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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or
15(d) of The Securities Exchange Act of
1934
For the Fiscal Year Ended December 31, 1998
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.)
3490 Piedmont Road, Suite 1550, 30305
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
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 10-K. X
-----.
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant (assuming for these purposes, but without conceding, that all
executive officers and directors and greater than five percent shareholders are
"affiliates" of the Registrant) as of February 28, 1999 (based on the closing
sale price of the Common Stock as quoted on the Nasdaq National Market System on
such date) was $38,460,000.
At February 28, 1999, there were 8,136,933 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, 1998 are incorporated by reference into Parts I and II.
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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PART I
FORWARD-LOOKING STATEMENTS
Certain information and statements in this Form 10-K includes
forward-looking statements with the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934,
as amended, that reflect Fidelity National Corporation's current expectations
regarding the future and involve risks and uncertainties. The words "believes,"
"expects," "anticipates," "estimates" and "intends" and similar expressions are
intended to identify forward-looking statements. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of disruptions in Fidelity National Corporation's, its correspondents',
its counterparties', its customers', or its suppliers' operations arising from
system and other failures relating to the Year 2000, general economic conditions
and other factors. Investors are encouraged to read the related section in
Fidelity National Corporation's 1998 Annual Report to Shareholders and those
discussed below under "Risk Factors".
ITEM I. BUSINESS
Fidelity National Corporation ("Fidelity") is a registered bank holding
company headquartered in Atlanta, Georgia. All of Fidelity's activities are
conducted by its wholly-owned subsidiaries: Fidelity National Bank ("Bank"),
which was organized as a national banking corporation in 1973, and its
wholly-owned subsidiary Fidelity National Mortgage Corp. ("Fidelity Mortgage"),
organized as a Georgia corporation in 1979; and Fidelity National Capital
Investors, Inc. ("Fidelity Capital"), organized as a Georgia corporation in May
1992.
The Bank provides traditional deposit, lending, mortgage, securities
brokerage, international trade services and trust products and services to its
commercial and retail customers. The Bank is a full-service banking operation;
Fidelity Mortgage is a full-service residential mortgage banking operation; and
Fidelity Capital is a securities brokerage operation. Fidelity conducts its
full-service banking and residential mortgage lending through 19 locations in
the metropolitan Atlanta area.
Fidelity conducts its 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 locations.
Residential construction lending is also conducted at the Tampa, Florida
location. At December 31, 1998, Fidelity had total assets of $713 million, total
loans of $536 million, total deposits of $621 million and shareholders' equity
of $55 million.
Fidelity as used herein includes Fidelity National Corporation and its
subsidiaries unless the context otherwise requires.
RECENT DEVELOPMENTS
On December 1, 1998, the Office of the Comptroller of the Currency
("OCC") terminated the formal agreement dated November 14, 1996 between the Bank
and the OCC ("formal agreement"). The formal agreement provided that the Bank
(i) appoint an "Oversight Committee;" (ii) achieve and maintain specified higher
capital levels; (iii) develop a three-year capital program
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which included, among other things, certain restrictions on dividend payments by
the Bank; and (iv) revise and amend its strategic plan. See Note 2 to the
Consolidated Financial Statements.
MARKET AREA
The Bank conducts banking activities primarily through 19 branches in
Fulton, DeKalb, Cobb and Gwinnett counties, Georgia. Three of these branches
were opened during 1998. The Bank's customers are primarily small and medium
sized businesses and individuals. The customer base for its credit card
portfolio is national in scope, with customers in all 50 states. Indirect
automobile lending and residential construction and mortgage lending are
conducted from the Jacksonville, Florida office in addition to its offices in
Georgia. The Bank also conducts construction lending from its Jacksonville and
Tampa, Florida offices. Customers of its other services are located almost
exclusively in Georgia.
PRODUCTS AND SERVICES
Fidelity's products and services include (i) depository accounts, (ii)
direct and indirect automobile and home equity lending, (iii) credit card loans,
(iv) construction and residential real estate loans, (v) commercial loans,
including commercial loans secured by real estate, (vi) securities brokerage
services, (vii) trust products and services and (viii) international trading
services.
Deposits
Fidelity offers a full range of depository accounts and services to
both individuals and businesses. As of December 31, 1998, the deposit base
totaled approximately $621 million, consisted of approximately $102 million in
noninterest-bearing demand deposits (16.4% of total deposits), approximately
$128 million in interest-bearing demand deposits and money market accounts
(20.6% of total deposits), approximately $22 million in savings deposits (3.6%
of total deposits), approximately $261 million in time deposits in amounts less
than $100,000 (42.0% of total deposits), and approximately $108 million in time
deposits of $100,000 or more (17.4% of total deposits). There were no brokered
deposits at December 31, 1998.
Lending
Fidelity's primarily lending activities include consumer loans (direct
and indirect automobile loans and credit card loans), real estate loans and
commercial loans to small and medium sized businesses. Secured construction
loans to home builders are made in the Atlanta, Georgia, Jacksonville and Tampa,
Florida metropolitan areas. Residential mortgages are made in Atlanta, Georgia
and Jacksonville, Florida. The loans are often secured by first and second real
estate mortgages. FNB offers direct installment loans to consumers on both a
secured and unsecured basis. Commercial lending includes the extension of credit
for business purposes.
As of December 31, 1998, Fidelity had consumer (including installment
and credit card loans), real estate (including residential mortgage,
construction and commercial loans secured by real estate), and commercial loans
of $304 million, $159 million and $73 million, representing approximately 56.8%,
29.6% and 13.6%, respectively, of the total loan portfolio. Real estate loans
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included $61 million in construction loans, $80 million in residential real
estate loans and $18 million in commercial loans secured by real estate. As of
December 31, 1998, commercial loans, including commercial loans secured by real
estate, totaled $91 million.
Consumer Lending
Fidelity consumer lending primarily consists of indirect automobile
lending and consumer credit cards. Fidelity also makes direct consumer loans,
including direct automobile loans, home equity and personal loans.
Indirect Automobile Lending. Fidelity acquires, on a non-recourse
basis, consumer installment contracts secured by new and used vehicles purchased
by consumers from motor vehicle dealers located primarily in Atlanta, Georgia
and Northeastern Florida. As of December 31, 1998, the aggregate amount of
indirect automobile loans outstanding was $179 million, representing 33.4% of
FNB's total loan portfolio. Approximately 60% and 23% of the outstanding
indirect automobile loans at December 31, 1998, were originated in the Atlanta
and Jacksonville, Florida offices, respectively. An additional $234 million of
indirect automobile loans originated and sold by Fidelity are being serviced by
Fidelity for others. Each potential sales finance contract is reviewed for
creditworthiness and collateral value by Fidelity, which notifies the automobile
dealer as to the terms (including interest rate and length of contract) on which
the loan will be made to the dealer's customer. Since the sales finance
contracts are purchased on a nonrecourse basis, no credit is being extended to
the dealers and the dealers have no liability for the sales finance contracts
purchased from them, except to the extent of the dealer reserve discussed below
and representations and warranties in the dealer's agreement. Once the loan has
been documented, the dealer sells the contract to Fidelity.
The interest rate quoted by a dealer on a sales finance contract may
exceed the interest charged by Fidelity on the particular contract. That
interest differential or flat fee, depending on dealer arrangement, is amortized
in a prepaid asset account. Usually 75% to 100% of the interest differential or
flat fee is immediately paid to the dealer as compensation for originating and
documenting the loan. The unpaid portion is retained in the dealer holdback
account and Fidelity may deduct from this account prepayments, rebates,
charge-offs and any rebates of interest charges due Fidelity on sales finance
contracts purchased from the dealer. If any amount is remaining in the holdback
account at the time all sales finance contracts purchased by Fidelity from the
dealer have been paid in full, such amount is paid to the dealer. As of December
31, 1998, the balance in the holdback accounts was $127,000. The potential
charge-offs in excess of the holdback are provided for by the allowance for loan
losses. Net charge-offs on indirect automobile loans for the two years ended
December 31, 1998 and 1997, were $2.0 million and $3.2 million, respectively.
Credit Card Loans. Fidelity offers Visa, MasterCard, Visa Gold,
affinity Visa programs and sponsors Visa/MasterCard agent bank relationships.
These programs are offered on a nationwide basis to persons, businesses,
partnerships and associations who meet Fidelity's established underwriting
standards with respect to income, credit rating, established residence or
domicile and employment. Credit card loans are subject to seasonal fluctuations
based on consumer spending habits, with the outstanding balances of such credit
card loans rising at the end of each calendar year. At December 31, 1998, credit
card loans were approximately $104 million, or 19.4% of the total loan
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portfolio. The credit card portfolio was built substantially through affinity
programs. The affinity programs include colleges, associations and other
entities which contract to assist Fidelity in marketing its credit cards in
return for issuance and transaction fee income.
Residential Mortgage Banking
Fidelity Mortgage is engaged in the residential mortgage banking
business, focusing on one-to-four family properties. Fidelity Mortgage offers
Federal Housing Authority ("FHA"), Veterans Administration ("VA"), conventional
and non-conforming loans (those with balances over $240,000). In addition, loans
are purchased from independent mortgage companies located in the southeast.
Fidelity Mortgage operates from three locations in the Atlanta metropolitan area
and also has loan origination offices in Jacksonville and Tampa, Florida.
Fidelity Mortgage is an approved originator and servicer for Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") and is an approved originator for loans insured by Housing and Urban
Development ("HUD").
Mortgage loans held-for-sale fluctuate due to economic conditions,
interest rates, the level of real estate activity and seasonal factors. During
1998, Fidelity Mortgage originated approximately $34 million in loans to be held
in Fidelity's portfolio. Fidelity Mortgage typically retains the right to
service mortgages sold to investors, but from time to time sells servicing
rights to other mortgage loan servicers. Servicing activities include the
collection of principal and interest payments, maintenance of escrow balances
and remittance of insurance and tax payments on behalf of mortgagees and the
offer of insurance products to borrowers. In return for servicing mortgages,
Fidelity Mortgage is entitled to a servicing fee, generally .25% to .50% per
annum of the outstanding principal balance of a mortgage serviced. Due to normal
amortization of the principal balance, the dollar amount of the fee earned on a
particular mortgage declines over time and no further fee will be earned if the
mortgage is prepaid or goes into default. During 1998, Fidelity Mortgage closed
$140 million of residential mortgage loans. Substantially all servicing rights
were retained, except for government and non-conforming loans. As of December
31, 1998, Fidelity Mortgage serviced loans totaling $278 million, of which $45
million were held by the Bank and $220 million were serviced for others.
Securities Brokerage Services
Fidelity Capital commenced business as a full-service broker in late
1992. Fidelity Capital is also a registered investment advisor with the
Securities and Exchange Commission, operates as a fully disclosed introducing
broker and is a member of the National Association of Securities Dealers
("NASD"). Fidelity Capital operates from its headquarters in Atlanta and from
two other offices in Fidelity's banking facilities in the Atlanta metropolitan
area.
Trust Products and Services
Fidelity provides investment products and services to individuals and
organizations under trust and agency agreements. At December 31, 1998, the Bank
serviced approximately $243 million in assets, with the majority of accounts in
custodial and self-directed IRAs. Other services include
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personal trusts, employee benefit trusts, guardianships, estate settlement
accounts, management agency accounts and corporate trusts.
International Trade Services
Fidelity provides services to individuals and business clients in
meeting their international business requirements. Letters of credit, foreign
currency drafts, foreign and documentary collections, export finance and
international wire transfers are some of the services provided.
SIGNIFICANT OPERATING POLICIES
Lending Policy
Lending authority is delegated by the Board of Directors of the Bank to
loan officers, each of whom is limited as to the amount of secured and unsecured
loans that the loan officer can make to a single borrower or related group of
borrowers. All loans in excess of $100,000 (new relationships) or $250,000
(existing relationships) must be approved by a committee of officers of the
Bank. All loans over $500,000 must be approved by the President and Chief
Executive Officer of the Bank or the Chairman of the Board of the Bank. All
loans in excess of $1,000,000 must be approved by the Loan and Discount
Committee of the Board of Directors of the Bank.
The Bank provides written guidelines for lending activities. Secured
loans, except indirect installment loans which are generally secured by the
vehicle purchased, are to be made to persons who are well-established and have
net worth, collateral and cash flow to support the loan. Real estate loans are
made only when such loans are secured by real property located primarily in
Georgia or Florida. Unsecured loans, except credit card loans, normally are to
be made by the Bank only to persons who maintain depository relationships with
the Bank. Any loan renewal request is reviewed in the same manner as an
application for a new loan.
Under certain circumstances, the Bank takes investment securities as
collateral for loans. If the purpose of the loan is to purchase or carry margin
stock, the Bank will not advance loan proceeds of more than 50% of the market
value of the stock serving as collateral. If the loan proceeds will be used for
purposes other than purchasing or carrying margin stock, the Bank generally will
lend up to 70% of the current market value of the stock serving as collateral.
Making loans to businesses for working capital is a traditional
function of commercial banks. Such loans are expected to be repaid out of the
current earnings of the commercial entity. The ability of the borrower to
service its debt is dependent upon the success of the commercial enterprise. It
is the policy of the Bank to require security for these loans.
For loans that are collateralized by inventory, furniture, fixtures and
equipment, the Bank does not generally advance loan proceeds of more than 50% of
the inventory value and more than 50% of the furniture, fixtures and equipment
value serving as collateral. When inventory serves as primary collateral,
accounts receivable generally will also be taken as collateral. Maximum
collateral values for accounts receivable is 80% of eligible receivables
outstanding. No collateral value will be assigned for accounts receivable
outstanding past 90 days.
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Many of the Bank's commercial loans are secured by real estate (and
thus are categorized as real estate mortgage loans) because such collateral may
be superior to other types of collateral owned by small businesses. Loans
secured by commercial real estate, however, are subject to certain inherent
risks. Commercial real estate may be substantially illiquid, and commercial real
estate values are difficult to ascertain and are subject to wide fluctuations
depending upon economic conditions. For loans in excess of $250,000, the Bank
generally requires that qualified independent appraisers determine the value of
any commercial real estate taken as collateral, and the Bank will generally lend
75% of the appraised value or the purchase price of the real estate, whichever
is less.
The Bank originates short-term residential construction loans for
detached housing and a limited number of residential acquisition and development
loans in the Atlanta and Jacksonville metropolitan areas. Residential
construction loans are made through the use of officer guidance lines, which are
approved, when appropriate, by the Bank's Loan and Discount Committee. Specific
maximum loan commitment and numbers of unsold houses allowed are clearly
identified for each of the approximately 75 builders' officer guidance lines.
Each loan is individually reviewed and approved by the loan officer and is
subject to an appraisal and a maximum 80% loan-to-value ratio.
These guidelines are approved for established builders with track
records and adequate financial strength to support the credit being requested.
Loans may be for speculative starts or for pre-sold residential property to
specific purchasers. As of December 31, 1998, approximately $61 million (11.4%
of total loans) was outstanding on total residential construction loans, of
which approximately $16 million was for acquisition and development loans.
Acquisition and development loans generally have 18 month or shorter maturities
and are for the purpose of developing lots for a builder's own building program
usage or are generally pre-sold to an established builder or builders.
Inter-agency guidelines adopted by Federal banking regulators,
including the OCC, require that financial institutions establish real estate
lending policies. The guidelines also established certain maximum allowable real
estate loan-to-value standards. The Bank has adopted the Federal standards as
its maximum allowable standards, but has in place loan policies which are, in
some cases, more conservative than the OCC guidelines. The Bank and OCC
guidelines require maximum allowable loan-to-value ratios for various types of
real estate loans as set forth below.
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<TABLE>
<CAPTION>
MAXIMUM ALLOWABLE
LOAN-TO-VALUE RATIO
--------------------
LOAN CATEGORY
<S> <C>
Land............................................ 65%
Land development................................ 75
Construction:
Commercial, multifamily(1) and other
nonresidential.............................. 80
One-to-four family residential.................. 85
Improved property............................... 85
Owner-occupied one-to-four family and
home equity(2)............................... --
</TABLE>
- ----------
(1) Multifamily construction includes condominiums and cooperatives.
(2) A loan-to-value limit has not been established for permanent mortgage
or home equity loans on owner-occupied, one-to-four family residential
property. However, for any such loan with a loan-to-value ratio that
equals or exceeds 90% at origination, appropriate credit enhancement in
the form of either mortgage insurance or readily marketable collateral
should be required.
Potential specific risk elements associated with each of the Bank's
lending categories include the following:
<TABLE>
<S> <C>
Credit cards................................ Employment status, changes in local economy, unsecured
credit risks
Installment loans to
individuals................................ Employment status, changes in local economy, difficulty in
monitoring collateral (vehicle, boat, mobile home) and limited
personal contact as a result of indirect lending through dealers
Commercial, financial
and agricultural........................... Industry concentrations, difficulty in monitoring the valuation
of collateral (inventory, accounts receivable and vehicles),
borrower management expertise, increased competition, and
specialized or obsolete equipment as collateral
Real estate-residential
construction .............................. Inadequate collateral and change in market conditions
Real estate-residential
mortgage.................................. Changes in local economy and caps on variable rate loans
</TABLE>
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Management believes that the outstanding loans included in each of
these categories do not represent more than the normal risks associated with
these categories, as described above. Fidelity's underwriting and asset quality
monitoring systems focus on minimizing the risks outlined above.
Loan Review and Nonperforming Assets
The Bank's credit administration department reviews its loan portfolio
to identify potential deficiencies and appropriate corrective action. The credit
administration department attempts to review 30% to 45% of commercial and
construction loan portfolios and 10% of the consumer portfolio, annually. The
results of the reviews are presented to the Bank's Board of Directors on a
monthly basis. Loan reviews are performed on credits that are selected according
to their risk. Past due loans are reviewed weekly by each lending officer and by
the credit administration department. A summary report is reviewed monthly by
the Bank's Board of Directors. The Bank Loan Committee of the Board of Directors
of Bank annually reviews all loans over $1.0 million.
A sampling of credit card accounts are reviewed on a monthly basis for
compliance with credit policy. Review procedures include a determination of
whether the appropriate review of employment, residence and other information
has been completed, recalculation of the borrower's debt coverage ratio, and
analysis of the borrower's credit history to determine if it meets the Bank's
established criteria. Policy exceptions are analyzed monthly. Delinquencies are
monitored daily. Accounts are charged off after they are 180 days past due in
accordance with industry practice.
A 10% sample of consumer loans is reviewed on a monthly basis in
compliance with the Bank's policies and procedures.
A provision for loan losses and a corresponding increase in the
allowance for loan losses are recorded monthly, taking into consideration the
historical charge-off experience, delinquency and current economic conditions,
and management's estimate of losses inherent in the loan portfolio.
Asset/Liability Management
Fidelity's asset/liability committee (the "Committee") is comprised of
officers of Fidelity and the Bank who are charged with managing Fidelity's
assets and liabilities. The Committee attempts to manage asset growth, liquidity
and capital in order to maximize income and reduce interest rate risk. The
Committee directs Fidelity's overall acquisition and allocation of funds. At its
monthly meetings, the Committee reviews and discusses the monthly asset and
liability funds budget and projections in relation to the actual flow of funds.
The Committee also reviews and discusses peer group comparisons, the ratio of
the amount of rate-sensitive assets to the amount of rate-sensitive liabilities
and other variables, such as expected loan demand, investment opportunities,
core deposit growth within specified categories, regulatory changes, monetary
policy adjustments and the overall state of the economy.
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Investment Policy
Fidelity's investment portfolio policy is to maximize income consistent
with liquidity, asset quality, regulatory constraints and asset/liability
objectives. The policy is reviewed at least annually by Fidelity's and the
Bank's Board of Directors. The Boards of Directors are provided information
monthly concerning sales, purchases, resulting gains or losses, average
maturity, Federal taxable equivalent yields and appreciation or depreciation by
investment categories.
SUPERVISION AND REGULATION
Holding Company Regulation
Fidelity is a registered bank holding company subject to regulation by
the Federal Reserve Board ("Federal Reserve" or "FRB") under the Bank Holding
Company Act of 1956, as amended ("Holding Company Act"). Fidelity is required to
file financial information with the Federal Reserve periodically and is subject
to periodic examination by the Federal Reserve.
The Holding Company Act requires every bank holding company to obtain
the prior approval of the Federal Reserve (i) before it may acquire, direct or
indirect, ownership or control of more than 5% of the voting shares of any bank
that it does not control; (ii) before it or any of its subsidiaries, other than
a bank, may acquire all or substantially all of the assets of a bank; and (iii)
before it may merge or consolidate with any other bank holding company. In
addition, a bank holding company is generally prohibited from engaging in
non-banking activities, or acquiring direct or indirect control of voting shares
of any company engaged in such activities. This prohibition does not apply to
activities found by the Federal Reserve, by order or regulation, to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve has determined
by regulation or order to be closely related to banking are: making or servicing
loans and certain types of leases; performing certain data processing services;
acting as fiduciary or investment or financial advisor; providing discount
brokerage services; and making investments in corporations or projects designed
primarily to promote community welfare.
Fidelity must also register with the Georgia Department of Banking and
Finance ("GDBF"). Such registration filing includes information with respect to
the financial condition, operations, management and intercompany relationships
of Fidelity, Fidelity and its other subsidiaries, and related matters. The GDBF
may also require such other information as is necessary to keep itself informed
as to whether the provisions of Georgia law and the regulations and orders
issued thereunder by the GDBF have been complied with, and the GDBF may make
examinations of Fidelity.
Fidelity, Fidelity Mortgage and Fidelity Capital are "affiliates" of
Fidelity National Bank under the Federal Reserve Act, which imposes certain
restrictions on (i) loans by the Bank to Fidelity, (ii) investments in the stock
or securities of Fidelity by the Bank, (iii) the Bank's accepting the stock or
securities of one of its affiliates from a borrower as collateral for loans and
(iv) the purchase of assets from Fidelity by the Bank. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any grant of credit, lease or sale of property
or furnishing of services.
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Bank Regulation
The Bank is a national bank chartered under the National Bank Act. The
Bank and its wholly-owned subsidiaries are subject to the supervision of, and
are regularly examined by, the OCC. The OCC regulates and monitors all areas of
the Bank and Fidelity Mortgages' operations and activities, including reserves,
loans, mergers, issuances of securities, payments of dividends, interest rates,
mortgage servicing, accounting and establishment of branches. Interest and
certain other charges collected or contracted for by the Bank are also subject
to state usury laws or certain Federal laws concerning interest rates.
The Bank is insured by the Federal Deposit Insurance Corporation (the
"FDIC"). The major functions of the FDIC with respect to insured banks include
paying depositors to the extent provided by law if an insured bank is closed
without adequate provision having been made to pay claims of depositors, acting
as a receiver of state banks placed in receivership when appointed receiver by
state authorities and preventing the development or continuance of unsound and
unsafe banking practices. The FDIC also has the authority to recommend to the
appropriate Federal agency supervising an insured bank that the agency take
informal action against such institution and to act to implement the enforcement
action itself if the agency fails to follow the FDIC's recommendation. The FDIC
also has the authority to examine all insured banks.
In 1991, the Federal Deposit Insurance Corporation Improvement Act of
1991 ("1991 Act") was adopted, the principal initial effect of which was to
permit the Bank Insurance Fund ("BIF") to borrow up to $30 billion from the U.S.
Treasury (to be repaid through deposit insurance premiums over 15 years) and to
permit the BIF to borrow working capital from the Federal Financing Bank in an
amount up to 90% of the value of the assets the FDIC has acquired from failed
banks. Pursuant to the 1991 Act, the FDIC has implemented a risk-based
assessment system whereby banks are assessed on a sliding scale depending on
their placement in nine separate supervisory categories. Effective June 1, 1995,
the BIF reached the designated reserve ratio of 1.25% of total estimated
deposits and the FDIC lowered the assessment rate schedule for BIF members to
$0.04 per $100 of deposits for the healthiest banks to $.31 per $100 of deposits
for less healthy institutions. The Bank's BIF assessment rate was $.07 per $100
of deposits in 1996.
As a result of the Bank's capital position in 1996, its FDIC
assessments increased significantly during 1997. The Bank's total FDIC insurance
and SAIF assessments for the three years ended December 31, 1996, 1997 and 1998
were $427,000, $1,065,000 and $1,208,000, respectively. At December 31, 1998,
the Bank's BIF assessment rate was $.17 per $100 of deposits. Effective January
1, 1999, the Bank's BIF assessment rate became $.03 per $100 of deposits.
Various other sections of the 1991 Act impose substantial new auditing
and reporting requirements and increase the role of independent accountants and
outside directors on banks having assets of $500 million or more, and regulators
may encourage smaller banks to comply with such requirements. The 1991 Act also
provides for a ban on the acceptance of brokered deposits except by well
capitalized institutions and by adequately capitalized institutions with the
permission of the FDIC, and for restrictions on the activities engaged in by
state banks and their subsidiaries as principal, including insurance
underwriting, to the same activities permissible for national banks and
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their subsidiaries, unless the state bank is well capitalized and a
determination is made by the FDIC that the activities do not pose a significant
risk to the insurance fund. The effect on Fidelity of these measures contained
in the bill will be to a great extent dependent upon the manner in which bank
regulatory authorities interpret and enforce regulations that have been issued
pursuant to the 1991 Act.
One-Time SAIF Assessment
In 1992 the Bank acquired deposits from a savings and loan institution.
These deposits are subject to FDIC deposit insurance assessments for the SAIF.
On September 3, 1996, legislation authorizing the recapitalization of the SAIF
became effective. This legislation required the Bank and all other depository
institutions having SAIF insured deposits, to pay a one-time assessment. The
Bank provided for this special assessment and recorded a pretax charge of
$250,000 in the third quarter of 1996.
Capital Requirements
The information contained in notes 2 and 11 to Fidelity's 1998 Annual
Report to Shareholders under the headings "Regulatory Agreements" and
"Shareholders' Equity" are incorporated herein by reference.
Interstate Banking Act
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act") became law. The Interstate
Banking Act has two major provisions regarding the merger, acquisition and
operation of banks across state lines. First it provides that effective
September 29, 1995, adequately capitalized and managed bank holding companies
will be permitted to acquire banks in any state. State laws prohibiting
interstate banking or discriminating against out-of-state banks will be
preempted as of the effective date. States cannot enact laws opting out of this
provision; however, states may adopt a minimum restriction requiring that target
banks located within the state be in existence for a period of years, up to a
maximum of five years, before such bank may be subject to the Interstate Banking
Act. The Interstate Banking Act establishes deposit caps which prohibit
acquisitions that would result in the acquirer controlling 30% or more of the
deposits of insured banks and thrifts held in the state in which the acquisition
or merger is occurring or in any state in which the target maintains a branch or
10% or more of the deposits nationwide. State-level deposit caps are not
preempted as long as they do not discriminate against out-of-state acquirers,
and the Federal deposit caps apply only to initial entry acquisitions.
The legislation also provides that, unless an individual state elects
beforehand either (i) to accelerate the effective date or (ii) to prohibit
out-of-state banks from operating interstate branches within its territory, on
or after June 1, 1997, adequately capitalized and managed bank holding companies
will be able to consolidate their multistate bank operations into a single bank
subsidiary and to branch interstate through acquisitions. De novo branching by
an out-of-state bank would be permitted only if it is expressly permitted by the
laws of the host state. The authority of a bank to establish and operate
branches within a state will continue to be subject to applicable state
branching laws. The State of Georgia has enacted legislation in connection with
the Interstate Banking Act
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<PAGE> 13
which requires that a bank located within the state must be in existence for a
period of five years before it may be acquired by an out-of-state institution.
This state legislation also requires out-of-state institutions to purchase an
existing bank or branch in the state rather than starting a de novo bank. Many
states, including Georgia, have enacted legislation which permits banks with
different home states to merge if the states involved have enacted legislation
permitting interstate bank mergers prior to June 1, 1997. Under Georgia law, as
of July 1, 1998, new or additional branch banks may be established anywhere in
the state with the prior approval of the appropriate regulator.
The Interstate Banking Act was amended on July 3, 1997, for the purpose
of ensuring that state banks are competitive with national banks under the new
interstate banking laws. The amendment provides that state law of the host state
applies to an out-of-state, state-chartered bank that branches in the host state
to the same extent that it applies to a national bank operating a branch in the
host state to the same extent that it applies to a national bank operating a
branch in the host state. The law also provides that bank branches operating in
the host state and chartered in another state may exercise powers they have
under their home-state charters if host state-chartered banks or national banks
may exercise those powers.
Fidelity believes that this legislation may result in increased
takeover activity of Georgia financial institutions by out-of-state financial
institutions. Fidelity does not presently anticipate that such legislation will
have a material impact on its operations or future plans.
Regulation of Mortgage Banking
The mortgage banking industry is subject to the rules and regulations
of, and examinations by, the GDBF, FNMA, FHLMC, Government National Mortgage
Association ("GNMA"), HUD, FHA and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
residential mortgage loans. In addition, there are other Federal and state
statutes and regulations affecting such activities. These rules and regulations,
among other things, require licensing of mortgage bankers, govern how mortgage
servicers process a mortgagor's payment, require an annual analysis of Fidelity
Mortgage's escrow balances and also regulate the procedure for making investor
payments.
Many states have adopted statutes and regulations which require the
payment of interest on escrow accounts, but many of these provisions contain
exemptions from the requirement to pay interest. The common exemptions are:
interest is paid only on loans originated after enactment or a phase-in;
interest need only be paid if the mortgage servicer earns interest on the
account; interest need not be paid by an out-of-state mortgage servicer; and
interest need not be paid on low loan-to-value loans or government loans or
where interest is offset by administrative expenses. It is presently unclear
whether these statutes and regulations, or some variation thereof, will be
implemented by other states and if so what effect that will have on Fidelity and
Fidelity Mortgage.
Georgia law requires the registration and licensing of mortgage brokers
and lenders engaged in making loans secured by one-to-four family residential
property located in Georgia (the "Mortgage Act"). Fidelity Mortgage, as a
subsidiary of a Georgia bank holding company subject to examination by the GDBF,
is exempt from the licensing requirement of the Mortgage Act, but is required to
register with the GDBF. Fidelity Mortgage must renew its registration annually
and
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<PAGE> 14
provide the GDBF in its renewal application with information, including a
general plan of the business, financial statements and other financial
information requested by the GDBF and shareholders owning at least 10% of the
mortgage lender's equity. Fidelity Mortgage is required to maintain such records
as the GDBF may require and is subject to examination by the GDBF. In addition,
Fidelity Mortgage must file an annual report with the GDBF each year.
The Mortgage Act requires that mortgage brokers and lenders, including
Fidelity Mortgage, make certain disclosures to applicants for mortgage loans.
The Mortgage Act also provides authority for the GDBF to promulgate rules with
respect to escrow accounts and the advertising of mortgage loans, and the GDBF
has promulgated regulations governing mortgage loan advertising. In addition,
the Mortgage Act imposes restrictions on unfair mortgage banking practices, as
defined by the Mortgage Act.
There are numerous rules and regulations imposed on mortgage loan
originators that require originators to obtain and maintain licenses; establish
eligibility criteria for mortgage loans; prohibit discrimination; regulate
advertising of loans; encourage lenders to identify and meet the credit needs of
the community, including low and moderate income neighborhoods, consistent with
sound lending practices, by requiring certain statistical information be
maintained and publicly available regarding mortgage lending practices within
certain geographical areas; provide for inspections and appraisals of
properties; require credit reports on prospective borrowers; regulate payment
features; and, in some cases, fix maximum interest rates, fees and loan amounts.
Failure to comply with these requirements can lead to loss of approved status,
termination of servicing contracts without compensation to the servicer, demands
for indemnification or loan repurchases, and administrative enforcement actions.
Broker-Dealer Regulation
Securities broker-dealers are subject to extensive regulation.
Generally, broker-dealers must register with the Commission and the states in
which they operate. All broker-dealers must be members of the National
Association of Securities Dealers ("NASD"), subject to its rules and
disciplinary procedures. Personnel of broker-dealers engaged in sales activities
must be licensed as salespeople under the appropriate state laws and register
with the NASD. Registered broker-dealers are subject to detailed record keeping
and reporting requirements. The extent to which broker-dealers can extend credit
is also subject to regulation. Fidelity Capital, as a registered broker-dealer,
is also subject to rules regarding minimum capital, disclosure obligations,
restrictions on markups, and other matters.
COMPETITION
The banking business is highly competitive. Fidelity's primary market
area, other than for credit cards, residential mortgages and indirect automobile
loans, consists of Fulton, DeKalb, Cobb and Gwinnett counties, Georgia. The Bank
competes for traditional bank business with numerous other commercial banks and
thrift institutions with offices in Fidelity's primary trade area, many of which
have greater financial resources than Fidelity. Fidelity also competes for loans
with insurance companies, regulated small loan companies, credit unions and
certain governmental agencies. Fidelity Capital competes with independent
brokerage and investment companies as well as state and
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<PAGE> 15
national banks and their affiliates and other financial companies. There can be
no assurance that additional companies will not offer products and services that
are competitive with those offered by Fidelity and its subsidiaries. The
emergence of such competitors could have a material adverse effect on results of
operations and financial condition of Fidelity.
The credit card, indirect automobile financing and mortgage banking
industries are also highly competitive. Fidelity competes with banks and special
purpose credit card banks and companies throughout the United States as well as
entities such as General Motors Corporation for credit card customers. In the
indirect automobile financing industry, Fidelity competes with specialty
consumer finance companies in addition to banks. Fidelity Mortgage competes with
independent mortgage banking companies, state and national banks and their
subsidiaries, as well as thrift institutions and insurance companies. There can
be no assurance that additional companies will not offer products and services
that are competitive with those offered by Fidelity. The emergence of such
competitors could have a material adverse effect on the results of operations
and financial condition of Fidelity.
EMPLOYEES
As of December 31, 1998, Fidelity had 410 full-time equivalent
employees. Fidelity is not a party to any collective bargaining agreement.
Fidelity believes that its employee relations are good.
EXECUTIVE OFFICERS
Executive officers are elected by the Board of Directors annually at
the Board of Directors' meeting held directly after the Annual Meeting of
Shareholders and hold office until the next election, unless they sooner resign
or are removed from office.
Fidelity's executive officers, their ages, their positions with
Fidelity at February 28, 1998, and the period during which the person served as
an executive officer, are as follows:
<TABLE>
<CAPTION>
Officer
Name Age Since Position
---- --- ------ --------
<S> <C> <C> <C>
James B. Miller, Jr. 58 1979 Chairman of the Board, President and Chief
Executive Officer of Fidelity since 1979;
Chairman of Fidelity Bank since 1998;
President of the Bank from 1977 to 1997,
Chairman of Fidelity Mortgage since 1979,
and Chairman of Fidelity Capital since
1992.
Larry D. Peterson 50 1997 Vice President of Fidelity since 1997; President and
Chief Executive Officer of the Bank since 1997.
</TABLE>
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<PAGE> 16
<TABLE>
<CAPTION>
Officer
Name Age Since Position
---- --- ------ --------
<S> <C> <C> <C>
M. Howard Griffith, Jr. 55 1994 Principal Accounting Officer of Fidelity and Chief
Financial Officer of the Bank since February 1994.
Palmer Proctor, Jr. 31 1996 Vice President of Fidelity since 1996; Vice President
of the Bank since 1993. Joined the Bank as a Management
Associate in 1990.
</TABLE>
RISK FACTORS
Credit Card Loan Loss Trends; Seasoning Risks of Credit Card Portfolio
During 1996 and 1997, Fidelity experienced higher than historical
levels of loan losses on its credit card loans. There can be no assurance that
future credit card losses will not continue at higher than historical levels in
the future. Continued credit card loan losses exceeding Fidelity's historical
rate could have a material adverse affect on the results of operations and
financial condition of Fidelity.
Credit Risk and Loan Concentration
A major risk facing lenders is the risk of losing principal and
interest as a result of a borrower's failure to perform according to the terms
of the loan agreement, or "credit risk." Real estate loans include residential
mortgages and construction and commercial loans secured by real estate.
Fidelity's credit risk with respect to its real estate loans relates principally
to the value of the underlying collateral. Fidelity's credit risk with respect
to its indirect automobile loans and commercial loans relates principally to the
general creditworthiness of the borrowers who primarily are individuals and
small and medium-sized businesses in the metropolitan areas of Atlanta, Georgia
and Jacksonville and Tampa, Florida. While indirect automobile loans are
secured, they are characterized by loan to value ratios that could result in
Fidelity not recovering the full value of an outstanding loan upon default by
the borrower. Fidelity's credit risk with respect to its credit card portfolio
relates principally to the general creditworthiness of individuals in light of
the unsecured nature of credit card loans. There can be no assurance that the
allowance for loan losses will be adequate to cover future losses in the
existing loan portfolios. Loan losses exceeding Fidelity's historical rates
could have a material adverse affect on the results of operations and financial
condition of Fidelity.
Year 2000 Issues
Fidelity uses software that will be affected by the date change in the
Year 2000. Date sensitive systems may recognize the Year 2000 as 1900, or not at
all. This may cause systems to process critical financial and operational
information incorrectly or not at all. Fidelity has taken and is taking action
to correct this problem. Fidelity has taken various actions to determine the
nature
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<PAGE> 17
and work required to make its system Year 2000 compliant. Fidelity continues to
evaluate the estimated costs of compliance and has commenced corrective action
to achieve compliance. Fidelity has implemented a Year 2000 program and has, in
its opinion, allocated adequate resources for this purpose. While compliance has
and will involve additional costs, Fidelity believes, based on current
information, that it will timely achieve Year 2000 compliance without a material
adverse effect on its business. However, there can be no assurances that its
estimates of costs involved will prove to be accurate or that it will have
timely resolved all Year 2000 related issues. Failure to timely achieve Year
2000 compliance at its cost estimates could have a material adverse effect on
its financial condition and business of Fidelity.
Potential Impact of Change in Interest Rate
The profitability of Fidelity depends to a large extent upon its net
interest income which is the difference between interest income on
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. The net interest
income of Fidelity would be adversely affected if changes in market interest
rates resulted in the cost of interest-bearing liabilities increasing faster
than the increase in the yield on the interest-earning assets of Fidelity. In
addition a decline in interest rates may result in greater than normal
prepayments of the higher interest bearing obligations held by Fidelity.
Management Information Systems
The sophistication and level of risk of Fidelity's business requires
the utilization of thorough and accurate management information systems. Failure
of management to effectively implement, maintain, update and utilize updated
management information systems could prevent management from recognizing in a
timely manner deterioration in the performance of its business, particularly its
credit card and indirect automobile loan portfolios. Such failure to effectively
implement, maintain, update and utilize comprehensive management information
systems could have a material adverse effect on the results of operations and
financial condition of Fidelity.
Adverse Economic Conditions
Fidelity's major lending activities are indirect automobile, credit
card, and real estate and commercial loans. Indirect automobile loans and
residential mortgage loans are also produced for resale with servicing rights
retained. An increase in interest rates could have a material adverse effect on
the housing and automobile industries and consumer spending generally. In
addition, an increase in interest rates could cause a decline in the value of
residential mortgages and indirect automobile loans held-for-sale by Fidelity.
These events could adversely affect the results of operations and financial
condition of Fidelity.
As of December 31, 1998, residential mortgages held-for-sale by
Fidelity were principally on real property located in the metropolitan areas of
Atlanta, Georgia and Jacksonville, Florida. Fidelity's indirect automobile loans
have been obtained principally from automobile dealers located in the
metropolitan areas of Jacksonville and Tampa, Florida, and Atlanta, Georgia. As
of December 31, 1998, credit card loans were concentrated with borrowers in
Georgia, California, Texas and
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<PAGE> 18
Florida. Adverse national, regional and local economic conditions may adversely
affect the results of operations and financial condition of Fidelity.
Dependence on Key Personnel
Fidelity currently depends heavily on the services of its Chief
Executive Officer, James B. Miller, Jr, and a number of other key management
personnel. The loss of Mr. Miller's services or of other key personnel could
materially and adversely affect the results of operations and financial
condition of Fidelity. Fidelity's success will also depend in part on its
ability to attract and retain additional qualified management personnel.
Competition for such personnel is strong in the banking industry and Fidelity
may not be successful in attracting or retaining the personnel it requires.
Governmental Regulation -- Banking
Fidelity and the Bank are subject to extensive supervision, regulation
and control by several federal and state governmental agencies, including the
FRB, OCC, GBDF, FDIC, FNMA, FHLMC, and GNMA. Future legislation, regulations and
government policy could adversely affect Fidelity and the financial institutions
industry as a whole, including the cost of doing business. Although the impact
of such legislation, regulation and policies cannot be predicted, future changes
may alter the structure of and competitive relationships among financial
institutions and the cost of doing business.
Governmental Regulation -- Mortgage Banking
The mortgage banking operations of Fidelity are subject to extensive
regulation by federal and state governmental authorities and agencies, including
FNMA, FHLMC, GNMA, the Federal Housing Authority, and the Veterans
Administration. Consequently, Fidelity is subject to various laws, rules and
regulations and judicial and administrative decisions that, among other things,
regulate credit-granting activities, govern secured transactions, and establish
collection, repossession and claims-handling procedures and other trade
practices. Failure to comply with regulatory requirements can lead to loss of
approved status, termination of servicing contracts without compensation to the
servicer, demands for indemnification or mortgage loan repurchases, class action
lawsuits and administrative enforcement actions. Although Fidelity believes that
it is in compliance in all material respects with applicable federal, state and
agency laws, rules and regulations, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future which
could make compliance more difficult or expensive, restrict Fidelity's ability
to originate, purchase or sell mortgage loans, further limit or restrict the
amount of interest and other fees that may be earned or charged on mortgage
loans originated, purchased or serviced by Fidelity or otherwise adversely
affect the results of operations and financial condition of Fidelity.
Governmental Regulation -- Securities
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Broker-dealers are subject to
regulations covering all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of customers'
funds and securities, capital structure, record keeping and the conduct of
directors,
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<PAGE> 19
officers and employees. Fidelity Capital is required to comply with many complex
laws and rules as a broker-dealer, including rules relating to possession and
control of customer funds and securities, margin lending and execution and
settlement of transactions.
Additional legislation, changes in rules promulgated by the Securities
and Exchange Commission ("Commission"), NASD, the FRB, the various stock
exchange and other self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The Commission, the
NASD, and other self-regulatory organizations and state securities commissions
may conduct administrative proceedings regarding alleged violations of their
rules, which can result in censure, fine, the issuance of cease-and-desist
orders or the suspension or expulsion of a broker-dealer or any of its officers
or employees. Fidelity Capital's ability to comply with all applicable laws and
rules is dependent in large part upon the establishment and maintenance of a
compliance system reasonably designed to ensure such compliance, as well as
Fidelity Capital's ability to attract and retain qualified compliance personnel.
The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities markets, rather than protection of
creditors and stockholders of broker-dealers. Fidelity Capital could in the
future be subject to disciplinary or other actions due to claimed noncompliance,
which could have a material adverse effect on the results of operations and
financial condition of Fidelity.
Consumer and Debtor Protection Laws
Fidelity is subject to numerous federal and state consumer protection
laws that impose requirements related to offering and extending credit. The
United States Congress and state governments may enact laws and amend existing
laws to regulate further the consumer industry or to reduce finance charges or
other fees or charges applicable to credit card and other consumer revolving
loan accounts. Such laws, as well as any new laws or rulings which may be
adopted, may adversely affect Fidelity's ability to collect on account balances
or maintain previous levels of finance charges and other fees and charges with
respect to the accounts. Any failure by Fidelity to comply with such legal
requirements also could adversely affect its ability to collect the full amount
of the account balances. Changes in federal and state bankruptcy and debtor
relief laws could adversely affect the results of operations and financial
condition of Fidelity if such changes result in, among other things, additional
administrative expenses and accounts being written off as uncollectible.
Composition of Real Estate Loan Portfolio
The real estate loan portfolio of Fidelity includes residential
mortgages and construction and commercial loans secured by real estate. Fidelity
generates all of its real estate mortgage loans in Georgia and Florida.
Therefore, conditions of these real estate markets could strongly influence the
level of Fidelity's non-performing mortgage loans and the results of operations
and financial condition of Fidelity. Real estate values and the demand for
mortgages and construction loans are affected by, among other things, changes in
general or local economic conditions, changes in governmental rules or policies,
the availability of loans to potential purchasers, and acts of nature. Although
Fidelity's underwriting standards are intended to protect Fidelity against
adverse general and local real estate trends, declines in real estate markets
could adversely impact the demand for
18
<PAGE> 20
new real estate loans, the value of the collateral securing Fidelity's loans and
the results of operations and financial condition of Fidelity.
Monetary Policy
The operating results of the Bank are affected by credit policies of
monetary authorities, particularly the Federal Reserve. The instruments of
monetary policy employed by the Federal Reserve include open market operations
in U.S. Government securities, changes in the discount rate on bank borrowings
and changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels and loan demand on the results of operations and business
of Fidelity.
Relationship with Dealers
Fidelity's indirect automobile lending operation depends in large part
upon its ability to maintain and service its relationships with automobile
dealers. There can be no assurance Fidelity will be successful in maintaining
such relationships or increasing the number of dealers with which it does
business or that its existing dealer base will continue to generate a volume of
finance contracts comparable to the volume historically generated by such
dealers.
ITEM 2. PROPERTIES
Fidelity's principal executive offices consist of 49,368 leased square
feet (of which 23,939 square feet are sublet) in Atlanta, Georgia. Fidelity's
operations are principally conducted from 80,000 square feet located at 3
Corporate Square, Atlanta, Georgia. The Bank has 19 Branch offices located in
Fulton, DeKalb, Cobb and Gwinnett Counties, Georgia, 13 are owned and six are
leased. Fidelity leases loan production offices in Jacksonville and Tampa,
Florida.
ITEM 3. LEGAL PROCEEDINGS
Fidelity is a party to claims and lawsuits arising in the course of
normal business activities. Although the ultimate outcome of these claims and
lawsuits cannot be ascertained at this time, it is the opinion of management
that none of these matters when resolved will have a material adverse effect on
Fidelity's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 21
PART II
ITEM 5. MARKET FOR FIDELITY'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
STOCK. Fidelity's Common Stock is listed on the Nasdaq National Market
under the trading symbol LION. There were approximately 575 holders of record
and approximately 2,000 beneficial owners whose shares of Fidelity's Common
Stock are held by brokers, dealers and their nominees as of February 28, 1998.
Market prices of the Fidelity's Common Stock included on the inside
back cover of the 1998 Annual Report to Shareholders are incorporated herein by
reference. The last sale price on December 31, 1998, was $10.75.
On September 30, 1996, Fidelity sold an aggregate of 44,015 shares of
Common Stock to directors and their affiliates in a private placement at $12.625
per share paid in cash. This private placement of securities is exempt from
registration under Section 4(2) of the Securities Act of 1933.
During June 1997, Fidelity issued 752,000 shares of Preferred Stock at
a purchase price of $6.25 per share in a private placement. 704,000 shares of
Preferred Stock were sold for cash aggregating $4,400,000 and 48,000 shares of
Preferred Stock were exchanged for Fidelity subordinated debt in the principal
amount of $300,000. During July 1997, an additional 232,000 shares of Preferred
Stock were sold for $1,100,000 paid in cash and $350,000 in exchange for
subordinated debt of Fidelity in the principal amount of $350,000. The sale of
the Preferred Stock was exempt from registration under Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated by the Commission.
In connection with the public offering of Common Stock in December
1997, Fidelity issued to Raymond James & Associates, Inc., the principal
underwriter, warrants to purchase 150,000 shares of Common Stock at a purchase
price of $8.25 per share. The warrants are exercisable during the four-year
period commencing December 12, 1998. The issuance of the warrants was exempt
from registration under Section 4(2) of the Securities Act of 1933.
DIVIDENDS. Fidelity paid $.04 cash dividend on the Common Stock in
December, 1998. There were no cash dividends paid on Fidelity's Common Stock
during 1997.
Restrictions on Dividends - Indenture. The indenture ("Indenture")
relating to the 8 1/2% Subordinated Notes ("Notes") provides that Fidelity may
not pay cash dividends on its capital stock or redeem any shares of its capital
stock if the cumulative dividends and redemptions would exceed cumulative
consolidated net income of Fidelity for the three-year period ending on the
dividend declaration date or redemption date. In addition, no dividend can be
declared on the capital stock if an event of default has occurred and is
continuing under the Notes, including the failure to pay interest on such
indebtedness or default on other indebtedness exceeding $1 million. See Note 8
to the Consolidated Financial Statements.
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<PAGE> 22
Fidelity is currently in default of the covenant of the Indenture
restricting dividend payments. During 1998, Fidelity declared dividends on the
Preferred Stock and Common Stock aggregating $369,000. If the trustee of the
Indenture or holders of ten percent of the Notes sends Fidelity a notice of
default and the default continues for a period of thirty days after the notice
have been given, then the default will constitute an Event of Default. Upon an
Event of Default the trustee may, in its discretion, appoint an observer to
attend the meetings of Fidelity's Board of Directors and report thereon to the
holders of the Notes. Also, the trustee may take appropriate judicial action as
the trustee deems most effective to protect and enforce the rights of the
holders of the Notes.
Restriction on Dividends - FRB Agreement. The FRB Agreement provides
that no dividends are to be declared or paid on Fidelity's Common Stock without
the prior written approval of the FRB. The payment of the 1998 dividend on the
Common Stock was approved by the FRB.
Restrictions on Dividends by FNB - Regulations. Under the regulations
of the OCC the Bank may declare dividends out of net profits. The approval of
the OCC is required if the total of all dividends declared by the Bank exceeds
the total of its net profits for the year, combined with its retained net
profits for the preceding two years. The payment of dividends by the Bank may
also be affected or limited by other factors, such as the requirement to
maintain capital above regulatory guidelines. At December 31, 1998, the Bank's
total shareholders' equity totaled $51 million and exceeds the minimum required
capital. Currently, cumulative dividends do exceed cumulative consolidated net
income of the Bank for the preceding three year period. Therefore, no dividends
can be declared by the Bank on its common stock without the approval of the OCC.
During 1997 and 1998, no dividends were paid by the Bank on its common stock. In
addition, if, in the opinion of the applicable regulatory authority, a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending upon the financial condition of the bank,
could preclude the payment of dividends), such authority may require, after
notice and hearing, that such bank cease and desist from such practice.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the five years ended December 31,
1998, is included in Fidelity's 1998 Annual Report to Shareholders (page 3) and
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations appear under the caption "Consolidated Financial Review" of
Fidelity's 1998 Annual Report to Shareholders (pages 4 to 20) and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The discussion on Market Risk appears under the caption "Consolidated
Financial Review" of Fidelity's 1998 Annual Report to Shareholder (pages 9 to
11) and is incorporated herein by
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<PAGE> 23
reference. Quarterly results of operations on page 20 of Fidelity's 1998 Annual
Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements of Fidelity's 1998
Annual Report to Shareholders (pages 21 to 42) are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF FIDELITY
The information to be contained under the heading "Information About
Nominees for Director" in the definitive Proxy Statement to be sent to
shareholders in connection with the solicitation of proxies for Fidelity's 1999
Annual Meeting of Shareholders to be held on April 15, 1999, to be filed with
the Commission, is incorporated herein by reference. Pursuant to instruction 3
to paragraph (b) of Item 401 of Regulation S-K, information relating to the
executive officers of Fidelity is included in Item I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information to be contained under the headings "Executive
Compensation," "Compensation of Directors," "Compensation Committee Interlocks
and Insider Participation" in the definitive Proxy Statement to be sent to
shareholders in connection with the solicitation of proxies for Fidelity's
Annual Meeting of Shareholders to be held on April 15, 1999, to be filed with
the Commission, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information to be contained under the heading "Voting Securities
and Principal Holders" in the definitive Proxy Statement to be sent to
shareholders in connection with the solicitation of proxies for Fidelity's 1999
Annual Meeting of Shareholders to be held on April 15, 1999, to be filed with
the Commission, is incorporated herein by reference. For purposes of determining
the aggregate market value of Fidelity's voting stock held by non-affiliates,
shares held by all Fidelity directors and executive officers have been excluded.
The exclusion of such shares is not intended to, and shall not, constitute a
determination as to which persons or entities may be "affiliates" of Fidelity as
defined by the Commission.
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<PAGE> 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be contained under the heading "Compensation
Committee Interlocks and Insider Participation" in the definitive Proxy
Statement to be sent to shareholders in connection with the solicitation of
proxies for Fidelity's 1999 Annual Meeting of Shareholders to be held on April
15, 1999, to be filed with the Commission, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements.
The following consolidated financial statements and notes thereto of
Fidelity are incorporated by reference in Item 8 of this Report:
Report of Independent Auditors
Consolidated Statements of Condition - December 31, 1998, and December
31, 1997
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997, and 1996
Consolidated Statements of Comprehensive Income (Loss) for the Years
Ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997, and 1996
Notes to Consolidated Financial Statements - December 31, 1998
(2) Financial Statement Schedules.
No financial statement schedules are required to be filed as part
of this Report on Form 10-K.
(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.
23
<PAGE> 25
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
3(a) and 4(a) Articles of Incorporation of Fidelity, as amended (included as
Exhibit 3(a) and 4(a) to Fidelity's Registration Statement
on Form 10, Commission File No. 0-22374, filed with the
Commission and incorporated herein by reference).
3(b) ByLaws of Fidelity (included as Exhibit 3(b) and 4(b) to
Fidelity'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 Corporation increasing the number of authorized
shares of capital stock (included as Exhibit 3(d) to the
Report on Form 10-K for 1996 which is incorporated by
reference).
3(e) Articles of Amendment to the Articles of Incorporation of
Fidelity Corporation authorizing the issuance of preferred
stock (included as Exhibit 3(e) to the Report on Form 10-K
for 1996 which is incorporated by reference).
3(f) Amendment to Articles of Incorporation of Fidelity setting
forth the terms of the Preferred Stock (included herein by
reference to Exhibit 3(a) to Fidelity's report on Form 8-K
dated June 23, 1997).
4(b) Form of Trust Indenture (included herein by reference as
Exhibit 4(a) of Amendment 1 to Fidelity's Registration
Statement on From
S-1, No. 333-99174).
4(c) Form of Subordinated Note (included herein by reference to
Exhibit 4(b) of Amendment 1 to Fidelity's Registration
Statement
on Form 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 Fidelity's Registration Statement on
Form 10, Commission File No. 0-22376, filed with the
Commission and incorporated herein by reference).
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
10(b) Lease Agreement dated February 6, 1989, by and between DELOS
and Fidelity National Bank and amendments thereto (included
as Exhibit 10(e) to Fidelity's Registration Statement on
Form 10, Commission File No. 0-22376, filed with the
Commission and incorporated herein by reference).
10(c) Lease Agreement dated September 7, 1995, by and between Toco
Hill, Inc. and Fidelity National Bank (included as Exhibit 10(f) to
Fidelity's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference).
10(d) Agreement dated November 14, 1996, between the OCC and
Fidelity (included as Exhibit 10(h) to Fidelity's Annual Report on
Form 10-K for the year ended December 31, 1996, which is
incorporated herein by reference).
10(e) Resolution adopted by the Board of Directors of Fidelity on
February 13, 1997 (included as Exhibit 10(i) to Fidelity's Annual
Report on Form 10-K for the year ended December 31, 1996, which
is incorporated herein by reference).
*10(f) Employment Agreement between Fidelity and James B. Miller, Jr.
dated as of September 18, 1997 (included as Exhibit 10(d) to
Registration Statement on Form S-2, No. 333-36377, which is
incorporated herein by reference).
*10(g) Amendment to Employment Agreement between Management
and James B. Miller, Jr. dated November 3, 1997.
*10(h) Employment Agreement among Fidelity, the Bank and Larry D.
Peterson dated as of September 15, 1997 (included as Exhibit
10(C) to Registration Statement on Form S-2, No. 333-36377,
which is incorporated herein by reference).
*10(i) The Stock Option Plan (incorporated by reference to Exhibit
A of the Proxy Statement of Fidelity dated April 21, 1997,
for the 1997 Annual Meeting of Shareholders).
*10(j) Stock Option Agreement between Larry D. Peterson and Fidelity
(included as Exhibit 10(C) to Registration Statement on Form S-2,
No. 333-36377, which is incorporated herein by reference).
*10(k) Stock Option Agreement between James B. Miller, Jr. and Fidelity
(included as Exhibit 10(d) to Registration Statement on Form S-2,
No. 333-36377, which is incorporated herein by reference).
10(l) Common Stock Purchase Warrant issued to Raymond James &
Associates, Inc. dated December 12, 1997 (included as Exhibit 10(e)
to Registration Statement on Form S-2, No. 333-36377, which is
incorporated by reference).
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
----------- ---------------
<S> <C>
13 1998 Annual Report to Shareholders. Certain portions of this
Exhibit are incorporated by reference into this Form 10-K;
except as so incorporated by reference, the 1998 Annual
Report to Shareholders is not deemed to be filed as part of
this Report on Form 10-K.
21 Subsidiaries of Fidelity (included as Exhibit 22 to Fidelity'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
24 Powers of Attorney
27 Financial Data Schedule (for SEC use only)
* management contract or compensatory arrangement required to be
filed as an
exhibit.
(b) Reports on Form 8-K. No reports on Form 8-K were
filed during the fiscal quarter ended December 31,
1998.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a) (2) above.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Fidelity National Corporation has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIDELITY NATIONAL CORPORATION
By: /s/ James B. Miller, Jr.
---------------------------
James B. Miller, Jr.
Chairman of the Board
March 24, 1999
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Fidelity
National Corporation and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ James B. Miller, Jr. Date: March 24, 1999
- -------------------------------------------------------
James B. Miller, Jr.
Chairman of the Board and Director
(Principal Executive Officer)
/s/ M. Howard Griffith, Jr. Date: March 24, 1999
- ------------------------------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
* Date: March 24, 1999
- ------------------------------------------------------
David R. Bockel
Director
* Date: March 24, 1999
- ------------------------------------------------------
Edward G. Bowen, M.D.
Director
* Date: March 24, 1999
- ------------------------------------------------------
Kevin S. King
Director
* Date: March 24, 1999
- ------------------------------------------------------
Larry D. Peterson
Director
* Date: March 24, 1999
- ------------------------------------------------------
Robert J. Rutland
Director
</TABLE>
27
<PAGE> 29
<TABLE>
<S> <C>
* Date: March 24, 1999
- ------------------------------------------------------
W. Clyde Shepherd, Jr.
Director
* Date: March 24, 1999
- ------------------------------------------------------
Gordon M. Sherman
Director
* Date: March 24, 1999
- ------------------------------------------------------
R. Phillip Shinall, III
Director
* Date: March 24, 1999
- ------------------------------------------------------
Rankin M. Smith, Jr.
Director
* Date: March 24, 1999
- ------------------------------------------------------
Felker W. Ward, Jr.
Director
* /s/ M. Howard Griffith, Jr. Date: March 24, 1999
- ------------------------------------------------------
M. Howard Griffith, Jr.
Attorney-in-fact
</TABLE>
28
<PAGE> 1
EXHIBIT 10(G)
ADDENDUM TO EMPLOYMENT AGREEMENT,
DATED SEPTEMBER 18, 1997
BETWEEN
FIDELITY NATIONAL CORPORATION
AND
JAMES B. MILLER, JR.
This Addendum ("Addendum") is entered into as of the 3rd day of
November, 1997, by and between Fidelity National Corporation ("Corporation") and
James B. Miller, Jr. ("Executive").
WHEREAS, the Corporation and the Executive have entered into an
Employment Agreement, dated September 18, 1997 ("Employment Agreement"); and
WHEREAS, the parties wish to amend paragraph 3(b) as set forth
therein.
NOW THEREFORE, in consideration of the mutual promises herein made
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. Amendment of paragraph 3(b). Paragraph 3(b) of the Employment
Agreement, is amended to add the following:
Subsequent to the date of any written notice of termination
provided to Miller pursuant to this paragraph 3(b), Fidelity
shall engage the independent accounting firm regularly
utilized by Fidelity (the "Accounting Firm") to provide to
Fidelity and Miller, at Fidelity's expense, a determination
of whether any compensation payable to Miller pursuant to
this paragraph 3(b) constitutes a "parachute payment" (A
"Parachute Payment") as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"). If
the Accounting Firm determines that any compensation payable
to Miller pursuant to this paragraph 3(b) constitutes a
Parachute Payment, the Accounting Firm shall also determine:
(i) the amount of the excise tax to be imposed under Section
4999 of the Code; (ii) whether Miller would realize a
greater amount after federal and Georgia income taxes
(assuming the highest marginal rates then in effect apply)
if the compensation payable to Miller pursuant to this
paragraph 3(b) were reduced (assuming latest payments are
reduced first) so that no amount payable to Miller hereunder
constitutes a Parachute Payment than he would realize after
federal and Georgia income taxes (assuming the highest
marginal rates then in effect apply) so that no amount
payable to Miller hereunder constitutes a Parachute Payment
than he would realize after federal and Georgia income taxes
(assuming the highest marginal rates then in effect apply)
and after imposition of the excise tax
29
<PAGE> 2
under Section 4999 of the Code if the amounts payable to
Miller hereunder were not so reduced; and (iii) if the
Accounting Firm determines in (ii) above that Miller would
realize a higher amount if the compensation payable to
miller were so reduced, the amounts of the reductions. All
determinations should be made on a present value basis. The
Accounting Firm shall provide to Fidelity and to Miller a
written report of its determinations hereunder no later than
forty-five (45) days prior to the termination date. No later
than fifteen (15) days following his receipt of the report
from the Accounting Firm, Miller may notify Fidelity in
writing of any disagreement with said report, and in such
case, Fidelity shall direct the Accounting Firm to promptly
discuss its determinations with an accountant or other
counsel designated by Miller in his written notice and seek
to reach an agreement regarding same no later than fifteen
(15) days prior to the termination date, with Fidelity and
Miller, each bearing the cost of their own accountants or
counsel. If no agreement can be reached, the matter shall be
promptly submitted to binding arbitration under paragraph 13
hereof. The determinations so made shall be binding on the
parties. If it is determined hereunder that Miller would
realize a greater amount after federal and Georgia income
taxes (assuming the highest marginal rates then in effect
apply) if the compensation payable to him pursuant to this
paragraph 3(b) were reduced (assuming latest payments are
reduced first) so that no amount payable to Miller hereunder
constitutes a Parachute Payment, then the amounts payable to
Miller pursuant to this paragraph 3(b) shall be so reduced.
2. Ratification. Except as set forth herein, the parties hereto ratify
and confirm the Employment Agreement.
IN WITNESS WHEREOF, the parties have executed this Addendum as of
the date and year first set forth above.
FIDELITY NATIONAL CORPORATION
By:/s/ R. Phillip Shinall, III
---------------------------------
Name: R. Phillip Shinall, III
Title: Director
EXECUTIVE
/s/ James B. Miller, Jr.
---------------------------------
James B. Miller, Jr.
30
<PAGE> 1
Fidelity National Corporation ("Fidelity") is a Georgia corporation
incorporated on August 3, 1979, and is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended.
Through its subsidiaries, Fidelity provides a wide range of personal
and corporate banking services, including trust and investment management,
mortgage banking, and credit cards, as well as traditional deposit and credit
services, to a growing customer base. Fidelity National Bank, Fidelity National
Mortgage Corporation and Fidelity National Capital Investors, Inc. are
Subsidiaries.
Fidelity National Bank ("the Bank"), a national banking association
which opened February 10, 1974, has 19 full-service offices in Georgia, and two
residential construction lending and two indirect car loan offices in Florida.
The Bank's subsidiary, Fidelity National Mortgage Corporation, is a Georgia
corporation organized in 1979 and engaged in the residential mortgage
origination and servicing business. There are three mortgage offices in Georgia
and two in Florida. Fidelity National Capital Investors, Inc., a Georgia
corporation organized in 1992, provides retail brokerage and other securities
related services.
As of December 31, 1998, Fidelity had total assets and shareholders'
equity of $713 million and $55 million, respectively.
Fidelity is an equal opportunity employer and had 410 full-time
employees at December 31, 1998. Employees are provided a variety of benefits
including hospitalization, medical-surgical, major medical, dental, group life
and disability income, and a 401(k) retirement plan.
BOARDS OF DIRECTORS:
FIDELITY NATIONAL CORPORATION
DAVID R. BOCKEL
President, Bockel & Company
DR. EDWARD G. BOWEN
Gynecologist and Obstetrician
KEVIN S. KING
Attorney, King & Carragher
JAMES B. MILLER, JR.
Chairman, President and CEO, Fidelity National
Corporation Chairman, Fidelity National Bank; Fidelity National
Mortgage Corporation; and Fidelity National Capital Investors, Inc.
LARRY D. PETERSON
President and CEO, Fidelity National Bank
ROBERT J. RUTLAND
Chairman and CEO, Allied Holdings, Inc.
W. CLYDE SHEPHERD, JR.
Secretary/Treasurer, Shepherd Construction Company
GORDON M. SHERMAN
Retired December 1998, as Regional Commissioner,
Social Security Administration
R. PHILLIP SHINALL, III
Attorney, Holland & Knight LLP
RANKIN M. SMITH, JR.
Advisor to Atlanta Falcons
FELKER W. WARD, JR.
Chairman, Pinnacle Investment Advisors, Inc.
DIRECTORS EMERITUS
James W. Anderson, Jr.
Mrs. Alice Shinall
<TABLE>
<CAPTION>
FIDELITY NATIONAL BANK FIDELITY NATIONAL MORTGAGE CORPORATION
<S> <C>
James B. Miller, Jr., Chairman James B. Miller, Jr., Chairman
David R. Bockel James W. Anderson, Jr.
Dr. Edward G. Bowen Benjamin C. Bishop, III
Kevin S. King A.J. Facchinetti
Larry D. Peterson B. Jefferson Russell
Robert J. Rutland
W. Clyde Shepherd, III FIDELITY NATIONAL CAPITAL
Gordon M. Sherman INVESTORS, INC.
R. Phillip Shinall, III James B. Miller, Jr., Chairman
Rankin M. Smith, Jr. Sharon R. Denney
Felker W. Ward, Jr. Norman R. Hess
Amelia James
Karina L. Miller
W. Clyde Shepherd, III
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
To Our Shareholders 1
Financial Highlights 3
Consolidated Financial Review 4
Report of Independent Auditors 21
Consolidated Financial Statements 22
Corporate Information 43
</TABLE>
<PAGE> 2
DEAR FELLOW SHAREHOLDERS,
Atlanta, Georgia, and Jacksonville, Florida, are two of the best
markets in the world, and we are fortunate to be doing business in them. It
gives flexibility which contributed to several of Fidelity's 1998 significant
accomplishments.
The year's highlights include:
- Enhanced Profitability
- Reconfigured Balance Sheet
- Renewed Loan Growth
- Improved Asset Quality
- Increased Core Noninterest Income
- Opened Three Branches
- Secured Release of Regulatory Agreement
- Renewed Dividend Payout
Enhanced Profitability. One of management's goals is to
continually enhance shareholder value through substantially improved earnings.
Significant strides were made to achieve this goal as net income for 1998 was
$3.9 million, a 300% increase over 1997's results. Fidelity's 1998 return on
assets was .57% compared to .16% for 1997.
Reconfigured Balance Sheet. Beginning with Fidelity's 1997
strategic plan and continuing through 1998, many steps were taken to reduce
balance sheet risk while maintaining Fidelity's strong net interest margins. The
following are some of the changes that have resulted from this effort:
- Fidelity's net interest margin was 5.78% in 1998, placing it in
the top 90% of its peer financial institutions.
- Higher risk credit card loans have declined from 34.3% of total
loans at December 31, 1995, to 19.5% of total loans at December
31, 1998.
- Lower yielding investment securities have declined from 20.8% of
earning assets at December 31, 1997, to 11.1% of earning assets at
December 31, 1998, while higher yielding total loans have grown to
81.7% of earning assets compared to 72.1% at December 31, 1997.
Renewed Loan Growth. During 1998, total loans, excluding credit
card loans, grew 36%. While credit card outstandings declined, commercial and
real estate mortgage loans and real estate construction loans grew 38.6% and
36.3%, respectively. Overall, total loans grew 22.6% during 1998.
1
<PAGE> 3
Improved Asset Quality. During this period of significant loan
growth, key nonperforming ratios declined not only in relation to the loan
portfolio, but also in real terms. Some of the more notable changes were:
- loans past due 90 days or more declined 29.1%;
- nonperforming assets declined 20.1%; and
- net charge-offs declined 28.7%.
Increased Noninterest Income. Core noninterest income grew 14.6%
in 1998 over 1997. Core noninterest income excludes securities gains and losses,
gains on sale of mortgage servicing rights and other significant non-recurring
items.
Opened Three New Branches. During the summer of 1998, we opened
three branches, bringing our total number of bank branches to 19. Supported by
targeted advertising, the openings benefited Fidelity's entire branch network.
The openings gave Fidelity a stronger market penetration in the rapidly growing
Lawrenceville suburb of Atlanta and the company's first office in south Atlanta.
Secured Release from Regulatory Agreement. On December 1, 1998,
following its annual examination of Fidelity National Bank, the OCC terminated
the formal agreement dated November 14, 1996, which included, among other
things, certain restrictions on dividend payments by the Bank. Another benefit
of securing release from the agreement should be a significant reduction in
regulatory related costs in 1999 and thereafter.
Renewed Dividend Payout. In December 1998, Fidelity paid its
first common stock dividend since the fourth quarter of 1996. The dividend was
$.04 per share.
Capital. Thanks to our successful public offering providing $23
million of new capital in late 1997, we are capitalized to support significant
growth. At December 31, 1998, the Tier 1 risk-based capital ratio was 9.25%; the
leverage ratio was 7.57%; and the total risk-based capital ratio was 13.14%.
Thank You. The significant improvements listed above could not
have been achieved without the support and investments in our company by our
shareholders, directors and employees. Thank you all, and a special thank you to
Fidelity's customers who are the source of all of our business and most of our
referrals.
Reflections - Sharon Denney, Dan Ford. This is our 25th
anniversary. Our history has been about change. I preach change, but practicing
is sometimes harder than preaching. Sharon joined Fidelity in 1979. We were
still in the trailer. His coming made it possible for us to begin growing. He
knows people and he knows how to get things done. He is my dearest friend. Dan
joined us in 1987. His knowledge of credit and character is without equal in
Atlanta. We three, along with Curtis James, were a team. We complemented each
other. We supported each other. The growth and success of this company are the
result. What a reward it has been to work with and be a friend to these great
gentlemen. They retired in 1998, but inspired us to do more.
Sincerely,
/s/ James B. Miller, Jr.
James B. Miller, Jr.
Chairman
2
<PAGE> 4
FIDELITY NATIONAL CORPORATION
FINANCIAL HIGHLIGHTS
(Dollars in Thousands Except Per Share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
For the Year 1998 1997(1) 1996 1995 1994
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $ 63,772 $ 62,153 $ 59,800 $ 48,080 $ 35,887
Net interest income 36,028 35,943 33,073 29,209 24,122
Provision for loan losses 9,450 14,435 25,127 8,090 4,125
Noninterest income, including securities gains 18,940 17,379 18,305 11,679 8,769
Securities gains, net 255 140 604 853 124
Noninterest expense 39,448 37,420 35,489 25,583 22,375
Net income (loss) 3,853 963 (5,742) 4,649 4,299
Dividends declared common 325 - 693 644 628
Dividends declared preferred 369 251 - - -
PER SHARE DATA
Net income (loss) - basic $ .43 $ .15 $ (1.24) $ 1.01 $ .93
Net income (loss) - diluted .42 .15 (1.24) 1.01 .93
Book value 5.95 5.57 4.53 6.02 4.65
Dividends paid common .04 - .15 .14 .14
Dividend payout ratio 18.02% 26.07% *% 13.85% 14.62%
Average common shares outstanding 8,123,049 4,831,364 4,619,530 4,608,383 4,608,383
PROFITABILITY RATIOS
Return on average assets .57% .16% *% 1.01% 1.15%
Return on average equity 7.26 3.66 * 18.91 20.40
Net interest margin 5.78 6.42 5.97 6.87 6.95
Efficiency ratio 71.77 70.18 69.07 62.57 68.03
ASSET QUALITY RATIOS
Net charge-offs to average loans 2.42% 3.58% 3.00% 1.91% 1.54%
Allowance to period-end loans 2.40 3.31 3.85 1.54 1.31
Nonperforming assets to total loans and OREO .73 .85 .85 1.22 .87
Allowance to nonperforming loans 6.45x 10.07x 5.62x 1.80x 3.65x
Allowance to nonperforming assets 3.29 3.89 4.71 1.25 1.50
LIQUIDITY RATIOS
Total loans to total deposits 86.26% 76.90% 85.80% 87.30% 87.10%
Average total loans to average earning assets 73.02 82.73 85.00 84.60 80.60
Noninterest-bearing deposits to total deposits 16.49 15.30 13.56 16.10 15.80
CAPITAL RATIOS
Leverage 7.57% 8.05% 2.67% 5.42% 5.51%
Risk-based capital
Tier 1 9.25 9.99 3.40 6.15 6.49
Total 13.14 14.46 6.38 10.47 8.25
Average equity to average assets 7.85 4.63 4.50 5.35 5.64
BALANCE SHEET DATA (AT END OF PERIOD)
Assets $ 712,878 $ 656,933 $ 605,420 $ 524,822 $ 429,927
Earnings assets 656,137 606,533 545,375 428,714 393,980
Total loans, net 535,876 437,182 467,390 407,290 333,674
Total deposits 621,264 568,317 544,713 466,507 383,016
Long-term debt 15,650 15,800 15,500 16,750 2,491
Shareholders' equity 54,555 51,348 21,073 27,762 21,430
Realized shareholders' equity 54,479 51,139 21,213 27,073 23,067
DAILY AVERAGE
Assets $ 675,769 $ 608,569 $ 611,517 $ 459,251 $ 373,869
Earning assets 623,837 560,617 554,354 426,525 348,312
Total loans 488,697 463,898 471,200 360,915 280,593
Long-term debt 15,701 15,558 16,500 3,439 1,684
Shareholders' equity 53,053 26,330 27,484 24,589 21,077
</TABLE>
*NOT MEANINGFUL
(1) As restated, see Note 1 to the Consolidated Financial Statements.
3
<PAGE> 5
CONSOLIDATED FINANCIAL REVIEW
The following management's discussion and analysis reviews important factors
affecting the results of operations and financial condition of Fidelity National
Corporation and its subsidiaries ("Fidelity") 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 with headquarters
in Atlanta, Georgia. Fidelity commenced operations as Fidelity National Bank
("the Bank"), a full-service banking operation, in 1974. Fidelity National Bank
provides traditional deposit, lending, mortgage, international trade services
and trust products and services to its commercial and retail customers. The
Bank's wholly owned subsidiary, Fidelity National Mortgage Corporation, is a
full-service residential mortgage banking operation; and Fidelity National
Corporation's wholly owned subsidiary, Fidelity National Capital Investors,
Inc., is a securities brokerage operation. Fidelity currently conducts
full-service banking and residential mortgage lending businesses through 19
locations in the metropolitan Atlanta area. Fidelity conducts indirect
automobile lending (the purchase of consumer automobile installment sales
contracts from automobile dealers) at its Atlanta, Georgia and Jacksonville and
Tampa, Florida offices. Residential mortgage lending and residential
construction lending are conducted through certain of its Atlanta offices and
from loan production offices in Jacksonville and Tampa, Florida.
The year 1998 was the beginning of a period of renewed growth. Since its
inception, Fidelity has pursued a strategy of growth primarily through internal
expansion built on providing quality financial services in selected market
areas. At December 31, 1998, Fidelity had grown to $713 million in total assets
from $430 million in total assets at December 31, 1994.
Loan growth is a key component of Fidelity's strategic plan and was the
primary growth driver in 1998. During 1998, total loans grew $99 million, or
22.6%. This growth was experienced in every major loan category except credit
card loans. Loan categories excluding credit card loans grew 36.0%.
Commercial and real estate mortgage loans grew steadily during 1998,
increasing $45 million or 38.6% compared to 1997. Real estate construction loans
grew $16 million or 36.3% compared to 1997, with most of the increase coming
late in 1998.
Fidelity has experienced significant growth in indirect automobile
lending since it implemented a strategy to expand this activity. In 1995,
Fidelity modified its strategic plan for indirect lending to take advantage of
its ability to produce indirect automobile loans and to enhance other
noninterest income. At December 31, 1998, these loans totaled $179 million,
compared to $78 million at December 31, 1994. During 1998, 1997 and 1996,
Fidelity sold, either through whole loan sales or securitization, approximately
$158 million, $92 million and $137 million, respectively, of indirect automobile
loans with servicing retained. In addition, during 1997 and 1996, Fidelity sold
$33 million and $38 million, respectively, of indirect automobile loans
servicing released. Fidelity anticipates that it will continue to sell
periodically, through whole loan sales, a substantial portion of its indirect
automobile loan production to enhance noninterest income and manage the relative
level of indirect automobile loans in its portfolio.
Historically, credit card loans have been an important part of Fidelity's
total loan portfolio. At December 31, 1994, credit card loans represented 33.2%
of the total loan portfolio of $327 million. In 1994, as a result of additional
affinity programs and the introduction of Fidelity's Olympic card, credit card
loans outstanding and balances began to increase. The affinity programs include
colleges, associations and other entities which contract to assist in the
marketing of Fidelity's credit cards in return for issuance and transaction fee
income. At December 31, 1996, credit card loans totaled $144 million or 30.8% of
total loans. During late 1996 and the first quarter of 1997, net credit card
losses increased significantly, reflecting a national trend and credit quality
issues related to an affinity program introduced in the middle of 1995. This
affinity program was subsequently discontinued in May 1996. Since March 1997,
credit card net losses have significantly declined and net credit card loans
have declined. At December 31, 1998, credit card loans were $104 million or
21.0% of the total loan portfolio.
During 1997, Fidelity raised $29.1 million in capital, including $6.15
million from a private placement of non-cumulative 8% convertible preferred
stock, series A. The balance of the new capital was raised in a public offering
of 3,450,000 shares of common stock in December 1997. The proceeds of these
offerings, net of issuance costs, were used to increase Fidelity National Bank's
capital ratios and for general corporate purposes.
On December 1, 1998, the Office of the Comptroller of the Currency ("OCC")
lifted a formal agreement between Fidelity National Bank and the OCC. The formal
agreement, dated November 14, 1996, among other things placed certain
restrictions on Fidelity National Bank's capital levels and dividend payments.
For additional information see Note 2 of the Notes to Consolidated Financial
Statements.
While closing its books for 1998, management discovered an error which had
resulted in an overstatement of the value of its only securitization asset at
year-end 1997. The asset's lower valuation resulted from higher than expected
loan
4
<PAGE> 6
prepayments and credit losses. The restatement of fourth quarter results for
1997 reduced earnings by $871,236 or $.18 per share. For additional information
see Note 1 of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
NET INCOME Fidelity National Corporation's net income for the year ended
December 31, 1998, was $3.9 million or $.43 earnings per share - basic, compared
to $963,000 or $.15 per share for 1997, as restated. Earnings per share -diluted
for 1998 were $.42 compared to $.15 for 1997, as restated. The major factors
contributing to the improved earnings for 1998 were a $5.0 million reduction in
the provision for loan losses and a $1.6 million increase in noninterest income.
Fidelity had a net loss in 1996 of $5.7 million or $1.24 per share. The loss for
1996 was primarily due to a higher loan loss provision resulting from higher
levels of delinquencies and charge-offs in Fidelity's credit card loan
portfolio.
AVERAGE BALANCES, INTEREST AND YIELDS TABLE 1
<TABLE>
<CAPTION>
(Dollars in Thousands) For the Years Ended December 31,
------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------------- ----------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- -------- ------ -------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans, net of unearned income (1)(2)
Taxable $487,293 $ 55,216 11.33% $462,495 $ 55,928 12.09% $469,846 $ 54,254 11.55%
Tax-exempt (3) 1,404 128 9.11 1,495 134 8.96 1,355 127 9.37
-------- -------- -------- -------- -------- --------
Total loans 488,697 55,344 11.32 463,990 56,062 12.08 471,201 54,381 11.54
Investment securities-taxable 100,539 6,631 6.60 71,548 4,835 6.76 73,433 4,956 6.75
Interest-bearing deposits 3,483 156 4.49 2,712 68 2.51 1,431 74 5.17
Federal funds sold 31,118 1,689 5.43 22,568 1,239 5.49 8,289 437 5.27
-------- -------- -------- -------- -------- --------
Total interest-earning assets 623,837 63,820 10.23 560,818 62,204 11.09 554,354 59,848 10.80
Noninterest-earning assets:
Cash and due from banks 27,474 20,438 22,011
Allowance for loan losses (13,208) (15,865) (6,829)
Premises and equipment 20,055 20,734 14,164
Other real estate owned 2,136 2,010 1,246
Other assets 15,475 20,435 26,598
-------- -------- --------
Total assets $675,769 $608,570 $611,544
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Demand deposits $103,912 $ 3,590 3.46% $ 82,298 $ 2,298 2.79% $100,966 $ 3,542 3.51%
Savings deposits 22,649 762 3.36 28,963 1,032 3.56 26,516 1,058 3.99
Time deposits 367,484 21,198 5.77 363,148 20,906 5.76 344,551 19,933 5.79
-------- -------- -------- -------- -------- -------
Total interest-bearing deposits 494,045 25,550 5.17 474,409 24,236 5.11 472,033 24,533 5.20
Federal funds purchased 672 36 5.35 715 39 5.46 2,306 144 6.24
Securities sold under agreements to
repurchase 20,756 678 3.26 13,266 412 3.11 13,305 390 2.93
Other short-term borrowings 744 27 3.60 1,341 35 2.61 3,296 159 4.82
Long-term debt 15,701 1,454 9.26 15,558 1,488 9.56 16,500 1,501 9.10
-------- -------- -------- -------- -------- --------
Total interest-bearing 531,918 27,745 5.22 505,289 26,210 5.19 507,440 26,727 5.27
liabilities -------- -------- --------
Noninterest-bearing
Demand deposits 85,720 72,807 70,073
Other liabilities 5,078 4,144 6,520
Shareholders' equity 53,053 26,330 27,511
-------- -------- --------
Total liabilities and
shareholders' equity $675,769 $608,570 $611,544
======== ======== ========
Net interest income/spread $ 36,075 5.01% $ 35,994 5.90% $33,121 5.53%
======== ======== =======
Net interest rate margin 5.78% 6.42% 5.97%
</TABLE>
(1) Fee income relating to loans of $4,310 in 1998, $3,720 in 1997 and $4,007
in 1996 is included in interest income.
(2) Nonaccrual loans are included in average balances and income on such
loans, if recognized, is recognized on a cash basis.
(3) Interest income includes the effects of taxable-equivalent adjustments of
$49, $50, and $48 for each of the three years ended December 31, 1998,
1997 and 1996, respectively, using a combined tax rate of 38%.
5
<PAGE> 7
NET INTEREST INCOME/MARGIN Taxable-equivalent net interest income was $36.0
million in 1998 compared to $36.0 million in 1997. The $5.3 million increase in
interest income attributable to net growth in interest earnings assets was
offset by an 86 basis point decline in the yield on loans and the $27 million
growth in balances and two basis point increase in the cost of interest-bearing
liabilities. The 86 basis point interest rate decline negatively impacted
earnings by $3.7 million and was primarily attributable to the decline in yield
and volume in Fidelity's credit card portfolio.
Average interest-earning assets grew $63 million in 1998 to $624
million, an 11.2% increase. Increases in interest-earning assets occurred in
every major category. As a result of Fidelity's public offering in December
1997, Fidelity's and the Bank's capital position was significantly improved. The
renewed growth in average interest-earning assets throughout 1998 was made
possible by Fidelity's strengthened capital position. Asset growth during 1997
and most of 1996 had been restricted due to Fidelity's capital position during
that period.
For 1998, total average loans increased $25 million or 5.3%, average
investment securities grew $29 million or 40.5% and average Federal funds
purchased and interest-bearing deposits grew $19 million or 36.9% over 1997.
These increases provided a $5.3 million increase in interest income. During
1998, the average yield on interest-earning assets declined 86 basis points,
reducing interest income by $3.7 million. This decrease was caused by the
following:
1) Management's decision to reduce the percentage of credit card loans
as a percent of Fidelity's total loan portfolio.
2) The initial deployment of the proceeds of the December 1997, public
offering in lower yielding investment securities.
3) The 75 basis point reduction in prime rate during the fourth quarter
of 1998 resulting from interest rate actions taken by the Board of
Governors of the Federal Reserve.
A portion of the growth in average loans was funded by reducing
Fidelity's lower yielding investment portfolio. This offset some of the effects
of the $16 million decline in the higher yielding credit card loans during 1998.
The cost of interest-bearing liabilities increased $1.5 million during
1998 over 1997. The increase was due to a $27 million or 5.3% increase in
interest bearing liabilities and a three basis point increase in the cost of
interest-bearing liabilities.
Average total loans declined $7.2 million during 1997. The decline in
loans was principally in credit card and construction loans, partially offset by
an increase in indirect automobile loans. The decline in average loans and the
$1.9 million decline in average investment securities was more than offset by
the $14.3 million average increase in Federal funds sold.
The $517,000 decrease in total interest expense in 1997 compared to 1996
was attributable primarily to an eight basis point decrease in the rates paid on
average total interest-bearing liabilities, partially offset by a slight
decrease in interest-bearing liabilities.
RATE/VOLUME ANALYSIS TABLE 2
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
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 $ 2,906 $ (3,618) $ (712) $ (642) $ 2,316 $ 1,674
Tax-exempt (2) (8) 2 (6) 10 (3) 7
Investment securities-taxable 1,900 (104) 1,796 (95) (26) (121)
Federal funds sold 464 (14) 450 388 414 802
Interest-bearing deposits 23 65 88 22 (28) (6)
-------- -------- ---------- --------- -------- -----------
Total interest-earning assets $ 5,285 $ (3,669) $ 1,616 $ (317) $ 2,673 $ 2,356
======== ======== ========== ========= ======== ===========
Interest-bearing deposits:
Demand $ 678 $ 615 $ 1,293 $ (293) $ (950) $ (1,243)
Savings (216) (54) (270) 46 (73) (27)
Time 260 32 292 531 442 973
-------- -------- ---------- --------- -------- -----------
Total interest-bearing deposits 722 593 1,315 284 (581) (297)
Federal funds purchased (2) (1) (3) (44) (61) (105)
Securities sold under agreements
to repurchase 245 21 266 174 (152) 22
Other short-term borrowings (19) 11 (8) (35) (89) (124)
Long-term debt 13 (48) (35) (44) 31 (13)
-------- -------- ---------- --------- -------- -----------
Total interest-bearing liabilities $ 959 $ 576 $ 1,535 $ 335 $ (852) $ (517)
======== ======== ========== ========= ======== ===========
</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 combined tax rate of
38%.
6
<PAGE> 8
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.
The provision for loan losses was $9.5 million in 1998, $14.4 million in
1997 and $25.1 million in 1996. Fidelity was able to reduce the provision for
loan losses during 1998 and 1997 as a result of declining credit card and
consumer loan net charge-offs, which peaked in 1997, and declining
delinquencies. Net charge-offs were $11.9 million in 1998 compared to $16.6
million in 1997. Net charge-offs to average loans was 2.60% in 1998 compared to
3.58% in 1997.
For the same reason, Fidelity was able to reduce the allowance for loan
losses and the allowance for loan losses allocated to credit card loans during
1997. The decline in credit card net charge-offs was primarily due to bringing
credit card collections in-house, the discontinuance of issuing preapproved
credit cards in May 1996 to recent home buyers, and the maturing of the
pre-approved credit cards in the portfolio.
The following schedule summarizes credit card and total net charge-offs for the
past four years by quarter:
<TABLE>
<CAPTION>
Net Charge-offs
------------------------------------------------------------------------------------------------------------------
Quarter Ended Credit Card Total Quarter Ended Credit Card Total
--------------------- ------------- ----------- ---------------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
March 31, 1995 $ 1,348 $ 1,424 March 30, 1997 $ 4,165 $ 5,262
June 30, 1995 1,738 1,766 June 30, 1997 3,748 4,563
September 30, 1995 1,697 1,749 September 30, 1997 3,021 3,597
December 31, 1995 1,806 1,958 December 31, 1997 2,466 3,204
March 31, 1996 1,653 1,825 March 31, 1998 2,657 3,282
June 30, 1996 2,439 2,690 June 30, 1998 3,015 3,522
September 30, 1996 4,471 5,225 September 30, 1998 1,690 2,263
December 31, 1996 4,025 4,413 December 31, 1998 2,375 2,792
</TABLE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES TABLE 3
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 14,320 $ 16,511 $ 5,537 $ 4,344 $ 4,550
Charge-offs:
Commercial, financial and agricultural 28 154 3 60 226
Real estate-construction - - - - -
Real estate-mortgage - - - - -
Consumer installment 2,444 3,367 1,657 328 88
Credit cards 12,092 14,735 13,156 7,051 4,466
--------- -------- --------- -------- --------
Total charge-offs 14,564 18,256 14,816 7,439 4,780
Recoveries:
Commercial, financial and agricultural 29 103 31 42 29
Real estate-construction - - - - -
Real estate-mortgage - - - - 2
Consumer installment 321 192 64 38 24
Credit cards 2,355 1,335 568 462 394
--------- -------- --------- -------- --------
Total recoveries 2,705 1,630 663 542 449
--------- -------- --------- -------- --------
Net charge-offs 11,859 16,626 14,153 6,897 4,331
Provision for loan losses 9,450 14,435 25,127 8,090 4,125
--------- -------- --------- -------- --------
Balance at end of period $ 11,911 $ 14,320 $ 16,511 $ 5,537 $ 4,344
========= ======== ========= ======== ========
Ratio of net charge-offs during period to
average loans outstanding, net 2.42% 3.58% 3.00% 1.91% 1.54%
Allowance for loan losses as a percentage of loans 2.40 3.31 3.85 1.54 1.31
</TABLE>
7
<PAGE> 9
In 1996, the provision for loan losses of $25.1 million was the most
significant factor contributing to Fidelity's loss. Net charge-offs were $14.2
million in 1996. Net charge-offs to average loans were 3.00%. Approximately
88.9% of the loan charge-offs were attributable to credit card loans. This
significant increase in credit card losses in 1996 was due to several factors.
Nationally, credit card charge-offs reached record highs as consumers found
themselves unable to meet their credit card obligations. Many of these consumers
filed for bankruptcy and bankruptcies hit record levels. Moreover, a significant
portion of Fidelity's credit card portfolio's charge-offs was attributable to
one specific program. Under this program, which Fidelity initiated in the middle
of 1995 and discontinued in May 1996, Fidelity 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, Fidelity's policy not to issue credit cards without first conducting a
credit review, Fidelity 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. In May 1996, Fidelity
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 that 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.
NONINTEREST INCOME Noninterest income for 1998 was $18.9 million compared to
$17.4 million in 1997. Noninterest income in 1998 and 1997 benefited from
$255,000 and $140,000 in securities gains, respectively. In 1998, noninterest
income also benefited from a non-recurring gain of $654,000 and in 1997
noninterest income benefited from a $1.5 million gain on the sale of mortgage
servicing rights. Excluding those non-recurring items, noninterest income for
1998 was $18.0 million compared to $15.7 million in 1997, a 14.6% increase.
Fidelity's 1998 indirect automobile lending activities income increased $1.5
million or 68.5% over 1997. This was the primary contributor to the growth in
noninterest income during 1998.
Fidelity's strategic plan calls for increasing noninterest income as a
percentage of total revenues (net interest income plus noninterest income). A
key component of that growth comes from expanding Fidelity's indirect automobile
lending loan sales and indirect automobile loan servicing. During 1998, Fidelity
sold $158 million of its indirect automobile loan production, servicing
retained. This compares to sales of $125 million in 1997, of which $92.1 million
was sold servicing retained. The 1998 gains from loan sales were $1.9 million
compared to $921,000 for 1997. At December 31, 1998, Fidelity was servicing
$236.0 million of indirect automobile loans it had sold, compared to $168.3
million at December 31, 1997. The balance of the 1998 increase in noninterest
income was attributable to increased fee generating banking activities.
Noninterest income for 1997 declined $900,000 from 1996. The $1.5
million increase in service charge income, credit card fees and other operating
income during 1997 was more than offset by the $2.0 million decline in income
from mortgage banking activities and a $464,000 decline in securities gains.
Noninterest income during 1997 benefited from a $1.5 million gain on the sale of
mortgage servicing rights, compared to $2.1 million in such gains during 1996.
Primarily as a result of the sales of mortgage servicing rights, mortgage
servicing income declined $1.1 million in 1997. Gains from loan sales increased
$249,000 to $921,000 in 1997 compared to 1996.
The profits from the sales of mortgage servicing rights in 1997 and 1996
offset losses in the mortgage business due to declining loan production and the
sales reduced Fidelity's exposure to mortgage servicing rights impairment due to
mortgage loan prepayments.
NONINTEREST EXPENSE Noninterest expense increased $2.0 million or 5.4% in 1998
to $39.4 million from a restated $37.4 million in 1997. Restated noninterest
expense in 1997 increased $1.9 million or 5.4% to $37.4 million when compared to
1996.
Salaries and employee benefits increased only 0.9% in 1998 to $17.2
million. The nominal increase in salaries and employee benefits during 1998,
while Fidelity experienced branch expansion and strong loan growth, was
primarily due to cost controls and strong personnel resource management. The
number of full time equivalent employees at December 31, 1998, was 410 compared
to 375 at December 31, 1997. Salaries and employee benefits increased 3.7% in
1997 to $17.0 million when compared to 1996. This was a result of salary
increases, the staffing of several new management positions and bringing credit
card collections in-house.
Furniture and equipment expense and net occupancy costs increased
$714,000 during 1998 and $950,000 during 1997 due to general corporate growth
including branch bank expansion, the consolidation of departments into an
operations center, and the opening of loan production offices.
Professional and other outside services increased 22.1% to $2.9 million
in 1998 when compared to 1997. Consulting expenses of approximately $816,000
relating to the mitigation of potential risks related to the Year 2000 ("Y2K")
testing accounted for much of this increase. (See the discussion of the Year
2000 risks under "Market Risks".) The increase of $673,000 in 1997 to $1.2
million is primarily the result of a $424,000 increase in outside services
provided and an increase in audit and legal fees related to the losses incurred
in 1996 and the resulting regulatory and capital adequacy issues which were
resolved in 1997 and 1998.
Regulatory assessments increased $185,000 during 1998 to $1.4 million
when compared to 1997, primarily as a result of deposit growth. The increase of
$673,000 to $1.2 million in 1997 compared to 1996 was primarily the result of
regulatory and capital adequacy issues. These issues were substantially resolved
in 1997 and 1998.
8
<PAGE> 10
Expenses related to the amortization of mortgage servicing rights
increased 15.5% to $910,000 in 1998 when compared to 1997, primarily because of
substantial loan refinancing activity during the low mortgage interest rate
environment experienced in 1998 and an 18.1% increase in mortgage servicing
rights assets in 1998 compared to 1997 as a result of an 11.6% increase in
mortgage production volume in 1998. Expenses related to the amortization of
mortgage servicing rights declined to $788,000 in 1997 compared to $1.9 million
in 1996 due to the 1996 and 1997 sales of mortgage servicing rights.
Excluding mortgage servicing rights, expenses related to mortgage
banking activities were $3.5 million in 1998 compared to $3.8 million in 1997
and $4.5 million in 1996.
The following schedule summarizes the change in mortgage servicing
rights for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------
1998 1997 1996
------ ------ ------
(Dollars In Millions)
<S> <C> <C> <C>
Beginning balance $ 2.2 $ 5.5 $ 7.8
Add:
Originated servicing rights 1.3 0.3 0.9
------ ------ ------
3.5 5.8 8.7
Less:
Amortization 0.4 0.5 0.8
Loan payoff 0.5 0.3 0.8
Bulk sale - 2.8 1.6
------ ------ ------
Ending balance $ 2.6 $ 2.2 $ 5.5
====== ====== ======
</TABLE>
Expenses related to retail brokerage and securities related services
totaled $2.9 million in 1998 compared to $3.1 million in both 1997 and 1996.
Other expenses in 1998 totaled $6.0 million, which is approximately the
same amount as in restated 1997. Fidelity recorded a $671,000 write-down of a
commercial real estate owned property in 1998 as a result of an impairment to
its value, while in 1997, Fidelity restated its financial results to reflect a
$1.3 million impairment of an asset related to a 1996 indirect automobile loan
securitization. (See "Restatement" discussion in Note 1 to Consolidated
Financial Statements.) Advertising and promotion expenses increased $244,000 to
$370,000 and collection fees increased $253,000 to $345,000 in 1998 when
compared to 1997.
PROVISION FOR INCOME TAXES The provision for income taxes consists of provisions
for Federal and state income taxes. The provision for income taxes for 1998 and
1997 was $2.2 million and $0.5 million, respectively, compared to a $3.5 million
tax benefit for the same period in 1996. Fidelity's effective tax rate
approximated statutory rates for all periods.
FINANCIAL CONDITION
Fidelity 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. As a result of the public
offering in December 1997, Fidelity has increased its funding alternatives and
significantly improved its capital and liquidity position.
Fidelity's Asset/Liability Management Committee ("ALCO") meets regularly
to review Fidelity's interest rate sensitivity positions and its current and
projected liquidity.
MARKET RISK Fidelity's primary risk exposures are interest rate risk and credit
risk and, to a lesser extent, liquidity risk. Over the next twelve months, an
additional primary risk exposure is that which is associated with the Y2K issues
discussed below. These risk exposures relate to computer operations and
automated information systems and controls and liquidity issues that may evolve
from market behaviors caused by Y2K concerns. Fidelity has little or no risk
related to trading accounts, commodities or foreign exchange.
Interest rate risk is the exposure of a banking organization's financial
condition and earnings ability to adverse movements in interest rates. Accepting
this risk can be an important source of profitability and shareholder value;
however, excessive levels of interest rate risk can pose a significant threat to
Fidelity's assets, earnings and capital base. Accordingly, effective risk
management that maintains interest rate risk at prudent levels is essential to
Fidelity's success.
Fidelity's ALCO, which includes senior management representatives,
monitors and considers methods of managing the rate and sensitivity repricing
characteristics of the balance sheet components consistent with maintaining
acceptable levels of changes in portfolio values and net interest income with
changes in interest rates. A primary purpose of the ALCO is to manage interest
rate risk, to effectively invest Fidelity's capital, and to preserve the value
created by its core business operations. Fidelity's exposure to interest rate
risk is reviewed on at least a quarterly basis by the Board of Directors.
Evaluating a financial institution's exposure to changes in interest
rates includes assessing both the adequacy of the management process used to
control interest rate risk and the organization's quantitative levels of
exposure. When assessing the interest rate risk management process, Fidelity
seeks to ensure that appropriate policies, procedures, management information
systems and internal controls are in place to maintain interest rate risk at
prudent levels with
9
<PAGE> 11
consistency and continuity. Evaluating the quantitative level of interest rate
risk exposure requires Fidelity to assess the existing and potential future
effects of changes in interest rates on its consolidated financial condition,
including capital adequacy, earnings, liquidity, and, where appropriate, asset
quality.
The Board of Governors of the Federal Reserve, together with the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation,
adopted a Joint Agency Policy Statement on Interest Rate Risk, effective June
26, 1996. The policy statement provides guidance to examiners and bankers on
sound practices for managing interest rate risk, which will form the basis for
ongoing evaluation of the adequacy of interest rate risk management at
supervised institutions. The policy statement also outlines fundamental elements
of sound management that have been identified in prior Federal Reserve guidance
and discusses the importance of these elements in the context of managing
interest rate risk.
Interest rate sensitivity analysis is used to measure Fidelity's interest
rate risk by computing estimated changes in earnings and the net present value
of its cash flows from assets, liabilities and off-balance sheet items in the
event of a range of assumed changes in market interest rates. Net present value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in market risk
sensitive instruments in the event of a sudden and sustained 200 basis point
increase or decrease in market interest rates.
Fidelity utilizes a statistical research firm specializing in the banking
industry to provide various quarterly analyses related to its current and
projected financial performance, including a rate shock analysis.
Data sources for this and other analyses include quarterly FDIC Call
Reports and the Federal Reserve Y-9C, management assumptions, industry norms and
financial markets data. The standard algebraic formula for calculating present
value is used. Present value is the future cash flows of a financial investment,
or portfolio of financial instruments, discounted to the present. For purposes
of evaluating rate shock, rate change induced sensitivity tables are used in
determining repayments, prepayments and early withdrawals.
The schedule below sets forth an analysis of Fidelity's assumed earnings
market value risk and earnings risk inherent in its interest rate sensitive
instruments related to interest-rate swings of 200 basis points, both above and
below current levels (rate shock analysis). Earnings and fair value estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Assumptions have
been made as to appropriate discount rates, prepayment speeds, expected cash
flows and other variables. Changes in assumptions significantly affect the
estimates and, as such, the derived earnings and fair value may not be
indicative of the value negotiated in an actual sale or comparable to that
reported by other financial institutions. In addition, the fair value estimates
are based on existing financial instruments without attempting to estimate the
value of anticipated future business. The tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
Rate shock analysis provides only a limited, point in time view of
Fidelity's interest rate sensitivity. The gap analysis also does not reflect
factors such as the magnitude (versus the timing) of future interest rate
changes and asset prepayments. The actual impact of interest rate changes upon
Fidelity's earnings and net present value may differ from that implied by any
static rate shock measurement. In addition, Fidelity's net interest income and
net present value under various future interest rate scenarios are affected by
multiple other factors not embodied in a static rate shock analysis, including
competition, changes in the shape of the Treasury yield curve, divergent
movement among various interest rate indices, and the speed with which interest
rates change.
The following schedule illustrates the effects on annual earnings over a
one year period and the effects on net present value of Fidelity's assets,
liabilities and off-balance sheet items as a result of an immediate increase and
an immediate decrease of 200 basis points in market rates of interest:
RATE SHOCK ANALYSIS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C>
Market rates of interest +200 Basis Points -200 Basis Points +200 Basis Points -200 Basis Points
------------------- ------------------ ------------------- -------------------
Change in net present value $(2,993) $301 $(6,491) $ 4,536
=================== ================== =================== ===================
Percent change in net interest income 1.22% (1.46)% 1.49% (1.76)%
=================== ================== =================== ===================
Percent change in net income 7.53% (8.96)% 4.01% (4.73)%
=================== ================== =================== ===================
</TABLE>
The analysis indicates that an immediate 200 basis point increase in
market rates of interest would reduce the net present value of Fidelity, while
an immediate 200 basis point decrease in market rates of interest would increase
the net present value. The impact on net present value has decreased under both
scenarios when compared to 1997, primarily because of the relative balance
between asset sensitivity and liability sensitivity over time. The analysis
indicates that a similar rate increase would increase both net interest income
and net income over a one year period, while a similar decrease would reduce
both net interest income and net income. The projected impact on earnings
reflects the asset
10
<PAGE> 12
sensitive characteristics of Fidelity in the short term. (See "Interest Rate
Sensitivity".) The impact on percent change in net interest income for 1998 is
similar to that for 1997 and reflects the asset sensitivity of Fidelity over a
six month time horizon and the liability sensitivity of Fidelity over a six to
twelve month time horizon. The analysis indicates that the effects of either an
immediate and sustained increase or decrease in market rates of interest of 200
basis points would not be material to Fidelity's net present value or operating
results over a one year period.
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 Fidelity's policy not to
invest in derivatives in the ordinary course of business. Fidelity 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 primarily included based on scheduled payments with a minor prepayment
factor incorporated, and credit card loans with a fixed rate are spread based on
historical run-off experience over an eight month period. Through such analysis,
Fidelity monitors and manages its interest sensitivity gap to minimize the
effects of changing interest rates.
The interest rate sensitivity structure within Fidelity's balance sheet
at December 31, 1998, indicated a cumulative net interest sensitivity liability
gap of 12.07% when projecting out one year. In the near term, defined as six
months, Fidelity had a cumulative net interest sensitivity asset gap of 10.47%
as of December 31, 1998. This information represents a general indication of
repricing characteristics over time; however, the sensitivity of certain deposit
products may vary during extreme swings in the interest rate cycle. Since all
interest rates and yields do not adjust at the same velocity, the interest rate
sensitivity gap is only a general indicator of the potential effects of interest
rate changes on net interest income.
Fidelity's policy states that the cumulative gap at the six month and
one year period should not exceed 10%. Any interest rate risk associated with
greater cumulative gap positions was mitigated in 1998 because of the net
interest sensitivity asset gap in the near term and the net interest sensitivity
liability gap at one year. Fidelity's interest rate shock analysis indicates
that Fidelity was relatively insensitive to an interest rate shock of plus or
minus 200 basis points. (See "Market Risk" on the preceeding page.) The
following table illustrates Fidelity's interest rate sensitivity at December 31,
1998, as well as the cumulative position at December 31, 1998:
INTEREST RATE SENSITIVITY ANALYSIS (1) TABLE 4
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31, 1998
----------------------------------------------------------------------------
Repricing Within
0-30 31-60 61-90 91-120 121-150 151-180 181-365
Days Days Days Days Days Days Days
-------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Investment securities
available-for-sale $ 1,150 $ 21,100 $ 1,050 $ 1,000 $ 2,950 $ 900 $ 5,400
Investment securities
held-to-maturity 630 620 600 585 570 550 13,000
Loans 155,510 7,604 5,339 6,329 6,398 7,539 34,954
Loans held for sale 9,655 30,000 - - - - -
Federal funds sold 45,786 - - - - - -
Due from banks - interest earning 1,418 - - - - - -
-------- -------- --------- --------- --------- --------- ---------
Total interest-earning assets 214,149 59,324 6,989 7,914 9,918 8,989 53,354
-------- -------- --------- --------- --------- --------- ---------
Interest-bearing liabilities
Demand deposit accounts 5,121 5,121 5,121 5,121 5,121 5,121 30,727
Savings and NOW accounts 1,188 1,188 1,188 1,188 1,188 1,188 7,130
Money market 3,931 3,931 3,931 3,931 3,931 3,931 23,587
Time Deposits>$100,000 24,878 7,893 7,269 5,880 6,891 3,579 33,661
Time Deposits <$100,000 20,240 15,831 18,448 20,580 16,998 12,132 106,077
Long-term debt - - - - - - 50
Short-term borrowings 16,516 - - - - - -
-------- -------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 71,874 33,964 35,957 36,700 34,129 25,951 201,232
-------- -------- --------- --------- --------- --------- ---------
Interest-sensitivity gap $142,275 $ 25,360 $ (28,968) $ (28,787) $ (24,211) $ (16,963) $(147,880)
======== ======== ========= ========= ========= ========= =========
Cumulative gap at 12/31/98 $142,275 $167,625 $ 138,667 $ 109,880 $ 85,669 $ 68,706 $ (79,174)
======== ======== ========= ========= ========= ========= =========
Ratio of cumulative gap to total
interest-earning assets 21.68% 25.55% 21.13% 16.75% 13.06% 10.47% (12.07)%
Ratio of interest-sensitive assets to
interest-sensitive liabilities
(12/31/98) 297.95 174.67 19.44 21.56 29.06 34.64 26.51
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------
Repricing Within
Over
One Year Total
---------- --------
<S> <C> <C>
Interest-earning assets
Investment securities $ 9,855 $ 43,405
available-for-sale
Investment securities 13,098 29,653
held-to-maturity
Loans 272,549 496,221
Loans held for sale - 39,655
Federal funds sold - 45,786
Due from banks - interest earning - 1,418
--------- --------
Total interest-earning assets 295,501 656,137
--------- --------
Interest-bearing liabilities
Demand deposit accounts 40,970 102,425
Savings and NOW accounts 57,037 71,296
Money market 31,450 78,625
Time Deposits>$100,000 17,549 107,600
Time Deposits <$100,000 51,014 261,318
Long-term debt 15,600 15,650
Short-term borrowings - 16,516
--------- --------
Total interest-bearing liabilities 213,620 653,429
--------- --------
Interest-sensitivity gap $ 81,881 $ 2,708
======== ========
Cumulative gap at 12/31/98 $ 2,708
========
Ratio of cumulative gap to total
interest-earning assets 0.41%
Ratio of interest-sensitive assets to
interest-sensitive liabilities
(12/31/98) 138.33
</TABLE>
- --------------
(1) Fidelity 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.
11
<PAGE> 13
YEAR 2000 RISK Y2K technology risk exposure arises primarily as a result of many
computer operating systems and computer application programs utilizing only the
last two digits to refer to a year. Therefore, these computer programs do not
properly recognize a year that begins with a 20 rather than a 19 (for example,
the year 2000). If not corrected, many computer applications could fail or
create erroneous results. This problem could affect any computer hardware or
software, or computerized environmental systems (including elevators, security
systems, vault doors, etc.) Certain computer software could be affected by other
upcoming dates. For example, September 9, 1999, could affect software which
recognizes 99 or 999 as a command to void or cease certain operations.
Financial institutions are highly automated and computerized
applications are critical to their operations and controls. The financial
regulators, including the Federal Financial Institutions Examination Council
("FFIEC") are acutely aware of the potential problems associated with Y2K and
the effects they could have on individual financial institutions and, indeed, on
the entire financial system. The FFIEC has issued numerous recommended and
mandatory guidelines and timetables which financial institutions must meet in
order to assure that all Y2K issues are timely addressed and resolved. The FFIEC
has mandated that the primary regulator of each financial institution will
conduct quarterly reviews to assess the progress made in identifying and
rectifying any and all issues related to the Y2K problem.
The operating systems and the large majority of application systems used
by Fidelity are products of established national vendors which provide software
and services to numerous users. Fidelity is primarily utilizing the services of
consultants dedicated to working with Fidelity's data processing staff to
conduct its Y2K program. The Y2K program consists of a five-phase methodology
employed throughout the organization and addresses all automated processes. This
methodology includes awareness, assessment, renovation, validation and
implementation.
Fidelity has identified approximately 80 different programs or
applications which must be processed through the above five-phase methodology,
10 of which have been identified as mission-critical, or essential to the daily
operations of Fidelity. It is anticipated that all of these mission-critical
programs or applications will be certified as complete and Y2K compliant no
later than the target dates established by the FFIEC. The remaining programs or
applications are in various stages of completion and it is anticipated that
these systems will be compliant by June 30, 1999.
Fidelity is assessing any potentially material Y2K risks associated with
customers, suppliers, correspondents and counterparties and is conducting
inquiries, tests, evaluations and other due diligence procedures to mitigate or
eliminate these risks as deemed appropriate. No single customer, supplier,
correspondent or counterparty is considered to be critical to the business of
Fidelity. Legal documents and contracts such as those for new loans, equipment
purchases, service providers, etc. are being evaluated and modified on an
on-going basis as appropriate to mitigate any Y2K risks. Fidelity is also
developing contingency plans for its mission-critical systems if Y2K compliance
does not occur timely. Additionally, Fidelity has developed a contingency
liquidity plan should concerns about Y2K issues cause some customers to deviate
from normal banking behaviors. Finally, a detailed plan is being developed for
the week preceding and the week following December 31, 1999, which will detail
contingency and back-up procedures to address any possible internal or external
problems resulting from Y2K.
Procedures are in place to assure that all systems certified as Y2K
compliant remain compliant, that any new or revised systems or software is
tested for Y2K compliance before purchase or implementation, that customers,
correspondents or counterparties identified as having a possible material impact
on Fidelity as a result of potential Y2K problems are monitored on a periodic
basis to identify any changes in their Y2K risks profiles, and that all new
customers, correspondents or counterparties are evaluated for potential Y2K
risks.
Fidelity has incurred expenses of approximately $816,000 related to Y2K
issues for the twelve months ended December 31, 1998, primarily consisting of
consulting fees. It is anticipated that the total expenses associated with the
Y2K project during 1998 and 1999 will be approximately $1.2 million. An
additional $170,000 has been expended during 1998 for hardware, software and
software upgrades which are Y2K compliant. These expenditures will provide
operating enhancements or operating efficiencies and would have been made during
1998 or 1999 irrespective of the Y2K compliance issue.
Fidelity believes that it is taking all necessary actions to mitigate
Y2K technology issues and that the probability of significant Y2K problems in
1999 and thereafter is low. However, the occurrence of significant Y2K problems
could result in material operating and legal expenses, material disruption of
the operations of Fidelity and/or its customers and suppliers, material
liquidity problems and material charge-offs, which amounts cannot be quantified.
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-balance sheet and off-balance sheet
sources of and demands for funds on a daily and weekly basis.
12
<PAGE> 14
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; a collateralized line of credit at the Federal Reserve
Bank discount window: a collateralized line of credit from the Federal Home Loan
Bank of Atlanta; a secured line of credit from a correspondent bank; and
borrowings under unsecured overnight Federal funds lines available from
correspondent banks. During 1998 and 1997, Fidelity sold $158 million and $125
million, respectively in indirect automobile loans. In addition to interest
rate-sensitive deposits, the Bank's principal demand for liquidity is
anticipated fundings under credit commitments to customers.
Maintaining appropriate levels of capital is an important factor in
determining the availability of critical sources of liquidity. At December 31,
1998, capital ratios exceeded those regulatory levels required for a well
capitalized institution.
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.
Fidelity'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. Fidelity'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 unsecured Federal funds lines, secured
or collateralized lines, repurchase agreements, and other arrangements. The
Bank's principal source of operating cash flows is net interest income.
Fidelity National Corporation's ("the Parent Company") liquidity is
limited, and it relies primarily 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 and common stock. (See "Regulatory
Agreements" in Note 2 of the Notes to Consolidated Financial Statements.) The
Parent Company is currently prohibited from incurring additional debt and from
paying any dividend on the common stock of Fidelity 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 1998 by the increase in loans held-for-sale of $35 million. Net cash
flows provided by investing activities was positively impacted by the net sales
and calls of investment securities of $53 million and negatively impacted by a
net increase in loans of $233 million, offset in part by $160 million in
proceeds from the sale of loans. Net cash flows from financing activities was
positively impacted by an increase in deposits of $53 million.
Cash increased by $11 million during 1998 and was available for the
purchase of earning assets, including investment securities and loans and for
other corporate purposes.
Net cash provided by operations was positively impacted in 1997 by the
reduction in loans held-for-sale of $34 million when compared to 1996. Net cash
flows provided by investing activities were negatively impacted by the net
purchases of investment securities of $48 million and a net increase in loans of
$146 million, offset in part by $125 million in proceeds from the sale of loans.
Net cash flows from financing activities were positively impacted by an increase
in deposits of $24 million, proceeds from the issuance of preferred stock of $6
million and proceeds from the issuance of common stock of $23 million.
Net cash provided by operations was positively impacted in 1996 by the
reduction in loans held-for-sale of $9 million. Net cash flows provided by
investing activities were negatively impacted by the net purchases of investment
securities of $24 million and a net increase in loans of $286 million, offset in
part by $204 million in proceeds from the sale of loans. Net cash flows from
financing activities were positively impacted by an increase in deposits of $78
million and proceeds from an increase in short-term borrowings of $9 million.
Fidelity has adopted a contingency liquidity plan that addresses
liquidity issues which may evolve from market behaviors caused by Y2K concerns.
These items include additional credit lines, maintaining a higher than normal
liquidity position late in 1999 and higher than normal balances in cash and due
from banks.
Except for the possible adverse effects arising out of the FRB
Agreement, discussed in "Regulatory Agreement," the Y2K risks discussed above
and under "Market Risks" 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 Fidelity is aware that may have or that are
likely to have a material adverse effect on Fidelity's liquidity, capital
resources or operations.
LOANS During 1998, total loans outstanding, including loans held-for-sale,
increased $99 million or 22.6%, to $536 million. The increase in loans
outstanding was attributable to an aggressive lending focus, a strong lending
market and an improved capital position which allowed Fidelity to begin to
13
<PAGE> 15
grow its loan portfolios. This followed a period of capital restraint on growth
that ended at year-end 1997. By year-end 1998, commercial loans increased $21
million or 40.8%, consumer installment loans increased $48 or 31.4%, real estate
construction loans increased $16 million or 36.3%, and real estate mortgage
loans increased $24 million or 36.9%. These increases were partially offset by a
$16 million or 12.9% decline in credit card loans. Average total loans for 1998
increased $25 million to $489 million or 5.3%.
During 1997, total loans outstanding, including loans held-for-sale,
declined $30 million to $437 million. By year- end 1997, credit card loans
declined $24 million or 16.6%, real estate construction loans declined $12
million or 20.9% and real estate mortgage loans declined $7 million or 9.9%.
These declines were partially offset by increases in commercial and consumer
installment loans
NONPERFORMING ASSETS Nonperforming assets consist of nonaccrual and restructured
loans and other real estate. 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
LOANS, BY CATEGORY TABLE 5
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial:
Commercial, financial and agricultural $ 71,542 $ 50,169 $ 43,247 $ 37,778 $ 29,831
Tax exempt 1,259 1,527 698 1,517 2,091
-------- -------- -------- -------- --------
Total commercial 72,801 51,696 43,945 39,295 31,922
Real estate-construction 60,695 44,536 56,325 40,955 32,355
Real estate-mortgage 88,430 64,602 71,719 61,247 66,707
Consumer installment 169,938 152,123 113,513 78,806 89,595
Credit cards 104,357 119,864 143,782 139,873 110,870
-------- -------- -------- -------- --------
Loans 496,221 432,821 429,284 360,176 331,449
Allowance for loan losses 11,911 14,320 16,511 5,536 4,344
-------- -------- -------- -------- --------
Loans, net $484,310 $418,501 $412,773 $354,640 $327,105
======== ======== ======== ======== ========
Total Loans
Loans $496,221 $432,821 $429,284 $360,177 $331,449
Loans held-for-sale:
Mortgage loans 9,655 4,361 13,106 12,113 2,225
Consumer installment 30,000 - 25,000 35,000 -
-------- -------- -------- -------- --------
Total loans held-for-sale 39,655 4,361 38,106 47,113 2,225
-------- -------- -------- -------- --------
Total loans $535,876 $437,182 $467,390 $407,290 $333,674
======== ======== ======== ======== ========
</TABLE>
LOAN MATURITY AND INTEREST RATE SENSITIVITY TABLE 6
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------
Within One Through Over
One Year Five Years Five Years Total
-------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Loan Maturity
Commercial, financial and agricultural $33,268 $27,760 $11,774 $ 72,802
Real estate-construction 43,467 15,744 1,484 60,695
------- ------- ------- --------
Total $76,735 $43,504 $13,258 $133,497
======= ======= ======= ========
Interest Rate Sensitivity
Selected loans with:
Predetermined interest rates:
Commercial, financial and agricultural $ 6,795 $12,930 $ 6,968 $ 26,693
Real estate-construction - - 135 135
Floating or adjustable interest rates:
Commercial, financial and agricultural 26,473 14,830 4,806 46,109
Real estate-construction 43,467 15,744 1,349 60,560
------- ------- ------- --------
Total $76,735 $43,504 $13,258 $133,497
======= ======= ======= ========
</TABLE>
14
<PAGE> 16
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 is real property acquired by foreclosure or directly by title or deed
transfer in settlement of debt.
Nonperforming assets at December 31, 1998, were $2.9 million. Since
December 31, 1997, nonperforming assets have declined $741,000, or 20.1%. During
1998, other real estate declined $1.2 million to $1.1 million. This decline was
due in part to a write-down of approximately $671,000 on a commercial real
estate property as a result of a reduction in its appraised value. At December
31, 1998 and 1997, there were no restructured loans. Nonperforming assets
increased $175,000 in 1997 from $3.5 million at December 31, 1996. The ratio of
nonperforming assets to total loans and other real estate was .55% at December
31, 1998, compared to 0.84% and 0.75% at December 31, 1997 and 1996,
respectively. The ratio of loans past due 90 days and still accruing to total
loans was .82% at December 31, 1998. This ratio was 1.42% and 1.47% at December
31, 1997 and 1996, respectively.
When a loan is classified as nonaccrual, to the extent collection is in
question, previously accrued interest is reversed and interest income is reduced
by the interest accrued in the current year. If any portion of the accrued
interest had been accrued in the previous year, accrued interest is reduced and
a charge for that amount is made to the allowance for loan losses. For 1998, 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 approximately $110,000.
Credit card accounts are sampled on a quarterly basis and reviewed to
assure compliance with Fidelity's credit policy. Review procedures include a
determination that the appropriate verification process has been completed, a
recalculation of the borrower's debt ratio has been performed, and an analysis
of the borrower's credit history has been conducted to determine if it meets
established bank criteria. Policy exceptions are analyzed monthly. Delinquent
accounts are monitored daily and charged off after 180 days past due, 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 7
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonperforming Assets
Nonaccrual loans $1,848 $1,422 $2,940 $3,105 $1,189
Restructured loans - - - - -
Other real estate and repossessions 1,093 2,260 567 1,339 1,714
------ ====== ====== ====== ======
Total nonperforming assets $2,941 $3,682 $3,507 $4,444 $2,903
====== ====== ====== ====== ======
Loans past due 90 days or more and still accruing $4,393 $6,194 $6,890 $3,091 $2,134
====== ====== ====== ====== ======
Ratio of past due loans to total loans .82% 1.42% 1.47% .76% .64%
Ratio of nonperforming assets to total
loans and other real estate .55% .84% .75% 1.09% .87%
</TABLE>
Management is not aware of any potential problem loans other than those
disclosed in the table above, which includes all loans recommended for such
classification by regulators, which would have a material impact on asset
quality. The adverse trends impacting the consumer portfolio, primarily credit
cards and indirect auto loans, have been discussed elsewhere herein.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES Allocation of the allowance for loan
losses is based primarily on historical loan loss experience, utilizing loss
migration analysis where appropriate, adjusted for changes in the risk
characteristics of each loan category. Additional amounts are allocated based on
the evaluation of the loss potential of individual troubled loans and the
anticipated affect 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, 1998, the allowance for loan losses was $11.9 million, or
2.40% of loans compared to $14.3 million, or 3.31% of loans at December 31,
1997. At December 31, 1998 and 1997, credit card loans totaled $104 million and
$120 million, respectively, or 19.5% and 27.4% of total loans, respectively.
This is compared to $144 million, or 30.8%, at December 31, 1996. The amount of
the allowance for loan losses allocated to credit cards was $7.8 million at
December 31, 1998, compared to $9.4 million at December 31, 1997. Fidelity has
reduced its allowance for loan losses and particularly the allowance allocated
to credit card loans due to the decline in credit card loans outstanding,
declining credit card net charge-offs and delinquencies and the projected
decline in net charge-offs on credit card loans. See "Provision for Loan
Losses."
At December 31, 1996, Fidelity's allowance for loan losses as a percentage
of loans was 3.85%. A significant portion of the allowance was allocated to
Fidelity's credit card
15
<PAGE> 17
portfolio. During 1997 and 1998, credit card delinquencies and credit card
charge-offs declined. As a result, the allowance for loan losses as a percentage
of loans declined to 2.40% at December 31, 1998. Management believes the
allowance for loan losses is adequate to provide for losses inherent in the loan
portfolio.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES TABLE 8
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Allowance %* Allowance %* Allowance %*
--------- ----- --------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 174 14.67% $ 154 11.94% $ 98 10.24%
Real estate-construction 63 12.23 48 10.29 35 13.12
Real estate-mortgage 60 17.82 65 14.93 350 16.71
Consumer installment 3,458 34.25 3,442 35.15 2,282 26.44
Credit cards 7,779 21.03 9,436 27.69 13,746 33.49
Unallocated 377 - 1,175 - - -
-------- ------ -------- ------ -------- ------
Total $ 11,911 100.00% $ 14,320 100.00% $ 16,511 100.00%
======== ====== ======== ====== ======== ======
<CAPTION>
December 31, 1995 December 31, 1994
-------------------- ---------------------
Allowance %* Allowance %*
--------- ----- --------- ------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 97 10.91% $ 54 9.64%
Real estate-construction 30 11.37 26 9.85
Real estate-mortgage 8 17.00 16 20.10
Consumer installment 357 21.88 402 26.96
Credit cards 4,875 38.84 3,750 33.45
Unallocated 169 - 96 -
------ ------ ------ ------
Total $5,536 100.00% $4,344 100.00%
====== ====== ====== ======
</TABLE>
* Percentage of respective loan type to total loans.
The following schedule summarizes data related to Fidelity's preapproved and
other credit card activities:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding:
Preapproved $ 38,156 $ 46,868 $ 57,980 $ 30,690 $ -
Other 66,201 72,996 85,802 109,183 110,870
-------- -------- -------- -------- --------
Total $104,357 $119,864 $143,782 $139,873 $110,870
======== ======== ======== ======== ========
Delinquencies 30+ days:
Preapproved $ 5,093 $ 6,855 $ 8,665 $ 1,724 $ -
Other 3,511 4,197 6,715 6,055 5,553
-------- -------- -------- -------- --------
Total $ 8,604 $ 11,052 $ 15,380 $ 7,779 $ 5,553
======== ======== ======== ======== ========
Net charge-offs:
Preapproved $ 5,554 $ 7,810 $ 5,078 $ 52 $ -
Other 4,183 5,590 7,510 6,537 4,072
-------- -------- -------- -------- --------
Total $ 9,737 $ 13,400 $ 12,588 $ 6,589 $ 4,072
======== ======== ======== ======== ========
</TABLE>
16
<PAGE> 18
INVESTMENT SECURITIES The levels of taxable securities and short-term
investments reflect Fidelity's strategy of maximizing portfolio yields within
overall asset and liability management parameters while providing for liquidity
needs. Investment securities totaled $73 million and $126 million at December
31, 1998 and 1997, respectively. A significant percentage of the holdings are
backed by U.S. Government or Federal agency guarantees limiting the credit risks
associated with these securities. The decrease at December 31, 1998, compared to
December 31, 1997, was attributable to securities sales proceeds of $4.2
million, $52.5 million in securities called by the issuing agencies, $35.0
million in maturities and $10.5 million in principal payments on mortgage backed
securities for a total decline of $102 million in investment securities only
partially offset by purchases of investment securities totaling $49.0 million.
The decline in investment securities was the result of a decision to fund loan
growth in part through a decline in balances of lower yielding investment
securities, mitigating in part the decline in the average yield on
interest-earning assets during 1998. (See "Results of Operations".) The average
life of Fidelity's securities portfolio was 2.9 years at December 31, 1998. At
year-end 1998, approximately $43 million of investment securities were
classified as available-for-sale, compared to $88 million at December 31, 1997.
The net unrealized gains on these securities at December 31, 1998, were $0.1
million before taxes compared to net unrealized gains of $0.3 million before
taxes at December 31, 1997.
At December 31, 1998, Fidelity classified all but $30 million of its
investment securities as available-for-sale. Fidelity maintains a relatively
high percentage of its investment portfolio as available-for-sale for possible
liquidity needs related to loan production.
DISTRIBUTION OF INVESTMENT SECURITIES TABLE 9
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 32,978 $ 33,108 $ 94,272 $ 94,486 $ 54,128 $ 53,798
Mortgage-backed securities 36,942 37,037 28,899 29,022 21,754 21,740
Other investments 3,015 3,015 2,425 2,425 1,854 1,854
-------- -------- -------- -------- -------- --------
Total $ 72,935 $ 73,160 $125,596 $125,933 $ 77,736 $ 77,392
======== ======== ======== ======== ======== ========
</TABLE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES AND AVERAGE YIELDS (1) TABLE 10
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31, 1998 December 31, 1997
--------------------------------------- ------------------------------------
Amortized Fair Average Amortized Fair Average
Cost Value Yield (2) Cost Value Yield (2)
-------- ------- --------- --------- ----- ---------
AVAILABLE-FOR-SALE
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
Due in less than one year $ - $ - -% $34,850 $34,857 5.75%
Due after five years through ten years 23,000 23,058 6.75 25,442 25,578 6.96
Due after ten years - - - 12,970 13,025 7.47
Mortgage-backed securities 20,282 20,347 6.13 14,409 14,548 6.61
------- ------- ------- -------
Total $43,282 $43,405 $87,671 $88,008
======= ======= ======= =======
HELD-TO-MATURITY
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
Due after five years through ten years $ 9,978 $10,050 6.54% $ - $ - -%
Due after ten years - - - 21,010 21,026 6.93
Mortgage-backed securities 16,659 16,691 6.26 14,490 14,474 6.05
------- ------- ------- -------
Total $26,637 $26,741 $35,500 $35,500
======= ======= ======= =======
</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.
17
<PAGE> 19
DEPOSITS AND FUNDS PURCHASED Total deposits increased during 1998 to $622
million, or 9.6%, from $568 million at December 31, 1997. On an average balance
basis, interest-bearing demand deposits grew $22 million, savings deposits
declined $6 million and time deposits grew $4 million. During 1996, brokered
deposits were used to support loan growth for loan sales. Brokered deposits were
not used during 1997 or 1998. Core deposits, Fidelity's largest source of
funding, consist of all interest-bearing and noninterest-bearing deposits except
time deposits over $100,000. Core deposits are obtained from a broad range of
customers. Average interest-bearing core deposits were $396 million and $384 at
December 31, 1998 and 1997, respectively.
Total deposits as of December 31, 1997, increased $23 million or 4.3% from
$545 million as of December 31, 1996. On an average balance basis, all
categories of deposits except interest-bearing demand deposits reflected volume
increases.
Noninterest-bearing deposits are comprised of certain business accounts,
including correspondent bank accounts and escrow deposits, as well as individual
accounts. Average noninterest-bearing demand deposits represented 17.72% of
average core deposits in 1998 compared to 18.96% in 1997. 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 11
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
--------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 85,720 - $ 72,807 -% $ 70,073 -%
Interest-bearing demand deposits 103,912 3.46% 82,298 2.81 100,966 3.51
Savings deposits 22,649 3.36 28,963 3.56 26,516 3.99
Time deposits 367,484 5.77 363,148 5.75 344,551 5.79
-------- -------- --------
Total average deposits $579,765 5.17 $547,216 5.10 $542,106 4.53
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31, 1998
Maturity Distribution of Time Deposits $100,000 or More
-------------------------------------------------------
<S> <C>
Three months or less $ 40,039
Over three through six months 16,238
Over six through twelve months 33,774
Over twelve months 17,549
--------
Total $107,600
========
</TABLE>
SCHEDULE OF SHORT-TERM BORROWINGS (1) TABLE 12
(Dollars in Thousands)
<TABLE>
<CAPTION>
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>
1998 $ 46,909 $ 22,172 3.33% $ 16,516 3.16%
1997 $ 29,020 $ 15,322 3.17% $ 16,368 3.17%
1996 $ 25,760 $ 18,907 3.67% $ 17,184 3.06%
</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.
18
<PAGE> 20
LONG-TERM DEBT On December 12, 1995, Fidelity issued $15 million in 8.5%
Subordinated Notes due January 31, 2006. Fidelity loaned $10 million of the
proceeds to Fidelity National 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 balance of the long
term debt consists of subordinated notes payable to individuals.
SHAREHOLDERS' EQUITY Shareholders' equity at December 31, 1998, was $55 million,
an increase of $4 million, or 6.2%, from $51 million at December 31, 1997.
Realized shareholders' equity (shareholders' equity excluding unrealized gains
or losses on investment securities available-for-sale) was $55 million at
December 31, 1998, and $51 million at December 31, 1997. The increase in 1998
was due to net income and common stock issued under employee benefit plans,
offset primarily by the declaration of common stock and preferred stock
dividends.
The 1997 increase in shareholders' equity compared to 1996 was primarily
attributable to the net proceeds of $5,650,000 from the issuance of 984,000
shares, at $6.25 per share, of Non-Cumulative 8% Convertible Preferred Stock and
the net proceeds of $23,467,000 from the issuance of 3,450,000 shares, at $7.50
per share, of common stock through a public stock offering.
Fidelity paid preferred stock dividends of $492,000 and $128,000 in 1998
and 1997, respectively. During 1998 Fidelity paid $325,000 in dividends on
common stock compared to no dividends in 1997 and $693,000 in dividends in 1996.
The following schedule summarizes per share common stock dividends paid for the
last three years:
<TABLE>
<CAPTION>
Dividends Paid
---------------------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
First Quarter $ - $ - $ .0375
Second Quarter - - .0375
Third Quarter - - .0375
Fourth Quarter .0400 - .0375
For the Year .0400 - .1500
</TABLE>
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 beginning 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. Fidelity adopted the new standard in 1998. Fidelity has elected to
present comprehensive income (loss) in a separate financial statement. See
Consolidated 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 beginning 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. Because Fidelity generally operates in a single business segment, the
adoption of this standard did not have a significant impact on Fidelity's
financial disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". ("SFAS No.
133"). SFAS No.133 establishes new accounting and reporting activities for
derivatives. The standard requires all derivatives to be measured at fair value
and recognized as either assets or liabilities in the statement of condition.
Under certain conditions, a derivative may be specifically designated as a
hedge. Accounting for the changes in fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Adoption of the
standard is required for the Company's December 31, 2000, financial statements
with early adoption allowed as of the beginning of any quarter after June 30,
1998. Adoption is not expected to result in a material financial impact based on
Fidelity's limited use of derivatives.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software of Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance as to when it is or
is not appropriate to capitalized the cost of software developed or obtained for
internal use. The effect of the adoption of SOP 98-1 was not material to
Fidelity's financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This review contains certain forward-looking statements including
statements relating to present or future trends or factors generally affecting
the banking industry and specifically affecting Fidelity's operations, markets
and
19
<PAGE> 21
products. Without limiting the foregoing, the words "believes," "anticipates,"
"intends," "expects" or similar expressions are intended to identify
forward-looking statements. These forward-looking statements involve certain
risks and uncertainties. Actual results could differ materially from those
projected for many reasons, including, without limitation, changing events and
trends that have influenced Fidelity's assumptions. These trends and events
include (i) changes in the interest rate environment which may reduce margins,
(ii) non-achievement of expected growth, (iii) less favorable than anticipated
changes in the national and local business environment and securities markets,
(iv) adverse changes in the regulatory requirements affecting Fidelity, (v)
greater competitive pressures among financial institutions in Fidelity's market,
(vi) delay and/or increased costs in achieving Y2K compliance, and (vii) greater
than anticipated credit losses. Additional information and other factors that
could affect future financial results are included in Fidelity's filings with
the Securities and Exchange Commission, including the Annual Report and 10K for
1998.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, certain
consolidated quarterly financial information of Fidelity. 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 Fidelity's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this report.
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) TABLE 13
<TABLE>
<CAPTION>
(Dollars in Thousands)
1998 1997
------------------------------------------- -----------------------------------------
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 $16,299 $16,578 $15,465 $15,430 $15,343 $15,953 $15,611 $15,246
Interest expense 7,264 7,298 6,606 6,577 6,610 6,650 6,429 6,521
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 9,035 9,280 8,859 8,853 8,733 9,303 9,182 8,725
Provision for loan losses 2,700 2000 2,850 1,900 2,765 3,400 3,500 4,770
Noninterest income before
securities gains 4,775 4,617 5,201 4,092 4,251 4,173 3,581 5,234
Securities gains 121 41 93 - 140 - - -
------- ------- ------- ------- ------- ------- ------- -------
Total noninterest income 4,896 4,658 5,294 4,092 4,391 4,173 3,581 5,234
Noninterest expense 10,428 10,091 9,564 9,365 10,685 9,247 8,771 8,717
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 803 1,847 1,739 1,680 (326) 829 492 472
Income tax expense (benefit) 299 680 623 615 (101) 288 154 163
------- ------- ------- ------- ------- ------- ------- -------
Net Income (loss) $ 504 $ 1,167 $ 1,116 $ 1,065 $ (225) $ 541 $ 338 $ 309
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share $ .06 $ .13 $ .12 $ .12 $ .08 $ .09 $ .07 $ .07
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share $ .05 $ .13 $ .12 $ .12 $ .08 $ .09 $ .07 $ .07
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
20
<PAGE> 22
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Fidelity National Corporation
We have audited the accompanying consolidated statements of condition of
Fidelity National Corporation and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, comprehensive income
(loss), shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. 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.
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fidelity National Corporation and subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
January 29, 1999
21
<PAGE> 23
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997 (1)
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks - Note 13 $ 32,726,501 $ 25,843,295
Interest-bearing deposits with banks 1,417,679 2,349,419
Federal funds sold 45,785,746 41,068,827
Investment securities available-for-sale - Note 3 43,404,870 88,007,985
Investment securities held-to-maturity (fair values
of $29,755,873 and $37,924,411 for 1998
and 1997, respectively) - Note 3 29,652,667 37,925,224
Loans held-for-sale 39,655,259 4,360,765
Loans, net of unearned income - Note 4 496,220,907 432,820,665
Allowance for loan losses - Note 4 (11,910,601) (14,319,591)
------------- -------------
Loans, net 484,310,306 418,501,074
Premises and equipment, net - Note 5 19,643,697 20,517,650
Other real estate - Note 4 1,093,264 2,259,704
Accrued interest receivable 4,560,617 3,917,066
Other assets 10,626,947 12,181,758
------------- -------------
Total assets $ 712,877,553 $ 656,932,767
============= =============
LIABILITIES
Deposits - Note 6
Noninterest-bearing demand deposits $ 102,424,607 $ 87,054,288
Interest-bearing deposits:
Demand and money market 128,053,878 83,756,126
Savings 21,867,183 21,748,732
Time deposits, $100,000 and over 107,599,557 98,190,352
Other time deposits 261,318,402 277,567,827
------------- -------------
Total deposits 621,263,627 568,317,325
Short-term borrowings - Note 7 16,515,867 16,367,839
Long-term debt - Note 8 15,650,000 15,800,000
Accrued interest payable 3,189,129 3,192,701
Other liabilities 1,703,450 1,906,800
------------- -------------
Total liabilities 658,322,073 605,584,665
------------- -------------
Commitments and contingencies - Notes 13 and 14
SHAREHOLDERS' EQUITY - Notes 2 and 11
Preferred stock, no par value. Authorized
10,000,000; issued and outstanding 984,000 shares
of Non-cumulative 8% Convertible Preferred
Stock - Series A, stated value $6.25 6,150,000 6,150,000
Common Stock, no par value. Authorized
50,000,000; issued 8,144,958 and 8,125,499; outstanding
8,133,866 and 8,114,407 in 1998 and 1997, respectively 35,124,941 34,943,110
Treasury stock (69,325) (69,325)
Net unrealized gains on investment
securities available-for-sale, net of tax 75,968 208,694
Retained earnings 13,273,896 10,115,623
------------- -------------
Total shareholders' equity 54,555,480 51,348,102
------------- -------------
Total liabilities and shareholders' equity $ 712,877,553 $ 656,932,767
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
(1) As restated, see Note 1.
22
<PAGE> 24
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1998 1997 (1) 1996
----------- ----------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $55,295,291 $56,010,450 $ 54,333,446
Investment securities (taxable) 6,631,283 4,835,128 4,956,072
Federal funds sold 1,689,132 1,238,941 436,649
Deposits with other banks 156,465 68,463 74,104
----------- ----------- ------------
Total interest income 63,772,171 62,152,982 59,800,271
INTEREST EXPENSE
Deposits - Note 6 25,550,474 24,236,294 24,532,698
Short-term borrowings 759,736 485,593 692,591
Long-term debt 1,434,390 1,487,673 1,501,487
----------- ----------- ------------
Total interest expense 27,744,600 26,209,560 26,726,776
NET INTEREST INCOME 36,027,571 35,943,422 33,073,495
Provision for loan losses - Note 4 9,450,000 14,435,000 25,127,000
----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 26,577,571 21,508,422 7,946,495
NONINTEREST INCOME
Service charges on deposit accounts 2,376,002 2,096,948 1,737,145
Credit card fees 3,277,781 3,083,913 2,927,992
Mortgage banking activities 3,345,774 4,902,945 6,900,260
Brokerage activities 3,032,084 3,276,829 3,201,220
Indirect lending activities 3,786,746 2,247,941 1,379,354
Trust activities 1,107,639 1,131,220 845,794
Securities gains, net - Note 3 254,737 140,090 603,977
Other 1,758,834 498,870 709,480
----------- ----------- ------------
Total noninterest income 18,939,597 17,378,756 18,305,222
NONINTEREST EXPENSE
Salaries and employee benefits - Note 10 17,162,862 17,012,788 16,411,631
Furniture and equipment 2,757,686 2,293,866 1,722,979
Net occupancy 3,225,106 2,974,877 2,596,155
Credit card processing and transaction fees 3,011,844 2,814,563 3,030,290
Communication expenses 2,091,842 1,968,448 1,684,176
Professional and other services 2,926,444 2,397,399 1,383,890
Regulatory assessments 1,381,174 1,196,001 522,658
Amortization of mortgage servicing rights 910,207 788,201 1,927,250
Other 5,980,785 5,974,374 6,209,631
----------- ----------- ------------
Total noninterest expense 39,447,950 37,420,517 35,488,660
----------- ----------- ------------
Income (loss) before income taxes 6,069,218 1,466,661 (9,236,943)
Income tax expense (benefit) - Note 9 2,216,630 503,748 (3,495,212)
----------- ----------- ------------
NET INCOME (LOSS) $ 3,852,588 $ 962,913 $ (5,741,731)
=========== =========== ============
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 3,483,588 $ 711,835 $ (5,741,731)
=========== =========== ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.43 $ 0.15 $ (1.24)
=========== =========== ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.42 $ 0.15 $ (1.24)
=========== =========== ============
Weighted average shares outstanding 8,123,049 4,831,364 4,619,530
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
(1) As restated, see Note 1.
23
<PAGE> 25
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1998 1997 (1) 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME (LOSS) $ 3,852,588 $ 962,913 $(5,741,731)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: - Note 1
Net unrealized (losses) gains on investment securities
available-for-sale arising during the year (132,726) 348,935 (830,015)
Less reclassification adjustment for gains included in net income (168,850) (116,578) (496,433)
----------- ----------- -----------
Other comprehensive (loss) income (301,576) 232,357 (1,326,448)
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 3,551,012 $ 1,195,270 $(7,068,179)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(1) As restated, see Note 1.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
---------------------- ------------------------- ------------------
Shares Amount Shares Amount Shares Amount
------- ---------- --------- ------------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1996 -- -- 4,619,475 $ 11,303,406 11,092 $(69,325)
Net loss -- -- -- -- -- --
Dividends declared ($.15 per share) -- -- -- -- -- --
Common Stock issued under
Employee Stock Purchase Plan -- -- 1,766 19,502 -- --
Issuance of Common Stock to Directors -- -- 44,015 555,689 -- --
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax -- -- -- -- -- --
------- ---------- --------- ------------ ------ --------
BALANCE DECEMBER 31, 1996 -- -- 4,665,256 11,878,597 11,092 (69,325)
Net income (1) -- -- -- -- -- --
Preferred stock issued 984,000 6,150,000 -- (500,000) -- --
Common Stock issued through
public offering -- -- 3,450,000 23,466,963 -- --
Common Stock issued under
Employee Stock Purchase Plan -- -- 10,243 97,550 -- --
Preferred dividends declared ($.26 per share) -- -- -- -- -- --
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax -- -- -- -- -- --
------- ---------- --------- ------------ ------ --------
BALANCE DECEMBER 31, 1997 984,000 6,150,000 8,125,499 34,943,110 11,092 (69,325)
Net income -- -- -- -- -- --
Common Stock issued under
Employee Benefit Plans -- -- 19,459 181,831 -- --
Preferred dividends declared
($.375 per share) -- -- -- -- -- --
Common dividends declared
($.04 per share) -- -- -- -- -- --
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax -- -- -- -- -- --
------- ---------- --------- ------------ ------ --------
BALANCE DECEMBER 31, 1998 984,000 $6,150,000 8,144,958 $ 35,124,941 11,092 $(69,325)
======= ========== ========= ============ ====== ========
<CAPTION>
Net unrealized
gains (losses) on
Investment
Securities Total
Available-for- Retained Shareholders'
Sale Earnings Equity
--------- ------------ ------------
<S> <C> <C> <C>
BALANCE JANUARY 1, 1996 $ 689,774 $ 15,838,425 $ 27,762,280
Net loss -- (5,741,731) (5,741,731)
Dividends declared ($.15 per share) -- (692,909) (692,909)
Common Stock issued under
Employee Stock Purchase Plan -- -- 19,502
Issuance of Common Stock to Directors -- -- 555,689
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax (830,015) -- (830,015)
--------- ------------ ------------
BALANCE DECEMBER 31, 1996 (140,241) 9,403,785 21,072,816
Net income (1) -- 962,913 962,913
Preferred stock issued -- -- 5,650,000
Common Stock issued through
public offering -- -- 23,466,963
Common Stock issued under
Employee Stock Purchase Plan -- -- 97,550
Preferred dividends declared ($.26 per share) -- (251,075) (251,075)
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax 348,935 -- 348,935
--------- ------------ ------------
BALANCE DECEMBER 31, 1997 208,694 10,115,623 51,348,102
Net income -- 3,852,588 3,852,588
Common Stock issued under
Employee Benefit Plans -- -- 181,831
Preferred dividends declared
($.375 per share) -- (369,000) (369,000)
Common dividends declared
($.04 per share) -- (325,315) (325,315)
Change in net unrealized gains
(losses) on investment securities
available-for-sale, net of tax (132,726) -- (132,726)
--------- ------------ ------------
BALANCE DECEMBER 31, 1998 $ 75,968 $ 13,273,896 $ 54,555,480
========= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
(1) As restated, see Note 1.
24
<PAGE> 26
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1998 1997 (1) 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,852,588 $ 962,913 $ (5,741,731)
Adjustments to reconcile net income to net cash
provided by (used in)
operating activities:
Provision for loan losses 9,450,000 14,435,000 25,127,000
Depreciation and amortization of premises and equipment 2,291,075 1,979,847 1,481,379
Amortization of mortgage servicing rights 910,207 788,201 1,927,250
Additions of originated mortgage servicing rights (1,285,422) (343,974) (893,878)
Securities gains, net (254,737) (140,090) (603,977)
Gain on loan sales and securitization (1,924,424) (920,983) (672,012)
Proceeds from sales of other real estate 496,730 327,644 345,575
Net (increase) decrease in loans held-for-sale (35,294,494) 33,745,103 9,006,667
Net (increase) decrease in accrued interest receivable (68,195) 1,090,810 (1,430,014)
Net (decrease) increase in accrued interest payable (3,572) (309,930) 895,829
Net (decrease) increase in other liabilities (203,350) (540,952) 502,481
Net decrease (increase) in other assets 1,850,691 6,076,041 (7,504,116)
Other, net (372,677) (241,953) 54,117
------------- ------------- -------------
Net cash flows provided by (used in) operating activities (20,555,580) 56,907,677 22,494,570
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (17,149,952) (30,092,474) (33,294,485)
Maturities of investment securities held-to-maturity 25,441,717 -- 30,375,000
Sales of investment securities available-for-sale 4,152,969 9,117,568 43,781,536
Purchases of investment securities available-for-sale (31,922,142) (79,833,616) (65,077,185)
Maturities of investment securities available-for-sale 72,393,747 52,983,590 3,728,880
Net increase in loans (232,894,418) (146,410,725) (286,040,758)
Purchases of premises and equipment (1,417,122) (2,698,418) (10,692,025)
Proceeds from sale of loans 160,310,320 125,158,018 203,543,314
------------- ------------- -------------
Net cash flows used in investing activities (21,084,881) (71,776,057) (113,675,723)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, money market
accounts, and savings accounts 59,786,522 1,362,961 (5,693,692)
Net (decrease) increase in time deposits (6,840,220) 22,241,035 83,899,712
Proceeds from issuance of Preferred Stock -- 5,650,000 --
Proceeds from issuance of Common Stock 181,831 23,564,513 575,191
Repayment of long-term debt (150,000) (700,000) (250,000)
Increase (decrease) in short-term borrowings 148,028 (815,930) 8,938,578
Dividends paid (817,315) (128,075) (692,909)
------------- ------------- -------------
Net cash flows provided by financing activities 52,308,846 51,174,504 86,776,880
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 10,668,385 36,306,124 (4,404,273)
Cash and cash equivalents, beginning of year 69,261,541 32,955,417 37,359,690
------------- ------------- -------------
Cash and cash equivalents, end of year $ 79,929,926 $ 69,261,541 $ 32,955,417
============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 27,748,172 $ 26,519,490 $ 25,830,947
============= ============= =============
Income taxes $ 2,000,000 700,000 $ 1,375,000
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
(1) As restated, see Note 1.
25
<PAGE> 27
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Fidelity National Corporation and its wholly owned subsidiaries
(collectively Fidelity). Fidelity National Corporation 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.
Fidelity is a financial services company which offers traditional banking,
mortgage, trust, and investment services to its customers, who are generally
individuals and small to medium sized businesses. 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,
servicing assets, securitization assets 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.
RESTATEMENT. Fidelity's earnings for 1997 have been reduced $871,236 or $.18 per
share. This restatement of prior year earnings is attributable to an error that
caused an overstatement in the value of assets related to Fidelity's only
securitization asset at year-end 1997. Fidelity performs a quarterly evaluation
of its securitization asset. The error occurred as a result of a computational
error in determining the fair value of the securitization asset.
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," Fidelity 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. Fidelity had no trading securities at December 31, 1998 or 1997.
Held-to-maturity securities are those securities which Fidelity 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 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 or principal is
doubtful.
Rate related loan fee income is included in interest income. Loan
origination and commitment fees and certain direct origination costs are
deferred and the net amount is amortized as an adjustment of the yield over the
contractual lives of the related loans, taking into consideration assumed
prepayments.
26
<PAGE> 28
Current period accrued interest-related income charges on credit card
loans are charged off to interest income. Annual fees collected for credit cards
are recognized as income on a straight-line basis over the period the fee
entitles the cardholder to use the card.
Impaired loans are 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 "Accounting by Creditors for Impairment of a
Loan," 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.
CREDIT CARDS. Costs related to the origination of credit cards are capitalized
and amortized over one year using the straight-line method. The net amount of
capitalized costs remaining as of December 31, 1998 and 1997, is $59,000 and
$38,000, respectively.
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 Fidelity's allowance for loan
losses. Such agencies may require Fidelity 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 Fidelity's loans is secured by real estate
located in metropolitan Atlanta, Georgia. In addition, all of Fidelity'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 at December 31, 1998, and mortgage loans at December
31, 1997. 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, 1998 or 1997, 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 as 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 less selling costs 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. Fidelity 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
27
<PAGE> 29
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
INCOME PER COMMON SHARE. Fidelity has adopted the provisions of SFAS No. 128,
"Earnings Per Share." All earnings per share amounts for all periods presented
have been restated to conform to the requirements of SFAS 128. The difference
between basic earnings per share and diluted earnings per share during 1998 was
a result of the dilutive effect of stock options.
MORTGAGE BANKING ACTIVITIES. Effective January 1, 1995, Fidelity adopted SFAS
No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB
Statement No. 65." On January 1, 1997, Fidelity adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which superseded SFAS No. 122. SFAS No. 122 requires
capitalization of purchased as well as internally originated mortgage servicing
rights based on the fair value of the mortgage servicing rights relative to the
loan as a whole. Prior to the issuance of SFAS No. 122, capitalization of
mortgage servicing rights was limited to servicing rights purchased from third
parties. Mortgage servicing rights are amortized in proportion to and over the
period of estimated net servicing income. The fair value of mortgage servicing
rights is determined based on the present value of estimated expected future
cash flows determined using assumptions that market participants would use in
estimating future net servicing income which includes discount rate, prepayment
estimate, and per loan cost to service. Mortgage servicing rights are stratified
by loan type (government or conventional) and interest rate for purposes of
measuring impairment on a quarterly basis. An impairment loss is recognized to
the extent by which the amortized capitalized mortgage servicing rights for each
stratum exceeds the current fair value. Impairment losses are recognized as
reductions in the carrying value of the asset, through the use of a valuation
allowance.
During 1998, 1997 and 1996, Fidelity capitalized approximately
$1,259,000, $343,000 and $894,000, respectively, of originated servicing rights,
recorded amortization of approximately $406,000, $429,000 and $573,000,
respectively and recorded a valuation allowance of approximately $29,000,
$14,000 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, 1998 and 1997, was approximately $ 3.0
million and $3.2 million, respectively.
STOCK OPTIONS. Fidelity has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and
related interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of Fidelity's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which is
effective for annual and interim periods beginning 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. Fidelity adopted this statement in 1998, which is a more inclusive
financial reporting methodology that includes disclosure of certain financial
information that previously has not been recognized in the calculation and
reporting of net income. Fidelity's only comprehensive income items are related
to unrealized gains and losses on investment securities classified as
available-for-sale and reclassification adjustments for gains on securities
sales and calls included in net income. All comprehensive income items are tax
effected at a rate of 38%.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for annual and interim periods beginning 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. The adoption of this standard
did not have a significant impact on Fidelity as Fidelity principally operates
in one business segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes new accounting and reporting activities for
derivatives. The standard requires all derivatives to be measured at fair value
and recognized as either assets or liabilities in the statement of condition.
Under certain conditions, a derivative may be specifically designated as a
hedge. Accounting for the changes in fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Adoption of the
standard is required for Fidelity's December 31, 2000, financial statements with
early adoption allowed as of the beginning of any quarter after June 30, 1998.
Adoption is not expected to result in a material financial impact based on
Fidelity's limited use of derivatives.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance as to when it is or is
not appropriate to capitalized the cost of software
28
<PAGE> 30
developed or obtained for internal use. The effect of the adoption of SOP 98-1
was not material to Fidelity's financial position or results of operations.
2 - REGULATORY AGREEMENTS
Fidelity National 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 (the "FRB")
and to banks whose deposits are insured by the Federal Deposit Insurance
Corporation.
Fidelity National Bank's principal regulator is the Office of the
Comptroller of the Currency (the "OCC"). At periodic intervals, the OCC examines
and evaluates the financial condition, operations, and policies and procedures
of nationally chartered banks as part of its 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. 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. Better capitalized institutions are subject to less
onerous regulation and supervision than banks with lesser amounts of capital.
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 declines to 2% or less.
To implement the prompt corrective action provisions of the 1991 Act,
the OCC adopted regulations placing financial institutions in five categories
based upon capitalization ratios. Undercapitalized institutions 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. Institutions
experiencing or anticipating significant growth or those with other than minimum
risk profiles may be expected to maintain capital above the minimum level.
On December 1, 1998, the OCC terminated the formal agreement dated
November 14, 1996, between Fidelity National Bank and the OCC. The formal
agreement had provided that Fidelity National Bank (i) appoint an "Oversight
Committee"; (ii) achieve and maintain specified higher capital levels; (iii)
develop a three-year capital program which included, among other things, certain
restrictions on dividend payments by the Bank; and (iv) revise and amend its
strategic plan.
Also, on December 1, 1998, the OCC advised Fidelity National Bank that
it was deemed to be "well capitalized." On April 3, 1997, the OCC had notified
Fidelity National Bank that since it had not met the minimum capital levels
established for an "adequately capitalized" bank as of December 31, 1996, the
Bank was then deemed to be "undercapitalized" and was subject to "prompt
corrective action." As a result, the Bank had been subject to restrictions on
its ability to pay dividends and management fees and to restrictions on asset
growth and expansion in 1997 and 1998.
The table below sets forth the capital requirements for the Bank under
OCC regulations, under the formal agreement (which was terminated on December 1,
1998) and the Bank's capital ratios at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
OCC Regulations
--------------------------- December 31,
Adequately Well Formal ------------------------
Capital Ratios Capitalized Capitalized Agreement 1998 1997
- ------------------- ----------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.00% 7.10% 7.49%
Risk-Based Capital:
Tier 1 4.00 6.00 7.00 8.68 9.30
Total 8.00 10.00 11.00 11.65 12.60
</TABLE>
The Board of Governors of the Federal Reserve System ("FRB") is the
principal regulator of Fidelity National Corporation, a bank holding company.
The FRB has established capital requirements as a function of its oversight of
bank holding companies. Each bank holding company must maintain the minimum
capital ratios set forth in the following table. At December 31, 1998 and 1997,
Fidelity National Corporation exceeded the minimum capital requirements.
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 redeeming its
capital stocks, paying
29
<PAGE> 31
dividends on its common stock or incurring debt without prior approval of the
FRB. The FRB Agreement continues until canceled by the FRB.
The following table depicts Fidelity's capital ratios at December 31,
1998 and 1997, in relation to the minimum capital ratios established by the
regulations of the FRB (dollars In thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------- ------------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Tier 1 Capital:
Actual $ 54,069 9.25% $ 49,280 9.97%
Minimum 23,385 4.00 19,762 4.00
-------- ----- -------- -----
Excess $ 30,684 5.25% $ 29,518 5.97%
======== ===== ======== =====
Total risk-based capital:
Actual $ 76,794 13.14% $ 71,326 14.44%
Minimum 46,770 8.00 39,525 8.00
-------- ----- -------- -----
Excess $ 30,024 5.14% $ 31,801 6.44%
======== ===== ======== =====
Tier 1 Capital Leverage Ratio:
Actual 7.57% 8.04%
Minimum 3.00 3.00
----- -----
Excess 4.57% 5.04%
===== =====
</TABLE>
Set forth below are Fidelity's pertinent capital ratios under the FRB
regulations as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
Adequately Well ------------------------
Capital Ratios Capitalized Capitalized 1998 1997
- ------------------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Leverage 3.00% 5.00% 7.57% 8.04%
Risk-Based Capital:
Tier 1 4.00 6.00 9.25 9.97
Total 8.00 10.00 13.14 14.44
</TABLE>
Generally, dividends that may be paid by Fidelity National Bank to
Fidelity 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, 1998, Fidelity National Bank's total shareholders' equity was $51
million.
30
<PAGE> 32
3 - INVESTMENT SECURITIES
Investment securities at December 31, 1998 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
Securities available-for-sale at December 31, 1998:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $23,000,000 $ 58,350 $ -- $23,058,350
Mortgage-backed securities 20,282,339 126,239 (62,058) 20,346,520
----------- -------- -------- -----------
Total $43,282,339 $184,589 $(62,058) $43,404,870
=========== ======== ======== ===========
Securities available-for-sale at December 31, 1997:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $73,261,961 $212,240 $(14,376) $73,459,825
Mortgage-backed securities 14,409,423 141,440 (2,703) 14,548,160
----------- -------- -------- -----------
Total $87,671,384 $353,680 $(17,079) $88,007,985
=========== ======== ======== ===========
Securities held-to-maturity December 31, 1998:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 9,978,219 $ 71,781 $ -- $10,050,000
Mortgage-backed securities 16,659,200 62,399 (30,974) 16,690,625
Other securities 3,015,248 -- -- 3,015,248
----------- -------- -------- -----------
Total $29,652,667 $134,180 $(30,974) $29,755,873
=========== ======== ======== ===========
Securities held-to-maturity at December 1997:
U.S. Treasury securities and obligations of U.S.
Government corporation and agencies $21,010,285 $ 15,540 $ -- $21,025,825
Mortgage-backed securities 14,489,939 -- (16,353) 14,473,586
Other securities 2,425,000 -- -- 2,425,000
----------- -------- -------- -----------
Total $37,925,224 $ 15,540 $(16,353) $37,924,411
=========== ======== ======== ===========
</TABLE>
Proceeds from sales of investment securities available-for-sale during
1998 and 1997 were $4,152,969 and $9,117,568, respectively. Gross gains of
$187,129 and $140,090 for 1998 and 1997, respectively, were realized on those
sales. In 1998, an additional gain of $67,608 was realized on $52,500,000 of
investment securities called at par. Proceeds from the sale of investment
securities were $43,781,536 in 1996 with related gross gains of $603,977. Income
tax expense related to the sale of securities was $90,584, $49,816 and $214,776
in 1998, 1997 and 1996, respectively. There were no investments held in trading
accounts during 1998, 1997 or 1996.
31
<PAGE> 33
The following table depicts amortized cost and estimated fair value of
investment securities at December 31, 1998 and 1997, 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, 1998 December 31, 1997
----------------------------- -----------------------------
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 $ -- $ -- $34,850,094 $34,856,375
Due after five years through ten years 23,000,000 23,058,350 25,441,677 25,577,705
Due after ten years or more -- -- 12,970,190 13,025,745
----------- ----------- ----------- -----------
23,000,000 23,058,350 73,261,961 73,459,825
Mortgage-backed securities 20,282,339 20,346,520 14,409,423 14,548,160
----------- ----------- ----------- -----------
Total $43,282,339 $43,404,870 $87,671,384 $88,007,985
=========== =========== =========== ===========
HELD-TO-MATURITY
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies:
Due after five years through ten years $ 9,978,219 $10,050,000 $ -- $ --
Due after ten years -- -- 21,010,285 21,025,825
Mortgage-backed securities 16,659,200 16,690,625 14,489,939 14,473,586
----------- ----------- ----------- -----------
Total $26,637,419 $26,740,625 $35,500,224 $35,499,411
=========== =========== =========== ===========
</TABLE>
Investment securities with a carrying value of approximately
$70,012,000 and $58,330,000 at December 31, 1998 and 1997, respectively, were
pledged as collateral for public deposits, securities sold under agreements to
repurchase, and for other purposes required by law.
4 - LOANS
Loans outstanding, by classification, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Credit cards $104,356,609 $119,864,009
Real estate-mortgage 88,429,607 64,601,854
Real estate-construction 60,695,156 44,535,553
Commercial, financial and agricultural 72,801,512 51,696,075
Consumer installment 169,938,023 152,123,174
------------ ------------
Total loans 496,220,907 432,820,665
Less: Allowance for loan losses 11,910,601 14,319,591
------------ ------------
Loans, net $484,310,306 $418,501,074
============ ============
</TABLE>
Loans held-for-sale at December 31, 1998, totaled $39,655,259, of which
$9,655,259 were mortgage loans and $30,000,000 were indirect auto loans.
Fidelity, through one of its subsidiaries, had loan participations sold without
recourse in the amount of $4.7 million and $6.3 million at December 31, 1998 and
1997, respectively. Fidelity, through its mortgage subsidiary, was servicing
loans for others of approximately $220 million, $233 million and $580 million at
December 31, 1998, 1997 and 1996, respectively.
Loans in nonaccrual status amounted to approximately $1,848,000,
$1,422,000, and $2,940,000 at December 31, 1998, 1997 and 1996, respectively.
The allowance for loan losses related to these impaired loans was $61,000,
$56,000, and $561,000 at December 31, 1998, 1997 and 1996, respectively. The
average recorded investment in impaired loans during 1998, 1997 and 1996 was
$1,869,952, $1,592,000, and $3,135,000, respectively. If such impaired loans had
been on a full accrual basis, interest income on these loans would have been
approximately $110,000, $73,000, and $278,000 in 1998, 1997 and 1996,
respectively.
32
<PAGE> 34
There were no loans transferred to other real estate in 1998. Loans
totaling approximately $2,011,000 and $237,600 were transferred to other real
estate in 1997 and 1996, respectively. In 1998, Fidelity recorded a write-down
of $671,000 on a commercial real estate owned property as a result of an
impairment to its value. There were sales of $480,000 from other real estate
financed by Fidelity in 1998. Loans are reported net of deferred loan fees of
$74,449, $63,591 and $104,669 at December 31, 1998, 1997 and 1996, respectively.
Fidelity 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 customers, and did not involve more than the
normal risk. The following is a summary of activity during 1998 for such loans:
<TABLE>
<S> <C>
Loan balances at December 31, 1997 $3,418,633
New loans 2,853,839
Less loan repayments 1,970,978
----------
Loan balances at December 31, 1998 $4,301,494
==========
</TABLE>
The following is a summary of activity in the allowance for loan losses:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 14,319,591 $ 16,510,842 $ 5,536,504
Provision for loan losses 9,450,000 14,435,000 25,127,000
Loans charged off:
Credit cards (12,091,609) (14,734,739) (13,156,340)
Other loans (2,472,604) (3,521,443) (1,659,492)
Recoveries on loans charged off 2,705,224 1,629,931 663,170
------------ ------------ ------------
Balance at end of year $ 11,910,601 $ 14,319,591 $ 16,510,842
============ ============ ============
</TABLE>
5 - PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land $ 4,019,020 $ 2,735,320
Buildings and improvements 9,634,385 11,014,127
Furniture and equipment 17,742,752 16,411,152
----------- -----------
31,396,157 30,160,599
Less accumulated depreciation and amortization 11,752,460 9,642,949
----------- -----------
Premises and equipment, net $19,643,697 $20,517,650
=========== ===========
</TABLE>
As of December 31, 1998, Fidelity was lessee in two leases at market
terms with two corporations, one of which is controlled by a director of
Fidelity, and the other corporation of which a director of Fidelity is a
majority shareholder. The first lease is for a bank branch, 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 second lease is for a 2,200 square foot bank branch at an
approximate annual rate of $11 per square foot, subject to pro rata increases
for any increases in taxes and insurance.
6 - DEPOSITS
Time deposits over $100,000 as of December 31, 1998 and 1997, were
$107,599,557 and $98,190,352, respectively. Maturities for time deposits over
$100,000 as of December 31, 1998, in excess of one year are as follows:
$11,611,554 in one to two years, $3,930,672 in two to three years, $1,345,772 in
three to five years, and $660,653 after five years. Related interest expense was
$5,655,764, $5,131,909, and $5,042,964 for the years ended December 31, 1998,
1997 and 1996,
33
<PAGE> 35
respectively. Included in demand and money market deposits were NOW accounts
totaling $49,907,053 and $39,673,545 at December 31, 1998 and 1997,
respectively.
7 - SHORT-TERM BORROWINGS
At December 31, 1998 and 1997, short-term borrowings consisted of
securities sold under agreements to repurchase totaling $16,515,867 and
$16,367,839, respectively. Short-term borrowings mature either overnight or on a
fixed maturity not to exceed three months. At December 31, 1998, Fidelity had a
line of credit with the Federal Home Loan Bank to borrow up to a maximum of $20
million under a line of credit, which requires loans secured by real estate,
investment securities or other acceptable collateral. The Bank also has a $15
million collateralized line of credit and a total of $20.4 million in unsecured
short term lines of credit available with several financial institutions.
Interest expense on Federal Home Loan Bank advances was $26,830 in 1998 and
$36,720 in 1997. The weighted average rate on short-term borrowings outstanding
at December 31, 1998 1997 and 1996, was 3.16%, 3.17% and 3.06%, respectively.
8 - LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Junior subordinated Series A capital notes with interest at prime plus 2%
due December 15, 1999; interest payable quarterly $ 50,000 $ 50,000
Subordinated capital notes with interest at 11% through March 27, 2000,
and at prime plus 2% thereafter, due March 27, 2002, interest payable
quarterly 600,000 750,000
8.5% subordinated notes due January 31, 2006, interest payable quarterly 15,000,000 15,000,000
----------- -----------
Total $15,650,000 $15,800,000
=========== ===========
</TABLE>
Note maturities as of December 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
1999 $ 50,000
2000 --
2001 --
2002 600,000
2003 --
Thereafter 15,000,000
-----------
Total $15,650,000
===========
</TABLE>
On December 12, 1995, Fidelity issued $15,000,000 in 8.5% Subordinated
Notes due January 31, 2006. Under the terms of the notes, Fidelity 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. Under the provisions of the
notes, Fidelity may declare or pay dividends on any of its capital stock as long
as the amounts of dividends paid cumulatively for the three-year period ending
on the declaration date of the dividend does not exceed cumulative consolidated
net income of Fidelity for the three-year period ending on the applicable
declaration date. The cumulative consolidated net loss of Fidelity for the
three-year period ended December 31, 1998, was $926,000 and the dividends paid
during such period were $1.6 million. Fidelity violated this provision during
1998 and 1997 with the declaration of preferred stock dividends. Although a
technical event of default occurred under the provisions of the Notes, the
remedies available do not include acceleration of the debt. In addition, no
dividend can be declared on the capital stock of Fidelity 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.
The subordinated notes due March 27, 2002, may be redeemed at the
option of Fidelity at any time after March 27, 2000, without penalty. All other
subordinated notes may be redeemed at the option of Fidelity 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, 1998.
34
<PAGE> 36
9 - INCOME TAXES
Income tax expense (benefit) attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
Current Deferred Total
----------- ----------- -----------
<S> <C> <C> <C>
Year ended December 31, 1998:
Federal $ 1,615,737 $ 796,556 $ 2,412,293
State -- (195,663) (195,663)
----------- ----------- -----------
$ 1,615,737 $ 600,893 $ 2,216,630
=========== =========== ===========
Year ended December 31, 1997:
Federal $ 420,157 $ 118,393 $ 538,550
State -- (34,802) (34,802)
----------- ----------- -----------
$ 420,157 $ 83,591 $ 503,748
=========== =========== ===========
Year ended December 31, 1996:
Federal $ 1,006,128 $(4,124,579) $(3,118,451)
State -- (376,761) (376,761)
----------- ----------- -----------
$ 1,006,128 $(4,501,340) $(3,495,212)
=========== =========== ===========
</TABLE>
Income tax expense (benefit) 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>
1998 1997 1996
----------- --------- -----------
<S> <C> <C> <C>
Taxes at statutory rate $ 2,063,534 $ 498,665 $(3,140,561)
Increase (reduction) in income taxes resulting from:
State income tax expense, net of Federal income tax benefit (129,138) (22,969) (248,662)
Tax exempt income (22,982) (23,014) (22,770)
Other, net 305,216 51,066 (83,219)
----------- --------- -----------
Income tax expense (benefit) $ 2,216,630 $ 503,748 $(3,495,212)
=========== ========= ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997, are presented below:
<TABLE>
<CAPTION>
Deferred Tax
-------------------------------------------------------------
1998 1997
---------------------------- ---------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
State tax credit carry forwards $ 438,556 $ -- $ 242,893 $ --
Allowance for loan losses 3,424,774 -- 3,762,518 --
Accelerated depreciation -- 790,032 -- 465,718
Securitization 207,895 -- 167,677 --
Deferred loan fees, net -- 146,598 28,771 --
Other real estate 275,791 -- 41,050 --
Unrealized holding gains on securities
available-for-sale -- 46,562 -- 127,909
Capitalized mortgage servicing rights -- 561,548 -- 206,521
Other 148,312 17,890 142,793 51,963
---------- ---------- ---------- --------
$4,495,328 $1,562,630 $4,385,702 $852,111
========== ========== ========== ========
</TABLE>
At December 31, 1998, Fidelity had approximately $855,000 in state tax
carryforward credits that have not been utilized. These credits expire in one to
five years.
35
<PAGE> 37
10 - EMPLOYEE BENEFITS
The Chairman and Chief Executive Officer of Fidelity and the President
of the Bank have entered into employment agreements for three-year periods
commencing January 1, 1998, and September 15, 1997, respectively, providing for
the payment of or reimbursement of certain split-dollar life, term life and
disability insurance plans.
Fidelity maintains a 401(k) defined contribution retirement savings
plan for employees age 18 or older who have completed ninety days of service.
Employee contributions to the plan are voluntary. Fidelity matches up to 15% of
the participants' eligible contributions. For the years ended December 31, 1998,
1997 and 1996, Fidelity contributed $65,135, $62,348, and $71,873, respectively,
to the plan.
Fidelity has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of Fidelity's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Fidelity's 1997 Incentive Stock Option Plan has authorized the grant of
options to management personnel for up to 500,000 shares of Fidelity's Common
Stock. All options granted have 5 to 7 year terms and vest and become fully
exercisable at the end of 4 to 5 years of continued employment.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if Fidelity had accounted
for its employee stock options under the fair value method of that Statement.
The effects of applying SFAS 123 for providing pro forma disclosures are not
likely to be representative of the effects on reported net income for future
years.
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Price
------- --------------
<S> <C> <C>
Under option, January 1, 1997 -- $ --
Granted 250,000 9.15
Exercised -- --
Expired -- --
------- -----
Under option, December 31, 1997 250,000 $9.15
======= =====
</TABLE>
At December 31, 1998 and 1997, there were 250,000 options outstanding
at a price ranging from $9.00 to $9.90, with a weighted average price of $9.15.
The weighted average remaining contractual term of the options is five years.
There were no such options granted, exercised or expired in 1998.
<TABLE>
<CAPTION>
Net Income Net Income
Net Per Share Per Share
Income Basic Diluted
----------- ------ -------
<S> <C> <C> <C>
December 31, 1998
As reported $ 3,852,588 $ 0.43 $ 0.42
Stock based compensation net of related
tax effect (137,724) (0.02) (0.02)
----------- ------ ------
As adjusted $ 3,714,864 $ 0.41 $ 0.40
=========== ====== ======
December 31, 1997
As reported $ 962,913 $ 0.15 $ 0.15
Stock based compensation net of related
tax effect (25,662) (0.01) (0.01)
----------- ------ ------
As adjusted $ 937,251 $ 0.14 $ 0.14
=========== ====== ======
</TABLE>
36
<PAGE> 38
The per share weighted fair value of stock options granted during 1997
was $2.77 using the Black-Scholes option pricing model. The fair value of the
options granted during the year was based upon the discounted value of future
cash flows of options using the following assumptions:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Risk-free rate 4.76% 5.12%
Expected life of the options (in years) 5 - 7 5 - 7
Expected dividends (as a percent of the fair value of the stock) 1.50% 0%
Volatility 57.90% 27.50%
</TABLE>
11 - SHAREHOLDERS' EQUITY
In addition to the previously mentioned regulatory agreement, dividends
that may be paid by Fidelity National 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
a 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. For additional dividend restrictions, see
Note 8. At December 31, 1998, total shareholders' equity of Fidelity National
Bank was approximately $51 million. Also, under current Federal Reserve System
regulations, Fidelity National Bank is limited in the amount it may loan to its
nonbank affiliates, including Fidelity. As of December 31, 1998, there were no
loans outstanding from the Bank to Fidelity.
During mid-1997, Fidelity sold, in a private placement, $6.15 million
Non-Cumulative 8% Convertible Preferred Stock, Series A ("Preferred Stock"). In
December 1997, Fidelity sold in a public offering 3,450,000 shares of Common
Stock at a price of $7.50 per share. The proceeds, net of stock issuance costs,
from the Preferred Stock and Common Stock offerings were $5.6 million and $23.5
million, respectively. The proceeds were used to provide additional capital to
Fidelity National Bank and for general corporate purposes. In connection with
the public offering, Fidelity agreed to issue to the underwriter warrants to
purchase 150,000 shares of Common Stock at a purchase price of $8.25 per share.
The warrants are exercisable during the four-year period commencing December 12,
1998.
As of December 31, 1998, there were 984,000 shares of Preferred Stock
issued and outstanding. Each share of Preferred Stock may be converted by the
holder thereof at any time into .86926 of a share of Common Stock. Holders of
Preferred Stock are entitled to vote on each matter on which holders of Common
Stock are entitled to vote and are accorded all voting powers and rights of
holders of Common Stock. Each share of Preferred Stock has the number of votes
equal to the number of shares of Common Stock into which it is convertible.
The Preferred Stock is redeemable by Fidelity at its stated value of
$6.25, in whole or in part, at Fidelity's option, at any time after the later of
(i) the second anniversary of its issuance or (ii) the last day of a period of
ten (10) consecutive trading dates on which the closing price of a share of
Common Stock on each such day shall equal or exceed $10.00. Any redemption is
also subject to the prior approval of the FRB. Fidelity has accorded each holder
of Preferred Stock one demand registration right covering the shares of Common
Stock acquired upon the conversion of the Preferred Stock into Common Stock.
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 Fidelity.
37
<PAGE> 39
The carrying amounts reported in the Statements of Condition for cash,
due from banks, and Federal funds sold, approximate 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 Fidelity'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 Fidelity for debt of the same remaining maturities. The carrying
amount of long-term debt approximates its estimated fair value.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial instruments (assets)
Cash and due from banks $ 34,144,180 $ 34,144,180 $ 28,192,714 $ 28,192,714
Federal funds sold 45,785,746 45,785,746 41,068,827 41,068,827
Investment securities available-for-sale 43,404,870 43,404,870 88,007,985 88,007,985
Investment securities held-to-maturity 29,652,667 29,755,873 37,925,224 37,924,411
Loans, net of unearned income 535,876,166 542,232,323 437,181,430 438,831,812
------------ ------------ ------------ ------------
Total financial instruments (assets) 688,863,629 $695,322,992 632,376,180 $634,025,749
Non-financial instruments (assets) 24,013,924 ============ 24,556,587 ============
------------ ------------
Total assets $712,877,553 $656,932,767
============ ============
Financial instruments (liabilities)
Noninterest-bearing demand deposits $102,424,607 $102,424,607 $ 87,054,288 $ 87,054,288
Interest-bearing deposits 518,839,020 521,552,017 481,263,037 482,896,887
------------ ------------ ------------ ------------
Total deposits 621,263,627 623,976,624 568,317,325 569,951,175
Short-term borrowings 16,515,867 16,515,867 16,367,839 16,376,839
Long-term debt 15,650,000 15,650,000 15,800,000 15,800,000
------------ ------------ ------------ ------------
Total financial instruments (liabilities) 653,429,494 $656,142,491 600,485,164 $602,128,014
============ ============
Non-financial instruments (liabilities
and shareholders' equity) 59,448,059 56,447,603
------------ ------------
Total liabilities and shareholders' equity $712,877,553 $656,932,767
============ ============
</TABLE>
For off-balance sheet instruments, fair values are based on rates
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing for
loan commitments and letters of credit. The estimated fair values of Fidelity's
off-balance sheet financial instruments as of December 31, 1998 and 1997, are
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Fair Value Fair Value
---------- ----------
<S> <C> <C>
Unfunded commitments to
extend credit $318,563 $355,552
Standby letters of credit 10,694 3,465
</TABLE>
38
<PAGE> 40
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 Fidelity.
13 - COMMITMENTS AND CONTINGENCIES
The approximate future minimum rental commitments as of December 31,
1998, 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>
1999 $ 2,346,000
2000 2,377,000
2001 2,299,000
2002 2,176,000
Thereafter 5,589,000
-----------
Total $14,787,000
===========
</TABLE>
Rental expense for all leases amounted to approximately $2,408,000,
$2,282,000, and $1,740,000, in 1998, 1997 and 1996, respectively.
Due to the nature of their activities, Fidelity is at times engaged in
various legal proceedings which arise in the normal course of business, some of
which are outstanding at December 31, 1998. 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
Fidelity'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 the banks' average deposits. The Bank's reserve requirements at
December 31, 1998 and 1997, were $8,562,000 and $6,625,000, respectively.
14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Fidelity 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 these instruments reflect the extent of involvement Fidelity has in
particular classes of financial instruments.
Fidelity's exposure to credit loss, in the event of nonperformance by
customers for commitments to extend credit and letters of credit, is represented
by the contractual or notional amount of those instruments. Fidelity 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 Fidelity. Fidelity controls the
interest rate risk of its forward sales contracts through management approvals,
dollar limits, and monitoring procedures.
39
<PAGE> 41
Financial instruments with off-balance sheet risk at December 31, 1998,
are summatrized as follows (dollars in thousands):
<TABLE>
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Loan commitments
Credit card lines $220,704
Home equity 13,109
Commercial real estate, construction and land development 48,535
Commercial 27,446
Mortgage loans 7,869
Lines of credit 900
Standby letters of credit 10,694
--------
Total loan commitments $329,257
========
Financial instruments whose notional or contractual amounts
represent interest rate risk:
Forward sales contracts $ 10,700
========
</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. Fidelity evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by Fidelity 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 Fidelity 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. Fidelity holds collateral supporting
those commitments as deemed necessary.
Forward sales contracts are contracts for delayed delivery of mortgage
loans in which Fidelity 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.
40
<PAGE> 42
15 - CONDENSED FINANCIAL INFORMATION OF FIDELITY NATIONAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997 (1)
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 7,845,408 $ 8,345,809
Land 419,418 419,418
Investment in bank subsidiary 51,137,047 47,911,567
Investments in and amounts due from nonbank subsidiaries 589,135 501,974
Subordinated loan to bank subsidiary 10,000,000 10,000,000
Other assets 203,359 482,790
------------ ------------
Total assets $ 70,194,367 $ 67,661,558
============ ============
LIABILITIES
Long-term debt $ 15,650,000 $ 15,800,000
Other liabilities (11,113) 513,456
------------ ------------
Total liabilities 15,638,887 16,313,456
SHAREHOLDERS' EQUITY
Preferred stock 6,150,000 6,150,000
Common stock 35,124,941 34,943,110
Treasury stock (69,325) (69,325)
Net unrealized gains on investment securities available-for-sale,
net of tax 75,968 208,694
Retained earnings 13,273,896 10,115,623
------------ ------------
Total shareholders' equity 54,555,480 51,348,102
------------ ------------
Total liabilities and shareholders' equity $ 70,194,367 $ 67,661,558
============ ============
</TABLE>
(1) As restated, see Note 1.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1998 1997 (1) 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ -- $ -- $ 272,941
Deposits in bank 410,467 66,828 46,315
Subordinated loan to bank 850,000 850,000 768,542
----------- ----------- -----------
Total interest income 1,260,467 916,828 1,087,798
INTEREST EXPENSE - Long-term debt 1,378,688 1,431,971 1,501,488
----------- ----------- -----------
NET INTEREST EXPENSE
(118,221) (515,143) (413,690)
NONINTEREST INCOME
Lease income 120,000 120,000 120,000
Dividends from subsidiaries 450,000 428,444 1,600,000
Management fees 138,156 108,000 91,740
Other -- 3,157
----------- ----------- -----------
Total other income 708,156 656,444 1,814,897
NONINTEREST EXPENSE 208,932 275,378 185,462
----------- ----------- -----------
Income (loss) before income taxes and undistributed income (loss) of subsidiary 381,003 (134,077) 1,215,745
Income tax benefit 26,218 213,758 146,017
----------- ----------- -----------
Income before equity in undistributed income (loss) of subsidiaries 407,221 79,681 1,361,762
Equity in undistributed income (loss) of subsidiaries 3,445,367 883,232 (7,103,493)
----------- ----------- -----------
NET INCOME (LOSS) $ 3,852,588 $ 962,913 $(5,741,731)
=========== =========== ===========
</TABLE>
(1) As restated, see Note 1.
41
<PAGE> 43
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1998 1997 (1) 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,852,588 $ 962,913 $(5,741,731)
Equity in undistributed income of subsidiaries (3,445,367) (883,232) 7,103,493
Decrease (increase) in other assets 279,431 568,097 (102,509)
(Decrease) increase in other liabilities (401,569) 154,402 76,341
----------- ------------ -----------
Net cash flows provided by operating activities 285,083 802,180 1,335,594
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of commercial loans -- -- 5,574,770
Net increase in loans to and investment in subsidiaries -- (22,000,000) (5,830,870)
----------- ------------ -----------
Net cash flows used in investing activities -- (22,000,000) (256,100)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term-debt (150,000) (700,000) (250,000)
Issuance of Common Stock 181,831 23,564,513 575,191
Issuance of Preferred stock -- 5,650,000 --
Dividends paid (817,315) (128,075) (692,909)
----------- ------------ -----------
Net cash flows (used in) provided by financing activities (785,484) 28,386,438 (367,718)
----------- ------------ -----------
Net increase in cash (500,401) 7,188,618 711,776
Cash, beginning of year 8,345,809 1,157,191 445,415
----------- ------------ -----------
Cash, end of year $ 7,845,408 $ 8,345,809 $ 1,157,191
=========== ============ ===========
</TABLE>
(1) As restated, see Note 1.
42
<PAGE> 44
<TABLE>
<CAPTION>
CORPORATE INFORMATION AFFILIATE INFORMATION
<S> <C> <C> <C>
CORPORATE HEADQUARTERS AUDITORS BANKING SERVICES SOUTHLAKE
3490 Piedmont Rd. Ernst & Young LLP Mailing Address 1267 Southlake Circle
Suite 1550 600 Peachtree St. P.O. Box 105075 Morrow, GA 30260
Atlanta, GA 30305 Suite 2800 Atlanta, GA 30348 (770) 961-9040
(404) 639-6500 Atlanta, GA 30308-2215 (404) 639-6500
TERRELL MILL
MAILING ADDRESS ATTORNEYS BUCKHEAD 1371 Powers Ferry Rd., S.E.
P.O. Box 105075 Schreeder, Wheeler & Flint 3490 Piedmont Rd. Marietta, GA 30067
Atlanta, GA 30348-5075 The Candler Building Atlanta, GA 30305 (770) 952-0212
127 Peachtree St., N.E. (404) 814-8114
FIDELITY NATIONAL BANK Sixteenth Floor TOCO HILLS
3500 Holcomb Bridge Rd. Atlanta, GA 30303-1845 CANTON ROAD 2936 North Druid Hills Rd.
Norcross, GA 30092 830 Old Piedmont Rd. Atlanta, GA 30329
(404) 639-6500 Varner, Stephens, Humphries & Marietta, GA 30066 (404) 329-9595
White, LLP (770) 919-0175
FIDELITY NATIONAL MORTGAGE 3350 Riverwood Parkway VININGS
CORPORATION Suite 1700 Riverwood 100 CRABAPPLE 4300 Paces Ferry Rd.
3 Corporate Square Atlanta, GA 30339 10920 Crabapple Rd. Atlanta, GA 30339
Suite 700 Roswell, GA 30075 (770) 434-7800
Atlanta, GA 30329 Miller & Martin LLP (770) 993-3438
(404) 639-6555 100 Galleria Parkway, N.W. FIDELITY DIRECT
Atlanta, GA 30339-3122 DECATUR Telephone Banking
FIDELITY NATIONAL CAPITAL 160 Clairemont Ave. (404) 248-LION
INVESTORS, INC. Holland & Knight LLP Decatur, GA 30030 (1-888) 248-LION-outside Atlanta
3490 Piedmont Rd. One Atlantic Center (404) 371-9333
Suite 1450 1201 West Peachtree St., N.E. JACKSONVILLE, FL
Atlanta, GA 30305 Suite 2000 DUNWOODY 10151 Deerwood Park Blvd.
(404) 240-1600 Atlanta, GA 30309-3400 1425 Dunwoody Village Pkwy. Bldg. 200, Ste. 100
Atlanta, GA 30338 Jacksonville, FL 32256
Kilpatrick & Stockton LLP (770) 668-0527 (904) 996-1000
1100 Peachtree St.
Atlanta, GA 30309-4530 LAWRENCEVILLE TAMPA, FL
415 Grayson Hwy. 1915 Dale Mabry, Ste. 402
__________________________________________________ Lawrenceville, GA 30245 Tampa, FL 33607
(770) 237-0121 (877) 336-5466
ANNUAL REPORT ON FORM 10-K MERCHANT'S WALK MORTGAGE SERVICES
Copies of Fidelity's Annual Report on Form 10-K filed with the 1223 Johnson Ferry Rd. ATLANTA
Securities and Exchange Commission and supplemental quarterly Marietta, GA 30068 3 Corporate Square
information are available on request without charge. (770) 973-5494 Ste. 700
Atlanta, GA 30329(404) 639-6555
ANNUAL MEETING NORTHLAKE
The annual meeting of shareholders will be held on Thursday, 2255 Northlake Pkwy. JACKSONVILLE, FLORIDA
April 15, 1999, at three p.m. in Fidelity National Tucker, GA 30084 10151 Deerwood Park Blvd.
Corporation's Board Room in Suite 1550 at 3490 Piedmont Road, (770) 491-7770 Bldg. 200, Suite 100
Atlanta, GA. Jacksonville, FL 32256
PEACHTREE CENTER
_________________________________________________ 235 Peachtree St., N.E. TRUST SERVICES
Atlanta, GA 30303 BUCKHEAD
SENIOR MANAGEMENT (404) 524-1171 3490 Piedmont Rd., Ste. 1450
Atlanta, GA 30305
PEACHTREE CORNERS (404) 240-1519
3500 Holcomb Bridge Rd.
JAMES B. MILLER, JR. M. HOWARD GRIFFITH, JR. Norcross, GA 30092 INVESTMENT BROKERAGE
Chairman, President and CEO Chief Financial Officer (770) 448-0554 BUCKHEAD
3490 Piedmont Rd., Ste. 1450
LARRY D. PETERSON H. PALMER PROCTOR, JR. PERIMETER CENTER Atlanta, GA 30305
Vice President Vice President 2 Perimeter Center East (404) 240-1600
President and CEO, the Bank Atlanta, GA 30346
(770) 551-8662 LOAN PRODUCTION OFFICES
PERIMETER CENTER WEST Jacksonville, FL 1,2,3
135 Perimeter Center West
Atlanta, GA 30346 Tampa Bay, FL 2,3
(770) 351-9038
1. Indirect Automobile Financing
RIVER EXCHANGE
2080 Riverside Pkwy. 2. Residential Construction
Lawrenceville, GA 30043 Lending
(770) 338-4037
3. Home Mortgages
ROSWELL
1325 Hembree Rd.
Roswell, GA 30076
(770) 667-9797
SANDY SPRINGS
225 Sandy Springs Cir.
Sandy Springs, GA 30328
(404) 252-3602
</TABLE>
43
<PAGE> 45
SHAREHOLDER INFORMATION
COMMON STOCK
Fidelity National Corporation's Common Stock is registered with the Securities
and Exchange Commission. It is included in the Nasdaq National Market under the
symbol "LION." It is listed in The Wall Street Journal under "FidNtl."
FINANCIAL INFORMATION
Analysts, investors and others seeking financial information about Fidelity
should contact:
Martha C. Fleming (404) 240-1504
or write:
Fidelity National Corporation
P.O. Box 105075
Atlanta, GA 30348
www.fidelitynational.com
MARKET PRICES - COMMON STOCK
<TABLE>
<CAPTION>
1998 High Low
---- ---- ---
<S> <C> <C>
Fourth Quarter 10-7/8 7-3/16
Third Quarter 12-1/2 8-1/4
Second Quarter 15-1/8 11-1/8
First Quarter 13-7/8 9-1/8
<CAPTION>
1997
----
<S> <C> <C>
Fourth Quarter 9-3/4 7-1/2
Third Quarter 9-3/8 8-3/4
Second Quarter 9-5/8 7
First Quarter 13 8-1/2
</TABLE>
As of February 28, 1999, there were approximately 575 shareholders of record. In
addition, shares of approximately 2,000 beneficial owners of Fidelity's Common
Stock were held by brokers, dealers and their nominees.
DIVIDEND REINVESTMENT PLAN
The Fidelity National Corporation Dividend Reinvestment Plan was established to
provide shareholders with an easy way to purchase additional shares of stock.
The Plan allows shareholders to reinvest their quarterly dividends and make cash
investments in Fidelity stock for a minimum of $100 up to $50,000 per quarter
and $100,000 per year. For more information contact the transfer agent.
SHAREHOLDER ASSISTANCE
Shareholders requiring a change of address, records or information about lost
certificates or dividend checks may contact Fidelity's transfer agent:
The Bank of New York
Investor Relations Department
P.O. Box 11258
Church Street Station
New York, NY 10286-1258
1-800-524-4458
MARKET MAKERS
Allen C. Ewing & Co.
Herzog, Heine, Geduld, Inc.
Knight Securities LP
Raymond James & Associates, Inc.
Sandler O'Neill & Partners, L.P.
Spear, Leeds & Kellogg Capital Markets
Sterne, Agee & Leach, Inc.
44
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Fidelity National Corporation and subsidiaries of our report dated January
29, 1999, included in the 1998 Annual Report to the Shareholders of Fidelity
National Corporation and subsidiaries, and to the incorporation by reference in
the Registration Statement (Form S-8 No. 33-11877) pertaining to the Employee
Stock Purchase Plan of Fidelity National Corporation and in the Registration
Statement (Form S-3 No. 33-11879) of Fidelity National Corporation and in the
related prospectus of our report dated January 29, 1999, with respect to the
consolidated financial statements of Fidelity National Corporation and
subsidiaries incorporated by reference in the Annual Report (Form 10-K) for the
year ended December 31, 1998.
Atlanta, Georgia /s/ Ernst & Young LLP
March 24, 1999 ---------------------------
Ernst & Young LLP
31
<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, 1998, 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 18th day of March, 1999.
/s/ James B. Miller, Jr.
-----------------------------------------------------------
JAMES B. MILLER, JR.
32
<PAGE> 2
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, and each of
them, the undersigned's true and lawful attorneys-in-fact, with power of
substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1998, 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 18th day of March, 1999.
/s/ Larry D. Peterson
-----------------------------------------------------------
LARRY D. PETERSON
33
<PAGE> 3
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, and each of
them, the undersigned's true and lawful attorneys-in-fact, with power of
substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1998, 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 18th day of March, 1999.
/s/ David R. Bockel
-----------------------------------------------------------
DAVID R. BOCKEL
34
<PAGE> 4
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, and each of
them, the undersigned's true and lawful attorneys-in-fact, with power of
substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1998, 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 18th day of March, 1999.
/s/ Dr. Edward G. Bowen
------------------------------------------------------------
DR. EDWARD G. BOWEN
35
<PAGE> 5
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, and each of
them, the undersigned's true and lawful attorneys-in-fact, with power of
substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1998, 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 18th day of March, 1999.
/s/ W. Clyde Shepherd, Jr.
------------------------------------------------------------
W. CLYDE SHEPHERD, JR.
36
<PAGE> 6
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, and each of
them, the undersigned's true and lawful attorneys-in-fact, with power of
substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1998, 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 18th day of March, 1999.
/s/ Gordon M. Sherman
------------------------------------------------------------
GORDON M. SHERMAN
37
<PAGE> 7
EXHIBIT 24
FIDELITY NATIONAL CORPORATION
POWER OF ATTORNEY
The undersigned director and/or officer of FIDELITY NATIONAL
CORPORATION, a Georgia corporation, does hereby make, constitute and appoint
James B. Miller, Jr., M. Howard Griffith, Jr. and Martha C. Fleming, and each of
them, the undersigned's true and lawful attorneys-in-fact, with power of
substitution, for the undersigned and in the undersigned's name, place and
stead, to sign and affix the undersigned's name as such director and/or officer
of said Corporation to the annual report for the Corporation's fiscal year
ending December 31, 1998, 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 18th day of March, 1999.
/s/ R. Phillip Shinall, III
------------------------------------------------------------
R. PHILLIP SHINALL, III
38
<PAGE> 8
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, 1998, 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 18th day of March, 1999.
/s/ Rankin Smith, Jr.
------------------------------------------------------------
RANKIN SMITH, JR.
39
<PAGE> 9
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, 1998, 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 18th day of March, 1999.
/s/ Felker W. Ward, Jr.
------------------------------------------------------------
FELKER W. WARD, JR.
40
<PAGE> 10
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, 1998, 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 18th day of March, 1999.
/s/ M. Howard Griffith, Jr.
------------------------------------------------------------
M. HOWARD GRIFFITH, JR.
41
<PAGE> 11
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, 1998, 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 18th day of March, 1999.
/s/ Kevin S. King
------------------------------------------------------------
KEVIN S. KING
42
<PAGE> 12
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, 1998, 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 18th day of March, 1999.
/s/ Robert J. Rutland
------------------------------------------------------------
ROBERT J. RUTLAND
43
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 32,726,501
<INT-BEARING-DEPOSITS> 1,417,679
<FED-FUNDS-SOLD> 45,785,746
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,404,870
<INVESTMENTS-CARRYING> 29,652,667
<INVESTMENTS-MARKET> 29,755,873
<LOANS> 535,876,166
<ALLOWANCE> 11,910,601
<TOTAL-ASSETS> 712,877,553
<DEPOSITS> 621,263,627
<SHORT-TERM> 16,515,867
<LIABILITIES-OTHER> 4,892,579
<LONG-TERM> 15,650,000
0
6,150,000
<COMMON> 35,124,941
<OTHER-SE> 13,280,539
<TOTAL-LIABILITIES-AND-EQUITY> 712,877,553
<INTEREST-LOAN> 55,295,291
<INTEREST-INVEST> 6,631,283
<INTEREST-OTHER> 1,845,597
<INTEREST-TOTAL> 63,772,171
<INTEREST-DEPOSIT> 25,550,474
<INTEREST-EXPENSE> 27,744,600
<INTEREST-INCOME-NET> 36,027,571
<LOAN-LOSSES> 9,450,000
<SECURITIES-GAINS> 254,737
<EXPENSE-OTHER> 39,447,950
<INCOME-PRETAX> 6,069,218
<INCOME-PRE-EXTRAORDINARY> 3,852,588
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,852,588
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
<YIELD-ACTUAL> 10.23
<LOANS-NON> 1,848,000
<LOANS-PAST> 4,393,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,319,591
<CHARGE-OFFS> 14,564,214
<RECOVERIES> 2,705,224
<ALLOWANCE-CLOSE> 11,910,601
<ALLOWANCE-DOMESTIC> 11,910,601
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 377,000
</TABLE>
