<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, 1998
------------------------------------------------
Commission File Number: 0-22374
-------------------------------------------------------
Fidelity National Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1416811
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3490 Piedmont Road, Suite 1550 Atlanta, GA 30305
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 639-6500
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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, 1998
-------------------------- -------------------------------
Common Stock, no par value 8,130,968
<PAGE> 2
FIDELITY NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Condition September 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Income (unaudited)
Three Months Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-12
Part II. Other Information 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk (included in Part I Item 2) 8-10
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 13
</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,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,885,092 $ 25,843,295
Interest-bearing deposits with banks 11,504,425 2,349,419
Federal funds sold 71,173,027 41,068,827
Investment securities available-for-sale 50,871,839 88,007,985
Investment securities held-to-maturity (approximate fair value
of $40,021,685 and $37,924,411 at September 30, 1998, and
December 31, 1997, respectively) 39,817,588 37,925,224
Loans held-for-sale 35,048,376 4,360,765
Loans 462,710,148 432,820,665
Allowance for loan losses (12,002,710) (14,319,591)
------------- -------------
Loans, net 450,707,438 418,501,074
Premises and equipment, net 19,795,038 20,517,650
Other real estate 1,174,264 2,259,704
Accrued interest receivable 5,039,775 4,492,422
Other assets 12,064,439 12,477,638
------------- -------------
Total assets $ 723,081,301 $ 657,804,003
============= =============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 94,224,254 $ 87,054,288
Interest-bearing deposits:
Demand and money market 128,130,039 83,756,126
Savings 21,664,538 21,748,732
Time deposits, $100,000 and over 101,122,979 98,190,352
Other time deposits 272,050,036 277,567,827
------------- -------------
Total deposits 617,191,846 568,317,325
Short-term borrowings 29,090,360 16,367,839
Long-term debt 15,650,000 15,800,000
Accrued interest payable 3,368,194 3,192,701
Other liabilities 2,382,097 1,906,800
------------- -------------
Total liabilities 667,682,497 605,584,665
SHAREHOLDERS' EQUITY
Preferred stock, no par value. Authorized 10,000,000; issued
984,000 shares of Non-Cumulative 8% Convertible Preferred Stock
- Series A, stated value $6.25 6,150,000 6,150,000
Common Stock, no par value. Authorized 50,000,000; issued 8,140,512 and
8,125,499 and outstanding 8,129,420 and 8,114,407 in 1998 and 1997,
respectively 35,115,000 34,943,110
Treasury stock (69,325) (69,325)
Net unrealized gains on investment securities available- for-sale, net of tax 237,068 208,694
Retained earnings 13,966,061 10,986,859
------------- -------------
Total shareholders' equity 55,398,804 52,219,338
------------- -------------
Total liabilities and shareholders' equity $ 723,081,301 $ 657,804,003
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $41,028,119 $42,532,700 $14,335,420 $14,304,523
Investment securities 5,077,592 3,581,862 1,521,681 1,210,260
Federal funds sold 1,267,592 638,459 633,743 422,905
Deposits with other banks 99,651 56,452 87,398 14,832
----------- ----------- ----------- -----------
Total interest income 47,472,954 46,809,473 16,578,242 15,952,520
INTEREST EXPENSE
Deposits 18,930,060 18,087,287 6,797,264 6,209,338
Short-term borrowings 473,918 386,669 146,572 71,154
Long-term debt 1,077,030 1,126,189 354,059 369,203
----------- ----------- ----------- -----------
Total interest expense 20,481,008 19,600,145 7,297,895 6,649,695
----------- ----------- ----------- -----------
NET INTEREST INCOME 26,991,946 27,209,328 9,280,347 9,302,825
Provision for loan losses 6,750,000 11,670,000 2,000,000 3,400,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 20,241,946 15,539,328 7,280,347 5,902,825
NONINTEREST INCOME
Service charges on deposit accounts 1,728,821 1,570,875 611,151 541,122
Credit card fees 2,419,918 2,264,646 862,146 808,627
Mortgage banking activities 2,748,000 4,091,180 1,004,813 776,751
Securities gains, net 133,535 -- 40,423 --
Other 7,013,591 5,061,334 2,139,399 2,046,079
----------- ----------- ----------- -----------
Total noninterest income 14,043,865 12,988,035 4,657,932 4,172,579
NONINTEREST EXPENSE
Salaries and employee benefits 12,865,301 12,650,640 4,299,003 4,176,923
Furniture and equipment 2,010,383 1,677,829 753,594 602,414
Net occupancy 2,499,291 2,372,127 846,958 773,207
Credit card processing and transaction fees 2,297,469 2,157,146 782,156 740,816
Amortization of mortgage servicing rights 645,988 610,348 169,430 209,597
Other 8,701,454 7,266,296 3,239,927 2,743,579
----------- ----------- ----------- -----------
Total noninterest expense 29,019,886 26,734,386 10,091,068 9,246,536
----------- ----------- ----------- -----------
Income before income taxes 5,265,925 1,792,977 1,847,211 828,868
Income tax expense 1,917,723 604,994 680,313 287,647
----------- ----------- ----------- -----------
NET INCOME $ 3,348,202 $ 1,187,983 $ 1,166,898 $ 541,221
=========== =========== =========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 2,979,202 $ 1,059,983 $ 1,043,898 $ 421,221
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .37 $ .23 $ .13 $ .09
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,119,944 4,658,284 8,125,468 4,660,724
=========== =========== =========== ===========
</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,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,348,202 $ 1,187,983
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 6,750,000 11,670,000
Depreciation and amortization of premises and equipment 1,649,729 1,466,927
Amortization of mortgage servicing rights 667,226 610,348
Additions of originated mortgage servicing rights (854,834) (194,515)
Securities gains, net (133,535) --
Gain on loan sales (1,349,235) (311,172)
Proceeds from sale of other real estate 415,730 139,998
Increase in loans held-for-sale (30,687,611) (1,207,961)
Net (increase) decrease in accrued interest receivable (547,353) 123,804
Net increase (decrease) in accrued interest payable 175,493 (162,221)
Net decrease in other assets 413,199 6,415,043
Net increase (decrease) in other liabilities 475,297 (140,846)
Other 215,982 (271,466)
------------- ------------
Net cash flows (used in) provided by operating activities (19,328,175) 19,325,922
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (10,565,169) --
Maturities of investment securities held-to-maturity 8,672,805 18,005,000
Purchases of investment securities available-for-sale (22,994,168) (42,258,334)
Maturities and sales of investment securities available-for-sale 60,130,314 28,076,575
Net increase in loans (189,273,265) (89,225,918)
Purchases of premises and equipment (927,117) (2,296,375)
Proceeds from sale of loans 152,335,846 84,044,588
------------- ------------
Cash flows used in investing activities (2,620,754) (3,654,464)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
money market accounts, and savings accounts 51,459,685 (11,546,707)
Net (decrease) increase in time deposits (2,585,164) 13,853,882
Net increase (decrease) in short-term borrowings 12,722,521 (8,577,282)
Repayment of long-term debt (150,000) (150,000)
Dividends paid on preferred stock (369,000) (8,178)
Proceeds from the issuance of preferred stock -- 5,100,000
Proceeds from the sale of common stock 171,890 73,761
------------- ------------
Net cash flows provided by (used in) financing activities 61,249,932 (1,254,524)
------------- ------------
Increase in cash and cash equivalents 39,301,003 14,416,934
Cash and cash equivalents, beginning of period 69,261,541 32,955,417
------------- ------------
Cash and cash equivalents, end of period $ 108,562,544 $ 47,372,351
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 20,615,445 $ 19,762,366
============= ============
Income taxes $ 1,400,000 $ 200,000
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
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,
1998, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. 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, 1997.
Note B - Shareholders' Equity
The Company and its bank subsidiary (the Bank) are principally regulated by the
FRB and the OCC, respectively. At periodic intervals, the OCC examines and
evaluates the financial condition, operations, and policies and procedures of
nationally chartered banks, such as the Bank, as part of its legally prescribed
oversight responsibilities.
The OCC and the Bank entered into an Agreement dated November 14, 1996, ("OCC
Agreement"). The OCC Agreement provided that the Bank (i) appoint an "Oversight
Committee;" (ii) achieve and maintain specified higher capital levels; (iii)
develop a three year capital program which would include, among other things,
certain restrictions on dividend payments by the Bank; and (iv) revise and amend
its strategic plan.
In December 1997, the Company sold in a public offering 3,450,000 shares of
Common Stock at a price of $7.50 per share. The proceeds of this offering, net
of issuance costs, were used to increase FNB's capital ratios and for general
corporate purposes. At September 30, 1998, and December 31, 1997, the capital
ratios of the Bank exceeded those prescribed by the OCC Agreement.
On February 26, 1998, the Board of Directors of the Bank submitted the Bank's
revised strategic plan reflecting the Bank's December 31, 1997, capital ratios.
The Strategic Plan includes objectives for earnings performance, growth, balance
sheet mix, off-balance sheet activities, liability structure, capital adequacy,
product line development and market segments which the Bank intends to promote
or develop together with strategies to achieve these objectives. In February,
the Bank revised its Capital Plan to reflect the issuance of its Common Stock.
The Bank periodically submits reports to the OCC evidencing compliance with the
OCC Agreement. Even though the Bank meets the required capital levels, the OCC
Agreement continues in effect until it is amended or terminated. The OCC
Agreement can impair the ability of the Bank to declare and pay dividends to the
Company. Under the terms of the OCC Agreement, the Bank is permitted to pay
dividends on the preferred stock issued by the Bank to the Company, so long as
the Bank's capital ratios are at least 4% for leverage, 4% for Tier 1 risk-based
capital and 8% for total risk-based capital.
4
<PAGE> 7
On February 13, 1997, Fidelity's Board of Directors adopted a resolution
requested by the Federal Reserve Bank of Atlanta ("FRB Agreement"). The FRB
Agreement, among other things, prohibits Fidelity from redeeming its capital
stocks, paying dividends on Common Stock or incurring debt without prior
approval of the FRB. The FRB agreement continues until amended or terminated by
the FRB.
During the period ended September 30, 1998, the Company did not declare or pay
dividends on Common Stock. During the period ended September 30, 1998, 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 $369,000.
Note C - Recent Accounting Pronouncements
Beginning on January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
provided new accounting and reporting standards for sales, securitizations and
servicing of receivables and other financial assets and extinguishments of
liabilities and superseded SFAS No. 122. SFAS No. 125 was effective for
transactions occurring after December 31, 1996, except those provisions relating
to repurchase agreements, securities lending and other similar transactions and
pledged collateral, which were delayed until after December 31, 1997, by SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of Statement No.
125, and amendment of FASB Statement No. 125." Beginning on January 1, 1998, the
Company adopted the provisions of SFAS No. 127.
Beginning January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which is effective for annual and interim periods
beginning after December 15, 1997. SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities which, prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. During the third quarter and for the nine month period ended September
30, 1998, total comprehensive income amounted to $1,219,814 and $3,371,783,
respectively, and totaled $642,917 and $1,572,313, respectively, for the
comparable periods of 1997.
Beginning January 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for annual and interim periods beginning after December 15, 1997. This
statement established standards for the method that public entities are to use
to report information about operating segments in annual financial statements
and required that those enterprise reports be issued to shareholders, beginning
with annual financial statements in 1998 and for interim and annual financial
statements thereafter. It also established standards for related disclosures
about products and services, geographical areas and major customers.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis reviews important factors affecting financial condition
at September 30, 1998, compared to December 31, 1997, and the results of
operations for the three month and the nine month periods ended September 30,
1998, 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.
5
<PAGE> 8
FORWARD LOOKING STATEMENTS
Certain information and statements made in this Quarterly Report are
forward-looking statements that reflect the Company's current expectations
regarding the future and involve risks and uncertainties. The words "expects,"
"anticipates" and "estimates" and similar expressions are intended to identify
forward-looking statements. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of disruptions in
the Company's, its correspondents', its counterparties', its customers', or its
suppliers' operations arising from systems and other failures relating to the
Year 2000, general economic conditions and other factors. Investors are
encouraged to read the related section in the Company's 1997 Annual Report to
Stockholders and in the Annual Report on Form 10-K for 1997.
ASSETS
Total assets were $723 million at September 30, 1998, and $658 million at
December 31, 1997, an increase of $65 million, or 9.9%. Loans increased $30
million or 6.9% to $463 million, and loans held-for-sale increased $31 million
or 704% to $35 million at September 30, 1998. The increase in total loans was
primarily a result of the $31 million increase in loans held-for-sale, an $8
million increase in commercial loans, an $8 million increase in indirect
automobile loans and a $21 million increase in mortgage loans, offset in part by
a decline of $15 million in credit card loans to $105 million at September 30,
1998.
The following schedule summarizes the Company's total loans at September 30,
1998 and December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
TOTAL LOANS
Loans $462,710 $432,821
Loans held-for-sale:
Mortgage loans 8,048 4,361
Indirect auto loans 27,000 --
-------- --------
Total loans held-for-sale 35,048 4,361
-------- --------
Total loans $497,758 $437,182
======== ========
</TABLE>
ASSET QUALITY
The following schedule summarizes the Company's asset quality position at
September 30, 1998, and December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Nonperforming assets
Nonaccrual loans $ 1,576 $ 1,422
Other real estate owned 1,174 2,260
-------- -------
Total nonperforming assets $ 2,750 $ 3,682
======== =======
Loans 90 days past due and still accruing $ 4,431 $ 6,194
======== =======
Allowance for loan losses $ 12,003 $14,320
======== =======
Ratio of past due loans to loans .96% 1.43%
======== =======
Ratio of nonperforming assets to loans
and other real estate owned .59% .85%
======== =======
Allowance to period-end loans 2.59% 3.31%
======== =======
Allowance to nonperforming loans (coverage ratio) 9.92x 10.07x
======== =======
</TABLE>
6
<PAGE> 9
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, 1998, were $617 million compared to $568 million
at December 31, 1997, an 8.6% increase. During this period, total liabilities
increased $62 million, or 10.3%, to $668 million. The increase in deposits
occurred principally in noninterest-bearing demand deposits, which increased $7
million to $94 million, or 8.2% and in demand and money market deposits, which
increased by $44 million to $128 million, or 53.0%, in part from the investment
of trust deposits by the Bank's Trust Department for funds awaiting investment.
There were no brokered deposits at September 30, 1998 or December 31, 1997.
Partially offsetting these deposit increases was a decrease in time deposits of
$3 million, or .7%, to $373 million.
LIQUIDITY AND SOURCES OF CAPITAL
Market and public confidence in the financial strength of the Company and
financial institutions in general will largely determine the Company's access to
appropriate levels of liquidity. This confidence is significantly dependent on
the Company's ability to maintain sound asset credit quality and appropriate
levels of capital resources.
Liquidity is defined as the ability of the Company to meet anticipated customer
demand for funds under credit commitments and deposit withdrawals at a
reasonable cost and in a timely basis. Management measures the Company'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 sale or pledging to secure borrowings from dealers and
customers pursuant to securities sold under agreements to repurchase
("repurchase agreements"); loan repayments; loan sales; deposits and certain
interest rate-sensitive deposits; Federal Home Loan Bank borrowings; secured
borrowings, and borrowings under unsecured overnight Federal funds lines
available from correspondent banks. During the first nine months of 1998, the
Company sold $152 million in newly originated and held-for-sale indirect
automobile loans compared to the sale of $84 million in the first nine months of
1997. 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 $55.4 million at September 30, 1998, compared to $52.2
million at December 31, 1997. Shareholders' equity as a percent of total assets
was 7.7% at September 30, 1998, compared to 7.9% at December 31, 1997.
Management of the Company seeks to maintain a stable net liquidity position
while optimizing operating results, as reflected in net interest income, the net
yield on earning assets and the cost of interest-bearing liabilities in
particular. Key management meets regularly to review the Company's current and
projected net liquidity position and to review actions taken by management to
achieve this liquidity objective.
At September 30, 1998, the Company has available sources of liquidity in the
form of unused unsecured Federal funds lines totaling $16.4 million, unpledged
securities and money market assets of $4.5 million, $15 million in secured
borrowings from a bank, and Federal Home Loan Bank advance lines, subject to
available qualifying collateral.
7
<PAGE> 10
At September 30, 1998, and December 31, 1997, the Bank exceeded both the capital
ratios required by the OCC to be considered well capitalized and the capital
ratios prescribed by the OCC Agreement, as reflected in the following schedule:
<TABLE>
<CAPTION>
OCC Bank Ratios
------------------------------------- ---------------------------------
Adequately Well September 30, December 31,
Capital Ratios: Capitalized Capitalized Agreement 1998 1997
- --------------- ----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.00% 7.30% 7.46%
Risk - Based Capital
Tier I 4.00 6.00 7.00 9.23 9.23
Total 8.00 10.00 11.00 12.31 12.53
</TABLE>
At September 30, 1998, and December 31, 1997, the Company exceeded the capital
ratios required by the FRB to be considered well capitalized, as reflected in
the schedule below:
<TABLE>
<CAPTION>
FRB Company Ratios
-------------------------- ---------------------------
Adequately Well September 30, December 31,
Capital Ratios: Capitalized Capitalized 1998 1997
- --------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 7.82% 8.00%
Risk - Based Capital
Tier I 4.00 6.00 9.88 9.91
Total 8.00 10.00 13.93 14.38
</TABLE>
For additional information, see page 4, Note B of the Notes to Consolidated
Financial Statements.
INTEREST RATE SENSITIVITY
The interest rate sensitivity structure within the Company's Statement of
Condition at September 30, 1998, reflects a net interest sensitivity liability
gap of 10.00% when projecting forward one year. In the near term, defined as 90
days, the Company has a net interest sensitivity asset gap of 20.96%. When
projecting forward six months, the Company has a net interest sensitivity asset
gap of 12.25%. This information represents a general indication of repricing
characteristics over time; however, the sensitivity of callable securities and
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, 1998, the 61-90 day asset maturity/repricing total included $27
million of indirect automobile loans classified as held-for-sale. By selling
these loans, the Bank becomes less interest sensitive in the one year time
horizon. The Company's policy states that the cumulative gap at the six month
and one year period should not exceed 10% and 15%, respectively.
RISK EXPOSURE
The Company's primary risk exposures are interest rate risk and credit risk and,
to a lesser extent, liquidity risk. Over the next fifteen months, an additional
primary risk exposure is that which is associated with the Year 2000 issues
discussed below. This risk exposure is related to computer operations and
automated information systems and controls. The Company has little or no risk
related to trading accounts, commodities or foreign exchange. Interest rate risk
is the exposure of a banking organization's financial condition and earnings
ability to adverse movements in interest rates. The Company has analyzed the
assumed market value risk and earnings risk inherent in its interest rate
sensitive instruments related to interest-rate swings of 200 basis points, both
above and below current levels (rate shock analysis). Earnings and fair value
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
8
<PAGE> 11
The analysis reflected the asset sensitivity of the Company over a six month
time horizon and the liability sensitivity of the Company over a seven to twelve
month time horizon. The analysis indicated that the effects of either an
immediate and sustained increase or decrease in market rates of interest of 200
basis points would not be material to the Company's net present value or
operating results over a one year period.
The Year 2000 ("Y2K") risk exposure arises primarily as a result of many
computer operating and computer application programs utilizing only the last two
digits to refer to a year. Therefore, these computer programs do not properly
recognize a year that begins with a 20 rather than a 19 (for example, the year
2000). If not corrected, many computer applications could fail or create
erroneous results. This problem could effect any computer hardware or software,
or computerized environmental system (including elevators, security systems,
vault doors, etc.) Certain computer software could be effected by other upcoming
dates. For example, September 9, 1999, could effect software which recognizes 99
or 999 as a command to void or cease certain operations.
Financial institutions are highly automated and computerized applications are
critical to their operations and controls. The financial regulators, including
the Federal Financial Institutions Examination Council ("FFIEC") are acutely
aware of the potential problems associated with Y2K and the effects they could
have on individual financial institutions and, indeed, on the entire financial
system. The FFIEC has issued numerous recommended and mandatory guidelines and
timetables which financial institutions must meet in order to assure that all
Y2K issues are timely addressed and resolved. The FFIEC has mandated that the
primary regulator of each financial institution will conduct quarterly reviews
to assess the progress made in identifying and rectifying any and all issues
related to the Y2K problem.
The operating systems and the large majority of application systems used by the
Company are products of established national vendors which provide software and
services to numerous users. The Company is primarily utilizing the services of
dedicated consultants working with the Company's data processing staff to
conduct its Y2K program. The Y2K program consists of a five-phase methodology
employed throughout the organization and addresses all automated processes. This
methodology includes awareness, assessment, renovation, validation and
implementation.
The Company has identified approximately 80 different programs or applications
which must be processed through the above five-phase methodology, 10 of which
have been identified as mission-critical, or essential to the daily operations
of the Company. It is anticipated that all of these mission-critical programs or
applications will be certified as complete and Y2K compliant no later than the
target dates established by the FFIEC. The remaining programs or applications
are in various stages of completion and it is anticipated that these systems
will be compliant by June 30, 1999.
In addition, the Company is assessing any potentially material Y2K risks
associated with customers, suppliers, correspondents and counterparties and is
conducting inquiries, tests, evaluations and other due diligence procedures to
mitigate or eliminate these risks as deemed appropriate. Legal documents and
contracts such as those for new loans, for equipment purchases, for service
providers, etc. are being evaluated and modified on an on-going basis as
appropriate to mitigate any Y2K risks. The Company is also developing
contingency plans for its mission-critical systems if Y2K renovations do not
occur timely. Finally, a detailed plan is being developed for the week preceding
and the week following December 31, 1999, which will detail contingency and
back-up procedures to address any possible internal or external problems
resulting from Y2K.
Procedures are in place to assure that all systems certified as Y2K compliant
remain compliant, that any new or revised systems or software is tested for Y2K
compliance before purchase or implementation, that customers, correspondents or
counterparties identified as having a possible material impact on the Company as
a result of potential Y2K problems are monitored on a periodic basis to identify
any changes
9
<PAGE> 12
in their Y2K risks profiles, and that all new customers, correspondents or
counterparties are evaluated for potential Y2K risks.
The Company has incurred expenses of $443,000 related to Y2K issues for the nine
months ended September 30, 1998, primarily consisting of consulting fees. It is
anticipated that the total expenses associated with the Y2K project during 1998
and 1999 will be approximately $1.2 million. Approximately $170,000 has been
expended during the period for hardware, software and software upgrades which
are Y2K compliant. These expenditures will provide operating enhancements or
operating efficiencies and would have been made during 1998 or 1999 irrespective
of the Y2K compliance issue.
While the Company believes that it is taking all necessary actions to mitigate
all Y2K issues and that the probability of significant Y2K problems in 1999 and
thereafter is low, the occurrence of significant Y2K problems could result in
material operating and legal expenses, material disruption of the operations of
the Company and/or its customers and suppliers and material charge-offs, which
amounts cannot be quantified.
EARNINGS
Net income for the quarter ended September 30, 1998, was $1,167,000 compared to
net income of $541,000 for the comparable quarter of 1997, an increase of 116%.
Basic and diluted earnings were $.13 per share for the third quarter of 1998,
compared to $.09 per share for the same period in 1997.
The Company's net income was $3,348,000 for the nine months ended September 30,
1998, compared to net income of $1,188,000, for the nine months ended September
30, 1997, a 182% increase. Basic and diluted earnings were $.37 per share for
the first nine months of 1998 compared to $.23 per share for the comparable
period of 1997.
NET INTEREST INCOME
Net interest income for the third quarter of 1998 and 1997 was $9.3 million.
While the average balance of interest earning assets increased $81 million to
$645 million for the three months ended September 30, 1998, when compared to the
same period in 1997, the yield on those assets declined 100 basis points to
10.21% when compared to the same period in 1997. The yield on average loans
outstanding for the period declined 100 basis points to 11.31% when compared to
the same period in 1997 as a result of lower average balances outstanding in
high yielding credit cards and the reduction in yields on other loans due to a
lower interest rate environment and competition from other lenders. Contributing
to lower yields on average earning assets were $21 million and $15 million
increases in lower yielding investment securities and Federal funds balances,
respectively, during the third quarter of 1998 to $91 million and $45 million
when compared to the same period in 1997. In addition, higher yielding credit
card average balances outstanding declined $17 million to $106 million when
compared to the same quarter in 1997.
The average balance of interest bearing liabilities increased $43 million to
$548 million during the third quarter of 1998 when compared to the same period
in 1997 and the rate on these average balances increased 6 basis points to 5.22%
when compared to the same period in 1997.
Net interest income for the first nine months of 1998 was $27.0 million compared
to $27.2 million for the same period in 1997. The average balance of interest
earning assets increased $52 million to $611 million for the nine months ended
September 30, 1998 when compared to the same period in 1997; however, the yield
on average interest earning assets declined 81 basis points to 10.40% when
compared to the same period in 1997. Marginal growth in the loan portfolio
resulted from a decline in average credit card balances outstanding by $20
million to $110 million for the nine month period ended September 30, 1998, when
compared to the same period in 1997, while the average balances outstanding in
total loans increased $5 million to $475 million for the nine month period in
1998 compared to 1997.
10
<PAGE> 13
The average balance of interest bearing liabilities increased $22 million to
$524 million during the nine months ended September 30, 1998, while the rate on
these average balances increased 9 basis points to 5.21% when compared to the
same period in 1997.
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.
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 1998 was $6.8 million and $2.0 million, respectively,
compared to $11.7 million and $3.4 million, respectively, for the comparable
periods in 1997. The reduction in the provision for the first nine months and
the third quarter of 1998 is primarily due to the significant improvement in the
aggregate amount of credit card delinquencies and net charge-offs. Net
charge-offs to average total loans on an annualized basis for the nine months
ended September 30, 1998, were 2.56% compared to 3.81% for the same period in
1997.
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,
-------------------------- ------------
1998 1997 1997
--------- --------- ------------
<S> <C> <C> <C>
Balance at beginning of period $14,320 $16,511 $16,511
Charge-offs:
Commercial, financing and agricultural 22 155 154
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 1,942 2,588 3,367
Credit cards 9,427 11,850 14,735
------- ------- -------
Total charge-offs 11,391 14,593 18,256
Recoveries:
Commercial, financial and agricultural 5 103 103
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 254 153 192
Credit cards 2,065 915 1,335
------- ------- -------
Total recoveries 2,324 1,171 1,630
------- ------- -------
Net charge-offs 9,067 13,422 16,626
Provision for loan losses 6,750 11,670 14,435
------- ------- -------
Balance at end of period $12,003 $14,759 $14,320
======= ======= =======
</TABLE>
NONINTEREST INCOME
Noninterest income was $4.7 million for the third quarter of 1998 compared to
$4.2 million for the same period in 1997, an 11.6% increase. For the nine months
ended September 30, 1998, noninterest income increased $1.1 million to $14.0
million compared to the same period in 1997, an 8.1% increase. A non-recurring
gain of $654,000 and securities gains of $134,000 were included in noninterest
income for the nine month period ended September 30, 1998. Excluding the
non-recurring gain and securities gains in the first nine months of 1998 and
excluding a $1,494,000 gain on the sale of mortgage servicing rights
11
<PAGE> 14
in the first nine months of 1997, noninterest income for the first nine months
of 1998 rose $1.8 million or 15.3% over the comparable period of 1997.
Service charges on deposit accounts and credit card fees for the nine months
ended September 30, 1998 increased $158,000 and $155,000 to $1,729,000 and
$2,420,000, respectively, when compared to the same period in 1997, and
reflected increased activity compared to the prior period.
The increase in mortgage banking income as a result of an increase in
originations and sales volume more than offset the sale of mortgage servicing
rights during the first quarter of 1997 and the associated reduction in
servicing fee income and is the primary reason for the increase in mortgage
banking activity income to $2,748,000 in the first nine months of 1998, compared
to $2,597,000 net of the gain on the sale of servicing for the same period in
1997.
Fee income for servicing indirect automobile loans was $1,365,000 for the nine
months ended September 30, 1998, compared to $948,000 for the same period of
1997. The gain on sale of primarily indirect automobile loans was $1,349,000
during the first nine months of 1998 compared to a gain of $311,000 for the same
period in 1997. A non-recurring gain of $654,000 was included in other
noninterest income during the nine months ended September 30, 1998.
NONINTEREST EXPENSE
Noninterest expense for the three months ended September 30, 1998, was $10.1
million compared to $9.2 million for the comparable period of 1997, a 9.1%
increase. Noninterest expense was $29.0 million for the nine months ended
September 30, 1998, compared to $26.7 million for the comparable period of 1997,
an 8.5% increase.
Salaries and benefit expenses in the first nine months of 1998 increased
$215,000, or 1.7% to $12.9 million, compared to the same period in 1997. These
expenses were $4.3 million for the third quarter of 1998 compared to $4.2
million for the same quarter last year, a 2.9% increase. The number of full-time
equivalent employees increased to 405 as of September 30, 1998, from 385 at
September 30, 1997. The increase in employees is primarily the result of the
opening of three new branches in 1998, as well as general corporate growth.
Furniture and equipment expense and net occupancy expense during the nine month
period ended September 30, 1998, increased to $2.0 million and $2.5 million,
respectively, from $1.7 million and $2.3 million, respectively, for the same
period in 1997. These increases were primarily due to costs associated with
corporate expansion including the opening of three new retail banking locations,
computer systems enhancements and increased activity.
The $140,000 increase in credit card processing and transaction fees to $2.3
million during the first nine months of 1998 when compared to the same period in
1997 is primarily the result of increased activity in merchant banking and
credit card transaction processing.
Other noninterest expense increased $1,435,000 to $8.7 million during the nine
month period ended September 30, 1998 compared to the same period in 1997.
Federal Deposit Insurance Corporation fees and Office of the Comptroller of the
Currency assessments increased $306,000 during the period, while advertising and
promotion increased $258,000. Expenses related to Year 2000 compliance issues
were $443,000 during the nine month period ended September 30, 1998, while no
expenses were incurred for this purpose during the comparable period in 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes for the third quarter and the first nine months
of 1998 was $680,000 and $1.9 million, respectively, compared to $288,000 and
$605,000, respectively, for the same periods in 1997. These changes were due to
changes in taxable income.
12
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 27. Financial Data Schedule (For SEC use only).
(B) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1998.
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 6, 1998 BY: /s/ James B. Miller, Jr.
-----------------------------
James B. Miller, Jr.
Chief Executive Officer
Date: November 6, 1998 /s/ M. Howard Griffith, Jr.
-----------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 25,885,092
<INT-BEARING-DEPOSITS> 11,504,425
<FED-FUNDS-SOLD> 71,173,027
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,871,839
<INVESTMENTS-CARRYING> 39,817,588
<INVESTMENTS-MARKET> 40,021,685
<LOANS> 497,758,524
<ALLOWANCE> 12,002,710
<TOTAL-ASSETS> 723,081,301
<DEPOSITS> 617,191,846
<SHORT-TERM> 29,090,360
<LIABILITIES-OTHER> 5,750,291
<LONG-TERM> 15,650,000
0
6,150,000
<COMMON> 35,115,000
<OTHER-SE> 14,133,804
<TOTAL-LIABILITIES-AND-EQUITY> 723,081,301
<INTEREST-LOAN> 41,028,119
<INTEREST-INVEST> 5,077,592
<INTEREST-OTHER> 1,367,243
<INTEREST-TOTAL> 47,472,954
<INTEREST-DEPOSIT> 18,930,060
<INTEREST-EXPENSE> 20,481,008
<INTEREST-INCOME-NET> 26,991,946
<LOAN-LOSSES> 6,750,000
<SECURITIES-GAINS> 133,535
<EXPENSE-OTHER> 29,019,886
<INCOME-PRETAX> 5,265,925
<INCOME-PRE-EXTRAORDINARY> 3,348,202
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,348,202
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 10.40
<LOANS-NON> 1,576,000
<LOANS-PAST> 4,431,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,319,591
<CHARGE-OFFS> 11,390,677
<RECOVERIES> 2,323,796
<ALLOWANCE-CLOSE> 12,002,710
<ALLOWANCE-DOMESTIC> 12,002,710
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
