<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A No. 1
[X] Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-22374
FIDELITY NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-14166811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Clairemont Avenue, Decatur, Georgia 30030
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 240-1504
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, without stated par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10K. X .
-----
Aggregate market value of the voting stock held by non-affiliates (which for
purposes hereof are all holders other than executive officers and directors) of
the Registrant as of April 7, 1997: $13,120,898 (based on 1,543,635 shares
outstanding at $8.50 per share).
At April 7, 1997, there were 4,655,656 shares of Common Stock outstanding,
without stated par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1996 are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III.
<PAGE> 2
ITEM 14
(3) Exhibits.
(a) The following exhibits are required to be filed with this Report
by Item 601 of Regulation S-K. Items marked with an asterisk
relate to management contracts or compensatory plan or
arrangement.
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
3(a) and 4(a) Articles of Incorporation of the Registrant, as amended (included as
Exhibit 3(a) and 4(a) to the Registrant's Registration Statement on Form
10, Commission File No. 0-22374, filed with the Commission and
incorporated herein by reference).*
3(b) Bylaws of the Registrant (included as Exhibit 3(b) and 4(b) to the
Registrant's Registration Statement on Form 10, Commission File 0-22374,
filed with the Commission and incorporated herein by reference).*
3(c) Articles of Amendment to the Articles of Incorporation of Fidelity
Southern Corporation (included as Exhibit 3(c) to the Report filed on Form
8-K dated August 4, 1995 filed with the Commission and incorporated herein
by reference).*
3(d) Articles of Amendment to the Articles of Incorporation of Fidelity
National Corporation increasing the number of authorized shares of capital
stock.*
3(e) Articles of Amendment to the Articles of Incorporation of Fidelity
National Corporation authorizing the issuance of preferred stock.*
4(d) Form of Trust Indenture (included herein by reference as Exhibit 4(a) of
Amendment 1 to Registrant's Registration Statement on From S-1, No. 33-
99174.*
4(e) Form of Subordinated Note (included herein by reference to Exhibit 4(b) of
Amendment 1 to Registrant's Registration Statement on From S-1, No. 33-
99174.*
10(a) Fidelity National Bank Defined Contribution Master Plan and Trust
Agreement and related Adoption Agreement, as amended (included as Exhibit
10(a) to the Registrant's Registration Statement on Form 10, Commission
File No. 0-22376, filed with the Commission and incorporated herein by
reference).*
</TABLE>
1
<PAGE> 3
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
10(b) Loan Agreement dated March 26, 1992, by and between Bank South, N.A. and
the Registrant related to $1,000,000 loan and related pledge agreement and
promissory note, and amendment to the Loan Agreement dated August 23, 1993
(included as Exhibit 10(b) to the Registrant's Registration Statement on
Form 10, Commission File No. 0-22376, filed with the Commission and
incorporated herein by reference).*
10(c) Purchase and Assumption Agreement between Resolution Trust Corporation and
the Registrant dated March 27, 1992, related to Vinings branch of the
Federal Savings Bank, FS (included as Exhibit 10(c) to the Registrant's
Registration Statement on Form 10, Commission File No. 0-22376, filed with
the Commission and incorporated herein by reference).*
10(d) Purchase and Assumption Agreement between Resolution Trust Corporation and
the Registrant dated March 27, 1992, related to East Cobb branch of the
United Federal Savings Bank (included as Exhibit 10(d) to the Registrant's
Registration Statement on Form 10, Commission File No. 0-22376, filed with
the Commission and incorporated herein by reference).*
10(e) Lease Agreement dated February 6, 1989, by and between DELOS and Fidelity
National Bank and amendments thereto (included as Exhibit 10(e) to the
Registrant's Registration Statement on Form 10, Commission File No. 0-
22376, filed with the Commission and incorporated herein by reference).*
10(f) Lease Agreement dated September 7, 1995, by and between Toco Hill, Inc.
and Fidelity National Bank (included as Exhibit 10(f) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference).*
10(g) **Salary Continuation Agreement dated August 26, 1985, between Fidelity
National Bank and Sharon Denney as filed (included as Exhibit 10(f) to the
Registrant's Report on Form 10-K for the fiscal year ended December 31,
1994) was extended by Resolution of the Board of Directors until December
31, 2003 (included as Exhibit 10(g) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).*
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
10(h) Agreement dated November 14, 1996 between the OCC and the Registrant.*
10(i) Resolution adopted by the Board of Directors of Registrant on February 13,
1997.*
10(j) Letter from OCC to Bank dated April 3, 1997*
13(a) 1996 Annual Report to Shareholders. Certain portions of this Exhibit are
incorporated by reference into Form 10-K; except as so incorporated
by reference, the 1996 Annual Report to Shareholders is not deemed to be
filed as part of Report on Form 10-K.*
(b) Amended Consolidated Financial Review, Consolidated Financial Statements
and Notes
21 Subsidiaries of the Registrant (included as Exhibit 22 to the Registrant's
Registration Statement on Form 10, Commission File No. 0-22376, filed with
the Commission and incorporated herein by reference).*
23 Consent of Ernst & Young LLP Independent Auditors*
24 Powers of Attorney
27 Financial Data Schedule (for SEC use only)*
99 Report of KPMG Peat Marwick LLP*
</TABLE>
- ----------------------------
* Previously filed
** management contract or compensatory arrangement required to be filed as an
exhibit.
(b) No reports on Form 8-K were filed during the fiscal quarter ended
December 31, 1996.
(c) Exhibits. See Item 14 (3).
(d) Financial Statement Schedules. See Item 14 (2).
3
<PAGE> 5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to the
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Decatur, State of Georgia, on the 4th day of
December, 1997.
FIDELITY NATIONAL CORPORATION
By: /s/ James B. Miller, Jr.
-----------------------------------
James B. Miller, Jr.
Chairman of the Board
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Amendment to Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ James B. Miller, Jr. Date: December 4, 1997
- --------------------------------------------
James B. Miller, Jr.
Chairman of the Board and Director
(Principal Executive Officer)
/s/ M. Howard Griffith, Jr. Date: December 4, 1997
- --------------------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
* Date: December 4, 1997
- --------------------------------------------
David R. Bockel
</TABLE>
4
<PAGE> 6
<TABLE>
<S> <C>
* Date: December 4, 1997
- ------------------------------------------------------------
Edward G. Bowen, M.D.
Director
* Date: December 4, 1997
- ------------------------------------------------------------
Robert J. Rutland
Director
* Date: December 4, 1997
- ------------------------------------------------------------
W. Clyde Shepherd, Jr.
Director
Date: December , 1997
- ------------------------------------------------------------
Gordon M. Sherman
* Date: December 4, 1997
- ------------------------------------------------------------
R. Phillip Shinall, III
Director
* Date: December 4, 1997
- ------------------------------------------------------------
Rankin Smith, Jr.
Director
Date: December , 1997
- ------------------------------------------------------------
Felker W. Ward, Jr.
Director
* /s/ M. Howard Griffith, Jr. Date: December 4, 1997
- ------------------------------------------------------------
M. Howard Griffith, Jr.
Attorney-in-Fact
</TABLE>
5
<PAGE> 1
EXHIBIT 13(b)
CONSOLIDATED FINANCIAL REVIEW
The following management's discussion and analysis reviews important
factors affecting the results of operations and financial condition of the
Company for the periods shown. The Consolidated Financial Statements and
related notes should be read in conjunction with this review. In the
discussion, net interest income and net interest margin are presented on a fully
taxable-equivalent basis.
OVERVIEW
Fidelity National Corporation is a bank holding company headquartered in
Atlanta, Georgia. The Company, which commenced operations as FNB in 1973,
provides traditional deposit, lending, mortgage, securities brokerage,
international trade services and trust products and services to its commercial
and retail customers through its subsidiaries. FNB is a full-service banking
operation; FNMC is a full-service residential mortgage banking operation; and
FNCI is a securities brokerage operation. The Company currently conducts
full-service banking and residential mortgage lending businesses through 16
locations in the metropolitan Atlanta area. The Company conducts indirect
automobile lending (the purchase of consumer automobile installment sales
contracts from automobile dealers), residential mortgage lending and residential
construction lending through certain of its Atlanta offices and its
Jacksonville, Florida location. Indirect automobile lending is also conducted at
the Tampa, Florida location which was opened in 1995.
Historically, credit card loans have been an important part of the
Company's total loan portfolio. At December 31, 1992, credit card loans
represented 53.8% of the Company's loan portfolio of $186 million. During 1992
and 1993, the outstanding balance of credit card loans remained relatively flat
and declined as a percentage of total loans to 33.4% at December 31, 1994. In
1994, as a result of additional affinity programs and the introduction of the
Company's Olympic card, credit card loans outstanding increased. The Company's
affinity programs include colleges, associations and other entities which
contract to assist the Company in marketing the Company's credit cards in return
for issuance and transaction fee income. This growth continued through 1995 and
into 1996, and at December 31, 1996, credit card loans totaled $144 million.
During late 1996, 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.
The Company has experienced significant growth in indirect automobile
lending since it implemented a strategy in 1993 to expand this activity. At
December 31, 1996, these loans, including $25 million held-for-sale, totaled
$139 million compared to $12 million at December 31, 1992. During 1996, the
Company sold, either through whole loan sales or securitization, approximately
$137 million of indirect automobile loans with servicing retained to take
advantage of its ability to produce indirect automobile loans and to enhance
other noninterest income. In addition, during 1996, the Company sold $38
million of indirect automobile loans, servicing released. The Company
anticipates that it will continue to sell periodically, either through whole
loan sales or securitization, a substantial portion of its indirect automobile
loan production to enhance fee income and manage the relative level of indirect
automobile loans in the Company's loan portfolio.
Going Concern. The independent auditors' report on the Company's
Consolidated Financial Statements for the year ended December 31, 1996 includes
an explanatory paragraph indicating that the Company's and the Bank's ability to
continue as a going concern is dependent upon its ability to increase the
capital ratios of the Bank in accordance with the OCC Agreement. See
"-- Regulatory Agreements."
The accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred a net loss of $5.7 million during the year ended December 31, 1996. At
December 31, 1996, Fidelity and the Bank were not in compliance with the minimum
capital requirements prescribed by the FRB and the OCC and were considered
"undercapitalized" under the provisions of the Federal Deposit Insurance
Improvement Act of 1991. In addition, Fidelity and the Bank entered into
agreements with the FRB and OCC, respectively. If Fidelity and the Bank are
unable to meet the minimum capital requirements of the agreements, one or more
regulatory sanctions may result. These sanctions include such operating
restrictions as growth limitations, prohibitions on dividend payments, increased
supervisory monitoring, limitations on executive compensation, restrictions on
deposit interest rates, and regulatory seizure. No such regulatory sanctions
have been imposed. Management's plans concerning these matters and a description
of Fidelity's and the Bank's capital plan which was submitted to the FRB and
OCC, including plans to raise additional capital, are described below.
These factors, among others, may indicate that the Company will be unable
to continue as a going concern. The consolidated financial statements do not
include the adjustments, if any, that might have been required had the outcome
of the above-mentioned uncertainties been known, or any adjustments relating to
the recoverability of recorded asset amounts or the amount of liabilities that
may be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent on its ability to
comply with the terms of the agreements, maintain sufficient liquidity, and
operate profitably. See "-- Regulatory Agreements" and "-- Liquidity."
Management's Plans. The Company incurred significant losses which have
eroded capital. Accordingly, management's primary focus is to obtain additional
capital and to return the Company to profitability. In the fourth quarter of
1996, the Bank increased rates charged on credit card products demonstrating
higher loss exposure, brought credit card collections in-house, and strengthened
its credit card management team while consolidating and downsizing in selected
areas.
Fidelity has neither adequate cash flow nor the financial flexibility to
enable it to act as a source of financial strength to the Bank. The Company is
pursuing the Offering to raise additional capital, which will enable the Company
and the Bank to exceed all minimum capital requirements and the ratio levels
required under the OCC Agreement. A capital plan, subject to amendment, was
filed with the OCC as required under the OCC Agreement.
As discussed previously, the Company's net loss for 1996 and the overall
growth of the Company, the capital ratios of the Company and its primary
operating subsidiary, the Bank, declined significantly and were not in
compliance with the minimum capital requirements prescribed by the FRB and the
OCC at December 31, 1996.
RESULTS OF OPERATIONS.
NET INCOME. The Company's net loss was $5.7 million for the year ended December
31, 1996, compared to net income of $4.6 million for 1995. The net loss per
share was $1.24 for 1996, compared to net income per share of $1.01 for 1995.
The major factor contributing to the loss for 1996 was higher loan loss
provision resulting from higher levels of delinquencies and charge-offs in the
Company's credit card loan portfolio. During 1996, earnings were also adversly
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 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.
<PAGE> 2
NET INTEREST INCOME/MARGIN. 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.
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.
<PAGE> 3
AVERAGE BALANCES, INTEREST AND YIELDS
<TABLE>
<CAPTION>
(Dollars in Thousands) For the Years Ended December 31,
---------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net of unearned income (1) (2)
Taxable $469,846 $54,206 11.54% $358,685 $43,572 12.15%
Tax-exempt (3) l,355 127 9.36 2,230 227 10.18
-------- ------- -------- -------
Total loans 471,201 54,333 11.53 360,915 43,799 12.14
Investment securities
Taxable 73,433 4,956 6.75 60,060 4,025 6.70
Tax-exempt (3) - - - 10 1 5.62
-------- ------- -------- -------
Total investment securities 73,433 4,956 6.75 60,070 4,026 6.70
Interest-bearing deposits 1,431 74 5.17 129 9 6.98
Federal funds sold 8,289 437 5.27 5,411 324 5.99
-------- ------- -------- -------
Total interest-earning assets 554,354 59,800 10.79 426,525 48,158 11.29
Cash and due from banks 22,011 14,645
Allowance for loan losses (6,829) (4,487)
Premises and equipment 14,164 9,259
Other real estate owned 1,246 1,458
Other assets 26,598 11,851
-------- --------
Total assets $611,544 $459,251
======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands) For the Years Ended December 31,
--------------------------------------------
1994
--------------------------------------------
Average Income/ Yield/
ASSETS Balance Expense Rate
<S> <C> <C> <C>
Interest earning assets:
Loans, net of unearned income (1) (2)
Taxable $277,933 $31,953 11.50%
Tax-exempt (3) 2,660 253 9.51
-------- -------
Total loans 280,593 32,206 11.48
Investment securities
Taxable 58,433 3,424 5.86
Tax-exempt (3) 133 9 6.77
-------- -------
Total investment securities 58,566 3,433 5.86
Interest-bearing deposits 350 13 3.71
Federal funds sold 8,803 323 3.67
-------- -------
Total interest-earning assets 348,312 35,975 10.33
Cash and due from banks 13,614
Allowance for loan losses (4,384)
Premises and equipment 8,104
Other real estate owned 1,705
Other assets 6,518
--------
Total assets $373,869
========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
LIABILITIES AND SHAREHOLDERS' EQUITY Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities
Demand deposits $100,966 3,542 3.51% $ 92,107 $ 3,148 3.42%
Savings deposits 26,516 1,058 3.99 15,292 520 3.40
Time deposits 344,551 19,933 5.79 243,617 14,260 5.85
-------- ------- ------- -------
Total interest-bearing deposits 472,033 24,533 5.20 351,016 17,928 5.11
Federal funds purchased 2,306 144 6.24 1,786 106 5.94
Securities sold under agreements to
repurchase 13,305 390 2.94 8,053 236 2.93
Other short-term borrowings 3,296 159 4.83 4,349 247 5.68
Long-term debt 16,500 1,501 9.10 3,439 354 10.29
-------- ------- ------- -------
Total interest-bearing liabilities 507,440 26,727 5.27 368,643 18,871 5.12
Noninterest-bearing demand
deposits 70,073 60,131
Other liabilities 6,520 5,888
Shareholders' equity 27,484 24,589
-------- -------
Total liabilities and
shareholders' equity $611,517 $459,251
======== ========
Net interest income/spread $33,121 5.52% $29,287 6.17%
======= =======
Net interest rate margin 5.97% 6.87%
</TABLE>
<TABLE>
<CAPTION>
For The Years Ended December 31,
-------------------------------------
1994
-------------------------------------
Average Income/ Yield/
Balance Expense Rate
------- ------- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Interest-bearing liabilities
Demand deposits $ 88,530 $ 2,386 2.70%
Savings deposits 20,914 630 3.01
Time deposits 176,381 8,152 4.62
Total interest-bearing deposits 285,825 11,168 3.91
Federal funds purchased 1,357 73 5.38
Securities sold under agreements to
repurchase 4,725 129 2.73
Other short-term borrowings 4,923 264 5.36
Long-term debt 1,684 131 7.78
------- ------
Total interest-bearing liabilities 298,514 11,765 3.94
Noninterest-bearing demand
deposits 50,637
Other liabilities 3,641
Shareholders' equity 21,077
Total liabilities and
shareholders' equity $373,869
========
Net interest income/spread $24,210 6.39%
=======
Net interest rate margin 6.95%
</TABLE>
(1) Fee income relating to loans of $3,720 in 1996, $3,854 in 1995, and $2,710
in 1994 is included in interest income.
(2) Nonaccrual loans are included in average balances and income on such
loans, if recognized, is recognized on cash basis.
(3) Interest income includes the effects of taxable-equivalent adjustments of
$48, $77 and $89 for each of the three years ended December 31, 1996,
using a federal tax rate of 34%.
<PAGE> 4
RATE/VOLUME ANALYSIS
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Variance Attributed To (1) Variance Attributed To (1)
-------------------------------- -------------------------------
Volume Rate Net Change Volume Rate Net Change
--------- --------- ---------- ------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loans:
Taxable $12,927 $(2,245) $10,682 $9,724 $1,895 $ 11,619
Tax-exempt (2) (83) (17) (100) (43) 17 (26)
Investment securities:
Taxable 902 29 931 98 503 601
Tax-exempt (2) (1) - (1) (7) (1) (8)
Federal funds sold 156 (43) 113 (154) 155 1
Interest bearing deposits 68 (3) 65 (11) 7 (4)
------- ------- ------- ------ ------ -------
Total interest-earning assets $13,969 $(2,279) $11,690 $9,607 $2,576 $12,183
======= ======== ======= ====== ====== ========
Interest-bearing deposits:
Demand $ 309 $ 85 $ 394 $100 $ 662 $ 762
Savings 435 103 538 (184) 74 (110)
Time 5,841 (168) 5,673 3,595 2,513 6,108
------- ------- ------- ------ ------ -------
Total interest-bearing
deposits 6,585 20 6,605 3,511 3,249 6,760
Federal funds purchased 33 5 38 25 8 33
Securities sold under agreements
to repurchase 154 - 154 97 10 107
Other short-term borrowings (54) (34) (88) (32) 15 (17)
Long-term debt 1,192 (45) l,147 170 53 223
------- ------- ------- ------ ------ -------
Total interest-bearing
liabilities $ 7,910 $ (54) $ 7,856 $3,771 $3,335 $ 7,106
======= ======== ======= ====== ====== ========
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
the components in proportion to the relationship of the
dollar amounts of the change in each.
(2) Reflects fully taxable equivalent adjustments using a Federal tax rate of
34%.
PROVISION FOR LOAN LOSSES. Management's policy is to maintain the allowance for
loan losses at a level sufficient to absorb estimated losses inherent in the
loan portfolio. The allowance is increased by the provision for loan losses and
decreased by charge-offs, net of recoveries. 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 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
filed bankruptcy and bankruptcies hit record levels. Moreover, a significant
portion of the Company's credit card portfolio's charge-offs were attributable
to one specific program. Under this program, which the Company initiated in the
middle of 1995 and discontinued in May 1996, the Company issued to recent home
buyers credit cards with a $3,000 credit limit, no annual fee in the first year,
a $30 annual fee thereafter and an interest rate of 14.9%. While it was, and
continues to be, the Company's policy not to issue credit cards without first
conducting a credit review, the Company initially issued preapproved credit
cards under this specific program without such a review. The reason for this
policy exception was that these customers had recently completed a credit review
necessary to secure residential mortgages from unrelated third-party lenders.
There have been no other changes to the Company's credit card issuance policy
and no changes to the Company's credit card non-accrual and charge-off policies.
In May 1996, the Company ceased issuing preapproved credit cards under this
program. A substantial portion of the additional provision for loan losses
recorded in 1996 was to provide for losses deemed inherent in this portfolio as
of year end. As a result of the higher risk inherent in the preapproved program,
the rate on those cards was increased to 17.9% in November 1996.
<PAGE> 5
In 1995 the provision for loan losses was $8.1 million compared to $4.1
million in 1994. The increase in the provision for loan losses in 1995 over
1994 was due primarily to credit card loan growth and increases in credit
card charge-offs during 1995. Net charge-offs were $6.9 million for 1995
compared to $4.3 million in 1994.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................. $5,537 $4,344 $4,550 $4,007 $4,011
Charge-offs:
Commercial, financial and agricultural.... 3 60 226 18 68
Real estate-construction.................. - - - - 13
Real estate-mortgage...................... - - - 34 341
Consumer installment...................... 1,657 328 88 36 80
Credit cards.............................. 13,156 7,051 4,466 4,091 4,345
------- ------ ------ ------ ------
Total charge-offs............... 14,816 7,439 4,780 4,179 4,847
Recoveries:
Commercial, financial and agricultural.... 31 42 29 122 89
Real estate-construction.................. - - - - -
Real estate-mortgage...................... - - 2 35 88
Consumer installment...................... 64 38 24 11 21
Credit cards.............................. 568 462 394 354 320
------- ------ ------ ------ ------
Total recoveries................ 663 542 449 522 518
------- ------ ------ ------ ------
Net charge-offs................................ 14,153 6,897 4,331 3,657 4,329
Provision for loan losses...................... 25,127 8,090 4,125 4,200 4,325
------- ------ ------ ------ ------
Balance at end of period....................... $16,511 $5,537 $4,344 $4,550 $4,007
======= ====== ====== ====== ======
Ratio of net charge-offs during period to
average loans outstanding, net............ 3.00% 1.91% 1.54% 1.65% 2.23%
Allowance for loan losses as a percentage
of loans.................................. 3.85 1.54 1.31 1.97 2.15
</TABLE>
<PAGE> 6
NONINTEREST INCOME. Noninterest income for 1996 was $18.3 million compared to
$11.7 million in 1995. This increase resulted primarily from growth in
residential mortgage banking activities, brokerage operations, gains on loan
sales and a loan securitization, sale of mortgage servicing rights and increased
fee income from servicing indirect automobile loans which were sold. For 1996,
noninterest income benefited from a $2.1 million gain on sales of $286 million
in mortgage servicing rights and a $672,000 gain on sales of $195 million of
indirect automobile and credit card loans. There were no such sales in 1995.
The profits from the sales of mortgage servicing rights in 1996 partially
offset the losses in the mortgage business due to declining loan production and
reduced the Company's exposure to mortgage servicing rights impairment due to
mortgage loan prepayments. Noninterest income in 1996 also benefited from a $1.0
million increase in brokerage fee income, a $402,000 increase in mortgage
servicing fee income, and a $707,000 increase in indirect automobile loan
servicing fees.
Noninterest income for 1995 was $11.7 million compared to $8.8 million in
1994. This increase resulted primarily from growth in residential mortgage
banking activities, brokerage operations and net gains from securities
transactions. During 1995, income from residential mortgage banking activities
increased 91.8% to $3.3 million and income from brokerage activities increased
to $2.2 million in 1995 from $1.6 million in 1994. Reflecting the Company's
commitment to increase noninterest fee income, late in 1994, the Company began
to make bulk purchases of mortgage servicing rights to increase noninterest
income from mortgage banking activities. As noted above, beginning in 1996,
the Company began selling portions of its mortgage servicing rights portfolio.
The Company adopted Statement of Financial 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 million 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
December 31, 1996 and 1995, the fair value of these rights approximated net book
value.
NONINTEREST EXPENSE.
The following schedule summarizes the change in mortgage servicing rights
for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Beginning balance.................................. $7.8 $3.0 $ .7
Add:
Purchased loans.................................. - - 1.3
Bulk purchases................................... - 4.9 1.3
Originated servicing rights...................... .9 1.0 -
---- ---- ----
8.7 8.9 3.3
Less:
Amortization..................................... .8 .7 .2
Loan payoff...................................... .8 .4 .1
Bulk sale........................................ 1.6 - -
---- ---- ----
Ending balance..................................... $5.5 $7.8 $3.0
==== ==== ====
</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 from $11.8 million in 1995. The number of full
time equivalent employees at December 31, 1996 was 436 compared to 311 at
December 31, 1995. The increase in salaries and employee benefits during 1996
was primarily attributable to expansion in traditional banking activities and
general corporate growth.
Expenses related to the amortization of mortgage servicing rights were
$1.9 million in 1996 compared to $1.1 million and $364,000 in 1995 and 1994,
respectively. Excluding mortgage servicing, expenses related to mortgage
banking activities were $4.5 million in 1996 compared to $2.8 million in 1995.
Expenses related to securities brokerage activities were $3.1 million in 1996
compared to $2.4 million in 1995.
Furniture and equipment expense and net occupancy costs increased during
1996 due to general corporate growth including branch bank expansion, the
opening of a new operations center, and the opening of loan production offices.
Noninterest expense for 1995 was $25.6 million compared to $22.4 million
for 1994, a 14.3% increase. The increase in salaries and benefits accounted
for 59.5% of the total increase in noninterest expense. The increase in
noninterest expense was primarily attributable to general corporate growth in
traditional banking activities, requiring an increase in full-time equivalent
employees.
PROVISION FOR INCOME TAXES. The provision for income taxes consists of
provisions for federal and state income taxes. In 1996, a tax benefit of $3.5
million was recorded compared to a $2.6 million provision for income taxes for
1995. The provision for income taxes for 1995 was $2.6 million compared to $2.1
million for the same period in 1994. The Company's effective tax rate
approximated statutory rates for all periods.
FINANCIAL CONDITION. The Company manages its assets and liabilities to
maximize long-term earnings opportunities while maintaining the integrity of
its financial position and the quality of earnings. To accomplish this
objective, management strives to effect efficient management of interest rate
risk and liquidity needs. The primary objectives of interest-sensitivity
management are to minimize the effect of interest rate changes on the net
interest margin and to manage the exposure to risk while maintaining net
interest income at acceptable levels. Liquidity is provided by carefully
structuring the balance sheet. The decline in capital ratios to below
statutory minimums at December 31, 1996, (see Shareholders' Equity - Regulatory
Capital Requirements) reduced the Company's liquidity position and funding
alternatives.
The Company's Asset Liability Committee meets regularly to
review both the Company's interest rate sensitivity positions and liquidity.
<PAGE> 7
LOANS. During 1996 and 1995, the Company experienced increases in every major
loan category. At December 31, 1996, total loans outstanding, including loans
held for sale, were $467 million, compared to $407 million at year end 1995, a
14.8% increase. Average total loans during 1996 increased $110 million or
30.6%, to $471 million. The most significant increases in 1996 occurred in real
estate construction loans which were up $15 million, or 37.5%, to $56
million; real estate-mortgage loans which increased $10 million, or 17.1%, to
$72 million; and consumer installment loans which increased $25 million, or
21.7%, to $139 million.
Total loans at December 31, 1995 were $407 million, an increase of 22.1%
over year end 1994. This increase was attributable primarily to significant
increases in credit card and indirect automobile, residential construction and
commercial loans.
Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial:
Commercial, financial and agricultural $ 43,247 $ 37,778 $ 29,831 $ 19,732 $ 15,817
Tax exempt 698 1,518 2,091 2,435 1,584
-------- -------- -------- -------- --------
Total commercial 43,945 39,296 31,922 22,167 17,401
Real estate-construction 56,325 40,955 32,355 20,012 10,687
Real estate-mortgage 71,719 61,247 66,707 47,064 45,722
Consumer installment 113,513 78,806 89,595 43,115 12,323
Credit cards 143,782 139,873 110,870 98,135 100,153
-------- -------- -------- -------- --------
Loans 429,284 360,177 331,449 230,493 186,286
Allowance for loan losses 16,511 5,537 4,344 4,550 4,007
-------- -------- -------- -------- --------
Loans, net $412,773 $354,640 $327,105 $225,943 $182,279
======== ======== ======== ======== ========
TOTAL LOANS
Loans $429,284 $360,177 $331,449 $230,493 $186,286
Loans held-for-sale:
Mortgage loans 13,106 12,113 2,225 19,419 16,271
Consumer installment 25,000 35,000 - - -
-------- -------- -------- -------- --------
Total loans held-for-sale 38,106 47,113 2,225 19,419 16,271
-------- -------- -------- -------- --------
Total loans $467,390 $407,290 $333,674 $249,912 $202,557
======== ======== ======== ======== ========
</TABLE>
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
(Dollars in Thousands)
<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>
<PAGE> 8
NONPERFORMING ASSETS. Nonperforming assets consist of nonaccrual and
restructured loans and other real estate owned. Nonaccrual loans are loans on
which the interest accruals have been discontinued when it appears that future
collection of principal or interest according to the contractual terms may be
doubtful. Interest on these loans is reported on the cash basis as received
when the full recovery of principal is anticipated or after full principal has
been recovered when collection of interest is in question. Restructured loans
are those loans whose terms have been modified, because of economic or legal
reasons related to the debtor's financial difficulties, to provide for a
reduction in principal, change in terms, or modification of interest rates to
below market levels. Other real estate owned is real property acquired by
foreclosure or directly by title or deed transfer in settlement of debt.
Nonperforming assets at December 31, 1996, were $3.5 million. Since
December 31, 1995, nonperforming assets have declined $914,000, or 20.6%.
During 1996, other real estate owned declined $772,000 to $567,000. At December
31, 1996 and 1995, there were no restructured loans. Nonperforming assets
increased $1.5 million in 1995 from $2.9 million at December 31, 1994.
The ratio of loans past due 90 days and still accruing to total loans was
1.60% at December 31, 1996. This ratio was .87% and .64% at December 31, 1995
and 1994, respectively.
When a loan is classified as nonaccrual, previously accrued interest is
reversed and interest income is decreased to the extent of all interest accrued
in the current year. If any portion of the accrued interest had been accrued
in the previous year, accrued interest is decreased and a charge for that
amount is made to the allowance for loan losses. For 1996, the gross amount of
interest income that would have been recorded on nonaccrual and restructured
loans, if all such loans had been accruing interest at the original contract
rate, was $278,000.
Credit card accounts are sampled on a quarterly basis and reviewed to
assure compliance with the Bank's credit policy. Review procedures include
determination that the appropriate verification process has been completed,
recalculation of the borrower's debt ratio, and analysis of the borrower's
credit history to determine if it meets established Bank criteria. Policy
exceptions are analyzed monthly. Delinquent accounts are monitored daily and
charged off after 180 days, which is the industry standard. Prior to
charge-off, interest on credit card loans continues to accrue. Upon charge-off,
all current period interest income and related fees are charged against interest
income.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $2,940 $3,105 $1,189 $ 632 $2,314
Restructured loans - - - - 267
Other real estate owned 567 1,339 1,714 2,016 2,213
------ ------ ------ ------ ------
Total nonperforming assets $3,507 $4,444 $2,903 $2,648 $4,794
====== ====== ====== ====== ======
Loans past due 90 days or more and still accruing $6,890 $3,091 $2,134 $1,422 $1,297
====== ====== ====== ====== ======
Ratio of past due loans to total loans 1.60% .87% .64% .62% .70%
Ratio of nonperforming assets to total ====== ====== ====== ====== ======
loans and other real estate owned .82% 1.24% .87% 1.14% 2.54%
====== ====== ====== ====== ======
</TABLE>
Management is not aware of any potential problem loans other than those
disclosed in the table above, which includes all loans recommended for such
classification by regulators, which would have a material impact on asset
quality. The adverse trends impacting the consumer portfolio, primarily credit
cards and indirect auto loans, have been discussed elsewhere herein.
<PAGE> 9
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. Allocation of the allowance for loan
losses is based primarily on historical loan loss experience, utilizing loss
migration analysis where appropriate, adjusted for changes in the risk
characteristics of each loan category. Additional amounts are allocated based
on the evaluation of the loss potential of individual troubled loans and the
anticipated effect of economic conditions on both individual loans and loan
categories. Since the allocation is based on estimates and subjective judgment,
it is not necessarily indicative of the specific amounts or loan categories in
which losses may ultimately occur.
At December 31, 1996, credit card loans totaled $144 million or 33.5% of
loans compared to $140 million or 38.8% at December 31, 1995. The 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. The allocation is
based on a number of qualitative factors, and the amounts presented are not
necessarily indicative of actual amounts which will be charged to any particular
category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
-------------------- -------------------- --------------------
Allowance % Allowance % Allowance %
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 98 10.24% $ 97 10.91% $ 54 9.64%
Real estate-construction 35 13.12 30 11.37 26 9.85
Real estate-mortgage 350 16.71 8 17.00 16 20.10
Consumer installment 2,282 26.44 357 21.88 402 26.96
Credit cards 13,746 33.49 4,875 38.84 3,750 33.45
Unallocated - - 169 - 96 -
------- ------ ------ ------ ------ ------
Total $16,511 100.00% $5,536 100.00% $4,344 100.00%
======= ====== ====== ====== ====== ======
<CAPTION>
December 31, 1993 December 31, 1992
-------------------- --------------------
Allowance % Allowance %
--------- --------- --------- ---------
<C> <C> <C> <C>
Commercial, financial
and agricultural $ 52 8.86% $ 80 9.29%
Real estate-construction 17 8.04 50 5.74
Real estate-mortgage 24 26.59 180 24.56
Consumer installment 270 17.25 60 6.62
Credit cards 3,252 39.26 3,249 53.79
Unallocated 935 - 388 -
------- ------ ------ ------
Total $ 4,550 100.00% $4,007 100.00%
======= ====== ====== ======
</TABLE>
The following table summarizes data related to the Company's preapproved
and other credit card activities:
SUMMARY CREDIT CARD DATA
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans outstanding:
Preapproved.............................. $ 57,980 $ 30,690 $ -
Other.................................... 85,802 109,183 110,870
-------- -------- --------
Total............................ $143,782 $139,873 $110,870
======== ======== ========
Delinquencies:
Preapproved.............................. $ 8,665 $ 1,724 $ -
Other.................................... 6,715 6,055 5,553
-------- -------- --------
Total............................ $ 15,380 $ 7,779 $ 5,553
======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net charge-offs:
Preapproved.............................. $ 5,078 $ 52 $ -
Other.................................... 7,510 6,537 4,072
-------- -------- --------
Total............................ $ 12,588 $ 6,589 $ 4,072
======== ======== ========
</TABLE>
The following table depicts credit card delinquencies 30 days or greater
past due by quarter:
CREDIT CARD DELINQUENCIES
<TABLE>
<CAPTION>
QUARTER ENDED PREAPPROVED OTHER TOTAL
- ------------- ----------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
March 31, 1994........................................... $ - $3,928 $ 3,928
June 30, 1994............................................ - 3,707 3,707
September 30, 1994....................................... - 4,256 4,256
December 31, 1994........................................ - 5,553 5,553
March 31, 1995........................................... - 5,946 5,946
June 30, 1995............................................ - 5,208 5,208
September 30, 1995....................................... 107 5,440 5,547
December 31, 1995........................................ 1,724 6,055 7,779
March 31, 1996........................................... 3,596 6,334 9,930
June 30, 1996............................................ 5,052 6,597 11,649
September 30, 1996....................................... 6,430 6,111 12,541
December 31, 1996........................................ 8,665 6,715 15,380
</TABLE>
As shown in the chart above, credit card delinquencies rose significantly
during the fourth quarter of 1996. As a result, the provision for loan losses
associated with losses inherent in that portfolio increased significantly in
the fourth quarter of 1996.
INVESTMENT SECURITIES. The levels of taxable and tax-exempt securities and
short-term investments reflect the Company's strategy of maximizing portfolio
yields while providing for liquidity needs. Investment securities totaled $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
December 31, 1996 or 1995.
At December 31, 1996, the Company classified all but $6 million of its
investment securities as available-for-sale. The Company maintains a
relatively high percentage of its investment portfolio as available-for-sale as
a result of possible liquidity needs required by loan production and credit
card activities.
<PAGE> 10
The following table shows the distribution of investment securities for the
three years ended December 31, 1996.
DISTRIBUTION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
-------------------------------------------------------------------------------
1996 1995 1994
------------------ ---------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
securities and
obligations of U.S. Government $54,128 $53,798 $30,950 $31,623 $29,830 $29,202
corporations and agencies
State and municipal - - - - 60 60
Mortgage-backed securities 21,754 21,740 24,780 25,248 31,299 29,286
Other investments 1,854 1,854 1,588 1,588 1,539 1,539
------- ------- ------- ------- ------- -------
Total $77,736 $77,392 $57,318 $58,459 $62,728 $60,087
======= ======= ======= ======= ======= =======
</TABLE>
The following table shows the maturity distribution of investment
securities and average yields for the two years ended December 31, 1996.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AND AVERAGE YIELDS (1)
<TABLE>
(Dollars in Thousands) December 31, 1996 December 31, 1995
----------------------------------- ----------------------------------------
Amortized Fair Average Amortized Fair Average
Cost Value Yield (2) Cost Value Yield (2)
--------- ----- --------- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
securities and obligations of
U.S. Government corporations and agencies
Due in less than one year $17,993 $17,993 4.87% $ - $ - -%
Due in one year through five years - - - 1,987 2,147 5.35
Due after five years through ten years 17,436 17,362 6.96 15,973 16,457 6.27
Due after ten years 12,721 12,583 7.54 8,000 8,000 7.34
Mortgage-backed securities 21,754 21,740 5.73 24,780 25,248 6.31
------- ------- ------- -------
Total $69,904 $69,678 $50,740 $51,852
======= ======= ======= =======
HELD-TO-MATURITY
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 - - -
------- ------- ------- -------
Total $ 5,979 $ 5,860 $ 4,990 $ 5,019
======= ======= ======= =======
</TABLE>
- -----------------
(1) This table excludes equity investments which have no maturity date.
(2) Weighted average yields are calculated on the basis of the carrying
value of the security. The weighted average yields on tax-exempt
obligations are computed on a fully taxable-equivalent basis assuming a
federal tax rate of 34%.
DEPOSITS AND FUNDS PURCHASED. Total deposits as of December 31, 1996, were
$545. Total deposits as of December 31, 1996 increased $78 million or
16.8% from $467 million as of December 31, 1995. On an average balance basis,
all categories of deposits reflected volume increases. Core deposits, the
Company's largest source of funding, consist of all interest-bearing and
deposits except time deposits over $100,000. Core deposits are obtained from a
broad range of customers. Average interest-bearing core deposits grew 36.9%
to reach $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 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,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits......................... $ 70,074 --% $ 60,131 --% $ 50,637 --%
Interest-bearing demand deposits............................ 100,966 3.51 92,107 3.42 88,530 2.70
Savings deposits............................................ 26,516 3.99 15,292 4.30 20,914 3.01
Time deposits............................................... 344,551 5.79 243,617 5.85 176,381 4.62
-------- -------- --------
Total average deposits.............................. $542,107 4.53 $411,147 4.36 $336,462 3.32
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MATURITY DISTRIBUTION OF TIME DEPOSITS $100,000 OR MORE 1996
- ------------------------------------------------------- ------------
<S> <C>
Three months or less........................................ $37,943
Over three through six months............................... 16,213
Over six through twelve months.............................. 23,270
Over twelve months.......................................... 9,202
-------
Total............................................... $86,630
=======
</TABLE>
<PAGE> 11
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>
(Dollars in Thousands)
Weighted
Maximum Average Interest Average
Year ended Outstanding at Average Rate During Ending Interest Rate at
December 31, any Month-End Balance Year Balance Year-End
- ------------ --------------- ------- --------------- -------- --------
<S> <C> <C> <C> <C> <C>
1996 $25,760 $18,907 3.67% $17,184 3.06%
1995 23,939 14,188 4.15 8,245 2.96
1994 33,093 11,005 4.23 18,940 5.00
</TABLE>
(1) Consists of federal funds purchased, securities sold under agreements to
repurchase, and borrowings from the Federal Home Loan Bank that mature
either overnight or on a fixed maturity not to exceed three months.
Except for securities sold under agreements to repurchase, which were 79.2%
of shareholders' equity as of December 31, 1996, no other category of short-term
borrowings exceeded 30% of shareholders' equity for any period shown.
<PAGE> 12
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 December 31, 1996, was $5.0 million and the
dividends paid during such period were $2.0 million. In addition, no dividend
can be declared on the capital stock if an event of default has occurred and is
continuing under the Notes, including the failure to pay interest on such
indebtedness or default on other indebtedness exceeding $1 million.
<PAGE> 13
SHAREHOLDERS' EQUITY. Shareholders' equity at December 31, 1996, was $21.1
million, a decrease of $6.7 million or 24.1% from $27.8 million at December 31,
1995. Realized shareholders' equity (shareholders' equity excluding unrealized
gains or losses on investment securities available-for-sale) was $21.2 million
at December 31, 1996, and $27.1 million at December 31, 1995.
The 1996 decline in shareholders' equity was primarily attributable to the
$5.7 million decrease in retained earnings from the net loss for 1996 and the
$830,000 decrease in the unrealized gain on investment securities
available-for-sale, net of tax.
In 1996, the Company's 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 dividend payout
for the past three years restated to reflect the 10% Common Stock dividend.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
First Quarter $.0375 $.0341 $.0341
Second Quarter .0375 .0341 .0341
Third Quarter .0375 .0341 .0341
Fourth Quarter .0375 .0375 .0341
For the Year .1500 .1398 .1364
</TABLE>
<PAGE> 14
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 total assets ("leverage ratio") for the Bank of 4.0%. Institutions
experiencing or anticipating significant growth or those with other than minimum
risk profiles may be expected to maintain capital above the minimum levels.
The FRB establishes capital requirements for the Company as a function of
its oversight of bank holding companies. Each bank holding company must maintain
(i) a minimum ratio of Tier 1 capital ("Tier 1 Capital") to total risk-weighted
assets of 4.0% and (ii) a minimum ratio of total qualifying capital to total
qualifying assets ("total risk-based capital ratio") of 8.0% with the amount of
the allowance for credit losses that may be included in supplementary capital
("Tier 2 Capital") limited to 1.25% of total risk-weighted assets. The leverage
ratio established for a bank holding company is 3.0%.
The following table depicts the Company's capital ratios at December 31,
1995 and 1996 in relation to the minimum capital ratios established by the
regulations of the FRB:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Tier 1 Capital:
Actual........................ $17,052 3.40% $26,606 6.15%
Minimum....................... 20,059 4.00 17,309 4.00
------- ------ ------- ------
Excess (Deficiency)........... $(3,007) (.60)% $ 9,297 2.15%
======= ====== ======= ======
Total risk-based capital:
Actual........................ $31,976 6.38% $45,323 10.47%
Minimum....................... 40,118 8.00 34,619 8.00
------- ------ ------- ------
Excess (Deficiency)........... $(8,142) (1.62)% $10,704 2.47%
======= ====== ======= ======
Tier 1 Capital Leverage Ratio:
Actual........................ 2.67% 5.42%
Minimum....................... 3.00 3.00
------ ------
Excess (Deficiency)........... (.33)% 2.42%
====== ======
</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.
<PAGE> 15
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, and policies and procedures of
nationally chartered banks, such as the Bank, as part of its legally prescribed
oversight responsibilities.
On November 14, 1996, the Bank entered into an agreement with the OCC
("OCC Agreement") which provides that the Bank (i) will appoint an "Oversight
Committee"; (ii) will achieve and maintain specified higher capital levels
(see below); (iii) will develop a three-year capital program which will
include, among other things, certain restrictions on dividend payments by the
Bank; and (iv) will revise and amend its strategic plan. On April 3, 1997,
the OCC notified the Bank that since it did not meet the minimum capital levels
established for an "adequately capitalized" bank, the Bank was deemed to be
"undercapitalized" and is subject to prompt corrective action pursuant to 12
U.S.C. Sec. 1831o. As a result, the Bank is subject to restrictions on its
ability to pay dividends and management fees and to restrictions on asset
growth and expansion. The OCC may also impose other supervisory actions. The
Bank was also required to file a capital restoration plan with the OCC before
May 19, 1997, which was submitted and approved by the OCC. On June
24, 1997, the Company issued $4.7 million in Preferred Stock, the net cash
proceeds of which were invested in preferred stock of the Bank. As a result of
the issuance of the Preferred Stock and subsequent investment in the Bank, on
September 30, 1997, the Company and the Bank were adequately capitalized and no
longer subject to such prompt corrective action.
The Oversight Committee is comprised of three members of the board of
directors of the Bank, a majority of whom are not employees of the Company.
The Oversight Committee, which will meet and report monthly to the Board of
Directors, is responsible for monitoring and coordinating compliance by the
Bank with the OCC Agreement.
The Board of Directors of the Bank submitted to the OCC a three-year
capital program which was approved. The capital program includes projections
for growth and capital requirements, projections of the sources and timing of
additional capital to meet the current and future capital needs of the Bank and
contingency plans in the event the primary sources of capital projected are not
available. The OCC Agreement permits the Bank to declare dividends on preferred
stock held by the Company only when the Bank is "adequately capitalized." The
Bank may also declare dividends on its common stock held by the Company only
when the Bank is in compliance with its approved capital program and with the
prior written approval of the OCC.
The Board of Directors of the Bank 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 are 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.
<TABLE>
<CAPTION>
OCC Regulations OCC Agreement
--------------------------- ----------------------------------
Adequately Well Actual
Capital Ratios Capitalized Capitalized April 30, 1997 November 30, 1997 December 31, 1996
- -------------- ----------- ----------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Leverage 4.00% 5.00% 5.00% 6.00% 3.27%
Risk-Based Capital:
Tier 1 4.00 6.00 6.00 7.00 4.16
Total 8.00 10.00 10.00 11.00 7.43
</TABLE>
Set forth below are pertinent capital ratios for the Company as of
December 31, 1996 under the FRB regulations:
<TABLE>
<CAPTION>
Actual
------------
Minimum Capital December 31,
Capital Ratios Requirement 1996
- -------------- --------------- ------------
<S> <C> <C>
Leverage
Risk-Based Capital: 3.00% 2.67%
Tier 1 4.00 3.40
Total 8.00 6.38
</TABLE>
<PAGE> 16
Generally, dividends that may be paid by the Bank to the Company are subject to
certain regulatory limitations. Under Federal banking law, the approval of the
OCC will be required if the total of all dividends declared in any calendar
year by the Bank exceeds the Bank's net profits to date for that year combined
with its retained net profits for the preceding two years, subject to the
maintenance of minimum required regulatory capital. At December 31, 1996,
total shareholders' equity of the Bank was $25 million. At December 31,
1996, payment of future dividends was precluded by the OCC Agreement until the
Bank is in compliance with its approved capital program and it has received
written aproval from the OCC.
Absent sales of equity securities or subordinated debt by the Company,
capital will increase only through the retention of earnings. To meet the
capital requirements in the OCC Agreement, management has estimated that an
additional $14 million of capital will be needed to reach the April 30, 1997,
requirements and an additional $5 million to reach the November 30, 1997,
requirements.
The Board of Directors of the Company adopted a resolution ("FRB
Agreement") on February 13, 1997, as requested by the Federal Reserve Bank of
Atlanta, that prohibits the Company from paying dividends and incurring debt
without prior approval of the FRB.
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
sensitivity gap to minimize the effects of changing interest rates.
The interest rate sensitivity structure within the Company's balance sheet
at December 31, 1996, indicated a 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
interests rate changes on net interest income.
At December 31, 1996, the 90 day and 0-30 day windows included $25 million
of indirect automobile loans classified as held-for-sale. By selling these loans
the Bank becomes less interest sensitive. The Company's policy states that the
cumulative gap at the six month and one year period should not exceed 10%. The
Company interest rate shock analysis indicates that the Company is relatively
insensitive to an interest rate shock of plus or minus 200 basis points.
The following table illustrates the Company's interest rate sensitivity at
December 31, 1996 as well as the cumulative position at December 31, 1996:
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
</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 the Company sold or
securitized $195 million in indirect automobile and credit card loans. In
addition to interest rate-sensitive deposits, the Bank's principal demand for
liquidity is anticipated fundings under credit commitments to customers.
<PAGE> 17
Maintaining appropriate levels of capital is an important factor in
determining the availability of critical sources of liquidity. At December 31,
1996, capital ratios had declined below regulatory minimums. This decline has
tightened the Company's liquidity position and reduced the availability of
traditional funding sources, including warehouse borrowing from the Federal Home
Loan Bank (FHLB), the ability to acquire brokered deposits, and unsecured
federal funds lines.
Management of the Bank seeks to maintain a stable net liquidity position
while optimizing operating results, as reflected in net interest income, the
net yield on earning assets and the cost of interest-bearing liabilities in
particular. Key management meets regularly to review the Bank's current and
projected net liquidity position and to review actions taken by management to
achieve this liquidity objective.
The Company's Consolidated Statements of Cash Flows included in the
accompanying Consolidated Financial Statements present certain information
about cash flows from operating, investing and financing activities. The
Company's principal cash flows relate to investing and financing activities of
the Bank, rather than operating activities. While the statement presents the
periods' net cash flows from lending and deposit activities, it does not
reflect certain important aspects of the Bank's liquidity described above,
including (i) anticipated liquidity requirements under outstanding credit
commitments to customers, (ii) intraperiod volatility of deposits, particularly
fluctuations in the volume of commercial customers' noninterest-bearing demand
deposits, and (iii) unused borrowings available under federal funds lines,
repurchase agreements, and other arrangements. The Bank's principal source of
operating cash flows is net interest income.
FNC's liquidity is 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. As discussed previously, FNC and the Bank have
entered into agreements which also impact their overall liquidity position. See
"-- Regulatory Agreements." In accordance with those agreements, dividends on
the common stock of the Bank can only be paid when the Bank is in compliance
with the OCC Agreement and with the prior written consent of the OCC. In
addition, FNC is prohibited from incurring additional debt without the prior
approval of the FRB.
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 were
primarily used to support loan growth. In addition, during the year ended
December 31, 1996, the Company routinely utilized brokered deposits to fund
interim period loan growth for loan sales and a securitization. No such
deposits were outstanding as of year end. Due to its capital ratios at
year-end, the Company no longer meets the requirements to utilize such deposits.
The Company had unused sources of liquidity in the form of unused unsecured
federal funds lines of $20 million at December 31, 1996. As stated above, such
lines now require security. The Company manages asset and liability growth
through pricing strategies within regulatory capital constraints.
Except for the possible adverse effects arising out of the FRB and OCC
Agreements, discussed in "-- Regulatory Capital Requirements," and "--
Regulatory Agreements," and the level of the 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.
<PAGE> 18
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.
<PAGE> 19
QUARTERLY FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, certain
consolidated quarterly financial information of the Company. This information
is derived from unaudited consolidated financial statements which include, in
the opinion of management, all normal recurring adjustments which management
considers necessary for a fair presentation of the results for such periods. The
results for any quarter are not necessarily indicative of results for any future
period. 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.
<PAGE> 20
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------- --------------------------------------------
(Dollars in Thousands) Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $15,475 $15,644 $14,963 $13,718 $13,180 $12,322 $11,650 $10,928
Interest expense 6,963 7,151 6,776 5,837 5,181 5,019 4,682 3,989
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 8,512 8,493 8,187 7,881 7,999 7,303 6,968 6,939
Provision for loan losses 14,027 5,700 3,000 2,400 3,000 2,000 1,710 1,380
Noninterest income before
securities gain 5,450 4,053 4,830 3,368 3,582 2,876 2,484 1,882
Securities gains 243 79 195 87 408 206 139 102
------- ------- ------- ------- ------- ------- ------- -------
Total noninterest income 5,693 4,132 5,025 3,455 3,990 3,082 2,623 1,984
Noninterest expense 9,341 9,521 8,621 8,005 7,058 6,458 6,193 5,874
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income before income taxes (9,163) (2,596) 1,591 931 1,931 1,927 1,688 1,669
Income tax (benefit) expense (3,417) (992) 586 328 680 691 599 596
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income $(5,745) $(1,604) $ 1,005 $ 603 $ 1,251 $ 1,236 $ 1,089 $ 1,073
======= ======= ======= ======= ======= ======= ======= =======
Net (loss) income per share $ (1.24) $ (.35) $ .22 $ .13 $ .27 $ .27 $ .24 $ .23
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 21
FIDELITY NATIONAL CORPORATION
ATLANTA, GEORGIA
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Fidelity National Corporation
We have audited the consolidated statements of condition of Fidelity National
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Fidelity National Corporation and
subsidiaries for the year ended December 31, 1994 were audited by other
auditors whose report dated January 20, 1995, expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1996 and 1995 financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Fidelity National Corporation and subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the prompt corrective action provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
place restrictions on any insured depository institution that does not meet
certain requirements, including minimum capital ratios. These restrictions are
based on an institution's FDICIA defined capital category and become
increasingly severe as an institution's capital category declines. The Company
and its wholly owned subsidiary, Fidelity National Bank (Bank), are operating
under regulatory agreements with the Federal Reserve Bank of Atlanta (FRB) and
the Office of the Comptroller of the Currency (OCC) that require them to meet
<PAGE> 22
prescribed requirements. The Company and the Bank were deemed
"undercapitalized" based upon their respective capital positions at December
31, 1996. The Company and the Bank have filed a capital plan with the OCC and
FRB outlining plans for attaining the required levels of regulatory capital.
The Company was notified on April 3, 1997 that it would be required to file, in
addition to the capital plan, a capital restoration plan with the OCC within 45
days. Failure to increase their capital ratios in accordance with their
capital plans would expose the Company and the Bank to regulatory sanctions
that may include restrictions on operations and growth, mandatory asset
dispositions and seizure. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company
to continue as a going concern is dependent upon many factors, including
regulatory action and the ability of management to achieve its capital
restoration plan. Management's plans in regard to these matters are described
in Note 2 to the consolidated financial statements. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for certain
mortgage banking activities.
Atlanta, Georgia /s/ Ernst & Young LLP
April 3, 1997
<PAGE> 23
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks - Note 13.................... $ 29,311,690 $ 27,356,936
Interest-bearing deposits with banks................. 3,300,708 -
Federal funds sold................................... 343,019 10,002,754
Investment securities available-for-sale - Note 3.... 71,230,743 53,139,161
Investment securities held-to-maturity (fair values
of $5,320,209 and $6,161,119 for 1995 and 1996
respectively) - Note 3............................. 6,279,816 5,291,733
Loans held-for-sale.................................. 38,105,868 47,112,535
Loans, net of unearned income - Note 4............... 429,283,563 360,176,486
Allowance for loan losses - Note 4................... (16,510,842) (5,536,504)
------------ ------------
Loans, net........................................... 412,772,721 354,639,982
Premises and equipment, net - Note 5................. 19,799,079 10,588,433
Other real estate - Note 4........................... 566,751 1,339,318
Accrued interest receivable.......................... 5,007,876 3,577,862
Other assets......................................... 18,702,026 11,773,101
------------ ------------
Total assets............................... $605,420,297 $524,821,815
============ ============
LIABILITIES
Deposits - Note 6
Noninterest-bearing demand deposits................ $ 73,877,369 $ 75,120,501
Interest-bearing deposits:
Demand and money market............................ 78,451,267 107,475,974
Savings......................................... 38,867,549 14,293,402
Time deposits, $100,000 and over................ 86,630,315 65,503,961
Other time deposits............................. 266,886,829 204,113,471
------------ ------------
Total deposits............................. 544,713,329 466,507,309
Short-term borrowings - Note 7..................... 17,183,769 8,245,191
Long-term debt - Note 8............................ 16,500,000 16,750,000
Accrued interest payable........................... 3,502,631 2,606,802
Other liabilities.................................. 2,447,752 2,950,233
------------ ------------
Total liabilities.......................... 584,347,481 497,059,535
Commitments and contingencies - Notes 13 and 14
SHAREHOLDERS' EQUITY - Notes 2 and 11
Common Stock, no par value. Authorized 5,000,000,
and 50,000,000; issued 4,619,475 and 4,665,256;
outstanding 4,608,383 and 4,654,164 in 1995,
and 1996........................................ 11,878,597 11,303,406
Treasury stock..................................... (69,325) (69,325)
Net unrealized gains (losses) on investment
securities available-for-sale, net of tax....... (140,241) 689,774
Retained earnings.................................. 9,403,785 15,838,425
------------ ------------
Total shareholders' equity................. 21,072,816 27,762,280
------------ ------------
Total liabilities and shareholders'
equity................................... $605,420,297 $524,821,815
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 24
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees................... $54,333,446 $43,722,346 $32,120,759
Investment securities:
Taxable............................... 4,956,072 4,024,715 3,423,612
Tax-exempt............................ - 360 6,222
Federal funds sold...................... 436,649 323,622 322,542
Deposits with other banks............... 74,104 8,947 13,460
----------- ----------- -----------
Total interest income............ 59,800,271 48,079,990 35,886,595
INTEREST EXPENSE
Deposits - Note 6....................... 24,532,698 17,927,967 11,167,526
Short-term borrowings................... 692,591 589,733 466,138
Long-term debt.......................... 1,501,487 353,116 131,220
----------- ----------- -----------
Total interest expense........... 26,726,776 18,870,816 11,764,884
----------- ----------- -----------
NET INTEREST INCOME....................... 33,073,495 29,209,174 24,121,711
Provision for loan losses - Note 4...... 25,127,000 8,090,000 4,125,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................. 7,946,495 21,119,174 19,996,711
NONINTEREST INCOME
Service charges on deposit accounts..... 1,737,145 1,484,835 1,427,626
Credit card fees........................ 2,927,992 2,470,531 2,607,968
Mortgage banking activities............. 6,900,260 3,337,767 1,740,343
Securities gains, net - Note 3.......... 603,977 854,919 123,832
Other - Note 15......................... 6,135,848 3,531,359 2,869,005
----------- ----------- -----------
Total noninterest income......... 18,305,222 11,679,411 8,768,774
NONINTEREST EXPENSE
Salaries and employee benefits - Note
10.................................... 16,411,631 11,794,559 9,884,058
Furniture and equipment................. 1,722,979 1,389,858 1,235,464
Net occupancy........................... 2,596,155 1,905,762 1,575,822
Credit card processing and transaction
fees.................................. 3,030,290 1,973,557 2,382,252
Amortization of mortgage servicing
rights................................ 1,927,250 1,136,299 364,461
Other - Note 15......................... 9,800,355 7,383,149 6,932,730
----------- ----------- -----------
Total noninterest expense........ 35,488,660 25,583,184 22,374,787
----------- ----------- -----------
(Loss) income before income
taxes.......................... (9,236,943) 7,215,401 6,390,698
Income tax (benefit)
expense - Note 9............... (3,495,212) 2,566,019 2,091,689
----------- ----------- -----------
NET (LOSS) INCOME......................... $(5,741,731) $ 4,649,382 $ 4,299,009
=========== =========== ===========
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK................................... $(5,741,731) $ 4,649,382 $ 4,299,009
=========== =========== ===========
EARNINGS PER SHARE........................ $ (1.24) $ 1.01 $ .93
=========== =========== ===========
Average Common Shares..................... 4,619,530 4,608,383 4,608,383
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 25
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
Cash Flow From Operating Activities 1996 1995 1994
--------------- ------------- --------------
<S> <C> <C> <C>
Net (loss) income $ (5,741,731) $ 4,649,382 $ 4,299,009
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for loan losses 25,127,000 8,090,000 4,125,000
Depreciation and amortization of premises and equipment 1,481,379 1,097,090 990,554
Amortization of mortgage servicing rights 1,927,250 1,136,299 364,461
Additions of originated mortgage servicing rights (893,878) (1,031,548) -
Purchases of investments held in trading accounts - - (952,000)
Sales of investments held in trading accounts - - 941,382
Securities gains, net (603,977) (854,919) (123,832)
Gain on loan sales and securitization (672,012) (228,641) (221,216)
Decrease (increase) in loans held-for-sale 9,006,667 (44,887,263) 17,193,912
Net increase in accrued interest receivable (1,430,014) (984,844) (902,789)
Net increase in accrued interest payable 895,829 838,033 324,447
Net increase (decrease) in other liabilities 502,481 (757,175) 714,112
Net (increase) decrease in other assets (6,928,925) 229,358 (1,488,941)
Other, net 54,117 (87,167) (123,752)
------------- ------------ -------------
Net cash flows provided by (used in) operating activities 22,724,186 (32,791,395) 25,140,347
Cash Flows From Investing Activities
Purchases of investment securities held-to-maturity (33,294,485) (11,038,682) (3,993,750)
Maturities of investment securities held-to-maturity 30,375,000 14,056,006 400,000
Sales of investment securities available-for-sale 43,781,536 34,233,853 13,116,453
Purchases of investment securities available-for-sale (65,077,185) (43,826,318) (25,444,864)
Maturities of investment securities available-for-sale 3,728,880 12,956,531 6,880,913
Net increase in loans (286,040,758) (57,917,324) (109,215,310)
Purchases of mortgage servicing rights - (4,981,096) (1,333,283)
Purchases of premises and equipment (10,692,025) (2,863,948) (2,564,690)
Proceeds from sale of loans 203,543,314 21,125,520 4,060,528
Proceeds from sale of equipment - - 21,445
Proceeds from sales of other real estate 345,575 961,712 390,876
------------- ------------ -------------
Net cash flows used in investing activities (113,330,148) (37,293,746) (117,681,682)
Cash Flows From Financing Activities
Net (decrease) increase in demand deposits, money market accounts,
and savings accounts (5,693,692) 30,392,930 15,911,481
Net increase in time deposits 83,899,712 53,098,658 63,807,089
Proceeds from issuance of long-term debt - 16,250,000 926,000
Repayment of long-term debt (250,000) (1,991,000) (250,000)
Increase (decrease) in short-term borrowings 8,938,578 (10,695,102) 18,071,368
Dividends paid (692,909) (644,135) (628,411)
Sale of treasury stock - - 1,250
------------- ------------ -------------
Net cash flows provided by financing activities 86,201,689 86,411,351 97,838,777
------------- ------------ -------------
Net (decrease) increase in cash and cash equivalents (4,404,273) 16,326,210 5,297,442
Cash and cash equivalents, beginning of year 37,359,690 21,033,480 15,736,038
------------- ------------ -------------
Cash and cash equivalents, end of year $ 32,955,417 $ 37,359,690 $ 21,033,480
============= ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 25,830,947 $ 18,032,783 $ 11,440,437
============= ============ =============
Income taxes $ 1,375,000 $ 2,163,000 $ 1,528,000
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 26
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For Years December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net unrealized
gains (losses)
Common Stock Treasury Stock on Investment
---------------------- ------------------ Securities Retained
Shares Amount Shares Amount Available-for-Sale Earnings
--------- ----------- ------- --------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994 4,200,600 $ 5,125,000 11,292 $(70,575) $ 1,735,091 $14,340,986
Net income - - - - - 4,299,009
Dividends declared ($.1364 per
share) - - - - - (628,411)
Sale of treasury shares - - (200) 1,250 - -
Change in net unrealized gains
(losses) on investment
securities available-for-sale,
net of tax - - - - (3,372,268) -
--------- ----------- ------ -------- ----------- -----------
Balance December 31, 1994 4,200,600 5,125,000 11,092 (69,325) (1,637,177) 18,011,584
Net income - - - - - 4,649,382
Dividends declared ($.1398 per
share) - - - - - (644,135)
10% stock dividend 418,875 6,178,406 - - - (6,178,406)
Change in net unrealized gains
(losses) on investment - - - - - -
securities available-for-sale,
net of tax - - - - 2,326,951 -
--------- ----------- ------ -------- ----------- -----------
Balance December 31, 1995 4,619,475 11,303,406 11,092 (69,325) 689,774 15,838,425
Net loss - - - - - (5,741,731)
Dividends declared ($.15 per
share) - - - - - (692,909)
Common Stock issued under
Employee Stock Purchase Plan 1,766 19,502 - - - -
Issuance of Common Stock to Directors 44,015 555,689 - - - -
Change in net unrealized gains (losses)
on investment securities available-
for-sale, net of tax - - - - (830,015) -
--------- ----------- ------ -------- ----------- -----------
Balance December 31, 1996 4,665,256 $11,878,597 11,092 $(69,325) $ (140,241) $ 9,403,785
========= =========== ====== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Shareholders'
Equity
-----------
<S> <C>
Balance January 1, 1994 $21,130,502
Net income 4,299,009
Dividends declared ($.1364 per
share) (628,411)
Sale of treasury shares 1,250
Change in net unrealized gains
(losses) on investment
securities available-for-sale,
net of tax (3,372,268)
------------
Balance December 31, 1994 21,430,082
Net income 4,649,382
Dividends declared ($.1398 per
share) (644,135)
10% stock dividend -
Change in net unrealized gains
(losses) on investment -
securities available-for-sale,
net of tax 2,326,951
------------
Balance December 31, 1995 27,762,280
Net loss (5,741,731)
Dividends declared ($.15 per
share) (692,909)
Common Stock issued under
Employee Stock Purchase Plan 19,502
Issuance of Common Stock to Directors 555,689
Change in net unrealized gains (losses)
on investment securities available-
for-sale, net of tax (830,015)
------------
Balance December 31, 1996 $ 21,072,816
============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 27
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, 1996 or
1995. Held-to-maturity securities are those securities for which the Company
has the ability and positive intent to hold until maturity. All other
securities not included in trading or held-to-maturity are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized gains and losses
on trading securities are included in income. Unrealized gains and losses, net
of related income taxes, on available-for-sale securities are excluded from
income and are reported as a separate component of shareholders' equity until
realized. Transfers of securities between categories are recorded at fair value
at the date of transfer. Unrealized gains and losses are recognized in income
for transfers into trading securities. The unrealized gains or losses included
in the separate component of shareholders' equity for securities transferred
from available-for-sale to held-to-maturity are maintained and amortized into
income over the remaining life of the related security as an adjustment to
yield in a manner consistent with the amortization or accretion of premium or
discount on the security.
A decline in the fair value below cost of any available-for-sale or
held-to-maturity security that is deemed other than temporary results in a
charge to income and the establishment of a new cost basis for the security.
Purchase premiums and discounts are amortized or accreted over the life of
the related investment securities as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses for securities sold are included in income and are
derived using the specific identification method for determining the cost of
securities sold.
LOANS AND INTEREST INCOME. Loans are reported at principal amounts outstanding
net of unearned income, and deferred loan fees and costs. Interest income is
recognized in a manner that results in a level yield on principal amounts
outstanding. The accrual of interest is discontinued when, in management's
judgment, it is determined that the collectibility of interest is doubtful.
Rate related loan fee income is included in interest income. Loan
origination and commitment fees and certain direct origination costs are being
deferred and the net amount amortized as an adjustment of the yield over the
contractual lives of the related loans, taking into consideration assumed
prepayments.
Effective January 1, 1996, the Company modified its classification of
credit card current period interest charge-offs. In prior years, the Company
recorded credit card current period accrued interest meeting Company policy for
charge-off as a charge against the allowance for loan losses. Beginning
January 1, 1996, the Company commenced reversing current period accrued
interest-related income on credit card loans being charged off to interest
income. For the year ended December 31, 1996, $1,965,202 of such interest had
been reversed. Prior period statements do not reflect this reclassification.
The reclassification was made to conform to industry practice.
<PAGE> 28
Annual fees collected for credit cards are recognized on a straight-line
basis over the period the fee entitles the cardholder to use the card.
Effective January 1, 1995, the Company adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting for Impairment of a Loan - Income Recognition and Disclosure."
These standards require impaired loans to be measured based on the present
value of expected future cash flows discounted at the loan's original effective
interest rate, or at the loan's observable market price, or the fair value of
the collateral if the loan is collateral dependent.
Impaired loans are specifically reviewed loans for which it is probable
that the creditor will be unable to collect all amounts due according to the
terms of the loan agreement. A valuation allowance is required to the extent
that the measure of impaired loans is less than the recorded investment. SFAS
No. 114 does not apply to large groups of smaller balance, homogeneous loans,
which are consumer installment and credit card loans, and which are collectively
evaluated for impairment. Smaller balance commercial loans are also excluded
from the application of the statement. Interest on these loans is reported on
the cash basis as received when the full recovery of principal is anticipated,
or after full principal has been recovered when collection of interest is in
question. The adoption of these standards did not have a material impact on the
Company's financial position or results of operations.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through provisions charged to operations. Such provisions are based on
management's evaluation of the loan portfolio under current economic
conditions, past loan and credit card loss experience, adequacy of underlying
collateral, and such other factors which, in management's judgment, deserve
recognition in estimating loan losses. Loans are charged off when, in the
opinion of management, such loans are deemed to be uncollectible. Subsequent
recoveries are added to the allowance.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
A substantial portion of the Company's loans is secured by real estate in
metropolitan Atlanta, Georgia. In addition, a substantial portion of the
Company's other real estate is located in this same market area. Accordingly,
the ultimate collectibility of a substantial portion of the loan portfolio and
the recovery of a substantial portion of the carrying amount of other real
estate are susceptible to changes in market conditions in this market area.
LOANS HELD-FOR-SALE. Loans held-for-sale include mortgage loans and certain
indirect automobile loans. Those loans held-for-sale are recorded at the lower
of cost or market. For mortgage loans, this is determined by outstanding
commitments from investors for committed loans and on the basis of current
delivery prices in the secondary mortgage market for uncommitted loans. For
indirect automobile loans, the lower of cost or market is determined based on
evaluating the market value of the pool selected for sale. Based upon available
market information, no valuation adjustment was required at December 31, 1996
or 1995, and fair values for such loans held-for-sale approximated or exceeded
their carrying values.
Gains and losses on sales of loans are recognized at the settlement date.
Gains and losses are determined by the difference between the net sales
proceeds, including the estimated value associated with excess or deficient
servicing fees to be received, and the carrying value of the loans sold.
PREMISES AND EQUIPMENT. Premises and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are
amortized using the straight-line method over the lease term or estimated
useful life, whichever is shorter.
OTHER REAL ESTATE. Other real estate represents property acquired through
foreclosure or in satisfaction of loans. Other real estate is carried at the
lower of cost or fair value less estimated selling costs. Fair value is
determined on the basis of current appraisals, comparable sales, and other
estimates of value obtained principally from independent sources. Any excess of
the loan balance at the time of foreclosure or acceptance in satisfaction of
loans over the fair value of the real estate held as collateral is treated as a
loan loss and charged against the allowance for loan losses. Gain or loss on
sale and any subsequent adjustments to reflect changes in fair value and
selling costs are recorded as a component of income.
INCOME TAXES. The Company files a consolidated federal income tax return. Taxes
are accounted for in accordance with SFAS No. 109, "Accounting for Income
Taxes." Under the liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
<PAGE> 29
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<PAGE> 30
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995 and 1996, the Company capitalized approximately $1,032,000 and
$894,000, respectively of originated servicing rights and recorded amortization
of approximately $61,000 and $573,000, respectively and recorded a valuation
allowance of approximately $37,000 and $49,000, respectively related to those
rights. These amounts are included in other assets. The estimated fair value of
originated and purchased mortgage servicing rights at December 31, 1995 and
1996, was approximately $7,800,000 and $7,400,000, respectively.
Recent Accounting Pronouncements. Effective January 1, 1996, the Company
adopted SFAS No. 121, "Accounting For the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The adoption did not have a material
impact on the financial position or results of operations of the Company.
In June 1996, the Financial Accounting Standards Board issued "Accounting
For Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," SFAS No. 125, which provides new accounting and reporting
standards for sales, securitizations, and servicing of receivables and other
financial assets and extinguishments of liabilities. SFAS No. 125 is effective
for transactions occurring after December 31, 1996, except those provisions
relating to repurchase agreements, securities lending and other similar
transactions and pledged collateral, which have been delayed until after
December 31, 1997, by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of Statement No. 125, an amendment of FASB Statement No. 125." These
standards will be adopted as required in 1997 and 1998, and are not expected to
have a material impact on the Company's financial position or results of
operations.
2 -- REGULATORY MATTERS
Going Concern. The accompanying consolidated financial statements have
been prepared on a going-concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company incurred a net loss of $5.7 million during the year ended December 31,
1996. At December 31, 1996, Fidelity and the Bank were not in compliance with
the minimum capital requirements prescribed by the Federal Reserve Bank (FRB)
and the Office of the Comptroller of the Currency (OCC) and were considered
"undercapitalized" under the provisions of the Federal Deposit Insurance
Improvement Act of 1991. In addition, Fidelity and the Bank entered into
agreements with the FRB and OCC, respectively. The agreements and regulatory
capital requirements are described below. If Fidelity and the Bank are unable to
meet the minimum capital requirements of the agreements, one or more regulatory
sanctions may result. These sanctions include such operating restrictions as
growth limitations, prohibitions on dividend payments, increased supervisory
monitoring, limitations on executive compensation, restrictions on deposit
interest rates, and regulatory seizure. Management's plans concerning these
matters and a description of Fidelity's and the Bank's capital plan which was
submitted to the FRB and OCC, including plans to raise additional capital, are
described below.
These factors, among others, may indicate that the Company will be unable
to continue as a going concern. The consolidated financial statements do not
include the adjustments, if any, that might have been required had the outcome
of the above-mentioned uncertainties been known, or any adjustments relating to
the recoverability of recorded asset amounts or the amount of liabilities that
may be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent on its ability to
comply with the terms of the agreements, maintain sufficient liquidity, and
ultimately, return to profitable operations.
Management's Plans. The Company incurred significant losses which have
eroded capital. Accordingly, management's primary focus is to obtain additional
capital and to return the Company to profitability. In the fourth quarter of
1996, the Bank increased rates charged on credit card products demonstrating
higher loss exposure, brought credit card collections in-house, and strengthened
its credit card management team while consolidating and downsizing in selected
areas.
<PAGE> 31
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fidelity has neither adequate cash flow nor the financial flexibility to
enable it to act as a source of financial strength to the Bank. The Company is
pursuing options to raise additional capital which, if raised, will enable the
Company and the Bank to exceed all minimum capital requirements and the ratio
levels required under the OCC Agreement. A capital plan, subject to amendment,
was filed with the OCC as required under the OCC Agreement.
Regulatory Agreements. The Bank is a national banking association and is
subject to Federal and state statutes applicable to banks chartered under the
banking laws of the United States, to members of the Federal Reserve System and
to banks whose deposits are insured by the Federal Deposit Insurance
Corporation. The Board of Governors of the Federal Reserve System and the Office
of the Comptroller of the Currency (the OCC) have established capital adequacy
guidelines for bank holding companies and national banks.
The Bank's principal regulator is the OCC. At periodic intervals, the OCC
examines and evaluates the financial condition, operations, and policies and
procedures of nationally chartered banks, such as the Bank, as part of its
legally prescribed oversight responsibilities. Based on its examinations, the
OCC can direct a national bank to adjust its financial statements in accordance
with the examination's findings. In view of the regulatory environment in which
banks operate, the extent, if any, to which future OCC examinations may
ultimately result in adjustments to the consolidated financial statements cannot
presently be determined.
In 1991 the Federal Deposit Insurance Corporation Improvement Act of 1991
("1991 Act") was adopted. Additional supervisory powers and regulations mandated
by the 1991 Act include a "prompt corrective action" program based upon five
regulatory zones for banks in which all banks are placed, largely based on their
capital positions. Regulators are permitted to take increasingly harsh action as
a bank's financial condition declines. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches 2%. Better capitalized institutions
are subject to less onerous regulation and supervision than banks with lesser
amounts of capital.
To implement the prompt corrective action provisions of the 1991 Act, the
OCC adopted regulations, which became effective on December 19, 1992, placing
financial institutions in the following five categories based upon
capitalization ratios: (i) a "well capitalized" institution has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least
6% and a leverage ratio of at least 5%, (ii) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based
ratio of at least 4% and a leverage ratio of at least 3%; (iii) an
"undercapitalized" institution has a total risk-based ratio of under 8%, a Tier
1 risk-based ratio of under 4% or a leverage ratio of under 3%; (iv) a
"significantly undercapitalized" institution has a total risk-based ratio of
under 6%, a Tier 1 risk-based ratio of under 3% or a leverage ratio of under 3%;
and (v) a "critically undercapitalized" institution has a leverage ratio of 2%
or less. Institutions in any of the three undercapitalized categories are
prohibited from declaring dividends or making capital distributions. The
regulations also establish procedures for "downgrading" an institution to a
lower capital category based on supervisory factors other than capital.
The OCC and the Bank entered into an Agreement dated November 14, 1996,
("OCC Agreement"). The OCC Agreement provides that the Bank (i) appoint an
"Oversight Committee;" (ii) achieve and maintain specified higher capital
levels; (iii) develop a three-year capital program which will include, among
other things, certain restrictions on dividend payments by the Bank; and (iv)
revise and amend its strategic plan. On April 3, 1997, the Company was notified
that it would be required to file, in addition to the capital plan, a capital
restoration plan with the OCC within 45 days.
Fidelity's Board of Directors on February 13, 1997, adopted a resolution
requested by the Federal Reserve Bank of Atlanta ("FRB Agreement"). The FRB
Agreement, among other things, prohibits Fidelity from paying dividends and
incurring debt without prior approval of the FRB.
The OCC Agreement will impair the ability of the Bank to declare and pay
dividends to Fidelity since the Bank currently intends to retain any earnings to
augment its capital. As dividends from the Bank are the
<PAGE> 32
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal source of income to Fidelity, and because the payment of dividends by
Fidelity is subject to prior approval of the Federal Reserve, it is unlikely
that Fidelity will declare and pay dividends absent the increases in capital
obtained through the sale of equity securities.
The OCC Agreement establishes higher capital requirements than those
applicable under OCC regulations for an "adequately capitalized" bank. Specified
capital levels are to be achieved by the Bank by April 30, 1997, and maintained
until November 30, 1997. At November 30, 1997, higher capital levels become
effective and are applicable thereafter.
The table below sets forth the capital requirements for the Bank under OCC
regulations, and under the OCC Agreement and the Bank's capital ratios at
December 31, 1996.
<TABLE>
<CAPTION>
OCC REGULATIONS OCC AGREEMENT
------------------------- ------------------------ ACTUAL
ADEQUATELY WELL APRIL 30, NOVEMBER 30, DECEMBER 31,
CAPITAL RATIOS CAPITALIZED CAPITALIZED 1997 1997 1996
- -------------- ----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Leverage................................. 4.00% 5.00% 5.00% 6.00% 3.27%
Risk-Based Capital:
Tier 1................................. 4.00 6.00 6.00 7.00 4.16
Total.................................. 8.00 10.00 10.00 11.00 7.43
</TABLE>
Under the terms of the OCC Agreement, should the Bank capital be obtained
as preferred stock, for the purposes of paying dividends on the Preferred Stock,
the Bank's capital ratios must be at least 4% for leverage, 4% for Tier 1
risk-based capital and 8% for total risk-based capital.
Set forth below are pertinent capital ratios for the Company as of December
31, 1996, under the FRB regulation:
<TABLE>
<CAPTION>
MINIMUM
CAPITAL RATIOS CAPITAL REQUIREMENT ACTUAL
- -------------- ------------------- ------
<S> <C> <C>
Leverage.................................................... 3.00% 2.67%
Risk-Based Capital:
Tier 1.................................................... 4.00 3.40
Total..................................................... 8.00 6.38
</TABLE>
Absent sales of equity securities or subordinated debt by the Company,
capital will increase only through the retention of earnings.
To meet the capital requirements in the formal agreements, management has
estimated that at December 31, 1996, an additional $14 million of capital will
be needed to reach the April 30, 1997, requirements and an additional $5 million
will be needed to reach the November 30, 1997, requirements.
As of December 31, 1995, the Bank was considered to be "adequately
capitalized" by the OCC. The following table represents the regulatory capital
position of the Company and the Bank at December 31, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
COMPANY BANK
------------------ ---------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Tier 1 capital.................................... $17,052 $26,606 $20,799 $28,867
Tier 1 capital required........................... 20,059 17,309 20,003 17,027
------- ------- ------- -------
Excess (deficit) over required amount........... $(3,007) $ 9,297 $ 796 $11,840
======= ======= ======= =======
Total risk-based capital.......................... $31,976 $45,323 $37,180 $41,194
Total risk-based capital required................. 40,118 34,619 40,007 34,055
------- ------- ------- -------
Excess (deficiency) over required amount........ $(8,142) $10,704 $(2,827) $ 7,139
======= ======= ======= =======
</TABLE>
<PAGE> 33
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regulatory Capital Requirements
The Federal Reserve Board ("FRB") and the OCC have issued guidelines (the
"guidelines") regarding the capital leverage ratio and risk-based capital
requirements. The guidelines provide detailed definitions of regulatory capital
and assign different weights to various assets and credit equivalent amounts of
off-balance sheet financial instruments, depending upon the perceived degree of
credit risk to which they expose such entities. Each banking organization is
required to maintain a specified minimum ratio of capital to the total of such
risk-adjusted assets and off-balance sheet financial instruments.
The risk-based capital ratios of Fidelity and the Bank are calculated under
the guidelines by dividing their respective qualifying total capital by their
respective total risk-weighted assets. Fidelity's and the Bank's qualifying
total capital and total risk-weighted assets are determined on a fully
consolidated basis. Total qualifying capital is comprised of the sum of core
capital elements ("Tier 1 capital") and supplementary capital elements ("Tier 2
capital"). Tier 1 capital excludes any net unrealized gains or losses resulting
from the implementation of SFAS No. 115. Tier 2 capital includes the allowance
for loan losses, subject to limitations.
Under the guidelines, total risk-weighted assets of Fidelity and the Bank
are determined by assigning balance sheet assets and credit equivalent amounts
of off-balance sheet financial instruments to one of four broad risk categories
having risk weights ranging from zero % to 100%. The aggregate dollar amount of
each category is multiplied by the risk weight associated with that category and
the resulting weighted values from each category are summed to determine total
risk-weighted assets.
Each bank holding company and national bank must maintain (i) a minimum
ratio of Tier 1 capital to total risk-weighted assets of 4.0% and (ii) a minimum
ratio of total qualifying capital to total qualifying assets ("total risk-based
capital ratio") of 8.0% with the amount of the allowance for loan losses that
may be included in Tier 2 capital limited to 1.25% of total risk-weighted
assets.
Capital leverage ratio standards require a minimum ratio of Tier 1 capital
to adjusted average total assets ("capital leverage ratio") of 3.0%. The
leverage ratio is only a minimum. Institutions experiencing or anticipating
significant growth or those with other than minimum risk profiles will be
expected to maintain capital well above the minimum levels.
For additional information, see Note 11 -- Shareholders' Equity.
<PAGE> 34
3 - INVESTMENT SECURITIES
Investment securities at December 31, 1996 and 1995, are summarized as
follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Securities available-for-sale at December 31, 1996
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $48,149,420 $ 89,187 $301,169 $47,937,438
Mortgage-backed securities 21,754,422 63,558 77,775 21,740,205
Other securities 1,553,100 - - 1,553,100
----------- ---------- -------- -----------
Total $71,456,942 $ 152,745 $378,944 $71,230,743
=========== ========== ======== ===========
Securities available-for-sale at December 31, 1995
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $25,959,600 $ 644,259 $ - $26,603,859
Mortgage-backed securities 24,780,224 468,278 - 25,248,502
Other securities 1,286,800 - - 1,286,800
----------- ---------- -------- -----------
Total $52,026,624 $1,112,537 $ - $53,139,161
=========== ========== ======== ===========
Securities held-to-maturity at December 31, 1996
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 5,979,017 $ - $118,697 $ 5,860,320
Other securities 300,799 - - 300,799
----------- ---------- -------- -----------
Total $ 6,279,816 $ - $118,697 $ 6,161,119
=========== ========== ======== ===========
Securities held-to-maturity at December 31, 1995
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 4,990,274 $ 28,476 $ - $ 5,018,750
Other securities 301,459 - - 301,459
----------- ---------- -------- -----------
Total $ 5,291,733 $ 28,476 $ - $ 5,320,209
=========== ========== ======== ===========
</TABLE>
Proceeds from sales of investment securities available-for-sale during
1996 and 1995 were $43,781,536 and $34,233,853, respectively. Gross gains of
$603,977 and $917,786 for 1996 and 1995, respectively, were realized on those
sales. Gross losses in 1996 and 1995 were $0 and $62,867, respectively.
Proceeds from the sale of investment securities were $13,116,453 in 1994 with
related gross gains of $169,804 and gross losses of $35,354. Income tax
expense related to the sale of securities was $214,776, $304,036 and $40,530
in 1996, 1995 and 1994, respectively.
There were no investments held in trading accounts during 1996 or 1995.
Proceeds from the sale of investments held in trading accounts were $941,382 in
1994. Gross gains of $750 and gross losses of $11,368 were realized on those
sales.
<PAGE> 35
The following table depicts amortized cost and estimated fair value of
investment securities at December 31, 1996 and 1995, by contractual maturity.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, other securities, which primarily consist of Federal Reserve
Bank common stock and Federal Home Loan Bank common stock, are not included in
the following table as they have no stated maturity.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury Securities and obligations of U.S.
Government corporations and agencies
Due in one year or less $17,992,660 $17,992,660 $ - $ -
Due after one year through five years - - 1,986,449 2,146,880
Due after five years through ten years 17,436,200 17,361,645 15,973,151 16,456,979
Due after ten years or more 12,720,560 12,583,133 8,000,000 8,000,000
----------- ----------- ----------- -----------
48,149,420 47,937,438 25,959,600 26,603,859
Mortgage-backed securities 21,754,422 21,740,205 24,780,224 25,248,502
----------- ----------- ----------- -----------
Total $69,903,842 $69,677,643 $50,739,824 $51,852,361
=========== =========== =========== ===========
HELD-TO-MATURITY
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies
Due in one year or less $ - $ - $ 4,990,274 $ 5,018,750
Due after ten years 5,979,017 5,860,320 - -
----------- ----------- ----------- -----------
Total $ 5,979,017 $ 5,860,320 $ 4,990,274 $ 5,018,750
=========== =========== =========== ===========
</TABLE>
Investment securities with a carrying value of approximately $56,280,000 and
$51,207,000 at December 31, 1996 and 1995, respectively, were pledged as
collateral for public deposits, securities sold under agreements to repurchase,
and for other purposes required by law.
<PAGE> 36
4. LOANS
Loans outstanding, by classification, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Credit cards $143,781,711 $139,873,437
Real estate-mortgage 71,718,792 61,246,732
Real estate-construction 56,325,014 40,955,261
Commercial, financial and agricultural 43,945,706 39,295,512
Consumer installment 113,512,340 78,805,544
------------ ------------
Total loans 429,283,563 360,176,486
Less:
Allowance for loan losses 16,510,842 5,536,504
Loans, net $412,772,721 $354,639,982
============ ============
</TABLE>
Loans held for sale at December 31, 1996, totaled $38,105,868 which
included $13,105,868 of mortgage loans and $25,000,000 of indirect automobile
loans. The Company, through one of its subsidiaries, had loan participations
sold without recourse in the amount of $7.5 million and $10 million at December
31, 1996 and 1995, respectively. The Company, through its mortgage subsidiary,
was servicing loans for others of approximately $580.0 million, $882.6 million,
and $523.3 million at December 31, 1996, 1995 and 1994, respectively.
Loans in nonaccrual status amounted to approximately $2,940,000,
$3,105,000 and $1,189,000 at December 31, 1996, 1995 and 1994, respectively.
The allowance for loan losses related to these impaired loans was $561,000 and
$383,000 at December 31, 1996 and 1995. The average recorded investment in
impaired loans during 1996 and 1995 was $3,135,000 and $1,689,028,
respectively. If such impaired loans had been on a full accruing basis,
interest income on these loans would have been approximately $278,000, $51,000
and $55,000 in 1996, 1995 and 1994, respectively.
Loans totaling approximately $237,600, $554,500 and $241,500 were
transferred to other real estate in 1996, 1995 and 1994, respectively. There
were no other real estate sales in 1996 financed by the Company. The Company
financed other real estate sales of approximately $401,000 and $323,000 in 1995
and 1994, respectively. Loans are reported net of deferred loan fees of
$104,669, $389,355 and $112,759 at December 31, 1996, 1995 and 1994,
respectively.
The Company has loans outstanding to various executive officers,
directors, and their associates. Management believes that all of these loans
were made in the ordinary course of business on substantially the same terms
including interest rate and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than the
normal risk. The following is a summary of activity during 1996 for such loans:
<TABLE>
<S> <C>
Loan balances at December 31, 1995 $ 5,707,711
New loans 2,234,789
Loan repayments (4,671,759)
-----------
Loan balances at December 31, 1996 $ 3,270,741
===========
</TABLE>
The following is a summary of activity in the allowance for loan losses:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Balance at beginning of year $ 5,536,504 $ 4,343,657 $ 4,549,548
Provision for loan losses 25,127,000 8,090,000 4,125,000
Loans charged off:
Credit cards (13,156,340) (7,051,268) (4,465,609)
Other loans (1,659,492) (388,119) (314,405)
Recoveries on loans charged off 663,170 542,234 449,123
------------ ----------- -----------
Balance at end of year $ 16,510,842 $ 5,536,504 $ 4,343,657
============ =========== ===========
</TABLE>
<PAGE> 37
5 - PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Land $ 2,735,320 $ 2,110,321
Buildings and improvements 11,219,182 5,778,322
Furniture and equipment 13,543,963 8,934,164
----------- -----------
27,498,465 16,822,807
Less accumulated depreciation and amortization 7,699,386 6,234,374
-----------
Premises and equipment, net $19,799,079 $10,588,433
=========== ===========
</TABLE>
At December 31, 1996, the Company had entered into two leases at market
terms with a general partnership, of which a director is a general partner, and
a corporation of which a director is a majority shareholder. The partnership
lease is for a bank branch, general office, and storage space. This lease is
for approximately 35,000 square feet at an approximate annual rate of $17 per
square foot, subject to pro rata increases for any increases in taxes,
insurance, utilities, and maintenance. The corporate lease is for a 2,200
square foot bank branch at an approximate annual rate of $11 per square foot,
subject to pro rata increases for any increases in taxes and insurance.
<PAGE> 38
6 - DEPOSITS
Time deposits over $100,000 as of December 31, 1996 and 1995 were
$86,630,315 and $65,503,961, respectively. Related interest expense was
$5,042,964, $3,920,000 and $2,385,000 for the years ended December 31, 1996,
1995 and 1994 respectively. Included in demand and money market deposits were
NOW accounts totaling $37,322,255 and $37,701,876 at December 31, 1996 and
1995, respectively.
<PAGE> 39
7 - SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
----------- ----------
<S> <C> <C>
Federal funds purchased $ 500,000 $ -
Securities sold under agreements to repurchase 16,683,769 8,245,191
Total $17,183,769 $8,245,191
=========== ==========
</TABLE>
The above borrowings mature either overnight or on a fixed maturity not to
exceed three months. At December 31, 1996, the Company had a line of credit
with the Federal Home Loan Bank to borrow up to a maximum of $10 million. In
March 1997, the availability of borrowings on this line was suspended until the
Company achieves appropriate capital levels. Interest expense on Federal Home
Loan Bank advances was $158,838 in 1996 and $267,777 in 1995. The weighted
average rate on short term borrowings outstanding at December 31, 1996 and 1995
was 3.06% and 2.96%, respectively.
<PAGE> 40
8 - LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Note payable with interest at prime plus 1/4%, secured by Bank stock;
principal and interest payable in annual installments through 1996 $ - $ 250,000
Junior subordinated Series A capital notes with interest at prime plus 2%
due December 15, 1999; interest payable quarterly 250,000 250,000
Subordinated capital notes with interest at 11% through March 27, 2000,
and at prime plus 2% thereafter, due March 27, 2002, interest payable quarterly 1,000,000 1,000,000
Subordinated capital notes with interest at prime due October 1, 2002,
interest payable quarterly 250,000 250,000
8.5% subordinated notes due January 31, 2006, interest payable quarterly 15,000,000 15,000,000
----------- -----------
Total $16,500,000 $16,750,000
=========== ===========
Note maturities as of December 31, 1996, are summarized as follows:
Amount
-----------
1997 $ -
1998 -
1999 250,000
2000 -
2001 -
Thereafter 16,250,000
-----------
Total $16,500,000
===========
</TABLE>
The $250,000 note payable was paid off in 1996 in accordance with original
terms.
On December 12, 1995, the Company issued $15,000,000 in 8.5% subordinated
notes due January 31, 2006. Under the terms of the notes, the Company has the
right to redeem them on or after January 31, 2001, at 100% of the principal
amount plus accrued interest to the date of redemption.
The subordinated notes due March 27, 2002, may be redeemed at the option
of the Company at any time after March 27, 2000, without penalty. All other
subordinated notes may be redeemed at the option of the Company without
penalty.
There was no indebtedness to directors, executive officers, or principal
holders of equity securities in excess of 5% of shareholders' equity at
December 31, 1996.
<PAGE> 41
9. INCOME TAXES
Income tax (benefit) expense attributable to income from continuing
operations consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1996:
Federal $1,006,128 $(4,124,579) $(3,118,451)
State - (376,761) (376,761)
---------- ----------- -----------
$1,006,128 $(4,501,340) $(3,495,212)
========== ============ ===========
Year ended December 31, 1995:
Federal $2,366,181 $ 184,265 $ 2,550,446
State - 15,573 15,573
---------- ----------- -----------
$2,366,181 $ 199,838 $ 2,566,019
========== =========== ===========
Year ended December 31, 1994:
Federal $1,309,532 $ 694,301 $ 2,003,833
State - 87,856 87,856
---------- ----------- -----------
$1,309,532 $ 782,157 $ 2,091,689
========== =========== ===========
</TABLE>
Income tax expense differed from amounts computed by applying the
statutory U.S. Federal income tax rate to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Taxes at statutory rate $ (3,140,561) $2,453,236 $2,172,837
Increase (reduction) in income taxes resulting from:
State income tax expense, net of Federal income tax benefit (248,662) 10,278 57,985
Tax exempt income (22,770) (35,848) (58,855)
Other, net (83,219) 138,353 (80,278)
------------ ---------- ----------
Income tax expense $ (3,495,212) $2,566,019 $2,091,689
============ ========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
Deferred Tax Deferred Tax
---------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
State tax credit carryforwards $ 208,091 $ - $309,983 $ -
Allowance for loan losses 4,010,988 - - 502,961
Accelerated depreciation - 514,645 - 420,252
Accretion on U.S. Treasury securities - 29,440 - 34,749
Deferred loan fees - 289,598 - 355,741
Other real estate 41,050 - 41,050 -
FHLB stock dividends - - - 23,038
Unearned income 296,975 - 92,885 -
Unrealized holding gains on securities
securities available-for-sale 85,865 - - 422,320
Capitalized mortgage servicing rights - 284,329 - -
Other 94,722 2,497 86,017 -
---------- ---------- -------- ----------
$4,737,691 $1,120,509 $529,935 $1,759,061
========== ========== ======== ==========
</TABLE>
<PAGE> 42
10 - EMPLOYEE BENEFITS
The Bank provides a split-dollar insurance benefit plan for the President
of the Bank for which the life insurance benefit is $2,000,000. The
President's irrevocable insurance trust is designated as owner and beneficiary.
Upon termination of the plan, the Bank receives the portion of the insurance
proceeds equal to the total amount of premiums paid by the Bank. The Bank paid
premiums of $39,582 in 1996, 1995 and 1994, under the terms of the plan.
The Company maintains a 401(k) defined contribution retirement savings
plan for employees age 18 or older who have obtained ninety days of service.
Employee contributions to the plan are voluntary. The Company matches up to
15% of the participants' eligible contributions. For the years ended December
31, 1996, 1995 and 1994, the Company contributed $71,873, $136,187 and $86,014,
respectively, to the plan.
<PAGE> 43
11 - SHAREHOLDERS' EQUITY
In addition to the previously mentioned regulatory agreements, dividends
that may be paid by the Bank to Fidelity are subject to certain other
regulatory limitations. Under Federal banking law, the approval of the OCC
will be required if the total of all dividends declared in any calendar year by
the Bank exceeds the Bank's net profits to date for that year combined with its
retained net profits for the preceding two years, subject to the maintenance of
minimum required regulatory capital. At December 31, 1996, total shareholders'
equity of the Bank was approximately $24.6 million. Payment of dividends is
restricted without violating regulatory capital requirements. Also, under
current Federal Reserve System regulations, the Bank is limited in the amount
it may loan to its nonbank affiliates, including Fidelity. As of December 31,
1996, there were no loans outstanding from the Bank to Fidelity.
<PAGE> 44
12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on settlements using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets, and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts reported in the Statements of Condition for cash, due
from banks, and Federal fund sold, approximates those assets' fair values. For
investment securities, fair value equals quoted market price, if available. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities or dealer quotes.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type. The fair value of performing
loans is calculated by discounting scheduled cash flows through the remaining
maturities using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan.
Fair value for significant nonperforming loans is estimated taking into
consideration recent external appraisals of the underlying collateral for loans
that are collateral dependent. If appraisals are not available or if the loan
is not collateral dependent, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
The fair value of deposits with stated maturity, such as
noninterest-bearing demand deposits, savings, interest-bearing demand, and
money market accounts, is equal to the amount payable on demand. The fair value
of time deposits is based on the discounted value of contractual cash flows
based on the discount rates currently offered for deposits of similar remaining
maturities.
The carrying amounts reported in the balance sheet for short-term debt
approximate those liabilities' fair values.
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
amount of long-term debt approximates its estimated fair value.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<C> <C> <C> <C> <C>
Financial instruments (assets)
Cash and due from banks $ 32,612,398 $ 32,612,398 $ 27,356,936 $ 27,356,936
Federal funds sold 343,019 343,019 10,002,754 10,002,754
Investment securities available-for-sale 71,230,743 71,230,743 53,139,161 53,139,161
Investment securities held-to-maturity 6,279,816 6,161,119 5,291,733 5,320,209
Loans, net of unearned income 467,389,431 468,578,264 407,289,021 408,622,292
------------ ------------ ------------ ------------
Total financial instruments (assets) 577,855,407 $578,925,543 503,079,605 $504,441,352
============ ============
Non-financial instruments (assets) 27,564,890 21,742,210
------------ ------------
Total assets $605,420,297 $524,821,815
============ ============
Financial instruments (liabilities)
Noninterest-bearing demand deposits $ 73,877,369 $ 73,877,369 $ 75,120,501 $ 75,120,501
Interest-bearing deposits 470,835,960 471,954,804 391,386,808 393,178,992
------------ ------------ ------------ ------------
Total deposits 544,713,329 545,832,173 466,507,309 468,299,493
Short-term borrowings 17,183,769 17,183,769 8,245,191 8,245,191
Long-term debt 16,500,000 16,500,000 16,750,000 16,750,000
------------ ------------ ------------ ------------
Total financial instruments (liabilities) 578,397,098 $579,515,942 491,502,500 $493,294,684
============ ============
Non-financial instruments
(liabilities and shareholders' equity) 27,023,199 33,319,315
------------ ------------
Total liabilities and shareholders' equity $605,420,297 $524,821,815
============ ============
</TABLE>
For off-balance sheet instruments, fair values are based on rates currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing for loan
commitments and letters of credit. The estimated fair vaues of the Company's
off-balance sheet financial instruments as of December 31 are summarized below.
<PAGE> 45
<TABLE>
<CAPTION>
1996 1995
Estimated Estimated
(Dollars in Thousands) Fair Value Fair Value
---------- ----------
<S> <C> <C>
Unfunded commitments to
extend credit $388,711 $412,971
Letters of credit 3,767 2,135
</TABLE>
This presentation excludes certain financial instruments and all
nonfinancial instruments. The disclosures also do not include certain
intangible assets, such as customer relationships, deposit base intangibles and
goodwill. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
<PAGE> 46
13 - COMMITMENTS AND CONTINGENCIES
The approximate future minimum rental commitments as of December 31, 1996,
for all noncancellable leases with initial or remaining terms of one year or
more are shown in the following table:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
1997 $ 2,946,000
1998 2,940,000
1999 3,052,000
2000 3,075,000
Thereafter 12,993,000
-----------
Total $25,006,000
===========
</TABLE>
Rental expense for all leases amounted to approximately $1,740,000,
$1,550,000, and $1,250,000 in 1996, 1995, and 1994, respectively.
Due to the nature of their activities, Fidelity and the Bank are at times
engaged in various legal proceedings which arise in the normal course of
business, some of which are outstanding at December 31, 1996. While it is
difficult to predict or determine the outcome of these proceedings, it is the
opinion of management and its counsel that the ultimate liability, if any, will
not materially affect the Company's financial position.
The Federal Reserve Board requires that banks maintain cash on hand and
reserves in the form of average deposit balances at the Federal Reserve Bank
based on their average deposits. The Bank's reserve requirements at December
31, 1996 and 1995, were $5,429,000 and $5,280,000, respectively.
<PAGE> 47
14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, letters of
credit, and forward sales contracts. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated financial statements. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperforming by
the customer for commitments to extend credit and letters of credit, is
represented by the contractual or notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for recorded loans. For forward sales contracts, the
contract or notional amounts do not represent exposure to credit loss; however,
these financial instruments represent interest rate risk to the Company. The
Company controls the interest rate risk of its forward sales contracts through
management approvals, dollar limits, and monitoring procedures.
A summary of the Company's financial instruments with off-balance sheet
risk at December 31, 1996, is as follows (in thousands):
<TABLE>
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Loan commitments
Credit card lines $309,338
Home equity 9,039
Commercial real estate, construction and land development 33,532
Commercial 21,792
Mortgage loans 14,110
Lines of credit 900
Standby letters of credit 3,766
--------
Total loan commitments $392,477
========
Financial instruments whose notional or contractual amounts
represent interest rate risk -
Forward sales contracts $ 13,122
========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Company holds collateral
supporting those commitments as deemed necessary.
Forward sales contracts are contracts for delayed delivery of mortgage
loans in which the Company agrees to make delivery at a specified future date
at a specified price. Risks arise from the inability of counterparties to
meet the terms of their contracts and from movements in interest rates.
<PAGE> 48
15 - SUPPLEMENTAL FINANCIAL DATA
Components of other income and expense in excess of 1% of total revenues
for any of the respective periods are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Other income:
Brokerage commissions $3,201,220 $2,172,171 $1,580,814
Trust income 845,794 563,375 462,326
Other expense:
Stationery and supplies 930,816 734,876 544,036
Postage 640,499 486,624 383,336
Deposit insurance premiums 556,771 684,375 884,209
Telephone 831,670 502,148 492,250
</TABLE>
<PAGE> 49
16 - CONDENSED FINANCIAL INFORMATION OF FIDELITY NATIONAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash $ 1,157,191 $ 445,415
Land 419,418 419,418
Investment in bank subsidiary 24,822,351 30,007,881
Investments in and amounts due from nonbank subsidiaries 359,018 276,128
Subordinated loan to bank subsidiary 10,000,000 7,000,000
Commercial loan participations - 5,574,770
Other assets 1,050,888 948,379
----------- -----------
Total assets $37,808,866 $44,671,991
=========== ===========
LIABILITIES
Long-term debt $16,500,000 $16,750,000
Other liabilities 236,050 159,711
----------- -----------
Total liabilities 16,736,050 16,909,711
SHAREHOLDERS' EQUITY
Common stock 11,878,597 11,303,406
Treasury stock (69,325) (69,325)
Net unrealized (losses) gains on investment securities available-for-sale,
net of tax (140,241) 689,774
Retained earnings 9,403,785 15,838,425
----------- -----------
Total shareholders' equity 21,072,816 27,762,280
----------- -----------
Total liabilities and shareholders' equity $37,808,866 $44,671,991
=========== ===========
</TABLE>
<PAGE> 50
Note 16 continued
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------
1996 1995 1994
----------- --------------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 272,941 $ 5,973 $ 207
Deposits in bank 46,315 5,630 1,310
Subordinated loan to bank 768,542 40,164 -
----------- ---------- -----------
Total interests income 1,087,798 51,767 1,517
INTEREST EXPENSE - Long-term debt 1,501,488 353,284 131,220
----------- ---------- ----------
NET INTEREST EXPENSE (413,690) (301,517) (129,703)
OTHER INCOME
Lease income 120,000 120,000 92,000
Dividend from subsidiaries 1,600,000 950,000 850,000
Management fees 91,740 130,680 42,000
Other 3,157 6,525 -
----------- ---------- ----------
Total other income 1,814,897 1,207,205 984,000
OTHER EXPENSES 185,462 49,929 92,050
----------- ---------- ----------
Income before income taxes and undistributed (loss) income of subsidiary 1,215,745 855,759 762,247
Income tax benefit 146,017 38,045 47,685
----------- ---------- ----------
Income before equity in undistributed (loss) income of subsidiaries 1,361,762 893,804 809,932
Equity in undistributed (loss) income of subsidiaries (7,103,493) 3,755,578 3,489,077
----------- ---------- ----------
NET (LOSS) INCOME $(5,741,731) $4,649,382 $4,299,009
============ ========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(5,741,731) $ 4,649,382 $4,299,009
Equity in undistributed income of subsidiaries 7,103,493 (3,755,578) (3,489,077)
(Increase) decrease in other assets (102,509) (944,615) 43,935
Increase in other liabilities 76,341 130,084 26,299
----------- ------------ ----------
Net cash flows provided by operating activities 1,335,594 79,273 880,166
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of commercial loans 5,574,770 (5,574,770) -
Net increase in loans to and investment in subsidiaries (5,830,870) (8,071,122) (825,000)
----------- ------------ ----------
Net cash flows used in investing activities (256,100) (13,645,892) (825,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of long-term debt - 16,250,000 926,000
Repayment of long-term-debt (250,000) (1,991,000) (250,000)
Issuance of Common Stock 575,191 - -
Dividends paid (692,909) (644,135) (628,411)
Sale of treasury stock - - 1,250
----------- ------------ ----------
Net cash flows (used in) provided by financing activities (367,718) 13,614,865 48,839
----------- ------------ ----------
Net increase in cash 711,776 48,246 104,005
Cash, beginning of year 445,415 397,169 293,164
----------- ------------ ----------
Cash, end of year $ 1,157,191 $ 445,415 $ 397,169
=========== ============ ==========
</TABLE>
<PAGE> 1
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL CORPORATION, a
Georgia corporation, does hereby make, constitute and appoint James B. Miller,
Jr., M. Howard Griffith, Jr., and Martha C. Fleming, and each of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of said Corporation
to the annual report for the Corporation's fiscal year ending December 31, 1996,
on Form 10-K, and all amendments thereto, to be filed by said Corporation with
the Securities and Exchange Commission, Washington, D.C. pursuant to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder, and to file the same, with
all exhibits thereto and other supporting documents, with said Commission,
granting unto said attorneys-in-fact, and each of them, full power and authority
to do and perform any and all acts necessary or incidental to the performance
and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's
hand this 1st day of December, 1997.
/s/ David R. Bockel
----------------------------------
David R. Bockel
