<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 June 30, 1998
-----------------------------------------------
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) 639-6500
- --------------------------------------------------------------------------------
(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 July 31, 1998
-------------------------- -----------------------------------
Common Stock, no par value 8,119,588
<PAGE> 2
FIDELITY NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Condition June 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Income (unaudited)
Three Months Ended June 30, 1998 and 1997 2
Six Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 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 5-11
Part II. Other Information 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 8
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 33,371,585 $ 25,843,295
Interest-bearing deposits with banks 1,699,042 2,349,419
Federal funds sold 33,009,680 41,068,827
Investment securities available-for-sale 56,405,347 88,007,985
Investment securities held-to-maturity (approximate fair value
of $37,359,560 and $37,924,411 at June 30, 1998, and
December 31, 1997, respectively) 37,231,297 37,925,224
Loans held-for-sale 30,881,831 4,360,765
Loans 447,151,954 432,820,665
Allowance for loan losses (12,266,167) (14,319,591)
------------- -------------
Loans, net 434,885,787 418,501,074
Premises and equipment, net 19,970,388 20,517,650
Other real estate 1,174,264 2,259,704
Accrued interest receivable 4,892,829 4,492,422
Other assets 12,413,314 12,477,638
------------- -------------
Total assets $ 665,935,364 $ 657,804,003
============= =============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 93,061,926 $ 87,054,288
Interest-bearing deposits:
Demand and money market 88,533,085 83,756,126
Savings 23,050,993 21,748,732
Time deposits, $100,000 and over 99,939,731 98,190,352
Other time deposits 272,137,683 277,567,827
------------- -------------
Total deposits 576,723,418 568,317,325
Short-term borrowings 14,459,122 16,367,839
Long-term debt 15,650,000 15,800,000
Accrued interest payable 3,321,003 3,192,701
Other liabilities 1,583,671 1,906,800
------------- -------------
Total liabilities 611,737,214 605,584,665
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
8,129,907 and 8,125,499 and outstanding 8,118,815 and 8,114,407 in
1998 and 1997, respectively 34,994,131 34,943,110
Treasury stock
(69,325) (69,325)
Net unrealized gains on investment securities available-
for-sale, net of tax 201,181
208,694
Retained earnings 12,922,163 10,986,859
------------- -------------
Total shareholders' equity 54,198,150 52,219,338
------------- -------------
Total liabilities and shareholders' equity $ 665,935,364 $ 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>
Six Months Ended June 30, Three Months Ended June 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $26,692,699 $28,228,177 $13,425,293 $14,262,799
Investment securities 3,555,911 2,371,602 1,754,797 1,156,612
Federal funds sold 633,849 215,554 280,625 168,045
Deposits with other banks 12,253 41,620 3,977 23,263
----------- ----------- ----------- -----------
Total interest income 30,894,712 30,856,953 15,464,692 15,610,719
INTEREST EXPENSE
Deposits 12,132,796 11,877,949 6,066,251 5,975,672
Short-term borrowings 327,346 315,515 178,498 76,288
Long-term debt 722,971 756,986 361,487 376,912
----------- ----------- ----------- -----------
Total interest expense 13,183,113 12,950,450 6,606,236 6,428,872
----------- ----------- ----------- -----------
NET INTEREST INCOME 17,711,599 17,906,503 8,858,456 9,181,847
Provision for loan losses 4,750,000 8,270,000 2,850,000 3,500,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 12,961,599 9,636,503 6,008,456 5,681,847
NONINTEREST INCOME
Service charges on deposit accounts 1,117,670 1,029,753 558,446 514,201
Credit card fees 1,557,772 1,456,019 841,608 785,101
Mortgage banking activities 1,743,187 3,314,429 916,879 791,175
Securities gains, net 93,112 -- 93,112 --
Other 4,874,192 3,015,255 2,883,661 1,490,497
----------- ----------- ----------- -----------
Total noninterest income 9,385,933 8,815,456 5,293,706 3,580,974
NONINTEREST EXPENSE
Salaries and employee benefits 8,566,298 8,473,717 4,365,430 4,004,514
Furniture and equipment 1,256,789 1,075,415 650,684 578,938
Net occupancy 1,652,333 1,598,920 835,329 790,323
Credit card processing and transaction fees 1,515,313 1,416,330 764,169 752,114
Amortization of mortgage servicing rights 476,558 400,751 209,090 152,109
Other 5,461,527 4,522,717 2,738,496 2,493,201
----------- ----------- ----------- -----------
Total noninterest expense 18,928,818 17,487,850 9,563,198 8,771,199
----------- ----------- ----------- -----------
Income before income taxes 3,418,714 964,109 1,738,964 491,622
Income tax expense 1,237,410 317,347 622,785 153,471
----------- ----------- ----------- -----------
NET INCOME $ 2,181,304 $ 646,762 $ 1,116,179 $ 338,151
=========== =========== =========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 1,935,304 $ 638,584 $ 993,179 329,973
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.24 $ .14 $ .12 $ 4.07
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,117,133 4,657,057 8,118,126 4,658,267
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,181,304 $ 646,762
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 4,750,000 8,270,000
Depreciation and amortization of premises and equipment 1,041,050 873,594
Amortization of mortgage servicing rights 448,814 400,751
Additions of originated mortgage servicing rights (564,612) (145,500)
Securities gains, net 93,112 --
Gain on loan sales (684,994) (94,766)
Proceeds from sale of other real estate 415,730 84,466
Net (increase) decrease in loans held-for-sale (26,521,066) 21,921,757
Net (increase) decrease in accrued interest receivable (400,407) 182,538
Net increase (decrease) in accrued interest payable 128,302 (256,648)
Net decrease in other assets 64,324 4,660,486
Net decrease in other liabilities (323,129) (326,104)
Other 78,313 (471,148)
------------- -------------
Net cash flows (used in) provided by operating activities (19,293,259) 35,746,188
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (586,950) --
Maturities of investment securities held-to-maturity 1,280,876 18,005,000
Purchases of investment securities available-for-sale (20,000,000) (33,993,058)
Maturities and sales of investment securities available-for-sale 51,590,520 5,285,270
Net increase in loans (112,727,711) (76,267,496)
Purchases of premises and equipment (493,788) (2,162,490)
Proceeds from sale of loans 92,947,702 58,270,703
------------- -------------
Net cash flows provided by (used in) investing activities 12,010,649 (30,862,071)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
money market accounts, and savings accounts 12,086,858 (3,316,944)
Net (decrease) increase in time deposits (3,680,765) 15,633,286
Decrease in short-term borrowings (1,908,717) (8,616,395)
Repayment of long-term debt (150,000) (150,000)
Dividends paid on preferred stock (246,000) --
Proceeds from the issuance of preferred stock -- 4,000,000
------------- -------------
Net cash flows provided by financing activities 6,101,376 7,549,947
------------- -------------
Net (decrease) increase in cash and cash equivalents (1,181,234) 12,434,064
Cash and cash equivalents, beginning of period 69,261,541 32,955,417
============= =============
Cash and cash equivalents, end of period $ 68,080,307 $ 45,389,481
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Total interest paid $ 13,364,741 $ 13,207,098
============= =============
Total income taxes paid $ 900,000 $ --
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 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 six month periods ended June 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 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 June 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
Fidelity's Board of Directors on February 13, 1997, adopted a resolution
requested by the Federal Reserve Bank of Atlanta ("FRB Agreement"). The FRB
Agreement, among other things, prohibits Fidelity from redeeming its capital
stocks, paying 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 June 30, 1998, the Company did not declare or pay
dividends on Common Stock. During the period ended June 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
$246,000.
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 second quarter and for the six month period ended June 30,
1998, total comprehensive income amounted to $1,082,167 and $2,151,969,
respectively, and totaled $1,150,789 and $929,396, 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 June 30, 1998, compared to December 31, 1997, and the results of operations
for the three month and the six month periods ended June 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
ASSETS
Total assets were $666 million at June 30, 1998, and $658 million at December
31, 1997, an increase of $8 million, or 1.2%. Loans increased $14 million or
3.3% to $447 million, and loans held-for-sale increased $27 million or 608.2% to
$31 million at June 30, 1998. The increase in total loans was primarily a result
of the $27 million increase in loans held-for-sale, an $8 million increase in
commercial loans and a $14 million increase in mortgage loans, offset in part by
a decline of $13 million in credit card loans to $107 million at June 30, 1998.
The following schedule summarizes the Company's total loans at June 30, 1998 and
December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- -----------
<S> <C> <C>
TOTAL LOANS
Loans $447,152 $432,821
Loans held-for-sale:
Mortgage loans 5,882 4,361
Indirect auto loans 25,000 --
-------- --------
Total loans held-for-sale 30,882 4,361
-------- --------
Total loans $478,034 $437,182
======== ========
</TABLE>
ASSET QUALITY
The following schedule summarizes the Company's asset quality position at June
30, 1998, and December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Nonperforming assets
Nonaccrual loans $ 1,910 $ 1,422
Other real estate owned 1,174 2,260
======== ========
Total nonperforming assets $ 3,084 $ 3,682
======== ========
Loans 90 days past due and still accruing $ 3,974 $ 6,194
======== ========
Allowance for loan losses $ 12,266 $ 14,320
======== ========
Ratio of past due loans to loans .89% 1.43%
======== ========
Ratio of nonperforming assets to loans
and other real estate owned .69% .85%
======== ========
Allowance to period-end loans 2.74% 3.31%
======== ========
Allowance to nonperforming loans
(coverage ratio) 6.42x 10.07x
======== ========
</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.
6
<PAGE> 9
DEPOSITS
Total deposits at June 30, 1998, were $577 million compared to $568 million at
December 31, 1997, a 1.5% increase. During this period, total liabilities
increased $6 million, or 1.0%, to $612 million. The increase in deposits
occurred principally in noninterest-bearing demand deposits, which increased $6
million, or 6.9%. There were no brokered deposits at June 30, 1998 or December
31, 1997. Demand and money market deposits increased $5 million or 5.7% and
savings deposits increased $1 million or 6.0%. Partially offsetting these
deposit increases was a decrease in time deposits of $4 million, or 1.0%, to
$372 million.
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
demand for funds under credit commitments and deposit withdrawals at a
reasonable cost and in 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 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; and
borrowings under unsecured overnight Federal funds lines available from
correspondent banks. During the first six months of 1998, the Company sold $93
million in newly originated and held-for-sale indirect automobile loans compared
to the sale of $58 million in the first half 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 $54.2 million at June 30, 1998, compared to $52.2
million at December 31, 1997. Shareholders' equity as a percent of total assets
was 8.1% at June 30, 1998, compared to 7.9% at December 31, 1997.
Management of the Bank seeks to maintain a stable net liquidity position while
optimizing operating results, as reflected in net interest income, the net yield
on earning assets and the cost of interest-bearing liabilities in particular.
Key management meets regularly to review the Bank's current and projected net
liquidity position and to review actions taken by management to achieve this
liquidity objective.
The Company has available sources of liquidity in the form of unused Federal
funds lines totaling $16.4 million, unpledged securities and money market assets
of $31.6 million, and Federal Home Loan Bank advance lines, subject to available
qualifying collateral, at June 30, 1998.
7
<PAGE> 10
At June 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>
OCC Bank Ratios
--------------------------------------- ---------------------------
Adequately Well June 30, December 31,
Capital Ratios: Capitalized Capitalized Agreement 1998 1997
- --------------- ----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.00% 7.41% 7.46%
Risk - Based Capital
Tier I 4.00 6.00 7.00 9.10 9.23
Total 8.00 10.00 11.00 12.27 12.53
</TABLE>
At June 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 June 30, December 31,
Capital Ratios: Capitalized Capitalized 1998 1997
- --------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 7.95% 8.00%
Risk - Based Capital
Tier I 4.00 6.00 9.76 9.91
Total 8.00 10.00 13.94 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 June 30, 1998, reflects a net interest sensitivity liability gap of
10.57% when projecting out one year. In the near term, defined as 90 days, the
Company has a net interest sensitivity asset gap of 16.60%. At six months, the
Company is basically neutral, with a net interest sensitivity liability gap of
5.19%. 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 June 30, 1998, the 30-60 day window included $25 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%.
RISK EXPOSURE
The Company's primary risk exposures are interest rate risk and, to a lesser
extent, credit risk and liquidity risk. 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.
The analysis reflected the asset sensitivity of the Company over a five month
time horizon and the liability sensitivity of the Company over a six 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.
8
<PAGE> 11
EARNINGS
Net income for the quarter ended June 30, 1998, was $1,116,179 compared to net
income of $338,151 for the comparable quarter of 1997, an increase of 230%.
Basic and diluted earnings were $.12 per share for the second quarter of 1998,
compared to $.07 per share for the same period in 1997.
The Company's net income was $2,181,304 for the six months ended June 30, 1998,
compared to net income of $646,762, for the six months ended June 30, 1997, a
237% increase. Basic and diluted earnings were $.24 per share for the first half
of 1998 compared to $.14 per share for the comparable period of 1997.
NET INTEREST INCOME
Net interest income for the second quarter of 1998 was $8.9 million compared to
$9.2 million for the same period in 1997. While the average balance of interest
earning assets increased $41.6 million to $594.0 million for the three months
ended June 30, 1998, when compared to the same period in 1997, the yield on
those assets declined 106 basis points to 10.41% when compared to the same
period in 1997. The yield on average loans outstanding for the period declined
70 basis points to 11.51% 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 by other lenders. Contributing to lower yields on average earning
assets was the $36.8 million increase in lower yielding average investment
securities during the second quarter of 1998 to $105.2 million when compared to
the same period in 1997.
The average balance of interest bearing liabilities increased $3.9 million
during the second quarter of 1998 to $507.6 million and the rate on these
average balances increased 10 basis points to 5.22% when compared to the same
period in 1997.
Net interest income for the first six months of 1998 was $17.7 million compared
to $17.9 million for the same period in 1997. The average balance of interest
earning assets increased $37.8 million to $593.2 million for the six months
ended June 30, 1998; however, the yield on average interest earning assets
declined 74 basis points to 10.47% when compared to the same period in 1997.
Disintermediation in the credit card portfolio resulted in a decline in average
balances outstanding by $21.4 million to $112.1 million for the six month period
ended June 30, 1998, when compared to the same period in 1997, while the average
balances outstanding in total loans declined $8.1 million to $461.1 million for
the same period in 1998 compared to 1997.
The average balance of interest bearing liabilities declined $1.0 million to
$506.6 million during the six months ended June 30, 1998 while the rate on these
average balances increased 10 basis points to 5.25% 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.
9
<PAGE> 12
Management believes the allowance for loan losses is adequate to provide for
inherent loan losses. The provision for loan losses for the first half and
second quarter of 1998 was $4.8 million and $2.9 million, respectively, compared
to $8.3 million and $3.5 million, respectively, for the comparable periods in
1997. The reduction in the provision for the first half and the second quarter
of 1998 is primarily due to the significant improvement in the current aggregate
amount of credit card delinquencies and net charge-offs. Net charge-offs to
average loans on an annualized basis for the six months ended June 30, 1998,
were 3.10% compared to 4.22% 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>
Six Months Ended Year Ended
June 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 1,262 1,864 3,367
Credit cards 6,890 8,479 14,735
------- ------- -------
Total charge-offs 8,174 10,498 18,256
Recoveries:
Commercial, financial and agricultural 4 9 103
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 148 99 192
Credit cards 1,218 565 1,335
------- ------- -------
Total recoveries 1,370 673 1,630
------- ------- -------
Net charge-offs 6,804 9,825 16,626
Provision for loan losses 4,750 8,270 14,435
======= ======= =======
Balance at end of period $12,266 $14,956 $14,320
======= ======= =======
</TABLE>
NONINTEREST INCOME
Noninterest income was $5.3 million for the second quarter of 1998 compared to
$3.6 million for the same period in 1997, a 48% increase. A non-recurring gain
of $654,000 and securities gains of $93,112 were included in noninterest income
for the three and six month periods ended June 30, 1998. For the six months
ended June 30, 1998, noninterest income increased $570,477 to $9.4 million
compared to the same period in 1997. Excluding the non-recurring gain and
securities gains in the first half of 1998 and excluding a $1,494,000 gain on
the sale of mortgage servicing rights in the first half of 1997, noninterest
income for the first half of 1998 rose $1.3 million or 17.8% over the comparable
period of 1997.
Service charges on deposit accounts and credit card fees for the six months
ended June 30, 1998 increased $88,000 and $102,000 to $1,118,000 and $1,558,000,
respectively, when compared to the same period in 1997, and reflected increased
activity compared to the prior period.
The sale of mortgage servicing rights during the first quarter of 1997 and the
associated reduction in servicing fee income is the primary reason for the
decline in mortgage banking activity income to $1,743,000 in the first half of
1998, compared to $1,820,000 net of the gain on the sale of servicing for the
same period in 1997.
10
<PAGE> 13
Fee income for servicing indirect auto loans was $928,000 for the six months
ended June 30, 1998, compared to $615,000 for the same period of 1997. The gain
on sale of primarily automobile loans was $685,000 during the first half of 1998
compared to a gain of $95,000 for the same period in 1997. Retail brokerage
income increased $250,000 to $1,657,000 during the first half of 1998 compared
to the same period in 1997.
NONINTEREST EXPENSE
Noninterest expense for the three months ended June 30, 1998, was $9.6 million
compared to $8.8 million for the comparable period of 1997, a 9.0% increase.
Noninterest expense was $18.9 million for the six months ended June 30, 1998,
compared to $17.5 million for the comparable period of 1997, an 8.2% increase.
Salaries and benefit expenses in the first half of 1998 increased $93,000, or
1.1% to $8.6 million, over the same period in 1997. Brokerage salaries and
commissions increased $134,000 during the first six months of 1998 compared to
the same period in 1997 reflecting an increase in brokerage activity during
1998. These expenses were $4.4 million for the second quarter of 1998 compared
to $4.0 million for the same quarter last year. The number of full-time
equivalent employees increased to 391 on June 30, 1998, from 383 at June 30,
1997. The number of full-time equivalent employees had declined to 383 at June
30, 1997 from 439 at December 31, 1996, as a result of cost saving measures
taken in the first quarter of 1997.
The increase in furniture and equipment expense and net occupancy expense during
the six month period ended June 30, 1998 to $1.3 million and $1.7 million,
respectively, from $1.1 million and $1.6 million, respectively, for the same
period in 1997 was primarily due to costs associated with corporate expansion
including the opening of three new retail banking locations, computer systems
enhancements and increased activity.
The $99,000 increase in credit card processing and transaction fees to $1.5
million during the first half 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.
The $76,000 increase in the amortization of mortgage servicing rights to
$477,000 for the period ended June 30, 1998 when compared to the same period in
1997 is due to accelerated prepayments related to refinancing as a result of low
interest rates.
Other noninterest expense increased $939,000 to $5.5 million during the six
month period ended June 30, 1998 compared to $4.5 million for the same period in
1997. Federal Deposit Insurance Corporation fees and Office of the Comptroller
of the Currency assessments increased $434,000 during the period.
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter and the first half of 1998
was $623,000 and $1.2 million, respectively, compared to $153,000 and $317,000,
respectively, for the same periods in 1997. These changes were due to changes in
taxable income.
11
<PAGE> 14
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 June 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: August 11, 1998 BY: /s/ James B. Miller, Jr.
------------------------
James B. Miller, Jr.
Chief Executive Officer
Date: August 11, 1998 /s/ M. Howard Griffith, Jr.
---------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 33,371,585
<INT-BEARING-DEPOSITS> 1,699,042
<FED-FUNDS-SOLD> 33,009,680
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,405,347
<INVESTMENTS-CARRYING> 37,231,297
<INVESTMENTS-MARKET> 37,359,560
<LOANS> 478,033,785
<ALLOWANCE> 12,266,167
<TOTAL-ASSETS> 665,935,364
<DEPOSITS> 576,723,418
<SHORT-TERM> 14,459,122
<LIABILITIES-OTHER> 4,904,674
<LONG-TERM> 15,650,000
0
6,150,000
<COMMON> 34,994,131
<OTHER-SE> 13,054,019
<TOTAL-LIABILITIES-AND-EQUITY> 665,935,364
<INTEREST-LOAN> 26,692,699
<INTEREST-INVEST> 3,555,911
<INTEREST-OTHER> 646,102
<INTEREST-TOTAL> 30,894,712
<INTEREST-DEPOSIT> 12,132,796
<INTEREST-EXPENSE> 13,183,113
<INTEREST-INCOME-NET> 17,711,599
<LOAN-LOSSES> 4,750,000
<SECURITIES-GAINS> 93,112
<EXPENSE-OTHER> 18,928,818
<INCOME-PRETAX> 3,418,714
<INCOME-PRE-EXTRAORDINARY> 2,181,304
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,181,304
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<YIELD-ACTUAL> 10.47
<LOANS-NON> 1,910,000
<LOANS-PAST> 3,974,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,319,591
<CHARGE-OFFS> 8,174,144
<RECOVERIES> 1,370,720
<ALLOWANCE-CLOSE> 12,266,167
<ALLOWANCE-DOMESTIC> 12,266,167
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 922,000
</TABLE>
