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, 2001
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 Identification No.)
incorporation or organization)
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 March 7, 2002 (based on the closing sale
price of the Common Stock as quoted on the Nasdaq National Market System on such
date) was $40,177,953.
At March 7, 2002, there were 8,781,628 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, 2001 are incorporated
by reference into Parts I and II. Portions of the
Registrant's definitive Proxy Statement for the 2002
Annual Meeting of Shareholders are incorporated by
reference into Part III.
PART I
FORWARD-LOOKING STATEMENTS
Certain information and statements in this Form 10-K include
forward-looking statements within 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. These
forwarding-looking statements involve certain risks and uncertainties. The
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 then 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, and (vi) greater
loan losses than historic levels. Investors are encouraged to read the related
section in Fidelity National Corporation's 2001 Annual Report to Shareholders
and those discussed below under "Risk Factors".
ITEM 1. 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 ("FNB" or the
"Bank"), which was organized as a national banking corporation in 1973; 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 and international trade services to its commercial and retail
customers. The Bank is a full-service 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 location. At
December 31, 2001, Fidelity had total assets of $994 million, total loans of
$791 million, total deposits of $818 million and shareholders' equity of $59
million.
Fidelity as used herein includes Fidelity National Corporation and its
subsidiaries unless the context otherwise requires.
RECENT DEVELOPMENTS
The Bank entered into a consent order with the Office of the
Comptroller of the Currency dated December 21, 2000, related to its Trust
Department operations. Under the terms of the consent order, the Bank
discontinued accepting new trust accounts, engaged independent accountants and
legal counsel to review and evaluate its trust department business practices,
controls, policies and procedures in order to assure regulatory compliance and
maintenance of the Trust Department's books, records and filings on a current
basis and instituted an overall assessment of the current and future risks and
benefits of continuing the Bank's Trust Department operations. The Bank sold its
business of administrating self-directed individual retirement accounts in
December 2000 and on December 1, 2001, entered into a strategic alliance
agreement with Reliance Trust Company ("RTC"). Under the agreement, the Bank's
trust accounts became a part of RTC's trust and asset management business. The
Bank appointed a special committee of its Board of Directors to coordinate
execution of its obligations under the consent order and has completed most of
the requirements of the order.
The Bank entered into an agreement with the OCC on September 5, 2001,
(the "Letter Agreement"). The Letter Agreement, which stems from the OCC's
examination as of December 31, 2000, calls for, among other things (i) the
appointment of a Compliance Committee; (ii) total Bank capital of 11% of
risk-weighted assets and a leverage ratio of 8% of adjusted total assets; (iii)
three-year strategic and capital plans, revised as necessary; (iv) payment of
Bank dividends only when there is no supervisory objection; (v) formalizing the
process for reviewing new management capabilities and strengthen management, as
required; (vii) a review of loan policies, loan management information systems,
and the internal loan review process especially related to criticized assets,
nonaccrual loans and the allowance for loan losses; and (viii) revisions to the
internal audit process. Fidelity does not expect to incur significant additional
costs to comply with the consent order or the Letter Agreement, as most items
have already been addressed or can be addressed internally.
Fidelity's Board of Directors on March 21, 2002, adopted a resolution
requested by the Federal Reserve Bank of Atlanta ("Board Resolution"). The Board
Resolution, which followed the Federal Reserve Bank inspection of Fidelity as of
December 31, 2000 and September 30, 2001, among other things, prohibits Fidelity
from redeeming its capital stock, paying dividends on its Common Stock or
incurring debt without the prior approval of the FRB. The Board Resolution,
continues until cancelled by the FRB.
On March 22, 2002 the Bank entered into an alliance and sales
agreements with NOVA Information Systems ("NOVA") pursuant to which NOVA will
provide payment processing services to the merchant customers of the Bank
located predominately in the states of Georgia and Florida. Pursuant to the
sales agreement the Bank sold its existing merchant processing agreements and
recognized a gain of approximately $3.5 million. Under the agreement the Bank
will maintain an interest in the ongoing net revenues from new customers
acquired through this alliance. It is anticipated that the future earnings from
the alliance with NOVA will not be material.
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MARKET AREA
The Bank conducts banking activities primarily through 19 branches in
Fulton, DeKalb, Cobb, Clayton and Gwinnett counties in Georgia. The Bank's
customers are primarily individuals and small and medium sized businesses. The
customer base for its credit card portfolio is national in scope, with customers
in all 50 states. Indirect automobile, residential construction and mortgage
lending are conducted from the Jacksonville, Florida office in addition to the
offices in Georgia. 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) secured and
unsecured installment loans, (iv) credit card loans, (v) construction and
residential real estate loans, (vi) commercial loans, including commercial loans
secured by real estate, (vii) securities brokerage 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, 2001, the deposit base
totaled approximately $818 million, consisting of approximately $112 million in
noninterest-bearing demand deposits (13.8% of total deposits), approximately
$120 million in interest-bearing demand deposits and money market accounts
(14.7% of total deposits), approximately $101 million in savings deposits (12.4%
of total deposits), approximately $319 million in time deposits in amounts less
than $100,000 (38.9% of total deposits), and approximately $166 million in time
deposits of $100,000 or more (20.2% of total deposits). Brokered deposits at
December 31, 2001, included in time deposits in amounts less than $100,000,
totaled $20 million.
Lending
Fidelity's primary 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 and Jacksonville,
Florida metropolitan areas. Residential mortgages are made in Atlanta, Georgia
and Jacksonville, Florida. The loans are generally secured by first and second
real estate mortgages. The Bank offers direct installment loans to consumers on
both a secured and unsecured basis. Commercial lending consists of the extension
of credit for business purposes.
As of December 31, 2001, 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 $444 million, $293 million and $64 million, representing approximately 55.4%,
36.6% and 8.0%, respectively, of the total loan portfolio. Real estate loans
included $98 million in construction loans, $129 million in residential real
estate loans and
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$66 million in commercial loans secured by real estate. As of December 31, 2001,
commercial loans, including commercial loans secured by real estate, totaled
$130 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 nonrecourse basis,
consumer installment contracts secured by new and used vehicles purchased by
consumers from franchised motor vehicle dealers located primarily in Georgia,
Florida and North Carolina. As of December 31, 2001, the aggregate amount of
indirect automobile loans outstanding was $342 million, representing 42.7% of
FNB's total loan portfolio. Approximately 54% and 26% of the outstanding
indirect automobile loans at December 31, 2001, were originated in the Atlanta
and Jacksonville, Florida offices, respectively. An additional $276 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 the 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 retained by Fidelity. 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
years ended December 31, 2001 and 2000, were $1.7 million and $1.9 million,
respectively.
Credit Card Loans. Fidelity offers Visa, MasterCard, Visa Gold,
Business and 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,
2001, credit card loans were approximately $81 million, or 11.0% of the total
loan portfolio. The credit card portfolio was
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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
The Bank is engaged in the residential mortgage banking business,
focusing on one-to-four family properties. The Bank offers Federal Housing
Authority ("FHA"), Veterans Administration ("VA"), conventional and
non-conforming loans (those with balances over $300,700). In addition, loans are
purchased from independent mortgage companies located in the Southeast. The Bank
operates its residential mortgage banking business from four locations in the
Atlanta metropolitan area and also has a loan origination office in
Jacksonville, Florida. The Bank 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
2001, the Bank originated approximately $5 million in loans to be held in the
Bank's portfolio. During 2001, the Bank did not service mortgage loans for third
parties. The Bank sells mortgages, service released, to investors.
Securities Brokerage Services
Fidelity Capital commenced business as a full-service broker in late
1992. Fidelity Capital is also a registered investment advisor operating on a
fully disclosed basis and is a member of the National Association of Securities
Dealers ("NASD"). Fidelity Capital operates from its headquarters in Atlanta and
from three other offices in Fidelity's banking facilities in the Atlanta
metropolitan area.
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 represent 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 $250,000 must be approved by the Officer's
Credit Committee 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.
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The Bank provides written guidelines for lending activities. Secured
loans, except indirect installment loans which are generally secured by the
vehicle purchased, are made to persons who are well-established and have net
worth, collateral and cash flow to support the loan. Real estate loans are made
only when such loans are secured by real property located primarily in Georgia
or Florida. Unsecured loans, except credit card loans, normally are 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 or 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 more than 90 days.
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 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. 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. The
specific maximum loan commitment and numbers of unsold houses allowed are
clearly identified for each of the approximately 74 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.
6
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, 2001, approximately $98 million (12.2%
of total loans) was outstanding on residential construction loans, of which
approximately $53 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 Office of the Comptroller of the Currency ("OCC"), require that
financial institutions establish real estate lending policies. The guidelines
also establish 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 the OCC guidelines require maximum allowable
loan-to-value ratios for various types of real estate loans as set forth in the
following schedule:
OCC
MAXIMUM ALLOWABLE
LOAN CATEGORY LOAN-TO-VALUE RATIO
------------- -------------------
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) ...........................
---
----------
(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
is required.
Potential specific risk elements associated with each of the Bank's
lending categories include the following:
Credit cards................... Employment status, changes in local economy,
unsecured credit risks
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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, changes in local
economy, 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 interest rate
caps on variable rate loans
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 the Bank's loan
portfolio to identify potential deficiencies and appropriate corrective action.
The Credit Administration Department reviews 30% to 45% of the 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 risks. 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's Loan and Discount Committee, comprised
of members of Board of Directors of the Bank, annually reviews all loans over
$1.0 million.
A sampling of credit card accounts is 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, a recalculation of the borrower's debt coverage ratio, and
an 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.
A 10% sample of consumer loans is reviewed on a monthly basis in
compliance with the Bank's policies and procedures.
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A provision for loan losses and a corresponding increase in the
allowance for loan losses are recorded monthly, taking into consideration
historical charge-off experience, delinquency, 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
meetings, the Committee reviews and discusses the 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.
Investment Portfolio 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 Boards 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
prior approval from 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, acquire all or substantially all of the assets of a bank; and (iii)
before it merges or consolidates 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
9
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 and its 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 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.
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's operations and activities, including reserves, loans, mergers,
issuances of securities, payments of dividends, interest rates, mortgage
servicing, accounting and establishment of branches. Interest and certain other
charges collected or contracted for by 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
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system whereby banks are assessed on a sliding scale, depending on their
placement in nine separate supervisory categories. Effective June 1, 1996, the
BIF reached a reserve ratio of 1.30% of total estimated deposits and the FDIC
lowered the assessment rate schedule for BIF members to no assessment for the
healthiest banks to $.27 per $100 of deposits for less healthy institutions.
Because of the Bank's rating, there was no BIF assessment at December 31, 2001.
Effective January 1, 2002, the Bank's assessment is $.03 per $100 of deposits.
The Bank's total FDIC insurance and SAIF assessments for the years
ended December 31, 2001, 2000 and 1999 were $137,000, $258,000 and $272,000,
respectively.
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. The 1991 Act
also provides for a ban on the acceptance of brokered deposits except by well
capitalized institutions and adequately capitalized institutions with the
permission of the FDIC, and for restrictions on the activities engaged in by
state banks and their subsidiaries as principal, including insurance
underwriting, to the same activities permissible for national banks and their
subsidiaries, unless the state bank is well capitalized and a determination is
made by the FDIC that the activities do not pose a significant risk to the
insurance fund. The effect on Fidelity of these measures contained in the 1991
Act will be to a great extent dependent upon the manner in which bank regulatory
authorities interpret and enforce regulations that have been issued pursuant to
the 1991 Act.
Capital Requirements
The information contained in Notes 2 and 12 to Fidelity's 2001 Annual
Report to Shareholders under the headings "Regulatory Agreements" and
"Shareholders' Equity" respectively, 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 were 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. The Federal
deposit caps apply only to initial entry acquisitions.
11
The legislation also provides that, unless an individual state elects
beforehand either (i) to accelerate the effective date or (ii) to prohibit
out-of-state banks from operating interstate branches within its territory, on
or after June 1, 1997, adequately capitalized and managed bank holding companies
will be able to consolidate their multistate bank operations into a single bank
subsidiary and to branch interstate through acquisitions. De novo branching by
an out-of-state bank would be permitted only if it is expressly permitted by the
laws of the host state. The authority of a bank to establish and operate
branches within a state will continue to be subject to applicable state
branching laws. The State of Georgia has enacted legislation in connection with
the Interstate Banking Act which requires that a bank located within the state
to 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. 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.
Impact of Enactment of the Gramm-Leach-Bliley Act
The activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act
("Gramm-Leach"). Among other things, Gramm-Leach establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies and
securities firms. Generally, the new law (i) repeals the historical restrictions
and eliminates many Federal and state law barriers to affiliations among banks
and securities firms, insurance companies and other financial service providers,
(ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (iii) broadens the activities that may
be conducted by subsidiaries of national banks and state banks, (iv) provides an
enhanced framework for protecting the privacy of information gathered by
financial institutions regarding their customers and consumers, (v) adopts a
number of provisions related to the capitalization, membership, corporate
governance and other measures designed to modernize the Federal Home Loan Bank
System, (vi) requires public disclosure of certain agreements relating to funds
expended in connection with an institution's compliance with the Community
Reinvestment Act, and (vii) addresses a variety of other legal and
12
regulatory issues affecting both day-to-day operations and long-term activities
of financial institutions, including the functional regulation of bank
securities and insurance activities.
Bank holding companies are now permitted to engage in a wider variety
of financial activities than permitted under the prior law, particularly with
respect to insurance and securities activities. In addition, in a change from
the prior law, bank holding companies are in a position to be owned, controlled
or acquired by any company engaged in financially related activities.
Activity Restrictions
The Bank Holding Company Act generally limits a company's activities to
managing or controlling banks, furnishing services to or performing services for
its subsidiaries and engaging in other activities that the FRB determines to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. In determining whether a particular activity is permissible,
the FRB must consider whether the performance of such an activity reasonably can
be expected to produce benefits to the public that outweigh possible adverse
effects. Possible benefits include greater convenience, increased competition
and gains in efficiency. Possible adverse effects include undue concentration of
resources, decreased or unfair competition, conflicts of interest and unsound
banking practices. The FRB has determined the following activities, among
others, to be permissible for bank holding companies:
- Factoring accounts receivable;
- Acquiring or servicing loans;
- Leasing personal property;
- Conducting discount securities brokerage activities;
- Performing certain data processing services;
- Acting as agent or broker and selling credit life insurance
and certain other types of insurance in connection with credit
transactions;
- Performing certain limited insurance underwriting activities;
- Acting as a fiduciary, investment or financial advisor;
- Making investments in corporations or projects designed
primarily to promote community welfare; and
- Acquiring savings and loan associations.
Effective March 11, 2000, Gramm-Leach expanded the range of permitted
activities of certain bank holding companies to include the offering of
virtually any type of service that is financial in nature or incidental thereto,
including banking, securities underwriting, insurance (both underwriting and
agency), merchant banking, acquisitions of and combinations with insurance
companies and securities firms and additional activities that the FRB, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. In order to engage in these new
activities, a bank holding company must qualify and register with the FRB as a
financial holding company. To qualify as a financial holding company, a bank
holding company must demonstrate that each of its bank subsidiaries is
well-capitalized and well-managed and has a rating of "satisfactory" or better
under the Community Reinvestment Act of 1977 ("CRA").
13
Certain of the additional activities authorized under Gramm-Leach may also be
undertaken by a financial subsidiary of a bank. Under Gramm-Leach, a functional
system of regulation will apply to financial holding companies under which
banking activities will be regulated by the Federal banking regulators,
securities activities will be regulated by the Federal securities regulators and
insurance activities will be subject to regulation by the appropriate state
insurance authorities.
Fidelity has not yet determined whether it will seek to qualify as or
engage in any of the additional activities authorized for a financial holding
company.
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.
Various Legislation requires that mortgage brokers and lenders,
including the Bank, make certain disclosures to applicants for mortgage loans.
The legislation also provides authority for the GDBF to promulgate rules with
respect to escrow accounts and the advertising of mortgage loans. In addition,
the legislation imposes restrictions on unfair mortgage banking practices, as
defined therein.
There are numerous rules and regulations imposed on mortgage loan
originators that require originators to 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 that 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 Securities and Exchange
Commission (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
14
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, Clayton 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 and
internet banks, 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 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. The residential mortgage
banking business of Fidelity 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, 2001, Fidelity had 408 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 March 1, 2002, and the period during which the person served as an
executive officer, are as follows:
15
Officer
Name Age Since Position
---- --- ------- --------
James B. Miller, Jr. 61 1979 Chairman of the Board, President and Chief Executive Officer of
Fidelity since 1979; Chairman of the Bank since 1998;
President of the Bank from 1977 to 1997, and Chairman of Fidelity
Capital since 1992.
Larry D. Peterson 53 1997 Vice President of Fidelity since 1997; President and Chief
Executive Officer of the Bank since 1997.
David Buchanan 44 1995 Vice President of Fidelity since 1999; Senior Vice President of
the Bank since 1995.
M. Howard Griffith, Jr. 59 1994 Principal Accounting Officer of Fidelity and Chief Financial
Officer of the Bank since February 1994.
H. Palmer Proctor, Jr. 34 1996 Vice President of Fidelity since 1996; Vice President of the Bank
since 1993. Joined the Bank as a Management Associate in 1990.
RISK FACTORS
Credit Card Loan Loss Trends; Seasoning Risks of Credit Card Portfolio
Fidelity's loan losses on its credit card loans approximate industry
norms. There can be no assurance that credit card losses will not return to
higher than historical levels. Credit card loan losses exceeding Fidelity's
current 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, 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
16
exceeding Fidelity's historical rates could have a material adverse affect on
the results of operations and financial condition of Fidelity.
Potential Impact of Changes in Interest Rates
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 for indirect automobile loans only. 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, 2001, 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, Florida, and Atlanta, Georgia. As of
December 31, 2001, credit card loans were concentrated with borrowers in
Georgia, California, Texas and 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
17
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 institution
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, 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.
18
Additional legislation, changes in rules promulgated by the 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 new real estate loans, the value of the
collateral securing Fidelity's loans and the results of operations and financial
condition of Fidelity.
19
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 49,501 square feet
(of which 29,641 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, Clayton and Gwinnett Counties, Georgia, where 13 are owned
and six are leased. Fidelity leases a loan production office in Jacksonville,
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.
20
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 750 shareholders 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 March 7,
2002.
Market prices of the Fidelity's Common Stock included on the inside
back cover of the 2001 Annual Report to Shareholders are incorporated herein by
reference. The last sale price on December 31, 2001, was $7.30.
DIVIDENDS. Fidelity paid four (4) quarterly cash dividends of $.05 per
share on the Common Stock in 2001 and 2000.
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 Fidelity's 2001 Annual Report to Shareholders.
Fidelity currently is not in default on the covenant of the Indenture
restricting dividend payments.
Restrictions on Dividends by the Bank - 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,
2001, the Bank's shareholders' equity totaled approximately $79.6 million. Based
on the regulations of the OCC and limitations set in the Letter Agreement, the
Bank could pay $2.5 million in dividends with OCC regulatory approval. In 2001
and 2000, the Bank paid dividends to Fidelity aggregating $2.4 million and $1.2
million, respectively on its common stock and $1.2 million and $975,556 million,
respectively on its Preferred 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),
21
such authority may require, after notice and hearing, that such bank cease and
desist from such practice.
Restrictions on Dividends by FNB - OCC Agreement. The OCC Letter
Agreement permits FNB to pay dividends on its preferred stock and on FNB's
common stock only when there is no supervisory objection.
Restrictions on Dividends by Fidelity - Board Resolution. Fidelity's
Board of Directors on March 21, 2002, adopted a resolution requested by the
Federal Reserve Bank of Atlanta ("Board Resolution"). The Board Resolution,
which related to the Federal Reserve Bank's inspection of Fidelity as of
December 31, 2000 and September 30, 2001, among other things, prohibits Fidelity
from redeeming its capital stock, paying dividends on its Common Stock or
incurring debt without the prior approval of the FRB. The Board Resolution
continues until cancelled by the FRB.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the five years ended December 31,
2001, is included in Fidelity's 2001 Annual Report to Shareholders (page 10) 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 2001 Annual Report to Shareholders (pages 11 to 32 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 2001 Annual Report to Shareholder (pages 18 to
20) and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements of Fidelity's 2001
Annual Report to Shareholders (pages 33 to 57) are incorporated herein by
reference. Quarterly Financial Information on pages 31 and 32 of Fidelity's 2001
Annual Report to Shareholders is incorporated herein by reference.
22
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 2002
Annual Meeting of Shareholders to be held on April 24, 2002 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 1 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 24, 2002, 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 2002
Annual Meeting of Shareholders to be held on April 24, 2002, 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.
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 2002 Annual Meeting of Shareholders to be held on April
24, 2002, to be filed with the Commission, is incorporated herein by reference.
23
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 Balance Sheets - December 31, 2001, and December 31, 2000
Consolidated Statements of Income for the Years Ended December 31,
2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements - December 31, 2001
(2) Financial Statement Schedules.
No financial statement schedules are required to be filed or included
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.
Exhibit No. Name of Exhibit
----------- ---------------
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
24
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).
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
25
ended December 31, 1995, and incorporated
herein by reference).
*10(d) 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(e) 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(f) 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(g) 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).
*10(h) Employment Agreement among Fidelity, the
Bank and Larry D. Peterson dated as of
September 15, 2000.
13 2001 Annual Report to Shareholders. Pages 10
through 57.
21 Subsidiaries of Fidelity
23 Consent of Ernst & Young LLP
24 Powers of Attorney
----------
* management contract or compensatory arrangement required to be filed as
an exhibit.
(b) Reports on Form 8-K. None.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a) (2)
above.
26
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 28, 2002
27
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.
/s/ James B. Miller, Jr. Date: March 28, 2002
---------------------------------------------------------
James B. Miller, Jr.
Chairman of the Board and Director
(Principal Executive Officer)
/s/ M. Howard Griffith, Jr. Date: March 28, 2002
---------------------------------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
* Date: March 28, 2002
---------------------------------------------------------
David R. Bockel
Director
* Date: March 28, 2002
---------------------------------------------------------
Edward G. Bowen, M.D.
Director
* Date: March 28, 2002
---------------------------------------------------------
Carl I. Gable
Director
* Date: March 28, 2002
---------------------------------------------------------
Kevin S. King
Director
* Date: March 28, 2002
---------------------------------------------------------
Larry D. Peterson
Director
28
* Date: March 28, 2002
---------------------------------------------------------
Robert J. Rutland
Director
* Date: March 28, 2002
---------------------------------------------------------
W. Clyde Shepherd, Jr.
Director
* Date: March 28, 2002
---------------------------------------------------------
Rankin M. Smith, Jr.
Director
* /s/ M. Howard Griffith, Jr. Date: March 28, 2002
---------------------------------------------------------
M. Howard Griffith, Jr.
Attorney-in-fact
29