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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-22374
FIDELITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-14166811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Clairemont Avenue, Decatur, Georgia 30030
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 240-1504
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, without stated par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10K. X .
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Aggregate market value of the voting stock held by non-affiliates (which for
purposes hereof are all holders other than executive officers and directors) of
the Registrant as of April 7, 1997: $13,120,898 (based on 1,543,635 shares
outstanding at $8.50 per share).
At April 7, 1997, there were 4,655,656 shares of Common Stock outstanding,
without stated par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1996 are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Fidelity National Corporation (the "Registrant") was incorporated
under the laws of the State of Georgia in 1979 and acquired 100% of the common
stock of Fidelity National Bank ("FNB" or "Bank") in a stock-for-stock
exchange. The Registrant is a registered bank holding company. All of the
Registrant's activities are currently conducted by its wholly-owned
subsidiaries: FNB, which was organized as a national banking corporation in
1973, and its wholly-owned subsidiary Fidelity National Mortgage Corp.
("FNMC"), organized as a Georgia corporation in 1979 to provide full-service
mortgage banking services; and Fidelity National Capital Investors, Inc.
("FNCI"), organized as a Georgia corporation in May 1992 to provide securities
brokerage services.
In September 1993, the Registrant filed a Form 10 in order to cause
its Common Stock to be traded on the NASDAQ Stock Market under the symbol
"LION."
The term "Registrant" as used herein includes Fidelity National
Corporation and its subsidiaries unless the context otherwise requires.
RECENT DEVELOPMENTS
The Registrant'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 major factor
contributing to the loss for 1996 was higher loan loss provisions on credit
cards and accrued interest and rate-related fee income reversals resulting from
higher levels of charge-offs in the Registrant's credit card loan portfolio.
For 1996, the provision for loan losses was $25.1 million compared to $8.1
million for the same period in 1995, an increase of 210.6%. Additional factors
adversely affecting 1996 earnings have been additional expenses attributable to
recent corporate expansion.
As a result of these losses, the Registrant and the Bank were not in
compliance with certain minimum capital requirements prescribed by the Federal
Reserve Bank ("FRB") and by the Office of the Comptroller of the Currency
("OCC") as of December 31, 1996.
On November 14, 1996, the Bank entered into an agreement with the OCC
("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 OCC Agreement permits the Bank to
declare dividends on preferred stock held by the Registrant only when the Bank
is "adequately capitalized." The Bank currently does not meet the capital
ratios of an "adequately capitalized" bank as established by the OCC.
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The Board of Directors of the Bank has submitted to the OCC a
three-year capital program which was approved. 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 Registrant only when the Bank is
"adequately capitalized." The Bank may declare dividends on its common stock
held by the Registrant and pay management fees to the Registrant 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 has revised its strategic plan in
light of the revised levels of capital required and its growth plans. The
strategic plan established 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 was submitted to the OCC for review.
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; however, it is not unusual for the OCC to grant
extensions of time in situations in which the financial institution has
evidenced good faith progress towards meeting the terms of the written
agreement absent unusual circumstances. Failure to comply with the terms of
the OCC Agreement may result in civil fines and other administrative actions.
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,
the Bank was deemed to be "undercapitalized" and is subject to "prompt
corrective action" pursuant to 12 U.S.C. Sec. 1831o. As a result, the Bank is
subject to restrictions on its ability to pay dividends and management fees and
to restrictions on asset growth and expansion. The OCC may also impose other
supervisory action. The Bank is also required to file a capital restoration
plan with the OCC before May 19, 1997 which is subject to acceptance by the
OCC. Failure to submit an acceptable capital restoration plan may result in the
imposition of various supervisory actions. There can be no assurances that the
capital restoration plan submitted to the OCC will be approved as submitted or
that the Bank will be able to achieve the objectives of the plan as submitted
or as revised from time to time. See "Capital."
The Board of Directors of the Registrant adopted resolutions on
February 13, 1997, as requested by the Federal Reserve Bank of Atlanta ("FRB
Agreement") that prohibit the Registrant from paying dividends or incurring
debt without prior approval of the FRB.
The agreements and regulatory capital requirements are described in
Note 2, Regulatory Matters, of the Registrant's "Notes to Consolidated
Financial Statements" and in the "Consolidated Annual Review - Shareholders'
Equity, Regulatory Matters" set forth in the Registrant's 1996 Annual Report to
Shareholders which are incorporated herein by reference.
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Capital of the Registrant and the Bank will increase only through the
retention of earnings and sales of equity securities and subordinated debt. To
meet the capital requirements in the OCC Agreement and regulations of the FRB,
management has estimated that an additional $14 million of capital will be
needed to reach the April 30, 1997 requirements and an additional $5 million to
reach the November 30, 1997 requirements. The Registrant is actively pursuing
the private placement and public offering of equity securities to meet the
capital requirements and to provide additional capital. There can be no
assurances that the necessary capital can be acquired in the amounts required
on a timely basis or that the time restrictions by which the capital ratios are
to be achieved will be modified as a result of the Registrant's initiatives as
of such dates.
If the Registrant and the Bank do not meet the capital requirements
set forth in the agreements, regulatory sanctions may result. Management's
plans concerning these matters and a description of the Registrant's and the
Bank's capital plan which was submitted to the FRB and the OCC, including plans
to raise additional capital, are also discussed in Note 2.
PRODUCT AND SERVICES
The Registrant provides a wide range of personal and corporate
services, including credit cards, trust and investment management, residential
mortgage banking, and securities brokerage. FNB offers such customary banking
services as consumer and commercial checking accounts, NOW accounts, savings
accounts, time deposits and lines of credit. FNB finances commercial and
consumer transactions, makes secured and unsecured loans and provides a variety
of other banking services. FNB's primary lending activities are credit card
loans, commercial loans to small and medium- sized businesses, and indirect
lending through its automobile sales finance activities. The Registrant also
makes secured loans to home builders and originates residential mortgages in
the Atlanta, Georgia, and Jacksonville, Florida metropolitan areas. The
Registrant also makes residential mortgages in Atlanta, Georgia and
Jacksonville and Tampa, Florida.
MARKETS OF FNB
FNB conducts banking activities primarily through 16 branches in
Fulton, DeKalb, Cobb and Gwinnett counties, Georgia. 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 financing and residential
construction lending from its Jacksonville, Florida office in addition to its
offices in Georgia. Customers of FNB's other services are located almost
exclusively in Georgia.
DEPOSITS OF FNB
FNB offers a full range of depository accounts and services both to
individuals and businesses. At December 31, 1996, the Registrant's deposit
base, totaling approximately $545 million, consisted of approximately $74
million in noninterest-bearing demand deposits (13.6% of total deposits),
approximately $78 million in interest-bearing demand deposits and money market
accounts (14.4%
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of total deposits), approximately $39 million in savings deposits (7.1% of
total deposits), approximately $267 million in time deposits in amounts less
than $100,000 (49.0% of total deposits), and approximately $87 million in time
deposits of $100,000 or more (15.9% of total deposits). As of December 31,
1996, none of these deposits were brokered deposits.
LOANS BY FNB
The Registrant makes loans to individuals, partnerships and
corporations. Secured loans include first and second real estate mortgage
loans. See "Mortgage Banking" below for a description of the Registrant's
residential mortgage banking subsidiary. 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.
At December 31, 1996, consumer (including installment and credit card
loans), real estate (including residential mortgage, construction and
commercial loans secured by real estate), and commercial loans represented
approximately 60.4%, 30.2% and 9.4% respectively, of the Registrant's total
loan portfolio of $467 million.
FNB currently offers Visa, MasterCard, Visa Gold, Consumer Card 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. At December 31, 1996, credit card
loans were approximately $144 million, 30.8% of FNB's total loan portfolio.
The credit card portfolio was built substantially through affinity programs.
The indirect automobile financing operation of FNB, which began in
January 1993, approves and acquires sales finance contracts secured by new and
used vehicles purchased by consumers from vehicle dealers, primarily in the
Atlanta, Georgia, and Jacksonville and Tampa, Florida metropolitan areas. 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 term 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. At December 31, 1996, the
aggregate amount of indirect automobile loans outstanding was $139 million,
29.5% of FNB's total loan portfolio. This included, at December 31, 1996,
approximately $25 million of consumer installment contracts classified as loans
held for sale.
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, is established 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
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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. At December 31, 1996, the balance in the holdback
account was $261,955. The Registrant's potential charge-offs in excess of the
holdback are provided by the allowance for loan losses. Net charge-offs for
the years ended December 31, 1996 and 1995 on indirect automobile loans were
$1.6 million and $290,000, respectively.
Based on a periodic review of the allocated portion of the allowance
for loan losses, dealer holdback accounts and the stability of the dealers,
management believes the Registrant has adequately provided for potential risk
exposures in this area.
LENDING POLICY OF FNB
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. 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 usually
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. 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 secure 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.
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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's guidance lines, which are approved
by FNB's Loan Committee. Specific maximum loan commitment and numbers of
unsold houses allowed are clearly identified for each of the approximately 75
builder's 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 speculative starts or for pre-sold residential property to
specific purchasers. At December 31, 1996, approximately $56 million (12.1% of
total loans) was outstanding on total residential construction loans, of which
approximately $12 million was for acquisition and development loans.
Acquisition and development loans have generally 18-month or shorter maturities
and are for the purpose of developing lots for a builder's own building program
usage or are often 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 restrictive than the OCC guidelines.
The OCC guidelines require maximum allowable loan-to-value ratios for various
types of real estate loans as set forth below:
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<TABLE>
<CAPTION>
Maximum Allowable
Loan-to-Value Ratio
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<S> <C>
LOAN CATEGORY
Land 65%
Land development 75
Construction:
Commercial, multi-family (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 for 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 are as follows:
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<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 Industry concentrations, difficulty in monitoring the
agricultural valuation of collateral (inventory, accounts receivable
and vehicles), borrower management expertise, increased
competition, and specialized or obsolete equipment as
collateral
Real Estate - Inadequate collateral and long-term financing agreements
construction
Real Estate - Changes in local economy and caps on variable rate loans
residential mortgage
</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. See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Provision for Loan
Losses." 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
deficiencies and corrective action to be taken. The credit administration
department attempts to review 30% to 45% of its 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 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.
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Policy exceptions are analyzed monthly. Delinquencies are monitored daily.
Accounts are charged off after 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
The asset/liability committee is composed of officers of the
Registrant and FNB who are charged with managing the assets and liabilities of
the Registrant 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 Registrant'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 needs, asset quality guidelines, 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.
MORTGAGE BANKING
FNMC is engaged in the residential mortgage banking business, focusing
on one-to-four family properties. FNMC offers FHA, VA, conventional, and
nonconforming loans (those with balances over $214,600). In addition, FNMC
purchases loans from independent mortgage companies located primarily in the
southeast. FNMC operates from its principal office in Atlanta, Georgia, and
also has loan origination offices in Jacksonville and Tampa, Florida. FNMC is
an approved originator and servicer for Freddie Mac and Fannie Mae, and is an
approved originator for HUD loans.
Mortgage loans held for sale fluctuate due to economic conditions,
interest rates, the level of real estate activity and seasonal factors. FNMC
usually 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,
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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 1995, the Registrant closed $295 million and $122
million of residential mortgage loans, respectively. All servicing rights were
initially retained, except for government and nonconforming loans. At December
31, 1996, FNMC serviced loans totaling $601 million of which $7 million were
held by FNB and $584 million were serviced for others. See "Regulation of
Mortgage Banking" for an overview of federal and state regulation of
residential mortgage banking.
BROKERAGE SERVICES
FNCI commenced business as a full service broker in late 1992, after
registration as a broker-dealer with the Securities and Exchange Commission
("Commission") in October 1992 and with the State of Georgia on May 15, 1992.
FNCI registered as an investment advisor with the Commission in October 1992.
The Registrant received approval from the Federal Reserve to operate FNCI as a
fully disclosed introducing broker in October 1992. FNCI also became a member
of the National Association of Securities Dealers, Inc. ("NASD") in October
1992. FNCI operates from its headquarters in Atlanta, and from three other
offices in FNB's banking facilities in the Atlanta metropolitan area.
EMPLOYEES
As of December 31, 1996, the Registrant has 436 full-time equivalent
employees. Neither the Registrant nor any of its subsidiaries is a party to
any collective bargaining agreement. The Registrant believes that its employee
relations are good.
COMPETITION
The banking business is highly competitive. The Registrant's primary
market area, other than for credit cards, residential mortgages and 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 Registrant's primary trade area, many
of which have greater financial resources than FNB. The Registrant 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 credit card, indirect automobile financing and mortgage banking
industries are also highly competitive. The Registrant 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 Registrant
competes with speciality consumer finance companies in addition to banks. FNMC
competes with
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independent mortgage banking companies, state and national banks and their
subsidiaries as well as thrift institutions and insurance companies.
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 business and earnings of the
Registrant or FNB.
SUPERVISION AND REGULATION
The Registrant 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 Registrant 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 Registrant 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.
The Registrant 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 Registrant, FNB and the Registrant'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
Registrant.
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The Registrant, FNMC and FNCI are "affiliates" of FNB under the
Federal Reserve Act, which imposes certain restrictions on (i) loans by FNB to
the Registrant, (ii) investments in the stock or securities of the Registrant
by FNB, (iii) FNB's taking the stock or securities of an affiliate as
collateral for loans by it to a borrower, and (iv) the purchase of assets from
the Registrant 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.
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.
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.
12
<PAGE> 14
CAPITAL
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 another depository institution
when a bank's capital leverage ratio reaches two percent. 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: (1) a "well capitalized" institution has a total
risk-based capital ratio of at least 10%, a Tier I risk-based ratio of at least
6% and a leverage ratio of at least 5%; (2) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier I risk-based
ratio of at least 4% and a leverage ratio of at least 3%; (3) an
"undercapitalized" institution has a total risk-based ratio of under 8%, a Tier
I risk-based ratio of under 4% or a leverage ratio of under 3%; (4) a
"significantly undercapitalized" institution has a total risk-based ratio of
under 6%, a Tier I risk-based ratio of under 3% or a leverage ratio of under
3%; and (5) a "critically undercapitalized" institution has 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.
To assess bank and bank holding company capital adequacy, the Federal
Reserve and the OCC have implemented substantially identical risk-based rules.
These regulations establish required minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks. Banks
and bank holding companies are required to have (1) a minimum standard of total
capital (as defined) to risk-rated assets of 8%; (2) a minimum Tier I Capital
(as defined below) to risk-rated assets of 4%; and (3) a minimum shareholders'
equity to risk-weighted assets of 4%. In addition, the Federal Reserve has
established a minimum of 3%, and the OCC has established a minimum 4% leverage
ratio of Tier I Capital to total assets for the most highly-rated banks and
bank holding companies. "Tier I Capital" generally consists of common equity,
minority interests in equity accounts of consolidated subsidiaries and certain
perpetual preferred stock less certain intangibles. The Federal Reserve and/or
OCC may require a bank holding company or a bank, respectively, to maintain
ratios greater than 3% and 4%, if it is experiencing or anticipating
significant growth or is operating with less than well-diversified risks in the
opinion of the Federal Reserve and OCC. The Federal Reserve and the OCC use
the leverage ratio in tandem with the risk-based ratio to assess capital
adequacy of banks and bank holding companies.
At December 31, 1996, the Registrant and the Bank were not in
compliance with the minimum leverage ratios and capital requirements prescribed
by the Federal Reserve Bank (FRB) and the Office of the Comptroller of Currency
(OCC). In addition, the Registrant and the Bank entered
13
<PAGE> 15
into agreements with the FRB and OCC, respectively. The agreements and
regulatory capital requirements are described below. If the Registrant and the
Bank are unable to meet the minimum capital requirements of the agreements,
various regulatory sanctions may be imposed.
Although the Registrant incurred significant losses in 1996 which have
reduced capital, management's primary focus is to return the Registrant 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 selective areas.
The Registrant has neither the cash flow nor the financial flexibility
to enable it to act as a source of financing for the Bank. The Registrant is
pursuing options to raise additional capital which, if raised, will enable the
Registrant and the Bank to exceed all applicable minimum capital requirements.
REGULATORY AGREEMENTS
The FRB is the Registrant's principal regulator. 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 increasingly uncertain regulatory environment in
which banks now operate, the extent, if any, to which future OCC examinations
may ultimately result in adjustments to the consolidated financial statements
cannot presently be determined. See "Recent Developments."
The OCC has entered into an agreement with the Bank dated November 14,
1996 (the "OCC Agreement"). The OCC Agreement 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.
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,
the Bank was deemed to be "undercapitalized" and is subject to "prompt
corrective action" pursuant to 12 U.S.C. Sec. 1831o. As a result, the Bank is
subject to restrictions on its ability to pay dividends and management fees and
to restrictions on asset growth and expansion. The OCC may also impose other
supervisory actions. The Bank is also required to file a capital restoration
plan with the OCC before May 19, 1997 which is subject to acceptance by the
OCC. Failure to submit an acceptable capital restoration plan may result in the
imposition of various supervisory actions. There can be no assurances that the
capital restoration plan submitted to the OCC will be approved as submitted or
that the Bank will be able to achieve the objectives of the plan as submitted
or as revised from time to time. See "Capital."
14
<PAGE> 16
The Board of Directors of the Registrant adopted resolutions required
by the FRB ("FRB Agreement") on February 13, 1997. The FRB Agreement prohibits
the Registrant from paying dividends and incurring debt without the prior
approval of the FRB.
The OCC Agreement impairs the ability of the Bank to declare and pay
dividends to the Registrant. In addition the Bank currently intends to retain
all earnings to augment its capital. As dividends from the Bank are the
principal source of cash flow to the Registrant, and because the payment of
dividends by the Registrant is subject to prior approval of the FRB, it is
unlikely that the Registrant will declare and pay dividends until the required
capital ratios are achieved.
The OCC Agreement establishes higher capital requirements than those
applicable under the OCC regulation with respect to 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
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 Registrant as of
December 31, 1996:
15
<PAGE> 17
<TABLE>
<CAPTION>
Minimum Capital
Capital Ratios 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
Registrant, capital will increase only through the retention of earnings.
To meet the capital requirements in the OCC Agreement, management has
estimated that an additional $14 million of capital will be needed to reach the
April 30, 1997 requirement and an additional $5 million to reach the November
30, 1997 requirement. See Note 2, Regulatory Matters, of the Registrant's
"Notes to Consolidated Financial Statements" and the "Consolidated Annual
Review - Shareholders' Equity, Regulatory Agreements" set forth in the
Registrant's 1996 Annual Report to Shareholders which are incorporated herein
by reference.
REGULATION OF MORTGAGE BANKING
The mortgage banking industry is subject to the rules and regulations
of, and examinations by, the DBF, Fannie Mae, Freddie Mac, Government National
Mortgage Association, 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 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 Registrant 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
16
<PAGE> 18
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 also numerous rules and regulations imposed on mortgage loan
originators. These rules and regulations 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 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.
REGULATION OF 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 recordkeeping 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.
RECENT LEGISLATION
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
17
<PAGE> 19
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 minimum restrictions requiring that target banks
located within the state be in existence for a period of 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 multi- state 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 Registrant believes that this
legislation may result in increased takeover activity of Georgia financial
institutions by out-of-state financial institutions. However, the Registrant
does not presently anticipate that such legislation will have a material impact
on its operations or future plans.
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 Institution 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.
18
<PAGE> 20
ONE-TIME SAIF ASSESSMENT
In 1992 FNB acquired deposits from a savings and loan institution.
These deposits are subject to FDIC deposit insurance assessments for the SAIF.
On September 3, 1996, legislation authorizing the recapitalization of the SAIF
became effective. This legislation required the Registrant, and all other
depository institutions having SAIF insured deposits, to pay a one-time
assessment. FNB provided for this special assessment and recorded a pretax
charge of $250,000 in the third quarter of 1996.
FDIC INSURANCE ASSESSMENTS
FNB is subject to FDIC deposit insurance assessments for the 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 deposits and the FDIC lowered the assessment rate schedule for BIF
members to $0.04 per $100 of deposits for the healthiest banks to $.31 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.
DIVIDENDS
The Registrant is a legal entity separate and distinct from FNB and
the Registrant's other subsidiaries. Most of the revenues of the Registrant
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 Registrant to its shareholders.
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 the Registrant and FNB may primarily also
be affected or limited by other factors, such as the requirement to maintain
capital above regulatory guidelines. Based on such guidelines, at December 31,
1996, FNB was precluded from making dividend payments to the Registrant. The
Registrant is dependent on dividend income and management fees from FNB to
provide funds to service its long-term indebtedness.
Also see "Capital - Regulatory Agreements."
19
<PAGE> 21
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers are elected by the Board of Directors annually at
the Board meeting held directly after the Annual Meeting of Shareholders and
hold office until the next election, unless they sooner resign or are removed
from office.
The executive officers of the Registrant, and their ages, positions
with the Registrant and subsidiaries and terms of office as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Officer
Name Age Since Position
---- --- ----- --------
<S> <C> <C> <C>
James B. Miller, Jr. 56 1979 Chairman of the Board, President and Chief Executive
Officer of the Registrant since 1979; President of FNB
since 1977, Chairman of FNMC since 1979, and Chairman of
FNCI beginning in 1995.
Sharon R. Denney 58 1985 Executive Vice President of the Registrant and FNB since
1992. Joined FNB as Vice President in 1979.
M. Howard Griffith, Jr. 54 1994 Principal Accounting Officer of the Registrant and Chief
Financial Officer of FNB since February 1994. Vice
President and Treasurer of Synovus Financial Corp., a bank
holding company based in Columbus, Georgia, from December
1992 through October 1993. Chief Financial Officer of
Fidelity Savings Bank in Dalton, Georgia from June 1992
through December 1992. Held various accounting positions,
culminating in the position of Finance Executive Officer,
with NationsBank of Georgia, N.A., from January 1975 to
March 1992.
Curtis A. James 72 1982 Senior Vice President of the Registrant since 1992; Senior
Vice President of FNB since 1989.
</TABLE>
ITEM 2. PROPERTIES
The Registrant's principal offices are located at 160 Clairemont
Avenue, Decatur, Georgia, all of which space is leased and includes
approximately 35,000 square feet, including the full-service Decatur Banking
Center. FNCI's principal offices are located in leased space at 3490 Piedmont
Road, Atlanta, Georgia. FNMC's principal offices are located at 3 Corporate
Square, Atlanta, Georgia where FNB leases approximately 80,000 square feet.
20
<PAGE> 22
As of December 31, 1996, FNB had 15 other branch offices located in
Fulton County, DeKalb County, Cobb County, and Gwinnett County, Georgia, ten of
which are owned and five of which are leased. FNB and FNMC each lease loan
production offices in Jacksonville and Tampa, Florida.
ITEM 3. LEGAL PROCEEDINGS
The Registrant and its subsidiaries are parties to certain claims and
litigation occurring in the normal course of operations. In the opinion of
management, none of these matters, when resolved, will have a material adverse
effect on the financial position of the Registrant or future operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
STOCK. The Registrant's Common Stock is traded on the National
Association of Securities Automated Quotation System ("NASDAQ") under the
trading symbol LION. There were approximately 370 holders of record and
approximately 250 beneficial owners whose shares of Registrant's common stock
are held by brokers, dealers and their nominees as of February 28, 1997.
Market prices of the Registrant's Common Stock included on the inside
back cover of the 1996 Annual Report to Shareholders are incorporated herein by
reference.
On September 30, 1996 the Registrant sold an aggregate of 44,015
shares of common stock to directors and their affiliates in a private placement
at $12.625 per share paid in cash. This private placement of securities is
exempt from registration under Section 4(2) of the Securities Act of 1933.
DIVIDENDS. Cash dividends paid by the Registrant in 1996, 1995, and
1994 were $.15, $.1398, and $.1364 per share, respectively. Prior to 1991, no
cash dividends were paid. The Registrant has discontinued paying dividends
pursuant to the FRB Agreement. See "Capital - Regulatory Agreements."
Further, the terms of the Registrant's long-term bank debt subject it
to certain financial covenants with respect to its and FNB's capital and FNB's
net income. The terms of the long-term debt provide that the Registrant may
not pay cash dividends on its Common Stock if such dividend payment would cause
the Registrant not to comply with the financial covenants of the long-term
debt. In addition, the ability of FNB to pay dividends to the Registrant is
restricted by applicable regulatory requirements. See "Item 1. Business -
Supervision and Regulation" and "Capital - Regulatory Agreements."
21
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the five years ended December 31,
1996, is included in the Registrant's 1996 Annual Report to Shareholders and is
incorporated herein by reference.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operation appear under the caption "Consolidated Financial Review"
of the Registrant's 1996 Annual Report to Shareholders and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements of the
Registrant's 1996 Annual Report to Shareholders are incorporated herein by
reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information to be contained under the heading "Information About
Nominees for Director" in the definitive Proxy Statement to be sent to
shareholders in connection with the solicitation of proxies for the
Registrant's annual meeting of shareholders to be held on May 15, 1997, to be
filed with the Commission, is incorporated herein by reference. Pursuant to
instruction 3 to paragraph (b) of Item 401 of Regulation S-K, information
relating to the executive officers of the Registrant is included in Item I of
this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information to be contained under the headings "Executive
Compensation," "Compensation of Directors," "Compensation Committee Interlocks
and Insider Participation" in the definitive Proxy Statement to be sent to
shareholders in connection with the solicitation of proxies for the
Registrant's annual meeting of shareholders to be held on May 15, 1997, to be
filed with the Commission, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
22
<PAGE> 24
The information to be contained under the heading "Voting Securities
and Principal Holders" in the definitive Proxy Statement to be sent to
shareholders in connection with the solicitation of proxies for the
Registrant's annual meeting of shareholders to be held on May 15, 1997, to be
filed with the Commission, is incorporated herein by reference. For purposes
of determining the aggregate market value of the Registrant's voting stock held
by non- affiliates, shares held by all directors and executive officers of the
Registrant have been excluded. The exclusion of such shares is not intended
to, and shall not, constitute a determination as to which persons or entities
may be "affiliates" of the Registrant as defined by the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be contained under the heading "Compensation
Committee Interlocks and Insider Participation" in the definitive Proxy
Statement to be sent to shareholders in connection with the solicitation of
proxies for the Registrant's annual meeting of shareholders to be held on May
15, 1997, to be filed with the Commission, is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM S-K
(1) Financial Statements.
(a) The following consolidated financial statements and notes
thereto of the Registrant are incorporated by reference into
Item 8 of this Report:
Report of Independent Auditors
Consolidated Statements of Condition - December 31, 1996 and
December 31, 1995
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - December 31, 1996
(2) Financial Statement Schedules.
No financial statement schedules are required to be filed as part of
this Report on Form 10-K.
23
<PAGE> 25
(3) Exhibits.
(a) The following exhibits are required to be filed with this Report
by Item 601 of Regulation S-K. Items marked with an asterisk
relate to management contracts or compensatory plan or
arrangement.
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
3(a) and 4(a) Articles of Incorporation of the Registrant, as amended (included as
Exhibit 3(a) and 4(a) to the Registrant's Registration Statement on Form
10, Commission File No. 0-22374, filed with the Commission and
incorporated herein by reference).
3(b) Bylaws of the Registrant (included as Exhibit 3(b) and 4(b) to the
Registrant's Registration Statement on Form 10, Commission File 0-22374,
filed with the Commission and incorporated herein by reference).
3(c) Articles of Amendment to the Articles of Incorporation of Fidelity
Southern Corporation (included as Exhibit 3(c) to the Report filed on Form
8-K dated August 4, 1995 filed with the Commission and incorporated herein
by reference).
3(d) Articles of Amendment to the Articles of Incorporation of Fidelity
National Corporation increasing the number of authorized shares of capital
stock.
3(e) Articles of Amendment to the Articles of Incorporation of Fidelity
National Corporation authorizing the issuance of preferred stock.
4(d) Form of Trust Indenture (included herein by reference as Exhibit 4(a) of
Amendment 1 to Registrant's Registration Statement on From S-1, No. 33-
99174.
4(e) Form of Subordinated Note (included herein by reference to Exhibit 4(b) of
Amendment 1 to Registrant's Registration Statement on From S-1, No. 33-
99174.
10(a) 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).
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
10(b) Loan Agreement dated March 26, 1992, by and between Bank South, N.A. and
the Registrant related to $1,000,000 loan and related pledge agreement and
promissory note, and amendment to the Loan Agreement dated August 23, 1993
(included as Exhibit 10(b) to the Registrant's Registration Statement on
Form 10, Commission File No. 0-22376, filed with the Commission and
incorporated herein by reference).
10(c) Purchase and Assumption Agreement between Resolution Trust Corporation and
the Registrant dated March 27, 1992, related to Vinings branch of the
Federal Savings Bank, FS (included as Exhibit 10(c) to the Registrant's
Registration Statement on Form 10, Commission File No. 0-22376, filed with
the Commission and incorporated herein by reference).
10(d) Purchase and Assumption Agreement between Resolution Trust Corporation and
the Registrant dated March 27, 1992, related to East Cobb branch of the
United Federal Savings Bank (included as Exhibit 10(d) to the Registrant's
Registration Statement on Form 10, Commission File No. 0-22376, filed with
the Commission and incorporated herein by reference).
10(e) 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(f) Lease Agreement dated September 7, 1995, by and between Toco Hill, 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(g) *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>
25
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
10(h) Agreement dated November 14, 1996 between the OCC and the Registrant.
10(i) Resolution adopted by the Board of Directors of Registrant on February 13,
1997.
10(j) Letter from OCC to Bank dated April 3, 1997
13 1996 Annual Report to Shareholders. Certain portions of this Exhibit are
incorporated by reference into this Form 10-K; except as so incorporated
by reference, the 1996 Annual Report to Shareholders is not deemed to be
filed as part of this Report on Form 10-K.
21 Subsidiaries of the Registrant (included as Exhibit 22 to the Registrant's
Registration Statement on Form 10, Commission File No. 0-22376, filed with
the Commission and incorporated herein by reference).
23 Consent of Ernst & Young LLP Independent Auditors
24 Powers of Attorney
27 Financial Data Schedule (for SEC use only)
99 Report of KPMG Peat Marwick LLP
</TABLE>
- ----------------------------
* management contract or compensatory arrangement required to be filed as an
exhibit.
(b) No reports on Form 8-K were filed during the fiscal quarter ended
December 31, 1996.
(c) Exhibits. See Item 14 (3) above.
(d) Financial Statement Schedules. See Item 14 (2) above.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Decatur, State of Georgia, on the 15th day of April, 1997.
FIDELITY NATIONAL CORPORATION
By: /s/ James B. Miller, Jr.
-----------------------------------
James B. Miller, Jr.
Chairman of the Board
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ James B. Miller, Jr. Date: April 15, 1997
- --------------------------------------------
James B. Miller, Jr.
Chairman of the Board and Director
(Principal Executive Officer)
/s/ M. Howard Griffith, Jr. Date: April 15, 1997
- --------------------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
* Date: April 15, 1997
- --------------------------------------------
James W. Anderson, Jr.
Director
</TABLE>
27
<PAGE> 29
<TABLE>
<S> <C>
* Date: April 15, 1997
- ------------------------------------------------------------
Edward G. Bowen, M.D.
Director
* Date: April 15, 1997
- ------------------------------------------------------------
Marvin C. Goldstein, D.D.S.
Director
* Date: April 15, 1997
- ------------------------------------------------------------
Manning M. Pattillo, Jr., Ph.D.
Director
* Date: April 15, 1997
- ------------------------------------------------------------
Robert J. Rutland
Director
Date: April 15, 1997
- ------------------------------------------------------------
W. Clyde Shepherd, Jr.
Director
* Date: April 15, 1997
- ------------------------------------------------------------
R. Phillip Shinall, III
Director
* Date: April 15, 1997
- ------------------------------------------------------------
Rankin Smith, Jr.
Director
Date: April 15, 1997
- ------------------------------------------------------------
Felker W. Ward, Jr.
Director
* /s/ M. Howard Griffith, Jr. Date: April 15, 1997
- ------------------------------------------------------------
M. Howard Griffith, Jr.
Attorney-in-Fact
</TABLE>
28
<PAGE> 1
EXHIBIT 3(d)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
FIDELITY NATIONAL CORPORATION
I.
The name of the corporation is Fidelity National Corporation.
II.
Article IV of the Articles of Incorporation of Fidelity National
Corporation is deleted and the following is substituted in lieu thereof:
"The Corporation shall have authority to issue not more than
fifty million (50,000,000) shares of Common Stock having no
par value per share."
All other provisions of the Articles of Incorporation shall remain in
full force and effect.
III.
This amendment was duly approved by the directors in accordance with
the provisions of Section 14-2-1003 of the Georgia Business Corporation Code
("Code") at a meeting of the Board of Directors held the 14th day of March,
1996. This amendment was duly approved by the shareholders at the annual
meeting of shareholders held on April 11, 1996 in accordance with the
provisions of Code Section 14-2-1003.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to be executed and attested by its duly authorized officers as of the
11th day of April, 1996.
FIDELITY NATIONAL CORPORATION
By: /s/ James B. Miller, Jr.
-------------------------------
James B. Miller, Jr. President
[CORPORATE SEAL]
ATTEST: /s/ Martha C. Fleming
-------------------------
Secretary
<PAGE> 1
EXHIBIT 3(e)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
FIDELITY NATIONAL CORPORATION
I.
The name of the corporation is FIDELITY NATIONAL CORPORATION.
II.
Article IV of the Articles of Incorporation of Fidelity National
Corporation is deleted and the following is substituted in lieu thereof:
"The Corporation shall have authority to issue not
more than Fifty Million (50,000,000) shares of Common Stock
having no par value per share and Ten Million (10,000,000)
shares of Preferred Stock having no par value per share.
The Board of Directors of the Corporation is
authorized, pursuant to Section 14-2-602 of the Georgia
Business Corporation Code (and any successor provision
thereof), to determine, in whole or in part, without
shareholder action, the preferences, limitations and relative
rights of (i) any class of shares of Preferred Stock before
the issuance of any shares of that class or (ii) one or more
series within a class, and designate the number of shares
within that series before the issuance of any shares of that
series, including, without limitation, the determination of
dividend rights, conversion rights, voting powers,
designations, qualifications, restrictions, rights and terms
of redemption (including sinking fund provisions and
liquidation preferences), all to the fullest extent now or
hereafter permitted by the Georgia Business Corporation Code.
Each holder of shares of Common Stock shall be
entitled to one vote for each share of Common Stock held of
record on all matters on which the holders of Common Stock are
entitled to vote."
All other provisions of the Articles of Incorporation shall remain in
full force and effect.
<PAGE> 2
III.
This amendment was duly approved by the directors in accordance with
the provisions of Section 14-2-1003 of the Georgia Business Corporation Code
("Code") at a meeting of the Board of Directors held the 25th day of September
1996. This amendment was duly approved by the shareholders at a special
meeting of shareholders held on October 7, 1996, in accordance with the
provisions of Code Section 14-2-1003.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to be executed and attested by its duly authorized officers as of the
5th day of December, 1996.
FIDELITY NATIONAL CORPORATION
By: /s/ James B. Miller, Jr.
-------------------------------------
James B. Miller, Jr. President
[CORPORATE SEAL]
ATTEST: /s/ Martha C. Fleming
-------------------------------
Secretary
<PAGE> 1
EXHIBIT 10(h)
AGREEMENT BY AND BETWEEN
FIDELITY NATIONAL BANK
NORCROSS, GEORGIA
AND
THE OFFICE OF THE COMPTROLLER OF THE CURRENCY
Fidelity National Bank, Norcross, Georgia (Bank), and the Comptroller
of the Currency of the United States of America (Comptroller) wish to protect
the interests of the depositors, other customers, and shareholders of the Bank,
and, toward that end, wish the Bank to operate safely and soundly and in
accordance with all applicable laws, rules and regulations.
The Comptroller, through his National Bank Examiner, has examined the
Bank, and his findings are contained in the Report of Examination, dated August
5, 1996.
In consideration of the above premises, it is agreed, between the
Bank, by and through its duly elected and acting Board of Directors (Board),
and the Comptroller, through his authorized representative, that the Bank shall
operate at all times in compliance with the articles of this Agreement.
ARTICLE I
(1) This Agreement shall be construed to be a "written agreement
entered into with the agency" within the meaning of 12 U.S.C. Section
1818(b)(1).
(2) This Agreement shall be construed to be a "written agreement
between such depository institution and such agency" within the meaning of 12
U.S.C. Section 1818(e)(1) and 12 U.S.C. Section 1818(i)(2).
<PAGE> 2
(3) All reports which the Bank agrees to file with the Director
shall be forwarded to the Field Office Director, Southeastern District, 245
Peachtree Center Avenue, N.E., Suite 600, Atlanta, Georgia 30303, with a copy
to the National Bank Examiners, 1117 Perimeter Center West, Suite W401,
Atlanta, Georgia 30338-5417.
ARTICLE II
(1) Within fifteen (15) days, the Board shall appoint an Oversight
Committee of three of its members. A majority of the members of the Oversight
Committee shall be directors who are not employees of the Bank or any of its
affiliates (as the term "affiliate" is defined in 12 U.S.C. Section
371c(b)(1)), or a family member of any such person.
(2) The Oversight Committee shall be responsible for monitoring
and coordinating the Bank's compliance with this Agreement and shall meet at
least monthly.
(3) Within thirty (30) days of the appointment of the committee,
and every thirty (30) days thereafter the Oversight Committee shall
submit a written report to the Board detailing the actions being taken to
comply with the provisions of this Agreement. Copies of these reports shall be
forwarded to the Director on a quarterly basis.
ARTICLE III
(1) No later than April 30, 1997, the Bank shall achieve, and
maintain until November 30, 1997, the following capital levels:
(a) Total risk-based capital at least equal to ten
percent (10%) of risk-weighted assets;
2
<PAGE> 3
(b) Tier 1 capital at least equal to six percent (6%) of
risk-weighted assets;
(c) Tier 1 capital at least equal to five percent (5%)
of adjusted total assets.1
(2) No later than November 30, 1997, the Bank shall achieve, and
thereafter maintain, the following capital levels:
(a) Total risk-based capital at least equal to eleven
percent (11 %) of risk-weighted assets;
(b) Tier 1 capital at least equal to seven percent (7%)
of risk-weighted assets;
(c) Tier 1 capital at least equal to six percent (6%) of
adjusted total assets.
(3) Within forty-five (45) days, the Board shall develop a
three-year capital program. The program shall include:
(a) specific plans for the maintenance of adequate
capital which may in no event be less than the
requirements of the Article;
(b) projections for growth and capital requirements based
upon a detailed analysis of the Bank's assets,
liabilities, earnings, fixed assets, and off balance
sheet activities;
(c) projections of the sources and timing of additional
capital to meet the Bank's current and future needs;
(d) the primary source(s) from which the Bank will
strengthen its capital structure to meet the Bank's
needs;
- ----------------------------------
1 Adjusted total assets is defined in 12 C.F.R. Section 3.2(a) as the
average total asset figure used for Call Report purposes minus end-of-quarter
intangible assets.
3
<PAGE> 4
(e) contingency plans which identify alternative methods
should the primary source(s) under (d) above not be
available; and
(f) a dividend policy which permits:
(i) the declaration of a Common Stock dividend
only when the Bank is in compliance with its
approved capital program, and with prior
written approval of the Director; and
(ii) the declaration of a Preferred Stock dividend
only when thereafter the Bank shall be
"adequately capitalized" as defined in 12
C.F.R. Section 6.4 (b)(2).
(4) Upon completion, the Bank's capital program shall be submitted
to the Director for approval. Upon approval by the Director, the Bank shall
implement and adhere to the capital program. The Board shall review and update
the Bank's capital program on an annual basis, or more frequently if necessary.
Copies of the reviews and updates shall be submitted to the Director.
ARTICLE IV
(1) Within ninety (90) days, the Board shall revise and amend its
three-year strategic plan for the Bank in light of the requirements of Article
m and its growth plans. The strategic plan shall establish objectives for the
Bank's 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 those objectives and, at a minimum, include:
4
<PAGE> 5
(a) a revised mission statement which forms the framework
for the establishment of strategic goals and
objectives;
(b) an assessment of the Bank's present and future
operating environment;
(c) an evaluation of the Bank's internal operations,
staffing requirements, board and management
information systems and policies and procedures;
(d) the development of strategic goals and objectives to
be accomplished over the short and long term;
(e) a management employment and succession program to
assure the retention and continuity of capable
management in relation to risks involved in current
and planned activities;
(f) a risk analysis of new product lines and market
segments the Bank intends to promote or develop;
(g) the development of a program for the maintenance of
an adequate Allowance for Loan and Lease Losses,
which shall be designed in light of the comments on
maintaining a proper Allowance for Loan and Lease
Losses found in the "Allowance for Loan & Lease
Losses" booklet of the Comptroller's Handbook, dated
June 1996;
(h) a revised action plan to improve bank earnings and
accomplish identified strategic goals and objectives
to include individual responsibilities,
accountability, and specific time frames; and
5
<PAGE> 6
(i) a revised financial forecast to include
projections for major balance sheet and
income statement accounts and desired
financial ratios over the period covered by
the strategic plan.
(2) Upon adoption, a copy of the plan shall be forwarded to the
Director for review.
ARTICLE V
(1) Although the Board has agreed to submit certain programs and
reports to the Director for review or approval, the Board has the ultimate
responsibility for proper and sound management of the Bank.
(2) It is expressly and clearly understood that if, at any time,
the Comptroller deems it appropriate in fulfilling the responsibilities placed
upon him by the several laws of the United States of America to undertake any
action affecting the Bank, nothing in this Agreement shall in any way inhibit,
estop, bar, or otherwise prevent the Comptroller from so doing.
(3) Any time limitations imposed by this Agreement shall begin to
run from the effective date of this Agreement. Such time requirements may be
extended by the Director for good cause upon written application by the Board.
(4) The provisions el this Agreement shall continue in full ve and
effect unless or until such provisions are amended by mutual consent of the
parties to the Agreement or excepted, waived, or terminated by the Comptroller.
6
<PAGE> 7
IN TESTIMONY WHEREOF, the undersigned, authorized by the Comptroller,
has hereunto set his hand on behalf of the Comptroller.
/s/ Vernon E. Fasbender 11/14/96
- ----------------------------- -----------------------------------
Vernon E. Fasbender Date
Field Office Director
Southeastern District
7
<PAGE> 8
IN TESTIMONY WHEREOF, the undersigned, as the duly elected and acting
Board of Directors of the Bank, have hereunto set their hands on behalf of the
Bank.
<TABLE>
<S> <C>
/s/ James W. Anderson, Jr. 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
James W. Anderson, Jr. Date
/s/ Edward G. Bowen 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
Edward G. Bowen Date
/s/ Marvin C. Goldstein 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
Marvin C. Goldstein Date
/s/ James B. Miller, Jr. 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
James B. Miller, Jr. Date
/s/ Manning M. Pattillo, Jr. 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
Manning M. Pattillo, Jr. Date
/s/ Robert J. Rutland 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
Robert J. Rutland Date
/s/ W. Clyde Shepherd, Jr. 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
W. Clyde Shepherd, Jr. Date
/s/ R. Phillip Shinall, III 1/14/96
- ------------------------------------------------------------ -----------------------------------------------------
R. Phillip Shinall, III Date
/s/ Rankin M. Smith, Jr. 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
Rankin M. Smith, Jr. Date
/s/ Felker Ward 11/14/96
- ------------------------------------------------------------ -----------------------------------------------------
Felker Ward Date
</TABLE>
8
<PAGE> 1
EXHIBIT 10(i)
FIDELITY NATIONAL CORPORATION
ATLANTA, GEORGIA
RESOLUTIONS
WHEREAS, the Federal Reserve Bank's inspection as of October 15, 1996 (as of
June 30, 1996) rated the overall condition of Fidelity National Corporation
less than satisfactory, and has requested that certain actions be taken to
strengthen the financial condition of the holding company and its bank
subsidiary, Fidelity National Bank, Atlanta, Georgia and nonbank subsidiary,
Fidelity National Capital Investors, Inc., Atlanta, Georgia.
WHEREAS, the following Resolutions should be adopted by the Board of Directors
of Fidelity National Corporation, and
WHEREAS, the holding company through its management agrees that it will act in
good faith to comply with these Resolutions and make every effort to follow the
actions requested by the Federal Reserve Bank for the benefit of the holding
company organization, as set forth in the inspection as of June 30, 1996.
NOW THEREFORE, the Board hereby adopts the following Resolutions:
(1) RESOLVED, the holding company shall not incur (additional) debt
without the prior written approval of the Federal Reserve Bank. The
holding company is to submit its request to the Federal Reserve Bank
30 days prior to the date on which it wishes to incur (additional)
debt. This restriction also includes any action, such as refinancing,
that would cause a change in debt instrument(s) or a change in any of
the terms of the existing debt instrument(s), i.e., interest rate,
maturity date, amortization schedule, etc.
(2) RESOLVED, the holding company shall not declare or pay common
dividends to its shareholders without the prior written approval of
the Federal Reserve Bank. The holding company is to submit its
request to the Federal Reserve Bank 30 days prior to the date on which
it wishes to declare or pay the dividends. Preferred stock dividends
may be declared only when thereafter the bank is "adequately
capitalized" as defined in 12 C.F.R. Section 6.4(b)(2).
(3) RESOLVED, the holding company shall not reduce its capital position by
purchasing or redeeming treasury stock without the prior written
approval of the Federal Reserve Bank. The holding company is to
submit its request to the Federal Reserve Bank 30 days prior to the
date on which it wishes to purchase or redeem treasury stock.
<PAGE> 2
(4) RESOLVED, management shall within 30 days of each quarter end,
beginning April 30, 1997, provide the Federal Reserve Bank with a
parent company only balance sheet, parent company only income
statement, and parent company only report of changes in stockholders'
equity.
(5) RESOLVED, management shall within 30 days of each quarter end,
beginning April 30, 1997, provide the Federal Reserve Bank with a copy
of the subsidiary bank's Report of Condition and Income.
(6) RESOLVED, management shall within 30 days of each quarter end,
beginning April 30, 1997, provide the Federal Reserve Bank with a
written progress report on the financial condition of the organization
and a current status report addressing progress achieved in raising
additional capital and compliance with the three-year capital plan.
Additionally, please include a copy of any correspondence with the
subsidiary bank's primary regulator.
(7) RESOLVED, management shall provide a copy of the 3 year strategic plan
when completed.
THESE Resolutions shall take effect upon this date. Each provision shall
remain in effect until stayed, modified, or terminated by the Federal Reserve
Bank or until such time as the holding company's financial condition is
considered satisfactory by the Federal Reserve Bank. The undersigned directors
of Fidelity National Corporation acknowledge that these Resolutions were
unanimously adopted by the Board.
Dated this 13th day of February, 1997.
[Signed]
/s/James W. Anderson, Jr.
- -----------------------------
James W. Anderson, Jr.
/s/Edward G. Bowen, MD
- -----------------------------------
Edward G. Bowen, MD
/s/Marvin Goldstein, DDS
- -----------------------------------
Marvin Goldstein, DDS
2
<PAGE> 3
/s/ James B. Miller, Jr.
- -----------------------------------
James B. Miller, Jr.
/s/ Dr. Manning M. Patillo, Jr.
- -----------------------------------
Dr. Manning M. Pattillo, Jr.
/s/ Robert J. Rutland
- -----------------------------------
Robert J. Rutland
/s/ W. Clyde Shepherd, Jr.
- -----------------------------------
W. Clyde Shepherd, Jr.
/s/ R. Phillip Shinall, III
- -----------------------------------
R. Phillip Shinall, III
/s/ Rankin M. Smith, Jr.
- -----------------------------------
Rankin M. Smith, Jr.
/s/ Felker M. Ward, Jr.
- -----------------------------------
Felker M. Ward, Jr.
3
<PAGE> 1
EXHIBIT 10(J)
- -----------------------------------------------------------------------------
COMPTROLLER OF THE CURRENCY
ADMINISTRATOR OF NATIONAL BANKS
- -----------------------------------------------------------------------------
Special Supervision
250 E. Street, SW
Washington, DC 20219
April 3, 1997
Board of Directors
Fidelity National Bank
3490 Piedmont Road
Atlanta, Georgia 30305
Re: Notification of PCA Capital Category
Dear Members of the Board:
This is to notify you of Fidelity National Bank's ("Bank") capital category
under Prompt Corrective Action ("PCA"), 12 U.S.C. Section 1831o and 12 C.F.R.
Part 6. Based on the Bank's most recent examination, your bank's key capital
ratios were as follows:
Total Capital to Risk-Weighted Assets . . . . . . . . . . . . 7.17%
Tier 1 Capital to Risk-Weighted Assets. . . . . . . . . . . . 3.96%
Tier 1 Capital to Adjusted Total Assets . . . . . . . . . . . 3.42%
These capital ratios fall below the minimum capital levels established by the
Office of the Comptroller of the Currency ("OCC") for adequately capitalized
banks pursuant to 12 U.S.C. Section 1831o ("Section 1831o") and 12 C.F.R. Part
6 ("Part 6"). As a result, the Bank is deemed to be UNDERCAPITALIZED for
purposes of PCA.
Upon receipt of this notification, the Bank is subject to restrictions on its
ability to pay dividends and management fees, and to restrictions on asset
growth and expansion. In addition, in accordance with Section 1831o and 12
C.F.R. 6.5, the Bank is required to file a capital restoration plan with the
OCC within 45 days. Failure to submit an acceptable plan by date 45 days hence
will result in the Bank being treated, for purposes of Section 1831o and Part
6, as if it were significantly undercapitalized.
<PAGE> 2
Board of Directors
Page 2
The Board is also advised that Section 1831o and Part 6 give the OCC discretion
to impose a number of other supervisory actions. The Bank will be notified
separately, pursuant to the procedures set forth in Part 6, if the OCC
determines such optional actions are appropriate for your bank.
Failure to comply fully with the requirements of Section 1831o and Part 6 holds
serious consequences for the bank. Accordingly, the Board is urged to contact
the appropriate OCC supervisory office to discuss the Bank's obligations under
prompt corrective action. The Board is also advised to consult the provisions
of 12 U.S.C. Section 1831o, its implementing regulations and Banking Circular
268 (February 25, 1993) O.C. Bulletin 94-43 (June 29, 1994) for additional
information. If you have any questions, please do not hesitate to contact
Karen Besser or me at 202-874-4450.
Very truly yours,
Ronald G. Scheck
Director for Special Supervision
<PAGE> 1
ABOUT THE COMPANY
Fidelity National Corporation ("FNC", "Fidelity National," or "the
Company,") is a Georgia corporation which was incorporated on August 3, 1979,
and is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended.
Through Fidelity National companies, FNC provides a wide range of personal
and corporate banking services, including trust and investment management,
mortgage banking, and credit cards, as well as traditional deposit and credit
services, to a growing customer base. Fidelity National Bank, Fidelity
National Mortgage Corporation and Fidelity National Capital Investors, Inc. are
referred to as "Subsidiaries."
Fidelity National Bank ("the Bank"), a national banking association, which
opened February 10, 1974, has sixteen full-service offices in Georgia, two
indirect auto-mobile lending offices in Florida. There is a construction
lending office in Florida. The Bank's subsidiary, Fidelity National Mortgage
Corporation, is a Georgia corporation, organized in 1979, engaged in the
residential mortgage origination and servicing business. There are two
mortgage offices in Florida. Fidelity National Capital Investors, Inc., a
Georgia corporation organized in 1992, provides retail brokerage and other
securities related services.
As of December 31, 1996, Fidelity National Corporation and its
subsidiaries had total assets and shareholders' equity of $605 million and $21
million, respectively.
The Company is an equal opportunity employer which had 436 full-time
employees at December 31, 1996. Employees are provided a variety of benefits
including hospitalization, medical-surgical, major medical, dental, group life
and disability income, and a 401(k) retirement plan.
================================================================================
TABLE OF CONTENTS
To Our Shareholders
Financial Highlights
Consolidated Financial Review
Report of Independent Auditors
Financial Statements
Corporate Information
================================================================================
BOARDS OF DIRECTORS:
FIDELITY NATIONAL CORPORATION
JAMES W. ANDERSON, JR.
President Emeritus, Jim Anderson & Co.
Insurance
DR. EDWARD G. BOWEN
Gynecology and Obstetrics
DR. MARVIN C. GOLDSTEIN
Orthodontist and Chief Executive Officer of Atlanta
American Motor Hotel
JAMES B. MILLER, JR.
Chairman of the Board, President and Chief Executive Officer,
Fidelity National Corporation
President and Chief Executive Officer,
Fidelity National Bank, and Chairman of the Boards of
Fidelity National Mortgage Corporation and
Fidelity National Capital Investors, Inc.
DR. MANNING M. PATTILLO, JR.
President Emeritus, Oglethorpe University
ROBERT J. RUTLAND
President and Director, Allied Holdings, Inc.
W. CLYDE SHEPHERD, JR.
Chairman of the Board, Fidelity National Bank
Secretary/Treasurer, Shepherd Construction Company
R. PHILLIP SHINALL III
Attorney, Glass, McCullough, Sherrill & Harrold, LLP
RANKIN M. SMITH, JR.
Advisor to Atlanta Falcons
FELKER W. WARD, JR.
President, Ward and Associates, Inc.; President, Ward
Bradford & Co.; Chairman, Pinnacle Investment Advisors, Inc.
MRS. ALICE SHINALL
Director Emeritus
FIDELITY NATIONAL BANK
Same Board as Fidelity National Corporation
FIDELITY NATIONAL MORTGAGE CORPORATION
James B. Miller, Jr., Chairman
James W. Anderson, Jr.
Dr. Marvin C. Goldstein
B. Jefferson Russell
FIDELITY NATIONAL CAPITAL INVESTORS, INC.
James B. Miller, Jr., Chairman
Amelia James
Norman R. Hess
Karina L. Miller
W. Clyde Shepherd III
<PAGE> 2
FIDELITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(Dollars in Thousands Except Per Share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
FOR THE YEAR 1996 1995 1994 1993 1992
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 59,800 $ 48,080 $ 35,887 $ 29,399 $ 25,486
Net interest income 33,073 29,209 24,122 19,709 14,915
Provision for loan losses 25,127 8,090 4,125 4,200 4,325
Noninterest income, including securities gains 18,305 11,679 8,769 9,620 8,126
Securities gains, net (realized) 604 853 124 44 72
Noninterest expense 35,489 25,583 22,375 18,641 14,308
(Loss) income before cumulative effect
of change in accounting principle (5,742) 4,649 4,299 4,271 2,838
Net (loss) income (5,742) 4,649 4,299 4,545 2,838
Dividends declared 693 644 628 472 420
PER SHARE DATA
(Loss) income before cumulative effect
of change in accounting principle $ (1.24) $ 1.01 $ .93 $ .92 $ .61
Net (loss) income (1.24) 1.01 .93 .98 .61
Book value 4.53 6.02 4.65 4.58 3.33
Dividends paid .15 .14 .14 .10 .09
Dividend payout ratio *% 13.85% 14.62% 10.39% 14.80%
Average shares outstanding 4,619,530 4,608,383 4,608,383 4,613,775 4,200,600
PROFITABILITY RATIOS
Return on average assets *% 1.01% 1.15% 1.50% 1.08%
Return on average equity * 18.91 20.40 26.26 20.80
Net interest margin 5.97 6.87 6.95 6.49 6.14
ASSET QUALITY RATIOS
Net charge-offs to average loans 3.00% 2.37% 1.54% 1.65% 2.23%
Allowance to period-end loans 3.85 1.54 1.31 1.97 2.15
Nonperforming assets to total loans and OREO .85 1.22 .87 1.14 2.54
Allowance to nonperforming loans 5.62x 1.80 x 3.65x 7.20x 1.55x
Allowance to nonperforming assets 4.71 1.25 1.50 1.72 .84
LIQUIDITY RATIOS
Total loans to total deposits 85.80% 87.30% 87.10% 82.40% 77.60%
Average total loans to average earning assets 85.00 84.60 80.60 78.80 79.50
Noninterest-bearing deposits to total deposits 13.56 16.10 15.80 16.00 14.60
CAPITAL RATIOS
Leverage 2.67% 5.42% 5.51% 5.73% 5.28%
Risk-based capital
Tier 1 3.40 6.15 6.49 7.39 6.99
Total 6.38 10.47 8.25 9.06 8.75
Average equity to average assets 4.50 5.35 5.64 5.73 5.21
SELECTED DATA (AT END OF PERIOD)
Assets $ 605,420 $ 524,822 $ 429,927 $ 331,956 $ 283,240
Earning assets 545,375 428,714 393,980 308,499 261,247
Total loans 467,389 407,289 333,786 249,989 202,447
Total deposits 544,713 466,507 383,016 303,297 260,907
Long-term debt 16,500 16,750 2,491 1,815 2,065
Shareholders' equity 21,073 27,762 21,430 21,131 15,393
Realized shareholders' equity 21,213 27,073 23,067 19,396 15,393
</TABLE>
* Not meaningful.
<PAGE> 3
CONSOLIDATED FINANCIAL REVIEW
The following management's discussion and analysis reviews important
factors affecting the financial condition and results of operations of Fidelity
National Corporation and its subsidiaries (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. Since its inception, the Company has pursued a strategy of growth
through internal expansion built on providing quality financial services in
selected market areas. At December 31, 1996, the Company had grown to $605
million in total assets from $283 million in total assets at December 31, 1992.
The Company currently operates through 16 locations in the metropolitan
Atlanta area and one each in Jacksonville and Tampa, Florida.
Loans comprise the largest single component of the Company's
interest-earning assets. At December 31, 1996, the Company's loan portfolio,
excluding loans held for sale, totaled $429 million. At December 31, 1996,
credit card loans made up 33.5% of the Company's loan portfolio and have been
the primary reason for the Company's higher-than-peer group net interest
margin. At December 31, 1996, the Company's net interest margin was 5.97%
compared to 6.87% for the year ended December 31, 1995.
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 39.3% 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 once again began growing.
This growth continued through 1995 and into 1996, and at December 31, 1996,
credit card loans totaled $144 million. During 1996, the Company's net losses
on its credit card loan portfolio increased significantly, reflecting a
national trend and credit quality issues related to a new program introduced in
late 1995 which was subsequently discontinued in May 1996.
The Company has experienced significant growth in indirect automobile
lending since it implemented a strategy in 1993 to expand this activity. At
December 31, 1996, these loans, including $25 million held-for-sale, totaled
$139 million compared to $12 million at December 31, 1992. During 1996, the
Company sold, either through whole loan sales or securitization, approximately
$136 million of indirect automobile loans with servicing retained to take
advantage of its ability to produce indirect automobile loans and to enhance
other noninterest income. In addition, during 1996, the Company sold $39
million of indirect automobile loans, servicing released. The Company
anticipates that it will continue to sell, periodically either 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.
Net loss for the year ended December 31, 1996, was $5.7 million compared
to net income of $4.6 million for the comparable period in 1995. The net loss
for 1996 was primarily attributable to higher loan loss provisions on credit
cards and accrued interest and rate-related fee income reversals resulting from
higher levels of charge-offs in the Company's credit card portfolio.
As a result of the net loss for 1996 and the overall growth of the
Company, the capital ratios of the Company and its primary operating
subsidiary, Fidelity National Bank (the "Bank"), declined significantly and
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") at December 31, 1996. See the discussion of "Shareholders' Equity"
which follows in this section and Note 2 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS.
NET INCOME. 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 higher loan loss
provisions on credit cards and accrued interest and rate-related fee income
reversals resulting from higher levels of charge-offs in the Company's credit
card loan portfolio. 1996 earnings were also adversly affected by recent
corporate expansion.
For 1996, the provision for loan losses was $25.1 million compared to $8.1
million for the same period in 1995, an increase of 210.6%. During the second
and third quarters of 1996, the trends in credit card bankruptcies, charge-offs
and delinquencies significantly worsened. Net charge-offs for credit card
loans during 1996 were $12.6 million and total net charge-offs were $14.2
million for 1996.
Increases in interest income and noninterest income in 1996 over 1995 were
offset by increases in the provision for loan losses and increases in
noninterest expense.
The Company's net income for 1995 was $4.6 million or $1.01 per share, an
increase of $350,000 or 8.2% from 1994. During 1995, increases in net interest
income and noninterest income were partially offset by increases in the
provision for loan losses and noninterest expense.
<PAGE> 4
NET INTEREST INCOME/MARGIN. Taxable-equivalent net interest income increased
$3.8 million or 13.1% in 1996 to $33.1 million from $29.2 million in 1995.
This increase resulted from a $127 million increase in average interest earning
assets to $554 million partially offset by a decrease in the yield on
interest-earning assets to 10.80% 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.
The 1996 $7.9 million increase in total interest expense was attributable
primarily to volume as rates paid on average total interest-bearing liabilities
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
the 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.
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
between the two years.
<PAGE> 5
AVERAGE BALANCES, INTEREST AND YIELDS TABLE 1
<TABLE>
<CAPTION>
(Dollars in Thousands) For the Years Ended December 31,
---------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net of unearned income (1) (2)
Taxable $469,846 $54,254 11.55% $358,685 $43,572 12.15%
Tax-exempt (3) l,355 127 9.36 2,230 227 10.18
-------- ------- -------- -------
Total loans 471,201 54,381 11.54 360,915 43,799 12.14
Investment securities
Taxable 73,433 4,956 6.75 60,060 4,025 6.70
Tax-exempt (3) - - - 10 1 5.62
-------- ------- -------- -------
Total investment securities 73,433 4,956 6.75 60,070 4,026 6.70
Interest-bearing deposits 1,431 74 5.17 129 9 6.98
Federal funds sold 8,289 437 5.27 5,411 324 5.99
-------- ------- -------- -------
Total interest-earning assets 554,354 59,848 10.80 426,525 48,158 11.29
Cash and due from banks 22,011 14,645
Allowance for loan losses (6,829) (4,487)
Premises and equipment 14,164 9,259
Other real estate owned 1,246 1,458
Other assets 26,598 11,851
-------- --------
Total assets $611,544 $459,251
======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands) For the Years Ended December 31,
--------------------------------------------
1994
--------------------------------------------
Average Income/ Yield/
ASSETS Balance Expense Rate
<S> <C> <C> <C>
Interest earning assets:
Loans, net of unearned income (1) (2)
Taxable $277,933 $31,953 11.50%
Tax-exempt (3) 2,660 253 9.51
-------- -------
Total loans 280,593 32,206 11.48
Investment securities
Taxable 58,433 3,424 5.86
Tax-exempt (3) 133 9 6.77
-------- -------
Total investment securities 58,566 3,433 5.86
Interest-bearing deposits 350 13 3.71
Federal funds sold 8,803 323 3.67
-------- -------
Total interest-earning assets 348,312 35,975 10.33
Cash and due from banks 13,614
Allowance for loan losses (4,384)
Premises and equipment 8,104
Other real estate owned 1,705
Other assets 6,518
--------
Total assets $373,869
========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in Thousands) For the Years Ended December 31,
---------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities
Demand deposits $100,966 3,542 3.51% $ 92,107 $ 3,148 3.42% $ 88,530
Savings deposits 26,516 1,058 3.99 15,292 520 3.40 20,914
Time deposits 344,551 19,933 5.79 243,617 14,260 5.85 176,381
-------- ------ ------- ------ -------
Total interest-bearing deposits 472,033 24,533 5.20 351,016 17,928 5.11 285,825
Federal funds purchased 2,306 144 6.24 1,786 106 5.94 1,357
Securities sold under agreements to
repurchase 13,305 390 2.94 8,053 236 2.93 4,725
Other short-term borrowings 3,296 159 4.83 4,349 247 5.68 4,923
Long-term debt 16,500 1,501 9.10 3,439 354 10.29 1,684
-------- ------ ------- ------ -------
Total interest-bearing liabilities 507,440 26,727 5.27 368,643 18,871 5.12 298,514
Noninterest-bearing demand
deposits 70,073 60,131 50,637
Other liabilities 6,520 5,888 3,641
Shareholders' equity 27,511 24,589 21,077
-------- ------- -------
Total liabilities and
shareholders' equity $611,544 $459,251 $373,869
======== ======== ========
Net interest income/spread $33,121 5.53% $29,287 6.17%
======= =======
Net interest rate margin 5.97% 6.87%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
ASSETS
Income/ Yield/
Expense Rate
------- ----
<S> <C> <C>
Interest-bearing liabilities
Demand deposits $ 2,386 2.70%
Savings deposits 630 3.01
Time deposits 8,152 4.62
Total interest-bearing deposits 11,168 3.91
Federal funds purchased 73 5.38
Securities sold under agreements to
repurchase 129 2.73
Other short-term borrowings 264 5.36
Long-term debt 131 7.78
------
Total interest-bearing liabilities 11,765 3.94
Noninterest-bearing demand
deposits
Other liabilities
Shareholders' equity
Total liabilities and
shareholders' equity
Net interest income/spread $24,210 6.39%
=======
Net interest rate margin 6.95%
</TABLE>
(1) Fee income relating to loans of $4,007 in 1996, $3,854 in 1995, and $2,710
in 1994 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
$48, $77 and $89 for each of the three years ended December 31, 1996,
using a federal tax rate of 34%.
<PAGE> 6
RATE/VOLUME ANALYSIS TABLE 2
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Variance Attributed To (1) Variance Attributed To (1)
-------------------------------- -------------------------------
Volume Rate Net Change Volume Rate Net Change
--------- --------- ---------- ------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loans:
Taxable $12,927 $(2,245) $10,682 $9,724 $1,895 $ 11,619
Tax-exempt (2) (83) (17) (100) (43) 17 (26)
Investment securities:
Taxable 902 29 931 98 503 601
Tax-exempt (2) (1) - (1) (7) (1) (8)
Federal funds sold 156 (43) 113 (154) 155 1
Interest bearing deposits 68 (3) 65 (11) 7 (4)
------- ------- ------- ------ ------ -------
Total interest-earning assets $13,969 $(2,279) $11,690 $9,607 $2,576 $12,183
======= ======== ======= ====== ====== ========
Interest-bearing deposits:
Demand $ 309 $ 85 $ 394 $100 $ 662 $ 762
Savings 435 103 538 (184) 74 (110)
Time 5,841 (168) 5,673 3,595 2,513 6,108
------- ------- ------- ------ ------ -------
Total interest-bearing
deposits 6,585 20 6,605 3,511 3,249 6,760
Federal funds purchased 33 5 38 25 8 33
Securities sold under agreements
to repurchase 154 - 154 97 10 107
Other short-term borrowings (54) (34) (88) (32) 15 (17)
Long-term debt 1,192 (45) l,147 170 53 223
------- ------- ------- ------ ------ -------
Total interest-bearing
liabilities $ 7,910 $ (54) $ 7,856 $3,771 $3,335 $ 7,106
======= ======== ======= ====== ====== ========
</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. Management's
evaluation process to determine inherent losses includes consideration of
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 year ended December 31, 1996, the provision for loan losses was
$25.1 million compared to $8.1 million in 1995, an increase of 210.6%. 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 1.91% 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
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 which the Company initiated in the middle of 1995 and
discontinued in May 1996. 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 a
residential mortgage from a third-party lender. 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.
In the third quarter of 1996, the Company revised its procedures related
to charge-offs for past due credit card and other loans. Prior to June
30, 1996, the Company recorded
<PAGE> 7
charge-offs monthly only after obtaining Board approval. While these
loans were included in the determination of the adequacy of the allowance for
loan losses, this procedure resulted in a one month delay in processing
charge-offs based on the date on which they were identified. The implementation
of the new procedure increased charge-offs for the year ended December 31, 1996,
by $1.1 million. The ratio of net charge-offs to average loans was 3.00% for
1996. Excluding the impact of the implementation of the new charge-off
procedure, the ratio would have been 2.77%.
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 charge-offs during 1995. Net charge-offs were $6.9 million for 1995
compared to $4.3 million in 1994.
<PAGE> 8
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES TABLE 3
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,537 $4,344 $4,550 $4,007 $4,011
Charge-offs:
Commercial, financial and agricultural 3 60 226 18 68
Real estate-construction - - - - 13
Real estate-mortgage - - - 34 341
Consumer installment 1,657 328 88 36 80
Credit cards 13,156 7,051 4,466 4,091 4,345
------- ------ ------ ------ ------
Total charge-offs 14,816 7,439 4,780 4,179 4,847
Recoveries:
Commercial, financial and agricultural 31 42 29 122 89
Real estate-construction - - - - -
Real estate-mortgage - - 2 35 88
Consumer installment 64 38 24 11 21
Credit cards 568 462 394 354 320
------- ------- ------ ------- ------
Total recoveries 663 542 449 522 518
------- ------- ------- ------- ------
Net charge-offs 14,153 6,897 4,331 3,657 4,329
Provision for loan losses 25,127 8,090 4,125 4,200 4,325
------- ------- ------- ------- ------
Balance at end of year $16,511 $5,537 $4,344 $4,550 $4,007
======= ====== ====== ====== ======
Ratio of net charge-offs during year to
average loans outstanding, net 3.00% 1.91% 1.54% 1.65% 2.23%
Allowance for loan losses as
a percentage of loans 3.85% 1.54% 1.31% 1.97% 2.15%
</TABLE>
<PAGE> 9
NONINTEREST INCOME. 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 operations, gains on loan
sales and a loan securitization, sale of mortgage servicing rights and
increased fee income from servicing indirect automobile loans which were sold.
For 1996, noninterest income benefited from a $2.1 million gain on sales of
mortgage servicing rights and a $672 gain on sales of $204 million of indirect
automobile and credit card loans. There were no such sales in 1995.
Year-to-date noninterest income also benefited from a $1.0 million increase in
brokerage fee income, a $467,000 increase in mortgage servicing fee income, and
a $707,000 increase in indirect automobile loan servicing fees.
The profits from the sales of mortgage servicing rights in 1996 mitigated
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 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 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 $.6 million and $1.0 million and $573,000 and
$61,000, respectively. The Company measures the value of mortgage servicing
rights for impairment based on loan type and rate structure. At December 31,
1996 and 1995, the fair value of these rights approximated net book value.
NONINTEREST EXPENSE. 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 46.6% of the total increase in noninterest
expense, were up 39.1% in 1996 to $16.4 million. 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. In 1996, a tax benefit of $3.5 million was
recorded 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 provision for income taxes consists of
provisions for Federal and state income taxes. 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
interest margin and to manage the exposure to risk while maintaining net
interest income at acceptable levels. Liquidity is provided by carefully
structuring the balance sheet. The decline in capital ratios to below
statutory minimums at December 31, 1996, (see Shareholders' Equity - Regulatory
Capital Re-quirements) has reduced the Company's liquidity position and funding
alternatives. The Company's Asset Liability Committee meets regularly to
review both the Company's interest rate sensitivity positions and liquidity.
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
<PAGE> 10
occurs. Balances are reported in the time band that corresponds to the
instrument's next repricing date or contractual maturity, whichever occurs
first. There are two exceptions. Fixed rate residential mortgage loans in the
amount of $5 million at December 31, 1996, are included based on scheduled
payments, and credit card loans in the amount of $115 million with a fixed rate
are spread based on historical run-off rates over an eight month period.
Through such analysis, the Company monitors and manages its interest
sensitivity gap to minimize the effects of changing interest rates.
The interest rate sensitivity structure within the Company's balance sheet
at December 31, 1996, indicated a net interest sensitive liability gap of 6.65%
when projecting out one year. In the near term, defined as 90 days, the
Company had a net interest sensitivity asset gap of 19.09%. This information
represents a general indication of repricing characteristics over time;
however, the sensitivity of certain deposit products may vary during extreme
swings in interest rates. 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 interests rate changes on net interest
income.
INTEREST RATE SENSITIVITY ANALYSIS (1) TABLE 4
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------
Repricing Within Over
0-30 31-60 61-90 91-120 121-150
(Dollars in Thousands) Days Days Days Days Days
<S> <C> <C> <C> <C> <C>
Interest-earning assets
Investment securities available-for-sale $ 17,993 $0 $1,553 $6,451 $0
Investment securities held-to-maturity 0 0 0 0 0
Loans 179,094 6,755 5,979 5,738 5,545
Loans held for sale 13,106 0 25,000 0 0
Federal funds sold 343 0 0 0 0
Due from banks-interest earning 3,301 0 0 0 0
--------- -------- --------- --------- ---------
Total interest-earning assets 213,837 6,755 32,532 12,189 5,545
Interest-bearing liabilities
Demand deposit accounts 7,388 7,388 7,388 2,463 2,463
Savings and NOW accounts 1,258 1,258 1,258 1,258 1,258
Money market 1,161 1,161 1,161 1,161 1,161
Time Deposits > $100,000 21,884 6,343 10,125 6,996 6,341
Time Deposits < $100,000 19,375 16,579 26,019 26,445 18,594
Long-term debt 1,500 0 0 0 0
Short-term borrowings 17,184 0 0 0 0
Total interest-bearing liabilities 69,750 32,729 45,951 38,323 29,817
--------- -------- --------- --------- ---------
Interest-sensitivity gap $144,087 $(25,974) $(13,419) $(26,134) $(24,272)
========= ======== ======== ======== ==========
Cumulative $144,087 $118,113 $104,694 $78,560 $54,288
========= ========= ======== ======== ==========
Ratio of cumulative gap to
total interest-earning assets 26.26% 21.53% 19.09% 14.32% 9.90%
Ratio of interest-sensitive assets to
interest-sensitive liabilities 306.58% 20.64% 70.80% 31.81% 18.60%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------
Repricing Within
151-180 Over One
(Dollars in Thousands) Days Year Year Total
---- ---- ---- -----
<C> <C> <C> <C> <C>
Interest-earning assets
Investment securities available-for-sale $ 0 $ 11,754 $ 33,480 $71,231
Investment securities held-to-maturity 0 301 5,979 6,280
Loans 5,487 32,924 $187,762 429,284
Loans held for sale 0 0 0 38,106
Federal funds sold 0 0 0 343
Due from banks-interest earning 0 0 0 3,301
-------- --------- -------- --------
Total interest-earning assets 5,487 44,979 227,221 548,545
Interest-bearing liabilities
Demand deposit accounts 2,463 14,773 29,551 73,877
Savings and NOW accounts 1,258 7,557 60,407 75,512
Money market 1,161 6,968 27,873 41,807
Time Deposits > $100,000 3,249 16,048 15,644 86,630
Time Deposits < $100,000 12,282 75,489 72,104 266,887
Long-term debt 0 0 15,000 16,500
Short-term borrowings 0 0 0 17,184
Total interest-bearing liabilities 20,413 120,835 220,579 578,397
-------- --------- -------- --------
Interest-sensitivity gap $(14,926) $ (75,856) $ 6,642 $(29,852)
======== ========= ======== =========
Cumulative $ 39,362 $ (36,494) $(29,852)
======== ========= ========
Ratio of cumulative gap to
total interest-earning assets 7.18% (6.65)% (5.44)%
Ratio of interest-sensitive assets to
interest-sensitive liabilities 26.88% 37.22% 103.01%
</TABLE>
<PAGE> 11
(1) The Company adopted 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.
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 the Company sold or
securitized $204 million 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.
<PAGE> 12
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 has tightened the Company's liquidity position and reduced funding
sources available to it in the past. These include unsecured federal funds
lines and warehouse borrowing from the Federal Home Loan Bank.
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
accompanying 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.
Fidelity National Corporation's liquidity is limited. Fidelity National
Corporation primarily relies on equity sales, interest income, management fees,
and dividends from the Bank as sources of liquidity. Dividends from
subsidiaries ordinarily provide a source of liquidity to a bank holding
company. Currently the Bank is prohibited from paying cash dividends without
the prior written consent of the OCC.
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 $17 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 $1.7 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 deposits, which increased to $545 million in 1996 from
$467 million in 1995 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 "Shareholders' Equity - Regulatory Capital
Requirements," the Company's current capital position and the increase in
credit card 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.
<PAGE> 13
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
real estate construction loans which were up $15 million, or 37.5%, to $56
million; real estate- mortgage loans which were up $10 million, or 17.1%, to
$72 million; and consumer installment loans which were up $25 million, or
21.7%, to $139 million.
Total loans at December 31, 1995 were $407 million, an increase of 22.1%
over year end 1994. This increase was attributable primarily to significant
increases in credit card and indirect automobile, residential construction and
commercial loans.
LOANS, NET BY CATEGORY TABLE 5
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial:
Commercial, financial and agricultural $ 43,247 $ 37,778 $ 29,831 $ 19,732 $ 15,817
Tax exempt 698 1,518 2,091 2,435 1,584
-------- -------- -------- -------- --------
Total commercial 43,945 39,296 31,922 22,167 17,401
Real estate-construction 56,325 40,955 32,355 20,012 10,687
Real estate-mortgage 71,719 61,247 66,707 47,064 45,722
Consumer installment 113,513 78,806 89,595 43,115 12,323
Credit cards 143,782 139,873 110,870 98,135 100,153
-------- -------- -------- -------- --------
Loans 429,284 360,177 331,449 230,493 186,286
Allowance for loan losses 16,511 5,537 4,344 4,550 4,007
-------- -------- -------- -------- --------
Loans, net $412,773 $354,640 $327,105 $225,943 $182,279
======== ======== ======== ======== ========
TOTAL LOANS
Loans $429,284 $360,177 $331,449 $230,493 $186,286
Loans held-for-sale:
Mortgage loans 13,106 12,113 2,225 19,419 16,271
Consumer installment 25,000 35,000 - - -
-------- -------- -------- -------- --------
Total loans held-for-sale 38,106 47,113 2,225 19,419 16,271
-------- -------- -------- -------- --------
Total loans $467,390 $407,290 $333,674 $249,912 $202,557
======== ======== ======== ======== ========
</TABLE>
LOAN MATURITY AND INTEREST RATE SENSITIVITY TABLE 6
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------
Within One Through Over
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Loan Maturity
Commercial, financial and agricultural $12,563 $45,160 $1,760 $ 59,483
Real estate-construction 17,204 18,804 4,673 40,681
------- ------- ------ --------
Total $29,767 $63,964 $6,433 $100,164
======= ======= ====== ========
Interest Rate Sensitivity
Selected loans with:
Predetermined interest rates:
Commercial, financial and agricultural $ - $ 413 $137 $ 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 $29,767 $63,964 $6,433 $100,164
======= ======= ====== ========
</TABLE>
<PAGE> 14
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 December 31, 1996, were $3.5 million, a decrease
of $.9 million, or 20.7%, from December 31, 1995. During 1996, other real
estate owned declined $772,000 to $557,000. 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.
At December 31, 1996, the ratio of loans past due 90 days and still
accruing to loans increased significantly to 1.66%, from .85% and .64% at
December 31, 1995 and 1994, respectively.
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.
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.
Beginning January 1, 1996, the Company commenced recording reversals of
current period accrued interest and rate-related fee income on credit card
accounts meeting Company policy for charge-offs as a charge to interest income.
This amount totaled $2.0 million for 1996. This charge-off policy is
consistent with industry practice. Such amounts previously were charged
against the allowance for loan losses
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 process has been completed,
recalculation of the borrower's debt ratio, and analysis of the borrower's
credit history to determine if it 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.
NONPERFORMING ASSETS TABLE 7
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Nonperforming Assets
Nonaccrual loans $2,940 $3,084 $1,189 $ 632 $2,314
Restructured loans - - - - 267
Other real estate owned 567 1,339 1,714 2,016 2,213
------ ------ ------ ------ ------
Total nonperforming assets $3,507 $4,423 $2,903 $2,648 $4,794
====== ====== ====== ====== ======
Loans past due 90 days or more and still accruing $6,890 $3,077 $2,134 $1,422 $1,297
====== ====== ====== ====== ======
Ratio of past due loans to total loans 1.66% .85% .64% .62% .70%
Ratio of nonperforming assets to total ====== ====== ====== ====== ======
loans and other real estate owned .85% 1.22% .87% 1.14% 2.54%
====== ====== ====== ====== ======
</TABLE>
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.
<PAGE> 15
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 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 portion of
the allowance for loan losses allocated to credit cards increased 1.82% during
1996. See "Provision for Loan Losses."
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES TABLE 8
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
-------------------- -------------------- --------------------
Allowance % Allowance % Allowance %
--------- --------- ----------------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 98 10.24% $97 10.99% $ 54 9.64%
Real estate-construction 35 13.12 30 11.37 26 9.85
Real estate-mortgage 350 16.71 8 16.92 16 20.10
Consumer installment 2,282 26.44 357 21.88 402 26.96
Credit cards 13,746 33.49 4,875 38.84 3,750 33.45
Unallocated - - 169 - 96 -
------- ------ ------ ------ ------ ------
Total $16,511 100.00% $5,536 100.00% $4,344 100.00%
======= ====== ====== ====== ====== ======
<CAPTION>
December 31, 1993 December 31, 1992
-------------------- --------------------
Allowance % Allowance %
--------- --------- ----------------- ---------
<C> <C> <C> <C>
Commercial, financial
and agricultural $ 52 8.86% $ 80 9.29%
Real estate-construction 17 8.04 50 5.74
Real estate-mortgage 24 26.59 180 24.56
Consumer installment 270 17.25 60 6.62
Credit cards 3,252 39.26 3,249 53.79
Unallocated 935 - 388 -
------- ------ ------ ------
Total $ 4,550 100.00% $4,007 100.00%
======= ====== ====== ======
</TABLE>
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 $78
million and $58 million at 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.
At December 31, 1996, the Company classified all but $6 million of its
investment securities 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.
<PAGE> 16
DISTRIBUTION OF INVESTMENT SECURITIES TABLE 9
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
-------------------------------------------------------------------------------
1996 1995 1994
------------------ ---------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
U.S.Treasury securities and
obligations of U.S. Government $54,128 $53,798 $30,950 $31,623 $29,830 $29,202
corporations and agencies
State and municipal - - - - 60 60
Mortgage-backed securities 21,754 21,740 24,780 25,248 31,299 29,286
Other investments 1,854 1,854 1,588 1,588 1,539 1,539
------- ------- ------- ------- ------- -------
Total $77,736 $77,392 $57,318 $58,459 $62,728 $60,087
======= ======= ======= ======= ======= =======
</TABLE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AND AVERAGE YIELDS (1) TABLE 10
<TABLE>
(Dollars in Thousands) December 31, 1996 December 31, 1995
----------------------------------- ----------------------------------------
Amortized Fair Average Amortized Fair Average
Cost Value Yield (2) Cost Value Yield (2)
--------- ----- --------- ---- ----- ---------
<S> <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 17,436 17,362 6.96 15,973 16,457 6.27
Due after ten years 12,721 12,583 7.54 8,000 8,000 7.34
Mortgage-backed securities 21,754 21,740 5.73 24,780 25,248 6.31
------- ------- ------- -------
Total $69,904 $69,678 $50,740 $51,852
======= ======= ======= =======
HELD-TO-MATURITY
U.S.Treasury securities and obligations of
U.S. Government corporations and agencies
Due in one year or less $ - $ - -% $4,991 $5,019 7.23%
Due after ten years 5,979 5,860 7.19 - - -
------- ------- ------ ------------
Total $ 5,979 $ 5,860 $4,991 $5,019
======= ======= ====== ============
</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 December 31, 1996, of $545
million increased $78 million or 16.8% from $467 million as of December 31,
1995. On an average balance basis, all categories of deposits reflected volume
increases. Core 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 grew 16.4% to reach $406 million in
1996.
Noninterest-bearing deposits are comprised of business accounts, including
correspondent bank accounts, escrow deposits, as well as individual accounts.
Average noninterest-bearing demand deposits repre-sented 17.3% of average core
deposits in 1996 compared to 17.2% in 1995.
<PAGE> 17
SELECTED STATISTICAL INFORMATION FOR DEPOSITS TABLE 11
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994
----------------- ---------------------- -----------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 70,074 -% $ 60,131 -% $ 50,637 -%
Interest-bearing demand deposits 100,966 3.51 92,107 3.42 88,530 2.70
Savings deposits 26,516 3.99 15,292 4.30 20,914 3.01
Time deposits 344,551 5.79 243,617 5.85 176,381 4.62
-------- -------- --------
Total average deposits $542,107 4.53% $411,147 4.36% $336,462 3.32%
======== ======== ========
</TABLE>
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1996
Maturity Distribution of Time Deposits $100,000 or More
- ------------------------------------------------------------
<S> <C>
Three months or less $37,945
Over three through six months 16,213
Over six through twelve months 23,270
Over twelve 9,202
-------
Total $86,630
=======
</TABLE>
<PAGE> 18
SCHEDULE OF SHORT-TERM BORROWINGS (1) TABLE 12
<TABLE>
<CAPTION>
(Dollars in Thousands)
Weighted
Maximum Average Interest Average
Year ended Outstanding at Average Rate During Ending Interest Rate at
December 31, any Month-End Balance Year Balance Year-End
- ------------ --------------- ------- --------------- -------- --------
<S> <C> <C> <C> <C> <C>
1996 $25,760 $18,907 3.67% $17,184 3.06%
1995 23,939 14,188 4.15 8,245 2.96
1994 33,092 11,005 4.23 18,940 5.00
</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.
<PAGE> 19
LONG-TERM DEBT. On December 12, 1995, the Company issued $15 million in
Subordinated 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 Subordinated Notes 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 December 31, 1996, was $5.0 million and the
dividends paid during such period were $2.0 million.
In addition, no dividend can be declared on the capital stock if an event
of default has occurred and is continuing under the Subordinated Notes,
including the failure to pay interest on such indebtedness or default on other
indebtedness exceeding $1 million.
<PAGE> 20
SHAREHOLDERS' EQUITY. 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) decreased $6.0
million or 21.6% to $21.2 million at December 31, 1996, from $27.1 million at
December 31, 1995.
The 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 dividend payout was $693,000 compared to $644,000
and $628,000 in 1995 and 1994, respectively.
On October 9, 1995, the Company paid a 10% stock dividend to shareholders
of record on September 28, 1995. The following table reflects the
Company's dividend payout for the past three years.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
First Quarter $.0375 $.0341 $.0341
Second Quarter .0375 .0341 .0341
Third Quarter .0375 .0341 .0341
Fourth Quarter .0375 .0375 .0341
For the Year .15 .1398 .1364
</TABLE>
<PAGE> 21
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 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.
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.
At December 31, 1996, the Company and the Bank did not meet the minimum
capital ratios and were considered "undercapitalized" under the provisions of
the Federal Deposit Insurance Improvement Act of 1991. (See "Regulatory
Agreements" section.)
Capital leverage ratio standards require a minimum ratio of capital to
adjusted total assets ("leverage ratio") for the Company of 3.0% and 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 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 ("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 credit losses, subject to limitations.
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.
Each bank holding company and national bank 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.
<PAGE> 22
Regulatory Agreements. The FRB is the Company's principal regulator. 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.
On November 14, 1996, the Bank entered into an agreement with the OCC
("OCC Agreement") which provides that the Bank (i) will appoint an "Oversight
Committee"; (ii) will achieve and maintain specified higher capital levels
(see below); (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. 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, the Bank was deemed to be
"undercapitalized" and is subject to prompt corrective action pursuant to 12
U.S.C. Sec. 1831o. As a result, the Bank is subject to restrictions on its
ability to pay dividends and management fees and to restrictions on asset
growth and expansion. The OCC may also impose other supervisory actions. The
Bank is also required to file a capital restoration plan with the OCC before
May 19, 1997 which is subject to acceptance by the OCC. Failure to submit an
acceptable capital restoration plan may result in the imposition of various
supervisory actions. There can be no assurances that the capital restoration
plan submitted to the OCC will be approved as submitted or that the Bank will
be able to achieve the objectives of the plan as submitted or as revised from
time to time. See "Capital."
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 will meet and report 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 has submitted to the OCC a three-year
capital program which was approved. 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 has revised its strategic plan in light
of the revised levels of capital required and its growth plans. The strategic
plan established 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 was submitted to the OCC for review.
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; however, it is not unusual for the OCC to grant
extensions of time in situations in which the financial institution has
evidenced good faith progress towards meeting the terms of the written
agreement. 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 Board of Directors of the Company adopted a resolution ("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.
The OCC Agreement establishes higher capital requirements than those
applicable to an adequately capitalized Bank under the OCC regulations.
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 the OCC regulations, and
under the OCC Agreement and the Bank's actual capital ratios at December 31,
1996.
<TABLE>
<CAPTION>
OCC Regulations OCC Agreement
--------------------------- ----------------------------------
Adequately Well Actual
Capital Ratios Capitalized Capitalized April 30, 1997 November 30, 1997 December 31, 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>
Set forth below are pertinent capital ratios for the Company as of
December 31, 1996 under the FRB regulations:
<TABLE>
<CAPTION>
Capital Ratios Minimum Capital Requirement Actual
- -------------- --------------------------- ------
<S> <C> <C>
Leverage
Risk-Based Capital: 3.00% 2.67%
Tier 1 4.00 3.40
Total 8.00 6.38
</TABLE>
<PAGE> 23
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 December 31, 1996,
total shareholders' equity of the Bank was $24.6 million. At December 31,
1996, payment of future dividends is precluded by the OCC Agreement until the
Bank is in compliance with its approved capital program and it has received
written aproval 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 an
additional $14 million of capital will be needed to reach the April 30, 1997,
requirements and an additional $5 million to reach the November 30, 1997,
requirements.
<PAGE> 24
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 position.
<PAGE> 25
RECENT ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1996, the Company
prospectively adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Adoption of
SFAS No. 121 was not material.
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," 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 occuring after December 31, 1996, except for certain
transactions which have been delayed until after December 31, 1997. This
standard will be adopted as required in 1997 and 1998 and is not expected to
have a material impact on the Company's financial position or results of
operations.
<PAGE> 26
FOURTH QUARTER REPORT. Net loss per share for the fourth quarter of 1996 was
$1.24 compared to net income of $.27 per share for the same period of 1995.
The net loss was $5.7 million compared to net income of $1.3 million in the
fourth quarter of 1995.
The main factors influencing the results in 1996 compared to 1995 were:
The provision for loan losses increased $11.0 million due primarily to
increases in delinquencies and charge-offs related to the credit card
portfolio.
An increase in the average volume of earning assets primarily
attributable to growth in every major loan category.
Noninterest income increased approximately $1.7 million. Most categories
of noninterest income increased over the prior year same quarter due to general
corporate growth. Additionally, mortgage banking activity benefited due to a
$1.0 million gain from the sale of mortgage servicing rights.
Noninterest expense was $9.3 million in the fourth quarter of 1996
compared to $7.1 million for the same quarter of 1995. This increase was a
result of higher salaries and benefits and net occupancy costs driven by
overall corporate growth.
<PAGE> 27
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.
The results for any quarter are not necessarily indicative of results for any
future period.
<PAGE> 28
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) TABLE 13
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------- --------------------------------------------
(Dollars in Thousands) Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $15,475 $15,644 $14,963 $13,718 $13,180 $12,322 $11,650 $10,928
Interest expense 6,963 7,151 6,776 5,837 5,181 5,019 4,682 3,989
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 8,512 8,493 8,187 7,881 7,999 7,303 6,968 6,939
Provision for loan losses 14,027 5,700 3,000 2,400 3,000 2,000 1,710 1,380
Noninterest income before
securities gain 5,450 4,053 4,830 3,368 3,582 2,876 2,484 1,882
Securities gains 243 79 195 87 408 206 139 102
------- ------- ------- ------- ------- ------- ------- -------
Total noninterest income 5,693 4,132 5,025 3,455 3,990 3,082 2,623 1,984
Noninterest expense 9,341 9,521 8,621 8,005 7,058 6,458 6,193 5,874
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income before income taxes (9,163) (2,596) 1,591 931 1,931 1,927 1,688 1,669
Income tax (benefit) expense (3,417) (992) 586 328 680 691 599 596
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income $(5,745) $(1,604) $ 1,005 $ 603 $ 1,251 $ 1,236 $ 1,089 $ 1,073
======= ======= ======= ======= ======= ======= ======= =======
Net (loss) income per share $ (1.24) $ (.35) $ .22 $ .13 $ .27 $ .27 $ .24 $ 23
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 29
FIDELITY NATIONAL CORPORATION
ATLANTA, GEORGIA
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, 1996 and 1995, 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 1996 and 1995 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
<PAGE> 30
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.
Atlanta, Georgia /s/ Ernst & Young LLP
April 3, 1997
<PAGE> 31
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995
------------- ------------
<C> <C> <C>
ASSETS
Cash and due from banks - Note 13 $ 29,311,690 $ 27,356,936
Interest-bearing deposits with banks 3,300,708 -
Federal funds sold 343,019 10,002,754
Investment securities available-for-sale - Note 3 71,230,743 53,139,161
Investment securities held-to-maturity
(fair values of $6,161,119 and
$5,320,209 for 1996 and 1995,
respectively) - Note 3 6,279,816 5,291,733
Loans held for sale 38,105,868 47,112,535
Loans, net of unearned income - Note 4 429,283,563 360,176,486
Allowance for loan losses - Note 4 (16,510,842) (5,536,504)
------------ ------------
Loans, net 412,772,721 354,639,982
Premises and equipment, net - Note 5 19,799,079 10,588,433
Other real estate - Note 4 566,751 1,339,318
Accrued interest receivable 5,007,876 3,577,862
Other assets 18,702,026 11,773,101
------------ ------------
Total assets $605,420,297 $524,821,815
============ ============
LIABILITIES
Deposits - Note 6
Noninterest-bearing demand deposits $ 73,877,369 $ 75,120,501
Interest-bearing deposits:
Demand and money market 78,451,267 107,475,974
Savings 38,867,549 14,293,402
Time deposits, $100,000 and over 86,630,315 65,503,961
Other time deposits 266,886,829 204,113,471
------------ ------------
Total deposits 544,713,329 466,507,309
Short-term borrowings - Note 7 17,183,769 8,245,191
Long-term debt - Note 8 16,500,000 16,750,000
Accrued interest payable 3,502,631 2,606,802
Other liabilities 2,447,752 2,950,233
------------ ------------
Total liabilities 584,347,481 497,059,535
Commitments and contingencies - Notes 13 and 14
SHAREHOLDERS' EQUITY - Notes 2 and 11
Common stock, no par value. Authorized
50,000,000 and 5,000,000; issued 4,665,256
and 4,619,475; outstanding 4,654,164 and
4,608,383, in 1996 and 1995, respectively 11,878,597 11,303,406
Treasury stock (69,325) (69,325)
Net unrealized (losses) gains on investment
securities available-for-sale, net of tax (140,241) 689,774
Retained earnings 9,403,785 15,838,425
------------ ------------
Total shareholders' equity 21,072,816 27,762,280
------------ ------------
Total liabilities and shareholders' equity $605,420,297 $524,821,815
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 32
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
1996 1995 1994
----------------- ----------------- ------------------
<C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $54,333,446 $43,722,346 $32,120,759
Investment securities:
Taxable 4,956,072 4,024,715 3,423,612
Tax-exempt - 360 6,222
Federal funds sold 436,649 323,622 322,542
Deposits with other banks 74,104 8,947 13,460
----------- ----------- -----------
Total interest income 59,800,271 48,079,990 35,886,595
INTEREST EXPENSE
Deposits - Note 6 24,532,698 17,927,967 11,167,526
Short-term borrowings 692,591 589,733 466,138
Long-term debt 1,501,487 353,116 131,220
----------- ----------- -----------
Total interest expense 26,726,776 18,870,816 11,764,884
NET INTEREST INCOME 33,073,495 29,209,174 24,121,711
Provision for loan losses - Note 4 25,127,000 8,090,000 4,125,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,946,495 21,119,174 19,996,711
NONINTEREST INCOME
Service charges on deposit accounts 1,737,145 1,484,835 1,427,626
Credit card fees 2,927,992 2,470,531 2,607,968
Mortgage banking activities 6,900,260 3,337,767 1,740,343
Securities gains, net - Note 3 603,977 854,919 123,832
Other - Note 15 6,135,848 3,531,359 2,869,005
----------- ----------- -----------
Total noninterest income 18,305,222 11,679,411 8,768,774
NONINTEREST EXPENSE
Salaries and employee benefits - Note 10 16,411,631 11,794,559 9,884,058
Furniture and equipment 1,722,979 1,389,858 1,235,464
Net occupancy 2,596,155 1,905,762 1,575,822
Credit card processing and transaction fees 3,030,290 1,973,557 2,382,252
Amortization of mortgage servicing rights 1,927,250 1,136,299 364,461
Other - Note 15 9,800,355 7,383,149 6,932,730
----------- ----------- -----------
Total noninterest expense 35,488,660 25,583,184 22,374,787
----------- ----------- -----------
(Loss) income before income taxes (9,236,943) 7,215,401 6,390,698
Income tax (benefit) expense - Note 9 (3,495,212) 2,566,019 2,091,689
----------- ----------- -----------
NET (LOSS) INCOME $(5,741,731) $ 4,649,382 $ 4,299,009
=========== =========== ===========
NET (LOSS) INCOME PER SHARE $ (1.24) $ 1.01 $ .93
=========== =========== ===========
Weighted average shares outstanding 4,619,530 4,608,383 4,608,383
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 33
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES 1996 1995 1994
--------------- ------------- --------------
<S> <C> <C> <C>
Net (loss) income $ (5,741,731) $ 4,649,382 $ 4,299,009
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for loan losses 25,127,000 8,090,000 4,125,000
Depreciation and amortization of premises and equipment 1,481,379 1,097,090 990,554
Amortization of mortgage servicing rights 1,927,250 1,136,299 364,461
Additions of originated mortgage servicing rights (893,878) (1,031,548) -
Purchases of investments held in trading accounts - - (952,000)
Sales of investments held in trading accounts - - 941,382
Securities gains, net (603,977) (854,919) (123,832)
Gain on loan sales and securitization (672,012) (228,641) (221,216)
Decrease (increase) in loans held-for-sale 9,006,667 (44,887,263) 17,193,912
Net increase in accrued interest receivable (1,430,014) (984,844) (902,789)
Net increase in accrued interest payable 895,829 838,033 324,447
Net increase (decrease) in other liabilities 502,481 (757,175) 714,112
Net (increase) decrease in other assets (6,928,925) 229,358 (1,488,941)
Other, net 54,117 (87,167) (123,752)
------------- ------------ -------------
Net cash flows provided by (used in) operating activities 22,724,186 (32,791,395) 25,140,347
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (33,294,485) (11,038,682) (3,993,750)
Maturities of investment securities held-to-maturity 30,375,000 14,056,006 400,000
Sales of investment securities available-for-sale 43,781,536 34,233,853 13,116,453
Purchases of investment securities available-for-sale (65,077,185) (43,826,318) (25,444,864)
Maturities of investment securities available-for-sale 3,728,880 12,956,531 6,880,913
Net increase in loans (286,040,758) (57,917,324) (109,215,310)
Purchases of mortgage servicing rights - (4,981,096) (1,333,283)
Purchases of premises and equipment (10,692,025) (2,863,948) (2,564,690)
Proceeds from sale of loans 203,543,314 21,125,520 4,060,528
Proceeds from sale of equipment - - 21,445
Proceeds from sales of other real estate 345,575 961,712 390,876
------------- ------------ -------------
Net cash flows used in investing activities (113,330,148) (37,293,746) (117,681,682)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, money market accounts,
and savings accounts (5,693,692) 30,392,930 15,911,481
Net increase in time deposits 83,899,712 53,098,658 63,807,089
Proceeds from issuance of long-term debt - 16,250,000 926,000
Repayment of long-term debt (250,000) (1,991,000) (250,000)
Increase (decrease) in short-term borrowings 8,938,578 (10,695,102) 18,071,368
Dividends paid (692,909) (644,135) (628,411)
Sale of treasury stock - - 1,250
------------- ------------ -------------
Net cash flows provided by financing activities 86,201,689 86,411,351 97,838,777
------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents (4,404,273) 16,326,210 5,297,442
Cash and cash equivalents, beginning of year 37,359,690 21,033,480 15,736,038
------------- ------------ -------------
Cash and cash equivalents, end of year $ 32,955,417 $ 37,359,690 $ 21,033,480
============= ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 25,830,947 $ 18,032,783 $ 11,440,437
============= ============ =============
Income taxes $ 1,375,000 $ 2,163,000 $ 1,528,000
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 34
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net unrealized
gains (losses)
Common Stock Treasury Stock on Investment
---------------------- ------------------ Securities Retained
Shares Amount Shares Amount Available-for-Sale Earnings
--------- ----------- ------- --------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1994 4,200,600 $ 5,125,000 11,292 $(70,575) $ 1,735,091 $14,340,986
Net income - - - - - 4,299,009
Dividends declared ($.1364 per
share) - - - - - (628,411)
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) 18,011,584
Net income - - - - - 4,649,382
Dividends declared ($.1398 per
share) - - - - - (644,135)
10% stock dividend 418,875 6,178,406 - - - (6,178,406)
Change in net unrealized gains
(losses) on investment - - - - - -
securities available-for-sale,
net of tax - - - - 2,326,951 -
--------- ----------- ------ -------- ----------- -----------
BALANCE DECEMBER 31, 1995 4,619,475 11,303,406 11,092 (69,325) 689,774 15,838,425
Net loss - - - - - (5,741,731)
Dividends declared ($.15 per
share) - - - - - (692,909)
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) $ 9,403,785
========= =========== ====== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Shareholders'
Equity
-----------
<S> <C>
BALANCE JANUARY 1, 1994 $21,130,502
Net income 4,299,009
Dividends declared ($.1364 per
share) (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 21,430,082
Net income 4,649,382
Dividends declared ($.1398 per
share) (644,135)
10% stock dividend -
Change in net unrealized gains
(losses) on investment -
securities available-for-sale,
net of tax 2,326,951
------------
BALANCE DECEMBER 31, 1995 27,762,280
Net loss (5,741,731)
Dividends declared ($.15 per
share) (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 $ 21,072,816
============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 35
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 (collectively 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, 1996 or
1995. 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 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.
<PAGE> 36
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 loans on which the accrual of interest has 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. 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.
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, 1996
or 1995, 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.
<PAGE> 37
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.
During 1996 and 1995, the Company capitalized approximately $894,000 and
$1,032,000, respectively of originated servicing rights and recorded
amortization of approximately $573,000 and $61,000, respectively and recorded a
valuation allowance of approximately $49,000 and $37,000, 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, 1996 and 1995, was approximately $7,400,000 and $7,800,000, 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.
<PAGE> 38
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.
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.
<PAGE> 39
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 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
--------------------------- ----------------------------------
Adequately Well Actual
Capital Ratios Capitalized Capitalized April 30, 1997 November 30, 1997 December 31,1996
- -------------- ----------- ----------- -------------- ----------------- ----------------
<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>
Capital Ratios Minimum 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 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, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
Company Bank
------------------ -----------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Tier 1 capital $17,052 $26,606 $ 20,799 $28,867
Tier 1 capital required 20,059 17,309 20,003 17,027
------- ------- -------- -------
Excess (deficit) over required amount $(3,007) $ 9,297 $ 796 $11,840
======= ======= ======== =======
Total risk-based capital $31,976 $45,323 $ 37,180 $41,194
Total risk-based capital required 40,118 34,619 40,007 34,055
------- ------- -------- -------
Excess (deficiency) over required amount $(8,142) $10,704 $ (2,827) $ 7,139
======= ======= ======== =======
</TABLE>
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
<PAGE> 40
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 core 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
loan losses that may be included in supplemental capital ("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.
<PAGE> 41
3 - INVESTMENT SECURITIES
Investment securities at December 31, 1996 and 1995, are summarized as
follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
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 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 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
=========== ========== ======== ===========
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
=========== ========== ======== ===========
</TABLE>
Proceeds from sales of investment securities available-for-sale during
1996 and 1995 were $43,781,536 and $34,233,853, respectively. Gross gains of
$603,977 and $917,786 for 1996 and 1995, respectively, were realized on those
sales. Gross losses in 1996 and 1995 were $0 and $62,867, respectively.
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. Income tax
expense related to the sale of securities was $214,776, $304,036 and $40,530
in 1996, 1995 and 1994, respectively.
There were no investments held in trading accounts during 1996 or 1995.
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.
<PAGE> 42
The following table depicts amortized cost and estimated fair value of
investment securities at December 31, 1996 and 1995, 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, 1996 December 31, 1995
------------------------------- -------------------------------
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 17,436,200 17,361,645 15,973,151 16,456,979
Due after ten years or more 12,720,560 12,583,133 8,000,000 8,000,000
----------- ----------- ----------- -----------
48,149,420 47,937,438 25,959,600 26,603,859
Mortgage-backed securities 21,754,422 21,740,205 24,780,224 25,248,502
----------- ----------- ----------- -----------
Total $69,903,842 $69,677,643 $50,739,824 $51,852,361
=========== =========== =========== ===========
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 $ 5,979,017 $ 5,860,320 $ 4,990,274 $ 5,018,750
=========== =========== =========== ===========
</TABLE>
Investment securities with a carrying value of approximately $56,280,000 and
$51,207,000 at December 31, 1996 and 1995, respectively, were pledged as
collateral for public deposits, securities sold under agreements to repurchase,
and for other purposes required by law.
<PAGE> 43
4. LOANS
Loans outstanding, by classification, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Credit cards $143,781,711 $139,873,437
Real estate-mortgage 71,718,792 61,246,732
Real estate-construction 56,325,014 40,955,261
Commercial, financial and agricultural 43,945,706 39,295,512
Consumer installment 113,512,340 78,805,544
------------ ------------
Total loans 429,283,563 360,176,486
Less:
Allowance for loan losses 16,510,842 5,536,504
Loans, net $412,772,721 $354,639,982
============ ============
</TABLE>
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 $7.5 million and $10 million at December
31, 1996 and 1995, respectively. The Company, through its mortgage subsidiary,
was servicing loans for others of approximately $580.0 million, $882.6 million,
and $523.3 million at December 31, 1996, 1995 and 1994, respectively.
Loans in nonaccrual status amounted to approximately $2,940,000,
$3,105,000 and $1,189,000 at December 31, 1996, 1995 and 1994, respectively.
The allowance for loan losses related to these impaired loans was $561,000 and
$383,000 at December 31, 1996 and 1995. The average recorded investment in
impaired loans during 1996 and 1995 was $3,135,000 and $1,689,028,
respectively. If such impaired loans had been on a full accruing basis,
interest income on these loans would have been approximately $278,000, $51,000
and $55,000 in 1996, 1995 and 1994, respectively.
Loans totaling approximately $237,600, $554,500 and $241,500 were
transferred to other real estate in 1996, 1995 and 1994, respectively. There
were no other real estate sales in 1996 financed by the Company. The Company
financed other real estate sales of approximately $401,000 and $323,000 in 1995
and 1994, respectively. Loans are reported net of deferred loan fees of
$104,669, $389,355 and $112,759 at December 31, 1996, 1995 and 1994,
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>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Balance at beginning of year $ 5,536,504 $ 4,343,657 $ 4,549,548
Provision for loan losses 25,127,000 8,090,000 4,125,000
Loans charged off:
Credit cards (13,156,340) (7,051,268) (4,465,609)
Other loans (1,659,492) (388,119) (314,405)
Recoveries on loans charged off 663,170 542,234 449,123
------------ ----------- -----------
Balance at end of year $ 16,510,842 $ 5,536,504 $ 4,343,657
============ =========== ===========
</TABLE>
<PAGE> 44
5 - PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Land $ 2,735,320 $ 2,110,321
Buildings and improvements 11,219,182 5,778,322
Furniture and equipment 13,543,963 8,934,164
----------- -----------
27,498,465 16,822,807
Less accumulated depreciation and amortization 7,699,386 6,234,374
-----------
Premises and equipment, net $19,799,079 $10,588,433
=========== ===========
</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.
<PAGE> 45
6 - DEPOSITS
Time deposits over $100,000 as of December 31, 1996 and 1995 were
$86,630,315 and $65,503,961, respectively. Related interest expense was
$5,042,964, $3,920,000 and $2,385,000 for the years ended December 31, 1996,
1995 and 1994 respectively. Included in demand and money market deposits were
NOW accounts totaling $37,322,255 and $37,701,876 at December 31, 1996 and
1995, respectively.
<PAGE> 46
7 - SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
----------- ----------
<S> <C> <C>
Federal funds purchased $ 500,000 $ -
Securities sold under agreements to repurchase 16,683,769 8,245,191
----------- ----------
Total $17,183,769 $8,245,191
=========== ==========
</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 $158,838 in 1996 and $267,777 in 1995. The weighted
average rate on short term borrowings outstanding at December 31, 1996 and 1995
was 3.06% and 2.96%, respectively.
<PAGE> 47
7 - SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
----------- ----------
<S> <C> <C>
Federal funds purchased $ 500,000 $ -
Securities sold under agreements to repurchase 16,683,769 8,245,191
Total $17,183,769 $8,245,191
=========== ==========
</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 $158,838 in 1996 and $267,777 in 1995. The weighted
average rate on short term borrowings outstanding at December 31, 1996 and 1995
was 3.06% and 2.96%, respectively.
<PAGE> 48
8 - LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
<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 $16,500,000 $16,750,000
=========== ===========
Note maturities as of December 31, 1996, are summarized as follows:
Amount
-----------
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.
<PAGE> 49
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, 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)
========== ============ ===========
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, 1994:
Federal $1,309,532 $ 694,301 $ 2,003,833
State - 87,856 87,856
---------- ----------- -----------
$1,309,532 $ 782,157 $ 2,091,689
========== =========== ===========
</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>
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Taxes at statutory rate $ (3,140,561) $2,453,236 $2,172,837
Increase (reduction) in income taxes resulting from:
State income tax expense, net of Federal income tax benefit (248,662) 10,278 57,985
Tax exempt income (22,770) (35,848) (58,855)
Other, net (83,219) 138,353 (80,278)
------------ ---------- ----------
Income tax expense $ (3,495,212) $2,566,019 $2,091,689
============ ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
Deferred Tax Deferred Tax
---------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
State tax credit carryforwards $ 208,091 $ - $309,983 $ -
Allowance for loan losses 4,010,988 - - 502,961
Accelerated depreciation - 514,645 - 420,252
Accretion on U.S. Treasury securities - 29,440 - 34,749
Deferred loan fees - 289,598 - 355,741
Other real estate 41,050 - 41,050 -
FHLB stock dividends - - - 23,038
Unearned income 296,975 - 92,885 -
Unrealized holding gains on securities
securities available-for-sale 85,865 - - 422,320
Capitalized mortgage servicing rights - 284,329 - -
Other 94,722 2,497 86,017 -
---------- ---------- -------- ----------
$4,737,691 $1,120,509 $529,935 $1,759,061
========== ========== ======== ==========
</TABLE>
<PAGE> 50
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 1996, 1995 and 1994, 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, 1996, 1995 and 1994, the Company contributed $71,873, $136,187 and $86,014,
respectively, to the plan.
<PAGE> 51
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.
<PAGE> 52
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.
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,
---------------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<C> <C> <C> <C> <C>
Financial instruments (assets)
Cash and due from banks $ 32,612,398 $ 32,612,398 $ 27,356,936 $ 27,356,936
Federal funds sold 343,019 343,019 10,002,754 10,002,754
Investment securities available-for-sale 71,230,743 71,230,743 53,139,161 53,139,161
Investment securities held-to-maturity 6,279,816 6,161,119 5,291,733 5,320,209
Loans, net of unearned income 467,389,431 468,578,264 407,289,021 408,622,292
------------ ------------ ------------ ------------
Total financial instruments (assets) 577,855,407 $578,925,543 503,079,605 $504,441,352
============ ============
Non-financial instruments (assets) 27,564,890 21,742,210
------------ ------------
Total assets $605,420,297 $524,821,815
============ ============
Financial instruments (liabilities)
Noninterest-bearing demand deposits $ 73,877,369 $ 73,877,369 $ 75,120,501 $ 75,120,501
Interest-bearing deposits 470,835,960 471,954,804 391,386,808 393,178,992
------------ ------------ ------------ ------------
Total deposits 544,713,329 545,832,173 466,507,309 468,299,493
Short-term borrowings 17,183,769 17,183,769 8,245,191 8,245,191
Long-term debt 16,500,000 16,500,000 16,750,000 16,750,000
------------ ------------ ------------ ------------
Total financial instruments (liabilities) 578,397,098 $579,515,942 491,502,500 $493,294,684
============ ============
Non-financial instruments
(liabilities and shareholders' equity) 27,023,199 33,319,315
------------ ------------
Total liabilities and shareholders' equity $605,420,297 $524,821,815
============ ============
</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 vaues of the Company's
off-balance sheet financial instruments as of December 31 are summarized below.
<PAGE> 53
<TABLE>
<CAPTION>
1996 1995
Estimated Estimated
(Dollars in Thousands) Fair Value Fair Value
---------- ----------
<S> <C> <C>
Unfunded commitments to
extend credit $388,711 $412,971
Letters of credit 3,767 2,135
</TABLE>
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.
<PAGE> 54
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 $1,740,000,
$1,550,000, and $1,250,000 in 1996, 1995, and 1994, 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, 1996 and 1995, were $5,429,000 and $5,280,000, respectively.
<PAGE> 55
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.
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.
<PAGE> 56
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,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Other income:
Brokerage commissions $3,201,220 $2,172,171 $1,580,814
Trust income 845,794 563,375 462,326
Other expense:
Stationery and supplies 930,816 734,876 544,036
Postage 640,499 486,624 383,336
Deposit insurance premiums 556,771 684,375 884,209
Telephone 831,670 502,148 492,250
</TABLE>
<PAGE> 57
16 - CONDENSED FINANCIAL INFORMATION OF FIDELITY NATIONAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash $ 1,157,191 $ 445,415
Land 419,418 419,418
Investment in bank subsidiary 24,822,351 30,007,881
Investments in and amounts due from nonbank subsidiaries 359,018 276,128
Subordinated loan to bank subsidiary 10,000,000 7,000,000
Commercial loan participations - 5,574,770
Other assets 1,050,888 948,379
----------- -----------
Total assets $37,808,866 $44,671,991
=========== ===========
LIABILITIES
Long-term debt $16,500,000 $16,750,000
Other liabilities 236,050 159,711
----------- -----------
Total liabilities 16,736,050 16,909,711
SHAREHOLDERS' EQUITY
Common stock 11,878,597 11,303,406
Treasury stock (69,325) (69,325)
Net unrealized (losses) gains on investment securities available-for-sale,
net of tax (140,241) 689,774
Retained earnings 9,403,785 15,838,425
----------- -----------
Total shareholders' equity 21,072,816 27,762,280
----------- -----------
Total liabilities and shareholders' equity $37,808,866 $44,671,991
=========== ===========
</TABLE>
<PAGE> 58
Note 16 continued
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------
1996 1995 1994
----------- --------------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 272,941 $ 5,973 $ 207
Deposits in bank 46,315 5,630 1,310
Subordinated loan to bank 768,542 40,164 -
----------- ---------- -----------
Total interests income 1,087,798 51,767 1,517
INTEREST EXPENSE - Long-term debt 1,501,488 353,284 131,220
----------- ---------- ----------
NET INTEREST EXPENSE (413,690) (301,517) (129,703)
OTHER INCOME
Lease income 120,000 120,000 92,000
Dividend from subsidiaries 1,600,000 950,000 850,000
Management fees 91,740 130,680 42,000
Other 3,157 6,525 -
----------- ---------- ----------
Total other income 1,814,897 1,207,205 984,000
OTHER EXPENSES 185,462 49,929 92,050
----------- ---------- ----------
Income before income taxes and undistributed (loss) income of subsidiary 1,215,745 855,759 762,247
Income tax benefit 146,017 38,045 47,685
----------- ---------- ----------
Income before equity in undistributed (loss) income of subsidiaries 1,361,762 893,804 809,932
Equity in undistributed (loss) income of subsidiaries (7,103,493) 3,755,578 3,489,077
----------- ---------- ----------
NET (LOSS) INCOME $(5,741,731) $4,649,382 $4,299,009
============ ========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(5,741,731) $ 4,649,382 $4,299,009
Equity in undistributed income of subsidiaries 7,103,493 (3,755,578) (3,489,077)
(Increase) decrease in other assets (102,509) (944,615) 43,935
Increase in other liabilities 76,341 130,084 26,299
----------- ------------ ----------
Net cash flows provided by operating activities 1,335,594 79,273 880,166
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of commercial loans 5,574,770 (5,574,770) -
Net increase in loans to and investment in subsidiaries (5,830,870) (8,071,122) (825,000)
----------- ------------ ----------
Net cash flows used in investing activities (256,100) (13,645,892) (825,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of long-term debt - 16,250,000 926,000
Repayment of long-term-debt (250,000) (1,991,000) (250,000)
Issuance of Common Stock 575,191 - -
Dividends paid (692,909) (644,135) (628,411)
Sale of treasury stock - - 1,250
----------- ------------ ----------
Net cash flows (used in) provided by financing activities (367,718) 13,614,865 48,839
----------- ------------ ----------
Net increase in cash 711,776 48,246 104,005
Cash, beginning of year 445,415 397,169 293,164
----------- ------------ ----------
Cash, end of year $ 1,157,191 $ 445,415 $ 397,169
=========== ============ ==========
</TABLE>
<PAGE> 59
SHAREHOLDER INFORMATION
STOCK
Fidelity National Corporation's Common Stock is registered with the Securities
and Exchange Commission. It is included in the NASDAQ National Market System
under the symbol "LION." It is listed in The Wall Street Journal under
"FidNtl."
FINANCIAL INFORMATION
Analysts, investors and others seeking financial information about the Company
should contact:
Martha Fleming (404) 240-1504
or write:
Fidelity National Corporation
P.O. Box 105075
Atlanta, GA 30348
SHAREHOLDER ASSISTANCE
Shareholders requiring a change of address, records or infor-mation about lost
certificates or dividend checks may contact the Company's transfer agent:
The Bank of New York
Investor Relations Department
P.O. Box 11258
Church Street Station
New York, NY 10286-1258
1-800-524-4458
MARKET PRICES - COMMON STOCK
<TABLE>
<CAPTION>
1996 High Low
---- ----- ---
<S> <C> <C>
Fourth Quarter 12-3/8 9-3/4
Third Quarter 14-3/4 11-7/8
Second Quarter 16-1/4 13-7/8
First Quarter 16-3/4 14-1/2
1995
----
Fourth Quarter 17-1/2 14-3/4
Third Quarter 15-1/4 10-3/4
Second Quarter 10-3/4 9-3/4
First Quarter 10-1/2 9-1/4
</TABLE>
As of February 28, 1997, there were approximately 370 shareholders of record.
In addition, shares of approximately 250 beneficial owners of the Company's
Common Stock are held by brokers, dealers and their nominees.
MARKET MAKERS
Sterne, Agee & Leach
Alex. Brown & Sons Inc.
G.V.R. Company
Herzog, Heine, Geduld, Inc.
Knight Securities LP
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Fidelity National Corporation and subsidiaries of our report dated April 3,
1997, included in the 1996 Annual Report to Shareholders of Fidelity National
Corporation and subsidiaries, and to the incorporation by reference in the
Registration Statement (Form S-8 No. 33- 11877) pertaining to the Employee
Stock Purchase Plan of Fidelity National Corporation and in the Registration
Statement (Form S-3 No. 33-11879) of Fidelity National Corporation and in the
related prospectus of our report dated April 3, 1997, with respect to the
consolidated financial statements of Fidelity National Corporation and
subsidiaries incorporated by reference in the Annual Report (Form 10-K) for the
year ended December 31, 1996.
Atlanta, Georgia /s/ Ernst & Young LLP
April 14, 1997 ---------------------
<PAGE> 1
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, 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 said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1996, on Form 10-K, and all amendments thereto, to be filed
by said Corporation with the Securities and Exchange Commission, Washington,
D.C. pursuant to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
and to file the same, with all exhibits thereto and other supporting documents,
with said 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 10th day of April, 1997.
/s/ James W. Anderson, Jr.
----------------------------------------
Name: James W. Anderson, Jr.
<PAGE> 2
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, 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 said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1996, on Form 10-K, and all amendments thereto, to be filed
by said Corporation with the Securities and Exchange Commission, Washington,
D.C. pursuant to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
and to file the same, with all exhibits thereto and other supporting documents,
with said 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 10th day of April, 1997.
/s/ Edward G. Bowen, M.D.
----------------------------------------
Name: Edward G. Bowen, M.D.
<PAGE> 3
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, 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 said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1996, on Form 10-K, and all amendments thereto, to be filed
by said Corporation with the Securities and Exchange Commission, Washington,
D.C. pursuant to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
and to file the same, with all exhibits thereto and other supporting documents,
with said 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 10th day of April, 1997.
/s/ Marvin C. Goldstein, D.D.S.
----------------------------------------
Name: Marvin C. Goldstein, D.D.S.
<PAGE> 4
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, 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 said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1996, on Form 10-K, and all amendments thereto, to be filed
by said Corporation with the Securities and Exchange Commission, Washington,
D.C. pursuant to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
and to file the same, with all exhibits thereto and other supporting documents,
with said 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 10th day of April, 1997.
/s/ Manning M. Pattillo, Jr., Ph.D.
--------------------------------------
Name: Manning M. Pattillo, Jr., Ph.D.
<PAGE> 5
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, 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 said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1996, on Form 10-K, and all amendments thereto, to be filed
by said Corporation with the Securities and Exchange Commission, Washington,
D.C. pursuant to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
and to file the same, with all exhibits thereto and other supporting documents,
with said 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 10th day of April, 1997.
/s/ Robert J. Rutland
----------------------------------------
Name: Robert J. Rutland
<PAGE> 6
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, 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 said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1996, on Form 10-K, and all amendments thereto, to be filed
by said Corporation with the Securities and Exchange Commission, Washington,
D.C. pursuant to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
and to file the same, with all exhibits thereto and other supporting documents,
with said 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 10th day of April, 1997.
/s/ R. Phillip Shinall, III
----------------------------------------
Name: R. Phillip Shinall, III
<PAGE> 7
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, 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 said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1996, on Form 10-K, and all amendments thereto, to be filed
by said Corporation with the Securities and Exchange Commission, Washington,
D.C. pursuant to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, and the regulations promulgated thereunder,
and to file the same, with all exhibits thereto and other supporting documents,
with said 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 10th day of April, 1997.
/s/ Rankin Smith, Jr.
----------------------------------------
Name: Rankin Smith, Jr.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 29,311,690
<INT-BEARING-DEPOSITS> 3,300,708
<FED-FUNDS-SOLD> 343,019
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,230,743
<INVESTMENTS-CARRYING> 6,279,816
<INVESTMENTS-MARKET> 6,161,119
<LOANS> 467,389,431
<ALLOWANCE> 16,510,842
<TOTAL-ASSETS> 605,420,297
<DEPOSITS> 544,713,329
<SHORT-TERM> 17,183,769
<LIABILITIES-OTHER> 5,950,383
<LONG-TERM> 16,500,000
0
0
<COMMON> 11,878,597
<OTHER-SE> 9,194,219
<TOTAL-LIABILITIES-AND-EQUITY> 605,420,297
<INTEREST-LOAN> 54,333,446
<INTEREST-INVEST> 4,956,072
<INTEREST-OTHER> 510,753
<INTEREST-TOTAL> 59,800,271
<INTEREST-DEPOSIT> 24,532,698
<INTEREST-EXPENSE> 26,726,776
<INTEREST-INCOME-NET> 33,073,495
<LOAN-LOSSES> 25,127,000
<SECURITIES-GAINS> 603,977
<EXPENSE-OTHER> 35,488,660
<INCOME-PRETAX> (9,236,943)
<INCOME-PRE-EXTRAORDINARY> (5,741,731)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,741,731)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
<YIELD-ACTUAL> 10.80
<LOANS-NON> 2,940,000
<LOANS-PAST> 6,890,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,536,504
<CHARGE-OFFS> 14,815,832
<RECOVERIES> 663,170
<ALLOWANCE-CLOSE> 16,510,842
<ALLOWANCE-DOMESTIC> 16,510,842
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
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
