<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
----------------------------------------------
Commission File Number: 0-22374
--------------------------------------------------------
Fidelity National Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Georgia 58-1416811
- -----------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3490 Piedmont Road, Suite 1550 Atlanta, GA 30305
- -----------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(404) 639-6921
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
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. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares Outstanding at October 31, 1997
--------------------------- ----------------------------------------
Common Stock, no par value 4,662,590
<PAGE> 2
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements
Consolidated Statements of Condition (unaudited)
September 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations (unaudited)
Three Months Ended September 30, 1997 and 1996
Nine Months Ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-10
Part II: Other Information
Signature Page 11
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,173,608 $ 29,311,690
Interest-bearing deposits with banks 2,721,089 3,300,708
Federal funds sold 29,477,654 343,019
Investment securities available-for-sale 67,406,847 71,230,743
Investment securities held-to-maturity (approximate fair
value of $6,099,000 and $6,161,000 at September 30, 1997, and
December 31, 1996, respectively) 6,280,471 6,279,816
Loans held for sale 39,313,829 38,105,868
Loans, net of unearned income 419,738,846 429,283,563
Allowance for loan losses (14,758,673) (16,510,842)
------------ ------------
Loans, net 404,980,173 412,772,721
Premises and equipment, net 20,628,527 19,799,079
Other real estate 2,041,803 566,751
Accrued interest receivable 4,884,072 5,007,876
Other assets 12,526,745 18,702,026
------------ ------------
Total assets $605,434,818 $605,420,297
============ ============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 79,398,400 $ 73,877,369
Interest-bearing deposits:
Demand and money market 77,869,871 78,451,267
Savings 22,381,007 38,867,549
Time deposits, $100,000 and over 76,495,842 86,630,315
Other time deposits 290,875,184 266,886,829
------------ ------------
Total deposits 547,020,304 544,713,329
Short-term borrowings 8,606,487 17,183,769
Long-term debt 15,800,000 16,500,000
Accrued interest payable 3,340,410 3,502,631
Other liabilities 2,426,805 2,447,752
------------ ------------
Total liabilities 577,194,006 584,347,481
SHAREHOLDERS' EQUITY
Preferred Stock, no par value. Authorized 10,000,000 in 1997 and none
in 1996; 984,000 shares of Non-cumulative 8% Convertible Preferred
Stock - Series A, stated value $6.25 in 1997; none in 1996 6,150,000 --
Common Stock, no par value. Authorized 50,000,000 shares in 1997
and 1996, issued 4,672,774 shares and 4,665,256 shares; and
outstanding 4,661,682 shares and 4,654,164 shares in 1997 and 1996,
respectively 11,452,358 11,878,597
Treasury shares, at cost. 11,092 shares in 1997 and 1996 (69,325) (69,325)
Net unrealized gains (losses) on investment securities available-for-sale 244,089 (140,241)
Retained earnings 10,463,690 9,403,785
------------ ------------
Total shareholders' equity 28,240,812 21,072,816
------------ ------------
Total liabilities and shareholders' equity $605,434,818 $605,420,297
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $42,532,700 $ 40,321,856 $14,304,523 $ 14,146,377
Investment securities-taxable 3,581,862 3,694,763 1,210,260 1,328,964
Federal funds sold 638,459 279,126 422,905 143,591
Deposits with other banks 56,452 29,745 14,832 25,230
----------- ------------ ----------- ------------
Total interest income 46,809,473 44,325,490 15,952,520 15,644,162
INTEREST EXPENSE
Deposits 18,087,287 18,035,032 6,209,338 6,581,305
Short-term borrowings 386,669 544,858 71,154 182,075
Long-term debt 1,126,189 1,184,133 369,203 387,272
----------- ------------ ----------- ------------
Total interest expense 19,600,145 19,764,023 6,649,695 7,150,652
----------- ------------ ----------- ------------
NET INTEREST INCOME 27,209,328 24,561,467 9,302,825 8,493,510
Provision for loan losses 11,670,000 11,100,000 3,400,000 5,700,000
----------- ------------ ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 15,539,328 13,461,467 5,902,825 2,793,510
NONINTEREST INCOME
Service charges on deposit accounts 1,570,875 1,290,474 541,122 455,752
Credit card fees 2,264,646 2,157,141 808,627 799,520
Mortgage banking activities 4,091,180 4,771,621 776,751 1,267,142
Securities gains, net -- 361,125 -- 78,595
Other 5,061,334 4,031,644 2,046,079 1,530,826
----------- ------------ ----------- ------------
Total noninterest income 12,988,035 12,612,005 4,172,579 4,131,835
NONINTEREST EXPENSE
Salaries and employee benefits 12,650,640 12,059,396 4,176,923 3,878,508
Furniture and equipment 1,677,829 1,200,988 602,414 447,085
Net occupancy 2,372,127 1,743,241 773,207 637,857
Credit card processing and transaction fees 2,157,146 2,212,184 740,816 924,509
Amortization of mortgage servicing rights 610,348 1,529,339 209,597 505,318
Other 7,266,296 7,402,339 2,743,579 3,128,277
----------- ------------ ----------- ------------
Total noninterest expense 26,734,386 26,147,487 9,246,536 9,521,554
----------- ------------ ----------- ------------
Income before income taxes 1,792,977 (74,015) 828,868 (2,596,209)
Income tax expense (benefit) 604,994 (77,616) 287,647 (991,878)
----------- ------------ ----------- ------------
NET INCOME (LOSS) $ 1,187,983 $ 3,601 $ 541,221 $ (1,604,331)
=========== ============ =========== ============
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK 1,059,905 $ 3,601 $ 533,043 $ (1,604,331)
=========== ============ =========== ============
NET INCOME (LOSS) PER SHARE $ 0.23 $ .00 $ 0.09 $ (0.35)
=========== ============ =========== ============
AVERAGE COMMON SHARES 4,658,284 4,609,026 4,660,724 4,610,297
=========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,187,983 $ 3,601
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 11,670,000 11,100,000
Depreciation and amortization of premises and equipment 1,466,927 1,069,290
Amortization of mortgage servicing rights 610,348 1,529,339
Additions of originated mortgage servicing rights (194,515) (528,466)
Other accretion, net (952,822) 251,684
Securities gains, net -- (282,530)
Gain on loan sales and securitization (311,172) (259,059)
(Increase) decrease in loans held-for-sale (1,207,961) 37,937,073
Net decrease (increase) in accrued interest receivable 123,804 (1,137,460)
Net (decrease) increase in accrued interest payable (162,221) 477,598
Net decrease (increase) in other assets 6,415,043 (5,138,740)
Net (decrease) in other liabilities (140,846) (344,174)
------------ -------------
Net cash flows provided by operating activities 18,504,568 44,678,156
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity -- (20,325,584)
Maturities of investment securities held-to-maturity 18,005,000 22,368,709
Sales of investment securities available-for-sale -- 14,962,557
Purchase of investment securities available-for-sale (42,258,334) (57,323,577)
Maturities of investment securities available-for-sale 28,725,526 11,427,782
Loan originations, net of repayments (89,225,918) (252,546,480)
Purchases of premises and equipment (2,296,375) (7,491,113)
Proceeds from sale of loans 84,044,588 152,003,660
Proceeds from sale of equipment 32,405 --
Proceeds from sale of other real estate 139,998 73,294
------------ -------------
Net cash flows used in investing activities (2,833,110) (136,850,752)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits,
money market accounts, and savings accounts (11,546,707) (7,787,575)
Net increase in time deposits 13,853,882 82,912,578
Repayment of long-term debt (150,000) (250,000)
(Decrease) increase in short-term borrowings (8,577,282) 9,465,752
Dividends paid (8,178) (518,442)
Net proceeds from sale of preferred stock 5,100,000 --
Net proceeds from sale of common stock 73,761 555,690
------------ -------------
Net cash flows provided by financing activities (1,254,524) 84,378,003
------------ -------------
Net increase (decrease) in cash and cash equivalents 14,416,934 (7,794,593)
Cash and cash equivalents, beginning of period $ 32,955,417 $ 37,359,690
============ =============
Cash and cash equivalents, end of period $ 47,372,351 $ 29,565,097
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Total interest paid $ 19,762,366 $ 19,286,425
============ =============
Total income taxes paid $ 200,000 $ 1,375,000
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements of Fidelity
National Corporation and subsidiaries (the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation of the financial position and results of operations for the interim
periods have been included. All such adjustments are normal recurring accruals.
Operating results for the three-month and nine-month periods ended September 30,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. These statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Note B - Shareholders' Equity
During the period ended September 30, 1996, the Company declared and paid
dividends on Common Stock totaling $518,442. During the period ended September
30, 1997, the Company declared and paid dividends on its Non-Cumulative 8%
Convertible Preferred Stock, Series A, Stated Value $6.25 per share ("Preferred
Stock") totaling $128,078 and $8,178, respectively.
The Board of Governors of the Federal Reserve has established capital adequacy
guidelines for bank holding companies. At December 31, 1996, the Company did not
meet the minimum capital ratios established by the guidelines and accordingly
was precluded from paying further dividends. During the period ended September
30, 1997, no dividends on Common Stock were declared or paid by the Company. On
June 23, 1997 and July 9, 1997, the Company issued 752,000 and 232,000 shares,
respectively, of Preferred Stock.
The Company has previously reported that, as a result of the losses for the
fiscal year ended December 31, 1996, the Company and Fidelity National Bank (the
Bank) were no longer in compliance with certain minimum capital requirements
prescribed by the Federal Reserve Bank (FRB) and by the Office of the
Comptroller of the Currency ("OCC") as of December 31, 1996. At that time and as
of March 31, 1997, the Company and the Bank were deemed to be "undercapitalized"
pursuant to the applicable regulations. The Bank filed a capital restoration
plan with the OCC in response to the OCC's formal notification of the Bank's
undercapitalized status dated April 3, 1997. The capital restoration plan was
accepted and approved by the OCC. The plan provided for the prompt raising of
additional capital by the Company and the Bank. In furtherance of this
undertaking, the Company engaged an investment banker. On September 30, 1997, as
a result of issuing the Preferred Stock and investing $5,500,000 in
Non-Cumulative 8% Convertible Preferred Stock of the Bank, both the Company and
the Bank were in compliance with the minimum capital requirements and were no
longer deemed to be "under capitalized" pursuant to the applicable regulations
of the FRB and OCC. The Bank is currently subject to a written agreement with
the OCC (OCC Agreement) to raise and maintain a specific capital level by April
30, 1997, which increases on November 30, 1997. The Bank has not met the capital
levels specified for April 30, 1997. There can be no assurance that the Bank and
the Company will be able to achieve the capital requirements established in
the OCC Agreement. See Item 1, "Recent Developments" and "Capital," of the
Company's
4
<PAGE> 7
Report on Form 10-K for 1996 and Note 2, "Regulatory Matters" of the Company's
"Notes to Consolidated Financial Statements" set forth in the Company's 1996
Annual Report to Shareholders which has been filed as an exhibit to the
Company's Report on Form 10-K for 1996.
Note C - Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The
statement revises standards for computing and presenting net income per share by
(a) replacing primary net income per share with basic net income per share, (b)
requiring dual presentation of basic and diluted net income per share for
entities with complex capital structures and (c) requiring a reconciliation of
the basic net income per share computation to diluted net income per share.
Basic net income per share is calculated by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted net income per share includes the effect of potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common shares. The adoption of SFAS No. 128
will not have a material effect on the Company's earnings per share
calculations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis reviews important factors affecting the financial
condition at September 30, 1997, compared to December 31, 1996, and results of
operations for the three month and the nine-month periods ended September 30,
1997, of Fidelity National Corporation and subsidiaries. These comments should
be read in conjunction with the Company's consolidated financial statements and
accompanying notes appearing in this report.
ASSETS
Total assets were $605 million at September 30, 1997 and December 31, 1996.
Loans, net of unearned income decreased $9.5 million or 2.2% to $420 million,
and loans held for sale increased $1.2 million or 3.2% to $39 million at
September 30, 1997. The decline in total loans was primarily a result of the
$22.4 million decline, or 15.6%, in credit card loans to $121 million at
September 30, 1997.
The following schedule summarizes the Company's total loans at September 30,
1997, and December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
TOTAL LOANS
Loans, net of unearned income $ 419,739 $ 429,284
Loans held for sale:
Mortgage loans 4,355 13,106
Indirect Auto Loans 34,959 25,000
------------- -------------
Total loans held for sale 39,314 38,106
------------- -------------
Total loans $ 459,053 $ 467,390
============= =============
</TABLE>
5
<PAGE> 8
ASSET QUALITY
The following schedule summarizes the Company's asset quality position at
September 30, 1997, and December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Nonperforming assets
Nonaccrual loans $ 1,488 $ 2,940
Other real estate owned 2,042 567
======== =======
Total nonperforming assets $ 3,530 $ 3,507
======== =======
Loans 90 days past due or more and still 6,106 $ 6,890
accruing ======== =======
Allowance for loan losses $ 14,759 $16,511
======== =======
Ratio of past due loans to loans 1.45% 1.60%
======== =======
Ratio of nonperforming assets to loans
and other real estate owned .84% .82%
======== =======
Allowance to period-end loans 3.52% 3.85%
======== =======
Allowance to nonperforming loans 9.92x 5.62x
(coverage ratio) ======== =======
</TABLE>
Management is not aware of any potential problem loans other than those
disclosed in the table above, which includes all loans recommended for
classification by regulators, which would have a material impact on asset
quality.
DEPOSITS
Total deposits at September 30, 1997, were $547 million compared to $545 million
at December 31, 1996, a 0.4% increase. During this period total liabilities
decreased $7 million or 1.2% to $577 million. The increase in deposits occurred
principally in time deposits which increased $14 million or 3.9%. There were no
brokered deposits at September 30, 1997 or December 31, 1996. Demand and money
market deposits increased $4.9 million or 3.2% and savings deposits decreased
$16 million or 42.4%.
LIQUIDITY AND SOURCES OF CAPITAL
Market and public confidence in the financial strength of the Bank and financial
institutions in general will largely determine the Bank's access to appropriate
levels of liquidity. This confidence is significantly dependent on the Bank's
ability to maintain sound asset credit quality and appropriate levels of capital
resources.
Liquidity is defined as the ability of the Bank to meet anticipated customer
demands for funds under credit commitments and deposit withdrawals at a
reasonable cost and on a timely basis. Management measures the Bank's liquidity
position by giving consideration to both on- and off-balance sheet sources of
and demands for funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities; investment
securities eligible for pledging to secure borrowings from dealers and
6
<PAGE> 9
customers pursuant to securities sold under agreements to repurchase
("repurchase agreements"); loan repayments; loan sales; deposits, and certain
interest rate-sensitive deposits; and borrowings under overnight federal fund
lines available from correspondent banks. During the first nine months of 1997,
the Company sold $81 million 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.
Shareholders' equity was $28.2 million at September 30, 1997, compared to $21.1
million at December 31, 1996. The $6.2 million increase in Preferred Stock
accounted for 85.8% of the increase in shareholders' equity. Shareholders'
equity as a percent of total assets was 4.7% at September 30, 1997, compared to
3.5% at December 31, 1996.
Maintaining appropriate levels of capital is an important factor in determining
the availability of critical sources of liquidity. At December 31, 1996,
capital ratios had declined below regulatory minimums. This decline tightened
the Company's liquidity position and reduced the availability of traditional
funding sources including unsecured federal funds lines, the ability to acquire
brokered deposits, and warehouse borrowing from the Federal Home Loan Bank
(FHLB). At September 30, 1997, as a result of the issuance of Preferred Stock,
capital ratios have been restored to above regulatory minimums and sources of
liquidity have expanded to again include the FHLB.(1)
Management of the Bank seeks to maintain stable net liquidity position while
optimizing operating results, as reflected in net interest income, the net yield
on earning assets and the cost of interest-bearing liabilities in particular.
Key management meets regularly to review the Bank's current and projected net
liquidity position and to review actions taken by management to achieve this
liquidity objective.
The Company has unused sources of liquidity in the form of unused federal funds
lines totaling $10.4 million, unpledged securities and money market assets of
$9.0 million, and Federal Home Loan Bank advance lines totaling $60 million at
September 30, 1997.
At September 30, 1997, based on the Federal Reserve Board's guidelines, the
Company's tier I capital ratio was 4.89%, the total risk-based capital ratio was
8.60%, and the leverage ratio was 4.05%. These ratios are in excess of the
Federal Reserve Board's requirements, as indicated in the capital adequacy
schedule below (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
-------------------------- ----------------------------
Amount Percent Amount Percent
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Tier I capital:
Actual $24,590 4.89% $ 17,052 3.40%
Minimum 20,119 4.00 20,059 4.00
Excess (deficit) 4,471 0.89 (3,007) (.60)
Total risk-based capital:
Actual $43,280 8.60% $ 31,976 6.28%
Minimum 40,237 8.00 40,118 8.00
Excess (deficit) 3,043 0.60 (8,142) (1.72)
Tier I capital leverage ratio:
Actual 4.05% 2.67%
Minimum acceptable 3.00 3.00
Excess (deficit) 1.05 (.33)
</TABLE>
For additional information, see page 4, Note B of the Notes to Consolidated
Financial Statements.
(1) In addition, the restriction on brokered deposits no longer applies and the
Bank is negotiating to obtain unsecured federal funds.
7
<PAGE> 10
INTEREST RATE SENSITIVITY
The interest rate sensitivity structure within the Company's balance sheet at
September 30, 1997, has a net interest sensitive liability gap of 19.29% when
projecting out one year. In the near term, defined as 90 days, the Company
currently has a net interest sensitivity asset gap of 17.49% as of September 30,
1997. 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.
At September 30, 1997 and December 31, 1996, the 90 and 0-30 day windows include
35 million and 25 million of indirect automobile loans classified as
held-for-sale. By selling these loans the Bank becomes less interest sensitive.
The Company's policy states that the cumulative gap at the six month and one
year period should not exceed 10%. The company interest rate shock analysis
indicates that the Company is relatively insensitive to an interest rate shock
of plus or minus 2000 basis points.
EARNINGS
Net income for the third quarter ended September 30, 1997, was $541,000 compared
to a net loss of $1,604,000 for the third quarter of 1996. Net income per share
was $.09 for the third quarter of 1997, compared to a $.35 loss for the same
period in 1996.
The Company's net income was $1,188,000, or $.23 per share for the nine months
ended September 30, 1997. This compared to net income of $4,000 for the nine
months ended September 30, 1996.
NET INTEREST INCOME
Net interest income for the third quarter of 1997 was $9.3 million compared to
$8.5 million for 1996. The 70 basis point increase in the yield on average
interest-earning assets more than offset the $28 million decrease in average
interest-earning assets in 1997 below the comparable period in 1996. This
coupled with the 3 basis point decline in rates on interest-bearing liabilities
provided the increase in net interest income.
For the nine months ended September 30, 1997, net interest income increased
$27.2 million, or 10.8% over the nine months ended September 30, 1996. This
increase was primarily a result of a $10 million increase in average
interest-earning assets to $559 million coupled with a 64 basis point increase
in the yield on average interest-earning assets. The net interest margin for the
third quarter and first nine months of 1997, were 6.54% and 6.51%, respectively,
compared to 5.71% and 5.93%, respectively, for the same periods of 1996. The
increases in net interest margin were due primarily to the increases in the
yield of all major loan category.
PROVISION 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.
8
<PAGE> 11
Management believes the allowance for loan losses is adequate to provide for
inherent loan losses. The provision for loan losses for the first nine months
and third quarter of 1997 was $11.7 million and $3.4 million, respectively,
compared to $11.1 million and $5.7 million, respectively for the comparable
periods of 1996. The increase in 1996 was a result of loan growth and the
increases in net charge-offs and delinquencies, primarily credit card and
consumer installment loans. Net charge-offs to average loans on an annualized
basis for the nine months ended September 30, 1997, were 3.80% compared to 2.13%
for the same period in 1996. The following schedule summarizes changes in the
allowance for loan losses for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
---------------------------
1997 1996 1996
-------- --------- ------------
<S> <C> <C> <C>
Balance at beginning of period $16,511 $ 5,537 $ 5,537
Charge-offs:
Commercial, financing and agricultural 155 3 3
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 2,588 1,226 1,657
Credit cards 11,850 8,953 13,156
------- ------- -------
Total charge-offs 14,593 10,182 14,816
Recoveries:
Commercial, financial and agricultural 103 18 31
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 153 34 64
Credit cards 915 390 568
------- ------- -------
Total recoveries 1,171 442 663
------- ------- -------
Net charge-offs 13,422 9,740 14,153
Provision for loan losses 11,670 11,100 25,127
======= ======= =======
Balance at end of period $14,759 $ 6,897 $16,511
======= ======= =======
</TABLE>
NONINTEREST INCOME
For the nine months ended September 30, 1997, noninterest income increased
$376,000 to $13.0 million or 3.0% over the same period in 1996. Noninterest
income was $4.2 million for the third quarter of 1997 compared to $4.1 million
for the same period in 1996, a 1.0% increase.
During 1996 and 1997, the Company sold mortgage servicing rights in part to
reduce its interest rate risk exposure to mortgage servicing prepayments. As a
result of this initiative, noninterest income for the nine months ended
September 30, 1997 and 1996, benefited from a $1.5 and $1.1 million gains on the
sale of mortgage servicing rights while servicing income declined $846,000 to
$843,000 for the nine months ended September 30, 1997.
There were no gains on securities transactions in 1997 compared to $361,000 in
1996. Fee income for servicing indirect auto loans was $948,000 for the nine
months ended September 30, 1997 compared to $304,000 for the same period of
1996.
9
<PAGE> 12
NONINTEREST EXPENSE
Noninterest expense was $26.7 million for the nine months ended September 30,
1997, compared to $26.1 million for the comparable period of 1996, a 2.3%
increase. Noninterest expense for the three months ended September 30, 1997, was
$9.2 million compared to $9.5 million for the comparable period of 1996, a 2.9%
decrease.
Salaries and benefit expenses increased $591,000, or 4.9%, in the first nine
months of 1997 over the comparable of 1996, and salary and benefits expenses in
the third quarter of 1997 were up $298,000 from the third quarter of 1996. The
number of full-time equivalent employees declined to 385 on September 30, 1997,
from 406 at September 30, 1996.
Expenses other than salaries, benefits and amortization of mortgage servicing
rights, for the first nine months and third quarter of 1997 increased $915,000
million and decreased $278,000, respectively. The increase was due primarily to
corporate expansion and the Company's opening of four additional bank branches
in the greater Atlanta metropolitan area and two loan production offices in
Florida and the consolidation of operations in the Company's new operations
center.
Amortization of mortgage servicing rights, including amortization relating to
loan repayments declined $919,000 to $610,000 for the nine months ended
September 30, 1997. Third quarter 1997 amortization of mortgage servicing rights
was $210,000 compared to $505,000 for the comparable period in 1996. The decline
in mortgage servicing amortization was due to sales of mortgage service rights.
PROVISION FOR INCOME TAXES
The provision for income taxes for the third quarter and the first nine months
of 1997 was $288,000 and $605,000, respectively, compared to a tax credit of
$992,000 and $78,000, respectively, for the same periods in 1996. These changes
were due to changes in taxable income.
Part II - Other Information
Item 2 - Changes in Securities and Use of Proceeds
(c) During July 1997, the Company issued 232,000 shares Non-Cumulative 8%
Convertible Preferred Stock, Series A ("Preferred Stock") at a purchase price of
$6.25 per share in a private placement. 192,000 shares of Preferred Stock were
sold for cash aggregating $1,200,000 and 40,000 shares of Preferred Stock were
exchanged for subordinated debt of the Company in the principal amount of
$250,000.
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 Securities and
Exchange Commission.
Item 6 - EXHIBITS and Reports on Form 8-K
(a) EXHIBIT 27 - Financial Data Schedule (for SEC purposes only).
(b) Current Report of Form 8-K, Date of Report June 23,1557, filed July 3, 1997,
ITEM 5. The Company reported the issuance in June 1997 of shares of Preferred
Stock.
10
<PAGE> 13
PART II: OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY NATIONAL CORPORATION
(Registrant)
Date: November 5, 1997 BY: /s/ James B. Miller, Jr.
---------- ---------------------------
James B. Miller, Jr.
Chief Executive Officer
/s/ M. Howard Griffith, Jr.
Date: November 5, 1997 ---------------------------
---------- M. Howard Griffith, Jr.
Chief Financial Officer
11
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