<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FIDELITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-1416811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3490 PIEDMONT ROAD, ATLANTA GEORGIA 30305, (404) 240-1504
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
M. HOWARD GRIFFITH, JR.
CHIEF FINANCIAL OFFICER
FIDELITY NATIONAL CORPORATION
3490 PIEDMONT ROAD
SUITE 1550
ATLANTA, GEORGIA 30305
(404) 639-6921
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<C> <C>
UGO F. IPPOLITO, ESQ. ALAN J. PRINCE, ESQ.
GLASS, MCCULLOUGH, SHERRILL & HARROLD, LLP KING & SPALDING
1409 PEACHTREE STREET, N.E. 191 PEACHTREE STREET
ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30303
(404) 885-6705 (404) 572-5100
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this
Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value......... 3,450,000 $8.875 $30,618,750 $9,278.41
=====================================================================================================================
</TABLE>
(1) Includes 450,000 shares of Common Stock issuable upon the exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1993 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED SEPTEMBER 25, 1997
PROSPECTUS
3,000,000 SHARES
[LOGO]
FIDELITY NATIONAL CORPORATION
COMMON STOCK
------------------------
All of the 3,000,000 shares of Common Stock offered hereby (the "Offering")
are being issued and sold by Fidelity National Corporation, a Georgia
corporation (the "Company" or "FNC"). The Common Stock is listed on the Nasdaq
National Market under the symbol "LION." It is currently estimated that the
offering price will be between $7 and $8 per share. On September 23, 1997, the
last reported sale price of the Common Stock on the Nasdaq National Market was
$9.00 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSIT ACCOUNTS OR
OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................... $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $
==================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $275,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock on the same terms and
conditions as the securities offered hereby, solely to cover
over-allotments, if any. If the option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as, and if delivered to and accepted by them, and subject
to certain other conditions including the right of the Underwriters to withdraw,
cancel, modify or reject any order in whole or in part. It is expected that
delivery of the shares will be made on or about , 1997 at the
offices of Raymond James & Associates, Inc., St. Petersburg, Florida.
------------------------
RAYMOND JAMES & ASSOCIATES, INC.
The date of this Prospectus is , 1997
<PAGE> 3
[MAP OF THE ATLANTA METROPOLITAN AREA SHOWING THE
LOCATION OF EACH OF THE 16 LOCATIONS OF THE COMPANY]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT AND STABILIZING TRANSACTIONS, THE PURCHASE OF
SUCH SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus or incorporated by reference in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes no exercise of the Underwriters' overallotment option. Investors should
carefully consider the information set forth under the heading "Risk Factors."
Per share data has been adjusted for the 10% stock dividend to shareholders of
record on September 28, 1995. As used herein, the term the "Company" refers to
Fidelity National Corporation or Fidelity National Corporation and its
subsidiaries.
THE COMPANY
Fidelity National Corporation is a bank holding company headquartered in
Atlanta, Georgia. The Company, which commenced operations as Fidelity National
Bank ("FNB" or the "Bank") in 1973, provides traditional deposit, lending,
mortgage, securities brokerage, international trade services and trust products
and services to its commercial and retail customers through its subsidiaries.
FNB is a full-service banking operation; Fidelity National Mortgage Corporation
("FNMC") is a full-service residential mortgage banking operation; and Fidelity
National Capital Investors, Inc. ("FNCI") is a securities brokerage operation.
The Company currently conducts full-service banking and residential mortgage
lending businesses through 16 locations in the metropolitan Atlanta area. The
Company conducts indirect automobile lending, residential mortgage lending and
residential construction lending through certain of its Atlanta offices and its
Jacksonville, Florida location. Indirect automobile lending is also conducted at
the Tampa, Florida location which was opened in 1995. At June 30, 1997, the
Company had total assets of $613 million, total loans of $452 million, total
deposits of $557 million and shareholders' equity of $26 million.
From 1992 to 1995, the Company experienced substantial growth. Total assets
increased from $238 million at December 31, 1991 to $525 million at December 31,
1995, a four-year compound annual growth rate of 21.9%. Total assets increased
to $605 million at December 31, 1996, an increase of 15.2% from December 31,
1995. Net income increased from $1.6 million for the year ended December 31,
1991 to $4.6 million for the year ended December 31, 1995, a four-year compound
annual growth rate of 30.1%. For the year ended December 31, 1996, the Company
had a net loss of $5.7 million. The major factor contributing to the Company's
1996 loss was higher loan loss provisions on credit cards resulting from higher
delinquencies and charge-offs during the third and fourth quarters of 1996.
Management has undertaken several initiatives to improve the profitability of
the Company, especially its credit card lending operations. Net income for the
six months ended June 30, 1997 was $647,000.
As a result of the 1996 loss and FNB's significant growth, the Company and
the Bank did not meet minimum capital levels established for an adequately
capitalized bank holding company and bank in accordance with regulations
promulgated by the Federal Reserve Bank ("FRB") and the Office of the
Comptroller of the Currency ("OCC") at December 31, 1996. On November 14, 1996,
the Bank and the OCC entered into an agreement ("OCC Agreement") pursuant to
which the Bank was required to achieve capital levels of at least a well
capitalized bank by April 30, 1997 and is required to achieve capital levels in
excess of a well capitalized bank by November 30, 1997. The Bank did not meet
the capital levels required by the OCC Agreement as of April 30, 1997. The
Company and the Bank have restored the capital levels to adequately capitalized
as defined in the regulations through the issuance by the Company of $4.7
million of Non-Cumulative 8% Convertible Preferred Stock, Series A ("Preferred
Stock") in June 1997. The net proceeds were invested by the Company in 8%
preferred stock of the Bank. The Company estimates that approximately $13
million in additional equity is currently required by the Bank to achieve the
capital levels required to meet the November 30, 1997 requirements of the OCC
Agreement. The purpose of the Offering is to raise additional capital to improve
the Bank's capital ratios in order to meet the capital requirements of the OCC
Agreement and to grow the businesses of the Company. See "Regulatory
Matters -- OCC Agreement."
The Company was incorporated in Georgia in 1979 and at that time acquired
all of the common stock of FNB, which was organized as a national bank in 1973.
In August 1995, the Company changed its name from Fidelity Southern Corporation
to Fidelity National Corporation. The Company's principal offices are located at
3490 Piedmont Road, Suite 1550, Atlanta, Georgia 30305, and its telephone number
is (404) 240-1504.
3
<PAGE> 5
STRATEGY
The Company's long-term strategy is to (i) continue to grow its
full-service banking operations, primarily in the metropolitan Atlanta area, by
fully utilizing its current branch capacity and by opening additional bank
branches; (ii) capitalize on the consolidating metropolitan Atlanta banking
market by increasing commercial and real estate loans and other banking
services, primarily to small and medium sized companies; (iii) retain a greater
number of its indirect automobile loans and residential mortgage loans; (iv)
strengthen its credit card lending operations and processes; (v) enhance
operating efficiencies; and (vi) further strengthen the Company's senior
management team.
Continue to grow banking operations. The Company is focused on growing its
full-service banking operations by leveraging its current branch capacity
resulting from the Company's recent opening of four branch offices and the move
of one branch into a significantly improved facility. These branches are not yet
mature and they continue to experience steady deposit and loan growth. In
addition, the Company has acquired and equipped three additional branches, which
it intends to open following the Offering subject to OCC approval. The Company
is currently incurring the fixed costs associated with these new and unopened
branches. Upon successful capitalization, the Company expects to be able to grow
the deposits of these new and unopened branches, thereby improving the return
realized on the Bank's operating cost structure. During the past twelve months,
the Company added six automated teller machines ("ATMs"), bringing the total
number of ATMs in its network to 27 at June 30, 1997. The Company expects to add
ten additional ATMs during the next twelve months.
Capitalize on the consolidating metropolitan Atlanta banking market. The
Company is positioning itself as the financial institution alternative to the
larger commercial banks headquartered outside of metropolitan Atlanta that have
been acquiring Atlanta commercial banks and thrifts. Management seeks to
capitalize on markets which it believes are being underserved as a result of
these acquisitions by increasing commercial loans and other banking services,
primarily to small and medium sized companies. The Company believes there is
still value to be added by providing the opportunity for greater personalized
banking relationships than exist with the larger commercial banks in its target
markets and will continue to emphasize personalized service by a locally
headquartered financial institution in order to differentiate itself from its
larger competitors. FNB's asset size of $613 million at June 30, 1997 and legal
lending limit per borrower of approximately $7.5 million position it to work
more effectively with middle-market customers than many smaller community banks
in the Atlanta metropolitan area.
Retain indirect automobile and residential mortgage loans. The Company
plans, based on its adherence to established underwriting criteria, to further
increase the profitability of its indirect automobile lending operation by
retaining a greater number of the indirect automobile loans that it acquires
from dealers in Atlanta, Georgia and Jacksonville and Tampa, Florida.
Historically, the Company has sold a significant portion of these contracts on a
non-recourse basis and generally has retained the servicing rights. The Company
also plans to retain a larger portion of its residential mortgage loan
production.
Strengthen credit card lending activities. Management of the Company has
recently undertaken several initiatives to improve and return to profitability
its credit card lending activities. The Company has discontinued the issuance of
preapproved credit cards under affinity programs, increased the rates and fees
on a significant portion of its credit card accounts to appropriately reflect
the risk levels and strengthened the collection and recovery processes on credit
card accounts. The Company continues to implement new procedures and
technologies to enhance its ability to monitor and manage the exposures inherent
in its credit card portfolio. The Company currently does not plan to issue new
affinity credit cards or aggressively market new credit cards. As a result, the
Company expects its credit card loans to diminish as a percentage of its total
loan portfolio. Over time, and in conjunction with an increase in commercial
loans and retained indirect automobile loans, the reduction in credit card loans
is expected to result in an increase in the percentage of secured loans in the
Company's loan portfolio.
Enhance operating efficiencies. During the fourth quarter of 1996, the
Company consolidated its data processing, deposit and loan operations and its
collection and consumer product operations into a centrally located office. In
connection with this consolidation, the Company has upgraded and is continuing
to upgrade
4
<PAGE> 6
its software and management information systems designed to improve marketing
and operating efficiencies. Specifically, the Company has implemented automated
dialers for marketing products and collection, telephone banking software,
delinquency analysis software, collection software and enhanced accounting
systems software. The Company continues to analyze its infrastructure and
technological developments in the banking industry for opportunities to improve
the efficiency of its operations.
Further Strengthen Senior Management. On September 15, 1997, FNB hired
Larry D. Peterson as its President and Chief Executive Officer. In addition,
during the past two years the Company has hired a senior consumer credit
officer, a manager of credit cards and a manager of indirect automobile lending.
The Company intends to continue to strengthen senior management. See
"Management."
THE OFFERING
Common Stock Offered Hereby..... 3,000,000 shares
Common Stock to be Outstanding
after the Offering(1)......... 7,659,892 shares
Use of Proceeds................. To provide funds to the Company to invest in
preferred and common stock of FNB so that FNB
will meet the capital levels set forth in the
OCC Agreement and for general corporate
purposes. See "Risk Factors," "Regulatory
Matters" and "Use of Proceeds."
Nasdaq National Market Symbol... LION
- ---------------
(1) Does not include (i) 500,000 shares of Common Stock reserved for issuance
pursuant to stock options under the Company's 1997 Stock Option Plan
("Plan"), of which 250,000 shares of Common Stock are reserved for issuance
pursuant to outstanding stock options; (ii) 855,351 shares of Common Stock
reserved for issuance upon the conversion of the Preferred Stock; and (iii)
150,000 shares of Common Stock reserved for issuance upon the exercise of
the Representative's Warrants. See "Underwriting."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1)
Interest income................................... $ 35,887 $ 48,080 $ 59,800 $ 28,681 $ 30,857
Interest expense.................................. 11,765 18,871 26,727 12,613 12,950
Net interest income............................... 24,122 29,209 33,073 16,068 17,907
Provision for loan losses......................... 4,125 8,090 25,127 5,400 8,270
Noninterest income, including securities gains.... 8,769 11,679 18,305 8,480 8,815
Securities gains, net (realized).................. 124 853 604 283 -
Noninterest expense............................... 22,375 25,583 35,489 16,626 17,488
Net income (loss)................................. 4,299 4,649 (5,742) 1,608 647
Dividends paid.................................... 628 644 693 346 -
PER SHARE DATA
Net income (loss)................................. .93 1.01 (1.24) .35 .14
Book value........................................ 4.65 6.02 4.53 5.90 4.65
Dividends paid.................................... .14 .14 .15 .0750 -
Dividend payout ratio............................. 14.62% 13.85% * 21.50% -
Average shares outstanding........................ 4,608,383 4,608,383 4,619,530 4,608,383 4,657,057
PERFORMANCE RATIOS
Return on average assets.......................... 1.15% 1.01% * .56% .22%
Return on average equity.......................... 20.40 18.91 * 11.71 6.00
Net interest margin............................... 6.95 6.87 5.97 6.15 6.63
Efficiency ratio.................................. 68.03 62.57 69.07 67.73 65.44
ASSET QUALITY RATIOS
Net charge-offs to average loans.................. 1.54% 2.37% 3.00% 2.53% 4.22%
Allowance to period-end loans..................... 1.31 1.54 3.85 1.52 3.43
Nonperforming assets to total loans and OREO...... .87 1.24 .82 1.14 .79
Allowance to nonperforming loans.................. 3.65x 1.80x 5.62x 1.87x 10.66x
Allowance to nonperforming assets................. 1.50 1.25 4.71 1.33 4.32
CAPITAL RATIOS
Leverage.......................................... 5.51% 5.42% 2.67% 4.56% 3.76%
Risk-based capital
Tier 1.......................................... 6.49 6.15 3.40 5.00 4.60
Total........................................... 8.25 10.47 6.38 8.64 8.17
Average equity to average assets.................. 5.64 5.35 4.50 4.80 3.62
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA
Assets...................................................... $613,367 $635,412
Total loans, net............................................ 452,149 452,149
Total deposits.............................................. 557,030 557,030
Long-term debt.............................................. 16,050 15,800
Shareholders' equity........................................ 26,344 49,839
Realized shareholders' equity............................... 26,202 49,697
</TABLE>
- ---------------
* Given the Company's net loss for the year ended December 31, 1996, this data
is not meaningful.
(1) Beginning January 1, 1996 and consistent with industry practice, the Company
commenced reversing current period accrued interest and rate-related income
on credit card charge-offs to interest income. This amount totaled $700,000
and $1.3 million for the six months ended June 30, 1996 and 1997,
respectively, and $2.0 million for the year ended December 31, 1996. Such
amounts were previously charged against the allowance for loan losses. Such
reclassifications have not been made in prior period financial statements.
(2) Pro forma as adjusted balance sheet data gives effect to the issuance of
232,000 shares of Preferred Stock on July 9, 1997 and the sale of 3,000,000
shares of the Common Stock offered hereby (assuming an offering price of
$8.00 per share and the application of the net proceeds as described
herein).
6
<PAGE> 8
RISK FACTORS
Information contained or incorporated by reference in this Prospectus
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended. These statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "intention" or "continue" or the negative
thereof or other comparable terminology. The following matters and certain other
factors noted throughout this Prospectus and any documents incorporated by
reference herein or therein and exhibits hereto and thereto constitute
cautionary statements that identify important factors with respect to any such
forward-looking statements, including certain risks and uncertainties, that
could cause the Company's actual results to differ materially from those
contained in any such forward-looking statements.
An investment in the Company involves a high degree of risk. In addition to
the other information contained in this Prospectus, the following risk factors
should be considered carefully in evaluating an investment in the Common Stock
offered hereby.
RESTRICTIONS UNDER REGULATORY AGREEMENTS; CAPITAL ADEQUACY
The OCC Agreement requires the Bank to maintain capital levels of at least
a well capitalized bank commencing April 30, 1997 and in excess of a well
capitalized bank commencing November 30, 1997. The Bank currently is adequately
capitalized as defined in the OCC's regulations but has not met the capital
levels required under the OCC Agreement as of April 30, 1997. Under the OCC
Agreement, the Bank may not declare a dividend (i) on its preferred stock owned
by the Company unless the Bank is adequately capitalized as defined in the
regulations and (ii) on its common stock owned by the Company unless the Bank
meets the capital levels required under the OCC Agreement and such dividend is
approved by the OCC. The failure of the Bank to maintain the capital levels set
forth in the OCC Agreement or its breach of any other provision thereof may
result in civil fines and other regulatory supervisory actions which may have a
material adverse effect on the results of operations and financial condition of
the Company. Such regulatory supervisory action may include growth limitations,
prohibitions on dividend payments, increased supervisory monitoring, limitations
on executive compensation, restrictions on deposit interest rates, mandatory
merger or sale, and regulatory seizure.
The Company intends to invest at least $17 million of the net proceeds of
the Offering in preferred and common stock of the Bank. Upon the application of
such proceeds, the Bank expects to exceed the capital levels required to be met
on November 30, 1997 under the OCC Agreement. The application of the proceeds
from the Offering will enable the Bank to meet the capital requirements imposed
by the OCC Agreement. However, given the risk profile of the Bank's loan
portfolio, there can be no assurance that the Bank will be able to (i) maintain
thereafter the higher capital levels required under the OCC Agreement or (ii)
obtain the written approval of the OCC for the payment of dividends on its
common stock even if it meets the required higher capital levels. Failure of the
Bank to pay the dividends on its preferred and common stock to the Company, in
whole or in part, will materially adversely affect the Company's ability to pay
interest on its 8.5% Subordinated Notes ("Notes") and other subordinated debt
and dividends on its Preferred Stock and Common Stock. Failure of the Company to
pay interest on the Notes or a dividend on the Preferred Stock will restrict the
Company's right to pay a dividend on the Common Stock. There can be no assurance
that FNB will be able to pay any dividend on its capital stock to the Company in
the future or pay dividends in amounts sufficient for the Company to pay
interest in full on the Notes and to pay dividends on the Preferred Stock and
Common Stock. See "Regulatory Matters -- OCC Agreement," "Dividend Policy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Capital Stock."
In addition, on February 13, 1997, the Board of Directors of the Company
adopted certain resolutions ("FRB Agreement") at the direction of the Federal
Reserve Board ("FRB"). The FRB Agreement prohibits the Company from incurring
additional debt or declaring dividends on the Common Stock without the prior
approval of the FRB. The failure to obtain the approval of the FRB will limit
the Company's ability to access
7
<PAGE> 9
funds, including funds to be loaned to the Bank to assist it in meeting its
liquidity needs. See "Regulatory Matters -- FRB Agreement."
GOING CONCERN QUALIFICATIONS IN REPORT OF INDEPENDENT AUDITORS
The independent auditors' report on the Company's Consolidated Financial
Statements for the year ended December 31, 1996 includes an explanatory
paragraph indicating that the Company's and the Bank's ability to continue as a
going concern is dependent upon its ability to increase the capital ratios of
the Bank in accordance with the OCC Agreement. Failure to increase its capital
ratios could subject the Bank to regulatory sanctions that may include
restrictions on operations and growth, mandatory asset dispositions and seizure.
The purpose of the Offering is to raise capital so that the Bank will meet the
capital requirements of the OCC Agreement. There can be no assurance that the
Company and the Bank will be able to increase or maintain the Bank's capital
ratios in accordance with the OCC Agreement. The consolidated financial
statements do not include the adjustments, if any, that might have been required
had the outcome of the above-mentioned uncertainties been known, or any
adjustments relating to the recoverability of recorded asset amounts or the
amount of liabilities that may be necessary should the Company be unable to
continue as a going concern.
LIQUIDITY
Because of the losses the Company experienced in 1996, the Bank's liquidity
position deteriorated. Liquidity is the ability of the Bank to meet anticipated
customer demands for funds under credit commitments and deposit withdrawals at a
reasonable cost and on a timely basis. The Company's and the Bank's liquidity
sources are limited. In addition, pursuant to the FRB Agreement, the Company
cannot incur any additional indebtedness without the approval of the FRB. Thus,
the Company will not be in a position to borrow funds and loan the funds to or
invest the funds in the Bank without the prior approval of the FRB. Failure to
maintain a sufficient level of liquidity can limit loan growth and adversely
affect the Bank's ability to meet significant withdrawal demands. Management of
the Bank meets liquidity needs by managing loan growth production and through
the sale of indirect automobile loans and through lines of credit with the FRB,
the Federal Home Loan Bank and federal fund lines with other banks. Failure of
management to accurately forecast liquidity needs or to properly assess capital
needs could have a material adverse effect on the Bank's and the Company's
financial position.
RISK OF FUTURE LOSSES
The Company reported a net loss of $5.7 million or $1.24 per share for the
year ended December 31, 1996. The major factor contributing to the losses in the
third and fourth quarters of 1996 was the higher loan loss provision on credit
cards resulting from higher delinquencies and charge-offs. For 1996, the
provision for loan losses was $25.1 million compared to $8.1 million for 1995.
In 1996, the Company also had higher expenses attributable to corporate
expansion and consolidation of its back office operations. While the Company has
taken several actions to return the credit card business to profitability, there
can be no assurance that credit card losses will not continue at current levels
or higher levels. In 1996, the Bank implemented strategies to increase its
capital, which included the sale of certain mortgage servicing rights, to
generate short-term income. These strategies could adversely affect future
earnings. Although the Company reported a profit for the first six months of
1997, there can be no assurance that the Company will continue to be profitable.
CREDIT CARD LOAN LOSS TRENDS; SEASONING RISKS OF CREDIT CARD PORTFOLIO
During 1996 and 1997, the Company experienced higher than historical levels
of loan losses on its credit card loans. Total net charge-offs in the credit
card loan portfolio were $12.6 million for the year ended December 31, 1996 and
$7.9 million for the six months ended June 30, 1997, compared to $6.9 million
for the year ended December 31, 1995 and $4.1 million for the six months ended
June 30, 1996. The net charge-off ratio for the credit card portfolio was 8.35%
for the year ended December 31, 1996 and 11.95% for the six months ended June
30, 1997 on an annualized basis, compared to 5.82% and 5.55%, respectively,
during 1995 and the six months ended June 30, 1996 on an annualized basis. There
can be no assurance that future credit
8
<PAGE> 10
card losses will not continue at higher than historical levels in the future.
Continued credit card loan losses exceeding the Company's historical rate could
have a material adverse affect on the results of operations and financial
condition of the Company and its ability to comply with the capital requirements
of the OCC Agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Provision for Loan Losses."
The delinquency and loss levels of a credit card portfolio do not stabilize
until many months after its origination. As a newly created credit card
portfolio ages, the delinquency and loss levels typically become more
predictable (referred to as "seasoning"). The less seasoned a credit card
portfolio is, the less predictable are the delinquencies and losses. A portfolio
consisting of older accounts generally behaves more predictably than a newly
originated portfolio. There is, however, no established time period after which
credit card portfolios are considered to be stabilized or by which delinquencies
and losses peak. It may be as long as three years before loans in a credit card
portfolio are considered stabilized. As of June 30, 1997, the Company had
100,384 credit card accounts of which 17,294 cards were issued within the last
18 months. In view of the limited seasoning of these accounts, the credit card
loans to these accounts may experience higher levels of delinquencies and losses
hereafter, which could have a material adverse effect on the results of
operations and financial condition of the Company.
CREDIT RISK AND LOAN CONCENTRATION
A major risk facing lenders is the risk of losing principal and interest as
a result of a borrower's failure to perform according to the terms of the loan
agreement, or "credit risk." As of June 30, 1997, the Company's total loan
portfolio was $452 million, or 73.7% of total assets, consisting primarily of
consumer loans (60.4% of total loans, including indirect automobile loans (29.0%
of total loans) and credit card loans (27.7% of total loans)) and real estate
loans (29.4% of total loans). Real estate loans include residential mortgages
and construction and commercial loans secured by real estate. In addition, other
commercial loans make up 10.2% of total loans. The Company's credit risk with
respect to its real estate loans relates principally to the value of the
underlying collateral. The Company's credit risk with respect to its indirect
automobile loans and commercial loans relates principally to the general
creditworthiness of the borrowers who primarily are individuals and small and
medium-sized businesses in the metropolitan areas of Atlanta, Georgia and
Jacksonville and Tampa, Florida. While indirect automobile loans are secured,
they are characterized by loan to value ratios that could result in the Bank not
recovering the full value of an outstanding loan upon default by the borrower.
The Company's credit risk with respect to its credit card portfolio relates
principally to the general creditworthiness of individuals in light of the
unsecured nature of credit card loans. During the last six months of 1996 and
the first three months of 1997, the Company experienced significant increases in
the amount and rate of delinquencies and charge-offs in its credit card loan
portfolio. In addition, the Company is experiencing higher loan losses in its
indirect automobile loan portfolio in 1997. Management believes that the
allowance for loan losses is adequate. However, there can be no assurance that
the allowance for loan losses will be adequate to cover future losses in the
existing loan portfolios. Loan losses exceeding the Company's historical rates
could have a material adverse affect on the results of operations and financial
condition of the Company. See "-- Credit Card Loan Loss Trends," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Provision for Loan Losses," "Business -- Products and Services --
Lending -- Significant Operating Policies" and Note 3 to the Consolidated
Financial Statements.
MANAGEMENT INFORMATION SYSTEMS
The sophistication and level of risk of FNB's business requires the
utilization of thorough and accurate management information systems. Failure of
management to effectively implement, maintain, update and utilize updated
management information systems could prevent management from recognizing in a
timely manner deterioration in the performance of its business, particularly its
credit card and indirect automobile loan portfolios. Such failure to effectively
implement, maintain, update and utilize comprehensive management information
systems could have a material adverse effect on the results of operations and
financial condition of the Company.
9
<PAGE> 11
ADVERSE ECONOMIC CONDITIONS
The Company's major lending activities are indirect automobile, credit
card, and real estate and commercial loans. Indirect automobile loans and
residential mortgage loans are also produced for resale with servicing rights
retained. An increase in interest rates could have a material adverse effect on
the housing and automobile industries and consumer spending generally. In
addition, an increase in interest rates could cause a decline in the value of
residential mortgages and indirect automobile loans held-for-sale by the
Company. These events could adversely affect the results of operations and
financial condition of the Company. As of June 30, 1997, residential mortgages
held-for-sale by the Company were principally on real property located in the
metropolitan areas of Atlanta, Georgia and Jacksonville, Florida. The Company's
indirect automobile loans have been obtained principally from automobile dealers
located in the metropolitan areas of Jacksonville and Tampa, Florida, and
Atlanta, Georgia. As of June 30, 1997, credit card loans were concentrated with
borrowers in Georgia (22.8%), California (8.9%), Texas (8.9%) and Florida
(7.1%). Adverse national, regional and local economic conditions may adversely
affect the results of operations and financial condition of the Company. See
"Business."
RESTRICTIONS ON DIVIDEND PAYMENTS
The indenture relating to the Notes (the "Indenture") issued in December
1995 provides that the Company may not pay cash dividends on its capital stock
or redeem any shares of its capital stock if the cumulative dividends and
redemptions would exceed cumulative consolidated net income of the Company for
the three-year period ending on the dividend declaration date or redemption
date. In addition, no dividend can be declared on capital stock if an event of
default has occurred and is continuing under the Notes and the Indenture,
including the failure to pay interest on such indebtedness or default on other
indebtedness exceeding $1 million. See Note 7 to the Consolidated Financial
Statements. The Articles of Incorporation of the Company, as amended, prohibit
the payment of dividends on shares of Common Stock during any calendar quarter
unless a full dividend has been paid during that calender quarter on the
Preferred Stock. There can be no assurance that the restrictions contained in
the Indenture and the Articles of Incorporation will not limit or restrict the
payment in the future of dividends on the capital stock of the Company. See
"Dividend Policy."
In addition, the FRB Agreement prohibits the declaration and payment of
dividends on the Common Stock without the prior approval of the FRB. There can
be no assurance that the FRB will approve the payment of dividends on the Common
Stock, when, as and if declared by the Board of Directors of the Company. See
"Regulatory Matters -- FRB Agreement."
LIMITED SOURCES OF PAYMENTS OF DIVIDENDS ON COMMON STOCK
The Company's primary source of funds to pay interest on the Notes and
other subordinated debt and dividends on the Preferred Stock and Common Stock is
from interest paid on subordinated notes of FNB and dividends paid to the
Company by FNB on its preferred stock and common stock. In 1995, the Company
sold $15 million aggregate principal amount of the Notes and, of the net
proceeds, loaned $10 million principal amount to FNB pursuant to subordinated
notes of FNB. The Company receives interest from FNB to cover the interest on
$10 million of the Notes and the balance of the interest is paid out of other
income and assets of the Company, including dividends on the preferred and
common stock of FNB. The ability of FNB to pay dividends is restricted by (i)
statutory and regulatory restrictions and (ii) the OCC Agreement. As of June 30,
1997, FNB could not pay any dividend under the applicable statutes and
regulations, without giving effect to the restrictions contained in the OCC
Agreement. The OCC Agreement permits FNB to pay dividends on its preferred stock
as long as FNB is adequately capitalized, which it was on June 30, 1997.
However, no dividends can be paid on FNB's common stock unless FNB is in
compliance with the capital ratios required commencing April 30, 1997 and
November 30, 1997. Since FNB has not met the capital levels required as of April
30, 1997, it can not declare a dividend on its common stock. Even if FNB were in
compliance with the required applicable capital levels, FNB could not declare a
dividend on its common stock without the approval of the OCC. There can be no
assurance that FNB will be able to pay any dividends to the Company in the
future or pay dividends in amounts sufficient to pay the interest on the Notes
in full and to pay dividends on
10
<PAGE> 12
the Preferred Stock and Common Stock. At June 30, 1997, the Company had
available $1.5 million of cash and other liquid assets for the payment of the
Company's obligations, including interest on the Notes and dividends on the
Preferred Stock and Common Stock. See "Regulatory Matters -- OCC Agreement,"
"Capitalization," "Dividend Policy," and "Business -- Supervision and
Regulation."
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The profitability of FNB depends to a large extent upon its net interest
income, which is the difference between interest income on interest-earning
assets, such as loans and investments, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. The net interest income of FNB
would be adversely affected if changes in market interest rates resulted in the
cost of interest-bearing liabilities increasing faster than the increase in the
yield on the interest-earning assets of FNB. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Interest Rate
Sensitivity."
DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL PERSONNEL
The success of the Company is dependent upon the services of certain senior
executive officers and the ability of the Company to strengthen senior
management. The loss of the services of one or more key individuals or the
inability to strengthen senior management could have a material adverse affect
on the results of operations and the financial condition of the Company. The
Company's success will also depend on the Company's ability to supplement
current management by hiring and retaining additional highly qualified personnel
with substantive expertise in the lines of business in which the Company and the
Bank are engaged, particularly credit cards and indirect automobile lending. In
addition, as the Company expands, it will be necessary for the Company to
continue to be able to attract and retain additional qualified senior
executives. The unexpected loss of James B. Miller, Jr., Chairman of the Board
of Directors, President and Chief Executive Officer of the Company, or any other
key executive of the Company or the inability to attract and retain qualified
personnel could have a material adverse effect on the results of operations and
financial condition of the Company. Mr. Miller and Mr. Peterson, President and
Chief Executive Officer of FNB, have entered into employment agreements with the
Company which contain confidentiality and non-compete provisions. The Company
does not maintain key man life insurance on any executive officers. See
"Business -- Strategy."
GOVERNMENTAL REGULATION -- BANKING
The Company and the Bank are subject to extensive supervision, regulation
and control by several federal and state governmental agencies, including the
FRB, OCC, Federal Deposit Insurance Corporation ("FDIC"), Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
and Governmental National Mortgage Association ("GNMA"), and future legislation
and government policy could adversely affect the Company and the financial
institutions industry as a whole, including the cost of doing business. Certain
recently enacted or proposed legislation or regulation, and future legislation
or regulation, could have an adverse effect on both the costs of doing business
and the competitive factors facing the financial institutions industry. Although
the impact of such legislation and regulation cannot be predicted, future
changes may alter the structure of and competitive relationships among financial
institutions and the cost of doing business. In addition, federal regulatory
authorities have the power in certain circumstances to prohibit dividends and
other payments from FNB. See "Regulatory Matters" and "Business -- Supervision
and Regulation."
GOVERNMENTAL REGULATION -- MORTGAGE BANKING
The mortgage banking operations of the Company are subject to extensive
regulation by federal and state governmental authorities and agencies, including
FNMA, FHLMC, GNMA, the Federal Housing Authority, and the Veterans
Administration. Consequently, the Company is subject to various laws, rules and
regulations and judicial and administrative decisions that, among other things,
regulate credit-granting activities, govern secured transactions, and establish
collection, repossession and claims-handling procedures and other trade
11
<PAGE> 13
practices. Failure to comply with regulatory requirements can lead to loss of
approved status, termination of servicing contracts without compensation to the
servicer, demands for indemnification or mortgage loan repurchases, class action
lawsuits and administrative enforcement actions. Although the Company believes
that it is in compliance in all material respects with applicable federal, state
and agency laws, rules and regulations, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future which
could make compliance more difficult or expensive, restrict the Company's
ability to originate, purchase or sell mortgage loans, further limit or restrict
the amount of interest and other fees that may be earned or charged on mortgage
loans originated, purchased or serviced by the Company or otherwise adversely
affect the results of operations and financial condition of the Company. See
"Business -- Supervision and Regulation."
GOVERNMENTAL REGULATION -- SECURITIES
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Broker-dealers are subject to
regulations covering all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of customers'
funds and securities, capital structure, record keeping and the conduct of
directors, officers and employees. FNCI is required to comply with many complex
laws and rules as a broker-dealer, including rules relating to possession and
control of customer funds and securities, margin lending and execution and
settlement of transactions.
Additional legislation, changes in rules promulgated by the Securities and
Exchange Commission ("Commission"), the National Association of Securities
Dealers ("NASD"), the FRB, the various stock exchange and other self-regulatory
organizations, or changes in the interpretation or enforcement of existing laws
and rules, may directly affect the mode of operation and profitability of
broker-dealers. The Commission, the NASD, and other self-regulatory
organizations and state securities commissions may conduct administrative
proceedings regarding alleged violations of their rules, which can result in
censure, fine, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer or any of its officers or employees. FNCI's ability
to comply with all applicable laws and rules is dependent in large part upon the
establishment and maintenance of a compliance system reasonably designed to
ensure such compliance, as well as FNCI's ability to attract and retain
qualified compliance personnel. The principal purpose of regulation and
discipline of broker-dealers is the protection of customers and the securities
markets, rather than protection of creditors and stockholders of broker-dealers.
FNCI could in the future be subject to disciplinary or other actions due to
claimed noncompliance, which could have a material adverse effect on the results
of operations and financial condition of the Company. See
"Business -- Supervision and Regulation."
CONSUMER AND DEBTOR PROTECTION LAWS
The Company and the Bank are subject to numerous federal and state consumer
protection laws that impose requirements related to offering and extending
credit. The United States Congress and state governments may enact laws and
amend existing laws to regulate further the consumer industry or to reduce
finance charges or other fees or charges applicable to credit card and other
consumer revolving loan accounts. Such laws, as well as any new laws or rulings
which may be adopted, may adversely affect the Company's ability to collect on
account balances or maintain previous levels of finance charges and other fees
and charges with respect to the accounts. Any failure by the Company or Bank to
comply with such legal requirements also could adversely affect its ability to
collect the full amount of the account balances. Changes in federal and state
bankruptcy and debtor relief laws could adversely affect the results of
operations and financial condition of the Company and Bank if such changes
result in, among other things, additional administrative expenses and accounts
being written off as uncollectible.
COMPOSITION OF REAL ESTATE LOAN PORTFOLIO
The real estate loan portfolio includes residential mortgages and
construction and commercial loans secured by real estate. The Company generates
all of its real estate mortgage loans in Georgia and Florida. Therefore,
conditions of these real estate markets could strongly influence the level of
the Company's non-performing mortgage loans and the results of operations and
financial condition of the Company. Real estate
12
<PAGE> 14
values and the demand for mortgages and construction loans are affected by,
among other things, changes in general or local economic conditions, changes in
governmental rules or policies, the availability of loans to potential
purchasers, and acts of nature. Although the Company's underwriting standards
are intended to protect the Company against adverse general and local real
estate trends, declines in real estate markets could adversely impact the demand
for new real estate loans, the value of the collateral securing the Company's
loans and the results of operations and financial condition of the Company.
MONETARY POLICY
The operating results of FNB are affected by credit policies of monetary
authorities, particularly the Federal Reserve. The instruments of monetary
policy employed by the Federal Reserve include open market operations in U.S.
Government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels and loan demand on the results of operations and business
of the Company.
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS
The banking business is highly competitive. The Company's primary market
area, other than for indirect automobile loans, residential mortgages and credit
cards, consists of Fulton, DeKalb, Gwinnett and Cobb counties, Georgia. FNB
competes for traditional bank business with numerous other commercial banks and
thrift institutions with offices in the Company's primary trade area, many of
which have greater financial resources than FNB. The Company also competes for
loans with insurance companies, regulated small loan companies, credit unions
and certain governmental agencies. FNCI competes with independent brokerage and
investment companies as well as state and national banks and their affiliates
and other financial companies.
The indirect automobile lending, credit card and mortgage banking
industries are also highly competitive. The Company competes with banks and
special purpose credit card banks and companies throughout the United States as
well as entities such as AT&T and General Motors Corporation for credit card
customers. In the indirect automobile lending area, the Company competes with
specialty consumer finance companies in addition to banks. FNMC competes with
independent mortgage banking companies, state and national banks and their
subsidiaries as well as thrift institutions and insurance companies. There can
be no assurance that other companies will not offer products and services that
are competitive with those offered by the Company and its subsidiaries. The
emergence of such competitors could have a material adverse effect on the
results of operations and financial condition of the Company. See
"Business -- Competition."
RELATIONSHIP WITH DEALERS
The Company's indirect automobile lending operation depends in large part
upon its ability to maintain and service its relationships with automobile
dealers. There can be no assurance the Company will be successful in maintaining
such relationships or increasing the number of dealers with which it does
business or that its existing dealer base will continue to generate a volume of
finance contracts comparable to the volume historically generated by such
dealers.
VOTING CONTROL; ANTI-TAKEOVER EFFECTS
James B. Miller, Jr., Chairman of the Board of Directors, President and
Chief Executive Officer of the Company, beneficially owns Common Stock and
Preferred Stock representing 48.6% of the voting power of the outstanding
capital stock of the Company. Upon the issuance of the Common Stock offered
hereby, the Common Stock and Preferred Stock beneficially owned by Mr. Miller
will represent 31.5% of the voting power of the outstanding capital stock of the
Company (29.5% if the Underwriters' over-allotment option is exercised in full).
Mr. Miller will have the power to influence significantly the outcome of
substantially all matters submitted to the shareholders for approval, including
the election of directors, and may be deemed to have control over management and
affairs of the Company. In view of Mr. Miller's significant equity interests,
13
<PAGE> 15
approval of certain corporate actions that could provide shareholders the
opportunity to realize a premium over the then-prevailing market price for their
Common Stock would be more difficult to obtain without Mr. Miller's support.
Mergers, liquidation, dissolution and sale of all or substantially all of the
assets of the Company require the affirmative vote of two-thirds of the
outstanding shares of capital stock. See "Principal Shareholders."
SUBSTANTIAL SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
7,659,892 shares of Common Stock. Of these shares, 4,551,693 shares, including
the 3,000,000 shares of Common Stock sold in the Offering, (5,001,693 shares if
the Underwriters' over-allotment option of 450,000 shares is exercised in full)
will be freely tradeable by persons other than affiliates of the Company without
restriction under the Securities Act. The remaining 3,108,199 shares of Common
Stock may be considered to be "restricted" securities within the meaning of Rule
144 promulgated under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available. All shares of Common Stock beneficially owned by persons who are
affiliates of the Company would be eligible for public sale subject to the
volume and other limitations of Rule 144. However, the Company's directors and
executive officers have agreed not be sell, contract to sell, offer, or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for shares of Common Stock or
any rights to purchase any of the foregoing for a period of 180 days after the
date of this Prospectus without the prior written consent of Raymond James &
Associates, Inc. Of these shares, 1,717,480 shares of Common Stock, which were
pledged as collateral by a director and officer of the Company prior to the
Offering, will not be subject to such restrictions upon the sale of the pledged
shares in the event of a default by the pledgor. The sale of a substantial
number of shares of Common Stock could adversely affect the market price of the
Common Stock. See "Shares Eligible for Future Sale."
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<PAGE> 16
REGULATORY MATTERS
OCC AGREEMENT
The OCC advised the Bank in the fourth quarter of 1996 that it will be
required to achieve higher capital levels. On November 14, 1996, the Bank
entered into the OCC Agreement which provides that the Bank (i) will appoint an
"Oversight Committee"; (ii) will achieve and maintain specified higher capital
levels; (iii) will develop a three-year capital program which will include,
among other things, certain restrictions on dividend payments by the Bank; and
(iv) will revise and amend its strategic plan. While the Bank, at June 30, 1997,
was an adequately capitalized bank as defined in the OCC regulations, it was not
an adequately capitalized bank at December 31, 1996 and until the Preferred
Stock was issued in June 1997. The OCC Agreement continues in effect until
modified or terminated by the OCC.
The Bank is required to submit reports monthly to the OCC evidencing
compliance with the OCC Agreement. The OCC Agreement continues in effect until
it is amended or terminated. Failure to comply with the terms of the OCC
Agreement may result in civil fines and other administrative actions.
As part of the Company's plan to comply with the November 30, 1997 capital
requirements of the OCC Agreement, the Company intends to acquire additional
capital through the Offering and to manage the Bank's asset growth in concert
with its capital growth. In managing asset growth, the Company intends to
continue to periodically sell indirect automobile loans with servicing rights
retained to enhance noninterest income. Capital growth is also expected to come
from earnings retention.
Oversight Committee. The Oversight Committee is comprised of three members
of the board of directors of the Bank, a majority of whom are not employees of
the Company. The Oversight Committee, which meets and reports monthly to the
Board of Directors, is responsible for monitoring and coordinating compliance by
the Bank with the OCC Agreement. The Oversight Committee was formed on November
14, 1996 and its members are Messrs. Anderson, Miller and Ward.
Capital Requirements. The OCC Agreement establishes higher capital
requirements for the Bank. Specified capital levels were to be achieved by the
Bank by April 30, 1997 and maintained until November 30, 1997. At November 30,
1997, higher capital levels become effective and are applicable thereafter.
While the Bank at June 30, 1997 was adequately capitalized as defined in the OCC
regulations, it did not attain the higher capital levels which were to be
achieved by April 30, 1997. The following table sets forth (i) the capital
requirements for the Bank under the OCC regulations and under the OCC Agreement
and (ii) the Bank's capital ratios at June 30, 1997, pro forma capital ratios to
give effect to the issuance of 232,000 additional shares of Preferred Stock
issued on July 9, 1997 and the investment of $1.0 million of the proceeds
thereof in common stock of the Bank and pro forma as adjusted capital ratios to
give effect to the issuance of such Preferred Stock and the investment of $17
million of the net proceeds of the Offering in Tier 1 risk-based capital of the
Bank:
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT JUNE 30, 1997
------------------------- ------------------------ ----------------------------------
ADEQUATELY WELL APRIL 30, NOVEMBER 30, PRO PRO FORMA AS
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 ACTUAL FORMA(1) ADJUSTED(1)(2)
- -------------- ----------- ----------- --------- ------------ ------ -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leverage(3).......... 4.00% 5.00% 5.00% 6.00% 4.33% 4.49% 7.12%
Risk-Based Capital:
Tier 1(4).......... 4.00 6.00 6.00 7.00 5.29 5.49 8.65
Total.............. 8.00 10.00 10.00 11.00 8.61 8.80 11.89
</TABLE>
- ---------------
(1) Assumes that the Company invests $1.0 million of the net proceeds from the
sale of Preferred Stock in July 1997 in Tier 1 capital of the Bank and the
Bank invests such proceeds in assets carrying a risk-weight that is
equivalent to the Company and the Bank's average risk-weight at June 30,
1997.
(2) Assumes that the Company invests $17 million of the net proceeds of the
Offering in common stock of the Bank and the Bank invests the net proceeds
in assets carrying a risk-weight that is equivalent to the Company and the
Bank's average risk-weight at June 30, 1997. See "Use of Proceeds."
(3) Leverage ratio is defined as Tier 1 capital as a percent of total average
assets.
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<PAGE> 17
(4) Tier 1 capital is comprised of common shareholder's equity and, subject to
certain limitations and qualifications, noncumulative perpetual preferred
stock.
The OCC Agreement permits the Bank to declare dividends on its preferred
stock held by the Company only when the Bank is adequately capitalized under the
regulations. The Bank may also declare dividends on its common stock held by the
Company only when the Bank is in compliance with its approved capital program
and with the prior written approval of the OCC.
During June 1997, the Company sold in a private placement 752,000 shares of
Preferred Stock for aggregate consideration of $4.4 million paid in cash and
$300,000 represented by subordinated notes of the Company surrendered by the
purchasers. During July 1997, the Company sold in a private placement 232,000
additional shares of Preferred Stock for aggregate consideration of $1.2 million
paid in cash and $250,000 represented by subordinated notes of the Company
surrendered by the purchasers. The net cash proceeds of the offerings were
invested in preferred stock of the Bank. See "Capital Stock -- Preferred Stock."
It is contemplated that approximately $17 million of the proceeds of the
Offering will be used to purchase preferred stock and/or common stock of the
Bank. This additional investment is expected to cause the Bank to exceed the
capital requirements commencing on November 30, 1997 as set forth in the OCC
Agreement. See "Use of Proceeds" and "Capitalization."
Capital Program. The Board of Directors of the Bank submitted to the OCC a
three-year capital program which was approved as modified. The capital program
includes specific plans for the maintenance of adequate capital levels as
required by the OCC Agreement, projections for growth and capital requirements,
projections of the sources and timing of additional capital to meet the current
and future capital needs of the Bank and contingency plans in the event the
primary sources of capital projected are not available.
Strategic Plan. The Board of Directors of the Bank is revising its
strategic plan in light of the revised levels of capital required and its growth
plans. The revised strategic plan will include objectives for earnings
performance, growth, balance sheet mix, off-balance sheet activities, liability
structure, capital adequacy, product line development and market segments which
the Bank intends to promote or develop together with strategies to achieve these
objectives. The strategic plan, when revised, will be submitted to the OCC for
approval.
FRB AGREEMENT
The FRB Agreement prohibits the Company from incurring additional debt or
declaring dividends on the Common Stock without the prior approval of the FRB.
As of the date of the FRB Agreement, the Company did not meet the capital levels
established by the FRB for an adequately capitalized bank holding company. Upon
the issuance of the Preferred Stock in June 1997, the Company became adequately
capitalized as defined in the regulations issued by the FRB. However, the FRB
Agreement continues in effect until modified or terminated by the FRB.
FDIC INSURANCE ASSESSMENTS
FNB is subject to FDIC deposit insurance assessments for the Bank Insurance
Fund ("BIF"). The FDIC has implemented a risk-based assessment system whereby
banks are assessed on a sliding scale depending on their placement in nine
separate supervisory categories. Prior to June 1, 1995, the assessment scale
ranged from $.23 per $100 of deposits for the healthiest banks (those with the
highest capital to assets ratios, best management and best overall condition) to
as much as $.31 per $100 of deposits for the less healthy institutions. However,
effective June 1, 1995, the BIF reached the designated reserve ratio of 1.25% of
total estimated insured deposits and the FDIC lowered the assessment rate
schedule for BIF members. Currently the deposit insurance premium is zero for
the healthiest banks and the premium is $.27 per $100 of deposits for less
healthy institutions. Prior to June 1, 1995, FNB's BIF assessment was $.26 per
$100 of deposits and after such date, the rate was reduced to $.07 per $100 of
deposits through June 30, 1997. Commencing July 1, 1997, FNB's BIF assessment is
$.28 per $100 of deposits.
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<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company (after deducting underwriting discounts and
estimated offering expenses) from the sale of the 3,000,000 shares of Common
Stock offered hereby (assuming an offering price of $8.00 per share), are
estimated to be approximately $22.0 million ($25.3 million if the Underwriters'
over-allotment option is exercised in full). The Company estimates that as of
June 30, 1997, approximately $13.0 million in additional equity was required for
the Bank to meet the capital levels set forth in the OCC Agreement for November
30, 1997. The purpose of this Offering is to provide the additional capital
required by the Bank to meet and exceed the capital levels set forth in the OCC
Agreement. Initially, the Company intends to invest $17.0 million of the net
proceeds in Tier 1 capital of the Bank and use the balance of the net proceeds
for general corporate purposes. The Bank intends to use such proceeds for
general corporate purposes. See "Risk Factors -- OCC Agreement," "Regulatory
Matters" and "Capitalization."
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company (i) as of June 30, 1997, (ii) on a pro forma basis to give effect to the
issuance of 232,000 shares of Preferred Stock on July 9, 1997, and (iii) pro
forma as adjusted basis to give effect to such issuance of the Preferred Stock
and to the sale of 3,000,000 shares of the Common Stock offered hereby (assuming
an offering price of $8.00 per share) and the application of the net proceeds
thereof:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LONG-TERM DEBT(1):
Long-term debt (subordinated)............................ $ 1,050 $ 800 $ 800
8.5% Subordinated Notes due 2006......................... 15,000 15,000 15,000
------- ------- -------
Total long-term debt........................... 16,050 15,800 15,800
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value. Authorized 10,000,000
shares; issued and outstanding 752,000 shares actual
and 984,000 shares pro forma and pro forma as adjusted
of Non-Cumulative 8% Convertible Preferred Stock,
Series A, stated value $6.25........................... 4,700 6,150 6,150
Common Stock, no par value. Authorized 50,000,000 shares;
4,659,091 shares issued and outstanding actual and pro
forma; 7,659,091 shares issued and outstanding pro
forma as adjusted(2)................................... 11,529 11,529 33,574
Treasury shares, at cost (11,092 shares)................. (69) (69) (69)
Net unrealized gains on investment securities
available-for-sale..................................... 142 142 142
Retained earnings........................................ 10,042 10,042 10,042
------- ------- -------
Total shareholders' equity..................... 26,344 27,794 49,839
------- ------- -------
Total capitalization........................... $42,394 $43,594 $65,639
======= ======= =======
</TABLE>
- ---------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity," "-- Interest Rate Sensitivity."
(2) Does not include (i) 500,000 shares of Common Stock reserved for issuance
pursuant to stock options under the Company's 1997 Stock Option Plan
("Plan"), of which 250,000 shares of Common Stock are reserved for issuance
pursuant to outstanding stock options; (ii) 855,351 shares of Common Stock
reserved for issuance upon the conversion of the Preferred Stock; and (iii)
150,000 shares of Common Stock reserved for issuance upon the exercise of
the Representative's Warrants. See "Underwriting."
17
<PAGE> 19
PRICE RANGE OF COMMON STOCK
Since October 31, 1994, the Common Stock has been listed on the Nasdaq
National Market under the Symbol "LION." The following table sets forth for the
periods indicated the high and low sales prices for the Common Stock on the
Nasdaq National Market and the dividends paid on the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
------- ------- ------------
<S> <C> <C> <C> <C> <C>
1995
First Quarter............................................... $10 1/2 $ 9 1/4 $.0341
Second Quarter.............................................. 10 3/4 9 3/4 .0341
Third Quarter............................................... 15 1/4 10 3/4 .0341
Fourth Quarter.............................................. 17 1/2 14 3/4 .0375
1996
First Quarter............................................... 16 3/4 14 1/2 .0375
Second Quarter.............................................. 16 1/4 13 7/8 .0375
Third Quarter............................................... 14 3/4 11 7/8 .0375
Fourth Quarter.............................................. 12 3/8 9 3/4 .0375
1997
First Quarter............................................... 13 8 1/2 --
Second Quarter.............................................. 9 5/8 7 --
Third Quarter (through September 23)........................ 9 3/8 8 7/8 --
</TABLE>
On September 23, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $9.00 per share. As of September 1, 1997, there
were approximately 375 holders of record of Common Stock.
DIVIDEND POLICY
Company Policy. During the first quarter of 1997, the Board of Directors
of the Company suspended payment of cash dividends on the Common Stock for the
foreseeable future. All earnings are being retained by the Company in order to
meet the capital levels required by the OCC Agreement and to fund future growth.
The Company is a legal entity separate and distinct from FNB and the Company's
other subsidiaries. Most of the revenues of the Company result from dividends
and interest paid to it by FNB. There are statutory and regulatory requirements
applicable to the payment of dividends by FNB as well as by the Company to its
shareholders.
Restrictions on Dividends -- Indenture. The Indenture provides that the
Company may not pay cash dividends on its capital stock or redeem any shares of
its capital stock if the cumulative dividends and redemptions would exceed
cumulative consolidated net income of the Company for the three-year period
ending on the dividend declaration date or redemption date. In addition, no
dividend can be declared on the capital stock if an event of default has
occurred and is continuing under the Notes, including the failure to pay
interest on such indebtedness or default on other indebtedness exceeding $1
million. There can be no assurance that the restrictions contained in the
Indenture will not limit or restrict the payment in the future of dividends on
the Common Stock. See Note 7 to the Consolidated Financial Statements.
Restriction on Dividends -- FRB Agreement. The FRB Agreement provides that
no dividends are to be declared or paid on the Common Stock without the prior
written approval of the FRB. See "Regulatory Matters -- FRB Agreement" and "Risk
Factors -- Restrictions on Dividend Payments."
Restrictions on Dividends by FNB -- Regulations. Under the regulations of
the OCC, dividends of FNB may be declared out of net profits of FNB. The
approval of the OCC is required if the total of all dividends declared by FNB
exceeds the total of its net profits for the year, combined with its retained
net profits for the preceding two years. The payment of dividends by FNB may
also be affected or limited by other factors, such as the requirement to
maintain capital above regulatory guidelines. At June 30, 1997, total
shareholders' equity of FNB was $29.5 million, none of which was available for
the payment of dividends to FNC. In
18
<PAGE> 20
addition, if, in the opinion of the applicable regulatory authority, a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending upon the financial condition of the bank,
could preclude the payment of dividends), such authority may require, after
notice and hearing, that such bank cease and desist from such practice.
Restrictions on Dividends by FNB -- OCC Agreement. The OCC Agreement
permits FNB to pay dividends on its preferred stock as long as FNB is
"adequately capitalized," which it was on June 30, 1997. However, no dividends
can be paid on FNB's common stock unless FNB is in compliance with the capital
ratios required commencing April 30, 1997 and November 30, 1997. Since FNB did
not meet the capital levels required as of April 30, 1997, it cannot declare a
dividend on its common stock. Even if it were in compliance with the required
applicable levels, FNB could not declare a dividend on its common stock without
the approval of the OCC. See "Regulatory Matters -- OCC Agreement."
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected financial data for the Company for
each of the five years ended December 31, 1996 and for the six months ended June
30, 1996 and 1997. This financial data is derived in part from, and should be
read in conjunction with, the Consolidated Financial Statements and the related
notes thereto presented elsewhere in the Prospectus. The financial information
as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 is
unaudited. In the opinion of management, all adjustments necessary for a fair
presentation of such interim data and periods have been included and such
adjustments are of a normal recurring nature. The results of operations and
other data for the six months ended June 30, 1997 are not necessarily indicative
of the results of operations which may be expected for the fiscal year ending
December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1)
Interest income...................... $25,486 $29,399 $35,887 $48,080 $59,800 $28,681 $30,857
Net interest income.................. 14,915 19,709 24,122 29,209 33,073 16,068 17,907
Provision for loan losses............ 4,325 4,200 4,125 8,090 25,127 5,400 8,270
Noninterest income, including
securities gains................... 8,126 9,620 8,769 11,679 18,305 8,480 8,815
Securities gains, net................ 72 44 124 853 604 283 -
Noninterest expense.................. 14,308 18,641 22,375 25,583 35,489 16,626 17,488
Income (loss) before cumulative
effect of change in accounting
principle.......................... 2,838 4,271 4,299 4,649 (5,742) 1,608 647
Net income (loss).................... 2,838 4,545 4,299 4,649 (5,742) 1,608 647
Dividends paid....................... 420 472 628 644 693 346 -
PER SHARE DATA
Net income (loss) before cumulative
effect of change in accounting
principle.......................... $ .61 $ .92 $ .93 $1.01 $(1.24) $ .35 $ .14
Net income (loss).................... .61 .98 .93 1.01 (1.24) .35 .14
Book value........................... 3.33 4.58 4.65 6.02 4.53 5.90 4.65
Dividends paid....................... .09 .10 .14 .14 .15 .0750 -
Dividend payout ratio................ 14.80% 10.39% 14.62% 13.85% * 21.50% -
Average shares outstanding........... 4,620,660 4,613,775 4,608,383 4,608,383 4,619,530 4,608,383 4,657,057
PERFORMANCE RATIOS
Return on average assets............. 1.08% 1.50% 1.15% 1.01% * .56% .22%
Return on average equity............. 20.80 26.26 20.40 18.91 * 11.71 6.00
Net interest margin.................. 6.14 6.49 6.95 6.87 5.97 6.15 6.63
Efficiency ratio..................... 62.10 63.56 68.03 62.57 69.07 67.73 65.44
ASSET QUALITY RATIOS
Net charge-offs to average loans..... 2.23% 1.65% 1.54% 2.37% 3.00% 2.53% 4.22%
Allowance to period-end loans........ 2.15 1.97 1.31 1.54 3.85 1.52 3.43
Nonperforming assets to total loans
and OREO........................... 2.54 1.14 .87 1.24 .82 1.14 .79
Allowance to nonperforming loans..... 1.55x 7.20x 3.65x 1.80x 5.62x 1.87x 10.66x
Allowance to nonperforming assets.... .84 1.72 1.50 1.25 4.71 1.33 4.32
CAPITAL RATIOS
Leverage............................. 5.28% 5.73% 5.51% 5.42% 2.67% 4.56% 3.76%
Risk-based capital:
Tier 1............................. 6.99 7.39 6.49 6.15 3.40 5.00 4.60
Total.............................. 8.75 9.06 8.25 10.47 6.38 8.64 8.17
Average equity to average assets..... 5.21 5.73 5.64 5.35 4.50 4.80 3.62
BALANCE SHEET DATA (AT END OF PERIOD)
Assets............................... $283,240 $331,956 $429,927 $524,822 $605,420 $654,842 $613,367
Total loans, net..................... 202,447 249,989 333,786 407,289 467,389 525,300 452,149
Total deposits....................... 260,907 303,297 383,016 466,507 544,713 579,337 557,030
Long-term debt....................... 2,065 1,815 2,491 16,750 16,500 16,500 16,050
Shareholders' equity................. 15,393 21,131 21,430 27,762 21,073 27,187 26,344
Realized shareholders' equity........ 15,393 19,396 23,067 27,073 21,213 28,335 26,202
DAILY AVERAGES
Assets............................... $261,645 $302,267 $373,869 $459,251 $611,517 $575,246 $603,800
Earning Assets....................... 244,198 281,237 348,312 426,525 554,354 526,196 545,366
Total loans.......................... 194,247 221,745 280,593 360,915 471,200 452,554 465,166
Total deposits....................... 240,209 276,882 336,462 411,147 542,107 505,398 545,082
Long-term debt....................... 1,898 1,857 1,684 3,439 16,500 16,617 16,472
Shareholders' equity................. 13,642 17,310 21,077 24,589 27,484 27,623 21,836
</TABLE>
- ---------------
* Given the Company's net loss for the year ended December 31, 1996, this data
is not meaningful.
(1) Beginning January 1, 1996 and consistent with industry practice, the Company
commenced reversing current period accrued interest and rate-related income
on credit card charge-offs to interest income. This amount totaled $700,000
and $1.3 million for the six months ended June 30, 1996 and 1997,
respectively, and $2.0 million for the year ended December 31, 1996. Such
amounts were previously charged against the allowance for loan losses. Such
reclassification has not been made in prior period financial statements.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis reviews important
factors affecting the results of operations and financial condition of the
Company for the periods shown. The Consolidated Financial Statements and related
notes should be read in conjunction with this review. In the discussion, net
interest income and net interest margin are presented on a fully
taxable-equivalent basis.
OVERVIEW
Fidelity National Corporation is a bank holding company headquartered in
Atlanta, Georgia. The Company, which commenced operations as FNB in 1973,
provides traditional deposit, lending, mortgage, securities brokerage,
international trade services and trust products and services to its commercial
and retail customers through its subsidiaries. FNB is a full-service banking
operation; FNMC is a full-service residential mortgage banking operation; and
FNCI is a securities brokerage operation. The Company currently conducts
full-service banking and residential mortgage lending businesses through 16
locations in the metropolitan Atlanta area. The Company conducts indirect
automobile lending, residential mortgage lending and residential construction
lending through certain of its Atlanta offices and its Jacksonville, Florida
location. Indirect automobile lending is also conducted at the Tampa, Florida
location which was opened in 1995. At June 30, 1997, the Company had total
assets of $613 million, total loans of $452 million, total deposits of $557
million and shareholders' equity of $26 million.
As of June 30, 1997, the Company had consumer (including indirect
automobile and credit card loans), real estate (including residential mortgage,
construction and commercial loans secured by real estate), and commercial loans
of $273 million, $133 million and $46 million, representing approximately 60.4%,
29.4% and 10.2%, respectively, of the Company's total loan portfolio. The real
estate loans included $52 million in construction loans, $49 million in
residential real estate loans and $32 million in commercial loans secured by
real estate. As of June 30, 1997, commercial loans of the Company, including
those commercial loans secured by real estate, totaled $78 million. Commercial
loans not secured by real estate totaled $46 million, or 10.2% of the total loan
portfolio of the Company. At June 30, 1997, the Company's net interest margin
was 6.63% compared to 5.97% for the year ended December 31, 1996.
Historically, credit card loans have been an important part of the
Company's total loan portfolio. At December 31, 1992, credit card loans
represented 53.8% of the Company's loan portfolio of $186 million. During 1992
and 1993, the outstanding balance of credit card loans remained relatively flat
and declined as a percentage of total loans to 33.4% at December 31, 1994. In
1994, as a result of additional affinity programs and the introduction of the
Company's Olympic card, credit card loans outstanding increased. This growth
continued through 1995 and into 1996, and at December 31, 1996, credit card
loans totaled $144 million. During late 1996 and early 1997, the Company's net
losses on its credit card loan portfolio increased significantly, reflecting a
national trend and credit quality issues related to an affinity program
introduced in the middle of 1995 which was subsequently discontinued in May
1996. During the first half of 1997, credit card loans declined to $125 million
due to the discontinuance of new programs, the lack of any new credit card
marketing initiatives and credit card balance seasonality.
The Company has experienced significant growth in indirect automobile
lending since it implemented a strategy in 1993 to expand this activity. At June
30, 1997, indirect automobile loans, including $10 million held-for-sale,
totaled $131 million compared to $12 million at December 31, 1992. During the
first half of 1997 and during 1996, the Company sold, either through whole loan
sales or securitization, approximately $24 million and $136 million,
respectively, of indirect automobile loans with servicing retained to take
advantage of its ability to produce indirect automobile loans and to enhance
other non-interest income. In addition, during 1997 and 1996, the Company sold
$33 million and $39 million, respectively, 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.
21
<PAGE> 23
As a result of the Company's net loss for 1996 and the overall growth of
the Company, the capital ratios of the Company and its primary operating
subsidiary, the Bank, declined significantly and were not in compliance with the
minimum capital requirements prescribed by the FRB and the OCC at December 31,
1996. On June 30, 1997, the Company's and the Bank's capital ratios met the
minimum capital requirements for an adequately capitalized bank holding company
and bank. The improvement was primarily due to the issuance of $4.7 million of
Preferred Stock in June 1997 and earnings retention.
RESULTS OF OPERATIONS
Net Income
The Company's net income was $647,000, or $.14 per share, for the six
months ended June 30, 1997, compared to net income of $1.6 million, or $.35 per
share, for the six months ended June 30, 1996. The major factors contributing to
the decline in earnings in 1997 were higher loss provisions due to higher credit
card delinquencies and charge-offs and a decline in earning assets due to
declining capital ratios. Additional factors adversely affecting 1997 earnings
have been additional expenses attributable to recent corporate consolidation of
operations into a centrally-located facility and the upgrade of its systems.
The Company's net loss was $5.7 million for the year ended December 31,
1996, compared to net income of $4.6 million for 1995. The net loss per share
was $1.24 for 1996, compared to net income per share of $1.01 for 1995. The
major factor contributing to the loss for 1996 was the higher loan loss
provision resulting from higher levels of delinquencies and charge-offs in the
Company's credit card loan portfolio. During 1996, earnings were also adversely
affected by expenses attributable to recent corporate consolidation and systems
upgrade.
The Company's net income for 1995 was $4.6 million, or $1.01 per share, an
increase of $350,000 from 1994, or $.08 per share. During 1995, increases in net
interest income and noninterest income were partially offset by increases in the
provision for loan losses and noninterest expense.
Net Interest Income/Margin
For the six months ended June 30, 1997, net interest income increased $1.8
million to $17.9 million, or 11.4% over the six months ended June 30, 1996. This
increase was primarily a result of a $19 million increase in average earning
assets to $545 million, combined with a 45-basis-point increase in the yield on
average interest-earning assets. The yield realized on average interest-earning
assets for the first six months of 1997 was 11.42% as compared to 10.97% for the
same period of 1996. The net interest margins for the comparable periods were
6.63% and 6.15%, respectively.
Taxable-equivalent net interest income increased $3.9 million, or 13.2%, in
1996, to $33.1 million from $29.2 million in 1995. This increase resulted from a
$128 million increase in average interest-earning assets to $554 million
partially offset by a decrease in the yield on interest earning assets to 10.79%
from 11.29%. Average total loans increased $110 million or 30.6% over average
total loans in 1995. While the increase in loan volume was primarily
attributable to indirect automobile and real estate construction loan growth,
increased loan volume occurred in all major loan categories as the economy
continued to grow.
The $7.9 million increase in total interest expense in 1996 over 1995 was
attributable primarily to an increase in the volume of interest-bearing
liabilities, as rates paid on average total interest-bearing liabilities only
increased 15 basis points.
The average balance of noninterest bearing demand deposits increased 16.5%
to $70 million during 1996. Interest on earning assets benefited from a 5 basis
point higher yield realized on investment securities and a 22.2% increase in the
average balance of investment securities to $73 million for 1996.
In summary, the increase in volume of every significant category of earning
assets in 1996 provided a $14.0 million increase in income on interest-earning
assets, which was partially offset by a $2.3 million decrease due to declining
yields. This provided a net $11.7 million increase in income from interest
earning assets.
22
<PAGE> 24
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.
AVERAGE BALANCES, INTEREST AND YIELDS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1994 1995 1996
--------------------------- --------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned
income(1)(2)
Taxable......................... $277,933 $31,953 11.50% $358,685 $43,572 12.15% $469,846 $54,206 11.54%
Tax-exempt(3)................... 2,660 253 9.51 2,230 227 10.18 1,355 127 9.36
-------- ------- -------- ------- -------- -------
Total loans............... 280,593 32,206 11.48 360,915 43,799 12.14 471,201 54,333 11.53
Investment securities
Taxable......................... 58,433 3,424 5.86 60,060 4,025 6.70 73,433 4,956 6.75
Tax-exempt(3)................... 133 9 6.77 10 1 5.62 - - -
-------- ------- -------- ------- -------- -------
Total investment
securities.............. 58,566 3,433 5.86 60,070 4,026 6.70 73,433 4,956 6.75
Interest-bearing deposits......... 350 13 3.71 129 9 6.98 1,431 74 5.17
Federal funds sold................ 8,803 323 3.67 5,411 324 5.99 8,289 437 5.27
-------- ------- -------- ------- -------- -------
Total interest-earning
assets.................. 348,312 35,975 10.33 426,525 48,158 11.29 554,354 59,800 10.79
Cash and due from banks........... 13,614 14,645 22,011
Allowance for loan losses......... (4,384) (4,487) (6,856)
Premises and equipment............ 8,104 9,259 14,164
Other real estate owned........... 1,705 1,458 1,246
Other assets...................... 6,518 11,851 26,598
-------- -------- --------
Total assets.............. $373,869 $459,251 $611,517
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Demand deposits................. $ 88,530 $2,386 2.70% $ 92,107 $3,148 3.42% $100,966 $3,542 3.51%
Savings deposits................ 20,914 630 3.01 15,292 520 3.40 26,516 1,058 3.99
Time deposits................... 176,381 8,152 4.62 243,617 14,260 5.85 344,551 19,933 5.79
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits................ 285,825 11,168 3.91 351,016 17,928 5.11 472,033 24,533 5.20
Federal funds purchased........... 1,357 73 5.38 1,786 106 5.94 2,306 144 6.24
Securities sold under agreements
to repurchase................... 4,725 129 2.73 8,053 236 2.93 13,305 390 2.93
Other short-term borrowings....... 4,923 264 5.36 4,349 247 5.68 3,296 159 4.83
Long-term debt.................... 1,684 131 7.78 3,439 354 10.29 16,500 1,501 9.10
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............. 298,514 11,765 3.94 368,643 18,871 5.12 507,440 26,727 5.27
------- ------- -------
Noninterest-bearing demand
deposits........................ 50,637 60,131 70,073
Other liabilities................. 3,641 5,888 6,520
Shareholders' equity.............. 21,077 24,589 27,484
-------- -------- --------
Total liabilities and
shareholders' equity.... $373,869 $459,251 $611,517
======== ======== ========
Net interest income/spread........ $24,210 6.39 $29,287 6.17 $33,121 5.52
======= ======= =======
Net interest rate margin.......... 6.95 6.87 5.97
</TABLE>
- ---------------
(1) Fee income relating to loans of $2,710 in 1994, $3,854 in 1995, and $3,720
in 1996, is included in interest income.
(2) Nonaccrual loans are included in average balances and income on such loans,
if recognized, is recognized on cash basis.
(3) Interest income includes the effects of taxable-equivalent adjustments of
$89, $77 and $48, respectively, for each of the three years ended December
31, 1996, using a federal tax rate of 34%.
23
<PAGE> 25
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1996 COMPARED TO 1995
VARIANCE ATTRIBUTED TO(1) VARIANCE ATTRIBUTED TO(1)
------------------------- ---------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net loans:
Taxable.................................. $9,724 $1,895 $11,619 $12,927 $(2,245) $10,682
Tax-exempt(2)............................ (43) 17 (26) (83) (17) (100)
Investment securities:
Taxable.................................. 98 503 601 902 29 931
Tax-exempt(2)............................ (7) (1) (8) (1) - (1)
Federal funds sold......................... (154) 155 1 156 (43) 113
Interest bearing deposits.................. (11) 7 (4) 68 (3) 65
------ ------ ------- ------- ------- -------
Total interest-earning assets.... $9,607 $2,576 $12,183 $13,969 $(2,279) $11,690
====== ====== ======= ======= ======= =======
Interest-bearing deposits:
Demand................................... $ 100 $ 62 $ 762 $ 309 $ 85 $ 394
Savings.................................. (184) 74 (110) 435 103 538
Time..................................... 3,595 2,513 6,108 5,841 (168) 5,673
------ ------ ------- ------- ------- -------
Total interest-bearing
deposits....................... 3,511 3,249 6,760 6,585 20 6,605
Federal funds purchased.................... 25 8 33 33 5 38
Securities sold under agreements to
repurchase............................... 97 10 107 154 - 154
Other short-term borrowings................ (32) 15 (17) (54) (34) (88)
Long-term debt............................. 170 53 223 1,192 (45) 1,147
------ ------ ------- ------- ------- -------
Total interest-bearing
liabilities.................... $3,771 $3,335 $ 7,106 $ 7,910 $ (54) $ 7,856
====== ====== ======= ======= ======= =======
</TABLE>
- ---------------
(1) The change in interest due to both rate and volume has been allocated to the
components in proportion to the relationship of the dollar amounts of the
change in each.
(2) Reflects fully taxable equivalent adjustments using a Federal tax rate of
34%.
Provision for Loan Losses
Management's policy is to maintain the allowance for loan losses at a level
sufficient to absorb estimated losses inherent in the loan portfolio. The
allowance is increased by the provision for loan losses and decreased by
charge-offs, net of recoveries. In determining inherent losses, management
considers financial services industry trends, conditions of individual
borrowers, historical loan loss experience and the general economic environment.
As these factors change, the level of loan loss provision changes.
For the six months ended June 30, 1997, the provision for loan losses was
$8.3 million compared to $5.4 million for the same period in 1996, an increase
of 53.7%. The major factors adversely affecting 1997 and 1996 earnings were the
increase in the provision for loan losses related to credit card and indirect
automobile loans due to the higher delinquencies and charge-offs. Net
charge-offs to average loans for the six months ended June 30, 1997, were 4.22%
compared to 2.53% for the same period in 1996.
For the year ended December 31, 1996, the provision for loan losses was
$25.1 million compared to $8.1 million in 1995, an increase of 209.9%. The
increase in the provision for loan losses was the most significant factor
contributing to the decline in earnings of the Company. Net charge-offs were
$14.2 million in 1996 compared to $6.9 million in 1995. Net charge-offs to
average loans for 1996 were 3.00% compared to 2.37% in 1995. Approximately 88.8%
of the loan charge-offs in 1996 were attributable to credit card loans. This
significant increase in credit card losses in 1996 was due to several factors.
Nationally, credit card charge-offs reached record highs as consumers found
themselves unable to meet their credit card obligations. Many of these consumers
filed bankruptcy and bankruptcies hit record levels. Moreover, a significant
portion of the Company's credit card portfolio's charge-offs were attributable
to one specific program which the Company
24
<PAGE> 26
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 1995 the provision for loan losses was $8.1 million compared to $4.1
million in 1994. The increase in the provision for loan losses in 1995 over 1994
was due primarily to credit card loan growth and increases in credit card
delinquencies and charge-offs during 1995. Net charge-offs were $6.9 million for
1995 compared to $4.3 million in 1994.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period....... $4,011 $4,007 $4,550 $4,344 $ 5,537 $5,537 $16,511
Charge-offs:
Commercial, financial and
agricultural.................... 68 18 226 60 3 3 155
Real estate-construction........... 13 - - - - - -
Real estate-mortgage............... 341 34 - - - - -
Consumer installment............... 80 36 88 328 1,657 448 1,864
Credit cards....................... 4,345 4,091 4,466 7,051 13,156 4,366 8,479
------ ------ ------ ------ ------- ------ -------
Total charge-offs.......... 4,847 4,179 4,780 7,439 14,816 4,817 10,498
Recoveries:
Commercial, financial and
agricultural.................... 89 122 29 42 31 8 9
Real estate-construction........... - - - - - - -
Real estate-mortgage............... 88 35 2 - - - -
Consumer installment............... 21 11 24 38 64 20 99
Credit cards....................... 320 354 394 462 568 274 565
------ ------ ------ ------ ------- ------ -------
Total recoveries........... 518 522 449 542 663 302 673
------ ------ ------ ------ ------- ------ -------
Net charge-offs...................... 4,329 3,657 4,331 6,897 14,153 4,515 9,825
Provision for loan losses............ 4,325 4,200 4,125 8,090 25,127 5,400 8,270
------ ------ ------ ------ ------- ------ -------
Balance at end of period............. $4,007 $4,550 $4,344 $5,537 $16,511 $6,422 $14,956
====== ====== ====== ====== ======= ====== =======
Ratio of net charge-offs during
period to average loans
outstanding, net................... 2.23% 1.65% 1.54% 1.91% 3.00% 2.53% 4.22%
Allowance for loan losses as a
percentage of loans................ 2.15 1.97 1.31 1.54 3.85 1.52 3.43
</TABLE>
Noninterest Income
For the six months ended June 30, 1997, noninterest income increased
$335,000 to $8.8 million, or 4.0%, over the same period in 1996. Noninterest
income for the six months ended June 30, 1996 and 1997 benefited from $1.1 and
$1.4 million gains on the sale of mortgage servicing rights, respectively.
Noninterest income for 1996 was $18.3 million compared to $11.7 million in
1995. This increase resulted primarily from growth in residential mortgage
banking activities, brokerage activities, gains on loan sales and a loan
securitization, sales of mortgage servicing rights and increased fee income from
servicing indirect automobile loans. For 1996, noninterest income benefited from
a $2.1 million gain on sales of mortgage servicing rights and a $672,000 gain on
sales of $195 million of indirect automobile and credit card loans. There were
no such sales in 1995. The profits from the sales of mortgage servicing rights
in 1996 partially
25
<PAGE> 27
offset the losses in the mortgage business due to declining loan production and
reduced the Company's exposure to mortgage servicing rights impairment due to
mortgage loan prepayments. Noninterest income in 1996 also benefited from a $1.0
million increase in brokerage fee income, a $402,000 increase in mortgage
servicing fee income, and a $707,000 increase in indirect automobile loan
servicing fees.
Noninterest income for 1995 was $11.7 million compared to $8.8 million in
1994. This increase resulted primarily from growth in residential mortgage
banking activities, brokerage operations and net gains from securities
transactions. During 1995, income from residential mortgage banking activities
increased 91.8% to $3.3 million and income from brokerage activities increased
to $2.2 million in 1995 from $1.6 million in 1994. Reflecting the Company's
commitment to increase noninterest fee income, late in 1994, the Company began
to make bulk purchases of mortgage servicing rights to increase noninterest
income from mortgage banking activities. As noted above, beginning in 1996, the
Company began selling portions of its mortgage servicing rights portfolio.
The company adopted Statement of Financial Accounting Standards (SFAS) No.
122, "Accounting for Mortgage Servicing Rights" effective January 1, 1995.
Accordingly, the Company capitalized the cost of originated mortgage servicing
rights beginning in 1995. The adoption of this new accounting standard had a
significant favorable impact on 1996 and 1995 noninterest income. During 1996
and 1995, the Company capitalized originated mortgage servicing rights and
recorded related amortization of $900,000 and $1.0 million and $573,000 and
$247,000, respectively. The Company measures the value of mortgage servicing
rights for impairment based on loan type and rate structure. At June 30, 1997,
December 31, 1996 and 1995, the fair value of these rights approximated net book
value.
Noninterest Expense
Noninterest expense increased 5.4%, from $17.5 million for the six months
ended June 30, 1997 compared to $16.6 million for the comparable period of 1996.
Salaries and benefit expenses increased $293,000, or 3.6%, in the first
half of 1997 over the comparable period of 1996. The number of full-time
equivalent employees declined to 383 on June 30, 1997 from 388 at June 30, 1996.
Expenses, other than salaries, benefits and amortization of mortgage
servicing rights, for the six months ended June 30, 1997 increased $1.2 million
compared to the six months ended June 30, 1996. These increases were due
primarily to the Company's opening of four additional bank branches in the
greater Atlanta metropolitan area and two loan production offices in Florida,
the consolidation of operations to the Company's new operations center and the
upgrading of its systems. Amortization of mortgage servicing rights, including
amortization relating to loan repayments, was $401,000 for the six months ended
June 30, 1997 compared to $1,024,000 for the comparable period in 1996.
26
<PAGE> 28
The following schedule summarizes the change in mortgage servicing rights
for the three years ended December 31, 1996, and for the six months ended June
30, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ -----------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Beginning balance....................................... $0.7 $3.0 $7.8 $7.8 $5.5
Add:
Purchased loans....................................... 1.3 - - - -
Bulk purchases........................................ 1.3 4.9 - - -
Originated servicing rights........................... - 1.0 0.9 0.6 0.1
---- ---- ---- ---- ----
3.3 8.9 8.7 8.4 5.6
==== ==== ==== ==== ====
Less:
Amortization.......................................... 0.2 0.7 0.8 0.5 0.2
Loan payoff........................................... 0.1 0.4 0.8 0.5 0.2
Bulk sale............................................. - - 1.6 - 2.8
---- ---- ---- ---- ----
Ending balance.......................................... $3.0 $7.8 $5.5 $7.4 $2.4
==== ==== ==== ==== ====
</TABLE>
Noninterest expense increased $9.9 million, or 38.7%, in 1996 to $35.5
million from $25.6 million in 1995. Salaries and employee benefits, which
accounted for 46.2% of the total increase in noninterest expense, increased
39.1% 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
The provision for income taxes consists of provisions for federal and state
income taxes. The provision for income taxes for the six months ended June 30,
1997 was $317,000, compared to $914,000 for the same period in 1996. These
changes were due to changes in taxable income.
In 1996, a tax benefit of $3.5 million was recorded by the Company compared
to a $2.6 million provision for income taxes for 1995. The provision for income
taxes for 1995 was $2.6 million compared to $2.1 million for the same period in
1994. The Company's effective tax rate approximated statutory rates for all
periods.
FINANCIAL CONDITION
The Company manages its assets and liabilities to maximize long-term
earnings opportunities while maintaining the integrity of its financial position
and the quality of earnings. To accomplish this objective, management strives to
effect efficient management of interest rate risk and liquidity needs. The
primary objectives of interest-sensitivity management are to minimize the effect
of interest rate changes on the net interest margin and to manage exposure to
risk while maintaining net interest income at acceptable levels.
27
<PAGE> 29
Liquidity is provided by carefully structuring the balance sheet. The decline in
capital ratios to below statutory minimums at December 31, 1996 (see
"-- Shareholders' Equity -- Regulatory Capital Requirements") reduced the
Company's liquidity position and funding alternatives. At June 30, 1997, as a
result of the issuance of 752,000 shares of Preferred Stock, the Company was
adequately capitalized in accordance with FRB regulations.
The Company's Asset Liability Committee meets regularly to review both the
Company's interest rate sensitivity positions and liquidity.
Loans
During the six months ended June 30, 1997, total loans, which include loans
held-for-sale, declined $15.3 million, or 3.3%, to $452.1 million, compared to
$467.4 million at December 31, 1996. This decline was primarily attributable to
the decline in the Company's credit card loans.
During 1996 and 1995, the Company experienced increases in every major loan
category. At December 31, 1996, total loans outstanding, including loans held
for sale, were $467 million, compared to $407 million at year end 1995, a 14.8%
increase. Average total loans during 1996 increased $110 million, or 30.6%, to
$471 million. The most significant increases in 1996 occurred in consumer
installment loans which increased $25 million, or 21.7%, to $139 million; real
estate mortgage loans which increased $10 million, or 17.1%, to $72 million; and
residential real estate construction loans which increased $15 million, or
37.5%, to $56 million.
Total loans at December 31, 1995 were $407 million, an increase of 22.1%
over total loans at December 31, 1994. This increase was attributable primarily
to significant increases in credit card and indirect automobile, residential
construction and commercial loans.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial:
Commercial, financial and
agricultural.................. $ 15,817 $ 19,732 $ 29,831 $ 37,778 $ 43,247 $ 44,570
Tax exempt....................... 1,584 2,435 2,091 1,518 698 1,559
-------- -------- -------- -------- -------- --------
Total commercial......... 17,401 22,167 31,922 39,296 43,945 46,129
Real estate - construction......... 10,687 20,012 32,355 40,955 56,325 51,979
Real estate - mortgage............. 45,722 47,064 66,707 61,247 71,719 74,528
Consumer installment............... 12,323 43,115 89,595 78,806 113,513 138,162
Credit cards....................... 100,153 98,135 110,870 139,873 143,782 125,167
-------- -------- -------- -------- -------- --------
Loans.............................. 186,286 230,493 331,449 360,177 429,284 435,965
Allowance for loan losses.......... 4,007 4,550 4,344 5,537 16,511 14,956
-------- -------- -------- -------- -------- --------
Loans, net......................... $182,279 $225,943 $327,105 $354,640 $412,773 $421,009
======== ======== ======== ======== ======== ========
TOTAL LOANS
Loans (net of unearned income)..... $186,286 $230,493 $331,449 $360,177 $429,284 $435,965
Loans held-for-sale:
Mortgage loans................... 16,271 19,419 2,225 12,113 13,106 6,184
Consumer installment............. - - - 35,000 25,000 10,000
-------- -------- -------- -------- -------- --------
Total loans
held-for-sale.......... 16,271 19,419 2,225 47,113 38,106 16,184
-------- -------- -------- -------- -------- --------
Total loans.............. $202,557 $249,912 $333,674 $407,290 $467,390 $452,149
======== ======== ======== ======== ======== ========
</TABLE>
28
<PAGE> 30
The following table shows the maturity distribution and interest rate
sensitivity of the Company's loan portfolio at December 31, 1996:
LOAN MATURITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
WITHIN ONE THROUGH OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Maturity
Commercial, financial and agricultural .... $12,576 $45,215 $1,692 $ 59,483
Real estate - construction................. 17,204 18,804 4,673 40,681
------- ------- ------ --------
Total.............................. $29,780 $64,019 $6,365 $100,164
======= ======= ====== ========
Interest Rate Sensitivity
Selected loans with:
Predetermined interest rates:
Commercial, financial and agricultural..... $ 13 $ 468 $ 69 $ 550
Real estate - construction................. 1,463 4,514 2,721 8,698
Floating or adjustable interest rates:
Commercial, financial and agricultural..... 12,563 44,747 1,623 58,933
Real estate - construction................... 15,741 14,290 1,952 31,983
------- ------- ------ --------
Total.............................. $29,780 $64,019 $6,365 $100,164
======= ======= ====== ========
</TABLE>
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 June 30, 1997 and December 31, 1996 were $3.5
million. Since December 31, 1995, nonperforming assets have declined $982,000,
or 22.1%. During 1996, other real estate owned declined $772,000 to $567,000. At
December 31, 1996 and 1995, there were no restructured loans. Nonperforming
assets increased $1.5 million in 1995 from $2.9 million at December 31, 1994.
At December 31, 1996, the ratio of loans past due 90 days and still
accruing to loans increased significantly to 1.60%, from .87% and .64% at
December 31, 1995 and 1994, respectively.
When a loan is classified as nonaccrual, previously accrued interest is
reversed and interest income is decreased to the extent of all interest accrued
in the current year. If any portion of the accrued interest had been accrued in
the previous year, accrued interest is decreased and a charge for that amount is
made to the allowance for loan losses. For 1996, the gross amount of interest
income that would have been recorded on nonaccrual and restructured loans, if
all such loans had been accruing interest at the original contract rate, was
$278,000.
Credit card accounts are sampled on a quarterly basis and reviewed to
assure compliance with the Bank's credit policy. Review procedures include
determination that the appropriate verification processes have been completed,
recalculation of the borrower's debt ratio, and analysis of the borrower's
credit history to determine if the borrower meets established Bank criteria.
Policy exceptions are analyzed monthly. Delinquent accounts
29
<PAGE> 31
are monitored daily and charged off after 180 days, which is the industry
standard. Prior to charge-off, interest on credit card loans continues to
accrue. Upon charge-off, all current period interest income and related fees are
charged against interest income.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans.................. $2,314 $ 632 $1,189 $3,105 $2,940 $1,403
Restructured loans................ 267 - - - - -
Other real estate owned........... 2,213 2,016 1,714 1,339 567 2,059
------ ------ ------ ------ ------ ------
Total nonperforming
assets................ $4,794 $2,648 $2,903 $4,444 $3,507 $3,462
====== ====== ====== ====== ====== ======
Loans past due 90 days or more and
still accruing.................. $1,297 $1,422 $2,134 $3,091 $6,890 $5,765
====== ====== ====== ====== ====== ======
Ratio of past due loans to total
loans........................... .70% .62% .64% .87% 1.60% 1.32%
Ratio of nonperforming assets to
total loans and other real
estate owned.................... 2.54 1.14 .87 1.24 .82 .79
</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.
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 June 30, 1997, credit card loans had declined $19 million to $125
million, or 28.7% of loans. This 13.2% decline in credit card loans outstanding
and the 28.0% decline in credit card delinquencies since peaking on January 31,
1997 are the primary causes of the $2.7 million decline in the allowance for
loan losses allocated to credit cards. At June 30, 1997, $11.0 million of the
allowance for loan losses was allocated to credit card loans, which represents
8.8% of such loans outstanding.
At December 31, 1996, credit card loans totaled $144 million, or 33.5% of
loans, compared to $140 million, or 38.8%, at December 31, 1995. The amount of
the allowance for loan losses allocated to credit cards decreased 5.46% during
1996. See "-- Provision for Loan Losses."
At December 31, 1996 and 1995, the Company increased the allowance for loan
losses as a percentage of loans to 3.85% and 1.54%, respectively, compared to
1.31% at December 31, 1994. The increases were due primarily to unfavorable
delinquency and charge-off trends related to credit card loans. Although credit
card balances increased nominally in 1996, this ratio was significantly
increased in 1996, as credit card delinquencies and net charge-offs increased.
Management believes the allowance for loan losses is adequate to provide for
losses inherent in the loan portfolio.
The table below presents an allocation of the allowance for loan losses by
category as of December 31 for each of the last five years and as of June 30,
1997. The allocation is based on a number of qualitative factors, and the
amounts presented are not necessarily indicative of actual amounts which will be
charged to any particular category.
30
<PAGE> 32
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31, 1992 DECEMBER 31, 1993 DECEMBER 31, 1994
-------------------- -------------------- --------------------
% OF % OF % OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN ALLOWANCE LOANS IN
BREAKDOWN CATEGORY BREAKDOWN CATEGORY BREAKDOWN CATEGORY
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................... $ 80 9.29% $ 52 8.86% $ 54 9.64%
Real estate - construction....... 50 5.74 17 8.04 26 9.85
Real estate - mortgage........... 180 24.56 24 26.59 16 20.10
Consumer installment............. 60 6.62 270 17.25 402 26.96
Credit cards..................... 3,249 53.79 3,252 39.26 3,750 33.45
Unallocated...................... 388 - 935 - 96 -
------ ------- ------ ------- ------ -------
Total.................. $4,007 100.00% $4,550 100.00% $4,344 100.0%
====== ======= ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
-------------------- -------------------- --------------------
% OF % OF % OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN ALLOWANCE LOANS IN
BREAKDOWN CATEGORY BREAKDOWN CATEGORY BREAKDOWN CATEGORY
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural................... $ 97 10.91% $ 98 10.24% $ 137 10.58%
Real estate - construction....... 30 11.37 35 13.12 55 11.92
Real estate - mortgage........... 8 17.00 350 16.71 97 17.10
Consumer installment............. 357 21.88 2,282 26.44 2,276 31.69
Credit cards..................... 4,875 38.84 13,746 33.49 11,029 28.71
Unallocated...................... 169 - - - 1,362 -
------ ------- ------- ------- ------- -------
Total.................. $5,536 100.00% $16,511 100.00% $14,956 100.00%
====== ======= ======= ======= ======= =======
</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.
There were no investments and no obligations of any one state or
municipality that exceeded 10% of the Company's shareholders' equity at June 30,
1997 or December 31, 1996 or 1995.
As of June 30, 1997, the Company included all but $6.0 million of its U.S.
Treasury securities and obligations of U.S. Government corporations and federal
agencies, as available-for-sale. The Company maintains a relatively high
percentage of its investment portfolio as available-for-sale as a result of
possible liquidity needs required by loan production and credit card activities.
31
<PAGE> 33
The following table shows the distribution of investment securities for the
three years ended December 31, 1996 and the six months ended June 30, 1997.
DISTRIBUTION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------- JUNE 30,
1994 1995 1996 1997
------------------- ------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies..... $29,830 $29,202 $30,950 $31,623 $54,128 $53,798 $66,134 $66,086
State and municipal........... 60 60 - - - - - -
Mortgage-backed securities...... 31,299 29,286 24,780 25,248 21,754 21,740 20,472 20,684
Other investments............... 1,539 1,539 1,588 1,588 1,854 1,854 2,119 2,119
------- ------- ------- ------- ------- ------- ------- -------
Total.................. $62,728 $60,087 $57,318 $58,459 $77,736 $77,392 $88,725 $88,889
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table shows the maturity distribution of investment
securities and average yields for the two years ended December 31, 1996 and the
six months ended June 30, 1997.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AND AVERAGE YIELDS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
--------------------------------- ------------------------------ ------------------------------
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD(2) COST VALUE YIELD(2) COST COST YIELD(2)
--------- ---------- -------- --------- ------- -------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies:
Due in less than one
year................... $ - $ - -% $17,993 $17,993 4.87% $19,995 $19,995 4.61%
Due in one year through
five years............. 1,987 2,147 5.35 - - - - - -
Due after five years
through ten years...... 15,973 16,457 6.27 17,436 17,362 6.96 27,439 27,450 6.99
Due after ten years...... 8,000 8,000 7.34 12,721 12,583 7.54 12,721 12,728 7.89
Mortgage-backed
securities............... 24,780 25,248 6.31 21,754 21,740 5.73 20,472 20,684 5.87
------- ------- ------- ------- ------- -------
Total............. $50,740 $51,852 $69,904 $69,678 $80,627 $80,857
======= ======= ======= ======= ======= =======
HELD-TO-MATURITY
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies:
Due in one year or
less................... $ 4,990 $ 5,019 7.23% $ - $ - -% $ - $ - -%
Due after ten years...... - - - 5,979 5,860 7.19 5,979 5,913 7.20
------- ------- ------- ------- ------- -------
Total............. $ 4,990 $ 5,019 $ 5,979 $ 5,860 $ 5,979 $ 5,913
======= ======= ======= ======= ======= =======
</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%.
32
<PAGE> 34
Deposits and Funds Purchased
Total deposits as of June 30, 1997 were $557 million compared to $545
million as of December 31, 1996. Total deposits as of December 31, 1996
increased $78 million, or 16.7%, from $467 million as of December 31, 1995. On
an average balance basis, all categories of deposits reflected volume increases.
Core deposits, the Company's largest source of funding, consist of all
interest-bearing and noninterest-bearing deposits except time deposits over
$100,000. Core deposits are obtained from a broad range of customers. Average
interest-bearing core deposits were $381 million as of June 30, 1997, compared
to $438 million on December 31, 1996. Average interest-bearing core deposits
grew 36.9% to $438 million in 1996.
Noninterest-bearing deposits are comprised of certain business accounts,
including correspondent bank accounts, escrow deposits, as well as individual
accounts. Average noninterest-bearing demand deposits represented 15.4% of
average core deposits in 1996 compared to 17.2% in 1995. The average amount of,
and average rate paid on, deposits by category for the periods shown are
presented below:
SELECTED STATISTICAL INFORMATION FOR DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits.................. $ 50,637 -% $ 60,131 -% $ 70,074 -% $ 72,329 -%
Interest-bearing demand
deposits.................. 88,530 2.70 92,107 3.42 100,966 3.51 82,127 2.86
Savings deposits............ 20,914 3.01 15,292 4.30 26,516 3.99 34,568 3.77
Time deposits............... 176,381 4.62 243,617 5.85 344,551 5.79 356,058 5.70
-------- -------- -------- --------
Total average
deposits......... $336,462 3.32 $411,147 4.36 $542,107 4.53 $545,082 4.39
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
MATURITY DISTRIBUTION OF TIME DEPOSITS $100,000 OR MORE 1996 1997
- ------------------------------------------------------- ------------ --------
<S> <C> <C>
Three months or less........................................ $37,943 $39,201
Over three through six months............................... 16,213 20,307
Over six through twelve months.............................. 23,270 17,732
Over twelve months.......................................... 9,202 14,271
------- -------
Total............................................. $86,630 $91,511
======= =======
</TABLE>
33
<PAGE> 35
The following table shows the maximum amount of short-term borrowings and
the average and year-end amount of borrowings, as well as average interest rates
at year-end for the last three years:
SCHEDULE OF SHORT-TERM BORROWINGS(1)
<TABLE>
<CAPTION>
MAXIMUM WEIGHTED
OUTSTANDING AVERAGE AVERAGE
YEAR ENDED AT ANY AVERAGE INTEREST RATE ENDING INTEREST RATE
DECEMBER 31, MONTH-END BALANCE DURING YEAR BALANCE AT YEAR-END
------------ ----------- ------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1994.............................. $33,093 $11,005 4.23% $18,940 5.00%
1995.............................. 23,939 14,188 4.15 8,245 2.96
1996.............................. 25,760 18,907 3.67 17,184 3.06
Period Ended
June 30, 1997(1)................ 29,020 18,287 4.06 8,567 2.96
</TABLE>
- ---------------
(1) Consists of federal funds purchased, securities sold under agreements to
repurchase, and borrowings from the Federal Home Loan Bank that mature
either overnight or on a fixed maturity not to exceed three months.
Except for securities sold under agreements to repurchase, which were 33%
of shareholders' equity as of June 30, 1997, no other category of short-term
borrowings exceeded 30% of shareholders' equity for any period shown.
Long-Term Debt
On December 12, 1995, the Company issued $15 million in Notes. The Company
loaned $7 million in 1995 and an additional $3 million in 1996 of the proceeds
to the Bank to enhance the Bank's total capital ratio. The balance of the
proceeds was used to retire certain previously issued subordinated notes and for
general corporate purposes.
The provisions of the Notes and Indenture prohibit the Company from
declaring or paying any dividend on its capital stock, including any preferred
stock, or from redeeming any of its capital stock if the cumulative amounts of
the dividends paid and amounts paid upon redemption for the three-year period
ending on the dividend declaration date or redemption date exceeds the
cumulative consolidated net income of the Company for the three-year period
ending on such date. The cumulative consolidated net income of the Company for
the three-year period ended June 30, 1997 was $2.0 million and the dividends
paid during such period were $1.7 million. In addition, no dividend can be
declared on the capital stock if an event of default has occurred and is
continuing under the Notes, including the failure to pay interest on such
indebtedness or default on other indebtedness exceeding $1 million.
Shareholders' Equity
Shareholders' equity as of June 30, 1997 was $26.3 million, an increase of
$5.2 million, or 24.6%, from December 31, 1996. This increase in shareholders'
equity is primarily attributable to the issuance of $4.7 million of Preferred
Stock. Shareholders' equity at December 31, 1996 was $21.1 million, a decrease
of $6.7 million, or 24.1%, from $27.8 million at December 31, 1995. Realized
shareholders' equity (shareholders' equity excluding unrealized gains or losses
on investment securities available-for-sale) at June 30, 1997, and December 31,
1996, and 1995, was $26.2 million, $21.2 million and $27.1 million,
respectively.
The 1996 decline in shareholders' equity was primarily attributable to the
$5.7 million decrease in retained earnings from the net loss for 1996 and the
$830,000 decrease in the unrealized gain on investment securities
available-for-sale, net of tax.
34
<PAGE> 36
In 1996, the Company's Common Stock dividend payout was $693,000 compared
to $644,000 and $628,000 in 1995 and 1994, respectively. In addition, on October
9, 1995, the Company paid a 10% Common Stock dividend to shareholders of record
on September 28, 1995. The following table reflects the Company's Common Stock
dividend payout for the past three years and for 1997, restated to reflect the
10% Common Stock dividend.
<TABLE>
<CAPTION>
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter............................................... $.0341 $.0341 $.0375 -
Second Quarter.............................................. .0341 .0341 .0375 -
Third Quarter............................................... .0341 .0341 .0375 -
Fourth Quarter.............................................. .0341 .0375 .0375
------ ------ ------
Total............................................. .1364 .1398 .1500
====== ====== ======
</TABLE>
Regulatory Capital Requirements
The Bank is a national banking association and is subject to Federal and
state statutes applicable to banks chartered under the banking laws of the
United States, to members of the Federal Reserve System and to banks whose
deposits are insured by the Federal Deposit Insurance Corporation. The FRB and
the OCC have established capital adequacy guidelines for bank holding companies
and national banks.
In 1991, Congress adopted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("1991 Act"). Additional supervisory powers and
regulations mandated by the 1991 Act include a "prompt corrective action"
program based upon five regulatory zones for banks in which all banks are
placed, largely based on their capital positions. Regulators are permitted to
take increasingly harsh action as a bank's financial condition declines.
Regulators are also empowered to place in receivership or require the sale of a
bank to another depository institution when a bank's capital leverage ratio
reaches 2%. Better capitalized institutions are subject to less onerous
regulation and supervision than banks with lesser amounts of capital.
To implement the prompt corrective action provisions of the 1991 Act, the
OCC adopted regulations which became effective on December 19, 1992, placing
financial institutions in the following five categories based upon
capitalization ratios: (i) a "well capitalized" institution has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least
6% and a leverage ratio of at least 5%; (ii) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based
ratio of at least 4% and a leverage ratio of at least 3%; (iii) an
"undercapitalized" institution has a total risk-based ratio of under 8%, a Tier
1 risk-based ratio of under 4% or a leverage ratio of under 3%; (iv) a
"significantly undercapitalized" institution has a total risk-based ratio of
under 6%, a Tier 1 risk-based ratio of under 3% or a leverage ratio of under 3%;
and (v) a "critically undercapitalized" institution has a leverage ratio of 2%
or less. Institutions in any of the three undercapitalized categories are
prohibited from declaring dividends or making capital distributions. The
regulations also establish procedures for "downgrading" an institution to a
lower capital category based on supervisory factors other than capital. See
"Regulatory Matters -- OCC Agreement."
Capital leverage ratio standards require a minimum ratio of capital to
adjusted average assets ("leverage ratio") for the Bank of 4.0%. Institutions
experiencing or anticipating significant growth or those with other than minimum
risk profiles may be expected to maintain capital above the minimum levels.
The FRB establishes capital requirements for the Company as a function of
its oversight of bank holding companies. Each bank holding company must maintain
(i) a minimum ratio of Tier 1 capital ("Tier 1 Capital") to total risk-weighted
assets of 4.0% and (ii) a minimum ratio of total qualifying capital to total
qualifying assets ("total risk-based capital ratio") of 8.0% with the amount of
the allowance for credit losses that may be included in supplementary capital
("Tier 2 Capital") limited to 1.25% of total risk-weighted assets. The leverage
ratio established for a bank holding company is 3.0%.
35
<PAGE> 37
The following table depicts the Company's capital ratios at December 31,
1995 and 1996 and at June 30, 1997 in relation to the minimum capital ratios
established by the regulations of the FRB:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital:
Actual........................ $26,606 6.15% $17,052 3.40% $22,555 4.60%
Minimum....................... 17,309 4.00 20,059 4.00 19,632 4.00
------- ------ ------- ------ ------- -----
Excess (Deficiency)........... $ 9,297 2.15% $(3,007) (.60)% $ 2,923 .60%
======= ====== ======= ====== ======= =====
Total risk-based capital:
Actual........................ $45,323 10.47% $31,976 6.38% $40,077 8.17%
Minimum....................... 34,619 8.00 40,118 8.00 39,264 8.00
------- ------ ------- ------ ------- -----
Excess (Deficiency)........... $10,704 2.47% $(8,142) (1.62)% $ 813 .17%
======= ====== ======= ====== ======= =====
Tier 1 Capital Leverage Ratio:
Actual........................ 5.42% 2.67% 3.76%
Minimum....................... 3.00 3.00 3.00
------ ------ -----
Excess (Deficiency)........... 2.42% (.33)% .76%
====== ====== =====
</TABLE>
The risk-based capital ratios of the Company and the Bank are calculated
under the guidelines by dividing their respective qualifying total capital by
their respective total risk-weighted assets. The Company's qualifying total
capital and total risk-weighted assets are determined on a fully consolidated
basis. Total qualifying capital is comprised of the sum of core capital elements
and supplementary capital elements. Tier 1 capital excludes any net unrealized
gains or losses resulting from the implementation of SFAS No. 115. Tier 2
capital includes the allowance for credit losses, subject to limitations.
Under the guidelines, total risk-weighted assets of the Company and the
Bank are determined by assigning balance sheet assets and credit equivalent
amounts of off-balance sheet financial instruments to one of four broad risk
categories having risk weights ranging from zero % to 100%. The aggregate dollar
amount of each category is multiplied by the risk weight associated with that
category and the resulting weighted values from each category are summed to
determine total risk-weighted assets.
Regulatory Agreements
The Company and the Bank are principally regulated by the FRB and the OCC,
respectively. At periodic intervals, the OCC examines and evaluates the
financial condition, operations, policies and procedures of nationally chartered
banks, such as the Bank, as part of its legally prescribed oversight
responsibilities.
On November 14, 1996, the Bank entered into an agreement with the OCC ("OCC
Agreement") which provides that the Bank will (i) appoint an "Oversight
Committee"; (ii) achieve and maintain specified higher capital levels; (iii)
develop a three-year capital program which will include, among other things,
certain restrictions on dividend payments by the Bank and (iv) revise and amend
its strategic plan. On April 3, 1997, the OCC notified the Bank that since it
did not meet the minimum capital levels established for an "adequately
capitalized" bank as of December 31, 1996, the Bank was deemed to be
"undercapitalized" and was subject to prompt corrective action pursuant to 12
U.S.C. Sec. 1831o. As a result, the Bank was subject to restrictions on its
ability to pay dividends and management fees and to restrictions on asset growth
and expansion. The Bank was required to file a capital restoration plan with the
OCC before May 19, 1997, which was submitted and approved by the OCC. On June
24, 1997, the Company issued $4.7 million in Preferred Stock, the net cash
proceeds of which were invested in preferred stock of the Bank. As a result of
the issuance of the Preferred Stock and subsequent investment in the Bank, on
June 30, 1997, the Company and the Bank were adequately capitalized and no
longer subject to such prompt corrective action.
The Oversight Committee is comprised of three members of the board of
directors of the Bank, a majority of whom are not employees of the Company. The
Oversight Committee, which meets and reports
36
<PAGE> 38
monthly to the Board of Directors, is responsible for monitoring and
coordinating compliance by the Bank with the OCC Agreement.
The Board of Directors of the Bank submitted to the OCC a three-year
capital program, which was approved as modified. The capital program includes
projections for growth and capital requirements, projections of the sources and
timing of additional capital to meet the current and future capital needs of the
Bank and contingency plans in the event the primary sources of capital projected
are not available. The OCC Agreement permits the Bank to declare dividends on
preferred stock held by the Company only when the Bank is "adequately
capitalized." The Bank may also declare dividends on its common stock held by
the Company only when the Bank is in compliance with its approved capital
program and with the prior written approval of the OCC.
The Board of Directors of the Bank is revising its strategic plan in light
of the revised levels of capital required and its growth plans. The revised
strategic plan will include objectives for earnings performance, growth, balance
sheet mix, off-balance sheet activities, liability structure, capital adequacy,
product line development and market segments which the Bank intends to promote
or develop together with strategies to achieve these objectives. The strategic
plan, when revised, will be submitted to the OCC for approval.
The Bank periodically submits reports to the OCC evidencing compliance with
the OCC Agreement. The OCC Agreement continues in effect until it is amended or
terminated. If the Bank continues to fail to meet its required capital levels,
the operations and future prospects of the Bank will depend principally on
regulatory attitudes and actions at the time, within applicable legal
constraints. Such failure could result in such operating restrictions as growth
limitations, prohibitions on dividend payments, increased supervisory
monitoring, limitations on executive compensation, restrictions on deposit
interest rates, forced merger, or regulatory seizure.
The OCC Agreement establishes higher capital requirements than those
applicable to an adequately capitalized Bank under the OCC regulations.
Specified capital levels were to be achieved by the Bank by April 30, 1997 and
are to be maintained until November 30, 1997. At November 30, 1997, higher
capital levels become effective and are applicable thereafter. The table below
sets forth the capital requirements for the Bank under the OCC regulations and
under the OCC Agreement and the Bank's actual capital ratios at December 31,
1996 and June 30, 1997.
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT ACTUAL
------------------------- ------------------------ -----------------------
ADEQUATELY WELL APRIL 30, NOVEMBER 30, DECEMBER 31, JUNE 30,
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 1996 1997
- -------------- ----------- ----------- --------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Leverage.......................... 4.00% 5.00% 5.00% 6.00% 3.27% 4.33%
Risk-Based Capital:
Tier 1.......................... 4.00 6.00 6.00 7.00 4.16 5.29
Total........................... 8.00 10.00 10.00 11.00 7.43 8.61
</TABLE>
Set forth below are pertinent capital ratios for the Company as of December
31, 1996, and June 30, 1997, under the FRB regulations:
<TABLE>
<CAPTION>
ACTUAL
-----------------------
MINIMUM CAPITAL DECEMBER 31, JUNE 30,
CAPITAL RATIOS REQUIREMENT 1996 1997
- -------------- --------------- ------------ --------
<S> <C> <C> <C>
Leverage.......................................... 3.00% 2.67% 3.76%
Risk-Based Capital:
Tier 1.......................................... 4.00 3.40 4.59
Total........................................... 8.00 6.38 8.16
</TABLE>
Generally, dividends that may be paid by the Bank to the Company are
subject to certain regulatory limitations. Under Federal banking law, the
approval of the OCC will be required if the total of all dividends declared in
any calendar year by the Bank exceeds the Bank's net profits to date for that
year combined with its retained net profits for the preceding two years, subject
to the maintenance of minimum required regulatory capital. At June 30, 1997 and
December 31, 1996, total shareholders' equity of the Bank was $29.5 million and
$24.6 million, respectively. At December 31, 1996, payment of future dividends
on the common stock of the
37
<PAGE> 39
Bank was precluded by the OCC Agreement until the Bank is in compliance with its
approved capital program and it has received written approval from the OCC.
Absent sales of equity securities or subordinated debt by the Company,
capital will increase only through the retention of earnings. To meet the
capital requirements in the OCC Agreement, management has estimated that as of
June 30, 1977, an additional $13 million of capital will be needed to reach the
requirements. Of this amount, approximately $1.0 million was invested in the
Bank on July 9, 1997.
The Board of Directors of the Company adopted resolutions ("FRB Agreement")
on February 13, 1997, as requested by the Federal Reserve Bank of Atlanta, that
prohibits the Company from paying dividends and incurring debt without prior
approval of the FRB.
INTEREST RATE SENSITIVITY
The major elements used to manage interest rate risk include the mix of
fixed and variable rate assets and liabilities and the maturity pattern of
assets and liabilities. It is the Company's policy not to invest in derivatives
in the ordinary course of business. The Company performs a monthly review of
assets and liabilities that reprice and the time bands within which the
repricing occurs. Balances generally are reported in the time band that
corresponds to the instrument's next repricing date or contractual maturity,
whichever occurs first. However, fixed rate residential mortgage loans are
included based on scheduled payments and credit card loans with a fixed rate are
spread based on historical run-off experience over an eight month period.
Through such analysis, the Company monitors and manages its interest rate
sensitivity gap to minimize the effects of changing interest rates.
The interest rate sensitivity structure within the Company's balance sheet
at June 30, 1997 has a cumulative net interest sensitive liability gap of 13.4%
when projecting out one year. In the near term, defined as 90 days, the Company
has a cumulative net interest sensitivity asset gap of 16.7% as of June 30,
1997. The interest rate sensitivity structure within the Company's balance sheet
at December 31, 1996 indicated a cumulative net interest sensitive liability gap
of 14.20% when projecting out one year. In the near term, defined as 90 days,
the Company had a cumulative net interest sensitivity asset gap of 20.61% as of
December 31, 1996. This information represents a general indication of repricing
characteristics over time; however, the sensitivity of certain deposit products
may vary during extreme swings in the interest rate cycle. Since all interest
rates and yields do not adjust at the same velocity, the interest rate
sensitivity gap is only a general indicator of the potential effects of interest
rate changes on net interest income.
38
<PAGE> 40
The following table illustrates the Company's interest rate sensitivity at
December 31, 1996 as well as the cumulative position at December 31, 1996 and
June 30, 1997:
INTEREST RATE SENSITIVITY ANALYSIS(1)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------
REPRICING WITHIN
-------------------------------------------------------------------------------------------------
0-30 31-60 61-90 91-120 121-150 151-180 OVER
DAYS DAYS DAYS DAYS DAYS DAYS ONE YEAR ONE YEAR TOTAL
-------- -------- -------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities
available-for-sale....... $ 17,993 $ - $ - $ - $ - $ - $ - $53,238 $ 71,231
Investment securities
held-to-maturity......... - - - - - - 301 5,979 6,280
Loans...................... 184,918 5,902 5,145 4,905 4,712 4,630 29,216 189,395 428,823
Loans held for sale........ 13,106 - 25,000 - - - - - 38,106
Federal funds sold......... 343 - - - - - - - 343
Due from banks - interest
earning.................. 3,301 - - - - - - - 3,301
-------- -------- -------- -------- -------- -------- --------- -------- --------
Total
interest-earning
assets........... 219,661 5,902 30,145 4,905 4,712 4,630 29,517 248,612 548,084
INTEREST-BEARING
LIABILITIES
Demand deposit accounts.... 3,694 3,694 3,694 3,694 3,694 3,694 22,164 29,549 73,877
Savings and NOW accounts... 1,258 1,258 1,258 1,258 1,258 1,258 7,557 60,404 75,509
Money market............... 2,090 2,090 2,090 2,090 2,090 2,090 12,543 16,727 41,810
Time Deposits>$100,000..... 21,892 8,102 8,376 5,919 6,691 3,179 22,906 9,565 86,630
Time Deposits<$100,000..... 19,931 17,389 27,262 25,746 17,602 12,411 76,694 64,852 266,887
Long-term debt............. 1,500 - - - - - - 15,000 16,500
Short-term borrowings...... 17,184 - - - - - - - 17,184
-------- -------- -------- -------- -------- -------- --------- -------- --------
Total
interest-bearing
liabilities...... 67,549 32,533 42,680 38,707 31,335 22,632 141,864 201,097 578,397
-------- -------- -------- -------- -------- -------- --------- -------- --------
Interest-sensitivity gap... $152,112 $(26,631) $(12,535) $(33,802) $(26,623) $(18,002) $(112,347) $47,515 $(30,313)
======== ======== ======== ======== ======== ======== ========= ======== ========
Cumulative gap at
12/31/96................. $152,112 $125,481 $112,946 $ 79,144 $ 52,521 $ 34,519 $ (77,828) $(30,313)
======== ======== ======== ======== ======== ======== ========= ========
Ratio of cumulative gap to
total interest-earning
assets................... 27.75% 22.89% 20.61% 14.44% 9.58% 6.30% (14.20)% (5.53)%
Ratio of interest-sensitive
assets to
interest-sensitive
liabilities (12/31/96)... 325.19 18.14 70.63 12.67 15.04 20.46 20.81 123.63
Cumulative gap at
6/30/97.................. $144,625 $112,001 $ 84,771 $ 44,596 $ 20,633 $ (322) $(108,040) $(24,948)
</TABLE>
- ---------------
(1) The Company follows FDIC guidelines for non-maturity deposit accounts across
multiple time bands. Savings and NOW accounts are equally distributed over
60 months with a limit of 40% of the total balance in the three to five year
time frame. Demand deposits and money market accounts are distributed over
36 months with a limit of 40% of the total balance in the one-to-three year
time frame.
LIQUIDITY
Market and public confidence in the financial strength of the Bank and
financial institutions in general will largely determine the Bank's access to
appropriate levels of liquidity. This confidence is significantly dependent on
the Bank's ability to maintain sound asset credit quality and appropriate levels
of capital resources.
Liquidity is defined as the ability of the Bank to meet anticipated
customer demands for funds under credit commitments and deposit withdrawals at a
reasonable cost and on a timely basis. Management measures the Bank's liquidity
position by giving consideration to both on-and off-balance sheet sources of and
demands for funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities; investment
securities eligible for pledging to secure borrowings from dealers and customers
pursuant to securities sold under agreements to repurchase ("repurchase
agreements"); loan repayments; loan sales; deposits and certain interest
rate-sensitive deposits; and borrowings under overnight federal fund lines
available from correspondent banks. During 1996 and the six-month period ended
June 30,
39
<PAGE> 41
1997, the Company sold or securitized $195 million and $57 million,
respectively, in indirect automobile and credit card loans. In addition to
interest rate-sensitive deposits, the Bank's principal demand for liquidity is
anticipated fundings under credit commitments to customers.
Maintaining appropriate levels of capital is an important factor in
determining the availability of critical sources of liquidity. At December 31,
1996, capital ratios had declined below regulatory minimums. This decline
tightened the Company's liquidity position and reduced funding sources available
to it in the past, including unsecured federal funds lines and warehouse
borrowing from the Federal Home Loan Bank. At June 30, 1997, as a result of the
issuance of Preferred Stock, capital ratios have been restored to above
regulatory minimums and the Company's liquidity sources have expanded.
Management of the Bank seeks to maintain a stable net liquidity position
while optimizing operating results, as reflected in net interest income, the net
yield on earning assets and the cost of interest-bearing liabilities in
particular. Key management meets regularly to review the Bank's current and
projected net liquidity position and to review actions taken by management to
achieve this liquidity objective.
The Company's Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements present certain information about cash flows
from operating, investing and financing activities. The Company's principal cash
flows relate to investing and financing activities of the Bank, rather than
operating activities. While the statement presents the periods' net cash flows
from lending and deposit activities, it does not reflect certain important
aspects of the Bank's liquidity described above, including (i) anticipated
liquidity requirements under outstanding credit commitments to customers, (ii)
intraperiod volatility of deposits, particularly fluctuations in the volume of
commercial customers' noninterest-bearing demand deposits and (iii) unused
borrowings available under federal funds lines, repurchase agreements, and other
arrangements. The Bank's principal source of operating cash flows is net
interest income.
FNC's liquidity sources are limited, and it primarily relies on equity
sales, interest income, management fees and dividends from the Bank as sources
of liquidity. Interest and dividends from subsidiaries ordinarily provide a
source of liquidity to a bank holding company. Currently the Bank can pay
interest on its subordinated debt and cash dividends on its preferred stock
without the prior written consent of the OCC. Dividends on the common stock of
the Bank can only be paid when the Bank is in compliance with the OCC Agreement
and with the prior written consent of the OCC.
Net cash from operating activities primarily results from net income or
loss adjusted for the following noncash items: the provision for loan losses and
depreciation and amortization. Net cash provided by operations was negatively
impacted in 1995 by the increase in indirect automobile loans held for sale of
$35 million. This followed an increase in net cash provided by operations of $19
million in 1994 when loans held for sale declined, due primarily to a decrease
in mortgage loan production. Cash was available during 1996 to increase earning
assets and to pay dividends of $692,909.
Significant financing activities include growth in core deposits,
short-term borrowings, and long-term debt. In 1995 the Company sold $16.2
million in subordinated notes and retired $1.5 million in subordinated debt. The
resulting increase in subordinated notes enhanced the Company's total risk-based
capital ratio. The Company plans to meet immediate capital needs from the
anticipated issuance of equity securities. In addition, the Company anticipates
that additional capital will be provided by growth in retained earnings and, if
appropriate, from the issuance of additional subordinated debt.
Cash flows from time deposits, which increased to $84 million in 1996 and
$16 million during the six months ended June 30, 1997, were primarily used to
support loan growth. In addition, during the year ended December 31, 1996 the
Company routinely utilized brokered deposits to fund interim period loan growth
for loan sales and a securitization. No such deposits were outstanding as of
year end. Due to its capital ratios at year-end, the Company no longer meets the
requirements to utilize such deposits. The Company had unused sources of
liquidity in the form of unused unsecured federal funds lines of $20 million at
December 31, 1996. As stated above, such lines now require security. The Company
manages asset and liability growth through pricing strategies within regulatory
capital constraints.
40
<PAGE> 42
Except for the possible adverse effects arising out of the FRB and OCC
Agreements discussed in "-- Regulatory Capital Requirements" and "-- Regulatory
Agreements," and the level of the Company's credit card and indirect automobile
loan delinquencies and charge-offs, there are no known trends, events, or
uncertainties of which the Company is aware that will have or that are likely to
have a material adverse effect on the Company's liquidity, capital resources or
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The adoption did not have a material impact on the financial position or
results of operations of the Company.
Beginning on January 1, 1997, the Company adopted the provisions of
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," SFAS No. 125, which provides new accounting and reporting
standards for sales, securitizations and servicing of receivables and other
financial assets and extinguishments of liabilities and supersedes SFAS 122.
SFAS No. 125 is effective for transactions occurring after December 31, 1996,
except those provisions relating to repurchase agreements, securities lending
and other similar transactions and pledged collateral, which have been delayed
until after December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of Statement No. 125, an amendment of FASB Statement No.
125."
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." The statement revises standards for computing and
presenting net income per share by (a) replacing primary net income per share
with basic net income per share, (b) requiring dual presentation of basic and
diluted net income per share for entities with complex capital structures, and
(c) requiring a reconciliation of the basic net income per share computation to
diluted net income per share. Basic net income per share is calculated by
dividing net income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted net income per share
includes the effect of potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
shares. The adoption of SFAS No. 128 will not have a material effect on the
Company's earnings per share calculations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
is effective for annual and interim periods ending after December 15, 1997. This
statement requires that all items that are required to be recognized under
accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for annual and interim
periods ending after December 15, 1997. This statement establishes standards for
the method that public entities are to use to report information about operating
segments in annual financial statements and requires that those enterprise
reports be issued to shareholders. It also establishes standards for related
disclosures about products and services, geographical areas and major customers.
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<PAGE> 43
QUARTERLY FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, certain
consolidated quarterly financial information of the Company. This information is
derived from unaudited consolidated financial statements which include, in the
opinion of management, all normal recurring adjustments which management
considers necessary for a fair presentation of the results for such periods.
This information should be read in conjunction with the Company's consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus. The results for any quarter are not necessarily indicative of
results for any future period.
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------- ------------------------------------- -----------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income.............. $10,928 $11,650 $12,322 $13,180 $13,718 $14,963 $15,644 $15,475 $15,246 $15,611
Interest expense............. 3,989 4,682 5,019 5,181 5,837 6,776 7,151 6,963 6,521 6,429
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income.......... 6,939 6,968 7,303 7,999 7,881 8,187 8,493 8,512 8,725 9,182
Provision for loan losses.... 1,380 1,710 2,000 3,000 2,400 3,000 5,700 14,027 4,770 3,500
Noninterest income before
securities gain............ 1,882 2,484 2,876 3,582 3,368 4,830 4,053 5,450 5,234 3,581
Securities gains............. 102 139 206 408 87 195 79 243 - -
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total noninterest income..... 1,984 2,623 3,082 3,990 3,455 5,025 4,132 5,693 5,234 3,581
Noninterest expense.......... 5,874 6,193 6,458 7,058 8,005 8,621 9,521 9,341 8,717 8,771
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes...................... 1,669 1,688 1,927 1,931 931 1,591 (2,596) (9,163) 472 492
Income tax (benefit)
expense.................... 596 599 691 680 328 586 (992) (3,417) 163 154
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............ $1,073 $1,089 $1,236 $1,251 $ 603 $1,005 $(1,604) $(5,746) $ 309 $ 338
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share...................... $ .23 $ .24 $ .27 $ .27 $ .13 $ .22 $ (.35) $(1.24) $ .07 $ .07
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
42
<PAGE> 44
BUSINESS
GENERAL
Fidelity National Corporation is a bank holding company headquartered in
Atlanta, Georgia. The Company, which commenced operations as Fidelity National
Bank in 1973, provides traditional deposit, lending, mortgage, securities
brokerage, international trade services and trust products and services to its
commercial and retail customers through its subsidiaries. FNB is a full-service
banking operation; FNMC is a full-service residential mortgage banking
operation; and FNCI is a securities brokerage operation. The Company currently
conducts its full-service banking and residential mortgage lending businesses
through 16 locations in the metropolitan Atlanta area. Indirect automobile
lending, residential mortgage lending and residential construction lending are
conducted through certain of its Atlanta offices and the Company's Jacksonville,
Florida location. Indirect automobile lending is also conducted at the Tampa,
Florida location which was opened in 1995. At June 30, 1997, the Company had
total assets of $613 million, total loans of $452 million, total deposits of
$557 million and shareholders' equity of $26 million.
STRATEGY
The Company's long-term strategy is to (i) continue to grow its
full-service banking operations, primarily in the metropolitan Atlanta area, by
fully utilizing its current branch capacity and by opening additional bank
branches; (ii) capitalize on the consolidating metropolitan Atlanta banking
market by increasing commercial and real estate loans and other banking
services, primarily to small and medium sized companies; (iii) retain a greater
number of its indirect automobile loans and residential mortgage loans; (iv)
strengthen its credit card lending operations and processes; (v) enhance
operating efficiencies; and (vi) further strengthen the Company's senior
management team.
Continue to grow banking operations. The Company is focused on growing its
full-service banking operations by leveraging its current branch capacity
resulting from the Company's recent opening of four branch offices and the move
of one branch into a significantly improved facility. These branches are not yet
mature and they continue to experience steady deposit and loan growth. In
addition, the Company has acquired and equipped three additional branches, which
it intends to open following the Offering subject to OCC approval. The Company
is currently incurring the fixed costs associated with these new and unopened
branches. Upon successful capitalization, the Company expects to be able to grow
the deposits of these new and unopened branches, thereby improving the return
realized on the Bank's operating cost structure. During the past twelve months,
the Company added six automated teller machines ("ATMs"), bringing the total
number of ATMs in its network to 27 at June 30, 1997. The Company expects to add
ten additional ATMs during the next twelve months.
Capitalize on the consolidating metropolitan Atlanta banking market. The
Company is positioning itself as the financial institution alternative to the
larger commercial banks headquartered outside of metropolitan Atlanta that have
been acquiring Atlanta commercial banks and thrifts. Management seeks to
capitalize on markets which it believes are being underserved as a result of
these acquisitions by increasing commercial loans and other banking services,
primarily to small and medium sized companies. The Company believes there is
still value to be added by providing the opportunity for greater personalized
banking relationships than exist with the larger commercial banks in its target
markets and will continue to emphasize personalized service by a locally
headquartered financial institution in order to differentiate itself from its
larger competitors. FNB's asset size of $613 million at June 30, 1997 and legal
lending limit per borrower of approximately $7.5 million position it to work
more effectively with middle-market customers than many smaller community banks
in the Atlanta metropolitan area.
Retain indirect automobile and residential mortgage loans. The Company
plans, based on its adherence to established underwriting criteria, to further
increase the profitability of its indirect automobile lending operation by
retaining a greater number of the indirect automobile loans that it acquires
from dealers in Atlanta, Georgia and Jacksonville and Tampa, Florida.
Historically, the Company has sold a significant
43
<PAGE> 45
portion of these contracts on a non-recourse basis and generally has retained
the servicing rights. The Company also plans to retain a larger portion of its
residential mortgage loan production.
Strengthen credit card lending activities. Management of the Company has
recently undertaken several initiatives to improve and return to profitability
its credit card lending activities. The Company has discontinued the issuance of
preapproved credit cards under affinity programs, increased the rates and fees
on a significant portion of its credit card accounts to appropriately reflect
the risk levels and strengthened the collection and recovery processes on credit
card accounts. The Company continues to implement new procedures and
technologies to enhance its ability to monitor and manage the exposures inherent
in its credit card portfolio. The Company currently does not plan to issue new
affinity credit cards or aggressively market new credit cards. As a result, the
Company expects its credit card loans to diminish as a percentage of its total
loan portfolio. Over time, and in conjunction with an increase in commercial
loans and retained indirect automobile loans, the reduction in credit card loans
is expected to result in an increase in the percentage of secured loans in the
Company's loan portfolio.
Enhance operating efficiencies. During the fourth quarter of 1996, the
Company consolidated its data processing, deposit and loan operations and its
collection and consumer product operations into a centrally located office. In
connection with this consolidation, the Company has and is continuing to upgrade
its software and management information systems designed to improve marketing
and operating efficiencies. Specifically, the Company has implemented automated
dialers for marketing products and collection, telephone banking software,
delinquency analysis software, collection software and enhanced accounting
systems software. The Company continues to analyze its infrastructure and
technological developments in the banking industry for opportunities to improve
the efficiency of its operations.
Further Strengthen Senior Management. On September 15, 1997, FNB hired
Larry D. Peterson as its President and Chief Executive Officer. In addition,
during the past two years the Company has hired a senior consumer credit
officer, a manager of credit cards and a manager of indirect automobile lending.
The Company intends to continue to strengthen senior management. See
"Management."
MARKET AREA
The Atlanta metropolitan area has been, and is expected to continue to be,
one of the fastest growing metropolitan areas in the country. The population in
the Atlanta metropolitan area grew from 2,959,950 in 1990 to an estimated
3,481,500 in 1995, an average annual growth rate of approximately 3%. The
Atlanta metropolitan area has also experienced substantial job growth.
According to the Georgia Department of Labor, the Atlanta economy created over
80,000 new jobs in each year from 1993 through 1996, while the local
unemployment rate dropped during that period from 5.2% to 3.8%. The May 1997
"Forecast of Georgia & Atlanta" issued by the Georgia State University Economic
Forecasting Center, has estimated that population growth in the Atlanta
metropolitan area will continue at annual rates of at least 2.6% through 1999.
The Economic Forecasting Center also expects job growth to continue, with
52,300, 40,800 and 35,000 new jobs created in 1997, 1998 and 1999,
respectively, during which periods it projects the national economy will be
slowing.
FNB conducts banking activities primarily through 16 branches in Fulton,
DeKalb, Cobb and Gwinnett counties, Georgia. Four of these branches were opened
in 1996 and the Company intends to open three additional branches in the Atlanta
metropolitan area following the Offering. Customers of FNB are primarily small
and medium sized businesses and individuals. FNB's customer base for its credit
card portfolio is national in scope, with customers in all 50 states. FNB also
conducts indirect automobile lending and residential construction lending from
its Jacksonville, Florida office in addition to its offices in Georgia. FNB also
conducts indirect automobile lending from its Tampa, Florida office. Customers
of its other services are located almost exclusively in Georgia.
PRODUCTS AND SERVICES
The Company's products and services include (i) depository accounts, (ii)
indirect automobile lending, (iii) credit card loans, (iv) construction and
residential real estate loans, (v) commercial loans, including
44
<PAGE> 46
commercial loans secured by real estate, (vi) securities brokerage services,
(vii) trust products and services and (viii) international trading services.
Deposits
FNB offers a full range of depository accounts and services to both
individuals and businesses. As of June 30, 1997, the Company's deposit base,
totaling approximately $557 million, consisted of approximately $76 million in
noninterest-bearing demand deposits (13.5% of total deposits), approximately $85
million in interest-bearing demand deposits and money market accounts (15.3% of
total deposits), approximately $27 million in savings deposits (4.9% of total
deposits), approximately $286 million in time deposits in amounts less than
$100,000 (51.3% of total deposits), and approximately $83 million in time
deposits of $100,000 or more (15.0% of total deposits). There were no brokered
deposits on June 30, 1997.
Lending
FNB's primary lending activities include consumer loans (indirect
automobile and credit card loans), real estate loans and commercial loans to
small and medium sized businesses. FNB also makes secured construction loans to
home builders and residential mortgagees in the Atlanta, Georgia and
Jacksonville, Florida metropolitan areas. The loans are often secured by first
and second real estate mortgages. FNB offers direct installment loans to
consumers on both a secured and unsecured basis. Commercial lending includes the
extension of credit to a company directly or to individuals for business
purposes.
As of June 30, 1997, the Company had consumer (including installment and
credit card loans), real estate (including residential mortgage, construction
and commercial loans secured by real estate), and commercial loans of $273
million, $133 million and $46 million, representing approximately 60.4%, 29.4%
and 10.2%, respectively, of the Company's total loan portfolio. As of June 30,
1997, real estate loans of the Company totaled $133 million. These loans
included $52 million in construction loans, $49 million in residential real
estate loans and $32 million in commercial loans secured by real estate. As of
June 30, 1997, commercial loans of the Company, including those commercial loans
secured by real estate, totaled $78 million. Commercial loans not secured by
real estate totaled $46 million, or 10.2% of the total loan portfolio of the
Company.
Indirect Automobile Lending
FNB acquires, on a non-recourse basis, consumer installment contracts
secured by new and used vehicles purchased by consumers from motor vehicle
dealers located primarily in Atlanta, Georgia and Jacksonville and Tampa,
Florida. As of June 30, 1997, the aggregate amount of indirect automobile loans
outstanding was $131 million, 29.0% of FNB's total loan portfolio. Approximately
60% and 31% of the outstanding indirect automobile loans at June 30, 1997 were
originated in the Atlanta and Jacksonville and Tampa offices, respectively. An
additional $123.7 million of indirect automobile loans originated and sold by
the Company are being serviced for others. This business has grown significantly
and origination volume for the quarter ended June 30, 1997 was approximately $47
million. Each potential sales finance contract is reviewed for creditworthiness
and collateral value by FNB, which notifies the dealer as to the terms
(including interest rate and length of contract) on which the loan will be made
to the dealer's customer. Since the sales finance contracts are purchased by FNB
on a nonrecourse basis, no credit is being extended to the dealers and the
dealers have no liability for the sales finance contracts purchased from them,
except to the extent of the dealer reserve discussed below. Once the loan has
been documented, the dealer assigns the contract to FNB.
The interest rate quoted by a dealer on a sales finance contract may exceed
the interest charged by FNB on the particular contract. That interest
differential or flat fee, depending on dealer arrangement, accrues in a prepaid
asset account. Usually 75% to 100% of the interest differential or flat fee is
immediately paid to the dealer as compensation for originating and documenting
the loan. The unpaid portion is retained in the dealer holdback account and FNB
may deduct from this account potential prepayments, rebates, charge-offs and any
rebates of interest charges due FNB on sales finance contracts purchased from
the dealer. If any amount is remaining in the holdback account at the time all
sales finance contracts purchased by FNB from the dealer
45
<PAGE> 47
have been paid in full, such amount is paid to the dealer. As of June 30, 1997,
the balance in the holdback account was $187,000. The Company's potential
charge-offs in excess of the holdback are provided for in the allowance for loan
losses. As of June 30, 1997, the aggregate amount of indirect automobile
financing loans outstanding was approximately $131 million. Net charge-offs on
indirect automobile loans for the years ended December 31, 1995 and 1996 and the
six months ended June 30, 1997 were $303,000, $1.6 million and $1.8 million,
respectively.
Credit Card Loans
FNB offers Visa, MasterCard, Visa Gold, ConsumerCard Visa, affinity Visa
programs and sponsored FNB Visa/MasterCard programs on a nationwide basis to
persons, businesses, partnerships and associations who meet FNB's established
underwriting standards with respect to income, credit rating, established
residence or domicile and employment. Credit card loans are subject to seasonal
fluctuations based on consumer spending habits, with the outstanding balances of
such credit card loans rising at the end of each calendar year. As of June 30,
1997, credit card loans were approximately $125 million, or 27.7% of the
Company's total loan portfolio. The credit card portfolio was built
substantially through affinity programs.
Residential Mortgage Banking
FNMC is engaged in the residential mortgage banking business, focusing on
one-to-four family properties. FNMC offers FHA, VA, conventional and
non-conforming loans (those with balances over $203,150). In addition, FNMC
purchases loans from independent mortgage companies located in the Southeast.
FNMC operates from the Company's office in Corporate Square, Atlanta, Georgia as
well as three other locations in the Atlanta metropolitan area and also has a
loan origination office in Jacksonville, Florida. FNMC is an approved originator
and servicer for Freddie Mac and Fannie Mae and is an approved originator for
loans insured by HUD.
Mortgage loans held-for-sale fluctuate due to economic conditions, interest
rates, the level of real estate activity and seasonal factors. During 1996, FNMC
originated approximately $7 million in loans to be held in FNB's portfolio. FNMC
typically retains the right to service mortgages sold to investors, but from
time to time sells servicing rights to other mortgage loan servicers. Servicing
activities include the collection of principal and interest payments,
maintenance of escrow balances and remittance of insurance and tax payments on
behalf of mortgagees and the offer of insurance products to borrowers. In return
for servicing mortgages, FNMC is entitled to a servicing fee, generally .25% to
.50% per annum of the outstanding principal balance of a mortgage serviced. Due
to normal amortization of the principal balance, the dollar amount of the fee
earned on a particular mortgage declines over time and no further fee will be
earned if the mortgage is prepaid or goes into default. During 1996 and the six
months ended June 30, 1997, the Company closed $176 million and $61 million of
residential mortgage loans, respectively. All servicing rights were retained,
except for government and non-conforming loans. As of June 30, 1997, FNMC
serviced residential mortgage loans totaling $258 million, of which $14 million
were held by FNB and $244 million were serviced for others. See "-- Supervision
and Regulation -- Regulation of Mortgage Banking."
Securities Brokerage Services
FNCI commenced business as a full-service broker in late 1992, after
registration as a broker-dealer with the Commission in October 1992 and with the
State of Georgia on May 15, 1992. In October 1992, FNCI registered as an
investment advisor with the Commission, received approval from the Federal
Reserve to operate as a fully disclosed introducing broker and became a member
of the NASD. FNCI operates from its headquarters in Atlanta and from three other
offices in FNB's banking facilities in the Atlanta metropolitan area.
Trust Products and Services
FNB provides investment products and services to individuals and
organizations under trust and agency agreements. Currently, FNB services
approximately $300 million in assets, with the majority of accounts in
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<PAGE> 48
custodial and self-directed IRAs. Other services include personal trusts,
employee benefit trusts, guardianships, estate settlement accounts, management
agency accounts and corporate trusts.
International Trade Services
FNB provides services to individuals and company clients in meeting their
international business requirements. Letters of credit, foreign currency drafts,
foreign clean and documentary collections, export finance and international wire
transfers are some of the services provided.
SIGNIFICANT OPERATING POLICIES
Lending Policy
Lending authority is delegated by the Board of Directors of FNB to loan
officers, each of whom is limited as to the amount of secured and unsecured
loans that he or she can make to a single borrower or related group of
borrowers. All loans in excess of $100,000 (new relationships) or $250,000
(existing relationships) must be approved by a committee of officers of the
Bank. All loans over $500,000 must be approved by the President and Chief
Executive Officer of the Bank or the Vice Chairman of the Bank. All loans in
excess of $1,000,000 must be approved by the Loan and Discount Committee of the
Board of Directors of the Bank.
FNB provides written guidelines for lending activities. Secured loans,
except indirect installment loans which are generally secured by the vehicle
purchased, are made to persons who are well-established and have net worth,
collateral and cash flow to support the loan. Real estate loans are made only
when such loans are secured by real property located in Georgia or the
Jacksonville, Florida area. Unsecured loans, except credit card loans, are
normally made by FNB only to persons who maintain depository relationships with
FNB. The Company does not have a rollover policy. Any loan renewal request is
reviewed in the same manner as an application for a new loan.
Under certain circumstances, FNB takes investment securities as collateral
for loans. If the purpose of the loan is to purchase or carry margin stock, FNB
will not advance loan proceeds of more than 50% of the market value of the stock
serving as collateral. If the loan proceeds will be used for purposes other than
purchasing or carrying margin stock, FNB generally will lend up to 70% of the
current market value of the stock serving as collateral.
Making loans to businesses for working capital is a traditional function of
commercial banks. Such loans are expected to be repaid out of the current
earnings of the commercial entity and the ability of the borrower to service its
debt is dependent upon the success of the commercial enterprise. It is FNB's
policy to require security for these loans.
For loans that are collateralized by inventory, furniture, fixtures and
equipment of a small business, FNB does not generally advance loan proceeds of
more than 60% of the inventory value and more than 50% of the furniture,
fixtures and equipment value serving as collateral. When inventory serves as
primary collateral, accounts receivable generally will also be taken as
collateral. Maximum collateral values for accounts receivable are recognized as
follows: 75% for receivables outstanding 60 days or less; 50% for receivables
outstanding 61 to 90 days; and no collateral value will be assigned for accounts
receivable outstanding past 90 days.
Many of FNB's commercial loans are secured by real estate (and thus are
categorized as real estate mortgage loans) because such collateral may be
superior to other types of collateral owned by small businesses. Loans secured
by commercial real estate, however, are subject to certain inherent risks.
Commercial real estate may be substantially illiquid, and commercial real estate
values are difficult to ascertain and are subject to wide fluctuations depending
upon economic conditions. FNB requires that qualified independent appraisers
determine the value of any commercial real estate taken as collateral, and FNB
will generally lend 75% of the appraised value or the purchase price of the real
estate, whichever is less.
FNB originates short-term residential construction loans for detached
housing and a limited number of residential acquisition and development loans in
the Atlanta and Jacksonville metropolitan areas. Residential
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<PAGE> 49
construction loans are made through the use of officer guidance lines, which are
approved by FNB's Loan and Discount Committee. Specific maximum loan commitment
and numbers of unsold houses allowed are clearly identified for each of the
approximately 75 builders' officer guidance lines. Each loan is individually
reviewed and approved by the loan officer and is subject to an appraisal and a
maximum 75% loan-to-value ratio.
These guidelines are approved for established builders with track records
and adequate financial strength to support the credit being requested. Loans may
be for speculative starts or for pre-sold residential property to specific
purchasers. As of June 30, 1997, approximately $52 million (11.5% of total
loans) was outstanding on total residential construction loans, of which
approximately $10 million was for acquisition and development loans. Acquisition
and development loans generally have 18 month or shorter maturities and are for
the purpose of developing lots for a builder's own building program usage or are
generally pre-sold to an established builder or builders.
Inter-agency guidelines adopted by federal bank regulators, including the
OCC, require that financial institutions establish real estate lending policies.
The guidelines also established certain maximum allowable real estate
loan-to-value standards. FNB has adopted the federal standards as its maximum
allowable standards, but has had in the past and now has in place loan policies
which are, in some cases, more conservative than the OCC guidelines. The FNB and
OCC guidelines require maximum allowable loan-to-value ratios for various types
of real estate loans as set forth below.
<TABLE>
<CAPTION>
MAXIMUM ALLOWABLE
LOAN-TO-VALUE RATIO
-------------------
<S> <C> <C>
LOAN CATEGORY
Land....................................................... 65%
Land development........................................... 75
Construction:
Commercial, multifamily(1) and other nonresidential...... 80
One-to-four family residential........................... 85
Improved property.......................................... 85
Owner-occupied one-to-four family and home equity(2)....... -
</TABLE>
- ---------------
(1) Multifamily construction includes condominiums and cooperatives.
(2) A loan-to-value limit has not been established for permanent mortgage or
home equity loans on owner-occupied, one-to-four family residential
property. However, for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, appropriate credit enhancement in the form of
either mortgage insurance or readily marketable collateral should be
required.
Potential specific risk elements associated with each of FNB's lending
categories include the following:
<TABLE>
<S> <C>
Credit cards......................... Employment status, changes in local economy,
unsecured credit risks
Installment loans to individuals..... Employment status, changes in local economy,
difficulty in monitoring collateral (vehicle, boat,
mobile home) and limited personal contact as a result
of indirect lending through dealers
Commercial, financial and
agricultural....................... Industry concentrations, difficulty in monitoring the
valuation of collateral (inventory, accounts
receivable and vehicles), borrower management
expertise, increased competition and specialized or
obsolete equipment as collateral
Real estate - construction........... Inadequate collateral and long-term financing
agreements
Real estate - residential mortgage... Changes in local economy and caps on variable rate
loans
</TABLE>
Management believes that the outstanding loans included in each of these
categories do not represent more than the normal risks associated with these
categories, as described above. FNB's underwriting and asset quality monitoring
systems focus on minimizing the risks outlined above.
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<PAGE> 50
Loan Review and Nonperforming Assets
FNB's credit administration department reviews its loan portfolio to
determine deficiencies and appropriate corrective action. The credit
administration department attempts to review 30% to 45% of FNB's loan portfolio
annually, excluding credit cards and consumer installment loans secured by new
and used vehicles. The results of the reviews are presented to FNB's Board of
Directors on a monthly basis. Loan reviews are performed on credits that are
selected according to their risk. Past due loans are reviewed weekly by each
lending officer and by the credit administration department. A summary report is
reviewed monthly by FNB's Board of Directors. The Loan Committee of the Board of
Directors of FNB annually reviews all loans over $1.0 million.
Credit card accounts are reviewed on a quarterly basis for compliance with
FNB credit policy. Review procedures include a determination of whether the
appropriate review of employment, residence and other information has been
completed, recalculation of the borrower's debt coverage ratio, and analysis of
the borrower's credit history to determine if it meets established FNB criteria.
Policy exceptions are analyzed monthly. Delinquencies are monitored daily.
Accounts are charged off after they are 180 days past due in accordance with
industry practice.
A provision for loan losses and a corresponding increase in the allowance
for loan losses are recorded monthly, taking into consideration the historical
charge-off experience, delinquency and current economic conditions.
Asset/Liability Management
FNB's asset/liability committee (the "Committee") is comprised of officers
of the Company and FNB who are charged with managing the assets and liabilities
of the Company and FNB. The Committee attempts to manage asset growth, liquidity
and capital in order to maximize income and reduce interest rate risk. The
Committee directs the Company's and FNB's overall acquisition and allocation of
funds. At its monthly meetings, the Committee reviews and discusses the monthly
asset and liability funds budget in relation to the actual flow of funds. The
Committee also reviews and discusses peer group comparisons, the ratio of the
amount of rate-sensitive assets to the amount of rate-sensitive liabilities, the
ratio of allowance for loan losses to outstanding and nonperforming loans, and
other variables, such as expected loan demand, investment opportunities, core
deposit growth within specified categories, regulatory changes, monetary policy
adjustments and the overall state of the economy.
Investment Policy
FNB's investment portfolio policy is to maximize income consistent with
liquidity, asset quality, regulatory constraints and asset/liability objectives.
The policy is reviewed at least annually by FNB's Board of Directors. The Board
of Directors of FNB is provided information monthly concerning sales, purchases,
resulting gains or losses, average maturity, federal taxable equivalent yields
and appreciation or depreciation by investment categories.
SUPERVISION AND REGULATION
Holding Company Regulation
The Company is a registered bank holding company subject to regulation by
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
("Holding Company Act"). The Company is required to file financial information
with the Federal Reserve periodically and is subject to periodic examination by
the Federal Reserve.
The Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve (i) before it may acquire direct or
indirect ownership or control of more than 5% of the voting shares of any bank
that is not already controlled; (ii) before it or any of its subsidiaries, other
than a bank, may acquire all or substantially all of the assets of a bank; and
(iii) before it may merge or consolidate with any other bank holding company. In
addition, a bank holding company is generally prohibited from engaging in
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<PAGE> 51
non-banking activities, or acquiring direct or indirect control of voting shares
of any company engaged in such activities. This prohibition does not apply to
activities found by the Federal Reserve, by order or regulation, to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve has determined
by regulation or order to be closely related to banking are: making or servicing
loans and certain types of leases; performing certain data processing services;
acting as fiduciary or investment or financial advisor; providing discount
brokerage services; and making investments in corporations or projects designed
primarily to promote community welfare.
The Company must also register with the Georgia Department of Banking and
Finance ("DBF"). Such registration filing includes information with respect to
the financial condition, operations, management and intercompany relationships
of the Company, FNB and the Company's other subsidiaries, and related matters.
The DBF may also require such other information as is necessary to keep itself
informed as to whether the provisions of Georgia law and the regulations and
orders issued thereunder by the DBF have been complied with, and the DBF may
make examinations of the Company.
The Company, FNMC and FNCI are "affiliates" of FNB under the Federal
Reserve Act, which imposes certain restrictions on (i) loans by FNB to the
Company, (ii) investments in the stock or securities of the Company by FNB,
(iii) FNB accepting the stock or securities of one of its affiliates from a
borrower as collateral for loans and (iv) the purchase of assets from the
Company by FNB. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
exercise of credit, lease or sale of property or furnishing of services.
Bank Regulation
FNB is a national bank chartered under the National Bank Act. FNB and its
wholly-owned subsidiaries are subject to the supervision of, and are regularly
examined by, the OCC. The OCC regulates and monitors all areas of FNB's and
FNMC's operations and activities, including reserves, loans, mergers, issuances
of securities, payments of dividends, interest rates, mortgage servicing,
accounting and establishment of branches. Interest and certain other charges
collected or contracted for by FNB are also subject to state usury laws or
certain federal laws concerning interest rates. See "Regulatory Matters -- OCC
Agreement."
FNB is insured by the FDIC. The major functions of the FDIC with respect to
insured banks include paying depositors to the extent provided by law if an
insured bank is closed without adequate provision having been made to pay claims
of depositors, acting as a receiver of state banks placed in receivership when
appointed receiver by state authorities and preventing the development or
continuance of unsound and unsafe banking practices. The FDIC also has the
authority to recommend to the appropriate federal agency supervising an insured
bank that the agency take informal action against such institution and to act to
implement the enforcement action itself if the agency fails to follow the FDIC's
recommendation. The FDIC also has the authority to examine all insured banks.
In 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991
("1991 Act") was adopted, the principal initial effect of which was to permit
the Bank Insurance Fund ("BIF") to borrow up to $30 billion from the U.S.
Treasury (to be repaid through deposit insurance premiums over 15 years) and to
permit the BIF to borrow working capital from the Federal Financing Bank in an
amount up to 90% of the value of the assets the FDIC has acquired from failed
banks.
Various other sections of the 1991 Act impose substantial new auditing and
reporting requirements and increase the role of independent accountants and
outside directors on banks having assets of $500 million or more, and regulators
may encourage smaller banks to comply with such requirements. The 1991 Act also
provides for a ban on the acceptance of brokered deposits except by well
capitalized institutions and by adequately capitalized institutions with the
permission of the FDIC, and for restrictions on the activities engaged in by
state banks and their subsidiaries as principal, including insurance
underwriting, to the same activities permissible for national banks and their
subsidiaries, unless the state bank is well capitalized and a determination is
made by the FDIC that the activities do not pose a significant risk to the
insurance fund. The effect on the Company of these measures contained in the
bill will be to a great extent dependent upon the
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<PAGE> 52
manner in which bank regulatory authorities interpret and enforce regulations
that have been issued pursuant to the 1991 Act.
Capital Requirements
The additional supervisory powers and regulations mandated by the 1991 Act
include a "prompt corrective action" program based upon five regulatory zones
for banks in which all banks are placed, largely based on their capital
positions. Regulators are permitted to take increasingly harsh action as a
bank's financial condition declines. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches 2%. Better capitalized institutions
are subject to less onerous regulation and supervision than banks with lesser
amounts of capital.
To implement the prompt corrective action provisions of the 1991 Act, the
OCC adopted regulations, which became effective on December 19, 1992, placing
financial institutions in the following five categories based upon
capitalization ratios: (i) a "well capitalized" institution has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least
6% and a leverage ratio of at least 5%; (ii) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based
ratio of at least 4% and a leverage ratio of at least 3%; (iii) an
"undercapitalized" institution has a total risk-based ratio of under 8%, a Tier
1 risk-based ratio of under 4% or a leverage ratio of under 3%; (iv) a
"significantly undercapitalized" institution has a total risk-based ratio of
under 6%, a Tier 1 risk-based ratio of under 4% or a leverage ratio of under 3%
and (v) a "critically undercapitalized" institution has a leverage ratio of 2%
or less. Institutions in any of the three undercapitalized categories are
prohibited from declaring dividends or making capital distributions. The
regulations also establish procedures for "downgrading" an institution to a
lower capital category based on supervisory factors other than capital.
In the fourth quarter of 1996, the OCC advised the Bank that it will be
required to achieve capital levels higher than "adequately capitalized" as
defined in the OCC regulations. On November 14, 1996, the Bank entered into the
OCC Agreement which provides that the Bank (i) will appoint an "Oversight
Committee"; (ii) will achieve and maintain specified higher capital levels;
(iii) will develop a three-year capital program which will include, among other
things, certain restrictions on dividend payments by the Bank and (iv) will
revise and amend its strategic plan.
The Oversight Committee is comprised of three members of the board of
directors of the Bank, a majority of whom are not employees of the Company. The
Oversight Committee, which meets and reports monthly to the Board of Directors,
is responsible for monitoring and coordinating compliance by the Bank with the
OCC Agreement.
The OCC Agreement establishes higher capital requirements than those
applicable under the OCC regulations. Specified capital levels were to be
achieved by the Bank by April 30, 1997 and maintained until November 30, 1997.
At November 30, 1997, higher capital levels become effective and are applicable
thereafter. While the Bank at June 30, 1997 was adequately capitalized as
defined in the regulations, it has not attained the higher capital level which
was to be achieved by April 30, 1997. The following table sets forth (i) the
capital requirements for the Bank under the OCC regulations and under the OCC
Agreement, (ii) the Bank's capital ratios at June 30, 1997, (iii) pro forma
capital ratios to give effect to the issuance of 232,000 additional shares of
Preferred Stock issued on July 9, 1997 and the investment of $1.0 million of the
proceeds thereof in common stock of the Bank and (iv) pro forma as adjusted
capital ratios to give effect to such
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<PAGE> 53
issuance of the Preferred Stock and the investment thereof and the investment of
$17 million of the net proceeds of this Offering in Tier 1 risk-based capital of
the Bank:
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT JUNE 30, 1997
------------------------- ------------------------ ----------------------------------
ADEQUATELY WELL APRIL 30, NOVEMBER 30, PRO PRO FORMA AS
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 ACTUAL FORMA(1) ADJUSTED(1)(2)
- -------------- ----------- ----------- --------- ------------ ------ -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leverage(3)............. 4.00% 5.00% 5.00% 6.00% 4.33% 4.49% 7.12%
Risk-Based Capital:
Tier 1(4)............. 4.00 6.00 6.00 7.00 5.29 5.49 8.65
Total................. 8.00 10.00 10.00 11.00 8.61 8.80 11.89
</TABLE>
- ---------------
(1) Assumes that the Company invests $1.0 million of the net proceeds from the
sale of Preferred Stock in July 1997 in Tier 1 capital of the Bank and the
Bank invests such proceeds in assets carrying a risk-weight that is
equivalent to the Company and the Bank's average risk-weight at June 30,
1997.
(2) Assumes that the Company invests approximately $17 million of the net
proceeds of the Offering in Tier 1 capital of the Bank and the Bank invests
the net proceeds in assets carrying a risk-weight that is equivalent to the
Company and the Bank's average risk-weight at June 30, 1997. See "Use of
Proceeds."
(3) Leverage ratio is defined as Tier 1 capital as a percent of total average
assets.
(4) Tier 1 capital is comprised of common shareholder's equity and, subject to
certain limitations and qualifications, non-cumulative perpetual preferred
stock.
Set forth below are (i) the capital requirements for the Company under the
FRB regulations, (ii) the capital ratios for the Company as of June 30, 1997,
(iii) the pro forma capital ratios to give effect to the issuance of 232,000
additional shares of Preferred Stock on July 9, 1997 and (iv) pro forma as
adjusted ratios to give effect to said issuance of the Preferred Stock and the
issuance of Common Stock pursuant to this Offering (assuming an offering price
of $8.00 per share):
<TABLE>
<CAPTION>
FRB REGULATIONS JUNE 30, 1997
--------------- ----------------------------------
MINIMUM CAPITAL PRO PRO FORMA AS
CAPITAL RATIOS REQUIREMENT ACTUAL FORMA(1) ADJUSTED(1)(2)
- -------------- --------------- ------ -------- --------------
<S> <C> <C> <C> <C>
Leverage (Tier 1 capital to total
assets)................................ 3.00% 3.76% 3.92% 7.31%
Risk-Based Capital:
Tier 1 capital to risk-based assets.... 4.00 4.59 4.79 8.86
Total capital to risk-based assets..... 8.00 8.16 8.46 13.25
</TABLE>
- ---------------
(1) Assumes that the net proceeds of $1.0 million from the sale of the Preferred
Stock are invested in assets carrying a risk-weight that is equivalent to
the Company and the Bank's average risk-weight at June 30, 1997.
(2) Assumes that the net proceeds from the Offering are approximately $22.0
million.
The FRB Agreement entered into in February 1997 provides that the Company
will not incur any additional debt, redeem its capital stock or declare or pay
dividends to the holders of Common Stock without the prior approval of the FRB.
As of the date of the FRB Agreement, the Company did not meet the minimum
capital requirements of a bank holding company in accordance with regulations
promulgated by the FRB. While the Company met the minimum capital requirements
as of June 30, 1997, these restrictions continue until terminated or modified by
the FRB.
Interstate Banking Act
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act") became law. The Interstate
Banking Act has two major provisions regarding the merger, acquisition and
operation of banks across state lines. First it provides that effective
September 29, 1995, adequately capitalized and managed bank holding companies
will be permitted to acquire banks in any state. State laws prohibiting
interstate banking or discriminating against out-of-state banks will be
preempted as of the effective date. States cannot enact laws opting out of this
provision; however, states may adopt a minimum restriction requiring that target
banks located within the state be in existence for a period of years, up to a
maximum of five years, before such bank may be subject to the Interstate Banking
Act. The Interstate
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<PAGE> 54
Banking Act establishes deposit caps which prohibit acquisitions that would
result in the acquirer controlling 30% or more of the deposits of insured banks
and thrifts held in the state in which the acquisition or merger is occurring or
in any state in which the target maintains a branch or 10% or more of the
deposits nationwide. State-level deposit caps are not preempted as long as they
do not discriminate against out-of-state acquirers, and the federal deposit caps
apply only to initial entry acquisitions.
The legislation also provides that, unless an individual state elects
beforehand either (i) to accelerate the effective date or (ii) to prohibit
out-of-state banks from operating interstate branches within its territory, on
or after June 1, 1997, "adequately capitalized" and managed bank holding
companies will be able to consolidate their multistate bank operations into a
single bank subsidiary and to branch interstate through acquisitions. De novo
branching by an out-of-state bank would be permitted only if it is expressly
permitted by the laws of the host state. The authority of a bank to establish
and operate branches within a state will continue to be subject to applicable
state branching laws. The State of Georgia has enacted legislation in connection
with the Interstate Banking Act which requires that a bank located within the
state must be in existence for a period of five years before it may be acquired
by an out-of-state institution. This state legislation also requires out-of-
state institutions to purchase an existing bank or branch in the state rather
than starting a de novo bank. Many states, including Georgia, have enacted
legislation which permits banks with different home states to merge if the
states involved have enacted legislation permitting interstate bank mergers
prior to June 1, 1997. The Company believes that this legislation may result in
increased takeover activity of Georgia financial institutions by out-of-state
financial institutions. However, the Company does not presently anticipate that
such legislation will have a material impact on its operations or future plans.
The Interstate Banking Act was amended on July 3, 1997 for the purpose of
ensuring that state banks are competitive with national banks under the new
interstate banking laws. The amendment provides that state law of the host state
applies to an out-of-state, state-chartered bank that branches in the host state
to the same extent that it applies to a national bank operating a branch in the
host state. The law also provides that bank branches operating in the host state
and chartered in another state may exercise powers they have under their
home-state charters if host state-chartered banks or national banks may exercise
those powers.
Under prior Georgia law which was applicable to national banks, the
establishment of new or additional branch banks in a county, other than the
county in which the parent bank was located, was prohibited except in very
narrow situations. Pursuant to legislation recently enacted, with the prior
approval of the appropriate regulator, after July 1, 1996, a state or national
bank may establish three new or additional branch banks de novo in the same
manner as currently provided for the establishment of bank offices under the
Georgia Financial Institutions Code. These branches may be located anywhere in
Georgia. If a bank is part of a bank holding company, all affiliates would be
treated as one bank and the holding company would be limited to branching to
only three counties. Otherwise, the same restrictions on Georgia banks' ability
to form or acquire branch banks that exist prior to July 1, 1996, continue to
apply until July 1, 1998. As of July 1, 1998, new or additional branch banks may
be established anywhere in the state with the prior approval of the appropriate
regulator.
Regulation of Mortgage Banking
The mortgage banking industry is subject to the rules and regulations of,
and examinations by, the DBF, FNMA, FHLMC, GNMA, HUD, FHA and state regulatory
authorities with respect to originating, processing, underwriting, selling,
securitizing and servicing residential mortgage loans. In addition, there are
other federal and state statutes and regulations affecting such activities.
These rules and regulations, among other things, require licensing of mortgage
bankers, govern how mortgage servicers process a mortgagor's payment, require an
annual analysis of FNMC's escrow balances and also regulate the procedure for
making investor payments.
Many states have adopted statutes and regulations which require the payment
of interest on escrow accounts, but many of these provisions contain exemptions
from the requirement to pay interest. The common exemptions are: interest is
paid only on loans originated after enactment or a phase-in; interest need only
be paid if the mortgage servicer earns interest on the account; interest need
not be paid by an out-of-state
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<PAGE> 55
mortgage servicer; and interest need not be paid on low loan-to-value loans or
government loans or where interest is offset by administrative expenses. It is
presently unclear whether these statutes and regulations, or some variation
thereof, will be implemented by other states and if so what effect that will
have on the Company and FNMC.
Effective July 1, 1993, the Georgia Legislature enacted registration and
licensing requirements for mortgage brokers and lenders engaged in making loans
secured by one-to-four family residential property located in Georgia (the
"Mortgage Act"). FNMC, as a subsidiary of a Georgia bank holding company subject
to examination by the DBF, is exempt from the licensing requirement of the
Mortgage Act, but is required to register with the DBF. FNMC must renew its
registration annually and provide the DBF in its renewal application with
information, including a general plan of the business, financial statements and
other financial information requested by the DBF and shareholders owning at
least 10% of the mortgage lender's equity. FNMC is required to maintain such
records as the DBF may require and is subject to examination by the DBF. In
addition, FNMC must file an annual report with the DBF each year.
The Mortgage Act requires that mortgage brokers and lenders, including
FNMC, make certain disclosures to applicants for mortgage loans. The Mortgage
Act also provides authority for the DBF to promulgate rules with respect to
escrow accounts and the advertising of mortgage loans, and the DBF has
promulgated regulations governing mortgage loan advertising. In addition, the
Mortgage Act imposes restrictions on unfair mortgage banking practices, as
defined by the Mortgage Act.
There are numerous rules and regulations imposed on mortgage loan
originators that require originators to obtain and maintain licenses; establish
eligibility criteria for mortgage loans; prohibit discrimination; regulate
advertising of loans; encourage lenders to identify and meet the credit needs of
the community, including low and moderate income neighborhoods, consistent with
sound lending practices, by requiring certain statistical information be
maintained and publicly available regarding mortgage lending practices within
certain geographical areas; provide for inspections and appraisals of
properties; require credit reports on prospective borrowers; regulate payment
features; and, in some cases, fix maximum interest rates, fees and loan amounts.
Failure to comply with these requirements can lead to loss of approved status,
termination of servicing contracts without compensation to the servicer, demands
for indemnification or loan repurchases, and administrative enforcement actions.
Broker-Dealers
Securities broker-dealers are subject to extensive regulation. Generally,
broker-dealers must register with the Commission and the states in which they
operate. All broker-dealers must be members of the NASD, subject to its rules
and disciplinary procedures. Personnel of broker-dealers engaged in sales
activities must be licensed as salespeople under the appropriate state laws and
register with the NASD. Registered broker-dealers are subject to detailed record
keeping and reporting requirements. The extent to which broker-dealers can
extend credit is also subject to regulation. FNCI, as a registered
broker-dealer, is also subject to rules regarding minimum capital, disclosure
obligations, restrictions on markups, and other matters.
COMPETITION
The banking business is highly competitive. The Company's primary market
area, other than for credit cards, residential mortgages and indirect automobile
loans, consists of Fulton, DeKalb, Cobb and Gwinnett counties, Georgia. FNB
competes for traditional bank business with numerous other commercial banks and
thrift institutions with offices in the Company's primary trade area, many of
which have greater financial resources than FNB. The Company also competes for
loans with insurance companies, regulated small loan companies, credit unions
and certain governmental agencies. FNCI competes with independent brokerage and
investment companies as well as state and national banks and their affiliates
and other financial companies. There can be no assurance that other companies
will not offer products and services that are competitive with those offered by
the Company and its subsidiaries. The emergence of such competitors could have a
material adverse effect on the results of operations and financial condition of
the Company.
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<PAGE> 56
The credit card, indirect automobile financing and mortgage banking
industries are also highly competitive. The Company competes with banks and
special purpose credit card banks and companies throughout the United States as
well as entities such as AT&T and General Motors Corporation for credit card
customers. In the indirect automobile financing industry, the Company competes
with specialty consumer finance companies in addition to banks. FNMC competes
with independent mortgage banking companies, state and national banks and their
subsidiaries, as well as thrift institutions and insurance companies. There can
be no assurance that other companies will not offer products and services that
are competitive with those offered by the Company and its subsidiaries. The
emergence of such competitors could have a material adverse effect on the
results of operations and financial condition of the Company.
EMPLOYEES
As of June 30, 1997, the Company had 383 full-time equivalent employees.
Neither the Company nor any one of its subsidiaries is a party to any collective
bargaining agreement. The Company believes that its employee relations are good.
PROPERTIES
The Company's principal executive offices consist of 49,368 leased square
feet (of which 23,939 square feet are sublet) in Atlanta, Georgia. The Bank
leases 35,000 square feet (of which 29,928 square feet are sublet) in Decatur,
Georgia, where it maintains a full-service banking center. The Company's
operations are principally conducted from 80,000 square feet located at 3
Corporate Square, Atlanta, Georgia. Of the other 15 branch offices of the Bank
located in Fulton, DeKalb, Cobb and Gwinnett Counties, Georgia, ten are owned
and five are leased. The Company leases loan production offices in Jacksonville
and Tampa, Florida.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to claims and lawsuits arising
in the course of normal business activities. Although the ultimate outcome of
these claims and lawsuits cannot be ascertained at this time, it is the opinion
of management that none of these matters when resolved will have a material
adverse effect on the Company's consolidated results of operations or financial
condition.
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<PAGE> 57
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors and their ages as of
September 18, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James B. Miller, Jr.................... 57 Chairman of the Board, President and
Chief Executive Officer
Larry D. Peterson...................... 49 Vice President; President and Chief
Executive Officer of FNB
Sharon R. Denney....................... 59 Executive Vice President
M. Howard Griffith, Jr................. 55 Chief Financial Officer
Palmer Proctor, Jr..................... 30 Vice President
James W. Anderson, Jr.(1).............. 86 Director
Dr. Edward G. Bowen(1)................. 61 Director
Dr. Marvin C. Goldstein................ 80 Director
Dr. Manning M. Pattillo, Jr............ 77 Director
Robert J. Rutland(1)(2)(3)............. 56 Director
W. Clyde Shepherd, Jr.(2)(3)........... 83 Director
R. Phillip Shinall, III(2)............. 50 Director
Rankin Smith, Jr....................... 50 Director
Felker W. Ward, Jr.(1)................. 64 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Executive Committee of the Board of Directors.
Officers are appointed annually and serve at the pleasure of the Board of
Directors. The directors are elected annually by the shareholders and hold
office until the next annual meeting of shareholders or until their respective
successors are duly elected and qualified.
James B. Miller, Jr. has served as the Chairman of the Board and as
President and Chief Executive Officer of the Company since 1979. He has also
served as the President and Chief Executive Officer of FNB from 1977 to 1997. He
has been the Chairman of FNCI and FNMC since 1992 and 1980, respectively. Prior
to joining the Company, Mr. Miller was the President of Mudrak Eisfabrik and
Ageka Wohnungsbau GmbH from 1971 to 1977. Prior to that time, Mr. Miller served
as an investment counselor at Citizens & Southern National Bank and a
stockbroker at Bache & Company. Mr. Miller holds a B.A. from Florida State
University and a LLB from Vanderbilt University, School of Law.
Larry D. Peterson was elected President and Chief Executive Officer of FNB
and a Vice President of the Company on September 18, 1997. From 1995 until 1997,
he was a Senior Vice President and the Senior Segment Manager of KeyCorp. He
served as the President -- Central Indiana Region of Society National Bank from
1992 to 1995. In 1994, KeyCorp and Society Corporation merged. He was the
President and Chief Executive Officer of Ameritrust Indiana Corporation
("Ameritrust"), a bank holding company headquartered in Indianapolis, Indiana
from 1991 until it was acquired in 1992 by Society Corporation, a bank holding
corporation headquartered in Cleveland, Ohio. Prior thereto, Mr. Peterson served
in various capacities with Ameritrust from 1980 to 1991 and with National City
Bank, Cleveland, Ohio from 1970 to 1980. Mr. Peterson holds a B.S. in Finance
from Pennsylvania State University and a Masters of Banking, Stonier Graduate
School of Banking, Rutgers University.
Sharon R. Denney has served as Executive Vice President of the Company
since 1993. He joined FNB as a Vice President in 1979 and has been an Executive
Vice President of FNB since 1992. He is also Secretary of FNMC.
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<PAGE> 58
M. Howard Griffith, Jr. has served as the Chief Financial Officer of the
Company and FNB since February 1994, and as Chief Financial Officer of FNMC
since September 1995. Prior to joining the Company, Mr. Griffith served as a
Vice President and the Treasurer of Synovus Financial Corp., a bank holding
company based in Columbus, Georgia, from December 1992 through October 1993, and
as Chief Financial Officer of Fidelity Savings Bank in Dalton, Georgia, from
June 1992 through December 1992. Mr. Griffith's experience includes 17 years
with C&S/Sovran and predecessors, holding several positions ending with Finance
Executive Officer and Director of Corporate Taxes and five years in public
accounting as a certified public accountant, during which he specialized in
audits of banks and savings and loan associations.
Palmer Proctor, Jr. has served as a Vice President of the Company since
1996. Mr. Proctor's current responsibilities as Branch Administrator, Operations
Manager, include oversight of deposit operations, credit card loans, data
processing and branch operations. He was elected a Vice President of FNB and was
appointed Branch Administrator in 1993. Mr. Proctor joined FNB in 1990 as a
Management Associate and until 1993, he worked in management capacities in the
various departments.
James W. Anderson, Jr. has served as a director of the Company since 1979,
a director of FNB since 1974, and a director of FNMC since 1991. Mr. Anderson
has been President Emeritus of Jim Anderson & Co., an insurance agency he
founded in 1946, since 1978.
Dr. Edward G. Bowen has served as a director of the Company since 1989 and
as a director of FNB since 1989. Dr. Bowen has been a gynecologist and
obstetrician in Atlanta, Georgia for more than 30 years.
Dr. Marvin C. Goldstein has served as a director of the Company and FNB
since 1984 and a director of FNMC since 1994. Dr. Goldstein has been an
orthodontist in Atlanta, Georgia for more than 50 years. He has also been
President and Chief Executive Officer of American Motor Hotel, the owner and
operator of a hotel in Atlanta, Georgia, since 1962.
Dr. Manning M. Pattillo, Jr. has served as a director of the Company since
1993 and a director of FNB since 1994. Dr. Pattillo was President of Oglethorpe
University in Atlanta, Georgia, from 1975 to 1988 and has been President
Emeritus since 1988. He has served as Interim President, Atlanta College of Art,
from 1993 to 1994 and has been a member of the Governing Board, American
College, since 1996.
Robert J. Rutland has served as a director of the Company since 1979 and a
director of FNB since 1974. Since 1995, Mr. Rutland has served as the Chairman
and Chief Executive Officer of Allied Holdings, Inc. ("Allied"), the second
largest transporter in North America specializing in automobiles and light
trucks. From 1986 to 1995, Mr. Rutland was President and Chief Executive Officer
of Allied.
W. Clyde Shepherd, Jr. has served as a director of the Company since 1979,
a director of FNB since 1974, and Chairman of the Board of Directors of FNB
since 1989. Mr. Shepherd has been the Secretary/Treasurer of Shepherd
Construction Company, a general contracting company located in Atlanta, Georgia,
since 1949.
R. Phillip Shinall, III has served as a director of the Company and FNB
since 1979. Mr. Shinall is an attorney practicing in Atlanta, Georgia. He was a
partner in the law firm of Glass, McCullough, Sherrill & Harrold, LLP from 1988
until April 1997.
Rankin M. Smith, Jr. has served as a director of the Company and FNB since
1987. Mr. Smith has been a director of and an advisor to the Atlanta Falcons
football team since 1990. He was President of the Atlanta Falcons from 1977 to
1990.
Felker W. Ward, Jr. has served as a director of the Company since 1996. Mr.
Ward has been a principal of Pinnacle Investment Advisors, Inc., an investment
advisory firm in Atlanta, Georgia, since 1991, and has been President of Ward &
Associates, Inc., an investment banking firm, since 1991. Mr. Ward is also a
director of AGL Resources, Inc., a natural gas distributing utility, and Abrams
Industries, Inc., a construction and property management company and a
manufacturer of fixtures.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with James B. Miller,
Jr. and Larry D. Peterson.
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<PAGE> 59
The employment agreement with Mr. Miller is for a three year period
commencing on January 1, 1998. It provides for an annual base salary of $300,000
and annual incentive compensation based upon the attainment by the Company of
certain net income targets. Such incentive compensation may range between
$150,000 and $400,000, depending upon the Company achieving between 70 and 120
percent of its net income target. In addition, seven year stock options were
granted to Mr. Miller to purchase 150,000 shares of Common Stock at $9.00 per
share. The stock options vest at the rate of 20% per year for five years,
commencing September 18, 1998. The stock options will vest in full upon a change
in control of the Company and upon the termination of his employment agreement
by the Company without cause.
The employment agreement with Mr. Peterson is for a three year period
commencing on September 15, 1997. It provides for an annual base salary of
$300,000. The employment agreement further provides that FNB will adopt, prior
to September 15, 1998, a deferred compensation program which will include all
senior executives of FNB.
Mr. Peterson's employment agreement requires he be paid a lump sum of
$50,000 within 30 days of the commencement of his employment. Also, the Company
agreed to reimburse Mr. Peterson for premiums on a $1 million term life
insurance policy and a disability insurance policy which will provide disability
benefits at the annual rate of $210,000.
Mr. Peterson was granted a seven year stock option on September 15, 1997 to
purchase 100,000 shares of Common Stock at $9.00 per share. The option vests at
the rate of 20% per year for five years, commencing September 15, 1998. The
stock options will vest in full upon a change in control of the Company and upon
the termination of his employment with the Company without cause.
The employment agreements with Messrs. Miller and Peterson each provide
that, if the executive terminates his employment or is terminated by the Company
for cause, such executive is subject to a non-compete provision for a period of
one year.
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<PAGE> 60
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 15, 1997, the beneficial
ownership of the Company's Common Stock by each person known by the Company to
be the beneficial owner of more than 5% of the Company's voting securities, by
each director and executive officer and by all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
PERCENTAGE
COMMON STOCK BENEFICIALLY OWNED
------------------ --------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
- ---- ------------------ -------- --------
<S> <C> <C> <C>
James B. Miller, Jr.(1)..................................... 2,680,810 48.6% 31.5%
James W. Anderson, Jr.(2)................................... 110,472 2.0 1.3
Dr. Edward G. Bowen(3)...................................... 11,000 * *
Dr. Marvin C. Goldstein(4).................................. 40,868 * *
Dr. Manning M. Pattillo, Jr................................. 1,420 * *
Robert J. Rutland........................................... 148,764 2.7 1.7
W. Clyde Shepherd, Jr....................................... 128,722 2.3 1.5
R. Phillip Shinall, III(5).................................. 8,887 * *
Rankin M. Smith, Jr.(6)..................................... 17,474 * *
Felker W. Ward, Jr.......................................... 7,920 * *
Sharon R. Denney............................................ 19,259 * *
M. Howard Griffith, Jr.(7).................................. 6,954 * *
Larry D. Peterson........................................... - - -
Palmer Proctor, Jr.......................................... 55 * *
All directors and executive officers as a group (14
persons)(8)............................................... 3,182,605 57.7% 37.4%
</TABLE>
- ---------------
* Less than one percent
(1) Includes 51,111 shares of Common Stock owned of record by Mr. Miller's wife,
330,520 shares held by FNB as trustee under five trusts for Mr. Miller's
children and 180,433 shares held by BAC Properties, a partnership of which
Mr. Miller and his wife own 40%. Also includes 34,770 shares of Common Stock
issuable upon conversion of shares of Preferred Stock owned by his spouse.
Mr. Miller's business address is 3490 Piedmont Road, Atlanta, Georgia 30305.
(2) Includes 53,666 shares of Common Stock owned by Mr. Anderson's spouse and
6,954 shares of Common Stock issuable upon conversion of shares of Preferred
Stock.
(3) Includes 10,560 shares of Common Stock held by Mr. Bowen as trustee for
Target Benefit Plan.
(4) Includes 13,908 shares of Common Stock issuable upon conversion of shares of
Preferred Stock.
(5) Includes 1,232 shares owned by Mr. Shinall's wife.
(6) Includes 7,823, 1,390 and 2,607 shares of Common Stock issuable upon
conversion of shares of Preferred Stock owned by Mr. Smith, his spouse and
Mr. Smith as custodian for family members, respectively.
(7) Represents 6,954 shares of Common Stock issuable upon conversion of shares
of Preferred Stock.
(8) Includes 74,406 shares of Common Stock issuable upon conversion of shares of
Preferred Stock.
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<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Articles of Incorporation of the Company currently authorize the
issuance of 50,000,000 shares of Common Stock and 10,000,000 shares, no par
value, of preferred stock, of which 4,000,000 shares have been designated
Non-Cumulative 8% Convertible Preferred Stock, Series A (the "Preferred Stock").
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, of
which 4,659,892 shares were outstanding on September 1, 1997. Each holder of
Common Stock is entitled to one vote per share. The holders of Common Stock vote
together with the holders of Preferred Stock. The holders of Common Stock do not
have cumulative voting or preemptive rights to subscribe to additional shares of
Common Stock issued by the Company.
The Articles of Incorporation of the Company provide that the holders of at
least two-thirds of the Company Common Stock must approve a merger, liquidation
or dissolution or any other action that would result in a disposition of all or
substantially all of the assets. The Articles of Incorporation of the Company
also provide that, in opposing a tender offer or other offer for the Company,
the Board of Directors may, but is not required to, consider any pertinent
issues, including certain nonfinancial factors, including but not limited to the
impact of the acquisition on employees, depositors and customers and the
reputation and business practices of the acquiror, among others. In addition,
the Articles of Incorporation provide that the amendment or repeal of the
sections described in the two preceding sentences require the vote of at least
two-thirds of the capital stock entitled to vote on such matters.
Upon liquidation, dissolution or winding up of the Company, after payment
to creditors and holders of any outstanding shares of preferred stock, the
assets of the Company will be divided pro rata on a per share basis among the
holders of the Common Stock. The outstanding shares of Common Stock are
non-assessable. The shares of Common Stock to be issued in the Offering will be
fully paid and non-assessable.
Dividends on the Common Stock are payable if, as and when declared by the
Board of Directors in its sole discretion. The Company's ability to pay
dividends is restricted by the terms of the Notes and the Preferred Stock, the
corporate laws of Georgia and applicable regulations, including those
promulgated by the FRB, and the FRB Agreement. See "Dividend Policy."
The transfer agent and registrar of the Common Stock is The Bank of New
York.
PREFERRED STOCK
The Articles of Incorporation of the Company authorize the issuance, in
series of up to 10,000,000 shares of preferred stock and permit the Board of
Directors of the Company to establish the powers, preferences and rights of each
series. The Board of Directors of the Company authorized the issuance of up to
4,000,000 shares of Preferred Stock. As of September 1, 1997, there were issued
and outstanding 984,000 shares of Preferred Stock.
Dividends are non-cumulative and are payable quarterly at the rate of 8%
per annum of the stated value, i.e. $0.125 per share per quarter, when, if and
as declared by the Board of Directors of the Company. A dividend was declared
and paid on the Preferred Stock outstanding July 1, 1997 for the period of June
24, 1997 (the date certain shares of Preferred Stock were issued) through June
30, 1997.
Each share of Preferred Stock may be converted by the holder thereof at any
time into .86926 of a share of Common Stock.
Holders of Preferred Stock are entitled to vote on each matter on which
holders of Common Stock are entitled to vote, and are entitled to receive notice
of any meeting of the holders of Common Stock, and shall otherwise be accorded
all voting powers and rights of holders of Common Stock. Each share of Preferred
Stock has the number of votes equal to the number of shares of Common Stock into
which it is convertible.
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<PAGE> 62
Whenever the approval or other action of the holders of the Preferred Stock
voting as a separate class is required by applicable law or by the Company's
Articles of Incorporation, each share of the Preferred Stock shall be entitled
to one vote, and the affirmative vote of the majority of such shares at a
meeting at which a majority of such shares is present or represented shall be
sufficient to constitute such approval or other action.
Upon the liquidation or winding up of the Company, holders of the Preferred
Stock shall be entitled to be paid, out of assets available for distribution to
holders of capital stock, $6.25 per share. This liquidation right is senior to
the liquidation rights of the Common Stock but subordinate to the liquidation
rights of all liabilities and obligations of the Company and shall be pari pasu
with certain holders of preferred stock which may hereafter be issued.
The Preferred Stock is redeemable by the Company at its stated value (i.e.
$6.25), in whole or in part, at the Company's option, at any time after the
later of (i) the second anniversary of its issuance or (ii) the last day of a
period of ten (10) consecutive trading dates on which the closing price of a
share of Common Stock on each such day shall equal or exceed $10.00. Any
redemption is also subject to the prior approval of the FRB.
The holders of Preferred Stock are not entitled to preemptive rights with
respect to the issuance of any additional preferred stock of any series or the
issuance of Common Stock.
The Preferred Stock is not publicly traded. The holders of Preferred Stock,
upon the conversion to Common Stock, will receive "restricted securities" under
Rule 144 promulgated by the SEC under the Securities Act. The restricted
securities may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exception provided by Rule 144. In addition, the
Company has agreed to register the shares of Common Stock issued upon the
conversion of the Preferred Stock upon the request of the stockholder.
WARRANTS
The Company has agreed to issue to Raymond James & Associates, Inc.
warrants ("Representative's Warrants" or "Warrants") to purchase 150,000 shares
of Common Stock at a purchase price per share equal to 110% of the public
offering price per share. The Representative's Warrants will be exercisable
during the four-year period commencing one year after the date the warrants are
issued. The Representative's Warrants will bear appropriate legends indicating
restrictions on transferability. Under the terms of the Representative's
Warrants, the Company will file a shelf registration statement one year after
the effective date of this Registration Statement with respect to the resale of
the shares of Common Stock acquired upon the exercise of the Representative's
Warrants. See "Underwriting."
OTHER REGISTRATIONS RIGHTS
The Company has accorded each holder of Preferred Stock one demand
registration right covering the shares of Common Stock acquired upon the
conversion of the Preferred Stock into Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
7,659,892 shares of Common Stock. Of these shares, 4,551,693 shares, including
the 3,000,000 shares of Common Stock sold in the Offering, (5,001,693 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable by persons other than affiliates of the Company without restriction
under the Securities Act. The remaining 3,108,199 shares of Common Stock may be
considered to be "restricted" securities within the meaning of Rule 144
promulgated under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available. All shares of Common Stock beneficially owned by persons who are
affiliates of the Company would be eligible for public sale subject to the
volume and other limitations of Rule 144. However, the Company's directors and
executive officers have agreed not to sell, contract to sell, offer, or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for shares of Common Stock or
any rights to
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<PAGE> 63
purchase any of the foregoing for a period of 180 days after the date of this
Prospectus without the prior written consent of Raymond James & Associates, Inc.
Of these shares, 1,717,480 shares of Common Stock, which were pledged as
collateral by a director and officer of the Company prior to the Offering, will
not be subject to such restrictions upon the sale of the pledged shares in the
event of a default by the pledgor. The sale of a substantial number of shares of
Common Stock could adversely affect the market price of the Common Stock.
In general, under Rule 144, a person (or group of persons whose shares are
aggregated) who are "affiliates" (as defined in Rule 144) of the Company, will
be entitled to sell, within any three-month period, a number of shares of Common
Stock (which otherwise are freely tradable) that does not exceed the greater of
(i) 1% of the then-outstanding shares of the Common Stock or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the forwarding of the notice of proposed sale to the Commission. The
sales are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Securities properly sold in reliance upon Rule 144 are thereafter
freely tradable without restrictions or registration under the Securities Act,
unless thereafter held by an "affiliate" of the Company. Sales of substantial
amounts of the Company's Common Stock in the public market could adversely
affect market prices. See "Risk Factors -- Substantial Shares Eligible for
Future Sale."
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<PAGE> 64
UNDERWRITING
The Underwriters named below, acting through their representative, Raymond
James & Associates, Inc. (the "Representative"), have severally agreed to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, subject to the terms and conditions of the Underwriting Agreement
between the Underwriters and the Company, the number of shares of Common Stock
set forth opposite the names of each underwriter below:
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
- ------------------- ----------------
<S> <C>
Raymond James & Associates, Inc.............................
---------
Total............................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares offered hereby, if any are purchased. The Company has
been advised by the Representative that the Underwriters propose initially to
offer the shares to the public at the offering price set forth on the cover page
of this Prospectus and to certain selected dealers, including the Underwriters,
at such price less a concession not in excess of $ per share. The public
offering price and concession may be changed after the initial offering to the
public. The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Underwriting Agreement provides for indemnification among the Company
and the Underwriters against certain liabilities in connection with this
offering, including liabilities under the Securities Act.
The Company and all directors and executive officers have agreed not to,
directly or indirectly, issue, sell, contract to sell, offer or otherwise
dispose of or transfer any shares of Common Stock, securities convertible into
or exercisable or exchangeable for shares of Common Stock or any rights to
purchase any of the foregoing, other than shares offered hereby, without the
consent of the Representative for a period of 180 days after the date of this
Prospectus. This restriction does not apply to certain issuances of Common Stock
by the Company pursuant to its stock option plan. See "Shares Eligible for
Future Sale."
The Company has granted to the Underwriters an option, exercisable during a
30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company
receives for the 3,000,000 shares offered hereby, for the sole purpose of
covering over-allotments, if any. To the extent that the Underwriters exercise
such option, each Underwriter will be committed, subject to certain conditions,
to purchase a number of the additional shares of Common Stock proportionate to
each Underwriter's initial commitment.
Raymond James & Associates, Inc. has indicated an intention to make a
market in the shares of Common Stock as permitted by applicable law and
regulations. Any such market making may be discontinued at any time at the sole
discretion of the Representative.
The foregoing contains a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Company has agreed to grant to the Representative the Warrants to
purchase up to 150,000 shares of Common Stock for a period of five years from
the date of this Prospectus (the "Warrant Exercise Term") at a price equal to
110% of the price to the public in the Offering. The Representative's Warrants
are not exercisable until one year from the date of this Prospectus and may not
be transferred, assigned, pledged or hypothecated by any person for one year
from the date of this Prospectus except to the
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<PAGE> 65
officers, directors, affiliates and shareholders of the Representative and to
the co-managers of the Offering. The Representative's Warrants will bear
appropriate legends indicating the restrictions on transferability. During the
Warrant Exercise Term, the holders of the Representative's Warrants are given
the opportunity to profit from a rise in the market price of the Common Stock.
Any profit realized by the Representative on the sale of the Representative's
Warrants or the underlying shares of Common Stock may be deemed additional
underwriting compensation.
The public offering price of the Common Stock will be determined by
negotiations among the Company and the Underwriters. Among the factors to be
considered in such negotiations will be prevailing market conditions, the
results of operations of the Company in recent periods, the capital structure of
the Company, the market price of the Common Stock, the number of shares being
sold, the price earnings multiples of publicly traded common stocks of
comparable companies, the Company's business potential and cash flow and
earnings prospects and other factors deemed relevant.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Overallotment involves syndicate sales in excess of the
offering size, which creates a syndicate short portion. Stabilizing transactions
permit bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum. Syndicate covering transactions involve
purchases of the Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In "passive" market
making, market makers in the Common Stock who are Underwriters or prospective
underwriters or managers may, subject to certain limitations, make bids for or
purchases of the Common Stock until the time, if any, at which a stabilizing bid
is made. Penalty bids permit the Representatives to reclaim a selling concession
from a syndicate member when shares of Common Stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on The Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
The Company has granted the Representative a right of first refusal to act
as the underwriter of any future public offering of any of the Company's
securities and to act as the Company's financial advisor for any business
combination or private placement involving the Company or any of its
subsidiaries at customary commissions and/or fees to be negotiated by the
parties. This right of first refusal expires on December 31, 1998.
EXPERTS
The consolidated financial statements of the Company for the year ended
December 31, 1994, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, included herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for the years ended December 31, 1995 and 1996, have been
audited by Ernst & Young LLP, independent auditors, as indicated in their report
thereon included therein and included and incorporated herein by reference. Such
consolidated financial statements are included and incorporated by reference in
reliance upon the authority of such firm as experts in accounting and auditing.
At a meeting held on July 13, 1995, the Board of Directors of the Company
approved the engagement of Ernst & Young LLP as its independent auditors for the
year ending December 31, 1995 to replace the firm of KPMG Peat Marwick LLP which
was dismissed on July 14, 1995. The Audit Committee of the Board of Directors
approved the change in auditors on July 13, 1995.
The report of KPMG Peat Marwick LLP on the consolidated financial
statements of the Company as of and for the year ended December 31, 1994 did not
contain an adverse opinion or a disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principles. In connection
with the
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<PAGE> 66
audit of the consolidated financial statements of the Company for the fiscal
year ended December 31, 1994, and the subsequent interim period through July 13,
1995, there were no disagreements with KPMG Peat Marwick LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of KPMG Peat
Marwick LLP, would have caused KPMG Peat Marwick LLP to make reference to the
matter in their report. KPMG Peat Marwick LLP has furnished a letter addressed
to the Commission stating that it agrees with the above statements.
LEGAL MATTERS
Certain legal matters including, among other things, the validity of the
Common Stock offered hereby, have been passed upon by Glass, McCullough,
Sherrill & Harrold, LLP, Atlanta, Georgia, counsel to the Company. The validity
of the Common Stock offered hereby will be passed upon for the Underwriters by
King & Spalding, Atlanta, Georgia.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and in accordance therewith
files reports, proxy statements, and other information with the Securities and
Exchange Commission ("Commission"). Such reports, proxy statements, and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven World Trade
Center, 13th Floor, New York, New York 10048. The Commission maintains a Web
site that contains reports, proxy statements and other information regarding the
Company at http://www.sec.gov. The Common Stock is listed on the Nasdaq National
Market and such reports, proxy statements and other information may be inspected
and copied at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 ("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus, which is a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and in the exhibits
thereto. Certain items were omitted in accordance with the rules and regulations
of the Commission. Any interested party may inspect the Registration Statement
without charge at the aforementioned public reference facilities of the
Commission and may obtain copies of all or any part of it from the Commission
upon payment of the fees prescribed. Statements contained herein which refer to
a document filed as an exhibit to the Registration Statement are qualified in
their entirety by reference to the copy of such document filed with the
Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents which have been filed by the Company (Commission
File No. 0-22374) with the Commission are incorporated herein by reference as if
fully set forth herein:
(i) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(ii) The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997;
(iii) The Company's Current Report on Form 8-K, dated June 23, 1997;
and
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<PAGE> 67
(iv) The description of the Company's 1997 Stock Option Plan contained
under the heading "Approval of the 1997 Stock Option Plan" in the Company's
proxy statement dated April 21, 1997.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14, or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the shares of Common
Stock offered hereby shall likewise be incorporated herein by reference and
shall become a part hereof from and after the time such documents are filed. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which is incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any or all of the documents referred to above which have been
incorporated into this Prospectus by reference (other than exhibits to such
documents). Requests for such copies should be directed to the Company, 3490
Piedmont Road, Suite 1550, Atlanta, Georgia 30305, Attention: Martha Fleming,
telephone number (404) 240-1504.
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<PAGE> 68
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors - Ernst & Young LLP.......... F-2
Independent Auditors' Report - KPMG Peat Marwick LLP........ F-3
Consolidated Statements of Condition as of December 31, 1995
and 1996 and June 30, 1997 (unaudited).................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited).................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997 (unaudited).................. F-6
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995, and 1996 and for the
six months ended June 30, 1997 (unaudited)................ F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 69
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Fidelity National Corporation
We have audited the consolidated statements of condition of Fidelity
National Corporation and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Fidelity National Corporation and
subsidiaries for the year ended December 31, 1994 were audited by other auditors
whose report dated January 20, 1995, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 and 1996 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Fidelity National Corporation and subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the prompt corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) place restrictions on any insured depository institution that does not
meet certain requirements, including minimum capital ratios. These restrictions
are based on an institution's FDICIA defined capital category and become
increasingly severe as an institution's capital category declines. The Company
and its wholly owned subsidiary, Fidelity National Bank (Bank), are operating
under regulatory agreements with the Federal Reserve Bank of Atlanta (FRB) and
the Office of the Comptroller of the Currency (OCC) that require them to meet
prescribed requirements. The Company and the Bank were deemed "undercapitalized"
based upon their respective capital positions at December 31, 1996. The Company
and the Bank have filed a capital plan with the OCC and FRB outlining plans for
attaining the required levels of regulatory capital. The Company was notified on
April 3, 1997 that it would be required to file, in addition to the capital
plan, a capital restoration plan with the OCC within 45 days. Failure to
increase their capital ratios in accordance with their capital plans would
expose the Company and the Bank to regulatory sanctions that may include
restrictions on operations and growth, mandatory asset dispositions and seizure.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. The ability of the Company to continue as a going concern is
dependent upon many factors, including regulatory action and the ability of
management to achieve its capital restoration plan. Management's plans in regard
to these matters are described in Note 2 to the consolidated financial
statements. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for certain
mortgage banking activities.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
April 3, 1997
F-2
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Fidelity National Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Fidelity National Corporation and
subsidiaries for the year ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Fidelity National Corporation and subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
January 20, 1995
F-3
<PAGE> 71
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks - Note 13.................... $ 27,356,936 $ 29,311,690 $ 29,794,789
Interest-bearing deposits with banks................. - 3,300,708 2,800,534
Federal funds sold................................... 10,002,754 343,019 12,794,158
Investment securities available-for-sale - Note 3.... 53,139,161 71,230,743 82,675,501
Investment securities held-to-maturity (fair values
of $5,320,209, $6,161,119, and $6,213,619 for 1995,
1996 and June 30, 1997, respectively) - Note 3..... 5,291,733 6,279,816 6,280,248
Loans held-for-sale.................................. 47,112,535 38,105,868 16,184,111
Loans, net of unearned income - Note 4............... 360,176,486 429,283,563 435,964,469
Allowance for loan losses - Note 4................... (5,536,504) (16,510,842) (14,956,013)
------------ ------------ ------------
Loans, net........................................... 354,639,982 412,772,721 421,008,456
Premises and equipment, net - Note 5................. 10,588,433 19,799,079 20,903,174
Other real estate - Note 4........................... 1,339,318 566,751 2,059,285
Accrued interest receivable.......................... 3,577,862 5,007,876 4,825,338
Other assets......................................... 11,773,101 18,702,026 14,041,540
------------ ------------ ------------
Total assets............................... $524,821,815 $605,420,297 $613,367,134
============ ============ ============
LIABILITIES
Deposits - Note 6
Noninterest-bearing demand deposits................ $ 75,120,501 $ 73,877,369 $ 75,464,903
Interest-bearing deposits:
Demand and money market............................ 107,475,974 78,451,267 85,440,597
Savings......................................... 14,293,402 38,867,549 26,973,741
Time deposits, $100,000 and over................ 65,503,961 86,630,315 83,315,323
Other time deposits............................. 204,113,471 266,886,829 285,835,107
------------ ------------ ------------
Total deposits............................. 466,507,309 544,713,329 557,029,671
Short-term borrowings - Note 7..................... 8,245,191 17,183,769 8,567,374
Long-term debt - Note 8............................ 16,750,000 16,500,000 16,050,000
Accrued interest payable........................... 2,606,802 3,502,631 3,245,983
Other liabilities.................................. 2,950,233 2,447,752 2,129,826
------------ ------------ ------------
Total liabilities.......................... 497,059,535 584,347,481 587,022,854
Commitments and contingencies - Notes 13 and 14
SHAREHOLDERS' EQUITY - Notes 2 and 11
Preferred Stock, no par value. Authorized
10,000,000 in 1997 and none in 1996; issued and
outstanding 752,000 shares of Non-Cumulative 8%
Convertible Preferred Stock, Series A, stated
value $6.25 in 1997; none in 1996............... - - 4,700,000
Common Stock, no par value. Authorized 5,000,000,
50,000,000 and 50,000,000; issued 4,619,475,
4,665,256 and 4,670,183; outstanding 4,608,383,
4,654,164 and 4,659,091, in 1995, 1996, and June
30, 1997, respectively.......................... 11,303,406 11,878,597 11,528,843
Treasury stock..................................... (69,325) (69,325) (69,325)
Net unrealized gains (losses) on investment
securities available-for-sale, net of tax....... 689,774 (140,241) 142,393
Retained earnings.................................. 15,838,425 9,403,785 10,042,369
------------ ------------ ------------
Total shareholders' equity................. 27,762,280 21,072,816 26,344,280
------------ ------------ ------------
Total liabilities and shareholders'
equity................................... $524,821,815 $605,420,297 $613,367,134
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 72
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees................... $32,120,759 $43,722,346 $54,333,446 $26,175,479 $28,228,177
Investment securities:
Taxable............................... 3,423,612 4,024,715 4,956,072 2,365,799 2,371,602
Tax-exempt............................ 6,222 360 - - -
Federal funds sold...................... 322,542 323,622 436,649 135,535 215,554
Deposits with other banks............... 13,460 8,947 74,104 4,515 41,620
----------- ----------- ----------- ----------- -----------
Total interest income............ 35,886,595 48,079,990 59,800,271 28,681,328 30,856,953
INTEREST EXPENSE
Deposits - Note 6....................... 11,167,526 17,927,967 24,532,698 11,453,727 11,877,949
Short-term borrowings................... 466,138 589,733 692,591 362,784 315,515
Long-term debt.......................... 131,220 353,116 1,501,487 796,860 756,986
----------- ----------- ----------- ----------- -----------
Total interest expense........... 11,764,884 18,870,816 26,726,776 12,613,371 12,950,450
NET INTEREST INCOME....................... 24,121,711 29,209,174 33,073,495 16,067,957 17,906,503
Provision for loan losses - Note 4...... 4,125,000 8,090,000 25,127,000 5,400,000 8,270,000
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................. 19,996,711 21,119,174 7,946,495 10,667,957 9,636,503
NONINTEREST INCOME
Service charges on deposit accounts..... 1,427,626 1,484,835 1,737,145 834,722 1,029,753
Credit card fees........................ 2,607,968 2,470,531 2,927,992 1,357,621 1,456,019
Mortgage banking activities............. 1,740,343 3,337,767 6,900,260 3,504,479 3,314,429
Securities gains, net - Note 3.......... 123,832 854,919 603,977 282,530 0
Other - Note 15......................... 2,869,005 3,531,359 6,135,848 2,500,818 3,015,255
----------- ----------- ----------- ----------- -----------
Total noninterest income......... 8,768,774 11,679,411 18,305,222 8,480,170 8,815,456
NONINTEREST EXPENSE
Salaries and employee benefits - Note
10.................................... 9,884,058 11,794,559 16,411,631 8,180,888 8,473,717
Furniture and equipment................. 1,235,464 1,389,858 1,722,979 753,903 1,075,415
Net occupancy........................... 1,575,822 1,905,762 2,596,155 1,105,384 1,598,920
Credit card processing and transaction
fees.................................. 2,382,252 1,973,557 3,030,290 1,287,675 1,416,330
Amortization of mortgage servicing
rights................................ 364,461 1,136,299 1,927,250 1,024,021 400,751
Other - Note 15......................... 6,932,730 7,383,149 9,800,355 4,274,062 4,522,717
----------- ----------- ----------- ----------- -----------
Total noninterest expense........ 22,374,787 25,583,184 35,488,660 16,625,933 17,487,850
----------- ----------- ----------- ----------- -----------
(Loss) income before income
taxes.......................... 6,390,698 7,215,401 (9,236,943) 2,522,194 964,109
Income tax (benefit)
expense - Note 9............... 2,091,689 2,566,019 (3,495,212) 914,262 317,347
----------- ----------- ----------- ----------- -----------
NET (LOSS) INCOME......................... $ 4,299,009 $ 4,649,382 $(5,741,731) $ 1,607,932 $ 646,762
=========== =========== =========== =========== ===========
EARNINGS PER SHARE........................ $ .93 $ 1.01 $ (1.24) $ .35 $ .14
=========== =========== =========== =========== ===========
Average Common Shares..................... 4,608,383 4,608,383 4,619,530 4,608,383 4,657,057
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 73
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- -------------------------
1994 1995 1996 1996 1997
------------ ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) income................................. $ 4,299,009 $ 4,649,382 $ (5,741,731) $ 1,607,932 $ 646,762
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses....................... 4,125,000 8,090,000 25,127,000 5,400,000 8,270,000
Depreciation and amortization of premises and
equipment..................................... 990,554 1,097,090 1,481,379 636,460 873,594
Amortization of mortgage servicing rights....... 364,461 1,136,299 1,927,250 1,024,021 400,751
Additions of originated mortgage servicing
rights........................................ - (1,031,548) (893,878) (587,004) (145,500)
Other amortization and (accretion), net......... (123,752) (87,167) 54,117 - -
Purchases of investments held in trading
accounts...................................... (952,000) - - (694,052) (471,148)
Sales of investments held in trading accounts... 941,382 - - - -
Securities gains, net........................... (123,832) (854,919) (603,977) (282,530) -
Gain on loan sales and securitization........... (221,216) (228,641) (672,012) - (94,766)
(Increase) decrease in loans held-for-sale...... 17,193,912 (44,887,263) 9,006,667 (55,073,320) 21,921,757
Net (increase) decrease in accrued interest
receivable.................................... (902,789) (984,844) (1,430,014) (692,837) 182,538
Net increase (decrease) in accrued interest
payable....................................... 324,447 838,033 895,829 471,317 (256,648)
Net increase (decrease) in other liabilities.... 714,112 (757,175) 502,481 1,439,587 (326,104)
Net (increase) decrease in other assets......... (1,488,941) 229,358 (6,928,925) (235,355) 4,660,486
------------ ----------- ------------ ----------- -----------
Net cash flows provided by (used in)
operating activities...................... 25,140,347 (32,791,395) 22,724,186 (46,985,781) 35,661,722
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities
held-to-maturity................................ (3,993,750) (11,038,682) (33,294,485) (10,359,729) -
Maturities of investment securities
held-to-maturity................................ 400,000 14,056,006 30,375,000 12,381,291 18,005,000
Sales of investment securities
available-for-sale.............................. 13,116,453 34,233,853 43,781,536 17,982,241 -
Purchases of investment securities
available-for-sale.............................. (25,444,864) (43,826,318) (65,077,185) (42,600,395) (33,993,058)
Maturities of investment securities
available-for-sale.............................. 6,880,913 12,956,531 3,728,880 5,134,406 5,285,270
Net increase in loans............................. (109,215,310) (57,917,324) (286,040,758) (66,767,580) (76,267,496)
Purchases of mortgage servicing rights............ (1,333,283) (4,981,096) - - -
Purchases of premises and equipment............... (2,564,690) (2,863,948) (10,692,025) (2,856,064) (2,162,490)
Proceeds from sale of loans....................... 4,060,528 21,125,520 203,543,314 - 58,241,478
Proceeds from sale of equipment................. 21,445 - - - 29,225
Proceeds from sales of other real estate........ 390,876 961,712 345,575 53,740 84,466
------------ ----------- ------------ ----------- -----------
Net cash flows used in investing
activities................................ (117,681,682) (37,293,746) (113,330,148) (87,032,090) (30,777,605)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, money
market accounts, and savings accounts........... 15,911,481 30,392,930 (5,693,692) 17,288,327 (3,316,944)
Net increase in time deposits..................... 63,807,089 53,098,658 83,899,712 95,541,734 15,633,286
Proceeds from issuance of long-term debt.......... 926,000 16,250,000 - - -
Repayment of long-term debt....................... (250,000) (1,991,000) (250,000) (250,000) (150,000)
Increase (decrease) in short-term borrowings...... 18,071,368 (10,695,102) 8,938,578 17,230,442 (8,616,395)
Dividends paid.................................... (628,411) (644,135) (692,909) (345,626) -
Sale of preferred stock........................... - - - - 4,000,000
Sale of treasury stock............................ 1,250 - - - -
------------ ----------- ------------ ----------- -----------
Net cash flows provided by financing
activities................................ 97,838,777 86,411,351 86,201,689 129,464,877 7,549,947
------------ ----------- ------------ ----------- -----------
Net (decrease) increase in cash and cash
equivalents............................... 5,297,442 16,326,210 (4,404,273) (4,552,994) 12,434,064
Cash and cash equivalents, beginning of year........ 15,736,038 21,033,480 37,359,690 37,359,690 32,955,417
------------ ----------- ------------ ----------- -----------
Cash and cash equivalents, end of year.............. $ 21,033,480 $37,359,690 $ 32,955,417 $32,806,696 $45,389,481
============ =========== ============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................ $ 11,440,437 $18,032,783 $ 25,830,947 $11,998,619 $13,207,098
============ =========== ============ =========== ===========
Income taxes.................................... $ 1,528,000 $ 2,163,000 $ 1,375,000 $ 1,005,556 $ -
============ =========== ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 74
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSSES) ON
INVESTMENT
PREFERRED STOCK COMMON STOCK TREASURY STOCK SECURITIES
-------------------- ----------------------- ----------------- AVAILABLE-
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT FOR-SALE
------- ---------- --------- ----------- ------ -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1994.............. - - 4,200,600 $ 5,125,000 11,292 $(70,575) $ 1,735,091
Net income........................... - - - - - - -
Dividends declared ($.1364 per
share)............................. - - - - - - -
Sale of treasury shares.............. - - - - (200) 1,250 -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - - - - - - (3,372,268)
------- ---------- --------- ----------- ------ -------- -----------
BALANCE DECEMBER 31, 1994............ - - 4,200,600 5,125,000 11,092 (69,325) (1,637,177)
Net income........................... - - - - - - -
Dividends declared ($.1398 per
share)............................. - - - - - - -
10% stock dividend................... - - 418,875 6,178,406 - - -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - - - - - - 2,326,951
------- ---------- --------- ----------- ------ -------- -----------
BALANCE DECEMBER 31, 1995............ - - 4,619,475 11,303,406 11,092 (69,325) 689,774
Net loss............................. - - - - - - -
Dividends declared ($.15 per
share)............................. - - - - - - -
Common Stock issued under Employee
Stock Purchase Plan................ - - 1,766 19,502 - - -
Issuance of Common Stock to
Directors.......................... - - 44,015 555,689 - - -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - - - - - - (830,015)
------- ---------- --------- ----------- ------ -------- -----------
BALANCE DECEMBER 31, 1996............ - - 4,665,256 11,878,597 11,092 (69,325) (140,241)
Net Income........................... - - - - - - -
Dividend Declared ($.011 per
share)............................. - - - - - - -
Issuance of Preferred Stock.......... 752,000 4,700,000 - (400,000) - - -
Common Stock issued under Employee
Stock Purchase Plan................ - - 4,928 50,246 - - -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - - - - - - 282,634
------- ---------- --------- ----------- ------ -------- -----------
BALANCE JUNE 30, 1997................ 752,000 $4,700,000 4,670,184 $11,528,843 11,092 $(69,325) $ 142,393
======= ========== ========= =========== ====== ======== ===========
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
----------- -------------
<S> <C> <C>
BALANCE JANUARY 1, 1994.............. $14,340,986 $21,130,502
Net income........................... 4,299,009 4,299,009
Dividends declared ($.1364 per
share)............................. (628,411) (628,411)
Sale of treasury shares.............. - 1,250
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - (3,372,268)
----------- -----------
BALANCE DECEMBER 31, 1994............ 18,011,584 21,430,082
Net income........................... 4,649,382 4,649,382
Dividends declared ($.1398 per
share)............................. (644,135) (644,135)
10% stock dividend................... (6,178,406) -
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - 2,326,951
----------- -----------
BALANCE DECEMBER 31, 1995............ 15,838,425 27,762,280
Net loss............................. (5,741,731) (5,741,731)
Dividends declared ($.15 per
share)............................. (692,909) (692,909)
Common Stock issued under Employee
Stock Purchase Plan................ - 19,502
Issuance of Common Stock to
Directors.......................... - 555,689
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - (830,015)
----------- -----------
BALANCE DECEMBER 31, 1996............ 9,403,785 21,072,816
Net Income........................... 646,762 646,762
Dividend Declared ($.011 per
share)............................. (8,178) (8,178)
Issuance of Preferred Stock.......... - 4,300,000
Common Stock issued under Employee
Stock Purchase Plan................ - 50,246
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax..... - 282,634
----------- -----------
BALANCE JUNE 30, 1997................ $10,042,369 $26,344,280
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 75
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Fidelity National Corporation and
subsidiaries (the "Company") conform to generally accepted accounting principles
and to general practices within the financial services industry. The following
is a description of the more significant of those policies.
Basis of Presentation. The consolidated financial statements include the
accounts of Fidelity National Corporation and its wholly owned subsidiaries.
Fidelity National Corporation ("Fidelity") owns 100% of Fidelity National Bank
(the "Bank") and Fidelity National Capital Investors, Inc. Fidelity National
Mortgage Corporation is a wholly owned subsidiary of the Bank. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements have been prepared in conformity with generally
accepted accounting principles followed within the financial services industry.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate to
the determination of the allowance for loan losses and the valuation of real
estate acquired in connection with foreclosures or in satisfaction of loans.
Certain previously reported amounts have been restated to conform to current
presentation.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand,
amounts due from banks, and federal funds sold. Generally, federal funds are
purchased and sold within one-day periods.
Investment Securities. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" the Company classifies its investment securities in one
of three categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. The Company had no trading securities at December 31, 1995 or
1996. Held-to-maturity securities are those securities for which the Company has
the ability and positive intent to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized gains and losses
on trading securities are included in income. Unrealized gains and losses, net
of related income taxes, on available-for-sale securities are excluded from
income and are reported as a separate component of shareholders' equity until
realized. Transfers of securities between categories are recorded at fair value
at the date of transfer. Unrealized gains and losses are recognized in income
for transfers into trading securities. The unrealized gains or losses included
in the separate component of shareholders' equity for securities transferred
from available-for-sale to held-to-maturity are maintained and amortized into
income over the remaining life of the related security as an adjustment to yield
in a manner consistent with the amortization or accretion of premium or discount
on the security.
A decline in the fair value below cost of any available-for-sale or
held-to-maturity security that is deemed other than temporary results in a
charge to income and the establishment of a new cost basis for the security.
Purchase premiums and discounts are amortized or accreted over the life of
the related investment securities as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses for securities sold are included in income and are
derived using the specific identification method for determining the cost of
securities sold.
Loans and Interest Income. Loans are reported at principal amounts
outstanding net of unearned income, and deferred loan fees and costs. Interest
income is recognized in a manner that results in a level yield
F-8
<PAGE> 76
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on principal amounts outstanding. The accrual of interest is discontinued when,
in management's judgment, it is determined that the collectibility of interest
is doubtful.
Rate-related loan fee income is included in interest income. Loan
origination and commitment fees and certain direct origination costs are being
deferred and the net amount amortized as an adjustment of the yield over the
contractual lives of the related loans, taking into consideration assumed
prepayments.
Effective January 1, 1996, the Company modified its classification of
credit card current period interest charge-offs. In prior years, the Company
recorded credit card current period accrued interest meeting Company policy for
charge-off as a charge against the allowance for loan losses. Beginning January
1, 1996, the Company commenced reversing current period accrued interest-related
income on credit card loans being charged off to interest income. For the year
ended December 31, 1996, $1,965,202 of such interest had been reversed. Prior
period statements do not reflect this reclassification. The reclassification was
made to conform to industry practice.
Annual fees collected for credit cards are recognized on a straight-line
basis over the period the fee entitles the cardholder to use the card.
Effective January 1, 1995, the Company adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting for Impairment of a Loan - Income Recognition and Disclosure."
These standards require impaired loans to be measured based on the present value
of expected future cash flows discounted at the loan's original effective
interest rate, or at the loan's observable market price, or the fair value of
the collateral if the loan is collateral dependent.
Impaired loans are 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
F-9
<PAGE> 77
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market is determined based on evaluating the market value of the pool selected
for sale. Based upon available market information, no valuation adjustment was
required at December 31, 1995 or 1996, and fair values for such loans
held-for-sale approximated or exceeded their carrying values.
Gains and losses on sales of loans are recognized at the settlement date.
Gains and losses are determined by the difference between the net sales
proceeds, including the estimated value associated with excess or deficient
servicing fees to be received, and the carrying value of the loans sold.
Premises and Equipment. Premises and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized using
the straight-line method over the lease term or estimated useful life, whichever
is shorter.
Other Real Estate. Other real estate represents property acquired through
foreclosure or in satisfaction of loans. Other real estate is carried at the
lower of cost or fair value less estimated selling costs. Fair value is
determined on the basis of current appraisals, comparable sales, and other
estimates of value obtained principally from independent sources. Any excess of
the loan balance at the time of foreclosure or acceptance in satisfaction of
loans over the fair value of the real estate held as collateral is treated as a
loan loss and charged against the allowance for loan losses. Gain or loss on
sale and any subsequent adjustments to reflect changes in fair value and selling
costs are recorded as a component of income.
Income Taxes. The Company files a consolidated federal income tax return.
Taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income
Taxes." Under the liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Income Per Common Share. Income per common share is computed based on the
weighted average number of shares outstanding, adjusted for any stock splits or
stock dividends.
Mortgage Banking Activities. Effective January 1, 1995, the Company
adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of
FASB Statement No. 65." SFAS No. 122 requires capitalization of purchased as
well as internally originated mortgage servicing rights based on the fair value
of the mortgage servicing rights relative to the loan as a whole. Prior to the
issuance of SFAS No. 122, capitalization of mortgage servicing rights was
limited to servicing rights purchased from third parties. Mortgage servicing
rights are amortized in proportion to and over the period of estimated net
servicing income. The fair value of mortgage servicing rights is determined
based on the present value of estimated expected future cash flows determined
using assumptions that market participants would use in estimating future net
servicing income which includes discount rate, prepayment estimate, and per loan
cost to service. Mortgage servicing rights are stratified by loan type
(government or conventional) and interest rate for purposes of measuring
impairment on a quarterly basis. An impairment loss is recognized to the extent
by which the amortized capitalized mortgage servicing rights for each stratum
exceeds the current fair value. Impairment losses are recognized as reductions
in the carrying value of the asset, through the use of a valuation allowance.
During 1995 and 1996, the Company capitalized approximately $1,032,000 and
$894,000, respectively of originated servicing rights and recorded amortization
of approximately $61,000 and $573,000, respectively and recorded a valuation
allowance of approximately $37,000 and $49,000, respectively related to those
rights. These amounts are included in other assets. The estimated fair value of
originated and purchased mortgage servicing rights at December 31, 1995 and
1996, was approximately $7,800,000 and $7,400,000, respectively.
F-10
<PAGE> 78
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncements. Effective January 1, 1996, the Company
adopted SFAS No. 121, "Accounting For the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The adoption did not have a material
impact on the financial position or results of operations of the Company.
In June 1996, the Financial Accounting Standards Board issued "Accounting
For Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," SFAS No. 125, which provides new accounting and reporting
standards for sales, securitizations, and servicing of receivables and other
financial assets and extinguishments of liabilities. SFAS No. 125 is effective
for transactions occurring after December 31, 1996, except those provisions
relating to repurchase agreements, securities lending and other similar
transactions and pledged collateral, which have been delayed until after
December 31, 1997, by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of Statement No. 125, an amendment of FASB Statement No. 125." These
standards will be adopted as required in 1997 and 1998, and are not expected to
have a material impact on the Company's financial position or results of
operations.
2 -- REGULATORY MATTERS
Going Concern. The accompanying consolidated financial statements have
been prepared on a going-concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company incurred a net loss of $5.7 million during the year ended December 31,
1996. At December 31, 1996, Fidelity and the Bank were not in compliance with
the minimum capital requirements prescribed by the Federal Reserve Bank (FRB)
and the Office of the Comptroller of the Currency (OCC) and were considered
"undercapitalized" under the provisions of the Federal Deposit Insurance
Improvement Act of 1991. In addition, Fidelity and the Bank entered into
agreements with the FRB and OCC, respectively. The agreements and regulatory
capital requirements are described below. If Fidelity and the Bank are unable to
meet the minimum capital requirements of the agreements, one or more regulatory
sanctions may result. These sanctions include such operating restrictions as
growth limitations, prohibitions on dividend payments, increased supervisory
monitoring, limitations on executive compensation, restrictions on deposit
interest rates, and regulatory seizure. Management's plans concerning these
matters and a description of Fidelity's and the Bank's capital plan which was
submitted to the FRB and OCC, including plans to raise additional capital, are
described below.
These factors, among others, may indicate that the Company will be unable
to continue as a going concern. The consolidated financial statements do not
include the adjustments, if any, that might have been required had the outcome
of the above-mentioned uncertainties been known, or any adjustments relating to
the recoverability of recorded asset amounts or the amount of liabilities that
may be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent on its ability to
comply with the terms of the agreements, maintain sufficient liquidity, and
ultimately, return to profitable operations.
Management's Plans. The Company incurred significant losses which have
eroded capital. Accordingly, management's primary focus is to obtain additional
capital and to return the Company to profitability. In the fourth quarter of
1996, the Bank increased rates charged on credit card products demonstrating
higher loss exposure, brought credit card collections in-house, and strengthened
its credit card management team while consolidating and downsizing in selected
areas.
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.
F-11
<PAGE> 79
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regulatory Agreements. The Bank is a national banking association and is
subject to Federal and state statutes applicable to banks chartered under the
banking laws of the United States, to members of the Federal Reserve System and
to banks whose deposits are insured by the Federal Deposit Insurance
Corporation. The Board of Governors of the Federal Reserve System and the Office
of the Comptroller of the Currency (the OCC) have established capital adequacy
guidelines for bank holding companies and national banks.
The Bank's principal regulator is the OCC. At periodic intervals, the OCC
examines and evaluates the financial condition, operations, and policies and
procedures of nationally chartered banks, such as the Bank, as part of its
legally prescribed oversight responsibilities. Based on its examinations, the
OCC can direct a national bank to adjust its financial statements in accordance
with the examination's findings. In view of the regulatory environment in which
banks operate, the extent, if any, to which future OCC examinations may
ultimately result in adjustments to the consolidated financial statements cannot
presently be determined.
In 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991
("1991 Act") was adopted. Additional supervisory powers and regulations mandated
by the 1991 Act include a "prompt corrective action" program based upon five
regulatory zones for banks in which all banks are placed, largely based on their
capital positions. Regulators are permitted to take increasingly harsh action as
a bank's financial condition declines. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches 2%. Better capitalized institutions
are subject to less onerous regulation and supervision than banks with lesser
amounts of capital.
To implement the prompt corrective action provisions of the 1991 Act, the
OCC adopted regulations, which became effective on December 19, 1992, placing
financial institutions in the following five categories based upon
capitalization ratios: (i) a "well capitalized" institution has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least
6% and a leverage ratio of at least 5%, (ii) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based
ratio of at least 4% and a leverage ratio of at least 3%; (iii) an
"undercapitalized" institution has a total risk-based ratio of under 8%, a Tier
1 risk-based ratio of under 4% or a leverage ratio of under 3%; (iv) a
"significantly undercapitalized" institution has a total risk-based ratio of
under 6%, a Tier 1 risk-based ratio of under 3% or a leverage ratio of under 3%;
and (v) a "critically undercapitalized" institution has a leverage ratio of 2%
or less. Institutions in any of the three undercapitalized categories are
prohibited from declaring dividends or making capital distributions. The
regulations also establish procedures for "downgrading" an institution to a
lower capital category based on supervisory factors other than capital.
The OCC and the Bank entered into an Agreement dated November 14, 1996,
("OCC Agreement"). The OCC Agreement provides that the Bank (i) appoint an
"Oversight Committee;" (ii) achieve and maintain specified higher capital
levels; (iii) develop a three-year capital program which will include, among
other things, certain restrictions on dividend payments by the Bank; and (iv)
revise and amend its strategic plan. On April 3, 1997, the Company was notified
that it would be required to file, in addition to the capital plan, a capital
restoration plan with the OCC within 45 days.
Fidelity's Board of Directors on February 13, 1997, adopted a resolution
requested by the Federal Reserve Bank of Atlanta ("FRB Agreement"). The FRB
Agreement, among other things, prohibits Fidelity from paying dividends and
incurring debt without prior approval of the FRB.
The OCC Agreement will impair the ability of the Bank to declare and pay
dividends to Fidelity since the Bank currently intends to retain any earnings to
augment its capital. As dividends from the Bank are the 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
F-12
<PAGE> 80
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
April 30, 1997, and maintained until November 30, 1997. At November 30, 1997,
higher capital levels become effective and are applicable thereafter.
The table below sets forth the capital requirements for the Bank under OCC
regulations, and under the OCC Agreement and the Bank's capital ratios at
December 31, 1996.
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT
------------------------- ------------------------ ACTUAL
ADEQUATELY WELL APRIL 30, NOVEMBER 30, DECEMBER 31,
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 1996
- -------------- ----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Leverage................................. 4.00% 5.00% 5.00% 6.00% 3.27%
Risk-Based Capital:
Tier 1................................. 4.00 6.00 6.00 7.00 4.16
Total.................................. 8.00 10.00 10.00 11.00 7.43
</TABLE>
Under the terms of the OCC Agreement, should the Bank capital be obtained
as preferred stock, for the purposes of paying dividends on the Preferred Stock,
the Bank's capital ratios must be at least 4% for leverage, 4% for Tier 1
risk-based capital and 8% for total risk-based capital.
Set forth below are pertinent capital ratios for the Company as of December
31, 1996, under the FRB regulation:
<TABLE>
<CAPTION>
MINIMUM
CAPITAL RATIOS CAPITAL REQUIREMENT ACTUAL
- -------------- ------------------- ------
<S> <C> <C>
Leverage.................................................... 3.00% 2.67%
Risk-Based Capital:
Tier 1.................................................... 4.00 3.40
Total..................................................... 8.00 6.38
</TABLE>
Absent sales of equity securities or subordinated debt by the Company,
capital will increase only through the retention of earnings.
To meet the capital requirements in the formal agreements, management has
estimated that at December 31, 1996, an additional $14 million of capital will
be needed to reach the April 30, 1997, requirements and an additional $5 million
will be needed to reach the November 30, 1997, requirements.
As of December 31, 1995, the Bank was considered to be "adequately
capitalized" by the OCC. The following table represents the regulatory capital
position of the Company and the Bank at December 31, 1995 and 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
COMPANY BANK
----------------- -----------------
1995 1996 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Tier 1 capital.................................... $26,606 $17,052 $28,867 $20,799
Tier 1 capital required........................... 17,309 20,059 17,027 20,003
------- ------- ------- -------
Excess (deficit) over required amount........... $ 9,297 $(3,007) $11,840 $ 796
======= ======= ======= =======
Total risk-based capital.......................... $45,323 $31,976 $41,194 $37,180
Total risk-based capital required................. 34,619 40,118 34,055 40,007
------- ------- ------- -------
Excess (deficiency) over required amount........ $10,704 $(8,142) $ 7,139 $(2,827)
======= ======= ======= =======
</TABLE>
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
F-13
<PAGE> 81
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sheet financial instruments, depending upon the perceived degree of credit risk
to which they expose such entities. Each banking organization is required to
maintain a specified minimum ratio of capital to the total of such risk-adjusted
assets and off-balance sheet financial instruments.
The risk-based capital ratios of Fidelity and the Bank are calculated under
the guidelines by dividing their respective qualifying total capital by their
respective total risk-weighted assets. Fidelity's and the Bank's qualifying
total capital and total risk-weighted assets are determined on a fully
consolidated basis. Total qualifying capital is comprised of the sum of core
capital elements ("Tier 1 capital") and supplementary capital elements ("Tier 2
capital"). Tier 1 capital excludes any net unrealized gains or losses resulting
from the implementation of SFAS No. 115. Tier 2 capital includes the allowance
for loan losses, subject to limitations.
Under the guidelines, total risk-weighted assets of Fidelity and the Bank
are determined by assigning balance sheet assets and credit equivalent amounts
of off-balance sheet financial instruments to one of four broad risk categories
having risk weights ranging from zero % to 100%. The aggregate dollar amount of
each category is multiplied by the risk weight associated with that category and
the resulting weighted values from each category are summed to determine total
risk-weighted assets.
Each bank holding company and national bank must maintain (i) a minimum
ratio of Tier 1 capital to total risk-weighted assets of 4.0% and (ii) a minimum
ratio of total qualifying capital to total qualifying assets ("total risk-based
capital ratio") of 8.0% with the amount of the allowance for loan losses that
may be included in Tier 2 capital limited to 1.25% of total risk-weighted
assets.
Capital leverage ratio standards require a minimum ratio of Tier 1 capital
to adjusted average total assets ("capital leverage ratio") of 3.0%. The
leverage ratio is only a minimum. Institutions experiencing or anticipating
significant growth or those with other than minimum risk profiles will be
expected to maintain capital well above the minimum levels.
For additional information, see Note 11 -- Shareholders' Equity.
F-14
<PAGE> 82
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3 -- INVESTMENT SECURITIES
Investment securities at December 31, 1995 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities available-for-sale at December 31,
1995
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $25,959,600 $ 644,259 $ - $26,603,859
Mortgage-backed securities.................. 24,780,224 468,278 - 25,248,502
Other securities............................ 1,286,800 - - 1,286,800
----------- ----------- ----------- -----------
Total................................ $52,026,624 $ 1,112,537 $ - $53,139,161
=========== =========== =========== ===========
Securities available-for-sale at December 31,
1996
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $48,149,420 $ 89,187 $ 301,169 $47,937,438
Mortgage-backed securities.................. 21,754,422 63,558 77,775 21,740,205
Other securities............................ 1,553,100 - - 1,553,100
----------- ----------- ----------- -----------
Total................................ $71,456,942 $ 152,745 $ 378,944 $71,230,743
=========== =========== =========== ===========
Securities held-to-maturity at December 31,
1995
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $ 4,990,274 $ 28,476 $ - $ 5,018,750
Other securities............................ 301,459 - - 301,459
----------- ----------- ----------- -----------
Total................................ $ 5,291,733 $ 28,476 $ - $ 5,320,209
=========== =========== =========== ===========
Securities held-to-maturity at December 31,
1996
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $ 5,979,017 $ - $ 118,697 $ 5,860,320
Other securities............................ 300,799 - - 300,799
----------- ----------- ----------- -----------
Total................................ $ 6,279,816 $ - $ 118,697 $ 6,161,119
=========== =========== =========== ===========
</TABLE>
Proceeds from the sale of investment securities were $13,116,453 in 1994
with related gross gains of $169,804 and gross losses of $35,354. Proceeds from
sales of investment securities available-for-sale during 1995 and 1996 were
$34,233,853 and $43,781,536, respectively. Gross gains of $917,786 and $603,977
for 1995 and 1996, respectively, were realized on those sales. Gross losses in
1995 and 1996 were $62,867 and $0, respectively. Income tax expense related to
the sale of securities was $40,530, $304,036 and $214,776 in 1994, 1995 and
1996, respectively.
Proceeds from the sale of investments held in trading accounts were
$941,382 in 1994. Gross gains of $750 and gross losses of $11,368 were realized
on those sales. There were no investments held in the trading accounts during
1995 and 1996.
F-15
<PAGE> 83
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table depicts amortized cost and estimated fair value of
investment securities at December 31, 1995 and 1996, by contractual maturity.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, other securities, which primarily consist of Federal Reserve
Bank common stock and Federal Home Loan Bank common stock, are not included in
the following table as they have no stated maturity.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasury Securities and
obligations of U.S. Government
corporations and agencies:
Due in one year or less........ $ - $ - $17,992,660 $17,992,660
Due after one year through five
years........................ 1,986,449 2,146,880 - -
Due after five years through
ten years.................... 15,973,151 16,456,979 17,436,200 17,361,645
Due after ten years or more.... 8,000,000 8,000,000 12,720,560 12,583,133
----------- ----------- ----------- -----------
25,959,600 26,603,859 48,149,420 47,937,438
Mortgage-backed securities........ 24,780,224 25,248,502 21,754,422 21,740,205
----------- ----------- ----------- -----------
Total..................... $50,739,824 $51,852,361 $69,903,842 $69,677,643
=========== =========== =========== ===========
Held-to-Maturity
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies:
Due in one year or less........ $ 4,990,274 $ 5,018,750 $ - $ -
Due after ten years............ - - 5,979,017 5,860,320
----------- ----------- ----------- -----------
Total..................... $ 4,990,274 $ 5,018,750 $ 5,979,017 $ 5,860,320
=========== =========== =========== ===========
</TABLE>
Investment securities with a carrying value of approximately $51,207,000
and $56,280,000 at December 31, 1995 and 1996, respectively, were pledged as
collateral for public deposits, securities sold under agreements to repurchase,
and for other purposes required by law.
4 -- LOANS
Loans outstanding, by classification, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ ------------
<S> <C> <C>
Credit cards.............................................. $139,873,437 $143,781,711
Real estate-mortgage...................................... 61,246,732 71,718,792
Real estate-construction.................................. 40,955,261 56,325,014
Commercial, financial and agricultural.................... 39,295,512 43,945,706
Consumer installment...................................... 78,805,544 113,512,340
------------ ------------
Loans (net of unearned income).................. 360,176,486 429,283,563
Less:
Allowance for loan losses............................... 5,536,504 16,510,842
------------ ------------
Loans, net...................................... $354,639,982 $412,772,721
============ ============
</TABLE>
F-16
<PAGE> 84
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans held for sale at December 31, 1996, totaled $38,105,868 which
included $13,105,868 of mortgage loans and $25,000,000 of indirect automobile
loans. The Company, through one of its subsidiaries, had loan participations
sold without recourse in the amount of $10 million and $7.5 million at December
31, 1995 and 1996, respectively. The Company, through its mortgage subsidiary,
was servicing loans for others of approximately $523.3 million, $882.6 million
and $580.0 million at December 31, 1994, 1995 and 1996, respectively.
Loans in nonaccrual status amounted to approximately $1,189,000, $3,105,000
and $2,940,000 at December 31, 1994, 1995 and 1996, respectively. The allowance
for loan losses related to these impaired loans was $383,000 and $561,000 at
December 31, 1995 and 1996. The average recorded investment in impaired loans
during 1995 and 1996 was $1,689,028 and $3,135,000, respectively. If such
impaired loans had been on a full accruing basis, interest income on these loans
would have been approximately $55,000, $51,000 and $278,000 in 1994, 1995 and
1996, respectively.
Loans totaling approximately $241,500, $554,500 and $237,600 were
transferred to other real estate in 1994, 1995 and 1996, respectively. There
were no other real estate sales in 1996 financed by the Company. The Company
financed other real estate sales of approximately $323,000 and $401,000 in 1994
and 1995, respectively. Loans are reported net of deferred loan fees of
$112,759, $389,355 and $104,669 at December 31, 1994, 1995 and 1996,
respectively.
The Company has loans outstanding to various executive officers, directors,
and their associates. Management believes that all of these loans were made in
the ordinary course of business on substantially the same terms including
interest rate and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than the normal risk.
The following is a summary of activity during 1996 for such loans:
<TABLE>
<S> <C>
Loan balances at December 31, 1995.......................... $ 5,707,711
New loans................................................... 2,234,789
Loan repayments............................................. (4,671,759)
-----------
Loan balances at December 31, 1996.......................... $ 3,270,741
===========
</TABLE>
The following is a summary of activity in the allowance for loan losses:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of year................... $ 4,549,548 $ 4,343,657 $ 5,536,504
Provision for loan losses...................... 4,125,000 8,090,000 25,127,000
Loans charged off:
Credit cards................................. (4,465,609) (7,051,268) (13,156,340)
Other loans.................................. (314,405) (388,119) (1,659,492)
Recoveries on loans charged off.............. 449,123 542,234 663,170
----------- ----------- ------------
Balance at end of year......................... $ 4,343,657 $ 5,536,504 $ 16,510,842
=========== =========== ============
</TABLE>
F-17
<PAGE> 85
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5 -- PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Land........................................................ $ 2,110,321 $ 2,735,320
Buildings and improvements.................................. 5,778,322 11,219,182
Furniture and equipment..................................... 8,934,164 13,543,963
----------- -----------
16,822,807 27,498,465
Less accumulated depreciation and amortization.............. 6,234,374 7,699,386
----------- -----------
Premises and equipment, net................................. $10,588,433 $19,799,079
=========== ===========
</TABLE>
At December 31, 1996, the Company had entered into two leases at market
terms with a general partnership, of which a director is a general partner, and
a corporation of which a director is a majority shareholder. The partnership
lease is for a bank branch, general office, and storage space. This lease is for
approximately 35,000 square feet at an approximate annual rate of $17 per square
foot, subject to pro rata increases for any increases in taxes, insurance,
utilities, and maintenance. The corporate lease is for a 2,200 square foot bank
branch at an approximate annual rate of $11 per square foot, subject to pro rata
increases for any increases in taxes and insurance.
6 -- DEPOSITS
Time deposits over $100,000 as of December 31, 1995 and 1996 were
$65,503,961 and $86,630,315, respectively. Related interest expense was
$2,385,000, $3,920,000 and $5,042,964 for the years ended December 31, 1994,
1995 and 1996, respectively. Included in demand and money market deposits were
NOW accounts totaling $37,701,876 and $37,322,255 at December 31, 1995 and 1996,
respectively.
7 -- SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- -----------
<S> <C> <C>
Federal funds purchased..................................... $ - $ 500,000
Securities sold under agreements to repurchase.............. 8,245,191 16,683,769
---------- -----------
Total............................................. $8,245,191 $17,183,769
========== ===========
</TABLE>
The above borrowings mature either overnight or on a fixed maturity not to
exceed three months. At December 31, 1996, the Company had a line of credit with
the Federal Home Loan Bank to borrow up to a maximum of $10 million. In March
1997, the availability of borrowings on this line was suspended until the
Company achieves appropriate capital levels. Interest expense on Federal Home
Loan Bank advances was $267,777 in 1995 and $158,838 in 1996. The weighted
average rate on short term borrowings outstanding at December 31, 1995 and 1996
was 2.96% and 3.06%, respectively.
F-18
<PAGE> 86
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 -- LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Note payable with interest at prime plus 1/4%, secured by
Bank stock; principal and interest payable in annual
installments through 1996................................. $ 250,000 $ -
Junior subordinated Series A capital notes with interest at
prime plus 2% due December 15, 1999; interest payable
quarterly................................................. 250,000 250,000
Subordinated capital notes with interest at 11% through
March 27, 2000, and at prime plus 2% thereafter, due March
27, 2002, interest payable quarterly...................... 1,000,000 1,000,000
Subordinated capital notes with interest at prime due
October 1, 2002, interest payable quarterly............... 250,000 250,000
8.5% subordinated notes due January 31, 2006, interest
payable quarterly......................................... 15,000,000 15,000,000
----------- -----------
Total............................................. $16,750,000 $16,500,000
=========== ===========
</TABLE>
Note maturities as of December 31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1997........................................................ $ -
1998........................................................ -
1999........................................................ 250,000
2000........................................................ -
2001........................................................ -
Thereafter.................................................. 16,250,000
-----------
Total............................................. $16,500,000
===========
</TABLE>
The $250,000 note payable was paid off in 1996 in accordance with original
terms.
On December 12, 1995, the Company issued $15,000,000 in 8.5% subordinated
notes due January 31, 2006. Under the terms of the notes, the Company has the
right to redeem them on or after January 31, 2001, at 100% of the principal
amount plus accrued interest to the date of redemption.
The subordinated notes due March 27, 2002, may be redeemed at the option of
the Company at any time after March 27, 2000, without penalty. All other
subordinated notes may be redeemed at the option of the Company without penalty.
There was no indebtedness to directors, executive officers, or principal
holders of equity securities in excess of 5% of shareholders' equity at December
31, 1996.
F-19
<PAGE> 87
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. -- INCOME TAXES
Income tax (benefit) expense attributable to income from continuing
operations consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Year ended December 31, 1994:
Federal................................................ $1,309,532 $ 694,301 $ 2,003,833
State.................................................. - 87,856 87,856
---------- ----------- -----------
$1,309,532 $ 782,157 $ 2,091,689
========== =========== ===========
Year ended December 31, 1995:
Federal................................................ $2,366,181 $ 184,265 $ 2,550,446
State.................................................. - 15,573 15,573
---------- ----------- -----------
$2,366,181 $ 199,838 $ 2,566,019
========== =========== ===========
Year ended December 31, 1996:
Federal................................................ $1,006,128 $(4,124,579) $(3,118,451)
State.................................................. - (376,761) (376,761)
---------- ----------- -----------
$1,006,128 $(4,501,340) $(3,495,212)
========== =========== ===========
</TABLE>
Income tax expense differed from amounts computed by applying the statutory
U.S. Federal income tax rate to pretax income from continuing operations as a
result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Taxes at statutory rate........................... $2,172,837 $2,453,236 $(3,140,561)
(Reduction) increase in income taxes resulting
from:
State income tax expense, net of Federal income
tax benefit.................................. 57,985 10,278 (248,662)
Tax exempt income............................... (58,855) (35,848) (22,770)
Other, net...................................... (80,278) 138,353 (83,219)
---------- ---------- -----------
Income tax expense................................ $2,091,689 $2,566,019 $(3,495,212)
========== ========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1995 DEFERRED TAX 1996 DEFERRED TAX
---------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
State tax credit carryforwards........... $309,983 $ - $ 208,091 $ -
Allowance for loan losses................ - 502,961 4,010,988 -
Accelerated depreciation................. - 420,252 - 514,645
Accretion on U.S. Treasury securities.... - 34,749 - 29,440
Deferred loan fees....................... - 355,741 - 289,598
Other real estate........................ 41,050 - 41,050 -
FHLB stock dividends..................... - 23,038 - -
Unearned income.......................... 92,885 - 296,975 -
Unrealized holding gains on securities
available-for-sale..................... - 422,320 85,865 -
Capitalized mortgage servicing rights.... - - - 284,329
Other.................................... 86,017 - 94,722 2,497
-------- ---------- ---------- ----------
$529,935 $1,759,061 $4,737,691 $1,120,509
======== ========== ========== ==========
</TABLE>
F-20
<PAGE> 88
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10 -- EMPLOYEE BENEFITS
The Bank provides a split-dollar insurance benefit plan for the President
of the Bank for which the life insurance benefit is $2,000,000. The President's
irrevocable insurance trust is designated as owner and beneficiary. Upon
termination of the plan, the Bank receives the portion of the insurance proceeds
equal to the total amount of premiums paid by the Bank. The Bank paid premiums
of $39,582 in 1994, 1995 and 1996, under the terms of the plan.
The Company maintains a 401(k) defined contribution retirement savings plan
for employees age 18 or older who have obtained ninety days of service. Employee
contributions to the plan are voluntary. The Company matches up to 15% of the
participants' eligible contributions. For the years ended December 31, 1994,
1995 and 1996, the Company contributed $86,014, $136,187 and $71,873,
respectively, to the plan.
11 -- SHAREHOLDERS' EQUITY
In addition to the previously mentioned regulatory agreements, dividends
that may be paid by the Bank to Fidelity are subject to certain other regulatory
limitations. Under Federal banking law, the approval of the OCC will be required
if the total of all dividends declared in any calendar year by the Bank exceeds
the Bank's net profits to date for that year combined with its retained net
profits for the preceding two years, subject to the maintenance of minimum
required regulatory capital. At December 31, 1996, total shareholders' equity of
the Bank was approximately $24.6 million. Payment of dividends is restricted
without violating regulatory capital requirements. Also, under current Federal
Reserve System regulations, the Bank is limited in the amount it may loan to its
nonbank affiliates, including Fidelity. As of December 31, 1996, there were no
loans outstanding from the Bank to Fidelity.
12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on settlements using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets, and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts reported in the Statements of Condition for cash, due
from banks, and Federal fund sold, approximates those assets' fair values. For
investment securities, fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities or dealer quotes.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type. The fair value of performing
loans is calculated by discounting scheduled cash flows through the remaining
maturities using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan.
Fair value for significant nonperforming loans is estimated taking into
consideration recent external appraisals of the underlying collateral for loans
that are collateral dependent. If appraisals are not available or if the loan is
not collateral dependent, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower information.
F-21
<PAGE> 89
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of deposits with stated maturity, such as
noninterest-bearing demand deposits, savings, interest-bearing demand, and money
market accounts, is equal to the amount payable on demand. The fair value of
time deposits is based on the discounted value of contractual cash flows based
on the discount rates currently offered for deposits of similar remaining
maturities.
The carrying amounts reported in the balance sheet for short-term debt
approximate those liabilities' fair values.
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
amount of long-term debt approximates its estimated fair value.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1995 1996
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial instruments (assets)
Cash and due from banks............... $ 27,356,936 $ 27,356,936 $ 32,612,398 $ 32,612,398
Federal funds sold.................... 10,002,754 10,002,754 343,019 343,019
Investment securities
available-for-sale................. 53,139,161 53,139,161 71,230,743 71,230,743
Investment securities
held-to-maturity................... 5,291,733 5,320,209 6,279,816 6,161,119
Loans, net of unearned income......... 407,289,021 408,622,292 467,389,431 468,578,264
------------ ------------ ------------ ------------
Total financial instruments
(assets)........................... 503,079,605 $504,441,352 577,855,407 $578,925,543
============ ============
Non-financial instruments (assets).... 21,742,210 27,564,890
------------ ------------
Total assets.................. $524,821,815 $605,420,297
============ ============
Financial instruments (liabilities)
Noninterest-bearing demand deposits... $ 75,120,501 $ 75,120,501 $ 73,877,369 $ 73,877,369
Interest-bearing deposits............. 391,386,808 393,178,992 470,835,960 471,954,804
------------ ------------ ------------ ------------
Total deposits................ 466,507,309 468,299,493 544,713,329 545,832,173
Short-term borrowings................. 8,245,191 8,245,191 17,183,769 17,183,769
Long-term debt........................ 16,750,000 16,750,000 16,500,000 16,500,000
------------ ------------ ------------ ------------
Total financial instruments
(liabilities)............... 491,502,500 $493,294,684 578,397,098 $579,515,942
============ ============
Non-financial instruments (liabilities
and shareholders' equity)........... 33,319,315 27,023,199
------------ ------------
Total liabilities and
shareholders' equity........ $524,821,815 $605,420,297
============ ============
</TABLE>
For off-balance sheet instruments, fair values are based on rates currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing for loan
commitments and letters of credit. The estimated fair values of the Company's
off-balance sheet financial instruments as of December 31 are summarized below.
<TABLE>
<CAPTION>
1995 1996
ESTIMATED ESTIMATED
FAIR VALUE FAIR VALUE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unfunded commitments to extend credit.................. $412,971 $388,711
Letters of credit...................................... 2,135 3,767
</TABLE>
F-22
<PAGE> 90
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This presentation excludes certain financial instruments and all nonfinancial
instruments. The disclosures also do not include certain intangible assets, such
as customer relationships, deposit base intangibles and goodwill. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
13 -- COMMITMENTS AND CONTINGENCIES
The approximate future minimum rental commitments as of December 31, 1996,
for all noncancellable leases with initial or remaining terms of one year or
more are shown in the following table:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1997........................................................ $ 2,946,000
1998........................................................ 2,940,000
1999........................................................ 3,052,000
2000........................................................ 3,075,000
Thereafter.................................................. 12,993,000
-----------
Total............................................. $25,006,000
===========
</TABLE>
Rental expense for all leases amounted to approximately $1,250,000, $1,550,000,
and $1,740,000 in 1994, 1995, and 1996, respectively.
Due to the nature of their activities, Fidelity and the Bank are at times
engaged in various legal proceedings which arise in the normal course of
business, some of which are outstanding at December 31, 1996. While it is
difficult to predict or determine the outcome of these proceedings, it is the
opinion of management and its counsel that the ultimate liability, if any, will
not materially affect the Company's financial position.
The Federal Reserve Board requires that banks maintain cash on hand and
reserves in the form of average deposit balances at the Federal Reserve Bank
based on their average deposits. The Bank's reserve requirements at December 31,
1995 and 1996, were $5,280,000 and $5,429,000, respectively.
14 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, letters of credit,
and forward sales contracts. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated financial statements. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperforming by the
customer for commitments to extend credit and letters of credit, is represented
by the contractual or notional amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for recorded loans. For forward sales contracts, the contract or notional
amounts do not represent exposure to credit loss; however, these financial
instruments represent interest rate risk to the Company. The Company controls
the interest rate risk of its forward sales contracts through management
approvals, dollar limits, and monitoring procedures.
F-23
<PAGE> 91
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's financial instruments with off-balance sheet
risk at December 31, 1996, is as follows (in thousands):
<TABLE>
<S> <C>
Financial instruments whose contract amounts represent
credit risk:
Loan commitments
Credit card lines......................................... $309,338
Home equity............................................... 9,039
Commercial real estate, construction and land
development............................................ 33,532
Commercial................................................ 21,792
Mortgage loans............................................ 14,110
Lines of credit........................................... 900
Standby letters of credit................................. 3,766
--------
Total loan commitments............................ $392,477
========
Financial instruments whose notional or contractual amounts
represent interest rate risk:
Forward sales contracts................................... $ 13,122
========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Company holds collateral
supporting those commitments as deemed necessary.
Forward sales contracts are contracts for delayed delivery of mortgage
loans in which the Company agrees to make delivery at a specified future date at
a specified price. Risks arise from the inability of counterparties to meet the
terms of their contracts and from movements in interest rates.
15 -- SUPPLEMENTAL FINANCIAL DATA
Components of other income and expense in excess of 1% of total revenues
for any of the respective periods are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Other income:
Brokerage commissions............................ $1,580,814 $2,172,171 $3,201,220
Trust income..................................... 462,326 563,375 845,794
Other expense:
Stationery and supplies.......................... 544,036 734,876 930,816
Postage.......................................... 383,336 486,624 640,499
Deposit insurance premiums....................... 884,209 684,375 556,771
Telephone........................................ 492,250 502,148 831,670
</TABLE>
F-24
<PAGE> 92
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16 -- CONDENSED FINANCIAL INFORMATION OF FIDELITY NATIONAL CORPORATION (PARENT
COMPANY ONLY)
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash...................................................... $ 445,415 $ 1,157,191
Land...................................................... 419,418 419,418
Investment in bank subsidiary............................. 30,007,881 24,822,351
Investments in and amounts due from nonbank
subsidiaries........................................... 276,128 359,018
Subordinated loan to bank subsidiary...................... 7,000,000 10,000,000
Commercial loan participations............................ 5,574,770 -
Other assets.............................................. 948,379 1,050,888
----------- -----------
Total assets...................................... $44,671,991 $37,808,866
=========== ===========
LIABILITIES
Long-term debt............................................ $16,750,000 $16,500,000
Other liabilities......................................... 159,711 236,050
----------- -----------
Total liabilities................................. 16,909,711 16,736,050
SHAREHOLDERS' EQUITY
Common stock.............................................. 11,303,406 11,878,597
Treasury stock............................................ (69,325) (69,325)
Net unrealized (losses) gains on investment securities
available-for-sale, net of tax......................... 689,774 (140,241)
Retained earnings......................................... 15,838,425 9,403,785
----------- -----------
Total shareholders' equity........................ 27,762,280 21,072,816
----------- -----------
Total liabilities and shareholders' equity........ $44,671,991 $37,808,866
=========== ===========
</TABLE>
F-25
<PAGE> 93
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans........................................... $ 207 $ 5,973 $ 272,941
Deposits in bank................................ 1,310 5,630 46,315
Subordinated loan to bank....................... - 40,164 768,542
---------- ---------- -----------
Total interests income.................. 1,517 51,767 1,087,798
INTEREST EXPENSE - Long-term debt................. 131,220 353,284 1,501,488
---------- ---------- -----------
NET INTEREST EXPENSE.............................. (129,703) (301,517) (413,690)
OTHER INCOME
Lease income.................................... 92,000 120,000 120,000
Dividend from subsidiaries...................... 850,000 950,000 1,600,000
Management fees................................. 42,000 130,680 91,740
Other........................................... - 6,525 3,157
---------- ---------- -----------
Total other income...................... 984,000 1,207,205 1,814,897
OTHER EXPENSES.................................... 92,050 49,929 185,462
---------- ---------- -----------
Income before income taxes and undistributed
income (loss) of subsidiary.................. 762,247 855,759 1,215,745
Income tax benefit.............................. 47,685 38,045 146,017
---------- ---------- -----------
Income before equity in undistributed income
(loss) of subsidiaries....................... 809,932 893,804 1,361,762
Equity in undistributed income (loss) of
subsidiaries................................. 3,489,077 3,755,578 (7,103,493)
---------- ---------- -----------
NET INCOME (LOSS)................................. $4,299,009 $4,649,382 $(5,741,731)
========== ========== ===========
</TABLE>
F-26
<PAGE> 94
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................... $ 4,299,009 $ 4,649,382 $(5,741,731)
Equity in undistributed income of subsidiaries........ (3,489,077) (3,755,578) 7,103,493
Decrease (increase) in other assets................... 43,935 (944,615) (102,509)
Increase in other liabilities......................... 26,299 130,084 76,341
----------- ----------- -----------
Net cash flows provided by operating
activities.................................. 880,166 79,273 1,335,594
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase (sale) of commercial loans................... - (5,574,770) 5,574,770
Net increase in loans to and investment in
subsidiaries....................................... (825,000) (8,071,122) (5,830,870)
----------- ----------- -----------
Net cash flows used in investing activities... (825,000) (13,645,892) (256,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of long-term debt............................ 926,000 16,250,000 -
Repayment of long-term-debt........................... (250,000) (1,991,000) (250,000)
Issuance of Common Stock.............................. - - 575,191
Dividends paid........................................ (628,411) (644,135) (692,909)
Sale of treasury stock................................ 1,250 - -
----------- ----------- -----------
Net cash flows provided (used in) by financing
activities.................................. 48,839 13,614,865 (367,718)
----------- ----------- -----------
Net increase in cash.......................... 104,005 48,246 711,776
Cash, beginning of year............................... 293,164 397,169 445,415
----------- ----------- -----------
Cash, end of year..................................... $ 397,169 $ 445,415 $ 1,157,191
=========== =========== ===========
</TABLE>
F-27
<PAGE> 95
======================================================
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR ANY OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT
BE LEGALLY MADE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Regulatory Matters.................... 15
Use of Proceeds....................... 17
Capitalization........................ 17
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Selected Consolidated Financial
Data................................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 43
Management............................ 56
Principal Shareholders................ 59
Description of Capital Stock.......... 60
Underwriting.......................... 63
Experts............................... 64
Legal Matters......................... 65
Available Information................. 65
Incorporation of Certain Information
by Reference........................ 65
Index to the Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
[FIDELITY NATIONAL LOGO]
3,000,000 SHARES
COMMON STOCK
FIDELITY NATIONAL
CORPORATION
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES &
ASSOCIATES, INC.
, 1997
======================================================
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are actual or estimated expenses incurred or to be incurred
by the Registrant in connection with the issuance and sale of the securities
being registered:
<TABLE>
<CAPTION>
FEES AMOUNT
- ---- --------
<S> <C>
SEC registration fee........................................ $ 9,278
NASD Fee.................................................... 31,119
Printing expenses........................................... 50,000
Registrant's legal fees..................................... 90,000
Blue Sky filing fees and expenses........................... 2,000
Accounting fees and expenses................................ 60,000
Miscellaneous expenses...................................... 32,603
--------
Total............................................. $275,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14-2-851 of the Georgia Business Corporation Code provides for the
indemnification of directors of the Company for liability and expenses incurred
by them in connection with any civil, criminal or administrative claim or
proceeding in which they may become involved by reason of being a director of
the Company or by service, at the request of the Company, as a director,
officer, partner, trustee, employee or agent of other companies in which the
Company is a shareholder, creditor, or is otherwise interested. The Section
applies to both civil and criminal actions (including civil actions brought as
derivative actions by or in the right of the Company) and permits
indemnification if the director acted in a manner he believed in good faith to
be in or not opposed to the best interest of the Company and, in addition, in
criminal actions, if he had no reasonable cause to believe his conduct to be
unlawful. If the required standard of conduct is met, indemnification may
include attorneys' fees, reasonable disbursements of the director or officer,
judgments, fines, penalties or settlement payments. Directors who are successful
with respect to any claim against them are entitled to indemnification as of
right. On the other hand, if the charges made in any action are sustained,
either the Board of Directors, acting by a majority of disinterested members,
independent legal counsel or the holders of a majority of the disinterested
stockholders entitled to vote can indemnify a director if they find that the
required standard of conduct has been met and the director was not adjudged
liable to the corporation nor improperly received a personal benefit. If, in an
action brought by or in the right of the Company, the director is adjudged to be
liable for negligence or misconduct in the performance of his duty, a court in
view of all the relevant circumstances can order indemnification for reasonable
expenses incurred, unless the Company's articles of incorporation state
otherwise. The shareholders themselves, by a majority of the votes entitled to
be cast, can indemnify a director who does not meet the standards set forth in
Section 14-2-851. Section 14-2-856 provides for such shareholder indemnification
unless the director or officer is adjudged liable to the corporation for the
appropriation of a corporate business opportunity, for acts or omissions which
involve intentional misconduct or a knowing violation of law, for unlawful
distributions of corporate assets, or for any transaction from which he received
an improper personal benefit.
Section 14-2-857 of the Georgia Business Corporation Code provides for the
indemnification of officers of the Company (unless the articles of incorporation
state otherwise) for reasonable expenses to the extent that the officer was
successful, on the merits or otherwise, in the defense of any proceeding in
which he was a party, or in defense of any claim, issue, or matter therein,
because he is or was an officer of the Company. Unless the Company's articles of
incorporation state otherwise, a court in view of all the relevant circumstances
can order indemnification for reasonable expenses incurred. The Company may also
provide for other methods of indemnification in its articles of incorporation,
bylaws, general or specific action of its board of directors or
II-1
<PAGE> 97
contract. Officers who are also directors are limited to the indemnification
provisions provided in the Georgia Business Corporation Code for directors.
Article Eight of the Company's Bylaws provides for indemnification of
directors and officers of the Company for liabilities and expenses incurred by
them in connection with any civil, criminal or administrative claim or
proceeding in which they may become involved by reason of being a director or
officer of the Company or by serving at the request of the Company, as a
director, officer, employee, or agent of other companies in which the Company is
a shareholder or creditor or is otherwise interested. Indemnification applies
both to civil and criminal actions (including civil actions brought as
derivative actions by or in the right of the Company) and permits
indemnification if the director or officer acted in a manner he or she
reasonably believed to be in or not opposed to the best interest of the Company
and, in addition, in criminal actions, if he or she had no reasonable cause to
believe his or her conduct was unlawful. If the required standard of conduct is
met, indemnification may include disbursements (including attorney's fees) or
the director or officer, judgments, fines, and settlement payments. Directors
and officers who are successful with respect to any claim against them are
entitled to indemnification as of right. On the other hand, if the charges made
in any action are sustained, either the Board of Directors, acting by a majority
of disinterested members, independent legal counsel or the holders of a majority
of the stock entitled to vote will determine if the required standard of conduct
has been met. If, in an action brought by or in the right of the Company, the
director or officer is adjudged to be liable for negligence or misconduct in the
performance of his duty, he will only be entitled to such indemnity as the court
shall deem proper.
The Company also maintains directors' and officers' liability insurance for
the benefit of the Company and its directors and officers. The policy provides
coverage for certain amounts paid as indemnification pursuant to the provisions
of Georgia law.
ITEM 16. EXHIBITS
(a) The following exhibits are filed as part of this Registration Statement
or incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement*
4(a) -- Form of Certificate for the Company's Common Stock, no
stated par value*
4(b) -- Form of Trust Indenture (included herein by reference as
Exhibit 4(a) of Amendment 1 to Registrant's Registration
Statement on Form S-1, No. 33-99174)
4(c) -- Form of Subordinated Note (included herein by reference to
Exhibit 4(b) of Amendment 1 to Registrant's Registration
Statement on Form S-1, No. 33-99174)
4(d) -- Articles of Amendment to the Articles of Incorporation of
Fidelity National Corporation authorizing the issuance of
preferred stock (included herein by reference to Exhibit
3(e) of the Company's Form 10-K for the fiscal year ended
December 31, 1996)
4(e) -- Amendment to Articles of Incorporation (included herein by
reference to Exhibit 3(a) to the Company's Current Report on
Form 8-K, dated June 23, 1997)
5 -- Opinion of Glass, McCullough, Sherrill and Harrold, LLP*
10(a) -- OCC Agreement (incorporated by reference to Exhibit 10(h) of
the Registrant's report on Form 10-K for the year ended
December 31, 1996)
10(b) -- FRB Agreement (incorporated by reference to Exhibit 10(i) of
the Registrant's report on Form 10-K for the year ended
December 31, 1996)
10(c) -- Employment Agreement among Company, FNB and Larry D.
Peterson dated as of September 15, 1997
10(d) -- Employment Agreement between Company and James B. Miller,
Jr. dated as of September 18, 1997*
10(e) -- Representative's Warrants*
10(f) -- The Stock Option Plan (incorporated by reference to Exhibit
A of the Proxy Statement of the Company dated April 21, 1997
for the 1997 Annual Meeting of Shareholders)
</TABLE>
II-2
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10(g) -- Fidelity National Bank Defined Contribution Master Plan and
Trust Agreement and related Adoption Agreement, as amended
(included as Exhibit 10(a) to the Registrant's Registration
Statement on Form 10, Commission File No. 0-22376, filed
with the Commission and incorporated herein by reference)
10(h) -- 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(i) -- 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(j) -- Salary Continuation Agreement dated August 26, 1985, between
Fidelity National Bank and Sharon Denney as filed (included
as Exhibit 10(f) to the Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1994) was extended by
Resolution of the Board of Directors until December 31, 2003
(included as Exhibit 10(g) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
23(a) -- Consent of Glass, McCullough, Sherrill and Harrold, LLP
(included in Exhibit 5)*
23(b) -- Consent of Ernst & Young LLP
23(c) -- Consent of KPMG Peat Marwick LLP
24 -- Powers of Attorney
</TABLE>
- ---------------
* To be filed by amendment.
(b) Reference is made to the Index to Consolidated Financial Statements in
the Prospectus for financial statements filed herewith and included in the
Prospectus.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
II-3
<PAGE> 99
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(b) Insofar as indemnifications for liabilities arising under the
Securities Act of 1993 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant is the successful defense
of any action, suit or proceeding) is asserted by such director, officer,
or controlling person in connection with the Preferred Stock and Common
Stock being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction, the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the bona fide offering
thereof.
II-4
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on the 25th day of
September, 1997.
FIDELITY NATIONAL CORPORATION
By: /s/ JAMES B. MILLER, JR.
------------------------------------
James B. Miller, Jr.
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 25th day of September, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JAMES B. MILLER, JR. Chairman of the Board, President and Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
James B. Miller, Jr. Officer)
/s/ M. HOWARD GRIFFITH, JR. Chief Financial Officer (Principal Financial
- ----------------------------------------------------- and Accounting Officer)
M. Howard Griffith, Jr.
* Director
- -----------------------------------------------------
James W. Anderson, Jr.
* Director
- -----------------------------------------------------
Edward G. Bowen, M.D.
Director
- -----------------------------------------------------
Marvin C. Goldstein, D.D.S.
* Director
- -----------------------------------------------------
Manning M. Pattillo, Jr., Ph.D.
* Director
- -----------------------------------------------------
Robert J. Rutland
* Director
- -----------------------------------------------------
W. Clyde Shepherd, Jr.
* Director
- -----------------------------------------------------
R. Phillip Shinall, III
* Director
- -----------------------------------------------------
Rankin Smith, Jr.
* Director
- -----------------------------------------------------
Felker W. Ward, Jr.
</TABLE>
By: /s/ M. HOWARD GRIFFITH, JR.
------------------------------------
M. Howard Griffith, Jr.
Attorney-in-Fact
II-5
<PAGE> 101
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
<C> <C> <S> <C>
1 -- Form of Underwriting Agreement*
4(a) -- Form of Certificate for the Company's Common Stock, no
stated par value*
4(b) -- Form of Trust Indenture (included herein by reference as
Exhibit 4(a) of Amendment 1 to Registrant's Registration
Statement on Form S-1, No. 33-99174)
4(c) -- Form of Subordinated Note (included herein by reference to
Exhibit 4(b) of Amendment 1 to Registrant's Registration
Statement on Form S-1, No. 33-99174)
4(d) -- Articles of Amendment to the Articles of Incorporation of
Fidelity National Corporation authorizing the issuance of
preferred stock (included herein by reference to Exhibit
3(e) of the Company's Form 10-K for the fiscal year ended
December 31, 1996)
4(e) -- Amendment to Articles of Incorporation (included herein by
reference to Exhibit 3(a) to the Company's Current Report on
Form 8-K, dated June 23, 1997)
5 -- Opinion of Glass, McCullough, Sherrill and Harrold, LLP*
10(a) -- OCC Agreement (incorporated by reference to Exhibit 10(h) of
the Registrant's report on Form 10-K for the year ended
December 31, 1996)
10(b) -- FRB Agreement (incorporated by reference to Exhibit 10(i) of
the Registrant's report on Form 10-K for the year ended
December 31, 1996)
10(c) -- Employment Agreement among Company, FNB and Larry D.
Peterson dated as of September 15, 1997
10(d) -- Employment Agreement between Company and James B. Miller,
Jr. dated as of September 18, 1997*
10(e) -- Representative's Warrants*
10(f) -- The Stock Option Plan (incorporated by reference to Exhibit
A of the Proxy Statement of the Company dated April 21, 1997
for the 1997 Annual Meeting of Shareholders)
10(g) -- Fidelity National Bank Defined Contribution Master Plan and
Trust Agreement and related Adoption Agreement, as amended
(included as Exhibit 10(a) to the Registrant's Registration
Statement on Form 10, Commission File No. 0-22376, filed
with the Commission and incorporated herein by reference)
10(h) -- 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(i) -- 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(j) -- Salary Continuation Agreement dated August 26, 1985, between
Fidelity National Bank and Sharon Denney as filed (included
as Exhibit 10(f) to the Registrant's Report on Form 10-K for
the fiscal year ended December 31, 1994) was extended by
Resolution of the Board of Directors until December 31, 2003
(included as Exhibit 10(g) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
23(a) -- Consent of Glass, McCullough, Sherrill and Harrold, LLP
(included in Exhibit 5)*
23(b) -- Consent of Ernst & Young LLP
23(c) -- Consent of KPMG Peat Marwick LLP
24 -- Powers of Attorney
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 10(C)
FIDELITY NATIONAL BANK/FIDELITY NATIONAL CORPORATION
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 15th
day of September, 1997, among Fidelity National Bank ("FNB"), a National
Association, Fidelity National Corporation ("Fidelity"), a Georgia corporation,
and Larry D. Peterson ("Executive").
WHEREAS, FNB agrees to employ Executive as an executive to provide the
services set forth herein; and
WHEREAS, Executive agrees to accept such engagement and provide such
services in accordance with the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual promises herein made and
of other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT/DUTIES.
(a) FNB shall employ Executive as the President and Chief
Executive Officer of FNB during the term of his employment as set forth in this
Agreement and Executive hereby accepts such employment. He shall also be a Vice
President of Fidelity.
(b) Executive shall be responsible for the day-to-day
operations of the business of FNB and shall have such authority as is
customarily and normally granted to the chief executive office or is necessary
for the conduct of such business under the general direction of the Board of
Directors of FNB ("Board").
(c) Executive agrees that he will at all times and to the
best of his ability and experience faithfully perform all of the duties that may
be required of him pursuant to the terms of this Agreement. Executive shall
devote his full business time to the performance of his obligations hereunder.
(d) The term of employment of Executive shall be for an
initial term of three (3) years and may be extended upon written agreement of
the parties. In the event the term of employment is not extended after the
initial term or another employment agreement is not entered into, upon terms
acceptable to Executive, then Executive or FNB shall have the option to
terminate Executive's employment upon 60 days' prior notice as of the last day
of the initial term. Upon such termination by Executive or FNB, FNB shall pay
Executive semi-monthly an amount equal to Executive's semi-monthly Base Salary
(as hereinafter defined) for a period of thirty-six months from the date of
termination.
<PAGE> 2
(e) Employment shall commence on September 15, 1997.
(f) The employment of the Executive hereunder is subject
to the prior receipt from the Office of the Comptroller of the Currency ("OCC")
of a no objection letter for Executive's election as President and Chief
Executive Officer of the FNB. The parties shall promptly complete and furnish
said information and documents requested by the OCC in connection with
Executive's employment hereunder.
2. COMPENSATION.
(a) Salary. During the term of the employment of
Executive, FNB will pay to Executive a base salary ("Base Salary") at the rate
of $300,000 per year, payable in arrears in equal semi-monthly payments. In the
event of a disability, to the extent payments are received under an employer
sponsored disability program and/or under a policy the premiums of which are
paid by FNB, the payments hereunder are to be reduced by an amount equal to such
disability payments.
(b) Stock Options. The Compensation Committee of the
Board of Directors of Fidelity has granted to Executive as of the first (1st)
day of his employment at FNB, a stock option to purchase 100,000 shares of
Common Stock, no par value, of Fidelity ("Common Stock") at its fair market
value on the first day of Executive's employment, as set forth in Exhibit A
attached hereto.
(c) Lump Sum Payment. Within thirty days of the commencement of
employment hereunder, FNB shall pay Executive $50,000.
(d) Employee Benefit Program. Executive shall be eligible to
participate in all employee benefit programs, including medical and
hospitalization programs, now or hereafter made available by FNB to its
employees or executives thereof, subject to terms and conditions of such
programs, including eligibility. It is understood that FNB reserves the right to
modify and rescind any program or adopt new programs in its sole discretion. FNB
may, in its sole discretion, maintain key man life insurance on the life of
Executive and designate FNB as the beneficiary. Executive agrees to execute any
documents necessary to effect such policy.
(e) Additional Benefits.
(1) During the term of this Agreement, FNB will
pay or reimburse Executive for the premiums on a $1,000,000 term life insurance
policy on the life of the Executive payable to his beneficiaries. Such annual
premiums are currently estimated to be approximately $12,500.00, and FNB's
obligations under this subparagraph (1) will not exceed such amount.
(2) During the term of this Agreement, FNB will
pay or reimburse Executive for the premiums on a disability insurance policy,
which together with other FNB disability payments will provide Executive with
monthly disability benefits at an annual rate of $210,000. Such annual premiums
are currently estimated to be approximately $2,500.00 per year
2
<PAGE> 3
and FNB's obligations under this subparagraph (2) will not exceed such amount.
(3) FNB or Fidelity National Corporation will
adopt a deferred compensation plan which will include senior executives of FNB
within 12 months of the date of this Agreement.
(f) Vacation. Executive is entitled to a minimum of three
(3) weeks of vacation every year. Vacation shall be taken at such times as not
to materially interfere with the business of FNB. The vacation time must be
taken prior to the end of each calendar year or as otherwise mutually agreed in
writing, otherwise it expires to the extent not used.
(g) Moving Allowance. FNB shall provide an allowance to
Executive equal to the aggregate of the actual cost of moving expenses, plus an
amount equal to the income taxes payable by Executive by reason of the payment
of the allowance for moving expenses. Moving expenses include packing and
unpacking and temporary storage of up to 120 days. In addition, FNB shall pay:
(i) the reasonable cost of temporary housing expenses; (ii) reasonable travel
expenses incurred in connection with such relocation for the Executive and his
spouse; (iii) closing costs on the purchase of a home in an amount not to exceed
2% of the purchase price (or compensating services in place thereof); and (iv)
the real estate commission payable on the sale of Executive's home. Executive
will make every effort to sell his present home, but if the home is not sold
within six (6) months, FNB will purchase the home for the average value as
determined by two appraisers, one named by Executive and one by FNB, and a third
chosen by the first two if their appraisals are more than 10% apart.
(h) Expenses. FNB shall pay all reasonable expenses
incurred by the Executive in the performance of his responsibilities and duties
for FNB, including without limitation the Executive's initiation fees and dues
payable to a country club of the Executive's choice and such civic organizations
which are approved by the Board. Executive shall submit to FNB periodic
statements of all expenses so incurred in accordance with the policies of FNB
then in effect. Subject to such reviews as FNB may deem reasonably necessary,
FNB shall, promptly in the ordinary course of business, reimburse the Executive
for the full amount of any such expenses advanced by the Executive.
(i) Automobile. FNB will provide the Executive with an
automobile for his use and will maintain and insure it at FNB's expense and pay
the license and registration fees and gasoline..
3. EARLY TERMINATION.
(a) For Cause. (1) Notwithstanding the foregoing, the
Board may terminate the employment of Executive "for cause" (as hereinafter
defined) at any time with 10 business days' prior written notice. The term "for
cause" shall mean (i) the commission of a felony or any other crime involving
moral turpitude or the pleading of nolo contendere to any such act, (ii) the
commission of any act or acts of dishonesty when such acts are intended to
result or result , directly or indirectly, in gain or personal enrichment of
Executive or any related person or
3
<PAGE> 4
affiliated company or are intended to cause harm or damage to FNB or its parents
or subsidiaries of its parent, (iii) the illegal use of controlled substances,
(iv) the use of alcohol so as to have a material adverse effect on the
performance of the Executive's duties, (v), the misappropriation or embezzlement
of assets of FNB or its parent or subsidiaries of its parent, or (vi) the breach
of any other material term or provision of this Agreement to be performed by
Executive which have not been cured within thirty (30) days of receipt of
written notice of such breach from the Board.
(2) Upon termination for cause, FNB shall have no further
obligation to pay any compensation to Executive for periods after the effective
date of the termination for cause. Base Salary which accrued to the termination
date shall be paid on the normal payment date.
(b) Other Termination by FNB. FNB may terminate the employment of
Executive for any reason (other than for cause) at any time upon at least 30
days' prior written notice. Upon such termination, Executive's right to
compensation after the effective date of termination shall cease, except that
the Base Salary shall continue to be paid semi-monthly for thirty-six (36)
months from the date of termination. A $10,000.00 relocation expense and twelve
(12) months of services of an out-placement firm selected by Executive will also
be provided to Executive.
(c) Termination by Executive. Executive may terminate his
employment at any time upon at least 30 days' prior written notice to FNB. Upon
such termination of employment Executive's right to compensation after the
effective date of termination shall cease. The Base Salary which accrued as of
the termination date will be paid after the effective date of termination under
this paragraph 3(c) on the normal payment date. Notwithstanding the foregoing,
if either FNB or Fidelity fails to perform any of its material obligations
hereunder and such failure continues for sixty (60) days after written notice by
Executive to the Board, termination by Executive of this Agreement for such
failure shall be deemed to constitute a termination by Fidelity or FNB without
cause under paragraph 3(b) of this Agreement. A material reduction in the
responsibilities and authority of Executive as provided in paragraph 1(b) shall
constitute a breach of a material obligation of FNB hereunder.
(d) Termination Upon Death or Disability.
(1) The employment of Executive shall terminate upon his
death, or (10) business days after written notice by FNB of termination, upon or
during the continuance of the total disability (as hereinafter defined) of
Executive.
(2) Upon termination upon death or upon or during total
disability, Executive's right to compensation after the effective date of
termination shall cease. Salary which accrued as of the termination date and
incentive compensation which accrued during the last full calendar month of
employment will be paid after the effective date of termination under this
paragraph 3(d) on the normal payment date(s). FNB shall have no obligation to
pay any compensation for periods after the effective date of such termination.
4
<PAGE> 5
(3) The term "total disability" means the inability of
Executive to substantially perform his duties hereunder for a continuous period
of sixty (60) days unless extended in writing by FNB. Total disability shall be
deemed to commence upon the expiration of such continuous sixty (60) day period.
In the event of any dispute as to the "total disability" of the Executive, the
matter shall be resolved by the decision of a single physician, serving as an
arbitrator, mutually selected or appointed in accordance with the rules of the
American Arbitration Association, Atlanta, Georgia. The decision of the
arbitrator shall be binding on all parties hereto. Executive agrees to submit
medical records requested and to submit to such examination and testing
requested by such physician.
4. COVENANT NOT TO COMPETE.
(a) Executive agrees that for the period commencing on
the date hereof and ending one (1) year after the expiration of the term of his
employment under this Agreement (and if employment is continued thereafter "at
will", then after termination of his employment with FNB or parent or any
subsidiary of its parent for any reason), Executive will not, alone or with
others, directly or indirectly, own, manage, operate, join, control, participate
in the ownership of, management, operation, or control of, be employed by,
consult with, advise or be connected in any other manner with any Business (as
hereinafter defined) in the counties of Fulton, DeKalb, Cobb, Gwinnett and
Clayton, Georgia ("Territory") other than with FNB and its parent and
subsidiaries of its parent. This covenant not to be compete shall not prohibit
engagements which do not involve, directly or indirectly, the Business.
Ownership of stock of companies listed on a stock exchange or traded over the
counter is not prohibited by this Agreement.
(b) The term "Business" means the business of banking,
including deposits, checking, lending (including mortgage lending) and trust
services, including such services provided by national and state banks and
savings and loan associations and other similar businesses, stock brokerage and
sale of insurance.
(c) Executive acknowledges that the products and services
provided by the Business are being and are intended to be marketed throughout
the Territory.
5. NON-SOLICITATIONS OF CUSTOMERS. Executive agrees that during
his employment and the period of twelve months immediately following termination
of his employment for any reason with FNB by himself or by FNB, Executive shall
not, directly or indirectly, on his own behalf or on behalf of any other person,
including any other business entity, solicit, contact, call upon, communicate
with or attempt to communicate with any customer or prospective customer of FNB
or any representative of any customer or prospective customer of FNB with a view
to the solicitation of the following banking services: deposit, checking,
lending and trust services; provided that the restrictions set forth in this
paragraph 5 shall apply only to customers or prospects of FNB or representative
thereof with which Executive had contact while in the employ of FNB during the
two year period preceding the termination of employment or such lessor period of
employment.
6. NON-SOLICITATIONS OF EMPLOYEES. Executive agrees that during
his employment
5
<PAGE> 6
and the period of twelve months immediately following termination of his
employment with FNB by himself or by FNB for any reason, Executive shall not,
directly or indirectly, on his own behalf or on behalf of any other person,
including any other business entity, solicit, hire or in any manner encourage
employees of FNB, Fidelity National Corporation or any subsidiary thereof, to
leave its employ for an engagement in any capacity by another person or to
provide the name of any such employee to any one who, to the knowledge of
Executive, may hire or be interested in hiring such employee.
7. CONFIDENTIALITY.
(a) During the term of Executive's employment with FNB,
and at all times thereafter, Executive shall not use or disclose to others,
without the prior written consent of FNB, any Trade Secrets (as hereinafter
defined) or Confidential Information (as hereinafter defined) of FNB or its
customers, except for use or disclosure thereof in the course of FNB's business,
and such disclosure shall be limited to those who have a need to know.
(b) Upon termination of employment with FNB for any
reason, the Executive shall not take with him any documents or data of FNB or of
any customer or any reproduction thereof.
(c) Executive agrees to take reasonable precautions to
safeguard and maintain the confidentiality and secrecy and limit the use of all
Trade Secrets and Confidential Information of FNB and of its customers.
(d) Trade Secrets shall include only such information
constituting a "Trade Secret" within the meaning of subsection 10-1-761(4) of
the Georgia Trade Secrets Act of 1990. Confidential Information shall mean all
information and data which is protectable as a legal form of property or
non-public information of FNB or its customers, excluding any information or
data which constitutes a Trade Secret.
(e) The parties agree that the limitations herein on
disclosure and use of Confidential Information of FNB and customers shall be for
a period commencing on the date of employment and ending three years after
termination of employment for any reason, by FNB or by the Executive.
(f) Trade Secrets and Confidential Information shall not
include any information (i) which becomes publicly known through no fault or act
of the Executive; (ii) is lawfully received by Executive from a third party
after termination of employment without a similar restriction regarding
confidentiality and use and without a breach of this Agreement; or (iii) which
is independently developed by Executive before the commencement of or after
termination of Executive's employment.
8. SPECIFIC PERFORMANCE. Because of Executive's knowledge and
experience, Executive agrees that FNB shall be entitled to specific performance,
an injunction, temporary injunction or other similar relief in addition to all
other rights and remedies it might have for any
6
<PAGE> 7
violation of the undertakings set forth in paragraphs 4, 5, 6 and 7 of this
Agreement. In any such court proceeding, Executive will not object thereto and
claim that monetary damages are an adequate remedy.
9. INDEMNIFICATION OF EXECUTIVE. FNB shall indemnify Executive
and shall advance reimburse expenses incurred by Executive in any proceeding
against Executive, including a proceeding brought by or in the right of FNB, as
a director or officer of FNB or any subsidiary thereof, except claims and
proceedings brought by FNB against Executive, to the fullest extent permitted
under the Georgia Business Corporation Code, as amended from time to time.
10. NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been given upon receipt when delivered by hand or by express
mail, overnight courier or other similar method or by facsimile transmission
(provided a copy is also sent by registered or certified mail or by overnight
courier), or five (5) days after deposit of the notice in the US mail, if mailed
by certified or registered mail, with postage prepaid addressed to the
respective party as set forth below, which address may be changed by written
notice to the other party:
(a) If to FNB
Fidelity National Bank
3490 Piedmont Road
Suite 1550
Atlanta, Georgia 30305
Attn: Chairman of the Board
(b) If to Executive:
Larry D. Peterson
c/o Fidelity National Bank
3490 Piedmont Road
Suite 1550
Atlanta, Georgia 30305
11. BINDING EFFECT. This Agreement shall inure to the benefit of
and be binding upon and enforceable by Executive and his estate, personal
representatives and heirs, and by FNB and its successors and assigns. This
Agreement and the payments hereunder may not be assigned, pledged or otherwise
hypothecated by Executive.
12. ENTIRE AGREEMENT. This Agreement, including the Exhibits
attached hereto, is intended by the parties hereto to constitute the entire
understanding of the parties with respect to the employment of Executive by FNB
and supersedes all prior agreements and understandings, oral or written.
13. BINDING ARBITRATION/ATTORNEY FEES. Except as otherwise
specifically provided Executive herein, including as provided in paragraph 8
hereof, all disputes arising under this
7
<PAGE> 8
Agreement shall be submitted to and settled by arbitration. Arbitration shall be
by one (1) arbitrator selected in accordance with the rules of the American
Arbitration Association, Atlanta, Georgia ("AAA") by the AAA. The hearings
before the arbitrator shall be held in Atlanta, Georgia and shall be conducted
in accordance with the rules existing on the date thereof of the AAA to the
extent not inconsistent with this Agreement. All reasonable costs and expense
incurred in connection with any such arbitration proceedings and those incurred
in any civil action to enforce the same shall be borne by the party against
which the decision is rendered.
14. AMENDMENTS. This Agreement may not be amended or modified
except in writing signed by both parties.
15. WAIVERS. The failure of either party to insist upon the strict
performance of any provision hereof shall not constitute a wavier of such
provision. All waivers must be in writing.
16. GOVERNING LAW. This Agreement shall be deemed to be made in
and in all respects shall be interpreted, construed and governed by and in
accordance with the laws of the State of Georgia.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
FIDELITY NATIONAL CORPORATION
By: /S/ James B. Miller, Jr.
--------------------------------------------
James B. Miller, Jr., Chairman
FIDELITY NATIONAL BANK
By: /S/ James B. Miller, Jr.
--------------------------------------------
James B. Miller, Jr. By Authority
of the Board of Directors
EXECUTIVE
/S/ Larry D. Peterson
-----------------------------------------------
Larry D. Peterson
9
<PAGE> 10
EXHIBIT A
Optionee: Larry D. Peterson
-----------------
Option Shares:
-----------------------------
(number of shares of
Common Stock)
Purchase Price
per share:
------------------------
Date of Grant: September , 1997
-----------------------------
First Vesting
Date: September , 1998
-----------------------------
Expiration Date: September , 2004
---------------------------
FIDELITY NATIONAL CORPORATION
STOCK OPTION AGREEMENT
("Option Agreement")
SECTION I
GRANT
Fidelity National Corporation ("Corporation") hereby grants to the
optionee set forth above ("Optionee") an incentive stock option ("Option")
within the meaning of Section 422 of the Internal Revenue Code to purchase the
number of shares of common stock, no par value, of the Corporation set forth
above (collectively "Option Shares") on the terms and conditions herein set
forth and the provisions of the Fidelity National Corporation 1997 Stock Option
Plan, as amended from time to time, ("Plan"). The purchase price of each such
share shall be the Purchase Price set forth above. The Option shall expire on
the Expiration Date set forth above, unless sooner terminated as provided in
Section III or Section X of this Option Agreement or Paragraph V of the Plan.
Each term used herein shall have the same meaning as provided in the Plan unless
herein otherwise provided. To the extent the Option does not qualify as an
incentive stock option it shall be treated as options which are not incentive
stock options.
The Option is granted pursuant to the Plan.
SECTION II
EXERCISE OF THE OPTION
The Option granted hereunder may be exercised at any time and from time
to time during
<PAGE> 11
the period commencing from the date the Option was granted until the date the
Option expires provided and to the extent that this Option has vested and is
exercisable as provided hereinafter and in the Plan. To the extent Option Shares
do not vest prior to the termination of the Option for any reason, such Option
Shares may not be acquired hereunder.
SECTION III
EARLY TERMINATION OF OPTION
The provisions of Sections I and II notwithstanding, this Option may
not be exercised in whole or in part upon the earliest to occur (i) upon
termination of employment by the Corporation (or any Subsidiary or Parent) for
cause (as defined in the Employment Agreement dated September 15, 1997), (ii)
more than three (3) months with respect to incentive stock options and twelve
(12) months with respect to non-qualified stock options following the date of
the termination of employment of the Optionee by the Corporation (or any
Subsidiary or Parent) for any reason, or by Optionee for any reason, other than
termination for cause, termination upon or during Total Disability (as defined
in the Employment Agreement) or termination upon the death of the Optionee while
an employee of the Corporation (or any Subsidiary or Parent), and (iii) more
than twelve (12) months following the date of termination of employment of the
Optionee, in the event the termination of employment is due to death or
Optionee's death occurs during said three month period set forth in subparagraph
(ii) or to the Total Disability of the Optionee.
SECTION IV
VESTING OF OPTION
(a) The Option hereby granted shall vest only during the Optionee's
continuous employment with the Corporation and/or any Parent and/or Subsidiary,
and shall be exercisable only upon and after such vesting and prior to the
termination of the Option, by Optionee in accordance with and in such number of
shares of Common Stock determined as set forth in the following schedule:
(i) 20% of the Option shares commencing on the first
anniversary of the grant of the Option;
(ii) additional 20% of the Option Shares commencing on the
second anniversary of the grant of the Option;
(iii) additional 20% of the Option Shares commencing on the
third anniversary of the grant of the Option;
(iv) additional 20% of the Option Shares commencing on the
fourth anniversary of the grant of the Option; and
(v) additional 20% of the Option Shares commencing on the
fifth anniversary of the grant of the Option.
A-2
<PAGE> 12
(b) Notwithstanding the foregoing provisions of this Section IV, in the
event of a Change in Control (as hereinafter defined) during the Optionee's
employment with the Corporation and/or any Parent and/or any Subsidiary, the
Option hereby granted shall vest in full immediately prior to such Change in
Control with respect to all remaining outstanding Option Shares that have not
theretofore vested.
The term "Change in Control" shall mean:
(i) The acquisition (other than from the Corporation, its
Parent or its Subsidiaries) by any person, entity or "group" within the
meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934 ("34 Act") (excluding, for this purpose, the Corporation, its
Parent or its Subsidiaries, or any employee benefit plan of the
Corporation, its Parent or its Subsidiaries) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the 34 Act) of more
than 50% of either the then outstanding shares (i) of Common Stock of
the Corporation or of the combined voting power of the Corporation's
then outstanding voting securities entitled to vote generally in the
election of directors, or (ii) of the combined voting power of the
outstanding voting securities of Fidelity National Bank ("FNB")
entitled to vote generally for the election of directors; or
(ii) Individuals who, as of the date hereof, constitute
the board of directors of the Corporation ("Incumbent Board") cease for
any reason to constitute at least a majority of the board of directors,
provided that any individual becoming a director subsequent to the date
hereof whose election, or nomination for election by the Corporation's
shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as
though such individual is a member of the Incumbent Board; or
(iii) Approval by the shareholders of the Corporation of a
merger, consolidation or other reorganization in each case, with
respect to which persons who were the shareholders of the Corporation
and optionees immediately prior to such merger, consolidation or other
reorganization, immediately thereafter, will not own more than 50% of
the combined voting power entitled to vote generally in the election of
directors of the merged, consolidated or reorganized corporation's then
outstanding voting securities, or of the sale of all or substantially
all of the assets of the Corporation or the sale of all or
substantially all of the voting securities of FNB.
(c) In addition, the Option hereby granted shall vest in full upon
the termination of employment of the Optionee (i) by the Corporation or FNB
without cause at any time during the term of the Option or (ii) by the Optionee
or FNB or the Corporation upon the expiration of the initial three (3) year term
of employment of Optionee by the Corporation or FNB.
A-3
<PAGE> 13
SECTION V
TRANSFER
The Option may not be transferred except by will or the laws of descent
and distribution and may be exercised only by Optionee during his lifetime. More
particularly, but without limiting the generality of the foregoing, the Option
may not be assigned, transferred (except as permitted in Section VI), pledged or
hypothecated in any way (whether by operation of law or otherwise). The Option
shall not be subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge, hypothecation, or other disposition of the Option
contrary to the provisions hereof, and the levy of any attachment or similar
process on the Option, shall be null and void and without effect.
SECTION VI
DEATH OF OPTIONEE
In the event of Optionee's death, the Option may be exercised by the
legal representatives of the estate of Optionee or by the person or persons to
whom Optionee's rights under the Option shall have passed by will or by the laws
of descent and distribution.
SECTION VII
TOTAL OR PARTIAL EXERCISE
The portion of the Option which has vested and is exercisable may be
exercised either at one time as to the total number of such Option Shares or may
be exercised from time to time as to any portion thereof prior to the
termination of the Option.
SECTION VIII
NOTICE OF EXERCISE; ISSUANCE OF CERTIFICATES
Subject to the terms and conditions of the Option, the vested portions
of the Option may be exercised by written notice to the Corporation, at its
principal office at Fidelity National Corporation, 3490 Piedmont Road, Suite
1550, Atlanta, Georgia 30305, or such other place designated in writing by the
Corporation from time to time to the Optionee. Such notice shall state the
election to exercise the Option and the number of shares in respect of which it
is being exercised, and shall be signed by the person so exercising the Option.
Such notice shall be accompanied by (i) a certified or bank cashier's check
payable to the order of the Corporation for or (ii) shares of Common Stock
assigned to the Corporation having a fair market value equal to or (iii) such or
other consideration approved by the Board of Directors for or (iv) a combination
of the foregoing for; the full purchase price of the Shares in respect of which
the Option is being exercised. The fair market value of the shares of Common
Stock shall be the average of the high and low selling prices at which the
shares of Common Stock traded on the Nasdaq Market (or
A-4
<PAGE> 14
other applicable market) on the date the Option was exercised. The certificate
or certificates representing the Shares shall be issued and delivered by the
Corporation as soon as practicable after receipt of the notice and payment. Such
certificate or certificates shall be registered in the name of the person so
exercising the Option and, if the Option shall be exercised by Optionee and the
Optionee shall so request in the notice exercising the Option, such certificate
or certificates shall be registered in the name of Optionee and another person
jointly, with right of survivorship, and shall be delivered to or on the written
order of the person or persons exercising the Option. In the event the Option is
being exercised pursuant to Section VI hereof, by any person or persons other
than Optionee, the notice shall be accompanied by appropriate proof of the right
of such person or persons to exercise the Option.
SECTION IX
ISSUANCE AND TRANSFER OF SHARES
Subject to the provisions of Paragraph VI of the Plan, in the event the
issuance or transfer of the shares covered by the Option may, in the opinion of
counsel to the Corporation, conflict or be inconsistent with any applicable law
or regulation of any governmental agency having jurisdiction, the Corporation
reserves the right to refuse or to delay the issuance or transfer of such
shares.
SECTION X
ADJUSTMENT ON RECAPITALIZATION
In the event of a merger, consolidation, reorganization,
recapitalization, reclassification of stock, stock dividend, split-up or other
change in the corporate structure or capitalization of the Corporation affecting
the Corporation's common stock as presently constitute, the Option shall be
adjusted, modified or terminated as provided in or pursuant to the provisions of
Paragraph V of the Plan.
SECTION XI
GOVERNING LAW
This option grant shall be governed by the laws of the State of
Georgia.
FIDELITY NATIONAL CORPORATION
By:
--------------------------------
Name: James B. Miller, Jr.
Title: Chairman
A-5
<PAGE> 15
OPTIONEE ACKNOWLEDGMENT
I have read the above Incentive Stock Option Agreement and the Fidelity
National Corporation 1997 Stock Option Plan ("Plan") and hereby accept the above
Option to purchase shares of the Common Stock of the Corporation in accordance
with and subject to the terms and conditions of the Incentive Stock Option
Agreement and the Plan with which I am familiar and I agree to be bound thereby.
I further understand that (i) any rule, regulation and determination, including
interpretation by the Board of Directors or Committee regarding the Plan, the
Options granted thereunder and the exercise thereof shall be final and
conclusive for all purposes and on all persons including the Corporation and
myself; and (ii) the grant of this Option shall not affect in any way the
Corporation and/or its Subsidiary and/or Parent's right to terminate my
employment or constitute an agreement by me to remain in the employ of the
Corporation or the Subsidiary or its Parent for any specified term.
-----------------------------------
OPTIONEE - Larry D. Peterson
Acceptance Date: As of
September 15, 1997
A-6
<PAGE> 1
EXHIBIT 23(B)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-2 No. 333-00000) and related Prospectus of
Fidelity National Corporation and subsidiaries for the registration of
3,000,000 shares of its common stock and to the inclusion and incorporation by
reference therein of our report dated April 3, 1997, with respect to the
consolidated financial statements of Fidelity National Corporation and
subsidiaries incorporated by reference in its Annual Report (Form 10-K) for the
year ended December 31, 1996, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
September 25, 1997
<PAGE> 1
EXHIBIT 23(C)
ACCOUNTANTS' CONSENT
The Board of Directors
Fidelity National Corporation
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
September 24, 1997
<PAGE> 1
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr., Martha C. Fleming and Ugo F. Ippolito and each of
them, the undersigned's true and lawful attorneys-in-fact, with power of
substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of the Company (i) to a Registration Statement of the Company on Form S-2 or
other applicable form, and all amendments, including post-effective amendments
("Amendments"), thereto, to be filed by the Company with the Securities and
Exchange Commission, Washington, D.C. ("SEC"), in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
not more than 3,000,000 shares of Common Stock, no par value, of the Company,
and (ii) to a Registration Statement of the Company on Form S-2 or other
applicable form, and all Amendments to be filed by the Company with the SEC in
connection with the registration under the Securities Act of 1933, as amended
("Securities Act"), of additional shares of Common Stock pursuant to Rule 462 of
the Securities Act proposed to be issued or sold by the Company; and to file the
same, with all exhibits thereto and other supporting documents, with the
Commission, granting unto said attorneys-in-fact, and each of them, full power
and authority to do and perform any and all acts necessary or incidental to the
performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ M. Howard Griffith, Jr.
---------------------------------
Name: M. Howard Griffith, Jr.
<PAGE> 2
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ James W. Anderson, Jr.
------------------------------
Name: James W. Anderson, Jr.
<PAGE> 3
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ Manning M. Pattillo, Jr.
--------------------------------
Name: Manning M. Pattillo, Jr.
<PAGE> 4
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ James B. Miller, Jr.
-----------------------------
Name: James. B. Miller, Jr.
<PAGE> 5
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ Felker W. Ward, Jr.
-----------------------------
Name: Felker W. Ward, Jr.
<PAGE> 6
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ W. C. Shepherd, Jr.
-------------------------------
Name: W. C. Shepherd, Jr.
<PAGE> 7
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ Rankin Smith, Jr.
-----------------------------
Name: Rankin Smith, Jr.
<PAGE> 8
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ Edward G. Bowen
-------------------------
Name: Edward G. Bowen
<PAGE> 9
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ R. Phillip Shinall
------------------------------
Name: R. Phillip Shinall
<PAGE> 10
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of Fidelity National
Corporation, a Georgia corporation ("Company"), does hereby make, constitute and
appoint James B. Miller, Jr. and M. Howard Griffith, Jr., and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of the Company (i)
to a Registration Statement of the Company on Form S-2 or other applicable form,
and all amendments, including post-effective amendments ("Amendments"), thereto,
to be filed by the Company with the Securities and Exchange Commission,
Washington, D.C. ("SEC"), in connection with the registration under the
Securities Act of 1933, as amended ("Securities Act"), of not more than
3,000,000 shares of Common Stock, no par value, of the Company, and (ii) to a
Registration Statement of the Company on Form S-2 or other applicable form, and
all Amendments to be filed by the Company with the SEC in connection with the
registration under the Securities Act of 1933, as amended ("Securities Act"), of
additional shares of Common Stock pursuant to Rule 462 of the Securities Act
proposed to be issued or sold by the Company; and to file the same, with all
exhibits thereto and other supporting documents, with the Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform any and all acts necessary or incidental to the performance and
execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 15th day of September, 1997.
/s/ R. J. Rutland
--------------------------
Name: R. J. Rutland
