohibit
acquisitions that would result in the acquirer controlling 30% or more of the
deposits of insured banks and thrifts held in the state in which the acquisition
or merger is occurring or in any state in which the target maintains a branch or
10% or more of the deposits nationwide. State-level deposit caps are not
preempted as long as they do not discriminate against out-of-state acquirers,
and the federal deposit caps apply only to initial entry acquisitions.
The legislation also provides that, unless an individual state elects
beforehand either (i) to accelerate the effective date or (ii) to prohibit
out-of-state banks from operating interstate branches within its territory, on
or after June 1, 1997, "adequately capitalized" and managed bank holding
companies will be able to consolidate their multistate bank operations into a
single bank subsidiary and to branch interstate through acquisitions. De novo
branching by an out-of-state bank would be permitted only if it is expressly
permitted by the laws of the host state. The authority of a bank to establish
and operate branches within a state will continue to be subject to applicable
state branching laws. The State of Georgia has enacted legislation in connection
with the Interstate Banking Act which requires that a bank located within the
state must be in existence for a period of five years before it may be acquired
by an out-of-state institution. This state legislation also requires out-of-
state institutions to purchase an existing bank or branch in the state rather
than starting a de novo bank. Many states, including Georgia, have enacted
legislation which permits banks with different home states to merge if the
states involved have enacted legislation permitting interstate bank mergers
prior to June 1, 1997. The Company believes that this legislation may result in
increased takeover activity of Georgia financial institutions by out-of-state
financial institutions. However, the Company does not presently anticipate that
such legislation will have a material impact on its operations or future plans.
The Interstate Banking Act was amended on July 3, 1997 for the purpose of
ensuring that state banks are competitive with national banks under the new
interstate banking laws. The amendment provides that state
54
<PAGE> 56
law of the host state applies to an out-of-state, state-chartered bank that
branches in the host state to the same extent that it applies to a national bank
operating a branch in the host state. The law also provides that bank branches
operating in the host state and chartered in another state may exercise powers
they have under their home-state charters if host state-chartered banks or
national banks may exercise those powers.
Under prior Georgia law which was applicable to national banks, the
establishment of new or additional branch banks in a county, other than the
county in which the parent bank was located, was prohibited except in very
narrow situations. Pursuant to legislation recently enacted, with the prior
approval of the appropriate regulator, after July 1, 1996, a state or national
bank may establish three new or additional branch banks de novo in the same
manner as currently provided for the establishment of bank offices under the
Georgia Financial Institutions Code. These branches may be located anywhere in
Georgia. If a bank is part of a bank holding company, all affiliates would be
treated as one bank and the holding company would be limited to branching to
only three counties. Otherwise, the same restrictions on Georgia banks' ability
to form or acquire branch banks that exist prior to July 1, 1996, continue to
apply until July 1, 1998. As of July 1, 1998, new or additional branch banks may
be established anywhere in the state with the prior approval of the appropriate
regulator.
Regulation of Mortgage Banking
The mortgage banking industry is subject to the rules and regulations of,
and examinations by, the DBF, FNMA, FHLMC, GNMA, HUD, FHA and state regulatory
authorities with respect to originating, processing, underwriting, selling,
securitizing and servicing residential mortgage loans. In addition, there are
other federal and state statutes and regulations affecting such activities.
These rules and regulations, among other things, require licensing of mortgage
bankers, govern how mortgage servicers process a mortgagor's payment, require an
annual analysis of FNMC's escrow balances and also regulate the procedure for
making investor payments.
Many states have adopted statutes and regulations which require the payment
of interest on escrow accounts, but many of these provisions contain exemptions
from the requirement to pay interest. The common exemptions are: interest is
paid only on loans originated after enactment or a phase-in; interest need only
be paid if the mortgage servicer earns interest on the account; interest need
not be paid by an out-of-state mortgage servicer; and interest need not be paid
on low loan-to-value loans or government loans or where interest is offset by
administrative expenses. It is presently unclear whether these statutes and
regulations, or some variation thereof, will be implemented by other states and
if so what effect that will have on the Company and FNMC.
Effective July 1, 1993, the Georgia Legislature enacted registration and
licensing requirements for mortgage brokers and lenders engaged in making loans
secured by one-to-four family residential property located in Georgia (the
"Mortgage Act"). FNMC, as a subsidiary of a Georgia bank holding company subject
to examination by the DBF, is exempt from the licensing requirement of the
Mortgage Act, but is required to register with the DBF. FNMC must renew its
registration annually and provide the DBF in its renewal application with
information, including a general plan of the business, financial statements and
other financial information requested by the DBF and shareholders owning at
least 10% of the mortgage lender's equity. FNMC is required to maintain such
records as the DBF may require and is subject to examination by the DBF. In
addition, FNMC must file an annual report with the DBF each year.
The Mortgage Act requires that mortgage brokers and lenders, including
FNMC, make certain disclosures to applicants for mortgage loans. The Mortgage
Act also provides authority for the DBF to promulgate rules with respect to
escrow accounts and the advertising of mortgage loans, and the DBF has
promulgated regulations governing mortgage loan advertising. In addition, the
Mortgage Act imposes restrictions on unfair mortgage banking practices, as
defined by the Mortgage Act.
There are numerous rules and regulations imposed on mortgage loan
originators that require originators to obtain and maintain licenses; establish
eligibility criteria for mortgage loans; prohibit discrimination; regulate
advertising of loans; encourage lenders to identify and meet the credit needs of
the community, including low and moderate income neighborhoods, consistent with
sound lending practices, by requiring
55
<PAGE> 57
certain statistical information be maintained and publicly available regarding
mortgage lending practices within certain geographical areas; provide for
inspections and appraisals of properties; require credit reports on prospective
borrowers; regulate payment features; and, in some cases, fix maximum interest
rates, fees and loan amounts. Failure to comply with these requirements can lead
to loss of approved status, termination of servicing contracts without
compensation to the servicer, demands for indemnification or loan repurchases,
and administrative enforcement actions.
Broker-Dealers
Securities broker-dealers are subject to extensive regulation. Generally,
broker-dealers must register with the Commission and the states in which they
operate. All broker-dealers must be members of the NASD, subject to its rules
and disciplinary procedures. Personnel of broker-dealers engaged in sales
activities must be licensed as salespeople under the appropriate state laws and
register with the NASD. Registered broker-dealers are subject to detailed record
keeping and reporting requirements. The extent to which broker-dealers can
extend credit is also subject to regulation. FNCI, as a registered
broker-dealer, is also subject to rules regarding minimum capital, disclosure
obligations, restrictions on markups, and other matters.
COMPETITION
The banking business is highly competitive. The Company's primary market
area, other than for credit cards, residential mortgages and indirect automobile
loans, consists of Fulton, DeKalb, Cobb and Gwinnett counties, Georgia. FNB
competes for traditional bank business with numerous other commercial banks and
thrift institutions with offices in the Company's primary trade area, many of
which have greater financial resources than FNB. The Company also competes for
loans with insurance companies, regulated small loan companies, credit unions
and certain governmental agencies. FNCI competes with independent brokerage and
investment companies as well as state and national banks and their affiliates
and other financial companies. There can be no assurance that other companies
will not offer products and services that are competitive with those offered by
the Company and its subsidiaries. The emergence of such competitors could have a
material adverse effect on the results of operations and financial condition of
the Company.
The credit card, indirect automobile financing and mortgage banking
industries are also highly competitive. The Company competes with banks and
special purpose credit card banks and companies throughout the United States as
well as entities such as AT&T and General Motors Corporation for credit card
customers. In the indirect automobile financing industry, the Company competes
with specialty consumer finance companies in addition to banks. FNMC competes
with independent mortgage banking companies, state and national banks and their
subsidiaries, as well as thrift institutions and insurance companies. There can
be no assurance that other companies will not offer products and services that
are competitive with those offered by the Company and its subsidiaries. The
emergence of such competitors could have a material adverse effect on the
results of operations and financial condition of the Company.
EMPLOYEES
As of September 30, 1997, the Company had 385 full-time equivalent
employees. Neither the Company nor any one of its subsidiaries is a party to any
collective bargaining agreement. The Company believes that its employee
relations are good.
PROPERTIES
The Company's principal executive offices consist of 49,368 leased square
feet (of which 23,939 square feet are sublet) in Atlanta, Georgia. The Bank
leases 35,000 square feet (of which 29,928 square feet are sublet) in Decatur,
Georgia, where it maintains a full-service banking center. The Company's
operations are principally conducted from 80,000 square feet located at 3
Corporate Square, Atlanta, Georgia. Of the other 15 branch offices of the Bank
located in Fulton, DeKalb, Cobb and Gwinnett Counties, Georgia, ten are owned
and five are leased. The Company leases loan production offices in Jacksonville
and Tampa, Florida.
56
<PAGE> 58
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to claims and lawsuits arising
in the course of normal business activities. Although the ultimate outcome of
these claims and lawsuits cannot be ascertained at this time, it is the opinion
of management that none of these matters when resolved will have a material
adverse effect on the Company's consolidated results of operations or financial
condition.
57
<PAGE> 59
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors and their ages as of
September 18, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James B. Miller, Jr.................... 57 Chairman of the Board, President and
Chief Executive Officer
Larry D. Peterson...................... 49 Vice President and Director; President
and Chief Executive Officer of FNB
Sharon R. Denney....................... 59 Executive Vice President
M. Howard Griffith, Jr................. 55 Chief Financial Officer
Palmer Proctor, Jr..................... 30 Vice President
David R. Bockel........................ 53 Director
Dr. Edward G. Bowen(1)................. 61 Director
Robert J. Rutland(1)(2)(3)............. 56 Director
W. Clyde Shepherd, Jr.(2)(3)........... 83 Director
Gordon M. Sherman...................... 64 Director
R. Phillip Shinall, III(2)............. 50 Director
Rankin Smith, Jr....................... 50 Director
Felker W. Ward, Jr.(1)................. 64 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Executive Committee of the Board of Directors.
Officers are appointed annually and serve at the pleasure of the Board of
Directors. The directors are elected annually by the shareholders and hold
office until the next annual meeting of shareholders or until their respective
successors are duly elected and qualified.
James B. Miller, Jr. has served as the Chairman of the Board and as
President and Chief Executive Officer of the Company since 1979. He has also
served as the President and Chief Executive Officer of FNB from 1977 to 1997. He
has been the Chairman of FNCI and FNMC since 1992 and 1980, respectively. Prior
to joining the Company, Mr. Miller was the President of Mudrak Eisfabrik and
Ageka Wohnungsbau GmbH from 1971 to 1977. Prior to that time, Mr. Miller served
as an investment counselor at Citizens & Southern National Bank and a
stockbroker at Bache & Company. Mr. Miller holds a B.A. from Florida State
University and a LLB from Vanderbilt University, School of Law.
Larry D. Peterson was elected President and Chief Executive Officer of FNB
and a Vice President of the Company on September 18, 1997 and has served as a
director of the Company since September 30, 1997. From 1995 until 1997, he was a
Senior Vice President and the Senior Segment Manager of KeyCorp. He served as
the President -- Central Indiana Region of Society National Bank from 1992 to
1995. In 1994, KeyCorp and Society Corporation merged. He was the President and
Chief Executive Officer of Ameritrust Indiana Corporation ("Ameritrust"), a bank
holding company headquartered in Indianapolis, Indiana from 1991 until it was
acquired in 1992 by Society Corporation, a bank holding corporation
headquartered in Cleveland, Ohio. Prior thereto, Mr. Peterson served in various
capacities with Ameritrust from 1980 to 1991 and with National City Bank,
Cleveland, Ohio from 1970 to 1980. Mr. Peterson holds a B.S. in Finance from
Pennsylvania State University and a Masters of Banking, Stonier Graduate School
of Banking, Rutgers University.
Sharon R. Denney has served as Executive Vice President of the Company
since 1993. He joined FNB as a Vice President in 1979 and has been an Executive
Vice President of FNB since 1992. He is also Secretary of FNMC.
58
<PAGE> 60
M. Howard Griffith, Jr. has served as the Chief Financial Officer of the
Company and FNB since February 1994, and as Chief Financial Officer of FNMC
since September 1995. Prior to joining the Company, Mr. Griffith served as a
Vice President and the Treasurer of Synovus Financial Corp., a bank holding
company based in Columbus, Georgia, from December 1992 through October 1993, and
as Chief Financial Officer of Fidelity Savings Bank in Dalton, Georgia, from
June 1992 through December 1992. Mr. Griffith's experience includes 17 years
with C&S/Sovran and predecessors, holding several positions ending with Finance
Executive Officer and Director of Corporate Taxes and five years in public
accounting as a certified public accountant, during which he specialized in
audits of banks and savings and loan associations.
Palmer Proctor, Jr. has served as a Vice President of the Company since
1996. Mr. Proctor's current responsibilities as Branch Administrator, Operations
Manager, include oversight of deposit operations, credit card loans, data
processing and branch operations. He was elected a Vice President of FNB and was
appointed Branch Administrator in 1993. Mr. Proctor joined FNB in 1990 as a
Management Associate and until 1993, he worked in management capacities in the
various departments.
David R. Bockel became a director of the Company on September 30, 1997. Mr.
Bockel has been the President of Bockel, Sabatino & Day, an advertising agency
in Atlanta, Georgia, since January 1997. Prior thereto, he was president of the
predecessor companies, which he first established in 1971. He is also a
Brigadier General, United States Army Reserve.
Dr. Edward G. Bowen has served as a director of the Company since 1989 and
as a director of FNB since 1989. Dr. Bowen has been a gynecologist and
obstetrician in Atlanta, Georgia for more than 30 years.
Robert J. Rutland has served as a director of the Company since 1979 and a
director of FNB since 1974. Since 1995, Mr. Rutland has served as the Chairman
and Chief Executive Officer of Allied Holdings, Inc. ("Allied"), the second
largest transporter in North America specializing in automobiles and light
trucks. From 1986 to 1995, Mr. Rutland was President and Chief Executive Officer
of Allied.
W. Clyde Shepherd, Jr. has served as a director of the Company since 1979,
a director of FNB since 1974, and Chairman of the Board of Directors of FNB
since 1989. Mr. Shepherd has been the Secretary/Treasurer of Shepherd
Construction Company, a general contracting company located in Atlanta, Georgia,
since 1949. Mr. Shepherd will not stand for re-election as a director at the
1998 Annual Meeting of Shareholders in accordance with the policy of mandatory
retirement for directors at age 70.
Gordon M. Sherman became a director of the Company on September 30, 1997.
Since 1975, Mr. Sherman has served as Regional Commissioner of the Social
Security Administration for the eight southeastern states.
R. Philip Shinall, III has served as a director of the Company and FNB
since 1979. Mr. Shinall has been a partner in the law firm of Holland & Knight,
LLP, Atlanta, Georgia, since October 1997. He was a partner in the law firm of
Glass, McCullough, Sherrill & Harrold, LLP, Atlanta, Georgia from 1988 until
April 1997.
Rankin M. Smith, Jr. has served as a director of the Company and FNB since
1987. Mr. Smith has been a director of and an advisor to the Atlanta Falcons
football team since 1990. He was President of the Atlanta Falcons from 1977 to
1990.
Felker W. Ward, Jr. has served as a director of the Company since 1996. Mr.
Ward has been a principal of Pinnacle Investment Advisors, Inc., an investment
advisory firm in Atlanta, Georgia, since 1991, and has been President of Ward &
Associates, Inc., an investment banking firm, since 1991. Mr. Ward is also a
director of AGL Resources, Inc., a natural gas distributing utility, and Abrams
Industries, Inc., a construction and property management company and a
manufacturer of fixtures.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with James B. Miller,
Jr. and Larry D. Peterson.
The employment agreement with Mr. Miller is for a three year period
commencing on January 1, 1998. It provides for an annual base salary of $300,000
and annual incentive compensation of up to $400,000 based
59
<PAGE> 61
upon the attainment by the Company of certain net income targets. In addition,
Mr. Miller was granted a five year incentive stock option to purchase 40,400
shares of Common Stock at $9.90 per share and a non-qualified stock option to
purchase 109,600 shares of Common Stock at $9.00 per share. The incentive stock
options vest at the rate of 25% per year for four years and the non-qualified
stock options vest at the rate of 20% per year for five years, each commencing
September 18, 1998. The stock options will vest in full upon a change in control
of the Company and upon the termination of his employment agreement by the
Company without cause.
The employment agreement with Mr. Peterson is for a three year period
commencing on September 15, 1997. It provides for an annual base salary of
$300,000. The employment agreement further provides that FNB will adopt, prior
to September 15, 1998, a deferred compensation program which will include all
senior executives of FNB. Mr. Peterson's employment agreement requires he be
paid a lump sum of $50,000 within 30 days of the commencement of his employment.
Also, the Company agreed to reimburse Mr. Peterson for premiums on a $1 million
term life insurance policy and a disability insurance policy which will provide
disability benefits at the annual rate of $210,000. Mr. Peterson was granted
seven year incentive and non-qualified stock options on September 15, 1997 to
purchase 100,000 shares of Common Stock at $9.00 per share. The option vests at
the rate of 20% per year for five years, commencing September 15, 1998. The
stock options will vest in full upon a change in control of the Company and upon
the termination of his employment with the Company without cause.
The employment agreements with Messrs. Miller and Peterson each provide
that, if the executive terminates his employment or is terminated by the Company
for cause, such executive is subject to a non-compete provision for a period of
one year.
60
<PAGE> 62
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of November 3, 1997, the beneficial
ownership of the Company's Common Stock by each person known by the Company to
be the beneficial owner of more than 5% of the Company's voting securities, by
each director and executive officer and by all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
PERCENTAGE
COMMON STOCK BENEFICIALLY OWNED
------------------ --------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
- ---- ------------------ -------- --------
<S> <C> <C> <C>
James B. Miller, Jr.(1)..................................... 2,680,810 48.6% 31.5%
David R. Bockel............................................. 200 * *
Dr. Edward G. Bowen(2)...................................... 11,000 * *
Robert J. Rutland........................................... 148,764 2.7 1.7
W. Clyde Shepherd, Jr....................................... 128,722 2.3 1.5
Gordon M. Sherman(3)........................................ 173,852 3.2 2.0
R. Phillip Shinall, III(4).................................. 8,887 * *
Rankin M. Smith, Jr.(5)..................................... 17,474 * *
Felker W. Ward, Jr.......................................... 7,920 * *
Sharon R. Denney............................................ 19,259 * *
M. Howard Griffith, Jr.(6).................................. 6,954 * *
Larry D. Peterson........................................... - - -
Palmer Proctor, Jr.......................................... 55 * *
All directors and executive officers as a group (13
persons)(7)............................................... 3,203,897 58.1% 37.6%
</TABLE>
- ---------------
* Less than one percent
(1) Includes 51,111 shares of Common Stock owned of record by Mr. Miller's wife,
330,520 shares held by FNB as trustee under five trusts for Mr. Miller's
children and 180,433 shares held by BAC Properties, a partnership of which
Mr. Miller and his wife own 40%. Also includes 34,770 shares of Common Stock
issuable upon conversion of shares of Preferred Stock owned by his spouse.
Mr. Miller's business address is 3490 Piedmont Road, Atlanta, Georgia 30305.
(2) Includes 10,560 shares of Common Stock held by Mr. Bowen as trustee for
Target Benefit Plan.
(3) Represents 173,852 shares of Common Stock issuable upon conversion of shares
of Preferred Stock.
(4) Includes 1,232 shares owned by Mr. Shinall's wife.
(5) Includes 7,823, 1,390 and 2,607 shares of Common Stock issuable upon
conversion of shares of Preferred Stock owned by Mr. Smith, his spouse and
Mr. Smith as custodian for family members, respectively.
(6) Represents 6,954 shares of Common Stock issuable upon conversion of shares
of Preferred Stock.
(7) Includes 227,396 shares of Common Stock issuable upon conversion of shares
of Preferred Stock.
61
<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Articles of Incorporation of the Company currently authorize the
issuance of 50,000,000 shares of Common Stock and 10,000,000 shares, no par
value, of preferred stock, of which 4,000,000 shares have been designated
Non-Cumulative 8% Convertible Preferred Stock, Series A (the "Preferred Stock").
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, of
which 4,662,590 shares were outstanding on October 31, 1997. Each holder of
Common Stock is entitled to one vote per share. The holders of Common Stock vote
together with the holders of Preferred Stock. The holders of Common Stock do not
have cumulative voting or preemptive rights to subscribe to additional shares of
Common Stock issued by the Company.
The Articles of Incorporation of the Company provide that the holders of at
least two-thirds of the Company Common Stock must approve a merger, liquidation
or dissolution or any other action that would result in a disposition of all or
substantially all of the assets. The Articles of Incorporation of the Company
also provide that, in opposing a tender offer or other offer for the Company,
the Board of Directors may, but is not required to, consider any pertinent
issues, including certain nonfinancial factors, including but not limited to the
impact of the acquisition on employees, depositors and customers and the
reputation and business practices of the acquiror, among others. In addition,
the Articles of Incorporation provide that the amendment or repeal of the
sections described in the two preceding sentences require the vote of at least
two-thirds of the capital stock entitled to vote on such matters.
Upon liquidation, dissolution or winding up of the Company, after payment
to creditors and holders of any outstanding shares of preferred stock, the
assets of the Company will be divided pro rata on a per share basis among the
holders of the Common Stock. The outstanding shares of Common Stock are
non-assessable. The shares of Common Stock to be issued in the Offering will be
fully paid and non-assessable.
Dividends on the Common Stock are payable if, as and when declared by the
Board of Directors in its sole discretion. The Company's ability to pay
dividends is restricted by the terms of the Notes and the Preferred Stock, the
corporate laws of Georgia and applicable regulations, including those
promulgated by the FRB, and the FRB Agreement. See "Dividend Policy."
The transfer agent and registrar of the Common Stock is The Bank of New
York.
PREFERRED STOCK
The Articles of Incorporation of the Company authorize the issuance, in
series of up to 10,000,000 shares of preferred stock and permit the Board of
Directors of the Company to establish the powers, preferences and rights of each
series. The Board of Directors of the Company authorized the issuance of up to
4,000,000 shares of Preferred Stock. As of October 31, 1997, there were issued
and outstanding 984,000 shares of Preferred Stock.
Dividends are non-cumulative and are payable quarterly at the rate of 8%
per annum of the stated value, i.e. $0.125 per share per quarter, when, if and
as declared by the Board of Directors of the Company. Dividends have been
declared and paid on the Preferred Stock from the date of issue through
September 30, 1997.
Each share of Preferred Stock may be converted by the holder thereof at any
time into .86926 of a share of Common Stock.
Holders of Preferred Stock are entitled to vote on each matter on which
holders of Common Stock are entitled to vote, and are entitled to receive notice
of any meeting of the holders of Common Stock, and shall otherwise be accorded
all voting powers and rights of holders of Common Stock. Each share of Preferred
Stock has the number of votes equal to the number of shares of Common Stock into
which it is convertible.
62
<PAGE> 64
Whenever the approval or other action of the holders of the Preferred Stock
voting as a separate class is required by applicable law or by the Company's
Articles of Incorporation, each share of the Preferred Stock shall be entitled
to one vote, and the affirmative vote of the majority of such shares at a
meeting at which a majority of such shares is present or represented shall be
sufficient to constitute such approval or other action.
Upon the liquidation or winding up of the Company, holders of the Preferred
Stock shall be entitled to be paid, out of assets available for distribution to
holders of capital stock, $6.25 per share. This liquidation right is senior to
the liquidation rights of the Common Stock but subordinate to the liquidation
rights of all liabilities and obligations of the Company and shall be pari pasu
with certain holders of preferred stock which may hereafter be issued.
The Preferred Stock is redeemable by the Company at its stated value (i.e.
$6.25), in whole or in part, at the Company's option, at any time after the
later of (i) the second anniversary of its issuance or (ii) the last day of a
period of ten (10) consecutive trading dates on which the closing price of a
share of Common Stock on each such day shall equal or exceed $10.00. Any
redemption is also subject to the prior approval of the FRB.
The holders of Preferred Stock are not entitled to preemptive rights with
respect to the issuance of any additional preferred stock of any series or the
issuance of Common Stock.
The Preferred Stock is not publicly traded. The holders of Preferred Stock,
upon the conversion to Common Stock, will receive "restricted securities" under
Rule 144 promulgated by the SEC under the Securities Act. The restricted
securities may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exception provided by Rule 144. In addition, the
Company has agreed to register the shares of Common Stock issued upon the
conversion of the Preferred Stock upon the request of the stockholder.
WARRANTS
The Company has agreed to issue to Raymond James & Associates, Inc.
warrants ("Representative's Warrants" or "Warrants") to purchase 150,000 shares
of Common Stock at a purchase price per share equal to 110% of the public
offering price per share. The Representative's Warrants will be exercisable
during the four-year period commencing one year after the date the warrants are
issued. The Representative's Warrants will bear appropriate legends indicating
restrictions on transferability. Under the terms of the Representative's
Warrants, the Company will file a shelf registration statement one year after
the effective date of this Registration Statement with respect to the resale of
the shares of Common Stock acquired upon the exercise of the Representative's
Warrants. See "Underwriting."
OTHER REGISTRATIONS RIGHTS
The Company has accorded each holder of Preferred Stock one demand
registration right covering the shares of Common Stock acquired upon the
conversion of the Preferred Stock into Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
7,662,590 shares of Common Stock. Of these shares, 4,651,319 shares, including
the 3,000,000 shares of Common Stock sold in the Offering, (5,101,319 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable by persons other than affiliates of the Company without restriction
under the Securities Act except as set forth below. The remaining 3,011,271
shares of Common Stock may be considered to be "restricted" securities within
the meaning of Rule 144 promulgated under the Securities Act and may not be sold
in the absence of registration under the Securities Act unless an exemption from
registration is available. All shares of Common Stock beneficially owned by
persons who are affiliates of the Company would be eligible for public sale
subject to the volume and other limitations of Rule 144. However, the Company's
directors, executive officers and certain shareholders, who own an aggregate of
3,143,179 shares of Common Stock have agreed not to sell, contract to sell,
offer, or otherwise dispose of or transfer any shares of Common Stock or
securities
63
<PAGE> 65
convertible into or exchangeable or exercisable for shares of Common Stock or
any rights to purchase any of the foregoing for a period of 180 days after the
date of this Prospectus without the prior written consent of Raymond James &
Associates, Inc. Of these shares, 1,717,480 shares of Common Stock, which were
pledged as collateral by a director and officer of the Company prior to the
Offering, will not be subject to such restrictions upon the sale of the pledged
shares in the event of a default by the pledgor. The sale of a substantial
number of shares of Common Stock could adversely affect the market price of the
Common Stock.
In general, under Rule 144, a person (or group of persons whose shares are
aggregated) who are "affiliates" (as defined in Rule 144) of the Company, will
be entitled to sell, within any three-month period, a number of shares of Common
Stock (which otherwise are freely tradable) that does not exceed the greater of
(i) 1% of the then-outstanding shares of the Common Stock or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the forwarding of the notice of proposed sale to the Commission. The
sales are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Securities properly sold in reliance upon Rule 144 are thereafter
freely tradable without restrictions or registration under the Securities Act,
unless thereafter held by an "affiliate" of the Company. Sales of substantial
amounts of the Company's Common Stock in the public market could adversely
affect market prices. See "Risk Factors -- Substantial Shares Eligible for
Future Sale."
64
<PAGE> 66
UNDERWRITING
The Underwriters named below, acting through their representative, Raymond
James & Associates, Inc. (the "Representative"), have severally agreed to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, subject to the terms and conditions of the Underwriting Agreement
between the Underwriters and the Company, the number of shares of Common Stock
set forth opposite the names of each underwriter below:
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
- ------------------- ----------------
<S> <C>
Raymond James & Associates, Inc.............................
---------
Total............................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares offered hereby, if any are purchased. The Company has
been advised by the Representative that the Underwriters propose initially to
offer the shares to the public at the offering price set forth on the cover page
of this Prospectus and to certain selected dealers, including the Underwriters,
at such price less a concession not in excess of $ per share. The public
offering price and concession may be changed after the initial offering to the
public. The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Underwriting Agreement provides for indemnification among the Company
and the Underwriters against certain liabilities in connection with this
offering, including liabilities under the Securities Act.
The Company and all directors and executive officers have agreed not to,
directly or indirectly, issue, sell, contract to sell, offer or otherwise
dispose of or transfer any shares of Common Stock, securities convertible into
or exercisable or exchangeable for shares of Common Stock or any rights to
purchase any of the foregoing, other than shares offered hereby, without the
consent of the Representative for a period of 180 days after the date of this
Prospectus. This restriction does not apply to certain issuances of Common Stock
by the Company pursuant to its stock option plan. See "Shares Eligible for
Future Sale."
The Company has granted to the Underwriters an option, exercisable during a
30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company
receives for the 3,000,000 shares offered hereby, for the sole purpose of
covering over-allotments, if any. To the extent that the Underwriters exercise
such option, each Underwriter will be committed, subject to certain conditions,
to purchase a number of the additional shares of Common Stock proportionate to
each Underwriter's initial commitment.
Raymond James & Associates, Inc. has indicated an intention to make a
market in the shares of Common Stock as permitted by applicable law and
regulations. Any such market making may be discontinued at any time at the sole
discretion of the Representative.
The Company has agreed to grant to the Representative the Warrants to
purchase up to 150,000 shares of Common Stock for a period of five years from
the date of this Prospectus (the "Warrant Exercise Term") at a price equal to
110% of the price to the public in the Offering. The Representative's Warrants
are not exercisable until one year from the date of this Prospectus and may not
be transferred, assigned, pledged or hypothecated by any person for one year
from the date of this Prospectus except to the officers, directors, affiliates
and shareholders of the Representative and to the co-managers of the Offering.
The Representative's Warrants will bear appropriate legends indicating the
restrictions on transferability. During the Warrant Exercise Term, the holders
of the Representative's Warrants are given the opportunity to profit from a rise
in the market price of the Common Stock. Any profit realized by the
Representative on the sale of the
65
<PAGE> 67
Representative's Warrants or the underlying shares of Common Stock may be deemed
additional underwriting compensation.
The public offering price of the Common Stock will be determined by
negotiations among the Company and the Underwriters. Among the factors to be
considered in such negotiations will be prevailing market conditions, the
results of operations of the Company in recent periods, the capital structure of
the Company, the market price of the Common Stock, the number of shares being
sold, the price earnings multiples of publicly traded common stocks of
comparable companies, the Company's business potential and cash flow and
earnings prospects and other factors deemed relevant.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Overallotment involves syndicate sales in excess of the
offering size, which creates a syndicate short portion. Stabilizing transactions
permit bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum. Syndicate covering transactions involve
purchases of the Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In "passive" market
making, market makers in the Common Stock who are Underwriters or prospective
underwriters or managers may, subject to certain limitations, make bids for or
purchases of the Common Stock until the time, if any, at which a stabilizing bid
is made. Penalty bids permit the Representatives to reclaim a selling concession
from a syndicate member when shares of Common Stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on The Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
The Company has granted the Representative a right of first refusal to act
as the underwriter of any future public offering of any of the Company's
securities and to act as the Company's financial advisor for any business
combination or private placement involving the Company or any of its
subsidiaries at customary commissions and/or fees to be negotiated by the
parties. This right of first refusal expires on December 31, 1998.
EXPERTS
The consolidated financial statements of the Company for the year ended
December 31, 1994, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, included herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for the years ended December 31, 1995 and 1996, have been
audited by Ernst & Young LLP, independent auditors, as indicated in their report
thereon included therein and included and incorporated herein by reference. Such
consolidated financial statements are included and incorporated by reference in
reliance upon the authority of such firm as experts in accounting and auditing.
At a meeting held on July 13, 1995, the Board of Directors of the Company
approved the engagement of Ernst & Young LLP as its independent auditors for the
year ending December 31, 1995 to replace the firm of KPMG Peat Marwick LLP which
was dismissed on July 14, 1995. The Audit Committee of the Board of Directors
approved the change in auditors on July 13, 1995.
The report of KPMG Peat Marwick LLP on the consolidated financial
statements of the Company as of and for the year ended December 31, 1994 did not
contain an adverse opinion or a disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principles. In connection
with the \audit of the consolidated financial statements of the Company for the
fiscal year ended December 31, 1994, and the subsequent interim period through
July 13, 1995, there were no disagreements with KPMG Peat Marwick LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
KPMG Peat Marwick LLP, would have
66
<PAGE> 68
caused KPMG Peat Marwick LLP to make reference to the matter in their report.
KPMG Peat Marwick LLP has furnished a letter addressed to the Commission stating
that it agrees with the above statements.
LEGAL MATTERS
Certain legal matters including, among other things, the validity of the
Common Stock offered hereby, have been passed upon by Glass, McCullough,
Sherrill & Harrold, LLP, Atlanta, Georgia, counsel to the Company. The validity
of the Common Stock offered hereby will be passed upon for the Underwriters by
King & Spalding, Atlanta, Georgia.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and in accordance therewith
files reports, proxy statements, and other information with the Securities and
Exchange Commission ("Commission"). Such reports, proxy statements, and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven World Trade
Center, 13th Floor, New York, New York 10048. The Commission maintains a Web
site that contains reports, proxy statements and other information regarding the
Company at http://www.sec.gov. The Common Stock is listed on the Nasdaq National
Market and such reports, proxy statements and other information may be inspected
and copied at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 ("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus, which is a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and in the exhibits
thereto. Certain items were omitted in accordance with the rules and regulations
of the Commission. Any interested party may inspect the Registration Statement
without charge at the aforementioned public reference facilities of the
Commission and may obtain copies of all or any part of it from the Commission
upon payment of the fees prescribed. Statements contained herein which refer to
a document filed as an exhibit to the Registration Statement are qualified in
their entirety by reference to the copy of such document filed with the
Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents which have been filed by the Company (Commission
File No. 0-22374) with the Commission are incorporated herein by reference as if
fully set forth herein:
(i) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(ii) The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997;
(iii) The Company's Current Report on Form 8-K, dated June 23, 1997;
and
(iv) The description of the Company's 1997 Stock Option Plan contained
under the heading "Item 2 -- Approval of the 1997 Stock Option Plan" (pages
7 and 8) in the Company's proxy statement dated April 21, 1997.
67
<PAGE> 69
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14, or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the shares of Common
Stock offered hereby shall likewise be incorporated herein by reference and
shall become a part hereof from and after the time such documents are filed. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which is incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any or all of the documents referred to above which have been
incorporated into this Prospectus by reference (other than exhibits to such
documents). Requests for such copies should be directed to the Company, 3490
Piedmont Road, Suite 1550, Atlanta, Georgia 30305, Attention: Martha Fleming,
telephone number (404) 240-1504.
68
<PAGE> 70
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors - Ernst & Young LLP.......... F-2
Independent Auditors' Report - KPMG Peat Marwick LLP........ F-3
Consolidated Statements of Condition as of December 31, 1995
and 1996 and September 30, 1997 (unaudited)............... F-4
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997 (unaudited)............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997 (unaudited)............. F-6
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995, and 1996 and for the
nine months ended September 30, 1997 (unaudited).......... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Fidelity National Corporation
We have audited the consolidated statements of condition of Fidelity
National Corporation and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Fidelity National Corporation and
subsidiaries for the year ended December 31, 1994 were audited by other auditors
whose report dated January 20, 1995, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 and 1996 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Fidelity National Corporation and subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the prompt corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) place restrictions on any insured depository institution that does not
meet certain requirements, including minimum capital ratios. These restrictions
are based on an institution's FDICIA defined capital category and become
increasingly severe as an institution's capital category declines. The Company
and its wholly owned subsidiary, Fidelity National Bank (Bank), are operating
under regulatory agreements with the Federal Reserve Bank of Atlanta (FRB) and
the Office of the Comptroller of the Currency (OCC) that require them to meet
prescribed requirements. The Company and the Bank were deemed "undercapitalized"
based upon their respective capital positions at December 31, 1996. The Company
and the Bank have filed a capital plan with the OCC and FRB outlining plans for
attaining the required levels of regulatory capital. The Company was notified on
April 3, 1997 that it would be required to file, in addition to the capital
plan, a capital restoration plan with the OCC within 45 days. Failure to
increase their capital ratios in accordance with their capital plans would
expose the Company and the Bank to regulatory sanctions that may include
restrictions on operations and growth, mandatory asset dispositions and seizure.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. The ability of the Company to continue as a going concern is
dependent upon many factors, including regulatory action and the ability of
management to achieve its capital restoration plan. Management's plans in regard
to these matters are described in Note 2 to the consolidated financial
statements. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for certain
mortgage banking activities.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
April 3, 1997
F-2
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Fidelity National Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Fidelity National Corporation and
subsidiaries for the year ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Fidelity National Corporation and subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
January 20, 1995
F-3
<PAGE> 73
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks - Note 13.................... $ 27,356,936 $ 29,311,690 $ 15,173,608
Interest-bearing deposits with banks................. - 3,300,708 2,721,089
Federal funds sold................................... 10,002,754 343,019 29,477,654
Investment securities available-for-sale - Note 3.... 53,139,161 71,230,743 67,406,847
Investment securities held-to-maturity (fair values
of $5,320,209, $6,161,119, and $ for 1995, 1996
and September 30, 1997, respectively) - Note 3..... 5,291,733 6,279,816 6,280,471
Loans held-for-sale.................................. 47,112,535 38,105,868 39,313,829
Loans, net of unearned income - Note 4............... 360,176,486 429,283,563 419,738,846
Allowance for loan losses - Note 4................... (5,536,504) (16,510,842) (14,758,673)
------------ ------------ ------------
Loans, net........................................... 354,639,982 412,772,721 404,980,173
Premises and equipment, net - Note 5................. 10,588,433 19,799,079 20,628,527
Other real estate - Note 4........................... 1,339,318 566,751 2,041,803
Accrued interest receivable.......................... 3,577,862 5,007,876 4,884,072
Other assets......................................... 11,773,101 18,702,026 12,526,745
------------ ------------ ------------
Total assets............................... $524,821,815 $605,420,297 $605,434,818
============ ============ ============
LIABILITIES
Deposits - Note 6
Noninterest-bearing demand deposits................ $ 75,120,501 $ 73,877,369 $ 79,398,400
Interest-bearing deposits:
Demand and money market............................ 107,475,974 78,451,267 77,869,871
Savings......................................... 14,293,402 38,867,549 22,381,007
Time deposits, $100,000 and over................ 65,503,961 86,630,315 76,495,842
Other time deposits............................. 204,113,471 266,886,829 290,875,184
------------ ------------ ------------
Total deposits............................. 466,507,309 544,713,329 547,020,304
Short-term borrowings - Note 7..................... 8,245,191 17,183,769 8,606,487
Long-term debt - Note 8............................ 16,750,000 16,500,000 15,800,000
Accrued interest payable........................... 2,606,802 3,502,631 3,340,410
Other liabilities.................................. 2,950,233 2,447,752 2,426,805
------------ ------------ ------------
Total liabilities.......................... 497,059,535 584,347,481 577,194,006
Commitments and contingencies - Notes 13 and 14
SHAREHOLDERS' EQUITY - Notes 2 and 11
Preferred Stock, no par value. Authorized
10,000,000 in 1997 and none in 1996; issued and
outstanding 984,000 shares of Non-Cumulative 8%
Convertible Preferred Stock, Series A, stated
value $6.25 in 1997; none in 1996............... - - 6,150,000
Common Stock, no par value. Authorized 5,000,000,
50,000,000 and 50,000,000; issued 4,619,475,
4,665,256 and 4,672,774; outstanding 4,608,383,
4,654,164 and 4,661,682, in 1995, 1996, and
September 30, 1997, respectively................ 11,303,406 11,878,597 11,452,358
Treasury stock..................................... (69,325) (69,325) (69,325)
Net unrealized gains (losses) on investment
securities available-for-sale, net of tax....... 689,774 (140,241) 244,089
Retained earnings.................................. 15,838,425 9,403,785 10,463,690
------------ ------------ ------------
Total shareholders' equity................. 27,762,280 21,072,816 28,240,812
------------ ------------ ------------
Total liabilities and shareholders'
equity................................... $524,821,815 $605,420,297 $605,434,818
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 74
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees................... $32,120,759 $43,722,346 $54,333,446 $40,321,856 $42,532,700
Investment securities:
Taxable............................... 3,423,612 4,024,715 4,956,072 3,694,763 3,581,862
Tax-exempt............................ 6,222 360 - - -
Federal funds sold...................... 322,542 323,622 436,649 279,126 638,459
Deposits with other banks............... 13,460 8,947 74,104 29,745 56,452
----------- ----------- ----------- ----------- -----------
Total interest income............ 35,886,595 48,079,990 59,800,271 44,325,490 46,809,473
INTEREST EXPENSE
Deposits - Note 6....................... 11,167,526 17,927,967 24,532,698 18,035,032 18,087,287
Short-term borrowings................... 466,138 589,733 692,591 544,858 386,669
Long-term debt.......................... 131,220 353,116 1,501,487 1,184,133 1,126,189
----------- ----------- ----------- ----------- -----------
Total interest expense........... 11,764,884 18,870,816 26,726,776 19,764,023 19,600,145
NET INTEREST INCOME....................... 24,121,711 29,209,174 33,073,495 24,561,467 27,209,328
Provision for loan losses - Note 4...... 4,125,000 8,090,000 25,127,000 11,100,000 11,670,000
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................. 19,996,711 21,119,174 7,946,495 13,461,467 15,539,328
NONINTEREST INCOME
Service charges on deposit accounts..... 1,427,626 1,484,835 1,737,145 1,290,474 1,570,875
Credit card fees........................ 2,607,968 2,470,531 2,927,992 2,157,141 2,264,646
Mortgage banking activities............. 1,740,343 3,337,767 6,900,260 4,771,621 4,091,180
Securities gains, net - Note 3.......... 123,832 854,919 603,977 361,125 -
Other - Note 15......................... 2,869,005 3,531,359 6,135,848 4,031,644 5,061,334
----------- ----------- ----------- ----------- -----------
Total noninterest income......... 8,768,774 11,679,411 18,305,222 12,612,005 12,988,035
NONINTEREST EXPENSE
Salaries and employee benefits - Note
10.................................... 9,884,058 11,794,559 16,411,631 12,059,396 12,650,640
Furniture and equipment................. 1,235,464 1,389,858 1,722,979 1,200,988 1,677,829
Net occupancy........................... 1,575,822 1,905,762 2,596,155 1,743,241 2,372,127
Credit card processing and transaction
fees.................................. 2,382,252 1,973,557 3,030,290 2,212,184 2,157,146
Amortization of mortgage servicing
rights................................ 364,461 1,136,299 1,927,250 1,529,339 610,348
Other - Note 15......................... 6,932,730 7,383,149 9,800,355 7,402,339 7,266,296
----------- ----------- ----------- ----------- -----------
Total noninterest expense........ 22,374,787 25,583,184 35,488,660 26,147,487 26,734,386
----------- ----------- ----------- ----------- -----------
(Loss) income before income
taxes.......................... 6,390,698 7,215,401 (9,236,943) (74,015) 1,792,977
Income tax (benefit)
expense - Note 9............... 2,091,689 2,566,019 (3,495,212) (77,616) 604,994
----------- ----------- ----------- ----------- -----------
NET (LOSS) INCOME......................... $ 4,299,009 $ 4,649,382 $(5,741,731) $ 3,601 $ 1,187,983
=========== =========== =========== =========== ===========
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK................................... $ 4,299,009 $ 4,649,382 $(5,741,731) $ 3,601 $ 1,059,905
=========== =========== =========== =========== ===========
EARNINGS PER SHARE........................ $ .93 $ 1.01 $ (1.24) $ 0.00 $ 0.23
=========== =========== =========== =========== ===========
Average Common Shares..................... 4,608,383 4,608,383 4,619,530 4,609,026 4,658,284
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 75
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) income................................ $ 4,299,009 $ 4,649,382 $ (5,741,731) $ 3,601 $ 1,187,983
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses...................... 4,125,000 8,090,000 25,127,000 11,100,000 11,670,000
Depreciation and amortization of premises and
equipment.................................... 990,554 1,097,090 1,481,379 1,069,290 1,466,927
Amortization of mortgage servicing rights...... 364,461 1,136,299 1,927,250 1,529,339 610,348
Additions of originated mortgage servicing
rights....................................... - (1,031,548) (893,878) (528,466) (194,515)
Other amortization and (accretion), net........ (123,752) (87,167) 54,117 251,684 (952,822)
Purchases of investments held in trading
accounts..................................... (952,000) - - - -
Sales of investments held in trading
accounts..................................... 941,382 - - - -
Securities gains, net.......................... (123,832) (854,919) (603,977) (282,530) -
Gain on loan sales and securitization.......... (221,216) (228,641) (672,012) (259,059) (311,172)
(Increase) decrease in loans held-for-sale..... 17,193,912 (44,887,263) 9,006,667 37,937,073 (1,207,961)
Net (increase) decrease in accrued interest
receivable................................... (902,789) (984,844) (1,430,014) (1,137,460) 123,804
Net increase (decrease) in accrued interest
payable...................................... 324,447 838,033 895,829 477,598 (162,221)
Net increase (decrease) in other liabilities... 714,112 (757,175) 502,481 (344,174) (140,846)
Net (increase) decrease in other assets........ (1,488,941) 229,358 (7,504,116) (5,138,740) 6,415,043
------------ ----------- ------------ ------------ -----------
Net cash flows provided by (used in)
operating activities..................... 25,140,347 (32,791,395) 22,148,995 44,678,156 18,504,568
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities
held-to-maturity............................... (3,993,750) (11,038,682) (33,294,485) (20,325,584) -
Maturities of investment securities
held-to-maturity............................... 400,000 14,056,006 30,375,000 22,368,709 18,005,000
Sales of investment securities
available-for-sale............................. 13,116,453 34,233,853 43,781,536 14,962,557 -
Purchases of investment securities
available-for-sale............................. (25,444,864) (43,826,318) (65,077,185) (57,323,577) (42,258,334)
Maturities of investment securities
available-for-sale............................. 6,880,913 12,956,531 3,728,880 11,427,782 28,725,526
Net increase in loans............................ (109,215,310) (57,917,324) (286,040,758) (252,546,480) (89,225,918)
Purchases of mortgage servicing rights........... (1,333,283) (4,981,096) - - -
Purchases of premises and equipment.............. (2,564,690) (2,863,948) (10,692,025) (7,491,113) (2,296,375)
Proceeds from sale of loans...................... 4,060,528 21,125,520 203,543,314 152,003,660 84,044,588
Proceeds from sale of equipment.................. 21,445 - - - 32,405
Proceeds from sales of other real estate......... 390,876 961,712 345,575 73,294 139,998
------------ ----------- ------------ ------------ -----------
Net cash flows used in investing
activities............................... (117,681,682) (37,293,746) (113,330,148) (136,850,752) (2,833,110)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, money
market accounts, and savings accounts.......... 15,911,481 30,392,930 (5,693,692) (7,787,575) (11,546,707)
Net increase in time deposits.................... 63,807,089 53,098,658 83,899,712 82,912,578 13,853,882
Proceeds from issuance of long-term debt......... 926,000 16,250,000 - - -
Repayment of long-term debt...................... (250,000) (1,991,000) (250,000) (250,000) (150,000)
Increase (decrease) in short-term borrowings..... 18,071,368 (10,695,102) 8,938,578 9,465,752 (8,577,282)
Dividends paid on Common Stock................... (628,411) (644,135) (692,909) (518,442) -
Dividends paid on preferred stock................ - - - - 8,178
Proceeds from sale of Common Stock............... - - 575,191 555,690 73,761
Sale of preferred stock.......................... - - - - 5,100,000
Sale of treasury stock........................... 1,250 - - -
------------ ----------- ------------ ------------ -----------
Net cash flows provided by financing
activities............................... 97,838,777 86,411,351 86,776,880 84,378,003 1,254,524
------------ ----------- ------------ ------------ -----------
Net (decrease) increase in cash and cash
equivalents.............................. 5,297,442 16,326,210 (4,404,273) (7,794,593) 14,416,934
Cash and cash equivalents, beginning of year....... 15,736,038 21,033,480 37,359,690 37,359,690 32,955,417
------------ ----------- ------------ ------------ -----------
Cash and cash equivalents, end of year............. $ 21,033,480 $37,359,690 $ 32,955,417 $ 29,565,097 $47,372,351
============ =========== ============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest....................................... $ 11,440,437 $18,032,783 $ 25,830,947 $ 19,286,425 $19,762,366
============ =========== ============ ============ ===========
Income taxes................................... $ 1,528,000 $ 2,163,000 $ 1,375,000 $ 1,375,000 $ 200,000
============ =========== ============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 76
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSSES) ON
INVESTMENT
PREFERRED STOCK COMMON STOCK TREASURY STOCK SECURITIES
-------------------- ----------------------- ----------------- AVAILABLE-
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT FOR-SALE
------- ---------- --------- ----------- ------ -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1994.............. - - 4,200,600 $ 5,125,000 11,292 $(70,575) $ 1,735,091
Net income........................... - - - - - - -
Dividends declared ($.1364 per
share)............................. - - - - - - -
Sale of treasury shares.............. - - - - (200) 1,250 -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - - - - - - (3,372,268)
------- ---------- --------- ----------- ------ -------- -----------
BALANCE DECEMBER 31, 1994............ - - 4,200,600 5,125,000 11,092 (69,325) (1,637,177)
Net income........................... - - - - - - -
Dividends declared ($.1398 per
share)............................. - - - - - - -
10% stock dividend................... - - 418,875 6,178,406 - - -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - - - - - - 2,326,951
------- ---------- --------- ----------- ------ -------- -----------
BALANCE DECEMBER 31, 1995............ - 4,619,475 11,303,406 11,092 (69,325) 689,774
Net loss............................. - - - - - - -
Dividends declared ($.15 per
share)............................. - - - - - - -
Common Stock issued under Employee
Stock Purchase Plan................ - - 1,766 19,502 - - -
Issuance of Common Stock to
Directors.......................... - 44,015 555,689 - - -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - - - - - - (830,015)
------- ---------- --------- ----------- ------ -------- -----------
BALANCE DECEMBER 31, 1996............ - - 4,665,256 11,878,597 11,092 (69,325) (140,241)
Net Income........................... - - - - - - -
Dividend Declared ($.125 per
share)............................. - - - - - -
Issuance of Preferred Stock.......... 984,000 6,150,000 (500,000) - - -
Common Stock issued under Employee
Stock Purchase Plan................ - - 7,518 73,761 - - -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - - - - - - 384,330
------- ---------- --------- ----------- ------ -------- -----------
BALANCE SEPTEMBER 30, 1997........... 984,000 $6,150,000 4,672,774 $11,452,358 11,092 $(69,325) $ 244,089
======= ========== ========= =========== ====== ======== ===========
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
----------- -------------
<S> <C> <C>
BALANCE JANUARY 1, 1994.............. $14,340,986 $21,130,502
Net income........................... 4,299,009 4,299,009
Dividends declared ($.1364 per
share)............................. (628,411) (628,411)
Sale of treasury shares.............. - 1,250
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - (3,372,268)
----------- -----------
BALANCE DECEMBER 31, 1994............ 18,011,584 21,430,082
Net income........................... 4,649,382 4,649,382
Dividends declared ($.1398 per
share)............................. (644,135) (644,135)
10% stock dividend................... (6,178,406) -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - 2,326,951
----------- -----------
BALANCE DECEMBER 31, 1995............ 15,838,425 27,762,280
Net loss............................. (5,741,731) (5,741,731)
Dividends declared ($.15 per
share)............................. (692,909) (692,909)
Common Stock issued under Employee
Stock Purchase Plan................ - 19,502
Issuance of Common Stock to
Directors.......................... - 555,689
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - (830,015)
----------- -----------
BALANCE DECEMBER 31, 1996............ 9,403,785 21,072,816
Net Income........................... 1,187,983 1,187,983
Dividend Declared ($.125 per
share)............................. (128,078) (128,078)
Issuance of Preferred Stock.......... - 5,650,000
Common Stock issued under Employee
Stock Purchase Plan................ - 73,761
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - 384,330
----------- -----------
BALANCE SEPTEMBER 30, 1997........... $10,463,690 $28,240,812
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 77
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Fidelity National Corporation and
subsidiaries (the "Company") conform to generally accepted accounting principles
and to general practices within the financial services industry. The following
is a description of the more significant of those policies.
Basis of Presentation. The consolidated financial statements include the
accounts of Fidelity National Corporation and its wholly owned subsidiaries.
Fidelity National Corporation ("Fidelity") owns 100% of Fidelity National Bank
(the "Bank") and Fidelity National Capital Investors, Inc. Fidelity National
Mortgage Corporation is a wholly owned subsidiary of the Bank. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements have been prepared in conformity with generally
accepted accounting principles followed within the financial services industry.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate to
the determination of the allowance for loan losses and the valuation of real
estate acquired in connection with foreclosures or in satisfaction of loans.
Certain previously reported amounts have been restated to conform to current
presentation.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand,
amounts due from banks, and federal funds sold. Generally, federal funds are
purchased and sold within one-day periods.
Investment Securities. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" the Company classifies its investment securities in one
of three categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. The Company had no trading securities at December 31, 1995 or
1996. Held-to-maturity securities are those securities for which the Company has
the ability and positive intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized gains and losses
on trading securities are included in income. Unrealized gains and losses, net
of related income taxes, on available-for-sale securities are excluded from
income and are reported as a separate component of shareholders' equity until
realized. Transfers of securities between categories are recorded at fair value
at the date of transfer. Unrealized gains and losses are recognized in income
for transfers into trading securities. The unrealized gains or losses included
in the separate component of shareholders' equity for securities transferred
from available-for-sale to held-to-maturity are maintained and amortized into
income over the remaining life of the related security as an adjustment to yield
in a manner consistent with the amortization or accretion of premium or discount
on the security.
A decline in the fair value below cost of any available-for-sale or
held-to-maturity security that is deemed other than temporary results in a
charge to income and the establishment of a new cost basis for the security.
Purchase premiums and discounts are amortized or accreted over the life of
the related investment securities as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses for securities sold are included in income and are
derived using the specific identification method for determining the cost of
securities sold.
Loans and Interest Income. Loans are reported at principal amounts
outstanding net of unearned income, and deferred loan fees and costs. Interest
income is recognized in a manner that results in a level yield
F-8
<PAGE> 78
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on principal amounts outstanding. The accrual of interest is discontinued when,
in management's judgment, it is determined that the collectibility of interest
is doubtful.
Rate-related loan fee income is included in interest income. Loan
origination and commitment fees and certain direct origination costs are being
deferred and the net amount amortized as an adjustment of the yield over the
contractual lives of the related loans, taking into consideration assumed
prepayments.
Effective January 1, 1996, the Company modified its classification of
credit card current period interest charge-offs. In prior years, the Company
recorded credit card current period accrued interest meeting Company policy for
charge-off as a charge against the allowance for loan losses. Beginning January
1, 1996, the Company commenced reversing current period accrued interest-related
income on credit card loans being charged off to interest income. For the year
ended December 31, 1996, $1,965,202 of such interest had been reversed. Prior
period statements do not reflect this reclassification. The reclassification was
made to conform to industry practice.
Annual fees collected for credit cards are recognized on a straight-line
basis over the period the fee entitles the cardholder to use the card.
Effective January 1, 1995, the Company adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting for Impairment of a Loan - Income Recognition and Disclosure."
These standards require impaired loans to be measured based on the present value
of expected future cash flows discounted at the loan's original effective
interest rate, or at the loan's observable market price, or the fair value of
the collateral if the loan is collateral dependent.
Impaired loans are specifically reviewed loans for which it is probable
that the creditor will be unable to collect all amounts due according to the
terms of the loan agreement. A valuation allowance is required to the extent
that the measure of impaired loans is less than the recorded investment. SFAS
No. 114 does not apply to large groups of smaller balance, homogeneous loans,
which are consumer installment and credit card loans, and which are collectively
evaluated for impairment. Smaller balance commercial loans are also excluded
from the application of the statement. Interest on these loans is reported on
the cash basis as received when the full recovery of principal is anticipated,
or after full principal has been recovered when collection of interest is in
question. The adoption of these standards did not have a material impact on the
Company's financial position or results of operations.
Allowance for Loan Losses. The allowance for loan losses is established
through provisions charged to operations. Such provisions are based on
management's evaluation of the loan portfolio under current economic conditions,
past loan and credit card loss experience, adequacy of underlying collateral,
and such other factors which, in management's judgment, deserve recognition 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.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
A substantial portion of the Company's loans is secured by real estate in
metropolitan Atlanta, Georgia. In addition, a substantial portion of the
Company's other real estate is located in this same market area. Accordingly,
the ultimate collectibility of a substantial portion of the loan portfolio and
the recovery of a substantial portion of the carrying amount of other real
estate are susceptible to changes in market conditions in this market area.
F-9
<PAGE> 79
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans Held-for-Sale. Loans held-for-sale include mortgage loans and
certain indirect automobile loans. Those loans held-for-sale are recorded at the
lower of cost or market. For mortgage loans, this is determined by outstanding
commitments from investors for committed loans and on the basis of current
delivery prices in the secondary mortgage market for uncommitted loans. For
indirect automobile loans, the lower of cost or market is determined based on
evaluating the market value of the pool selected for sale. Based upon available
market information, no valuation adjustment was required at December 31, 1995 or
1996, and fair values for such loans held-for-sale approximated or exceeded
their carrying values.
Gains and losses on sales of loans are recognized at the settlement date.
Gains and losses are determined by the difference between the net sales
proceeds, including the estimated value associated with excess or deficient
servicing fees to be received, and the carrying value of the loans sold.
Premises and Equipment. Premises and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized using
the straight-line method over the lease term or estimated useful life, whichever
is shorter.
Other Real Estate. Other real estate represents property acquired through
foreclosure or in satisfaction of loans. Other real estate is carried at the
lower of cost or fair value less estimated selling costs. Fair value is
determined on the basis of current appraisals, comparable sales, and other
estimates of value obtained principally from independent sources. Any excess of
the loan balance at the time of foreclosure or acceptance in satisfaction of
loans over the fair value of the real estate held as collateral is treated as a
loan loss and charged against the allowance for loan losses. Gain or loss on
sale and any subsequent adjustments to reflect changes in fair value and selling
costs are recorded as a component of income.
Income Taxes. The Company files a consolidated federal income tax return.
Taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income
Taxes." 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. 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.
Income Per Common Share. Income per common share is computed based on the
weighted average number of shares outstanding, adjusted for any stock splits or
stock dividends.
Mortgage Banking Activities. Effective January 1, 1995, the Company
adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of
FASB Statement No. 65." SFAS No. 122 requires capitalization of purchased as
well as internally originated mortgage servicing rights based on the fair value
of the mortgage servicing rights relative to the loan as a whole. Prior to the
issuance of SFAS No. 122, capitalization of mortgage servicing rights was
limited to servicing rights purchased from third parties. Mortgage servicing
rights are amortized in proportion to and over the period of estimated net
servicing income. The fair value of mortgage servicing rights is determined
based on the present value of estimated expected future cash flows determined
using assumptions that market participants would use in estimating future net
servicing income which includes discount rate, prepayment estimate, and per loan
cost to service. Mortgage servicing rights are stratified by loan type
(government or conventional) and interest rate for purposes of measuring
impairment on a quarterly basis. An impairment loss is recognized to the extent
by which the amortized capitalized mortgage servicing rights for each stratum
exceeds the current fair value. Impairment losses are recognized as reductions
in the carrying value of the asset, through the use of a valuation allowance.
F-10
<PAGE> 80
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995 and 1996, the Company capitalized approximately $1,032,000 and
$894,000, respectively of originated servicing rights and recorded amortization
of approximately $61,000 and $573,000, respectively and recorded a valuation
allowance of approximately $37,000 and $49,000, respectively related to those
rights. These amounts are included in other assets. The estimated fair value of
originated and purchased mortgage servicing rights at December 31, 1995 and
1996, was approximately $7,800,000 and $7,400,000, respectively.
Recent Accounting Pronouncements. Effective January 1, 1996, the Company
adopted SFAS No. 121, "Accounting For the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The adoption did not have a material
impact on the financial position or results of operations of the Company.
In June 1996, the Financial Accounting Standards Board issued "Accounting
For Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," SFAS No. 125, which provides new accounting and reporting
standards for sales, securitizations, and servicing of receivables and other
financial assets and extinguishments of liabilities. SFAS No. 125 is effective
for transactions occurring after December 31, 1996, except those provisions
relating to repurchase agreements, securities lending and other similar
transactions and pledged collateral, which have been delayed until after
December 31, 1997, by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of Statement No. 125, an amendment of FASB Statement No. 125." These
standards will be adopted as required in 1997 and 1998, and are not expected to
have a material impact on the Company's financial position or results of
operations.
2 -- REGULATORY MATTERS
Going Concern. The accompanying consolidated financial statements have
been prepared on a going-concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company incurred a net loss of $5.7 million during the year ended December 31,
1996. At December 31, 1996, Fidelity and the Bank were not in compliance with
the minimum capital requirements prescribed by the Federal Reserve Bank (FRB)
and the Office of the Comptroller of the Currency (OCC) and were considered
"undercapitalized" under the provisions of the Federal Deposit Insurance
Improvement Act of 1991. In addition, Fidelity and the Bank entered into
agreements with the FRB and OCC, respectively. The agreements and regulatory
capital requirements are described below. If Fidelity and the Bank are unable to
meet the minimum capital requirements of the agreements, one or more regulatory
sanctions may result. These sanctions include such operating restrictions as
growth limitations, prohibitions on dividend payments, increased supervisory
monitoring, limitations on executive compensation, restrictions on deposit
interest rates, and regulatory seizure. Management's plans concerning these
matters and a description of Fidelity's and the Bank's capital plan which was
submitted to the FRB and OCC, including plans to raise additional capital, are
described below.
These factors, among others, may indicate that the Company will be unable
to continue as a going concern. The consolidated financial statements do not
include the adjustments, if any, that might have been required had the outcome
of the above-mentioned uncertainties been known, or any adjustments relating to
the recoverability of recorded asset amounts or the amount of liabilities that
may be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent on its ability to
comply with the terms of the agreements, maintain sufficient liquidity, and
ultimately, return to profitable operations.
Management's Plans. The Company incurred significant losses which have
eroded capital. Accordingly, management's primary focus is to obtain additional
capital and to return the Company to profitability. In the fourth quarter of
1996, the Bank increased rates charged on credit card products demonstrating
higher loss exposure, brought credit card collections in-house, and strengthened
its credit card management team while consolidating and downsizing in selected
areas.
F-11
<PAGE> 81
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fidelity has neither adequate cash flow nor the financial flexibility to
enable it to act as a source of financial strength to the Bank. The Company is
pursuing options to raise additional capital which, if raised, will enable the
Company and the Bank to exceed all minimum capital requirements and the ratio
levels required under the OCC Agreement. A capital plan, subject to amendment,
was filed with the OCC as required under the OCC Agreement.
Regulatory Agreements. The Bank is a national banking association and is
subject to Federal and state statutes applicable to banks chartered under the
banking laws of the United States, to members of the Federal Reserve System and
to banks whose deposits are insured by the Federal Deposit Insurance
Corporation. The Board of Governors of the Federal Reserve System and the Office
of the Comptroller of the Currency (the OCC) have established capital adequacy
guidelines for bank holding companies and national banks.
The Bank's principal regulator is the OCC. At periodic intervals, the OCC
examines and evaluates the financial condition, operations, and policies and
procedures of nationally chartered banks, such as the Bank, as part of its
legally prescribed oversight responsibilities. Based on its examinations, the
OCC can direct a national bank to adjust its financial statements in accordance
with the examination's findings. In view of the regulatory environment in which
banks operate, the extent, if any, to which future OCC examinations may
ultimately result in adjustments to the consolidated financial statements cannot
presently be determined.
In 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991
("1991 Act") was adopted. Additional supervisory powers and regulations mandated
by the 1991 Act include a "prompt corrective action" program based upon five
regulatory zones for banks 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 subject to less onerous regulation and supervision than banks with lesser
amounts of capital.
To implement the prompt corrective action provisions of the 1991 Act, the
OCC adopted regulations, which became effective on December 19, 1992, placing
financial institutions in the following five categories based upon
capitalization ratios: (i) 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%, (ii) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based
ratio of at least 4% and a leverage ratio of at least 3%; (iii) an
"undercapitalized" institution has a total risk-based ratio of under 8%, a Tier
1 risk-based ratio of under 4% or a leverage ratio of under 3%; (iv) a
"significantly undercapitalized" institution has a total risk-based ratio of
under 6%, a Tier 1 risk-based ratio of under 3% or a leverage ratio of under 3%;
and (v) a "critically undercapitalized" institution has a leverage ratio of 2%
or less. Institutions in any of the three undercapitalized categories are
prohibited from declaring dividends or making capital distributions. The
regulations also establish procedures for "downgrading" an institution to a
lower capital category based on supervisory factors other than capital.
The OCC and the Bank entered into an Agreement dated November 14, 1996,
("OCC Agreement"). The OCC Agreement provides that the Bank (i) appoint an
"Oversight Committee;" (ii) achieve and maintain specified higher capital
levels; (iii) develop a three-year capital program which will include, among
other things, certain restrictions on dividend payments by the Bank; and (iv)
revise and amend its strategic plan. On April 3, 1997, the Company was notified
that it would be required to file, in addition to the capital plan, a capital
restoration plan with the OCC within 45 days.
Fidelity's Board of Directors on February 13, 1997, adopted a resolution
requested by the Federal Reserve Bank of Atlanta ("FRB Agreement"). The FRB
Agreement, among other things, prohibits Fidelity from paying dividends and
incurring debt without prior approval of the FRB.
The OCC Agreement will impair the ability of the Bank to declare and pay
dividends to Fidelity since the Bank currently intends to retain any earnings to
augment its capital. As dividends from the Bank are the
F-12
<PAGE> 82
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal source of income to Fidelity, and because the payment of dividends by
Fidelity is subject to prior approval of the Federal Reserve, it is unlikely
that Fidelity will declare and pay dividends absent the increases in capital
obtained through the sale of equity securities.
The OCC Agreement establishes higher capital requirements than those
applicable under OCC regulations for an "adequately capitalized" bank. Specified
capital levels are to be achieved by the Bank by April 30, 1997, and maintained
until November 30, 1997. At November 30, 1997, higher capital levels become
effective and are applicable thereafter.
The table below sets forth the capital requirements for the Bank under OCC
regulations, and under the OCC Agreement and the Bank's capital ratios at
December 31, 1996.
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT
------------------------- ------------------------ ACTUAL
ADEQUATELY WELL APRIL 30, NOVEMBER 30, DECEMBER 31,
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 1996
- -------------- ----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Leverage................................. 4.00% 5.00% 5.00% 6.00% 3.27%
Risk-Based Capital:
Tier 1................................. 4.00 6.00 6.00 7.00 4.16
Total.................................. 8.00 10.00 10.00 11.00 7.43
</TABLE>
Under the terms of the OCC Agreement, should the Bank capital be obtained
as preferred stock, for the purposes of paying dividends on the Preferred Stock,
the Bank's capital ratios must be at least 4% for leverage, 4% for Tier 1
risk-based capital and 8% for total risk-based capital.
Set forth below are pertinent capital ratios for the Company as of December
31, 1996, under the FRB regulation:
<TABLE>
<CAPTION>
MINIMUM
CAPITAL RATIOS CAPITAL REQUIREMENT ACTUAL
- -------------- ------------------- ------
<S> <C> <C>
Leverage.................................................... 3.00% 2.67%
Risk-Based Capital:
Tier 1.................................................... 4.00 3.40
Total..................................................... 8.00 6.38
</TABLE>
Absent sales of equity securities or subordinated debt by the Company,
capital will increase only through the retention of earnings.
To meet the capital requirements in the formal agreements, management has
estimated that at December 31, 1996, an additional $14 million of capital will
be needed to reach the April 30, 1997, requirements and an additional $5 million
will be needed to reach the November 30, 1997, requirements.
As of December 31, 1995, the Bank was considered to be "adequately
capitalized" by the OCC. The following table represents the regulatory capital
position of the Company and the Bank at December 31, 1995 and 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
COMPANY BANK
----------------- -----------------
1995 1996 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Tier 1 capital.................................... $26,606 $17,052 $28,867 $20,799
Tier 1 capital required........................... 17,309 20,059 17,027 20,003
------- ------- ------- -------
Excess (deficit) over required amount........... $ 9,297 $(3,007) $11,840 $ 796
======= ======= ======= =======
Total risk-based capital.......................... $45,323 $31,976 $41,194 $37,180
Total risk-based capital required................. 34,619 40,118 34,055 40,007
------- ------- ------- -------
Excess (deficiency) over required amount........ $10,704 $(8,142) $ 7,139 $(2,827)
======= ======= ======= =======
</TABLE>
F-13
<PAGE> 83
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regulatory Capital Requirements
The Federal Reserve Board ("FRB") and the OCC have issued guidelines (the
"guidelines") regarding the capital leverage ratio and risk-based capital
requirements. The guidelines provide detailed definitions of regulatory capital
and assign different weights to various assets and credit equivalent amounts of
off-balance sheet financial instruments, depending upon the perceived degree of
credit risk to which they expose such entities. Each banking organization is
required to maintain a specified minimum ratio of capital to the total of such
risk-adjusted assets and off-balance sheet financial instruments.
The risk-based capital ratios of Fidelity and the Bank are calculated under
the guidelines by dividing their respective qualifying total capital by their
respective total risk-weighted assets. Fidelity's and the Bank's qualifying
total capital and total risk-weighted assets are determined on a fully
consolidated basis. Total qualifying capital is comprised of the sum of core
capital elements ("Tier 1 capital") and supplementary capital elements ("Tier 2
capital"). Tier 1 capital excludes any net unrealized gains or losses resulting
from the implementation of SFAS No. 115. Tier 2 capital includes the allowance
for loan losses, subject to limitations.
Under the guidelines, total risk-weighted assets of Fidelity and the Bank
are determined by assigning balance sheet assets and credit equivalent amounts
of off-balance sheet financial instruments to one of four broad risk categories
having risk weights ranging from zero % to 100%. The aggregate dollar amount of
each category is multiplied by the risk weight associated with that category and
the resulting weighted values from each category are summed to determine total
risk-weighted assets.
Each bank holding company and national bank must maintain (i) a minimum
ratio of Tier 1 capital to total risk-weighted assets of 4.0% and (ii) a minimum
ratio of total qualifying capital to total qualifying assets ("total risk-based
capital ratio") of 8.0% with the amount of the allowance for loan losses that
may be included in Tier 2 capital limited to 1.25% of total risk-weighted
assets.
Capital leverage ratio standards require a minimum ratio of Tier 1 capital
to adjusted average total assets ("capital leverage ratio") of 3.0%. The
leverage ratio is only a minimum. Institutions experiencing or anticipating
significant growth or those with other than minimum risk profiles will be
expected to maintain capital well above the minimum levels.
For additional information, see Note 11 -- Shareholders' Equity.
F-14
<PAGE> 84
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3 -- INVESTMENT SECURITIES
Investment securities at December 31, 1995 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities available-for-sale at December 31,
1995
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $25,959,600 $ 644,259 $ - $26,603,859
Mortgage-backed securities.................. 24,780,224 468,278 - 25,248,502
Other securities............................ 1,286,800 - - 1,286,800
----------- ----------- ----------- -----------
Total................................ $52,026,624 $ 1,112,537 $ - $53,139,161
=========== =========== =========== ===========
Securities available-for-sale at December 31,
1996
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $48,149,420 $ 89,187 $ 301,169 $47,937,438
Mortgage-backed securities.................. 21,754,422 63,558 77,775 21,740,205
Other securities............................ 1,553,100 - - 1,553,100
----------- ----------- ----------- -----------
Total................................ $71,456,942 $ 152,745 $ 378,944 $71,230,743
=========== =========== =========== ===========
Securities held-to-maturity at December 31,
1995
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $ 4,990,274 $ 28,476 $ - $ 5,018,750
Other securities............................ 301,459 - - 301,459
----------- ----------- ----------- -----------
Total................................ $ 5,291,733 $ 28,476 $ - $ 5,320,209
=========== =========== =========== ===========
Securities held-to-maturity at December 31,
1996
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $ 5,979,017 $ - $ 118,697 $ 5,860,320
Other securities............................ 300,799 - - 300,799
----------- ----------- ----------- -----------
Total................................ $ 6,279,816 $ - $ 118,697 $ 6,161,119
=========== =========== =========== ===========
</TABLE>
Proceeds from the sale of investment securities were $13,116,453 in 1994
with related gross gains of $169,804 and gross losses of $35,354. Proceeds from
sales of investment securities available-for-sale during 1995 and 1996 were
$34,233,853 and $43,781,536, respectively. Gross gains of $917,786 and $603,977
for 1995 and 1996, respectively, were realized on those sales. Gross losses in
1995 and 1996 were $62,867 and $0, respectively. Income tax expense related to
the sale of securities was $40,530, $304,036 and $214,776 in 1994, 1995 and
1996, respectively.
Proceeds from the sale of investments held in trading accounts were
$941,382 in 1994. Gross gains of $750 and gross losses of $11,368 were realized
on those sales. There were no investments held in the trading accounts during
1995 and 1996.
F-15
<PAGE> 85
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table depicts amortized cost and estimated fair value of
investment securities at December 31, 1995 and 1996, by contractual maturity.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, other securities, which primarily consist of Federal Reserve
Bank common stock and Federal Home Loan Bank common stock, are not included in
the following table as they have no stated maturity.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasury Securities and
obligations of U.S. Government
corporations and agencies:
Due in one year or less........ $ - $ - $17,992,660 $17,992,660
Due after one year through five
years........................ 1,986,449 2,146,880 - -
Due after five years through
ten years.................... 15,973,151 16,456,979 17,436,200 17,361,645
Due after ten years or more.... 8,000,000 8,000,000 12,720,560 12,583,133
----------- ----------- ----------- -----------
25,959,600 26,603,859 48,149,420 47,937,438
Mortgage-backed securities........ 24,780,224 25,248,502 21,754,422 21,740,205
----------- ----------- ----------- -----------
Total..................... $50,739,824 $51,852,361 $69,903,842 $69,677,643
=========== =========== =========== ===========
Held-to-Maturity
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies:
Due in one year or less........ $ 4,990,274 $ 5,018,750 $ - $ -
Due after ten years............ - - 5,979,017 5,860,320
----------- ----------- ----------- -----------
Total..................... $ 4,990,274 $ 5,018,750 $ 5,979,017 $ 5,860,320
=========== =========== =========== ===========
</TABLE>
Investment securities with a carrying value of approximately $51,207,000
and $56,280,000 at December 31, 1995 and 1996, respectively, were pledged as
collateral for public deposits, securities sold under agreements to repurchase,
and for other purposes required by law.
4 -- LOANS
Loans outstanding, by classification, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ ------------
<S> <C> <C>
Credit cards.............................................. $139,873,437 $143,781,711
Real estate-mortgage...................................... 61,246,732 71,718,792
Real estate-construction.................................. 40,955,261 56,325,014
Commercial, financial and agricultural.................... 39,295,512 43,945,706
Consumer installment...................................... 78,805,544 113,512,340
------------ ------------
Loans (net of unearned income).................. 360,176,486 429,283,563
Less:
Allowance for loan losses............................... 5,536,504 16,510,842
------------ ------------
Loans, net...................................... $354,639,982 $412,772,721
============ ============
</TABLE>
F-16
<PAGE> 86
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans held for sale at December 31, 1996, totaled $38,105,868 which
included $13,105,868 of mortgage loans and $25,000,000 of indirect automobile
loans. The Company, through one of its subsidiaries, had loan participations
sold without recourse in the amount of $10 million and $7.5 million at December
31, 1995 and 1996, respectively. The Company, through its mortgage subsidiary,
was servicing loans for others of approximately $523.3 million, $882.6 million
and $580.0 million at December 31, 1994, 1995 and 1996, respectively.
Loans in nonaccrual status amounted to approximately $1,189,000, $3,105,000
and $2,940,000 at December 31, 1994, 1995 and 1996, respectively. The allowance
for loan losses related to these impaired loans was $383,000 and $561,000 at
December 31, 1995 and 1996. The average recorded investment in impaired loans
during 1995 and 1996 was $1,689,028 and $3,135,000, respectively. If such
impaired loans had been on a full accruing basis, interest income on these loans
would have been approximately $55,000, $51,000 and $278,000 in 1994, 1995 and
1996, respectively.
Loans totaling approximately $241,500, $554,500 and $237,600 were
transferred to other real estate in 1994, 1995 and 1996, respectively. There
were no other real estate sales in 1996 financed by the Company. The Company
financed other real estate sales of approximately $323,000 and $401,000 in 1994
and 1995, respectively. Loans are reported net of deferred loan fees of
$112,759, $389,355 and $104,669 at December 31, 1994, 1995 and 1996,
respectively.
The Company has loans outstanding to various executive officers, directors,
and their associates. Management believes that all of these loans were made in
the ordinary course of business on substantially the same terms including
interest rate and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than the normal risk.
The following is a summary of activity during 1996 for such loans:
<TABLE>
<S> <C>
Loan balances at December 31, 1995.......................... $ 5,707,711
New loans................................................... 2,234,789
Loan repayments............................................. (4,671,759)
-----------
Loan balances at December 31, 1996.......................... $ 3,270,741
===========
</TABLE>
The following is a summary of activity in the allowance for loan losses:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of year................... $ 4,549,548 $ 4,343,657 $ 5,536,504
Provision for loan losses...................... 4,125,000 8,090,000 25,127,000
Loans charged off:
Credit cards................................. (4,465,609) (7,051,268) (13,156,340)
Other loans.................................. (314,405) (388,119) (1,659,492)
Recoveries on loans charged off.............. 449,123 542,234 663,170
----------- ----------- ------------
Balance at end of year......................... $ 4,343,657 $ 5,536,504 $ 16,510,842
=========== =========== ============
</TABLE>
F-17
<PAGE> 87
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5 -- PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Land........................................................ $ 2,110,321 $ 2,735,320
Buildings and improvements.................................. 5,778,322 11,219,182
Furniture and equipment..................................... 8,934,164 13,543,963
----------- -----------
16,822,807 27,498,465
Less accumulated depreciation and amortization.............. 6,234,374 7,699,386
----------- -----------
Premises and equipment, net................................. $10,588,433 $19,799,079
=========== ===========
</TABLE>
At December 31, 1996, the Company had entered into two leases at market
terms with a general partnership, of which a director is a general partner, and
a corporation of which a director is a majority shareholder. The partnership
lease is for a bank branch, general office, and storage space. This lease is for
approximately 35,000 square feet at an approximate annual rate of $17 per square
foot, subject to pro rata increases for any increases in taxes, insurance,
utilities, and maintenance. The corporate lease is for a 2,200 square foot bank
branch at an approximate annual rate of $11 per square foot, subject to pro rata
increases for any increases in taxes and insurance.
6 -- DEPOSITS
Time deposits over $100,000 as of December 31, 1995 and 1996 were
$65,503,961 and $86,630,315, respectively. Related interest expense was
$2,385,000, $3,920,000 and $5,042,964 for the years ended December 31, 1994,
1995 and 1996, respectively. Included in demand and money market deposits were
NOW accounts totaling $37,701,876 and $37,322,255 at December 31, 1995 and 1996,
respectively.
7 -- SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- -----------
<S> <C> <C>
Federal funds purchased..................................... $ - $ 500,000
Securities sold under agreements to repurchase.............. 8,245,191 16,683,769
---------- -----------
Total............................................. $8,245,191 $17,183,769
========== ===========
</TABLE>
The above borrowings mature either overnight or on a fixed maturity not to
exceed three months. At December 31, 1996, the Company had a line of credit with
the Federal Home Loan Bank to borrow up to a maximum of $10 million. In March
1997, the availability of borrowings on this line was suspended until the
Company achieves appropriate capital levels. Interest expense on Federal Home
Loan Bank advances was $267,777 in 1995 and $158,838 in 1996. The weighted
average rate on short term borrowings outstanding at December 31, 1995 and 1996
was 2.96% and 3.06%, respectively.
F-18
<PAGE> 88
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 -- LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Note payable with interest at prime plus 1/4%, secured by
Bank stock; principal and interest payable in annual
installments through 1996................................. $ 250,000 $ -
Junior subordinated Series A capital notes with interest at
prime plus 2% due December 15, 1999; interest payable
quarterly................................................. 250,000 250,000
Subordinated capital notes with interest at 11% through
March 27, 2000, and at prime plus 2% thereafter, due March
27, 2002, interest payable quarterly...................... 1,000,000 1,000,000
Subordinated capital notes with interest at prime due
October 1, 2002, interest payable quarterly............... 250,000 250,000
8.5% subordinated notes due January 31, 2006, interest
payable quarterly......................................... 15,000,000 15,000,000
----------- -----------
Total............................................. $16,750,000 $16,500,000
=========== ===========
</TABLE>
Note maturities as of December 31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1997........................................................ $ -
1998........................................................ -
1999........................................................ 250,000
2000........................................................ -
2001........................................................ -
Thereafter.................................................. 16,250,000
-----------
Total............................................. $16,500,000
===========
</TABLE>
The $250,000 note payable was paid off in 1996 in accordance with original
terms.
On December 12, 1995, the Company issued $15,000,000 in 8.5% subordinated
notes due January 31, 2006. Under the terms of the notes, the Company has the
right to redeem them on or after January 31, 2001, at 100% of the principal
amount plus accrued interest to the date of redemption.
The subordinated notes due March 27, 2002, may be redeemed at the option of
the Company at any time after March 27, 2000, without penalty. All other
subordinated notes may be redeemed at the option of the Company without penalty.
There was no indebtedness to directors, executive officers, or principal
holders of equity securities in excess of 5% of shareholders' equity at December
31, 1996.
F-19
<PAGE> 89
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9 -- INCOME TAXES
Income tax (benefit) expense attributable to income from continuing
operations consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Year ended December 31, 1994:
Federal................................................ $1,309,532 $ 694,301 $ 2,003,833
State.................................................. - 87,856 87,856
---------- ----------- -----------
$1,309,532 $ 782,157 $ 2,091,689
========== =========== ===========
Year ended December 31, 1995:
Federal................................................ $2,366,181 $ 184,265 $ 2,550,446
State.................................................. - 15,573 15,573
---------- ----------- -----------
$2,366,181 $ 199,838 $ 2,566,019
========== =========== ===========
Year ended December 31, 1996:
Federal................................................ $1,006,128 $(4,124,579) $(3,118,451)
State.................................................. - (376,761) (376,761)
---------- ----------- -----------
$1,006,128 $(4,501,340) $(3,495,212)
========== =========== ===========
</TABLE>
Income tax expense differed from amounts computed by applying the statutory
U.S. Federal income tax rate to pretax income from continuing operations as a
result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Taxes at statutory rate........................... $2,172,837 $2,453,236 $(3,140,561)
(Reduction) increase in income taxes resulting
from:
State income tax expense, net of Federal income
tax benefit.................................. 57,985 10,278 (248,662)
Tax exempt income............................... (58,855) (35,848) (22,770)
Other, net...................................... (80,278) 138,353 (83,219)
---------- ---------- -----------
Income tax expense................................ $2,091,689 $2,566,019 $(3,495,212)
========== ========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1995 DEFERRED TAX 1996 DEFERRED TAX
---------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
State tax credit carryforwards........... $309,983 $ - $ 208,091 $ -
Allowance for loan losses................ - 502,961 4,010,988 -
Accelerated depreciation................. - 420,252 - 514,645
Accretion on U.S. Treasury securities.... - 34,749 - 29,440
Deferred loan fees....................... - 355,741 - 289,598
Other real estate........................ 41,050 - 41,050 -
FHLB stock dividends..................... - 23,038 - -
Unearned income.......................... 92,885 - 296,975 -
Unrealized holding gains on securities
available-for-sale..................... - 422,320 85,865 -
Capitalized mortgage servicing rights.... - - - 284,329
Other.................................... 86,017 - 94,722 2,497
-------- ---------- ---------- ----------
$529,935 $1,759,061 $4,737,691 $1,120,509
======== ========== ========== ==========
</TABLE>
F-20
<PAGE> 90
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10 -- EMPLOYEE BENEFITS
The Bank provides a split-dollar insurance benefit plan for the President
of the Bank for which the life insurance benefit is $2,000,000. The President's
irrevocable insurance trust is designated as owner and beneficiary. Upon
termination of the plan, the Bank receives the portion of the insurance proceeds
equal to the total amount of premiums paid by the Bank. The Bank paid premiums
of $39,582 in 1994, 1995 and 1996, under the terms of the plan.
The Company maintains a 401(k) defined contribution retirement savings plan
for employees age 18 or older who have obtained ninety days of service. Employee
contributions to the plan are voluntary. The Company matches up to 15% of the
participants' eligible contributions. For the years ended December 31, 1994,
1995 and 1996, the Company contributed $86,014, $136,187 and $71,873,
respectively, to the plan.
11 -- SHAREHOLDERS' EQUITY
In addition to the previously mentioned regulatory agreements, dividends
that may be paid by the Bank to Fidelity are subject to certain other regulatory
limitations. Under Federal banking law, the approval of the OCC will be required
if the total of all dividends declared in any calendar year by the Bank exceeds
the Bank's net profits to date for that year combined with its retained net
profits for the preceding two years, subject to the maintenance of minimum
required regulatory capital. At December 31, 1996, total shareholders' equity of
the Bank was approximately $24.6 million. Payment of dividends is restricted
without violating regulatory capital requirements. Also, under current Federal
Reserve System regulations, the Bank is limited in the amount it may loan to its
nonbank affiliates, including Fidelity. As of December 31, 1996, there were no
loans outstanding from the Bank to Fidelity.
12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on settlements using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets, and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts reported in the Statements of Condition for cash, due
from banks, and Federal fund sold, approximates those assets' fair values. For
investment securities, fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities or dealer quotes.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type. The fair value of performing
loans is calculated by discounting scheduled cash flows through the remaining
maturities using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan.
Fair value for significant nonperforming loans is estimated taking into
consideration recent external appraisals of the underlying collateral for loans
that are collateral dependent. If appraisals are not available or if the loan is
not collateral dependent, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower information.
F-21
<PAGE> 91
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of deposits with stated maturity, such as
noninterest-bearing demand deposits, savings, interest-bearing demand, and money
market accounts, is equal to the amount payable on demand. The fair value of
time deposits is based on the discounted value of contractual cash flows based
on the discount rates currently offered for deposits of similar remaining
maturities.
The carrying amounts reported in the balance sheet for short-term debt
approximate those liabilities' fair values.
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
amount of long-term debt approximates its estimated fair value.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1995 1996
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial instruments (assets)
Cash and due from banks............... $ 27,356,936 $ 27,356,936 $ 32,612,398 $ 32,612,398
Federal funds sold.................... 10,002,754 10,002,754 343,019 343,019
Investment securities
available-for-sale................. 53,139,161 53,139,161 71,230,743 71,230,743
Investment securities
held-to-maturity................... 5,291,733 5,320,209 6,279,816 6,161,119
Loans, net of unearned income......... 407,289,021 408,622,292 467,389,431 468,578,264
------------ ------------ ------------ ------------
Total financial instruments
(assets)........................... 503,079,605 $504,441,352 577,855,407 $578,925,543
============ ============
Non-financial instruments (assets).... 21,742,210 27,564,890
------------ ------------
Total assets.................. $524,821,815 $605,420,297
============ ============
Financial instruments (liabilities)
Noninterest-bearing demand deposits... $ 75,120,501 $ 75,120,501 $ 73,877,369 $ 73,877,369
Interest-bearing deposits............. 391,386,808 393,178,992 470,835,960 471,954,804
------------ ------------ ------------ ------------
Total deposits................ 466,507,309 468,299,493 544,713,329 545,832,173
Short-term borrowings................. 8,245,191 8,245,191 17,183,769 17,183,769
Long-term debt........................ 16,750,000 16,750,000 16,500,000 16,500,000
------------ ------------ ------------ ------------
Total financial instruments
(liabilities)............... 491,502,500 $493,294,684 578,397,098 $579,515,942
============ ============
Non-financial instruments (liabilities
and shareholders' equity)........... 33,319,315 27,023,199
------------ ------------
Total liabilities and
shareholders' equity........ $524,821,815 $605,420,297
============ ============
</TABLE>
For off-balance sheet instruments, fair values are based on rates currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing for loan
commitments and letters of credit. The estimated fair values of the Company's
off-balance sheet financial instruments as of December 31 are summarized below.
<TABLE>
<CAPTION>
1995 1996
ESTIMATED ESTIMATED
FAIR VALUE FAIR VALUE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unfunded commitments to extend credit.................. $412,971 $388,711
Letters of credit...................................... 2,135 3,767
</TABLE>
F-22
<PAGE> 92
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This presentation excludes certain financial instruments and all nonfinancial
instruments. The disclosures also do not include certain intangible assets, such
as customer relationships, deposit base intangibles and goodwill. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
13 -- COMMITMENTS AND CONTINGENCIES
The approximate future minimum rental commitments as of December 31, 1996,
for all noncancellable leases with initial or remaining terms of one year or
more are shown in the following table:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1997........................................................ $ 2,946,000
1998........................................................ 2,940,000
1999........................................................ 3,052,000
2000........................................................ 3,075,000
Thereafter.................................................. 12,993,000
-----------
Total............................................. $25,006,000
===========
</TABLE>
Rental expense for all leases amounted to approximately $1,250,000, $1,550,000,
and $1,740,000 in 1994, 1995, and 1996, respectively.
Due to the nature of their activities, Fidelity and the Bank are at times
engaged in various legal proceedings which arise in the normal course of
business, some of which are outstanding at December 31, 1996. While it is
difficult to predict or determine the outcome of these proceedings, it is the
opinion of management and its counsel that the ultimate liability, if any, will
not materially affect the Company's financial position.
The Federal Reserve Board requires that banks maintain cash on hand and
reserves in the form of average deposit balances at the Federal Reserve Bank
based on their average deposits. The Bank's reserve requirements at December 31,
1995 and 1996, were $5,280,000 and $5,429,000, respectively.
14 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, letters of credit,
and forward sales contracts. These instruments 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 those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperforming by the
customer for commitments to extend credit and letters of credit, is represented
by the contractual or notional amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for recorded loans. For forward sales contracts, the contract or notional
amounts do not represent exposure to credit loss; however, these financial
instruments represent interest rate risk to the Company. The Company controls
the interest rate risk of its forward sales contracts through management
approvals, dollar limits, and monitoring procedures.
F-23
<PAGE> 93
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's financial instruments with off-balance sheet
risk at December 31, 1996, is as follows (in thousands):
<TABLE>
<S> <C>
Financial instruments whose contract amounts represent
credit risk:
Loan commitments
Credit card lines......................................... $309,338
Home equity............................................... 9,039
Commercial real estate, construction and land
development............................................ 33,532
Commercial................................................ 21,792
Mortgage loans............................................ 14,110
Lines of credit........................................... 900
Standby letters of credit................................. 3,766
--------
Total loan commitments............................ $392,477
========
Financial instruments whose notional or contractual amounts
represent interest rate risk:
Forward sales contracts................................... $ 13,122
========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company 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 letters of credit are commitments issued by the Company 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 loan facilities to customers. The Company holds collateral
supporting those commitments as deemed necessary.
Forward sales contracts are contracts for delayed delivery of mortgage
loans in which the Company agrees to make delivery at a specified future date at
a specified price. Risks arise from the inability of counterparties to meet the
terms of their contracts and from movements in interest rates.
15 -- SUPPLEMENTAL FINANCIAL DATA
Components of other income and expense in excess of 1% of total revenues
for any of the respective periods are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Other income:
Brokerage commissions............................ $1,580,814 $2,172,171 $3,201,220
Trust income..................................... 462,326 563,375 845,794
Other expense:
Stationery and supplies.......................... 544,036 734,876 930,816
Postage.......................................... 383,336 486,624 640,499
Deposit insurance premiums....................... 884,209 684,375 556,771
Telephone........................................ 492,250 502,148 831,670
</TABLE>
F-24
<PAGE> 94
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16 -- CONDENSED FINANCIAL INFORMATION OF FIDELITY NATIONAL CORPORATION (PARENT
COMPANY ONLY)
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash...................................................... $ 445,415 $ 1,157,191
Land...................................................... 419,418 419,418
Investment in bank subsidiary............................. 30,007,881 24,822,351
Investments in and amounts due from nonbank
subsidiaries........................................... 276,128 359,018
Subordinated loan to bank subsidiary...................... 7,000,000 10,000,000
Commercial loan participations............................ 5,574,770 -
Other assets.............................................. 948,379 1,050,888
----------- -----------
Total assets...................................... $44,671,991 $37,808,866
=========== ===========
LIABILITIES
Long-term debt............................................ $16,750,000 $16,500,000
Other liabilities......................................... 159,711 236,050
----------- -----------
Total liabilities................................. 16,909,711 16,736,050
SHAREHOLDERS' EQUITY
Common stock.............................................. 11,303,406 11,878,597
Treasury stock............................................ (69,325) (69,325)
Net unrealized (losses) gains on investment securities
available-for-sale, net of tax......................... 689,774 (140,241)
Retained earnings......................................... 15,838,425 9,403,785
----------- -----------
Total shareholders' equity........................ 27,762,280 21,072,816
----------- -----------
Total liabilities and shareholders' equity........ $44,671,991 $37,808,866
=========== ===========
</TABLE>
F-25
<PAGE> 95
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans........................................... $ 207 $ 5,973 $ 272,941
Deposits in bank................................ 1,310 5,630 46,315
Subordinated loan to bank....................... - 40,164 768,542
---------- ---------- -----------
Total interests income.................. 1,517 51,767 1,087,798
INTEREST EXPENSE - Long-term debt................. 131,220 353,284 1,501,488
---------- ---------- -----------
NET INTEREST EXPENSE.............................. (129,703) (301,517) (413,690)
OTHER INCOME
Lease income.................................... 92,000 120,000 120,000
Dividend from subsidiaries...................... 850,000 950,000 1,600,000
Management fees................................. 42,000 130,680 91,740
Other........................................... - 6,525 3,157
---------- ---------- -----------
Total other income...................... 984,000 1,207,205 1,814,897
OTHER EXPENSES.................................... 92,050 49,929 185,462
---------- ---------- -----------
Income before income taxes and undistributed
income (loss) of subsidiary.................. 762,247 855,759 1,215,745
Income tax benefit.............................. 47,685 38,045 146,017
---------- ---------- -----------
Income before equity in undistributed income
(loss) of subsidiaries....................... 809,932 893,804 1,361,762
Equity in undistributed income (loss) of
subsidiaries................................. 3,489,077 3,755,578 (7,103,493)
---------- ---------- -----------
NET INCOME (LOSS)................................. $4,299,009 $4,649,382 $(5,741,731)
========== ========== ===========
</TABLE>
F-26
<PAGE> 96
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................... $ 4,299,009 $ 4,649,382 $(5,741,731)
Equity in undistributed income of subsidiaries........ (3,489,077) (3,755,578) 7,103,493
Decrease (increase) in other assets................... 43,935 (944,615) (102,509)
Increase in other liabilities......................... 26,299 130,084 76,341
----------- ----------- -----------
Net cash flows provided by operating
activities.................................. 880,166 79,273 1,335,594
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase (sale) of commercial loans................... - (5,574,770) 5,574,770
Net increase in loans to and investment in
subsidiaries....................................... (825,000) (8,071,122) (5,830,870)
----------- ----------- -----------
Net cash flows used in investing activities... (825,000) (13,645,892) (256,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of long-term debt............................ 926,000 16,250,000 -
Repayment of long-term-debt........................... (250,000) (1,991,000) (250,000)
Issuance of Common Stock.............................. - - 575,191
Dividends paid........................................ (628,411) (644,135) (692,909)
Sale of treasury stock................................ 1,250 - -
----------- ----------- -----------
Net cash flows provided (used in) by financing
activities.................................. 48,839 13,614,865 (367,718)
----------- ----------- -----------
Net increase in cash.......................... 104,005 48,246 711,776
Cash, beginning of year............................... 293,164 397,169 445,415
----------- ----------- -----------
Cash, end of year..................................... $ 397,169 $ 445,415 $ 1,157,191
=========== =========== ===========
</TABLE>
F-27
<PAGE> 97
======================================================
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR ANY OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT
BE LEGALLY MADE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Regulatory Matters.................... 15
Use of Proceeds....................... 17
Capitalization........................ 17
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Selected Consolidated Financial
Data................................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 45
Management............................ 58
Principal Shareholders................ 61
Description of Capital Stock.......... 62
Underwriting.......................... 65
Experts............................... 66
Legal Matters......................... 67
Available Information................. 67
Incorporation of Certain Information
by Reference........................ 67
Index to the Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
[LOGO]
3,000,000 SHARES
COMMON STOCK
FIDELITY NATIONAL
CORPORATION
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES &
ASSOCIATES, INC.
, 1997
======================================================
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are actual or estimated expenses incurred or to be incurred
by the Registrant in connection with the issuance and sale of the securities
being registered:
<TABLE>
<CAPTION>
FEES AMOUNT
- ---- --------
<S> <C>
SEC registration fee........................................ $ 9,278
NASD Fee.................................................... 31,119
Printing expenses........................................... 50,000
Registrant's legal fees..................................... 90,000
Blue Sky filing fees and expenses........................... 2,000
Accounting fees and expenses................................ 60,000
Miscellaneous expenses...................................... 32,603
--------
Total............................................. $275,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14-2-851 of the Georgia Business Corporation Code provides for the
indemnification of directors of the Company for liability and expenses incurred
by them in connection with any civil, criminal or administrative claim or
proceeding in which they may become involved by reason of being a director of
the Company or by service, at the request of the Company, as a director,
officer, partner, trustee, employee or agent of other companies in which the
Company is a shareholder, creditor, or is otherwise interested. The Section
applies to both civil and criminal actions (including civil actions brought as
derivative actions by or in the right of the Company) and permits
indemnification if the director acted in a manner he believed in good faith to
be in or not opposed to the best interest of the Company and, in addition, in
criminal actions, if he had no reasonable cause to believe his conduct to be
unlawful. If the required standard of conduct is met, indemnification may
include attorneys' fees, reasonable disbursements of the director or officer,
judgments, fines, penalties or settlement payments. Directors who are successful
with respect to any claim against them are entitled to indemnification as of
right. On the other hand, if the charges made in any action are sustained,
either the Board of Directors, acting by a majority of disinterested members,
independent legal counsel or the holders of a majority of the disinterested
stockholders entitled to vote can indemnify a director if they find that the
required standard of conduct has been met and the director was not adjudged
liable to the corporation nor improperly received a personal benefit. If, in an
action brought by or in the right of the Company, the director is adjudged to be
liable for negligence or misconduct in the performance of his duty, a court in
view of all the relevant circumstances can order indemnification for reasonable
expenses incurred, unless the Company's articles of incorporation state
otherwise. The shareholders themselves, by a majority of the votes entitled to
be cast, can indemnify a director who does not meet the standards set forth in
Section 14-2-851. Section 14-2-856 provides for such shareholder indemnification
unless the director or officer is adjudged liable to the corporation for the
appropriation of a corporate business opportunity, for acts or omissions which
involve intentional misconduct or a knowing violation of law, for unlawful
distributions of corporate assets, or for any transaction from which he received
an improper personal benefit.
Section 14-2-857 of the Georgia Business Corporation Code provides for the
indemnification of officers of the Company (unless the articles of incorporation
state otherwise) for reasonable expenses to the extent that the officer was
successful, on the merits or otherwise, in the defense of any proceeding in
which he was a party, or in defense of any claim, issue, or matter therein,
because he is or was an officer of the Company. Unless the Company's articles of
incorporation state otherwise, a court in view of all the relevant circumstances
can order indemnification for reasonable expenses incurred. The Company may also
provide for other methods of indemnification in its articles of incorporation,
bylaws, general or specific action of its board of directors or
II-1
<PAGE> 99
contract. Officers who are also directors are limited to the indemnification
provisions provided in the Georgia Business Corporation Code for directors.
Article Eight of the Company's Bylaws provides for indemnification of
directors and officers of the Company for liabilities and expenses incurred by
them in connection with any civil, criminal or administrative claim or
proceeding in which they may become involved by reason of being a director or
officer of the Company or by serving at the request of the Company, as a
director, officer, employee, or agent of other companies in which the Company is
a shareholder or creditor or is otherwise interested. Indemnification applies
both to civil and criminal actions (including civil actions brought as
derivative actions by or in the right of the Company) and permits
indemnification if the director or officer acted in a manner he or she
reasonably believed to be in or not opposed to the best interest of the Company
and, in addition, in criminal actions, if he or she had no reasonable cause to
believe his or her conduct was unlawful. If the required standard of conduct is
met, indemnification may include disbursements (including attorney's fees) or
the director or officer, judgments, fines, and settlement payments. Directors
and officers who are successful with respect to any claim against them are
entitled to indemnification as of right. On the other hand, if the charges made
in any action are sustained, either the Board of Directors, acting by a majority
of disinterested members, independent legal counsel or the holders of a majority
of the stock entitled to vote will determine if the required standard of conduct
has been met. If, in an action brought by or in the right of the Company, the
director or officer is adjudged to be liable for negligence or misconduct in the
performance of his duty, he will only be entitled to such indemnity as the court
shall deem proper.
The Company also maintains directors' and officers' liability insurance for
the benefit of the Company and its directors and officers. The policy provides
coverage for certain amounts paid as indemnification pursuant to the provisions
of Georgia law.
ITEM 16. EXHIBITS
(a) The following exhibits are filed as part of this Registration Statement
or incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement
4(a) -- Form of Certificate for the Company's Common Stock, no
stated par value**
4(b) -- Form of Trust Indenture (included herein by reference as
Exhibit 4(a) of Amendment 1 to Registrant's Registration
Statement on Form S-1, No. 33-99174)
4(c) -- Form of Subordinated Note (included herein by reference to
Exhibit 4(b) of Amendment 1 to Registrant's Registration
Statement on Form S-1, No. 33-99174)
4(d) -- Articles of Amendment to the Articles of Incorporation of
Fidelity National Corporation authorizing the issuance of
preferred stock (included herein by reference to Exhibit
3(e) of the Company's Form 10-K for the fiscal year ended
December 31, 1996)
4(e) -- Amendment to Articles of Incorporation (included herein by
reference to Exhibit 3(a) to the Company's Current Report on
Form 8-K, dated June 23, 1997)
5 -- Opinion of Glass, McCullough, Sherrill and Harrold, LLP**
10(a) -- OCC Agreement (incorporated by reference to Exhibit 10(h) of
the Registrant's report on Form 10-K for the year ended
December 31, 1996)
10(b) -- FRB Agreement (incorporated by reference to Exhibit 10(i) of
the Registrant's report on Form 10-K for the year ended
December 31, 1996)
10(c) -- Employment Agreement among Company, FNB and Larry D.
Peterson dated as of September 15, 1997*
10(d) -- Employment Agreement between Company and James B. Miller,
Jr. dated as of September 18, 1997
10(e) -- The Stock Option Plan (incorporated by reference to Exhibit
A of the Proxy Statement of the Company dated April 21, 1997
for the 1997 Annual Meeting of Shareholders)
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10(f) -- Fidelity National Bank Defined Contribution Master Plan and
Trust Agreement and related Adoption Agreement, as amended
(included as Exhibit 10(a) to the Registrant's Registration
Statement on Form 10, Commission File No. 0-22376, filed
with the Commission and incorporated herein by reference)
10(g) -- Lease Agreement dated February 6, 1989, by and between DELOS
and Fidelity National Bank and amendments thereto (included
as Exhibit 10(e) to the Registrant's Registration Statement
on Form 10, Commission File No. 0-22376, filed with the
Commission and incorporated herein by reference)
10(h) -- Lease Agreement dated September 7, 1995, by and between Toco
Hills, Inc. and Fidelity National Bank (included as Exhibit
10(f) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference)
10(i) -- Salary Continuation Agreement dated August 26, 1985, between
Fidelity National Bank and Sharon Denney as filed (included
as Exhibit 10(f) to the Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1994) was extended by
Resolution of the Board of Directors until December 31, 2003
(included as Exhibit 10(g) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
23(a) -- Consent of Glass, McCullough, Sherrill and Harrold, LLP
(included in Exhibit 5)**
23(b) -- Consent of Ernst & Young LLP
23(c) -- Consent of KPMG Peat Marwick LLP
24 -- Powers of Attorney
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
(b) Reference is made to the Index to Consolidated Financial Statements in
the Prospectus for financial statements filed herewith and included in the
Prospectus.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(b) Insofar as indemnifications for liabilities arising under the
Securities Act of 1993 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant is the successful defense
of any action, suit or proceeding) is asserted by such director, officer,
or controlling person in connection with the Preferred Stock and Common
Stock being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction, the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE> 101
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the bona fide offering
thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Atlanta, State of Georgia, on the 5th day of
November, 1997.
FIDELITY NATIONAL CORPORATION
By: /s/ JAMES B. MILLER, JR.
------------------------------------
James B. Miller, Jr.
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on the 5th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JAMES B. MILLER, JR. Chairman of the Board, President and Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
James B. Miller, Jr. Officer)
/s/ M. HOWARD GRIFFITH, JR. Chief Financial Officer (Principal Financial
- ----------------------------------------------------- and Accounting Officer)
M. Howard Griffith, Jr.
* Director
- -----------------------------------------------------
David R. Bockel
* Director
- -----------------------------------------------------
Edward G. Bowen, M.D.
* Director
- -----------------------------------------------------
Larry D. Peterson
* Director
- -----------------------------------------------------
Robert J. Rutland
* Director
- -----------------------------------------------------
W. Clyde Shepherd, Jr.
* Director
- -----------------------------------------------------
Gordon M. Sherman
* Director
- -----------------------------------------------------
R. Phillip Shinall, III
* Director
- -----------------------------------------------------
Rankin Smith, Jr.
* Director
- -----------------------------------------------------
Felker W. Ward, Jr.
By: /s/ JAMES B. MILLER, JR.
-------------------------------------------------
James B. Miller, Jr.
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 103
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
<C> <C> <S> <C>
1 -- Form of Underwriting Agreement
4(a) -- Form of Certificate for the Company's Common Stock, no
stated par value**
4(b) -- Form of Trust Indenture (included herein by reference as
Exhibit 4(a) of Amendment 1 to Registrant's Registration
Statement on Form S-1, No. 33-99174)
4(c) -- Form of Subordinated Note (included herein by reference to
Exhibit 4(b) of Amendment 1 to Registrant's Registration
Statement on Form S-1, No. 33-99174)
4(d) -- Articles of Amendment to the Articles of Incorporation of
Fidelity National Corporation authorizing the issuance of
preferred stock (included herein by reference to Exhibit
3(e) of the Company's Form 10-K for the fiscal year ended
December 31, 1996)
4(e) -- Amendment to Articles of Incorporation (included herein by
reference to Exhibit 3(a) to the Company's Current Report on
Form 8-K, dated June 23, 1997)
5 -- Opinion of Glass, McCullough, Sherrill and Harrold, LLP**
10(a) -- OCC Agreement (incorporated by reference to Exhibit 10(h) of
the Registrant's report on Form 10-K for the year ended
December 31, 1996)
10(b) -- FRB Agreement (incorporated by reference to Exhibit 10(i) of
the Registrant's report on Form 10-K for the year ended
December 31, 1996)
10(c) -- Employment Agreement among Company, FNB and Larry D.
Peterson dated as of September 15, 1997*
10(d) -- Employment Agreement between Company and James B. Miller,
Jr. dated as of September 18, 1997
10(e) -- The Stock Option Plan (incorporated by reference to Exhibit
A of the Proxy Statement of the Company dated April 21, 1997
for the 1997 Annual Meeting of Shareholders)
10(f) -- Fidelity National Bank Defined Contribution Master Plan and
Trust Agreement and related Adoption Agreement, as amended
(included as Exhibit 10(a) to the Registrant's Registration
Statement on Form 10, Commission File No. 0-22376, filed
with the Commission and incorporated herein by reference)
10(g) -- Lease Agreement dated February 6, 1989, by and between DELOS
and Fidelity National Bank and amendments thereto (included
as Exhibit 10(e) to the Registrant's Registration Statement
on Form 10, Commission File No. 0-22376, filed with the
Commission and incorporated herein by reference)
10(h) -- Lease Agreement dated September 7, 1995, by and between Toco
Hills, Inc. and Fidelity National Bank (included as Exhibit
10(f) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference)
10(i) -- Salary Continuation Agreement dated August 26, 1985, between
Fidelity National Bank and Sharon Denney as filed (included
as Exhibit 10(f) to the Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1994) was extended by
Resolution of the Board of Directors until December 31, 2003
(included as Exhibit 10(g) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
<C> <C> <S> <C>
23(a) -- Consent of Glass, McCullough, Sherrill and Harrold, LLP
(included in Exhibit 5)**
23(b) -- Consent of Ernst & Young LLP
23(c) -- Consent of KPMG Peat Marwick LLP
24 -- Powers of Attorney
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
2
<PAGE> 1
EXHIBIT 1
3,000,000 Shares
FIDELITY NATIONAL CORPORATION
Common Stock
-------------------
UNDERWRITING AGREEMENT
___________________, 1997
RAYMOND JAMES & ASSOCIATES, INC.
As Representative of the Several Underwriters
880 Carillon Parkway
St. Petersburg, Florida 33716
Ladies and Gentlemen:
Fidelity National Corporation, a Georgia corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the several Underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 3,000,000 authorized and unissued shares of the Company's common
stock, no par value (the "Firm Shares"). In addition, the Company has agreed to
sell to the Underwriters, upon the terms and conditions set forth herein, up to
an additional 450,000 authorized and unissued shares of the Company's common
stock, no par value (the "Additional Shares"), solely to cover over-allotments
by the Underwriters, if any. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares." The Company's common
stock, no par value, including the Shares, is hereinafter referred to as the
"Common Stock." Raymond James & Associates, Inc. is acting as the representative
of the several Underwriters and in such capacity is hereinafter referred to as
the "Representative."
The Company agrees with the Underwriters as follows:
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-2 (File No.
333-36377), including a prospectus subject to completion, relating to the
Shares. Such registration statement (including all financial schedules and
exhibits), as amended at the time when it became effective and as thereafter
amended by any post-effective amendment, together with any documents
incorporated by reference therein and any registration statement filed by the
<PAGE> 2
Company with respect to the foregoing pursuant to Rule 462(b) under the Act, is
referred to in this Agreement as the "Registration Statement." The term
"Prospectus" as used in this Agreement means (i) the prospectus in the form
included in the Registration Statement, or (ii) if the prospectus included in
the Registration Statement omits information in reliance upon Rule 430A under
the Act and such information is included in a prospectus filed with the
Commission pursuant to Rule 424(b) under the Act or as part of a post-effective
amendment to the Registration Statement after the Registration Statement becomes
effective, the prospectus as first filed pursuant to Rule 424(b), or (iii) if
the prospectus included in the Registration Statement omits information in
reliance upon Rule 430A under the Act and such information is included in a term
sheet (as described in Rule 434(c) under the Act) filed with the Commission
pursuant to Rule 424(b) under the Act, the prospectus included in the
Registration Statement and such term sheet, taken together, in each case
together with any documents incorporated by reference therein. The prospectus
subject to completion in the form included in the Registration Statement at the
time of the initial filing of such Registration Statement with the Commission
and as such prospectus is amended from time to time until the date upon which
the Registration Statement was declared effective by the Commission, together
with any documents incorporated by reference therein, is referred to in this
Agreement as the "Prepricing Prospectus."
SECTION 2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees
to sell the Firm Shares to the Underwriters and, upon the basis of the
representations, warranties and agreements of the Company and Fidelity National
Bank (the "Bank") herein contained and subject to all the terms and conditions
set forth herein, each Underwriter agrees, severally and not jointly, to
purchase from the Company the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number of Firm Shares as
adjusted pursuant to Section 10 hereof), at a purchase price of $____ per Share
(the "purchase price per Share").
Upon the basis of the representations, warranties and agreements of the
Company and the Bank herein contained and subject to all the terms and
conditions set forth herein, the Underwriters shall have the right for 30 days
from the date upon which the Registration Statement is declared effective by the
Commission to purchase from the Company, from time to time, and the Company
agrees to sell to the Underwriters, subject to the considerations set forth
below, any or all of the Additional Shares at the purchase price per Share for
the Firm Shares. The Additional Shares shall, if purchased, be purchased solely
for the purpose of covering over-allotments made in connection with the offering
of the Firm Shares. If any Additional Shares are to be purchased, each
Underwriter agrees, severally and not jointly, to purchase the number of
Additional Shares (subject to such adjustments as you may determine to avoid
fractional shares) which bears the same proportion to the total number of
Additional Shares to be purchased by the Underwriters as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto (or
such number of Firm Shares as adjusted pursuant to Section 10 hereof) bears to
the total number of Firm Shares.
SECTION 3. TERMS OF PUBLIC OFFERING. The Company has been advised by
you that the Underwriters propose to make a public offering of their respective
portions of the Shares as
-2-
<PAGE> 3
soon after the Registration Statement and this Agreement have become effective
as in your judgment is advisable and initially to offer the Shares upon the
terms set forth in the Prospectus.
SECTION 4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Certificates
for the Shares to be purchased by the Underwriters hereunder, in definitive form
and in such denominations and registered in such names as Raymond James &
Associates, Inc. may request upon at least 48 hours prior notice to the Company,
shall be delivered by or on behalf of the Company to the Underwriters for their
respective accounts, against payment by the Underwriters as provided herein.
Payment shall be made with respect to the purchase price for the Firm Shares and
any Additional Shares purchased from the Company if any Additional Shares are
purchased hereunder, to the Company by official bank check or checks payable to
the order of the Company, in New York Clearing House next day funds against
delivery of the certificates for the Firm Shares or Additional Shares purchased
from the Company, as the case may be.
Delivery to the Underwriters of the Firm Shares and payment therefor
shall be made at the offices of Raymond James & Associates, Inc., 880 Carillon
Parkway, St. Petersburg, Florida, at 10:00 a.m., St. Petersburg, Florida time,
four business days after the date hereof (the "Closing Date"). The place of
closing for the Firm Shares and the Closing Date may be varied by agreement
between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the offices of Raymond
James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida, at
10:00 a.m., St. Petersburg, Florida time, on such date or dates (the "Additional
Closing Date" (which may be the same as the Closing Date but shall in no event
be earlier than the Closing Date nor earlier than three nor later than ten
business days after the giving of the notice hereinafter referred to), as shall
be specified in a written notice from you on behalf of the Underwriters to the
Company, of the Underwriters' determination to purchase a number, specified in
such notice, of Additional Shares. Such notice may be given to the Company by
you at any time within 30 days after the date upon which the Registration
Statement is declared effective by the Commission. The place of closing for the
Additional Shares and the Additional Closing Date may be varied by agreement
between you and the Company.
SECTION 5. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company
covenants agrees with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereto to become effective, if it has not already
become effective, and will advise you promptly and, if requested by you, will
confirm such advice in writing (i) when the Registration Statement has become
effective and when any post-effective amendment to the Registration Statement or
any registration statement filed pursuant to Rule 462(b) under the Act relating
to the Registration Statement is filed or becomes effective, (ii) if information
is omitted from the Registration Statement pursuant to Rule 430A under the Act,
when the Prospectus or
-3-
<PAGE> 4
term sheet (as described in Rule 434(b) under the Act) has been timely filed
pursuant to Rule 424(b) under the Act, (iii) of any request by the Commission
for amendments or supplements to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information, (iv) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation (or threatened
initiation) of any proceeding for such purposes, and (v) within the period of
time referred to in Section 5(e) below, of any change in the Company's condition
(financial or other), business, prospects, properties, net worth or results of
operations, or of any event that comes to the attention of the Company that
makes any statement made in the Registration Statement or the Prospectus (as
then amended or supplemented) untrue in any material respect or that requires
the making of any additions thereto or changes therein in order to make the
statements therein not misleading in any material respect, or of the necessity
to amend or supplement the Prospectus (as then amended or supplemented) to
comply with the Act or any other law. If at any time the Commission shall issue
any stop order suspending the effectiveness of the Registration Statement, the
Company will make every reasonable effort to obtain the withdrawal of such order
at the earliest possible time.
(b) The Company will furnish to you, without charge, two signed copies
of the Registration Statement as originally filed with the Commission and of
each amendment thereto, including financial statements and all exhibits thereto,
and will also furnish to you, without charge, such number of conformed copies of
the Registration Statement as originally filed and of each amendment thereto as
you may reasonably request.
(c) The Company will not file any amendment to the Registration
Statement, file any registration statement pursuant to Rule 462(b) under the Act
or make any amendment or supplement to the Prospectus of which you shall not
previously have been advised (with a reasonable opportunity to review such
amendment, registration statement or supplement) or to which you have reasonably
objected after being so advised, or which is not in compliance with the Act. The
Company will prepare and file with the Commission any amendments or supplements
to the Registration Statement or Prospectus which, in the reasonable opinion of
counsel of the several Underwriters, may be necessary or advisable in connection
with the distribution of the Shares by the Underwriters.
(d) The Company has delivered or will deliver to you, without charge,
in such quantities as you have requested or may hereafter reasonably request,
copies of each form of the Prepricing Prospectus. The Company consents to the
use, in accordance with the Act and the securities or "blue sky" laws of the
jurisdictions in which the Shares are offered by the several Underwriters and by
dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so
furnished by the Company.
(e) As soon after the execution and delivery of this Agreement as is
practicable (but in no event later than 48 hours from the execution and delivery
of this Agreement) and thereafter from time to time for such period as in the
reasonable opinion of counsel for the Underwriters a
-4-
<PAGE> 5
prospectus is required by the Act to be delivered in connection with sales by
any Underwriter or a dealer, and for so long a period as you may request for the
distribution of the Shares, the Company will deliver to each Underwriter and
each dealer, without charge, as many copies of the Prospectus (and of any
amendment or supplement thereto) as they may reasonably request. The Company
consents to the use of the Prospectus (and of any amendment or supplement
thereto) in accordance with the Act and the securities or "blue sky" laws of the
jurisdictions in which the Shares are offered by the several Underwriters and by
all dealers to whom Shares may be sold, both in connection with the offering and
sale of the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection with sales by any Underwriter
or dealer. If at any time prior to the later of (i) the completion of the
distribution of the Shares pursuant to the offering contemplated by the
Registration Statement or (ii) the expiration of prospectus delivery
requirements with respect to the Shares under Section 4(3) of the Act and Rule
174 thereunder, any event shall occur that in the reasonable judgment of the
Company or in the reasonable opinion of counsel for the Underwriters is required
to be set forth in the Prospectus (as then amended or supplemented) or should be
set forth therein in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus to comply with the Act or any other law,
the Company will promptly prepare and, subject to Sections 5(a) and 5(c), file
with the Commission an appropriate supplement or amendment thereto, and will
furnish to each Underwriter and to each dealer who has previously requested
Prospectuses, without charge, a reasonable number of copies thereof.
(f) The Company will cooperate with you and counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or "blue sky" laws of such jurisdictions as you may reasonably
designate and will file such consents to service of process or other documents
as may be reasonably necessary in order to effect and maintain such registration
or qualification for so long as required to complete the distribution of the
Shares; provided that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to service of process in suits, other than those
arising out of the offering or sale of the Shares, in any jurisdiction where it
is not now so subject. In each jurisdiction in which the Shares shall have been
qualified as above provided, the Company will make and file such statements and
reports in each year as are or may be required by the laws of such jurisdiction.
In the event that the qualification of the Shares in any jurisdiction is
suspended, the Company shall so advise you promptly in writing.
(g) The Company will make generally available to its security holders a
consolidated earnings statement (in form complying with the provisions of Rule
158 under the Act), which need not be audited, covering a 12-month period
commencing after the effective date of the Registration Statement and ending not
later than 15 months thereafter, as soon as practicable after the end of such
period, which consolidated earnings statement shall satisfy the provisions of
Section 11(a) of the Act and Rule 158 under the Act, and will advise you in
writing when such statement has been so made available.
-5-
<PAGE> 6
(h) During the period ending five years from the date hereof, the
Company will furnish to you and, upon your request, to each of the other
Underwriters (i) as soon as available, a copy of each report or definitive proxy
statement of the Company filed with the Commission under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the National Association of
Securities Dealers, Inc. (the "NASD"), the Nasdaq Stock Market or any national
securities exchange, or mailed to shareholders and (ii) from time to time such
other information concerning the Company as you may reasonably request. Until
the termination of the offering of the Shares, the Company will timely file all
documents, and any amendments to previously filed documents, required to be
filed by it pursuant to Sections 13, 14 or 15(d) of the Exchange Act. In
addition, until the earlier of such date that the Company has reported a profit
for two consecutive years and either (i) the agreement with the OCC dated
November 14, 1996 (the "OCC Agreement") has been terminated or (ii) the capital
ratios set forth in the OCC Agreement have been complied with for 12
consecutive months, and, to the extent legally permissible, the Company will
furnish to you, as soon as it is available, a copy of each report from the FRB,
OCC or DBF relating to the Company or the Bank. The Company agrees to use its
best efforts to provide such reports to you including, without limitation,
seeking approval from each such regulatory agency to release such reports to
you.
(i) The Company will apply the net proceeds from the sale of the Shares
to be sold by it hereunder substantially in accordance with the statements set
forth under the caption "Use of Proceeds" in the Prospectus.
(j) If information is omitted from the Registration Statement pursuant
to Rule 430A under the Act, the Company will timely file the Prospectus or a
term sheet (as described in Rule 434(b) under the Act) pursuant to Rule 424(b)
under the Act.
(k) For a period of 180 days after the date of the Prospectus as first
filed with the Commission pursuant to Rule 424(b) under the Act, without the
prior written consent of Raymond James & Associates, Inc., the Company will not,
directly or indirectly, issue, sell, contract to sell, offer or otherwise
dispose of or transfer any shares of Common Stock or securities convertible into
or exchangeable or exercisable for shares of Common Stock (collectively,
"Company Securities") or any rights to purchase Company Securities, except (i)
to the Underwriters pursuant to this Agreement, (ii) pursuant to and in
accordance with the Company's stock option plans described in the Prospectus,
(iii) pursuant to the exercise or conversion of warrants, stock options,
preferred stock or convertible debentures issued and outstanding at the time of
effectiveness of the Registration Statement and described in the Registration
Statement or (iv) to employees pursuant to its employee stock purchase plan.
(l) Prior to the Closing Date or the Additional Closing Date, as the
case may be, the Company will furnish to you, as promptly as possible, copies of
any unaudited interim consolidated financial statements of the Company and its
Subsidiaries for any period subsequent to the periods covered by the financial
statements appearing in the Prospectus.
(m) The Company will comply with all provisions of any undertakings
contained in the Registration Statement.
(n) The Company will not, directly or indirectly, take any action that
would constitute or any action designed, or which might reasonably be expected
to cause or result in or constitute,
-6-
<PAGE> 7
under the Act or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(o) The Company will use its best efforts to qualify or register its
Common Stock for sale in non-issuer transactions under (or obtain exemptions
from the application of ) the "blue sky" laws of each state where necessary to
permit market making transactions and secondary trading, and will comply with
such blue sky laws and will continue such qualifications, registrations and
exemptions in effect for a period of five years after the date hereof, provided
that in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares in any jurisdiction where it is not now so
subject.
(p) If at any time during the 90-day period after the first date that
any of the Shares are released by you for sale to the public, any rumor,
publication, or event relating to or affecting the Company shall occur as a
result of which in your reasonable opinion the market price of the Common Stock
(including the Shares) has been or is likely to be materially affected
(regardless of whether such rumor, publication, or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, promptly
consult with Raymond James & Associates, Inc. concerning the advisability and
substance of, and, if appropriate, disseminate a press release or other public
statement reasonably satisfactory to Raymond James & Associates, Inc. responding
to or commenting on such rumor, publication, or event.
(q) The Company shall not invest or otherwise use the proceeds received
by the Company from its sale of the Shares, or otherwise conduct its business,
in such a manner as would require the Company or any Subsidiary (as defined
below) to register as an investment company under the Investment Company Act of
1940, as amended.
(r) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of its incorporation or the applicable rules of the Nasdaq
National Market or any national securities exchange on which the Common Stock is
then listed, a registrar (which, if permitted by applicable laws and rules, may
be the same entity as the transfer agent) for its Common Stock.
(s) The Company hereby agrees that this Agreement shall be deemed, for
all purposes, to have been made and entered into in Pinellas County, Florida.
The Company agrees that any dispute hereunder shall be litigated solely in the
Circuit Court of the State of Florida in Pinellas County, Florida or in the
United States District Court for the Middle district of Florida, Tampa Division,
and further agrees to submit itself to the personal jurisdiction of such courts.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE BANK.
The Company and the Bank, jointly and not severally, represent and warrant to
each Underwriter on
-7-
<PAGE> 8
the date hereof, and shall be deemed to represent and warrant to each
Underwriter on the Closing Date and the Additional Closing Date, that:
(a) The Registration Statement has been declared effective by the
Commission under the Act and no post-effective amendment to the Registration
Statement has been filed as of the date of this Agreement. Each Prepricing
Prospectus included as part of the Registration Statement as originally filed or
as part of any amendment or supplement thereto, or filed pursuant to Rule 424(a)
under the Act, complied when so filed in all material respects with the
provisions of the Act, except that this representation and warranty does not
apply to statements in or omissions from such Prepricing Prospectus (or any
amendment or supplement thereto) made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing by
or on behalf of any Underwriter through you expressly for use therein.
(b) The Commission has not issued any order preventing or suspending
the use of any Prepricing Prospectus, and the Prepricing Prospectus included as
part of the Registration Statement declared effective by the Commission complies
as to form in all material respects with the requirements of the Act. The
Company has satisfied all conditions to the use of Form S-2 with respect to the
offering of the Shares for sale to the public. The Registration Statement, in
the form in which it became effective and also in such form as it may be when
any post-effective amendment thereto shall become effective, and any
registration statement filed pursuant to Rule 462(b) under the Act, complies and
will comply in all material respects with the provisions of the Act and does not
and will not at any such times contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, except that this representation and
warranty does not apply to statements in or omissions from the Registration
Statement (or any amendment or supplement thereto) made in reliance upon and in
conformity with information relating to any Underwriter furnished to the Company
in writing by or on behalf of any Underwriter through you expressly for use
therein. The Prospectus, and any supplement or amendment thereto, when filed
with the Commission under Rule 424(b) under the Act, complies and will comply in
all material respects with the provisions of the Act and does not and will not
at any such times contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements, in the light of
the circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the Prospectus (or any amendment or supplement thereto) made in reliance upon
and in conformity with information relating to any Underwriter furnished to the
Company in writing by or on behalf of any Underwriter through you expressly for
use therein.
(c) The capitalization of the Company is as set forth in the Prospectus
as of the date set forth therein. All the outstanding shares of Common Stock and
other securities of the Company have been duly authorized and validly issued,
are fully paid and nonassessable and are free of any preemptive or similar
rights; all offers and sales of the capital stock, warrants, options and debt or
other securities of the Company and the Subsidiaries (as hereinafter defined)
prior to the date hereof were made in compliance with the Act and all other
applicable state, federal and
-8-
<PAGE> 9
foreign laws or regulations, or any actions under the Act or any state, federal
or foreign laws or regulations in respect of any such offers or sales are
effectively barred by effective waivers or statutes of limitation; the Shares to
be issued and sold to the Underwriters by the Company hereunder have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; the securities
of the Company conform to the description thereof in the Registration Statement
and the Prospectus (or any amendment or supplement thereto); the form of
certificate for the Shares conforms to the corporate law of the State of
Georgia; and the delivery of certificates for the Shares to be issued and sold
by the Company pursuant to the terms of this Agreement and payment for such
Shares will pass valid marketable title to such shares, free and clear of any
voting trust arrangements, liens, encumbrances, equities, claims or defects in
title to the several Underwriters purchasing such Shares in good faith and
without notice of any lien, claim or encumbrance.
(d) The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of Georgia with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as presently conducted and as described in the Registration Statement
and the Prospectus (or any amendment or supplement thereto), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company.
(e) Fidelity National Mortgage Corporation ("FNMC"), and Fidelity
National Capital Investors, Inc. ("FNCI"), are each corporations duly organized
and validly existing in good standing under the laws of the state of Georgia
with full corporate power and authority to own, lease and operate their
respective properties and to conduct their respective businesses as presently
conducted and as described in the Registration Statement and the Prospectus (and
any amendment or supplement thereto), and are each duly registered and qualified
to conduct their respective businesses and are in good standing in each
jurisdiction or place where the nature of their respective properties or the
conduct of their respective businesses require such registration or
qualification, except where the failure to so register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries, taken as a whole. The Company is duly registered as a Bank Holding
Company under the Bank Holding Company Act of 1956, as amended. The Bank has
been duly organized and is validly existing and in good standing as a national
bank under the laws of the United States of America. The Bank, FNMC and FNCI
individually are hereafter referred to as a "Subsidiary" and collectively as
"Subsidiaries." All of the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable (subject to 12 U.S.C. Section 1815 and, in the case of the Bank,
12 U.S.C. Section 55), and are owned by the Company directly (except that FNMC
is a subsidiary of the Bank), free and clear of any lien, adverse claim,
security interest, equity or
-9-
<PAGE> 10
other encumbrance. Except for the Subsidiaries, the Company does not own a
material interest in or control, directly or indirectly, any other corporation,
partnership, joint venture, association, trust or other business organization.
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any Subsidiary, or
to which the Company or any Subsidiary, or to which its respective properties,
is subject, that are required by the Act to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or any
document required to be incorporated by reference therein but are not described
as required. There are no actions, suits, inquiries, proceedings, or
investigations by or before any court or governmental or other regulatory or
administrative agency or commission pending or, to the best knowledge of the
Company, threatened against or involving the Company or any Subsidiary, nor is
there any basis for any such action, suit, inquiry, proceeding, or investigation
that are required to be described in the Registration Statement or the
Prospectus (or any amendment or supplement thereto) or any document required to
be incorporated by reference therein but are not described as required. There
are no terms, conditions and requirements imposed on the Company and its
Subsidiaries by any of the Board of Governors of the Federal Reserve System
("FRB"), the Office of the Comptroller of the Currency ("OCC"), the Federal
Deposit Insurance Corporation ("FDIC"), and the Georgia Department of Banking
and Finance ("DBF") that are required to be described in the Registration
Statement or the Prospectus that are not described as required by the Act and,
to the extent not satisfied or waived, all of such terms, conditions and
requirements have been disclosed to the Underwriters. There are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the Registration Statement
that are not described or filed as required or incorporated by reference as
permitted by the Act. All such contracts to which the Company or any Subsidiary
is a party have been duly authorized, executed and delivered by the Company or
the respective Subsidiary, constitute valid and binding agreements of the
Company or the respective Subsidiary and are enforceable against the Company or
the respective Subsidiary in accordance with the terms thereof.
(g) Neither the Company nor any Subsidiary is in violation of (i) its
articles of incorporation or bylaws or other charter documents, or, (ii) except
as described in the Registration Statement and Prospectus, of (A) any law,
ordinance, administrative or governmental rule or regulation applicable to the
Company or any Subsidiary (including, without limitation, all regulations,
decisions, directives and orders of the OCC and the FRB) or (B) of any decree of
any court or governmental agency or body having jurisdiction over the Company or
any Subsidiary, except in the case of (A) or (B) for such violations that would
not have a material adverse affect on the Company and the Subsidiaries, taken as
a whole, or (iii) in default in any material respect in the performance of any
obligation, agreement or condition contained in any bond, debenture, note or any
other evidence of indebtedness or in any material agreement, indenture, lease or
other instrument to which the Company or any Subsidiary is a party or by which
the Company or any Subsidiary or any of their respective properties may be
bound.
-10-
<PAGE> 11
(h) The execution and delivery of this Agreement, and the performance
by the Company of its obligations under this Agreement, have been duly and
validly authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except to
the extent that the indemnification provisions set forth in Section 8 of this
Agreement may be limited by federal or state securities laws or the public
policy underlying such laws and subject to applicable bankruptcy or insolvency
laws and of the similar laws of general application relating to the enforcement
of creditor rights.
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation by
the Company of the transactions contemplated hereby (i) is or may be void or
voidable by any person or entity, (ii) requires any consent, approval,
authorization or other order of or registration or filing with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required for the registration of the Shares
under the Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which will be, or have been, effected in accordance with
this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the articles of incorporation or
bylaws or other charter documents, of the Company or any Subsidiary, or (iii)
conflicts or will conflict with or constitutes a breach of, or a default under,
any agreement, indenture, lease or other instrument to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or any of their
respective properties may be bound, or violates any statute, law, regulation or
filing or judgment, injunction, order or decree applicable to the Company or any
Subsidiary or any of their respective properties, or results in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any Subsidiary pursuant to the terms of any agreement or instrument
to which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary may be bound or to which the property or assets of the Company or any
Subsidiary is subject.
(j) Except as described in the Prospectus and except for sales of
Common Stock pursuant to the employee stock purchase plan, the Company does not
have outstanding and at the Closing Date (and the Additional Closing Date, if
applicable) will not have outstanding any options to purchase, or any warrants
to subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of Common Stock or any
such warrants or convertible securities or obligations. Except as has been
complied with or waived, no holder of securities of the Company or any other
person has rights to the registration of any securities of the Company because
of the filing of the Registration Statement.
(k) Ernst & Young, LLP and KPMG Peat Marwick LLP, the certified public
accountants who have certified the consolidated financial statements filed as
part of the Registration Statement and the Prospectus (and any amendment or
supplement thereto), are independent public accountants as required by the Act.
The consolidated financial statements,
-11-
<PAGE> 12
together with related schedules and notes, forming part of the Registration
Statement and the Prospectus (and any amendment or supplement thereto), present
fairly the historical consolidated financial position, results of operations and
changes in financial position of the Company and the Subsidiaries on the basis
stated therein at the respective dates or for the respective periods to which
they apply; except as noted therein with respect to the Company as a going
concern, such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved and all adjustments necessary for a fair
presentation of the results for such period have been made; and the other
financial and statistical information and data set forth in the Registration
Statement and Prospectus (and any amendment or supplement thereto) is presented
fairly and prepared on a basis consistent with such financial statements and the
books and records of the Company. No financial statements or schedules are
required to be included in or incorporated by reference into the Registration
Statement that have not been so included or incorporated.
(l) Subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement thereto), neither the Company nor any Subsidiary has incurred any
liability or obligation, direct or contingent, or entered into any transaction,
whether or not in the ordinary course of business, that is material to the
Company and the Subsidiaries, taken as a whole, and there has not been (i) any
material change in or dividend paid on the capital stock, except for dividends
paid on the Preferred Stock pursuant to the term thereof, (ii) any material
increase in the short-term debt or long-term debt, of the Company or any
Subsidiary not offset by increases in loans held for sale, (iii) any material
increase in the aggregate dollar or principal amount of the Bank's assets which
are classified by the Bank as substandard, doubtful, or loss, or the Bank's
loans which are 90 days or more past due or real estate acquired by foreclosure,
or (iv) any material adverse change, or, to the best of the Company's knowledge,
any development involving or which may reasonably be expected to involve a
potential future material adverse change, in the condition (financial or other),
business, net worth or results of operations of the Company and the
Subsidiaries, taken as a whole.
(m) The Company and the Subsidiaries have good and marketable title to
all property (real and personal) described in the Registration Statement and the
Prospectus (or any amendment or supplement thereto) or any document required to
be incorporated by reference therein as being owned by the Company or such
Subsidiary, free and clear of all liens, claims, security interests or other
encumbrances except such as are described in the Registration Statement and the
Prospectus (or any amendment or supplement thereto) or such as are not material
and do not interfere in any material respect with the use of the property or the
conduct of the business of the Company and the Subsidiaries, taken as a whole,
and the property (real and personal) held under lease by the Company or any
Subsidiary, as applicable, is held by them under valid, subsisting and
enforceable leases with only such exceptions as in the aggregate are not
materially burdensome and do not interfere in any material respect with the
conduct of the business of the Company and the Subsidiaries, taken as a whole.
-12-
<PAGE> 13
(n) The Company has not distributed and will not distribute prior to
the Closing Date (or the Additional Closing Date, if any) any offering material
in connection with the offering and sale of the Shares other than the Prepricing
Prospectus and the Registration Statement, the Prospectus or other materials
permitted by the Act and distributed with the prior written approval of the
Underwriters. The Company has not taken, directly or indirectly, any action
which constituted or any action designed, or which might reasonably be expected
to cause or result in or constitute, under the Act or otherwise, stabilization
or manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares. The Company acknowledges that the Underwriters may
engage in passive market making transactions in the Common Stock on The Nasdaq
Stock Market in accordance with Regulation M under the Exchange Act.
(o) Neither the Company nor any Subsidiary is an "investment company,"
an "affiliated person" of, or "promoter" or "principal underwriter" for an
investment company within the meaning of the Investment Company Act of 1940, as
amended.
(p) The Company and the Subsidiaries have all permits, licenses,
franchises, approvals, consents and authorizations of governmental or regulatory
authorities or private persons or entities (hereinafter "permit or "permits") as
are necessary to own their respective properties and to conduct their respective
businesses in the manner described in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subject to such
qualifications as may be set forth therein, except where the failure to have
obtained any such permit has not had and will not have a material adverse effect
upon the condition (financial or other) or the business of the Company and the
Subsidiaries, taken as a whole; the Company and the Subsidiaries have fulfilled
and performed all of their material obligations with respect to each such permit
and no event has occurred which allows, or after notice or lapse of time would
allow, revocation or termination of any such permit or result in any other
material impairment of the rights of the holder of any such permit, subject in
each case to such qualification as may be set forth in the Prospectus; and,
except as described in the Prospectus, such permits contain no restrictions that
are materially burdensome to the Company and the Subsidiaries, taken as a whole.
(q) The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the business in which they are engaged;
and the Company has no reason to believe that the Company and the Subsidiaries
will not be able to renew their existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue their respective businesses at a comparable cost.
(r) The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted
-13-
<PAGE> 14
only in accordance with management's general or specific authorizations; and
(iv) the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(s) Neither the Company nor any Subsidiary has, directly or indirectly,
at any time during the past five years (i) made any unlawful contribution to any
candidate for political office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal, state or foreign
governmental official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof or applicable foreign
jurisdictions.
(t) Except as set forth in the Registration Statement and the
Prospectus, to the knowledge of the Company neither the Company nor any
Subsidiary has violated any environmental, safety or similar law applicable to
their respective businesses, nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees nor any applicable
federal or state wages and hours laws, nor any provisions of the Employee
Retirement Income Security Act or the rules and regulations promulgated
thereunder, which in each case might result in any material adverse change in
the business, prospects, financial condition or results of operation of the
Company and the Subsidiaries, taken as a whole. To the best of the Company's
knowledge, no labor disturbance by the employees of the Company or any of the
Subsidiaries exists or is imminent; and the Company is not aware of any existing
or imminent labor disturbances by the employees of any of its principal
suppliers that might be expected to result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and the Subsidiaries, taken as a whole. No collective
bargaining agreement exists with any of the Company's or any Subsidiary's
employees and, to the Company's knowledge, no such agreement is imminent. To the
best of the Company's knowledge, neither the employment by the Company or any
Subsidiary of their key personnel nor the activities of such individuals at the
Company or any Subsidiary conflicts with, constitutes a breach of, or otherwise
violates any employment, noncompetition, nondisclosure or similar agreement or
covenant by which such individuals may be bound.
(u) The Company and the Subsidiaries own and have full right, title and
interest in and to, or have the right to use, each material trade name,
trademark, service mark, patent, copyright, license, and other rights and all
know-how (including trade secrets and other unpatented and/or proprietary or
confidential information, systems, or procedures) (collectively, "Intellectual
Property Rights") under which the Company and the Subsidiaries conduct all or
any portion of their respective businesses, which Intellectual Property Rights
are adequate to conduct such businesses as conducted or as proposed to be
conducted or as described in the Registration Statement and the Prospectus (or
any amendment or supplement thereto); except as otherwise disclosed in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), neither the Company nor any Subsidiary has created any lien or
encumbrance on, or granted any right or license with respect to, its respective
Intellectual Property Rights; there is no claim pending against the Company or
any Subsidiary with respect to any of their respective
-14-
<PAGE> 15
Intellectual Property Rights; neither the Company nor any Subsidiary has
received notice that, nor is the Company aware that, any Intellectual Property
Right which they use or have used in the conduct of their respective businesses
infringed or infringes upon or conflicted or conflicts with the rights of any
third party, which infringement or conflict could have a material adverse effect
upon the condition (financial or other) of the Company and the Subsidiaries,
taken as a whole; and the Company is not aware of any facts which, with the
passage of time or otherwise, would cause the Company or any Subsidiary to
infringe upon or otherwise violate the Intellectual Property Rights of any third
party, which infringement or conflict could have a material adverse effect upon
the condition (financial or other) of the Company and the Subsidiaries, taken as
a whole.
(v) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act. The Company has timely and properly filed with the Commission all
reports and other documents required to have been filed with the Commission. The
documents incorporated by reference in the Registration Statement or the
Prospectus (or any amendment or supplement thereto), when the Registration
Statement became effective under the Act and when such documents were filed with
the Commission under the Exchange Act, conformed in all material respects with
the requirements of the Act or the Exchange Act, as applicable, and the rules
and regulations of the Commission thereunder. The Common Stock has been and
continues to be designated for inclusion on the Nasdaq National Market System
(the "Nasdaq National Market") under the symbol "LION" and the Company has
complied and will continue to comply with the maintenance and designation
criteria applicable to Nasdaq National Market issuers. The Company has taken no
action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from the Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(w) All federal, state, local and foreign tax returns required to be
filed by or on behalf of the Company and any Subsidiary with respect to all
periods ended prior to the date of this Agreement have been filed (or are the
subject of valid extension) with the appropriate federal, state, local and
foreign authorities and all such tax returns, as filed, are accurate in all
material respects. All federal, state, local and foreign taxes (including
estimated tax payments) required to be shown on all such tax returns or claimed
to be due from or with respect to the respective businesses of the Company and
the Subsidiaries have been paid or reflected as a liability on the consolidated
financial statements of the Company for appropriate periods, except where such
failure would not have a material adverse effect on the Company and the
Subsidiaries, taken as a whole. All deficiencies asserted as a result of any
federal, state, local or foreign tax audits have been paid or finally settled
and no issue has been raised in any such audit which, by application of the same
or similar principles, reasonably could be expected to result in a proposed
deficiency for any other period not so audited. No state of facts exist or has
existed which would constitute grounds for the assessment of any tax liability
with respect to the periods that have not been audited by appropriate federal,
state local or foreign authorities which could have a material
-15-
<PAGE> 16
adverse effect upon the condition (financial or other) of the Company and the
Subsidiaries taken as a whole. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any federal, state,
local or foreign tax return for any period.
(x) The Company and its Subsidiaries have obtained all required
permits, licenses, and other authorizations, if any, which are required under
federal, state, local and foreign statutes, ordinances and other laws relating
to pollution or protection of the environment, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, chemicals, or industrial, hazardous, or toxic materials or wastes
into the environment (including, without limitation, ambient air, surface water,
ground water, land surface, or subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, chemicals, or industrial,
hazardous, or toxic materials or wastes, or any regulation rule, code, plan,
order, decree, judgment, injunction, notice, or demand letter issued, entered,
promulgated, or approved thereunder ("Environmental Laws") the failure of which
to obtain would have a material adverse effect on the condition (financial or
other) of the Company and its Subsidiaries, taken as a whole. The Company and
its Subsidiaries are in material compliance with all terms and conditions of all
required permits, licenses and authorizations, and are also in material
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules, and timetables contained in
the Environmental Laws. There is no pending or, to the best knowledge of the
Company, threatened, civil or criminal litigation, notice of violation, or
administrative proceeding relating in any way to the Environmental Laws
(including notices, demand letters, or claims under the Resource Conservation
and Recovery Act of 1976, as amended ("RCRA"), the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and
similar foreign, state, or local laws) involving the Company or any Subsidiary.
There have not been and there are not any past, present, or foreseeable future
events, conditions, circumstances, activities, practices, incidents, actions, or
plans which may interfere with or prevent continued compliance, or which may
give rise to any common law or legal liability, or otherwise form the basis of
any claim, action, demand, suit, proceeding, hearing, study, or investigation,
based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release, or threatened release into the environment, of any
pollutant, contaminant, chemical, or industrial, hazardous, or toxic material or
waste, including, without limitation, any liability arising, or any claim,
action, demand, suit, proceeding, hearing, study, or investigation which may be
brought, under RCRA, CERCLA, or similar foreign, state or local laws, in each
case which individually or in the aggregate would have a material adverse effect
on the condition (financial or other) of the Company and its Subsidiaries, taken
as a whole.
(y) The Company and the Subsidiaries are in compliance with all
provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to
Disclosure of doing Business with Cuba; if the Company or any Subsidiary
commences engaging in business with the government of Cuba or with any person or
affiliate located in Cuba after the date the Registration Statement becomes or
has become effective with the Commission or with the Florida Department
-16-
<PAGE> 17
of Banking and Finance (the "Department"), whichever date is later, or if the
information reported or incorporated by reference in the Prospectus, if any,
concerning the business of the Company or any Subsidiary with Cuba or with any
person or affiliate located in Cuba changes in any material way, the Company
will provide the Department notice of such business or change, as appropriate in
a form acceptable to the Department.
(z) The Bank is a member in good standing of the Federal Home Loan
Bank of Atlanta, and the Bank's deposit accounts are insured by the FDIC to the
fullest extent provided under applicable law, and no proceeding for the
termination or revocation of such insurance is pending or, to the knowledge of
the Company or the Bank, threatened.
(aa) Except as described in the Prospectus, there are no contractual
encumbrances or material restrictions on the ability of the Bank (i) to pay
dividends or make any other distributions on its capital stock or to pay any
indebtedness owed, (ii) to make any loans or advances to, or investments in, any
subsidiary, or (iii) to transfer any of its property or assets to any
subsidiary. Except as described in the Prospectus, the Bank meets the
qualifications to make capital distributions as a "Tier 1 Association" under 12
C.F.R. Section 563.134.
(bb) Upon completion of the transaction contemplated by this Agreement
and the absence of any materially adverse events that are unforeseen as of the
date of this Agreement, and based upon discussions between the Company and Ernst
& Young LLP, the Company expects to get an audit report from Ernst & Young LLP
that does not contain a "going concern" qualification.
(cc) The execution and delivery of the warrant (the "Warrant") granting
Raymond James & Associates, Inc. the right to purchase 150,000 shares of the
Company's common stock, no par value (the "Warrant Shares"), and the performance
by the Company of its obligations under the Warrant, have been duly and validly
authorized by the Company, and the Warrant has been duly executed and delivered
by the Company and constitutes the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms. The Warrant Shares
to be issued to Raymond James & Associates, Inc. upon exercise of the Warrant
have been duly authorized and, when issued and delivered to Raymond James &
Associates, Inc. against payment therefor in accordance with the terms of the
Warrant, will be validly issued, fully paid and nonassessable and free of any
preemptive or similar rights.
SECTION 7. EXPENSES. The Company hereby agrees with the several
Underwriters that the Company will pay or cause to be paid the costs and
expenses associated with the following: (i) the preparation, printing or
reproduction, and filing with the Commission of the Registration Statement
(including financial statements and exhibits thereto), each Prepricing
Prospectus, the Prospectus, each registration statement filed pursuant to Rule
462(b) under the Act, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight charges
and charges for counting and packaging) of such copies of the Registration
Statement, each Prepricing Prospectus, the Prospectus, each registration
-17-
<PAGE> 18
statement filed pursuant to Rule 462(b) under the Act, and all amendments or
supplements to any of them, as may be reasonably requested for use in connection
with the offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the offering of the Shares; (iv) the printing
(or reproduction) and delivery of this Agreement, the preliminary and
supplemental Blue Sky Memoranda and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the Shares; (v)
the listing of the Shares on the Nasdaq National Market; (vi) the registration
or qualification of the Shares for offer and sale under the securities or Blue
Sky laws of the several states as provided in Section 5(f) hereof (including the
reasonable fees and expenses of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the preliminary and
supplemental Blue Sky Memoranda and such registration and qualification); (vii)
the filing fees in connection with any filings required to be made with the NASD
in connection with the offering; (viii) the transportation and other expenses
incurred by or on behalf of representatives of the Company in connection with
the presentations to prospective purchasers of the Shares; (ix) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company; (x) the preparation,
printing and distribution of a reasonable number of bound volumes of the
relevant transaction documents for the Representatives and their counsel; and
(xi) the performance by the Company of its other obligations under this
Agreement. If this Agreement shall be terminated by the Company after execution
pursuant to any provision hereof (except Section 11) or if the transactions
contemplated hereby are not consummated by reason of any failure, refusal or
inability on the part of the Company to perform any agreement on its part to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, the Company will reimburse the several Underwriters for all
reasonable out-of-pocket expenses (including travel expenses and fees and
disbursements of counsel for the several Underwriters) incurred by the
Underwriters in investigating, preparing to market or marketing the Shares,
which amounts shall not exceed $125,000. The provisions of this Section 7 are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company hereby agrees to pay, but shall not affect any agreement which
the Company may make, or may have made, for the sharing of such expenses and
costs. Such agreements shall not impair the obligations of the Company hereunder
to the several Underwriters.
SECTION 8. INDEMNIFICATION AND CONTRIBUTION. The Company and the Bank,
jointly and not severally, agree to indemnify and hold harmless you and each
other Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation) arising out of or based upon any breach of
any representation, warranty, agreement or covenant of the Company contained
herein or any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus, the Registration Statement, the
Prospectus, any amendment or supplement thereto, or in any Registration
Statement filed pursuant to Rule 462(b) under the Act, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or arising out of or based
-18-
<PAGE> 19
upon any untrue statement or alleged untrue statement of any material fact
contained in any audio or visual materials used in connection with the marketing
of the Shares, including, without limitation, slides, videos, films and tape
recordings, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon an untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to an
Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith or arise out
of materials prepared solely by the Underwriters based upon material information
obtained from sources other than, directly or indirectly, the Company or its
representatives. This indemnification shall be in addition to any liability that
the Company and the Bank may otherwise have.
If any action or claim shall be brought against any Underwriter or any
person controlling any Underwriter in respect of which indemnity may be sought
against the Company or the Bank, such Underwriter or such controlling person
shall promptly notify in writing the party(s) against whom indemnification is
being sought (the "indemnifying party" or "indemnifying parties"), but the
omission so to notify the indemnifying party(s) shall not relieve such
indemnifying party(s) from any liability which it may have to such Underwriter
or such controlling person except to the extent that it has been prejudiced in
any material respect by such failure. In case any such action or claim shall be
brought against any Underwriter or controlling person and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party(s) shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party(s) similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such Underwriter or
controlling person (who shall not, except with the consent of the Underwriter or
controlling person, be counsel to the indemnifying party), and, after notice
from the indemnifying party to such Underwriter or controlling person of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such Underwriter or controlling person under such subsection for any
legal expenses of other counsel or any other expenses, in each case subsequently
incurred by such Underwriter or controlling person, in connection with the
defense thereof or the costs of investigation. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action or claim and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the indemnifying party(s) has (have) agreed in
writing to pay such fees and expenses, (ii) the indemnifying party(s) has (have)
failed to assume the defense and employ counsel reasonably acceptable to the
Underwriter or such controlling person, or (iii) the named parties to any such
action (including any impleaded parties) include both such Underwriter or such
controlling person and the indemnifying party(s), and such Underwriter or such
controlling person shall have been advised by its counsel that representation of
such indemnified party and any indemnifying party(s) by the same counsel would
be inappropriate under applicable standards of professional conduct (whether or
not such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying
party(s) shall not have the right to assume the defense of such action or claim
on behalf of such Underwriter or such controlling
-19-
<PAGE> 20
person). The indemnifying party(s) shall not be liable for any settlement of any
such action or claim effected without its (their) written consent, but if
settled with such written consent, or if there be a final judgment for the
plaintiff in any such action, the indemnifying party(s) agrees to indemnify and
hold harmless any Underwriter and any such controlling person from and against
any loss, claim, damage, liability or expense by reason of such settlement or
judgment, but in the case of a judgment only to the extent stated in the
immediately preceding paragraph.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, and any person who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with respect
to information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter through you expressly for use in the Registration Statement,
the Prospectus or any Prepricing Prospectus, any amendment or supplement
thereto, or any Registration Statement filed pursuant to Rule 462(b) under the
Act. If any action or claim shall be brought or asserted against the Company,
any of its directors, any such officers, or any such controlling person based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, any
amendment or supplement thereto, or any Registration Statement filed pursuant to
Rule 462(b) under the Act, and in respect of which indemnity may be sought
against any Underwriter pursuant to this paragraph, such Underwriter shall have
the rights and duties given to the Company by the preceding paragraph (except
that if the Company shall have assumed the defense thereof such Underwriter
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Underwriter's expense), and the Company, its directors, any
such officers, and any such controlling persons shall have the rights and duties
given to the Underwriters by the immediately preceding paragraph. This
indemnification shall be in addition to any liability the Underwriters or any
Underwriter may otherwise have.
If the indemnification provided for in this Section 8 is judicially
determined to be unenforceable to an indemnified party under the first, and
third paragraph hereof in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then an indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and the Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company, on the one hand and the Underwriters on the
other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Shares (before deducting expenses) received by
the Company, bear to the total underwriting discounts
-20-
<PAGE> 21
and commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus; provided that, in the event that the
Underwriters shall have purchased any Additional Shares hereunder, any
determination of the relative benefits received by the Company, or the
Underwriters from the offering of the Shares shall include the net proceeds
(before deducting expenses) received by the Company, and the underwriting
discounts and commissions received by the Underwriters, from the sale of such
Additional Shares, in each case computed on the basis of the respective amounts
set forth in the notes to the table on the cover page of the Prospectus. The
relative fault of the Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on one hand or by
the Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
In any event, the Company will not, without the prior written consent
of the Representatives (which consent will not be unreasonably withheld), settle
or compromise or consent to the entry of any judgment in any proceeding or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not the Representatives or any person who
controls the Representatives within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent (i) includes an
unconditional release of all Underwriters and such controlling persons from all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act, by or on behalf of any Underwriter or controlling person.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8 was determined by a pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the fourth paragraph of this Section 8.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in the fourth paragraph of
this Section 8 shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 8 are several in proportion
to the respective numbers of Firm
-21-
<PAGE> 22
Shares set forth opposite their names in Schedule I hereto (or such numbers of
Firm Shares increased as set forth in Section 10 hereof) and not joint.
In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus, any supplement or amendment thereto, or
any registration statement filed pursuant to Section 462(b) of the Act, each
party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any person
controlling the Company (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person controlling any Underwriter, to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 8.
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares hereunder are
subject to the following conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., New York City time, on the date hereof, or at such later date
and time as shall be consented to in writing by you, and all filings required by
Rules 424(b) and 430A under the Act shall have been timely made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction.
(b) Subsequent to the effective date of the Registration Statement
there shall not have occurred any change, or any development involving, or which
might reasonably be expected to involve, a potential future material adverse
change, in the condition (financial or other), business, properties, net worth
or results of operations of the Company and the Subsidiaries, taken as a whole,
not contemplated by the Prospectus (or any supplement thereto), that in your
reasonable opinion, as Representatives of the several Underwriters, would
materially and adversely affect the market for the Shares.
-22-
<PAGE> 23
(c) You shall have received on the Closing Date (and the Additional
Closing Date, if any) an opinion of Glass, McCullough, Sherrill & Harrold, LLP,
counsel for the Company, dated the Closing Date (and the Additional Closing
Date, if any), reasonably satisfactory to you and your counsel, to the effect
that:
(i) The Company is a corporation duly incorporated under
the laws of the State of Georgia, and validly existing in good
standing, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto), and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net worth or
results of operation of the Company and the Subsidiaries, taken as a
whole.
(ii) Each Subsidiary is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction of
its organization, with full corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Registration Statement and the Prospectus (and any amendment or
supplement thereto), and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business
requires such registration or qualification except where the failure to
so register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or
results of operation of the Company and the Subsidiaries, taken as a
whole. All issued and outstanding shares of capital stock of each
Subsidiary have been validly issued and are fully paid and
nonassessable and, to such counsel's knowledge, free and clear of all
liens, encumbrances, equities and claims. To such counsel's knowledge,
the Company does not own or control, directly or indirectly, any
corporation, association or other entity other than Fidelity National
Bank, Fidelity National Mortgage Corporation, and Fidelity National
Capital Investors, Inc.
(iii) The authorized capital stock of the Company conform
in all material respects as to legal matters to the description thereof
contained in the Prospectus under the caption "Description of Capital
Stock."
(iv) All shares of capital stock or other securities of
the Company outstanding prior to the issuance of the Shares to be
issued and sold by the Company hereunder have been duly authorized and
validly issued, are fully paid and nonassessable and, to such counsel's
knowledge, have not been issued in violation of any co-sale right,
registration right, right of first refusal, preemptive right, or other
similar right.
-23-
<PAGE> 24
(v) To such counsel's knowledge, all offers and sales of
the Company's capital stock or other securities prior to the date
hereof were made in compliance with the registration provisions of the
Act and the registration provisions of all other applicable state and
federal laws or regulations or any actions under the Act, or any state
or federal securities laws or regulations, or applicable exemptions
therefrom.
(vi) The Shares to be issued and sold to the Underwriters
by the Company hereunder have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance
with the terms hereof, will be validly issued, fully paid and
nonassessable and, to such counsel's knowledge, free and clear of all
liens, encumbrances, equities and claims and, to such counsel's
knowledge, will not have been issued in violation of any co-sale right,
registration right, right of first refusal, preemptive right, or other
similar right.
(vii) The execution and delivery of the Warrant, and the
performance by the Company of its obligations under the Warrant, have
been duly and validly authorized by the Company, and the Warrant has
been duly executed and delivered by the Company and constitutes the
valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms. The Warrant Shares to be issued
to Raymond James & Associates, Inc. upon exercise of the Warrant have
been duly authorized and, when issued and delivered to Raymond James &
Associates, Inc. against payment therefor in accordance with the terms
of the Warrant, will be validly issued, fully paid and nonassessable
and, to such counsel's knowledge, free of any preemptive or similar
rights.
(viii) The form of certificates for the Shares conforms to
the requirements of the applicable corporate laws of the State of
Georgia.
(ix) The Registration Statement has become effective under
the Act and, to such counsel's knowledge after reasonable inquiry, no
stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose are pending before
or threatened by the Commission.
(x) The Company and the Bank have all requisite
corporate power and authority to enter into this Agreement and to
issue, sell and deliver the Shares to be sold by it to the
Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and the Bank and is
a valid, legal and binding agreement of the Company and the Bank
enforceable against the Company and the Bank in accordance with its
terms, except as enforceability thereof may be limited by (A) the
application of bankruptcy, reorganization, insolvency and other laws
affecting creditors' rights generally, and (B) equitable principles
being applied at the discretion of a court before which any proceeding
may be brought; and the Company and the Bank has adequate
authorization and has taken all action necessary to authorize the
indemnification provisions contained in Section 8
-24-
<PAGE> 25
herein, provided, however that such counsel may specifically refrain
from opining as to the validity of the indemnification provisions
hereof insofar as they are or may be held to be violative of public
policy (under either state or federal law) against such types of
provisions in the context of the offer, offer for sale, or sale of
securities.
(xi) Neither the Company nor any Subsidiary, to such
counsel's knowledge, is in violation of its respective articles of
incorporation or bylaws or other charter documents, and to the
knowledge of such counsel after reasonable inquiry, neither the Company
nor any Subsidiary is in default in the performance of any material
obligation, agreement or condition contained in any bond, indenture,
note or other evidence of indebtedness or in any other agreement
material to the Company and the Subsidiaries, taken as a whole.
(xii) Neither the offer, sale or delivery of the Shares,
the execution, delivery or performance of this Agreement and compliance
by the Company with all provisions hereof nor consummation by the
Company of the transactions contemplated hereby conflicts or will
conflict with or constitutes or will constitute a breach of, or a
default under, articles of incorporation or bylaws or other charter
documents, of the Company or any Subsidiary, or any agreement,
indenture, lease or other instrument to which the Company or any
Subsidiary, or any of their respective properties, is bound, that is or
was required to be filed by the Company with the Commission, or is
known to such counsel after reasonable inquiry, or, to the knowledge of
such counsel, will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary, nor will any such action result in any violation of any
existing law, regulation, ruling (assuming compliance with all
applicable state securities and "blue sky" laws), judgment, injunction,
order or decree known to such counsel after reasonable inquiry,
applicable to the Company or any Subsidiary, or any of their respective
properties.
(xiii) No consent, approval, authorization or other order
of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official is
required on the part of the Company (except such as have been obtained
under the Act or such as may be required under state securities or
"blue sky" laws governing the purchase and distribution of the Shares)
for the valid issuance and sale of the Shares to the Underwriters under
this Agreement.
(xiv) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements
and the notes thereto and the schedules and other financial and
statistical data included or incorporated by reference therein, as to
which such counsel need not express any opinion) comply as to form in
all material respects with the requirements of the Act, and the
conditions to the use of Form S-2 have been satisfied by the Company.
-25-
<PAGE> 26
(xv) To the knowledge of such counsel after reasonable
inquiry, (A) there are no legal or governmental proceedings pending or
threatened against the Company or any Subsidiary, or to which the
Company or any Subsidiary, or any of their respective properties, are
subject, that are required to be described in the Registration
Statement or Prospectus (or any amendment or supplement thereto) or any
document incorporated by reference therein that are not described as
required therein, and (B) there are no agreements, contracts,
indentures, leases or other instruments, that are required to be
described in the Registration Statement or the Prospectus (or any
amendment or supplement thereto) or any document incorporated by
reference therein or to be filed as an exhibit to the Registration
Statement or incorporated by reference therein that are not described
or filed as required, as the case may be.
(xvi) To the knowledge of such counsel after reasonable
inquiry, neither the Company nor any Subsidiary is in violation of any
law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any Subsidiary or of any decree of any
court or governmental agency or body having jurisdiction over the
Company or any Subsidiary except where such violation does not and will
not have a material adverse effect on the condition (financial or
other), business, properties, net worth or results of operation of the
Company and the Subsidiaries, taken as a whole.
(xvii) To the knowledge of such counsel after reasonable
inquiry, the Company and the Subsidiaries have such permits, licenses,
franchises, approvals, consents and authorizations of governmental or
regulatory authorities ("permits"), as are necessary to own their
respective properties and to conduct their respective businesses in the
manner described in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), subject to such qualifications as
may be set forth therein except where the failure to have obtained any
such permit has not had and will not have a material adverse effect
upon the condition (financial or other) or the business of the Company
and the Subsidiaries taken as a whole; the Company and the Subsidiaries
have fulfilled and performed all of their respective material
obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation
or termination thereof or result in any other material impairment of
the rights of the holder of any such permit, subject in each case to
such qualification as may be set forth in the Registration Statement
and the Prospectus (or any amendment or supplement thereto); and except
as described in the Registration Statement and the Prospectus (or any
amendment or supplement thereto), such permits contain no restrictions
that are materially burdensome to the Company and the Subsidiaries,
taken as a whole.
(xviii) The principal executive offices and properties
located in Decatur, Georgia and at 3 Corporate Square in Atlanta,
Georgia are held under valid, subsisting and enforceable leases, with
only such exceptions as in the aggregate are not material and do
-26-
<PAGE> 27
not interfere in any material respect with the conduct of the business
of the Company and the Subsidiaries, taken as a whole.
(xix) Such counsel has reviewed all agreements, contracts,
indentures, leases or other documents or instruments referred to in the
Registration Statement and the Prospectus (or any amendment or
supplement thereto) (other than routine contracts entered into by the
Company or any Subsidiary for the purchase of materials or the sale of
products, entered into in the normal course of business) and such
agreements, contracts, indentures, leases or other documents or
instruments are fairly summarized or disclosed therein, and filed as
exhibits thereto or incorporated by reference therein as required, and
such counsel does not know, after reasonable inquiry, of any
agreements, contracts, indentures, leases or other documents or
instruments required to be so summarized or disclosed or filed which
have not been so summarized or disclosed or filed.
(xx) The statements under the captions "Risk Factors,"
"Regulatory Matters," "Description of Capital Stock," and
"Capitalization," in the Registration Statement and the Prospectus,
insofar as such statements constitute a summary of documents referred
to therein or matters of law, are accurate summaries and fairly and
correctly summarize and present in all material respects the
information called for with respect to such documents and matters. Such
counsel has no reason to believe that the descriptions in the
Registration Statement and the Prospectus (or any amendment or
supplement thereto) of statutes, regulations or legal or governmental
proceedings are other than accurate or fail to present fairly the
information required to be shown.
(xxi) Neither the Company nor any Subsidiary is, nor will
any of them become, as a result of the consummation of the transactions
contemplated hereby and the application of the net proceeds therefrom
as set forth in the Registration Statement and the Prospectus (or any
amendment or supplement thereto) under the caption "Use of Proceeds,"
an "investment company" or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended.
(xxii) To the knowledge of such counsel after reasonable
inquiry, neither the Company nor any Subsidiary has received written
notice from any third party alleging that their employment of any
individual or the activities of any individual at the Company or any
Subsidiary conflicts with, constitutes a breach of, or otherwise
violates any employment, noncompetition, nondisclosure or similar
agreement or covenant by which such individual may be bound, and such
counsel has no reason to believe that the employment by the Company or
any Subsidiary of any individual or the activities of any individual at
the Company or any Subsidiary conflicts with, constitutes a breach of,
or otherwise violates any employment, noncompetition, nondisclosure or
similar agreement or covenant by which such individual may be bound.
-27-
<PAGE> 28
In rendering such opinion, counsel may rely upon an opinion or
opinions, each dated the Closing Date (and the Additional Closing Date, if
applicable), of other counsel as to the laws of a jurisdiction other than the
State of Georgia, provided that (1) each such local counsel is reasonably
acceptable to you, (2) each such opinion so relied upon is addressed to counsel
and you, (3) such reliance is expressly authorized by each opinion so relied
upon and a copy of each such opinion is delivered to you and is in form and
substance reasonably satisfactory to you, and (4) counsel shall state in their
opinion that they believe that they and you are justified in relying thereon. In
rendering such opinion, local counsel may rely, to the extent they deem such
reliance proper, as to matters of fact upon certificates of officers of the
Company and of government officials. Copies of all such certificates shall be
furnished to you and your counsel on the Closing Date (and the Additional
Closing Date, if applicable). In addition, if written confirmation of the
Commission is not available at the time such opinion is rendered, counsel may
rely upon the current oral representations of members of the Commission's staff
with respect to the Registration Statement or any amendment or supplement
thereto having become effective and the lack of issuance of a stop order or
institution of proceedings for that purpose.
In rendering such opinion, in each case where such opinion is qualified
by "the knowledge of such counsel after reasonable inquiry," such counsel may
rely as to matters of fact upon certificates of executive and other officers and
employees of the Company as you and such counsel shall deem are appropriate and
such other procedures as you and such counsel shall mutually agree; provided,
however, in each such case, such counsel shall state that it has no knowledge
contrary to the information contained in such certificates or developed by such
procedures and knows of no reason why you should not reasonably rely upon the
information contained in such certificates or developed by such procedures.
In addition to the opinion set forth above, such counsel shall state
that during the course of the preparation of the Registration Statement and the
Prospectus, and any amendments or supplements thereto, nothing has come to the
attention of such counsel which has caused it to believe that the Registration
Statement, as of the time it became effective under the Act, the Prospectus or
any amendment or supplement thereto, on the date it was filed pursuant to Rule
424(b), as of the respective dates when such documents were filed with the
Commission, and the Registration Statement and the Prospectus, or any amendment
or supplement thereto, as of the Closing Date (except for the financial
statements and other financial and statistical information contained therein or
omitted therefrom as to which no opinion need be expressed), contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statement therein not misleading. With
respect to such statement, counsel shall state that although such counsel did
not undertake to determine independently the accuracy, completeness and fairness
of the statements contained in the Registration Statement or in the Prospectus
and takes no responsibility therefor (except to the extent specifically set
forth herein), such counsel did participate in discussions and meetings with
officers and other representatives of the Company and discussions with the
auditor for the Company in connection with the preparation of the Registration
Statement and the Prospectus, and it is on the basis of the
-28-
<PAGE> 29
foregoing (relying as to certain factual matters on the information provided to
such counsel and not on an independent investigation) that such counsel is
making such statement.
(d) You shall have received on the Closing Date (and the Additional
Closing Date, if any) an opinion of King & Spalding, counsel for the
Underwriters, dated the Closing Date (and the Additional Closing Date, if any),
with respect to the issuance and sale of the Firm Shares (and Additional Shares,
if any), the Registration Statement and other related matters as you may
reasonably request, and the Company and its counsel shall have furnished to your
counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(e) You shall have received letters addressed to you and dated the date
hereof and the Closing Date (and the Additional Closing Date, if any) from Ernst
& Young LLP and KPMG Peat Marwick LLP, independent certified public accountants,
substantially in the forms heretofore approved by you.
(f) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
Commission at or prior to the Closing Date; (ii) there shall not have been any
change in the capital stock (except for shares issued pursuant to the employee
stock purchase plan) or other securities of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been since the respective dates as of which
information is given in the Registration Statement and the Prospectus (or any
amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change (present or potential future) in the condition
(financial or other), business properties, net worth or results of operations of
the Company and the Subsidiaries, taken as a whole, and the Company and the
Subsidiaries shall not have any liabilities or obligations, direct or contingent
(whether or not in the ordinary course of business) that are material to the
Company and the Subsidiaries, taken as a whole, other than those reflected in
the Registration Statement or the Prospectus (or any amendment or supplement
thereto); and (v) all of the representations and warranties of the Company
contained in this Agreement shall be true and correct in all material respects
on and as of the date hereof and on and as of the Closing Date as if made on and
as of the Closing Date, and you shall have received a certificate, dated the
Closing Date and signed by the chief executive officer and the chief financial
officer of the Company (or such other officers as are acceptable to you) to the
effect set forth in this Section 9(g) and in Section 9(h) hereof.
(g) The Company shall not have failed in any material respect at or
prior to the Closing Date to have performed or complied with any of its
agreements herein contained and required to be performed or complied with by it
hereunder at or prior to the Closing Date.
-29-
<PAGE> 30
(h) The Company shall have furnished or caused to have been furnished
to you such further certificates and documents as you shall have reasonably
requested.
(i) At or prior to the Closing Date, you shall have received the
written commitment of each of the Company's directors, executive officers and
shareholders set forth on Schedule II hereto, not to offer, sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for, or any rights to purchase or acquire, Common
Stock, during the period from the time of effectiveness of the Registration
Statement to the date 180 days following the effective date of the Registration
Statement, inclusive, without the prior written consent of Raymond James &
Associates, Inc., which commitments shall be in full force and effect as of the
Closing Date (and the Additional Closing Date, if any).
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and your counsel.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of the Additional
Closing Date of the conditions set forth in this Section 9, except that, if the
Additional Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (i) shall be dated on
the Additional Closing Date and the opinions and letters referred to in
paragraphs (c) through (e) shall be revised to reflect the sale of Additional
Shares.
SECTION 10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective upon the later of (a) the execution and delivery hereof by the parties
hereto, or (b) the effectiveness of the Registration Statement by the
Commission.
If any one or more of the Underwriters shall fail or refuse to purchase
Firm Shares which it or they have agreed to purchase hereunder, and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of Firm Shares, each non-defaulting Underwriter shall be
obligated, severally, in the proportion to which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in the Agreement Among Underwriters,
to purchase the Firm Shares which such defaulting Underwriter or Underwriters
agreed, but failed or refused to purchase. If any Underwriter or Underwriters
shall fail or refuse to purchase Firm Shares and the aggregate number of Firm
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares and arrangements satisfactory to you and the
Company for the purchase of such Firm Shares are not made within 36 hours after
such default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case that does not result
in termination of this Agreement, either you or the Company shall have the right
to postpone the Closing Date, but in no event for longer than seven (7) days, in
order that
-30-
<PAGE> 31
the required changes, if any, in the Registration Statement and the Prospectus
or any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement.
SECTION 11. TERMINATION OF AGREEMENT. This Agreement shall be subject
to termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or the Additional Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, American Stock Exchange or The Nasdaq
Stock Market shall have been suspended or materially limited, (ii) trading of
any securities of the Company, including the Shares, on the New York Stock
Exchange, American Stock Exchange or The Nasdaq Stock Market, as the case may
be, shall have been suspended or materially limited, whether as the result of a
stop order by the Commission or otherwise, (iii) a general moratorium on
commercial banking activities in New York or Florida shall have been declared by
either federal or state authorities, (iv) there shall have occurred any outbreak
or escalation of hostilities or other international or domestic calamity, crisis
or change in political, financial or economic conditions or other material event
the effect of which on the financial markets of the United States is such as to
make it, in your judgment, impracticable or inadvisable to market the Shares or
to enforce contracts for the sale of the Shares, or (v) the Company or any
Subsidiary shall have, in the sole judgment of the Representatives, sustained
any loss or interference, material to the Company and the Subsidiaries, taken as
a whole, with their respective businesses or properties from fire, flood,
hurricane, accident, or other calamity, whether or not covered by insurance, or
from any labor disputes or any legal or governmental proceeding, or there shall
have been any material adverse change (including, without limitation, a material
change in management or control of the Company) in the condition (financial or
otherwise), business prospects, net worth, or results of operations of the
Company and the Subsidiaries, taken as a whole, except in each case as described
in, or contemplated by, the Prospectus (including any amendment or supplement
thereto). Notice of such cancellation shall be promptly given to the Company and
its counsel by telegraph, telecopy or telephone and shall be subsequently
confirmed by letter.
All representations, warranties, covenants and agreements of the
Company herein or in certificates delivered pursuant hereto, and the indemnity
and contribution agreements contained in Section 8 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any Underwriter or any controlling person, or by or on behalf of the
Company or any of their officers, directors or controlling persons, and shall
survive the delivery of the Shares to the several Underwriters hereunder or
termination of this Agreement.
SECTION 12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements
set forth under the caption "Underwriting" in any Prepricing Prospectus and in
the Prospectus, constitute
-31-
<PAGE> 32
all the information furnished by or on behalf of the Underwriters through you or
on your behalf as such information is referred to in Sections 6(a), 6(b) and 8
hereof.
SECTION 13. NOTICES; SUCCESSORS AND ASSIGNS. Except as otherwise
provided herein, notice given pursuant to any of the provisions of this
Agreement shall be in writing and shall be delivered (i) if to the Company, at
the office of the Company at 3490 Piedmont Road, Atlanta, Georgia 30305,
Attention: M. Howard Griffith, Jr., Chief Financial Officer, with a copy to Ugo
F. Ippolito, Esq., Glass, McCullough, Sherrill & Harrold LLP, 1409 Peachtree
Street, N.E., Atlanta, Georgia 30309; or (ii) if to you, as the Underwriters, to
Raymond James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida
33716, Attention: Joel J. Kallett, with a copy to Alan J. Prince, Esq., King &
Spalding, 191 Peachtree Street, Atlanta, Georgia 30303.
SECTION 14. This Agreement has been and is made solely for the benefit
of the several Underwriters, the Company, its directors and officers and the
other controlling persons referred to in Section 8 hereof, and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither of the
terms "successor" and "successors and assigns" as used in this Agreement shall
include a purchaser from you of any of the Shares in his status as such
purchaser.
SECTION 15. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
governed by and construed in accordance with the laws of the State of Florida
without reference to choice of law principles thereunder. This Agreement may be
signed in various counterparts which together shall constitute one and the same
instrument. This Agreement shall be effective when, but only when, at least one
counterpart hereof shall have been executed on behalf of each party hereto.
-32-
<PAGE> 33
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us.
Very truly yours,
FIDELITY NATIONAL CORPORATION
By:
-------------------------------------
M. Howard Griffith
Chief Financial Officer
FIDELITY NATIONAL BANK
By:
-------------------------------------
Name:
Title:
CONFIRMED as of the date first
above mentioned, on behalf of
itself and the other several
Underwriters named in Schedule I
hereto.
RAYMOND JAMES & ASSOCIATES, INC.
By:
----------------------------------
Authorized Representative
-33-
<PAGE> 34
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Name Firm Shares
- ---- -----------
<S> <C>
Raymond James & Associates Inc................
Total......................................... =========
3,000,000
</TABLE>
<PAGE> 35
SCHEDULE II
LOCK-UP AGREEMENTS
Name
James B. Miller, Jr.
Sharon R. Denney
Palmer Proctor, Jr.
M. Howard Griffith, Jr.
James W. Anderson, Jr.
David R. Bockel
Dr. Edward G. Bowen
Dr. Marvin C. Goldstein
Dr. Manning M. Pattillo, Jr.
Larry Peterson
Robert J. Rutland
Gordon M. Sherman
W. Clyde Shepherd, Jr.
R. Phillip Shinall, III
Rankin Smith, Jr.
Felker W. Ward, Jr.
<PAGE> 1
EXHIBIT 10(d)
FIDELITY NATIONAL CORPORATION
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of
the 18th day of September, 1997, between FIDELITY NATIONAL CORPORATION
("Fidelity"), a Georgia Corporation, and James B. Miller, Jr. ("Miller").
WHEREAS, Fidelity agrees to continue to employ Miller as an
executive to provide the services set forth herein; and
WHEREAS, Miller agrees to accept such engagement and to continue
to provide such services in accordance with the terms and conditions of this
Agreement;
NOW, THEREFORE, in consideration of the mutual promises herein
made and of other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
EMPLOYMENT/DUTIES.
(a) Fidelity shall employ Miller as the Chairman
of the Board of Directors, President and Chief Executive Officer of Fidelity
during the term of his employment as set forth in this Agreement and Miller
hereby accepts such employment.
(b) Miller shall be the senior executive officer
of Fidelity and shall be responsible for the day-to-day operations of the
business of Fidelity and shall have such authority consistent with such
positions and necessary for the conduct of such business under the general
direction of the Board of Directors of Fidelity ("Board").
(c) Miller agrees that he will at all times and
to the best of his ability and experience faithfully perform all of the duties
that may be required of him pursuant to the terms of this Agreement. Miller
shall devote his full business time to the performance of his obligations
hereunder.
(d) The term of employment of Miller shall be for
an initial term of three (3) years and may be extended upon written agreement
of the parties.
(e) Employment hereunder shall commence on
January 1, 1998.
-1-
<PAGE> 2
COMPENSATION.
(a) Salary. During the term of the employment of
Miller hereunder, Fidelity will pay to Miller a base salary ("Base Salary") at
the rate of $300,000 per year, payable in arrears in equal semi-monthly
payments. In the event of a disability, to the extent payments are received
under any employer sponsored disability program and/or under a policy the
premiums of which are paid by Fidelity, the payments hereunder are to be
reduced by an amount equal to such disability payments.
(b) Incentive Compensation. Fidelity shall pay to
Miller the incentive compensation as set forth in Attachment A attached hereto.
Miller shall be eligible to participate in incentive plans and programs
hereafter adopted as determined by the Board or committee thereof.
(c) Stock Options. The Compensation Committee of
Fidelity has granted to Miller a stock option to purchase 150,000 shares of
Common Stock, no par value, of Fidelity at its fair market value, as set forth
in Exhibit A attached hereto.
(d) Employee Benefit Program. Miller shall be
eligible to participate in all employee benefit programs, including medical and
hospitalization programs, now or hereafter made available by Fidelity to its
employees or executives thereof, subject to terms and conditions of such
programs, including eligibility. It is understood that Fidelity reserves the
right to modify and rescind any program or adopt new programs in its sole
discretion. Fidelity may, in its sole discretion, maintain key man life
insurance on the life of Miller and designate Fidelity as the beneficiary.
Miller agrees to execute any documents necessary to effect such policy.
(e) Additional Benefits. The Split Dollar
Insurance Plan ("Split Dollar Plan") dated October 3, 1984 shall continue in
effect and shall not be affected by any modification or termination of this
Agreement.
(f) Vacation. Miller is entitled to four (4)
weeks vacation each year. Vacation shall be taken at such times as not to
materially interfere with the business of Fidelity. The vacation time must be
taken prior to the end of each calendar year or as otherwise mutually agreed in
writing, otherwise it expires to the extent not used.
(g) Expenses. Fidelity shall pay all reasonable
expenses incurred by Miller in the performance of his responsibilities and
duties for Fidelity, including without limitation, dues payable to a country
club of Miller's choice and to such reasonable civic organizations of Miller's
choice. Miller shall submit to Fidelity periodic statements of all expenses so
incurred in accordance with the policies of Fidelity then in effect. Subject to
such reviews as Fidelity may deem reasonably necessary, Fidelity shall,
promptly in the ordinary course of business, reimburse Miller for the full
amount of any such expenses advanced by Miller.
-2-
<PAGE> 3
(h) Automobile. Fidelity will continue to provide
Miller with an appropriate automobile for his use and will maintain and insure
it at Fidelity's expense.
EARLY TERMINATION.
(a) For Cause. (1) Notwithstanding the foregoing,
the Board may terminate the employment of Miller "for cause" (as hereinafter
defined) at any time with 10 business days' prior written notice. The term "for
cause" shall mean (i) the commission of a felony or any other crime involving
moral turpitude or the pleading of nolo contendere to any such act, (ii) the
commission of any act or acts of dishonesty when such acts are intended to
result or result , directly or indirectly, in gain or personal enrichment of
Miller or any related person or affiliated company or are intended to cause
harm or damage to Fidelity or its subsidiaries, (iii) the illegal use of
controlled substances, (iv) the use of alcohol so as to have a material adverse
effect on the performance of Miller's duties, (v), the misappropriation or
embezzlement of assets of Fidelity or its subsidiaries, or (vi) the breach of
any other material term or provision of this Agreement to be performed by
Miller which have not been cured within thirty (30) days of receipt of written
notice of such breach from the Board.
(2) Upon termination for cause, Fidelity shall
have no further obligation to pay any compensation to Miller for periods after
the effective date of the termination for cause. Base Salary which accrued to
the termination date shall be paid on the normal payment date.
(b) Other Termination by Fidelity. Fidelity may
terminate the employment of Miller for any reason (other than for cause) at any
time upon at least 90 days' prior written notice. Upon such termination,
Miller's right to compensation after the effective date of termination shall
cease, except that the Base Salary and 1/24 of the Average Incentive
Compensation (as defined in Attachment A) shall continue to be paid
semi-monthly for thirty-six (36) months from the date of termination.
(c) Termination by Miller. Miller may terminate
his employment at any time upon at least 90 days' prior written notice to
Fidelity. Upon such termination of employment Miller's right to compensation
after the effective date of termination shall cease. The Base Salary and
Average Incentive Compensation (determined for a period less than a full year
as set forth in Attachment A) which accrued as of the termination date will be
paid after the effective date of termination under this paragraph 3(c) on the
normal payment date. Notwithstanding the foregoing, if Fidelity fails to
perform any of its material obligations hereunder and such failure continues
for sixty (60) days after written notice thereof by Miller to the Board,
termination by Miller of this Agreement for such failure shall be deemed to
constitute a termination by Fidelity without cause under paragraph 3(b) of this
Agreement. A reduction in the responsibilities and authority of Miller as
provided in paragraph 1(b) shall constitute a breach of a material obligation
of Fidelity hereunder.
-3-
<PAGE> 4
(d) Termination Upon Death or Disability.
(1) The employment of Miller shall terminate
upon his death, or (10) business days after written notice by Fidelity of
termination, upon or during the continuance of the total disability (as
hereinafter defined) of Miller.
(2) Upon termination upon death or upon or
during total disability, Miller's right to compensation after the effective
date of termination shall cease. Salary which accrued as of the termination
date and incentive compensation which accrued during the last full calendar
month of employment will be paid after the effective date of termination under
this paragraph 3(d) on the normal payment date(s). Fidelity shall have no
obligation to pay any compensation for periods after the effective date of such
termination.
(3) The term "total disability" means the inability of Miller to
substantially perform Miller his duties hereunder for a continuous period of
ninety (90) days unless extended in writing by Fidelity. Total disability shall
be deemed to commence upon the expiration of such continuous ninety (90) day
period. In the event of any dispute as to the "total disability" of Miller, the
matter shall be resolved by the decision of a single physician, serving as an
arbitrator, mutually selected or appointed in accordance with the rules of the
American Arbitration Association, Atlanta, Georgia. The decision of the
arbitrator shall be binding on all parties hereto. Miller agrees to submit
medical records requested and to submit to such examination and testing
reasonable requested by such physician.
COVENANT NOT TO COMPETE.
(a) Miller agrees that for the period commencing
on the date hereof and ending one (1) year after the expiration of the term of
his employment under this Agreement (and if employment is continued thereafter
"at will", then after termination of his employment with Fidelity or any
subsidiary for any reason), Miller will not, alone or with others, directly or
indirectly, own, manage, operate, join, control, participate in the ownership
of, management, operation, or control of, be employed by, consult with, advise
or be connected in any other manner with any Business (as hereinafter defined)
in the counties of Fulton, DeKalb, Cobb, Gwinnett and Clayton, Georgia
("Territory") other than with Fidelity and its subsidiaries. This covenant not
to be compete shall not prohibit engagements which do not involve, directly or
indirectly, the Business.
(b) The term "Business" means the business of
banking, including deposits, checking, lending (including mortgage lending) and
trust services, including such services provided by national and state banks
and savings and loan associations and other similar businesses, stock brokerage
and sale of insurance.
(c) Miller acknowledges that the products and
services provided by the Business are being and are intended to be marketed
throughout the Territory.
-4-
<PAGE> 5
5. NON-SOLICITATIONS OF CUSTOMERS. Miller agrees that during his
employment and the period of twelve months immediately following termination of
his employment for any reason with Fidelity by Miller or by Fidelity, Miller
shall not, directly or indirectly, on his own behalf or on behalf of any other
person, including any other business entity, solicit, contact, call upon,
communicate with or attempt to communicate with any customer or prospective
customer of Fidelity or of any subsidiary or any representative of any customer
or prospective customer of Fidelity or any subsidiary with a view to the
solicitation of the following banking services: deposit, checking, lending and
trust services; provided that the restrictions set forth in this paragraph 5
shall apply only to customers or prospects of Fidelity and of its subsidiaries
or representatives thereof with which Miller had contact while in the employ of
Fidelity or any subsidiary during the two year period preceding the termination
of employment.
6. NON-SOLICITATIONS OF EMPLOYEES. Miller agrees that during his
employment and the period of twelve months immediately following termination of
his employment with Fidelity by Miller or by Fidelity for any reason, Miller
shall not, directly or indirectly, on his own behalf or on behalf of any other
person, including any other business entity, solicit, hire or in any manner
encourage employees of Fidelity or any subsidiary thereof, to leave the employ
of Fidelity or any subsidiary for an engagement in any capacity by another
person or to provide the name of any such employee to any one who, to the
knowledge of Miller, may hire or be interested in hiring such employee.
7. CONFIDENTIALITY.
(a) During the term of Miller's employment with
Fidelity, and at all times thereafter, Miller shall not use or disclose to
others, without the prior written consent of Fidelity, any Trade Secrets (as
hereinafter defined) or Confidential Information (as hereinafter defined) of
Fidelity or any subsidiary or its customers, except for use or disclosure
thereof in the course of Fidelity's business, and such disclosure shall be
limited to those who have a need to know.
(b) Upon termination of employment with Fidelity
for any reason, Miller shall not take with him any documents or data of
Fidelity or any subsidiary or of any customer or any reproduction thereof.
(c) Miller agrees to take reasonable precautions
to safeguard and maintain the confidentiality and secrecy and limit the use of
all Trade Secrets and Confidential Information of Fidelity or any subsidiary
and of its customers.
(d) Trade Secrets shall include only such
information constituting a "Trade Secret" within the meaning of subsection
10-1-761(4) of the Georgia Trade Secrets Act of 1990. Confidential Information
shall mean all information and data which is protectable as a
-5-
<PAGE> 6
legal form of property or non-public information of Fidelity or its customers,
excluding any information or data which constitutes a Trade Secret.
(e) The parties agree that the limitations herein
on disclosure and use of Confidential Information of the Company and customers
shall be for a period commencing on the date of employment and ending three
years after termination of employment for any reason, by Fidelity or by Miller.
(f) Trade Secrets and Confidential Information
shall not include any information (i) which becomes publicly known through no
fault or act of Miller; (ii) is lawfully received by Miller from a third party
after termination of employment without a similar restriction regarding
confidentiality and use and without a breach of this Agreement; or (iii) which
is independently developed by Miller before the commencement of or after
termination of Miller's employment.
8. SPECIFIC PERFORMANCE. Because of Miller's knowledge and
experience, Miller agrees that Fidelity shall be entitled to specific
performance, an injunction, temporary injunction or other similar relief in
addition to all other rights and remedies it might have for any violation of
the undertakings set forth in paragraphs 4, 5, 6 and 7 of this Agreement. In
any such court proceeding, Miller will not object thereto and claim that
monetary damages are an adequate remedy.
9. INDEMNIFICATION OF MILLER. Fidelity shall indemnify Miller
and shall advance reimbursable expenses incurred by Miller in any proceeding
against Miller, including a proceeding brought by or in the right of Fidelity,
as a director or officer of Fidelity or any subsidiary thereof, except claims
and proceedings brought by Fidelity against Miller, to the fullest extent
permitted under the Georgia Business Corporation Code, as amended from time to
time.
10. NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been given upon receipt when delivered by hand or upon delivery
to the address of the party determined pursuant to this paragraph when
delivered by express mail, overnight courier or other similar method to such
address or by facsimile transmission (provided a copy is also sent by
registered or certified mail or by overnight courier), or five (5) days after
deposit of the notice in the US mail, if mailed by certified or registered
mail, with postage prepaid addressed to the respective party as set forth
below, which address may be changed by written notice to the other party:
-6-
<PAGE> 7
If to Fidelity
Fidelity National Corporation
3490 Piedmont Road
Suite 1550
Atlanta, Georgia 30305
Attn: Board of Directors
If to Miller:
James B. Miller, Jr.
c/o Fidelity National Corporation
3490 Piedmont Road, Suite 1550
Atlanta, Georgia 30305
11. BINDING EFFECT. This Agreement shall inure to the benefit of
and be binding upon and enforceable by Miller and his estate, personal
representatives and heirs, and by Fidelity and its successors and assigns. This
Agreement and the payments hereunder may not be assigned, pledged or otherwise
hypothecated by Miller.
12. ENTIRE AGREEMENT. This Agreement, including the Attachment
hereto, and the Split Dollar Plan are intended by the parties hereto to
constitute the entire understanding of the parties with respect to the
employment of Miller as an employee and officer of Fidelity and supersedes all
prior agreements and understandings, oral or written.
13. BINDING ARBITRATION/ATTORNEY FEES. Except as otherwise
specifically provided Miller herein, including as provided in paragraph 8
hereof, all disputes arising under this Agreement shall be submitted to and
settled by arbitration. Arbitration shall be by one (1) arbitrator selected in
accordance with the rules of the American Arbitration Association, Atlanta,
Georgia ("AAA") by the AAA. The hearings before the arbitrator shall be held in
Atlanta, Georgia and shall be conducted in accordance with the rules existing
on the date thereof of the AAA to the extent not inconsistent with this
Agreement. All reasonable costs and expense incurred in connection with any
such arbitration proceedings and those incurred in any civil action to enforce
the same shall be borne by the party against which the decision is rendered.
14. AMENDMENTS. This Agreement may not be amended or modified
except in writing signed by both parties.
15. WAIVERS. The failure of either party to insist upon the
strict performance of any provision hereof shall not constitute a wavier of
such provision. All waivers must be in writing.
16. GOVERNING LAW. This Agreement shall be deemed to be made in
and in all respects shall be interpreted, construed and governed by and in
accordance with the laws of the State of Georgia.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
FIDELITY NATIONAL CORPORATION
By: /s/ R. Phillip Shinall, III
-----------------------------
Name: R. Phillip Shinall, III
-----------------------
Title: Director
-----------------------
MILLER
/s/ James B. Miller, Jr.
---------------------------
James B. Miller, Jr.
-8-
<PAGE> 9
ATTACHMENT A
INCENTIVE COMPENSATION
For each calendar year during the term of the Agreement the
Compensation Committee ("Committee") of the Board of Directors of Fidelity will
establish in its sole discretion (after discussion with Miller) a target
consolidated income before the Incentive Compensation provided herein and
before taxes of Fidelity, excluding extraordinary items (determined in
accordance with generally accepted accounting principles) ("Target Income") for
such calendar year prior to the commencement of the calendar year. Miller will
be paid incentive compensation ("Incentive Compensation") in cash depending
upon the percentage of the Target Income achieved for such calendar year.
In the event the percentage of the Target Income achieved is at
least 70% and is less than 100%, the Incentive Income shall be the sum of (i)
$150,000 and (ii) the product of (A) the percentage of the Target Income
achieved in excess of 70%, times (B) $500,000. In the event the percentage of
the Target Income achieved exceeds 100% and is not more than 120%, the
Incentive Income shall be the sum of (i) $300,000 and (ii) the product of (A)
the percentage of the Target Income achieved in excess of 100%, times (B)
$500,000. If the percentage of the Target Income achieved is 100%, the
Incentive Compensation is $300,000. No Incentive Compensation will be paid if
the percentage of Target Income achieved is less than 70%. No additional
Incentive Compensation will be paid if the percentage of the Target Income
achieved is greater than 120%. The maximum Incentive Income shall be $400,000.
The Compensation Committee may modify the Target Income for any
calendar year to reflect changes resulting from changes in accounting
principles or practices of Fidelity and changes in the business plan.
In the event of any dispute as to the actual consolidated income
before taxes and extraordinary items, it shall be such amount as set forth in
Fidelity's certified financial statements less the amount of this Incentive
Compensation for such calendar year.
The right of Miller to receive the Incentive Compensation
hereunder related to a calendar year shall vest on the last day of such
calendar year. In the event Miller is entitled pursuant to the Agreement to
Incentive Compensation for a period of less than a full year, the Incentive
Compensation for such year shall vest on the last day of his employment and the
amount shall be determined as set forth hereinabove for the calendar year
prorated based upon the percentage of the year Miller was employed under the
Agreement.
-9-
<PAGE> 10
Payment is to be made in cash promptly after the amount is
determined but in no event more than 90 days after the end of the calendar
year. The Committee, in its sole discretion, during a calendar year may make a
non-refundable prepayment of a portion of the Incentive Compensation to Miller
if it believes that the partial payment will exceed the amount of the Incentive
Compensation for that calendar year.
Average Incentive Compensation still mean the Incentive
Compensation for each full calendar year that has vested divided by the number
of said calendar years. In the event Incentive Compensation for a calendar year
has not vested, Average Incentive Compensation shall mean $300,000.
-10-
<PAGE> 11
Optionee: James B. Miller, Jr.
--------------------
Option Shares: 109,600
--------------------
(number of shares of
Common Stock)
Purchase Price
per share: $9.00
----------
Date of Grant: September 18, 1997
--------------------
First Vesting
Date: September 18, 1998
--------------------
Expiration Date: September 18, 2004
--------------------
FIDELITY NATIONAL CORPORATION
STOCK OPTION AGREEMENT
("Option Agreement")
SECTION I
GRANT
Fidelity National Corporation ("Corporation") hereby grants to
the optionee set forth above ("Optionee") a non-qualified stock option
("Option") to purchase the number of shares of common stock, no par value, of
the Corporation set forth above (collectively "Option Shares") on the terms and
conditions herein set forth and the provisions of the Fidelity National
Corporation 1997 Stock Option Plan, as amended from time to time, ("Plan"). The
purchase price of each such share shall be the Purchase Price set forth above.
The Option shall expire on the Expiration Date set forth above, unless sooner
terminated as provided in Section III or Section X of this Option Agreement or
Paragraph V of the Plan. Each term used herein shall have the same meaning as
provided in the Plan unless herein otherwise provided.
The Option is granted pursuant to the Plan.
<PAGE> 12
SECTION II
EXERCISE OF THE OPTION
The Option granted hereunder may be exercised at any time and
from time to time during the period commencing from the date the Option was
granted until the date the Option expires provided and to the extent that this
Option has vested and is exercisable as provided hereinafter and in the Plan.
To the extent Option Shares do not vest prior to the termination of the Option
for any reason, such Option Shares may not be acquired hereunder.
SECTION III
EARLY TERMINATION OF OPTION
The provisions of Sections I and II notwithstanding, this Option
may not be exercised in whole or in part upon the earliest to occur (i) upon
termination of employment by the Corporation (or any Subsidiary or Parent) for
cause (as defined in the Employment Agreement dated September 18, 1997), (ii)
more than three (3) months with respect to incentive stock options and twelve
(12) months with respect to non-qualified stock options following the date of
the termination of employment of the Optionee by the Corporation (or any
Subsidiary or Parent) for any reason, or by Optionee for any reason, other than
termination for cause, termination upon or during Total Disability (as defined
in the Employment Agreement) or termination upon the death of the Optionee
while an employee of the Corporation (or any Subsidiary or Parent), and (iii)
more than twelve (12) months following the date of termination of employment of
the Optionee, in the event the termination of employment is due to death or
Optionee's death occurs during said three month period set forth in
subparagraph (ii) or to the Total Disability of the Optionee.
SECTION IV
VESTING OF OPTION
(a) The Option hereby granted shall vest only during the
Optionee's continuous employment with the Corporation and/or any Parent and/or
Subsidiary, and shall be exercisable only upon and after such vesting and prior
to the termination of the Option, by Optionee in accordance with and in such
number of shares of Common Stock determined as set forth in the following
schedule:
(i) 20% of the Option shares commencing on the first
anniversary of the grant of the Option;
(ii) additional 20% of the Option Shares commencing on the
second anniversary of the grant of the Option;
(iii) additional 20% of the Option Shares commencing on the
third anniversary of the grant of the Option;
2
<PAGE> 13
(iv) additional 20% of the Option Shares commencing on the
fourth anniversary of the grant of the Option; and
(v) additional 20% of the Option Shares commencing on the
fifth anniversary of the grant of the Option.
(b) Notwithstanding the foregoing provisions of this Section IV,
in the event of a Change in Control (as hereinafter defined) during the
Optionee's employment with the Corporation and/or any Parent and/or any
Subsidiary, the Option hereby granted shall vest in full immediately prior to
such Change in Control with respect to all remaining outstanding Option Shares
that have not theretofore vested.
The term "Change in Control" shall mean:
(i) The acquisition (other than from the
Corporation, its Parent or its Subsidiaries) by any person,
entity or "group" within the meaning of Sections 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934 ("34 Act")
(excluding, for this purpose, the Corporation, its Parent or its
Subsidiaries, or any employee benefit plan of the Corporation,
its Parent or its Subsidiaries) of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the 34 Act) of more
than 50% of either the then outstanding shares (i) of Common
Stock of the Corporation or of the combined voting power of the
Corporation's then outstanding voting securities entitled to
vote generally in the election of directors, or (ii) of the
combined voting power of the outstanding voting securities of
Fidelity National Bank ("FNB") entitled to vote generally for
the election of directors; or
(ii) Individuals who, as of the date hereof,
constitute the board of directors of the Corporation ("Incumbent
Board") cease for any reason to constitute at least a majority
of the board of directors, provided that any individual becoming
a director subsequent to the date hereof whose election, or
nomination for election by the Corporation's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though
such individual is a member of the Incumbent Board; or
(iii) Approval by the shareholders of the
Corporation of a merger, consolidation or other reorganization
in each case, with respect to which persons who were the
shareholders of the Corporation and optionees immediately prior
to such merger, consolidation or other reorganization,
immediately thereafter, will not own more than 50% of the
combined voting power entitled to vote generally in the election
of directors of the merged, consolidated or reorganized
corporation's then outstanding voting securities, or of the sale
of all or substantially all of the assets of the Corporation or
the sale of all or substantially all of the voting securities of
FNB.
(c) In addition, the Option hereby granted shall vest in full
upon the termination of employment of the Optionee (i) by the Corporation or
FNB without cause at any time during the
3
<PAGE> 14
term of the Option or (ii) by the Optionee or FNB or the Corporation upon the
expiration of the initial three (3) year term of employment of Optionee by the
Corporation or FNB.
SECTION V
TRANSFER
The Option may not be transferred except by will or the laws of
descent and distribution and may be exercised only by Optionee during his
lifetime. More particularly, but without limiting the generality of the
foregoing, the Option may not be assigned, transferred (except as permitted in
Section VI), pledged or hypothecated in any way (whether by operation of law or
otherwise). The Option shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation, or other
disposition of the Option contrary to the provisions hereof, and the levy of
any attachment or similar process on the Option, shall be null and void and
without effect.
SECTION VI
DEATH OF OPTIONEE
In the event of Optionee's death, the Option may be exercised by
the legal representatives of the estate of Optionee or by the person or persons
to whom Optionee's rights under the Option shall have passed by will or by the
laws of descent and distribution.
SECTION VII
TOTAL OR PARTIAL EXERCISE
The portion of the Option which has vested and is exercisable
may be exercised either at one time as to the total number of such Option
Shares or may be exercised from time to time as to any portion thereof prior to
the termination of the Option.
SECTION VIII
NOTICE OF EXERCISE; ISSUANCE OF CERTIFICATES
Subject to the terms and conditions of the Option, the vested
portions of the Option may be exercised by written notice to the Corporation,
at its principal office at Fidelity National Corporation, 3490 Piedmont Road,
Suite 1550, Atlanta, Georgia 30305, or such other place designated in writing
by the Corporation from time to time to the Optionee. Such notice shall state
the election to exercise the Option and the number of shares in respect of
which it is being exercised, and shall be signed by the person so exercising
the Option. Such notice shall be accompanied by (i) a certified or bank
cashier's check payable to the order of the Corporation for or (ii) shares of
Common Stock assigned to the Corporation having a fair market value equal to or
(iii) such or other consideration approved by the Board of Directors for or
(iv) a combination of
4
<PAGE> 15
the foregoing for; the full purchase price of the Shares in respect of which
the Option is being exercised. The fair market value of the shares of Common
Stock shall be the average of the high and low selling prices at which the
shares of Common Stock traded on the Nasdaq Market (or other applicable market)
on the date the Option was exercised. The certificate or certificates
representing the Shares shall be issued and delivered by the Corporation as
soon as practicable after receipt of the notice and payment. Such certificate
or certificates shall be registered in the name of the person so exercising the
Option and, if the Option shall be exercised by Optionee and the Optionee shall
so request in the notice exercising the Option, such certificate or
certificates shall be registered in the name of Optionee and another person
jointly, with right of survivorship, and shall be delivered to or on the
written order of the person or persons exercising the Option. In the event the
Option is being exercised pursuant to Section VI hereof, by any person or
persons other than Optionee, the notice shall be accompanied by appropriate
proof of the right of such person or persons to exercise the Option.
SECTION IX
ISSUANCE AND TRANSFER OF SHARES
Subject to the provisions of Paragraph VI of the Plan, in the
event the issuance or transfer of the shares covered by the Option may, in the
opinion of counsel to the Corporation, conflict or be inconsistent with any
applicable law or regulation of any governmental agency having jurisdiction,
the Corporation reserves the right to refuse or to delay the issuance or
transfer of such shares.
SECTION X
ADJUSTMENT ON RECAPITALIZATION
In the event of a merger, consolidation, reorganization,
recapitalization, reclassification of stock, stock dividend, split-up or other
change in the corporate structure or capitalization of the Corporation
affecting the Corporation's common stock as presently constitute, the Option
shall be adjusted, modified or terminated as provided in or pursuant to the
provisions of Paragraph V of the Plan.
SECTION XI
GOVERNING LAW
This option grant shall be governed by the laws of the State of Georgia.
5
<PAGE> 16
FIDELITY NATIONAL CORPORATION
By: /s/ R. Phillip Shinall, III
-----------------------------
Name: R. Phillip Shinall, III
Title: Director
OPTIONEE ACKNOWLEDGMENT
I have read the above Stock Option Agreement and the Fidelity
National Corporation 1997 Stock Option Plan ("Plan") and hereby accept the
above Option to purchase shares of the Common Stock of the Corporation in
accordance with and subject to the terms and conditions of the Stock Option
Agreement and the Plan with which I am familiar and I agree to be bound
thereby. I further understand that (i) any rule, regulation and determination,
including interpretation by the Board of Directors or Committee regarding the
Plan, the Options granted thereunder and the exercise thereof shall be final
and conclusive for all purposes and on all persons including the Corporation
and myself; and (ii) the grant of this Option shall not affect in any way the
Corporation and/or its Subsidiary and/or Parent's right to terminate my
employment or constitute an agreement by me to remain in the employ of the
Corporation or the Subsidiary or its Parent for any specified term.
/s/ James B. Miller, Jr.
--------------------------------
OPTIONEE - James B. Miller, Jr.
Acceptance Date: As of
September 18, 1997
6
<PAGE> 17
Optionee: James B. Miller, Jr.
--------------------------
Option Shares: 40,400
--------------------------
(number of shares of
Common Stock)
Purchase Price
per share: $9.90
--------------------
Date of Grant: September 18, 1997
-------------------------
First Vesting
Date: September 18, 1998
-------------------------
Expiration Date:September 18, 2002
-------------------------
FIDELITY NATIONAL CORPORATION
STOCK OPTION AGREEMENT
("Option Agreement")
SECTION I
GRANT
Fidelity National Corporation ("Corporation") hereby grants to
the optionee set forth above ("Optionee") an incentive stock option ("Option")
within the meaning of Section 422 of the Internal Revenue Code to purchase the
number of shares of common stock, no par value, of the Corporation set forth
above (collectively "Option Shares") on the terms and conditions herein set
forth and the provisions of the Fidelity National Corporation 1997 Stock Option
Plan, as amended from time to time, ("Plan"). The purchase price of each such
share shall be the Purchase Price set forth above. The Option shall expire on
the Expiration Date set forth above, unless sooner terminated as provided in
Section III or Section X of this Option Agreement or Paragraph V of the Plan.
Each term used herein shall have the same meaning as provided in the Plan
unless herein otherwise provided. To the extent the Option does not qualify as
an incentive stock option it shall be treated as options which are not
incentive stock options.
The Option is granted pursuant to the Plan.
<PAGE> 18
SECTION II
EXERCISE OF THE OPTION
The Option granted hereunder may be exercised at any time and
from time to time during the period commencing from the date the Option was
granted until the date the Option expires provided and to the extent that this
Option has vested and is exercisable as provided hereinafter and in the Plan.
To the extent Option Shares do not vest prior to the termination of the Option
for any reason, such Option Shares may not be acquired hereunder.
SECTION III
EARLY TERMINATION OF OPTION
The provisions of Sections I and II notwithstanding, this Option
may not be exercised in whole or in part upon the earliest to occur (i) upon
termination of employment by the Corporation (or any Subsidiary or Parent) for
cause (as defined in the Employment Agreement dated September 18, 1997), (ii)
more than three (3) months with respect to incentive stock options and twelve
(12) months with respect to non-qualified stock options following the date of
the termination of employment of the Optionee by the Corporation (or any
Subsidiary or Parent) for any reason, or by Optionee for any reason, other than
termination for cause, termination upon or during Total Disability (as defined
in the Employment Agreement) or termination upon the death of the Optionee
while an employee of the Corporation (or any Subsidiary or Parent), and (iii)
more than twelve (12) months following the date of termination of employment of
the Optionee, in the event the termination of employment is due to death or
Optionee's death occurs during said three month period set forth in
subparagraph (ii) or to the Total Disability of the Optionee.
SECTION IV
VESTING OF OPTION
(a) The Option hereby granted shall vest only during the
Optionee's continuous employment with the Corporation and/or any Parent and/or
Subsidiary, and shall be exercisable only upon and after such vesting and prior
to the termination of the Option, by Optionee in accordance with and in such
number of shares of Common Stock determined as set forth in the following
schedule:
(i) 25% of the Option shares commencing on the first
anniversary of the grant of the Option;
(ii) additional 25% of the Option Shares commencing on the
second anniversary of the grant of the Option;
2
<PAGE> 19
(iii) additional 25% of the Option Shares commencing on the
third anniversary of the grant of the Option; and
(iv) additional 25% of the Option Shares commencing on the
fourth anniversary of the grant of the Option.
(b) Notwithstanding the foregoing provisions of this Section IV,
in the event of a Change in Control (as hereinafter defined) during the
Optionee's employment with the Corporation and/or any Parent and/or any
Subsidiary, the Option hereby granted shall vest in full immediately prior to
such Change in Control with respect to all remaining outstanding Option Shares
that have not theretofore vested.
The term "Change in Control" shall mean:
(i) The acquisition (other than from the
Corporation, its Parent or its Subsidiaries) by any person,
entity or "group" within the meaning of Sections 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934 ("34 Act")
(excluding, for this purpose, the Corporation, its Parent or its
Subsidiaries, or any employee benefit plan of the Corporation,
its Parent or its Subsidiaries) of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the 34 Act) of more
than 50% of either the then outstanding shares (i) of Common
Stock of the Corporation or of the combined voting power of the
Corporation's then outstanding voting securities entitled to
vote generally in the election of directors, or (ii) of the
combined voting power of the outstanding voting securities of
Fidelity National Bank ("FNB") entitled to vote generally for
the election of directors; or
(ii) Individuals who, as of the date hereof,
constitute the board of directors of the Corporation ("Incumbent
Board") cease for any reason to constitute at least a majority
of the board of directors, provided that any individual becoming
a director subsequent to the date hereof whose election, or
nomination for election by the Corporation's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though
such individual is a member of the Incumbent Board; or
(iii) Approval by the shareholders of the
Corporation of a merger, consolidation or other reorganization
in each case, with respect to which persons who were the
shareholders of the Corporation and optionees immediately prior
to such merger, consolidation or other reorganization,
immediately thereafter, will not own more than 50% of the
combined voting power entitled to vote generally in the election
of directors of the merged, consolidated or reorganized
corporation's then outstanding voting securities, or of the sale
of all or substantially all of the assets of the Corporation or
the sale of all or substantially all of the voting securities of
FNB.
(c) In addition, the Option hereby granted shall vest in full
upon the termination of employment of the Optionee (i) by the Corporation or
FNB without cause at any time during the
3
<PAGE> 20
term of the Option or (ii) by the Optionee or FNB or the Corporation upon the
expiration of the initial three (3) year term of employment of Optionee by the
Corporation or FNB.
SECTION V
TRANSFER
The Option may not be transferred except by will or the laws of
descent and distribution and may be exercised only by Optionee during his
lifetime. More particularly, but without limiting the generality of the
foregoing, the Option may not be assigned, transferred (except as permitted in
Section VI), pledged or hypothecated in any way (whether by operation of law or
otherwise). The Option shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation, or other
disposition of the Option contrary to the provisions hereof, and the levy of
any attachment or similar process on the Option, shall be null and void and
without effect.
SECTION VI
DEATH OF OPTIONEE
In the event of Optionee's death, the Option may be exercised by
the legal representatives of the estate of Optionee or by the person or persons
to whom Optionee's rights under the Option shall have passed by will or by the
laws of descent and distribution.
SECTION VII
TOTAL OR PARTIAL EXERCISE
The portion of the Option which has vested and is exercisable
may be exercised either at one time as to the total number of such Option
Shares or may be exercised from time to time as to any portion thereof prior to
the termination of the Option.
SECTION VIII
NOTICE OF EXERCISE; ISSUANCE OF CERTIFICATES
Subject to the terms and conditions of the Option, the vested
portions of the Option may be exercised by written notice to the Corporation,
at its principal office at Fidelity National Corporation, 3490 Piedmont Road,
Suite 1550, Atlanta, Georgia 30305, or such other place designated in writing
by the Corporation from time to time to the Optionee. Such notice shall state
the election to exercise the Option and the number of shares in respect of
which it is being exercised, and shall be signed by the person so exercising
the Option. Such notice shall be accompanied by (i) a certified or bank
cashier's check payable to the order of the Corporation for or (ii) shares of
Common Stock assigned to the Corporation having a fair market value equal to or
(iii) such or other consideration approved by the Board of Directors for or
(iv) a combination of
4
<PAGE> 21
the foregoing for; the full purchase price of the Shares in respect of which
the Option is being exercised. The fair market value of the shares of Common
Stock shall be the average of the high and low selling prices at which the
shares of Common Stock traded on the Nasdaq Market (or other applicable market)
on the date the Option was exercised. The certificate or certificates
representing the Shares shall be issued and delivered by the Corporation as
soon as practicable after receipt of the notice and payment. Such certificate
or certificates shall be registered in the name of the person so exercising the
Option and, if the Option shall be exercised by Optionee and the Optionee shall
so request in the notice exercising the Option, such certificate or
certificates shall be registered in the name of Optionee and another person
jointly, with right of survivorship, and shall be delivered to or on the
written order of the person or persons exercising the Option. In the event the
Option is being exercised pursuant to Section VI hereof, by any person or
persons other than Optionee, the notice shall be accompanied by appropriate
proof of the right of such person or persons to exercise the Option.
SECTION IX
ISSUANCE AND TRANSFER OF SHARES
Subject to the provisions of Paragraph VI of the Plan, in the
event the issuance or transfer of the shares covered by the Option may, in the
opinion of counsel to the Corporation, conflict or be inconsistent with any
applicable law or regulation of any governmental agency having jurisdiction,
the Corporation reserves the right to refuse or to delay the issuance or
transfer of such shares.
SECTION X
ADJUSTMENT ON RECAPITALIZATION
In the event of a merger, consolidation, reorganization,
recapitalization, reclassification of stock, stock dividend, split-up or other
change in the corporate structure or capitalization of the Corporation
affecting the Corporation's common stock as presently constitute, the Option
shall be adjusted, modified or terminated as provided in or pursuant to the
provisions of Paragraph V of the Plan.
SECTION XI
GOVERNING LAW
This option grant shall be governed by the laws of the State of Georgia.
5
<PAGE> 22
FIDELITY NATIONAL CORPORATION
By: /s/ R. Phillip Shinall, III
---------------------------
Name: R. Phillip Shinall, III
Title: Director
OPTIONEE ACKNOWLEDGMENT
I have read the above Stock Option Agreement and the Fidelity
National Corporation 1997 Stock Option Plan ("Plan") and hereby accept the
above Option to purchase shares of the Common Stock of the Corporation in
accordance with and subject to the terms and conditions of the Stock Option
Agreement and the Plan with which I am familiar and I agree to be bound
thereby. I further understand that (i) any rule, regulation and determination,
including interpretation by the Board of Directors or Committee regarding the
Plan, the Options granted thereunder and the exercise thereof shall be final
and conclusive for all purposes and on all persons including the Corporation
and myself; and (ii) the grant of this Option shall not affect in any way the
Corporation and/or its Subsidiary and/or Parent's right to terminate my
employment or constitute an agreement by me to remain in the employ of the
Corporation or the Subsidiary or its Parent for any specified term.
/s/ James B. Miller, Jr.
-------------------------------
OPTIONEE - James B. Miller, Jr.
Acceptance Date: As of
September 18, 1997
6
<PAGE> 1
EXHIBIT 23(B)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Amendment No. 1 to Form S-2 No. 333-36377) and related
Prospectus of Fidelity National Corporation and subsidiaries for the
registration of 3,000,000 shares of its common stock and to the inclusion and
incorporation by reference therein of our report dated April 3, 1997, with
respect to the consolidated financial statements of Fidelity National
Corporation and subsidiaries incorporated by reference in its Annual Report
(Form 10-K) for the year ended December 31, 1996, filed with the Securities and
Exchange Commission.
ERNST & YOUNG
Atlanta, Georgia
November 5, 1997
<PAGE> 1
EXHIBIT 23(C)
ACCOUNTANTS' CONSENT
The Board of Directors
Fidelity National Corporation
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
November 5, 1997
<PAGE> 1
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute
and appoint James B. Miller, Jr., Martha C. Fleming and Ugo F. Ippolito, and
each of them, the undersigned's true and lawful attorneys-in-fact, with power
of substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of the Company (i) to a Registration Statement of the Company on Form S-2 or
other applicable form, and all amendments, including post-effective amendments
("Amendments"), thereto, to be filed by the Company with the Securities and
Exchange Commission, Washington, D.C. ("SEC"), in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"),
of not more than 3,450,000 shares of Common Stock, no par value, of the
Company, and (ii) to a Registration Statement of the Company on Form S-2 or
other applicable form, and all Amendments to be filed by the Company with the
SEC in connection with the registration under the Securities Act of 1933, as
amended ("Securities Act"), of additional shares of Common Stock pursuant to
Rule 462 of the Securities Act proposed to be issued or sold by the Company;
and to file the same, with all exhibits thereto and other supporting documents,
with the Commission, granting unto said attorneys-in-fact, and each of them,
full power and authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein expressly
granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of October, 1997.
/s/ Larry D. Peterson
--------------------------
Name: Larry D. Peterson
<PAGE> 2
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute
and appoint James B. Miller, Jr., Martha C. Fleming and Ugo F. Ippolito, and
each of them, the undersigned's true and lawful attorneys-in-fact, with power
of substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of the Company (i) to a Registration Statement of the Company on Form S-2 or
other applicable form, and all amendments, including post-effective amendments
("Amendments"), thereto, to be filed by the Company with the Securities and
Exchange Commission, Washington, D.C. ("SEC"), in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"),
of not more than 3,450,000 shares of Common Stock, no par value, of the
Company, and (ii) to a Registration Statement of the Company on Form S-2 or
other applicable form, and all Amendments to be filed by the Company with the
SEC in connection with the registration under the Securities Act of 1933, as
amended ("Securities Act"), of additional shares of Common Stock pursuant to
Rule 462 of the Securities Act proposed to be issued or sold by the Company;
and to file the same, with all exhibits thereto and other supporting documents,
with the Commission, granting unto said attorneys-in-fact, and each of them,
full power and authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein expressly
granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of October, 1997.
/s/ Gordon M. Sherman
--------------------------
Name: Gordon M. Sherman
<PAGE> 3
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute
and appoint James B. Miller, Jr. Martha C. Fleming and Ugo F. Ippolito, and each
of them, the undersigned's true and lawful attorneys-in-fact, with power of
substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of the Company (i) to a Registration Statement of the Company on Form S-2 or
other applicable form, and all amendments, including post-effective amendments
("Amendments"), thereto, to be filed by the Company with the Securities and
Exchange Commission, Washington, D.C. ("SEC"), in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"),
of not more than 3,450,000 shares of Common Stock, no par value, of the
Company, and (ii) to a Registration Statement of the Company on Form S-2 or
other applicable form, and all Amendments to be filed by the Company with the
SEC in connection with the registration under the Securities Act of 1933, as
amended ("Securities Act"), of additional shares of Common Stock pursuant to
Rule 462 of the Securities Act proposed to be issued or sold by the Company;
and to file the same, with all exhibits thereto and other supporting documents,
with the Commission, granting unto said attorneys-in-fact, and each of them,
full power and authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein expressly
granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of October, 1997.
/s/ David R. Bockel
--------------------------
Name: David R. Bockel
