<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 March 31, 1999
-----------------------------------------------
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 incorporation (I.R.S. Employer
or organization) Identification No.)
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 April 30, 1999
----------------- -------------------------------------
Common Stock, no par value 8,141,702
<PAGE> 2
FIDELITY NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
Part I. Financial Information
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Condition March 31, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Income (unaudited)
Three Months Ended March 31, 1999 and
1998 2
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 1999 and 1998 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 12
Item 3. Quantitative and Qualitative Disclosures about Market 8-9
Risk (included in Part I Item 2)
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)
March 31, December 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 31,730,180 $ 32,726,501
Interest-bearing deposits with banks 1,266,154 1,417,679
Federal funds sold 33,046,660 45,785,746
Investment securities available-for-sale 42,107,960 43,404,870
Investment securities held-to-maturity (approximate fair value
of $38,361,980 and $29,755,873 at March 31, 1999,
and December 31, 1998, respectively) 38,413,993 29,652,667
Loans held-for-sale 35,155,354 39,655,259
Loans, net of unearned income 519,778,712 496,220,907
Allowance for loan losses (11,231,556) (11,910,601)
------------ ------------
Loans, net 508,547,156 484,310,306
Premises and equipment, net 19,494,558 19,643,697
Other real estate 911,390 1,093,264
Accrued interest receivable 4,659,284 4,560,617
Other assets 11,498,632 10,626,947
------------ ------------
Total assets $726,831,321 $712,877,553
============ ============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 93,335,884 $102,424,607
Interest-bearing deposits:
Demand and money market 136,287,112 128,053,878
Savings 24,898,228 21,867,183
Time deposits, $100,000 and over 106,618,581 107,599,557
Other time deposits 259,066,654 261,318,402
------------ ------------
Total deposits 620,206,459 621,263,627
Federal Home Loan Bank borrowings 15,000,000
Other short-term borrowings 15,306,356 16,515,867
Long-term debt 15,650,000 15,650,000
Accrued interest payable 2,960,436 3,189,129
Other liabilities 2,588,298 1,703,450
------------ ------------
Total liabilities 671,711,549 658,322,073
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value. Authorized 10,000,000; issued
and outstanding 984,000 shares of Non-Cumulative 8%
Convertible Preferred Stock-Series A, stated value $6.25 6,150,000 6,150,000
Common Stock, no par value. Authorized 50,000,000; issued
8,151,549 and 8,144,958; outstanding 8,140,457 and 8,133,866
in 1999 and 1998, respectively 35,177,978 35,124,941
Treasury stock (69,325) (69,325)
Net unrealized (losses) gains on investment securities available-for-
sale, net of tax (32,236) 75,968
Retained earnings 13,893,355 13,273,896
------------ ------------
Total shareholders' equity 55,119,772 54,555,480
------------ ------------
Total liabilities and shareholders' equity $726,831,321 $712,877,553
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE> 4
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
1999 1998
----------------- ---------------
INTEREST INCOME
<S> <C> <C>
Loans, including fees $14,463,400 $13,267,406
Investment securities 1,124,771 1,801,114
Federal funds sold 234,036 353,224
Deposits with other banks 16,995 8,276
----------- -----------
Total interest income 15,839,202 15,430,020
INTEREST EXPENSE
Deposits 6,329,005 6,066,545
Short-term borrowings 228,189 148,848
Long-term debt 357,359 361,484
----------- -----------
Total interest expense 6,914,553 6,576,877
----------- -----------
NET INTEREST INCOME 8,924,649 8,853,143
Provision for loan losses 1,700,000 1,900,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,224,649 6,953,143
NONINTEREST INCOME
Service charges on deposit accounts 661,426 559,224
Credit card fees 815,878 716,164
Mortgage banking activities 873,385 826,308
Brokerage activities 810,090 801,507
Indirect lending activities 907,166 722,247
Trust activities 363,500 256,500
Other 319,087 210,277
----------- -----------
Total noninterest income 4,750,532 4,092,227
NONINTEREST EXPENSE
Salaries and employee benefits 4,821,749 4,200,868
Furniture and equipment 734,338 606,105
Net occupancy 803,567 817,004
Credit card processing and transaction fees 661,078 751,144
Communication expenses 545,831 484,820
Professional and other services 724,891 532,848
Regulatory assessments 114,947 385,678
Amortization of mortgage servicing rights 176,448 267,468
Other 1,712,825 1,319,685
----------- -----------
Total noninterest expense 10,295,674 9,365,620
----------- -----------
Income before income taxes 1,679,507 1,679,750
Income tax expense 611,509 614,625
----------- -----------
NET INCOME $ 1,067,998 $ 1,065,125
=========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 944,998 $ 942,125
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.12 $ 0.12
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,137,391 8,116,129
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,067,998 $ 1,065,125
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 1,700,000 1,900,000
Depreciation and amortization of premises and equipment 640,156 513,617
Amortization of mortgage servicing rights 176,448 267,468
Additions of originated mortgage servicing rights (271,207) (246,752)
Gain on loan sales (362,034) (272,004)
Proceeds from sale of other real estate 178,542 415,730
Net decrease (increase) in loans held-for-sale 4,499,905 (13,821,613)
Net increase in accrued interest receivable (98,667) (662,607)
Net decrease in accrued interest payable (228,693) (144,036)
Net (increase) decrease in other assets (871,685) 103,028
Net increase in other liabilities 884,848 877,252
Other (21,711) 16,762
------------ ------------
Net cash flows provided by (used in) operating activities 7,293,900 (9,988,030)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (10,154,596) (586,950)
Maturities of investment securities held-to-maturity 1,393,270 499,399
Purchases of investment securities available-for-sale (26,198,200) (20,000,000)
Maturities of investment securities available-for-sale 27,495,110 37,939,790
Net increase in loans (92,178,831) (22,969,618)
Purchases of premises and equipment (491,017) (134,673)
Proceeds from sale of loans 66,604,015 21,366,991
------------ ------------
Net cash flows (used in) provided by investing activities (33,530,249) 16,114,939
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease (increase) in demand deposits,
money market accounts, and savings accounts 2,175,556 (4,741,653)
Net decrease in time deposits (3,232,724) (11,895,609)
Increase in short-term borrowings 13,790,489 4,723,953
Dividends paid (436,941) (123,000)
Proceeds from the issuance of Common Stock 53,037 26,054
------------ ------------
Net cash flows provided by (used in) financing activities 12,349,417 (12,010,255)
------------ ------------
Net decrease in cash and cash equivalents (13,886,932) (5,883,346)
Cash and cash equivalents, beginning of period 79,929,926 69,261,541
============ ============
Cash and cash equivalents, end of period $ 66,042,994 $ 63,378,195
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,143,246 $ 7,030,843
============ ============
Income taxes $ -- $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements of Fidelity
National Corporation and subsidiaries ("Fidelity") 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 period ended March 31, 1999,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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, 1998.
Note B - Shareholders' Equity
Fidelity's wholly owned subsidiary Fidelity National Bank ("the Bank") is a
national banking association. It is subject to Federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System ("the FRB") and to banks whose deposits
are insured by the Federal Deposit Insurance Corporation ("the FDIC").
Fidelity and the Bank are principally regulated by the FRB and the Office of
the Comptroller of the Currency ("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 Board of Governors of the FRB is the principal regulator of Fidelity
National Corporation, a bank holding company. The FRB and the OCC have
established capital requirements as a function of their oversight of bank
holding companies and nationally chartered banks. Each bank holding company and
the Bank must maintain the minimum capital ratios set forth in "Liquidity and
Sources of Capital". At March 31, 1999, and December 31, 1998, Fidelity
National Corporation and the Bank exceeded the minimum capital requirements.
Fidelity's Board of Directors on February 13, 1997, adopted a resolution
requested by the Federal Reserve Bank of Atlanta ("FRB Agreement"). The FRB
Agreement, among other things, prohibits Fidelity from redeeming its capital
stocks, paying dividends on common stock or incurring debt without prior
approval of the FRB. The FRB agreement continues until canceled by the FRB.
During the period ended March 31, 1999, Fidelity declared and paid dividends on
its common stock of $.04 per share totaling approximately $326,000 and on its
Non-Cumulative 8% Convertible Preferred Stock, Series A, Stated Value $6.25 per
share ("Preferred Stock") totaling $123,000.
Note C - Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes new accounting and reporting activities for
derivatives. The standard requires all derivatives to be measured
4
<PAGE> 7
at fair value and recognized as either assets or liabilities in the statement
of condition. Under certain conditions, a derivative may be specifically
designated as a hedge. Accounting for the changes in fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Adoption of the standard is required for Fidelity's December 31, 2000,
financial statements with early adoption allowed as of the beginning of any
quarter after June 30, 1998. Adoption is not expected to result in a material
financial impact based on Fidelity's limited use of derivatives.
Note D - Comprehensive Income
Fidelity's only comprehensive income items are related to unrealized gains and
losses on investment securities classified as available-for-sale and
reclassification adjustments for gains on securities sales and calls included
in net income. All comprehensive income items are tax effected at a rate of
38%. During the first quarter of 1999 and 1998, total comprehensive income
amounted to $948,138 and $1,069,802, respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis reviews important factors affecting Fidelity's financial
condition at March 31, 1999, compared to December 31, 1998, and the results of
operations for the three month period ended March 31, 1999. These comments
should be read in conjunction with Fidelity's consolidated financial
statements and accompanying notes appearing in this report.
ASSETS
Total assets were $727 million at March 31, 1999, and $713 million at December
31, 1998, an increase of $14 million, or 2.0%. Loans, net of unearned income
increased $24 million or 4.7% to $520 million, and loans held-for-sale
decreased $5 million or 11.3% to $35 million at March 31, 1999. The increase in
total loans was primarily a result of the growth in commercial loans of $9
million or 8.3% to $112 million, the growth in construction loans of $4 million
or 6.6% to $67 million, the growth in consumer loans of $10 million or 5.3% to
$190 million and a $5 million increase in mortgage loans to $50 million, offset
in part by a decline of $5 million in credit card loans to $99 million and the
$5 million decrease in loans held-for-sale.
The following schedule summarizes Fidelity's total loans at March 31, 1999,
and December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Total Loans
Loans, net of unearned income $ 519,779 $ 496,221
Loans held-for-sale:
Mortgage loans 3,755 9,655
Indirect auto loans 31,400 30,000
----------- ------------
Total loans held-for-sale 35,155 39,655
----------- ------------
Total loans $ 554,934 $ 535,876
=========== ============
</TABLE>
5
<PAGE> 8
ASSET QUALITY
The following schedule summarizes Fidelity 's asset quality position at March
31, 1999, and December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Nonperforming assets:
Nonaccrual loans $ 1,663 $ 1,848
Other real estate owned 913 1,093
============ ============
Total nonperforming assets $ 2,576 $ 2,941
============ ============
Loans 90 days past due and still accruing $ 3,685 $ 4,393
============ ============
Allowance for loan losses $ 11,232 $ 11,911
============ ============
Ratio of past due loans to loans .66% .82%
============ ============
Ratio of nonperforming assets to loans
and other real estate owned .46% .55%
============ ============
Allowance to period-end loans 2.16% 2.40%
============ ============
Allowance to nonperforming loans
(coverage ratio) 6.75x 6.45x
============ ============
</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 March 31, 1999, were $620 million compared to $621 million at
December 31, 1998, a 0.2% decrease. During this period, total liabilities
increased $13 million, or 2.0%, to $672 million due primarily to $15 million in
Federal Home Loan Bank ("FHLB") borrowings. The decrease in deposits occurred
principally in noninterest-bearing demand deposits, which decreased $9 million,
or 8.9%, offset by an increase in interest-bearing demand and money market
balances of $8 million or 6.4% to $136 million and an increase in savings
deposits of $3 million or 13.9% to $25 million. There were no brokered deposits
at March 31, 1999, or December 31, 1998.
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; a collateralized line of credit from the
FHLB; secured borrowings; borrowings under unsecured overnight
6
<PAGE> 9
Federal funds lines available from correspondent banks; and, a collateralized
line of credit at the Federal Reserve Bank Discount Window. During the first
three months of 1999, the Bank sold $67 million in newly originated and
held-for-sale indirect automobile loans compared to the sale of $21 million in
the first quarter of 1998. 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 million at March 31, 1999, and December 31, 1998.
Shareholders' equity as a percent of total assets was 7.6% at March 31, 1999,
compared to 7.7% at December 31, 1998.
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 Bank has unused sources of liquidity in the form of unused Federal funds
lines totaling $20 million, unpledged securities and money market assets of $14
million, a secured line of $15 million with a bank and FHLB and FRB lines of
credit, subject to available qualifying collateral, at March 31, 1999.
At March 31, 1999, and December 31, 1998, the Bank exceeded all capital ratios
required by the OCC to be considered well capitalized as reflected in the
following schedule:
<TABLE>
<CAPTION>
OCC Bank Ratios
--------------------------------- -----------------------------------
Adequately Well March 31, December 31,
Capital Ratios: Capitalized Capitalized 1999 1998
- --------------- --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 7.24% 7.10%
Risk-Based Capital
Tier I 4.00 6.00 8.79 8.68
Total 8.00 10.00 11.75 11.65
</TABLE>
At March 31, 1999, and December 31, 1998, Fidelity exceeded all capital ratios
required by the FRB to be considered well capitalized, as reflected in the
schedule below:
<TABLE>
<CAPTION>
FRB Fidelity Ratios
--------------------------------- -----------------------------------
Adequately Well March 31, December 31,
Capital Ratios: Capitalized Capitalized 1999 1998
- --------------- --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 7.67% 7.57%
Risk-Based Capital
Tier I 4.00 6.00 9.31 9.25
Total 8.00 10.00 13.15 13.14
</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 Fidelity's Statement of
Condition at March 31, 1999, reflects a net interest sensitivity liability gap
of 10.90% when projecting forward one year. In the near term, defined as 90
days, Fidelity has a net interest sensitivity asset gap of 16.53%. When
projecting forward six months, Fidelity has a net interest sensitivity asset
gap of 2.38%. 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.
7
<PAGE> 10
At March 31, 1999, the 31-60 day asset maturity/repricing total includes $31.4
million of indirect automobile loans classified as held-for-sale. By selling
these loans, Fidelity becomes less interest sensitive in the one year time
horizon. Fidelity's policy states that the cumulative gap at the six month and
one year period should not exceed 10% and 15%, respectively. Any interest rate
risk associated with the cumulative gap positions noted above was mitigated
because of the net interest sensitivity asset gap in the near term and the net
interest sensitivity liability gap at one year.
RISK EXPOSURE
Fidelity's primary risk exposures are interest rate risk and credit risk and,
to a lesser extent, liquidity risk. Over the next nine months, an additional
primary risk exposure is that which is associated with the Year 2000 ("Y2K")
issues discussed below. This risk exposure is related to computer operations
and automated information systems and controls. Fidelity has little or no risk
related to trading accounts, commodities or foreign exchange. Interest rate
risk is the exposure of a banking organization's financial condition and
earnings ability to adverse movements in interest rates. Fidelity 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 Fidelity 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 Fidelity's net present value or operating
results over a one year period.
The 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 affect any computer hardware or software, or computerized
environmental system (including elevators, security systems, vault doors, etc.)
Certain computer software could be affected by other upcoming dates. For
example, September 9, 1999, could affect software which recognizes 99 or 999 as
a command to void or cease certain operations.
Financial institutions are highly automated and computerized applications are
critical to their operations and controls. The financial regulators, including
the Federal Financial Institutions Examination Council ("FFIEC") are acutely
aware of the potential problems associated with Y2K and the effects they could
have on individual financial institutions and, indeed, on the entire financial
system. The FFIEC has issued numerous recommended and mandatory guidelines and
timetables which financial institutions must meet in order to assure that all
Y2K issues are timely addressed and resolved. The FFIEC has mandated that the
primary regulator of each financial institution will conduct quarterly reviews
to assess the progress made in identifying and rectifying any and all issues
related to the Y2K problem.
The operating systems and the large majority of application systems used by
Fidelity are products of established national vendors which provide software
and services to numerous users. Fidelity is primarily utilizing the services of
consultants dedicated to working with the Fidelity's data processing staff to
conduct its Y2K program. The Y2K program consists of a five-phase methodology
employed throughout the organization and addresses all automated processes.
This methodology includes awareness, assessment, renovation, validation and
implementation.
Fidelity has identified approximately 80 different programs or applications
which must be processed through the above five-phase methodology, 10 of which
have been identified as mission-critical, or essential to the daily operations
of Fidelity. All of these mission-critical programs or applications were
certified as complete and Y2K compliant no later than the target dates
established by the FFIEC. The
8
<PAGE> 11
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, Fidelity is assessing any potentially material Y2K risks
associated with customers, suppliers, correspondents and counterparties and is
conducting inquiries, tests, evaluations and other due diligence procedures to
mitigate or eliminate these risks as deemed appropriate. No single customer,
supplier, correspondent or counterparty is considered to be critical to the
business of Fidelity. Legal documents and contracts such as those for new
loans, for equipment purchases, for service providers, etc. are being evaluated
and modified on an on-going basis as appropriate to mitigate any Y2K risks.
Fidelity is also developing contingency plans for its mission-critical systems
if Y2K renovations do not occur timely. Additionally, Fidelity has developed a
contingency liquidity plan should concerns about Y2K issues cause some
customers to deviate from normal banking behaviors. Finally, a detailed plan is
being developed for the week preceding and the week following December 31,
1999, which will detail contingency and back-up procedures to address any
possible internal or external problems resulting from Y2K.
Procedures are in place to assure that all systems certified as Y2K compliant
remain compliant, that any new or revised systems or software is tested for Y2K
compliance before purchase or implementation, that customers, suppliers,
correspondents or counterparties identified as having a possible material
impact on Fidelity as a result of potential Y2K problems are monitored on a
periodic basis to identify any changes in their Y2K risks profiles, and that
all new customers, suppliers, correspondents or counterparties are evaluated
for potential Y2K risks.
Fidelity incurred expenses of approximately $816,000 and $239,000 related to
Y2K issues for the year ended December 31, 1998, and the quarter ended March
31, 1999, respectively, primarily consisting of consulting fees. It is
anticipated that the total expenses associated with the Y2K project during 1998
and 1999 will be approximately $1.4 million. In addition, approximately
$170,000 was expended during 1998 for hardware, software and software upgrades
which are Y2K compliant. These expenditures provided operating enhancements or
operating efficiencies and would have been made during 1998 or 1999
irrespective of the Y2K compliance issue.
Fidelity believes that it is taking all necessary actions to mitigate Y2K
technology issues and that the probability of significant Y2K problems in 1999
and thereafter is low. However, the occurrence of significant Y2K problems
could result in material operating and legal expenses, material disruption of
the operations of Fidelity and/or its customers and suppliers, material
liquidity problems and/or material charge-offs, which amounts cannot be
quantified.
EARNINGS
Net income for the quarter ended March 31, 1999, was $1,068,000 compared to net
income of $1,065,000 for the comparable quarter of 1998, an increase of 0.3%.
Basic and diluted earnings were $.12 per share for the first quarter of 1999
and 1998.
NET INTEREST INCOME
Net interest income for the first quarter of 1999 and 1998 was $8.9 million. An
87 basis point decline in the yield on average interest-earning assets for the
first quarter of 1999 compared to the same period in 1998 was more than offset
by the $70.2 million increase in average interest-earning assets in the first
quarter of 1999 over the comparable period in 1998, resulting in an increase in
total interest income of $409,000 in the first quarter of 1999 compared to the
same period in 1998.
The components of the $70.2 million increase in interest-earning assets were an
increase of $112.5 million in average loan balances, offset in part by a
decline of $42.4 million in average investment securities and other short-term
interest-earning asset balances. A 150 basis point decline in the yield on
average loan balances was due to a decline in average balances outstanding in
high yielding credit cards,
9
<PAGE> 12
a lower interest rate environment in general, the actions of the Board of
Governors of the Federal Reserve System in the last quarter of 1998 resulting
in a cumulative 75 basis point decline in the prime rate, and competition from
other lenders.
Average interest-bearing liabilities increased $53.6 million, offset in part by
a 26 basis point decline in the cost of average interest-bearing liabilities,
resulting in an increase of $338,000 in total interest expense in the first
quarter of 1999 compared to the same period in 1998.
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 quarter of
1999 was $1.7 million, compared to $1.9 million for the comparable period in
1998. The reduction in the provision for the first quarter of 1999 was a result
of the significant improvement in the current aggregate amount of credit card
delinquencies and net charge-offs due to initiatives put in place to improve
asset quality. Net charge-offs to average loans on an annualized basis for the
three months ended March 31, 1999, were 1.86% compared to 3.05% for the same
period in 1998.
The following schedule summarizes changes in the allowance for loan losses for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31 Year Ended
--------------------------- December 31
1999 1998 1998
------- ------- -----------
<S> <C> <C> <C>
Balance at beginning of period $11,911 $14,320 $14,320
Charge-offs:
Commercial, financing and agricultural -- 13 28
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 652 692 2,444
Credit cards 2,166 3,167 12,092
------- ------- -------
Total charge-offs 2,818 3,872 14,564
------- ------- -------
Recoveries:
Commercial, financial and agricultural 1 2 29
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 53 79 321
Credit cards 385 509 2,355
------- ------- -------
Total recoveries 439 590 2,705
------- ------- -------
Net charge-offs 2,379 3,282 11,859
Provision for loan losses 1,700 1,900 9,450
------- ------- -------
Balance at end of period $11,232 $12,938 $11,911
======= ======= =======
</TABLE>
NONINTEREST INCOME
Noninterest income for the first quarter of 1999 increased $658,000 to $4.8
million, or 16.1% over the same period in 1998.
10
<PAGE> 13
Service charges on deposit accounts increased $102,000 to $661,000 during the
first quarter of 1999 when compared to the same period last year due to deposit
growth and adjustments to fees. Credit card fees increased $100,000 to $816,000
during the three months ended March 31, 1999, compared to the same three months
last year, due primarily to growth in merchant banking fees.
Income from indirect lending activities increased $185,000 to $907,000 in the
first quarter of 1999 compared to the same period in 1998 because of gains on
sales of indirect automobile loans with the servicing of the loans retained and
from servicing fees and ancillary income on indirect automobile loans serviced
for others.
Income from trust activities increased $107,000 to $364,000 in the first
quarter of 1999 compared to the similar period in 1998 primarily as a result of
adjusting fees charged for trust services provided.
Other income increased $109,000 to $319,000 in the first quarter of 1999
compared to the first quarter of 1998 primarily because of growth in fee-based
income such as automated teller machine fees.
NONINTEREST EXPENSE
Noninterest expense totaled $10.3 million for the three months ended March 31,
1999 compared to $9.4 million for the same period in 1998, a 9.9% increase.
Salaries and benefit expenses increased $621,000 in the first three months of
1999 to $4.8 million compared to the same period in 1998. The number of
full-time equivalent employees increased to 432 as of March 31, 1999, from 382
at March 31, 1998. The increase in salary and benefit expenses was directly
related to the increase in full-time equivalent employees and was the result of
the addition of three branches in mid-1998, substantial growth in lending
volumes and balances in all lending portfolios other than credit cards , growth
in mortgage banking activities and general corporate growth.
Furniture and equipment expenses increased $128,000 to $734,000 in the first
quarter of 1999 compared to the same period in 1998, primarily as a result of
the addition of three new branches in mid-1998, the purchase of equipment and
software to provide new and/or enhanced services and purchases of furniture and
equipment to support staffing additions.
Professional and other services increased $192,000 to $725,000 in the three
months ending March 31, 1999 compared to the same three months in 1998, due to
the cost of Y2K review, testing and compliance certification of operational and
financial software and automated systems. Fidelity completed the testing and
rectification, where necessary, of all mission critical systems in the first
quarter of 1999. Based on current projections, management does not anticipate
that the remaining costs to address the Y2K issues will have a material adverse
impact on Fidelity's financial condition, results of operations, or liquidity.
FDIC insurance and other regulatory assessments decreased $271,000 to $115,000
in the first quarter of 1999 compared to the same period in 1998 as a result of
Fidelity's improvements in capital ratios and other regulatory rating factors
impacting assessment charges.
PROVISION FOR INCOME TAXES
The provision for income taxes for the first quarter of 1999 was $612,000
compared to $615,000 for the same period in 1998. These changes were due to
changes in taxable income.
FORWARD-LOOKING STATEMENTS
This discussion and analysis contains certain forward-looking statements
including statements relating to present or future trends or factors generally
affecting the banking industry and specifically affecting Fidelity's
operations, markets and products. Without limiting the foregoing, the words
"believes," "anticipates," "intends," "expects" or similar expressions are
intended to identify forward-looking
11
<PAGE> 14
statements. These forward-looking statements involve certain risks and
uncertainties. Actual results could differ materially from those projected for
many reasons, including, without limitation, changing events and trends that
have influenced Fidelity's assumptions. These trends and events include (i)
changes in the interest rate environment which may reduce margins, (ii)
non-achievement of expected growth, (iii) less favorable than anticipated
changes in the national and local business environment and securities markets,
(iv) adverse changes in the regulatory requirements affecting Fidelity, (v)
greater competitive pressures among financial institutions in Fidelity's
market, (vi) delay and/or increased costs in achieving Y2K compliance, and
(vii) greater than anticipated credit losses. Additional information and other
factors that could affect future financial results are included in Fidelity's
filings with the Securities and Exchange Commission, including the Annual
Report to Stockholders on Form 10-K for 1998.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 27. Financial Data Schedule (For SEC use only).
(B) Current Report on Form 8-K; filed on January 29, 1999; ITEM 5. Other
Events. Fidelity reported the issuance of a press release announcing its 1998
Fourth Quarter Year-End results and a Fourth Quarter 1997 restatement of
earnings.
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: May 11, 1999 BY: /s/ James B. Miller, Jr.
---------------------------------
James B. Miller, Jr.
Chief Executive Officer
Date: May 11, 1999 BY: /s/ M. Howard Griffith, Jr.
---------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 31,730,180
<INT-BEARING-DEPOSITS> 1,266,154
<FED-FUNDS-SOLD> 33,046,660
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,107,960
<INVESTMENTS-CARRYING> 38,413,993
<INVESTMENTS-MARKET> 38,361,980
<LOANS> 554,934,066
<ALLOWANCE> 11,231,556
<TOTAL-ASSETS> 726,831,321
<DEPOSITS> 620,206,459
<SHORT-TERM> 30,306,356
<LIABILITIES-OTHER> 5,548,734
<LONG-TERM> 15,650,000
0
6,150,000
<COMMON> 35,177,978
<OTHER-SE> 13,791,794
<TOTAL-LIABILITIES-AND-EQUITY> 726,831,321
<INTEREST-LOAN> 14,463,400
<INTEREST-INVEST> 1,124,771
<INTEREST-OTHER> 251,031
<INTEREST-TOTAL> 15,839,202
<INTEREST-DEPOSIT> 6,329,005
<INTEREST-EXPENSE> 6,914,553
<INTEREST-INCOME-NET> 8,924,649
<LOAN-LOSSES> 1,700,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,295,674
<INCOME-PRETAX> 1,679,507
<INCOME-PRE-EXTRAORDINARY> 1,067,998
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,067,998
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<YIELD-ACTUAL> 9.68
<LOANS-NON> 1,663,403
<LOANS-PAST> 3,685,090
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,910,601
<CHARGE-OFFS> 2,818,059
<RECOVERIES> 439,014
<ALLOWANCE-CLOSE> 1,700,000
<ALLOWANCE-DOMESTIC> 11,231,556
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
