<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, 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 (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 July 31, 1999
-------------------------- -----------------------------------
Common Stock, no par value 8,152,288
<PAGE> 2
FIDELITY NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
-------------
<S> <C> <C> <C>
Part I. Financial Information
Item l. Financial Statements
Consolidated Statements of Condition June 30, 1999,
(unaudited) and December 31, 1998 1
Consolidated Statements of Income (unaudited)
Three Months Ended June 30, 1999 and 1998, and
Six Months Ended June 30, 1999 and 1998 2
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1999 and 1998 3
Notes to Consolidated Financial Statements (unaudited) 4-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5-13
Part II. Other Information 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 8-9 (included in Part I Item 2) 8-9
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)
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 39,041,934 $ 32,726,501
Interest-bearing deposits with banks 1,029,317 1,417,679
Federal funds sold 23,971,966 45,785,746
Investment securities available-for-sale 47,232,280 43,404,870
Investment securities held-to-maturity (approximate fair value of
$36,341,230 and $29,755,873 at June 30, 1999, and December
31, 1998, respectively) 37,143,051 29,652,667
Loans held-for-sale 44,129,569 39,655,259
Loans 559,234,655 496,220,907
Allowance for loan losses (11,453,042) (11,910,601)
------------- -------------
Loans, net 547,781,613 484,310,306
Premises and equipment, net 19,005,723 19,643,697
Other real estate 908,690 1,093,264
Accrued interest receivable 5,404,730 4,560,617
Other assets 17,931,376 10,626,947
------------- -------------
Total assets $ 783,580,249 $ 712,877,553
============= =============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 104,034,224 $ 102,424,607
Interest-bearing deposits:
Demand and money market 127,958,274 128,053,878
Savings 28,854,010 21,867,183
Time deposits, $100,000 and over 132,746,331 107,599,557
Other time deposits 269,801,325 261,318,402
------------- -------------
Total deposits 663,394,164 621,263,627
Federal Home Loan Bank short-term borrowings 20,000,000 --
Other short-term borrowings 10,372,599 16,515,867
Long-term debt 29,650,000 15,650,000
Accrued interest payable 2,968,592 3,189,129
Other liabilities 2,518,003 1,703,450
------------- -------------
Total liabilities 728,903,358 658,322,073
------------- -------------
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
8,162,332 and 8,144,958; outstanding 8,151,240 and 8,133,866
in 1999 and 1998, respectively 35,271,114 35,124,941
Treasury stock (69,325) (69,325)
Accumulated other comprehensive (loss) income (897,032) 75,968
Retained earnings 14,222,134 13,273,896
------------- -------------
Total shareholders' equity 54,676,891 54,555,480
------------- -------------
Total liabilities and shareholders' equity $ 783,580,249 $ 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>
Six Months Ended June 30, Three Months Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $29,218,998 $26,692,699 $14,755,598 $13,425,293
Investment securities 2,445,821 3,555,911 1,321,050 1,754,797
Federal funds sold 385,499 633,849 151,463 280,625
Deposits with other banks 30,795 12,253 13,800 3,977
----------- ----------- ----------- -----------
Total interest income 32,081,113 30,894,712 16,241,911 15,464,692
INTEREST EXPENSE
Deposits 12,561,367 12,132,796 6,232,362 6,066,251
Short-term borrowings 655,457 327,346 427,268 178,498
Long-term debt 878,270 722,971 520,911 361,487
----------- ----------- ----------- -----------
Total interest expense 14,095,094 13,183,113 7,180,541 6,606,236
----------- ----------- ----------- -----------
NET INTEREST INCOME 17,986,019 17,711,599 9,061,370 8,858,456
Provision for loan losses 3,800,000 4,750,000 2,100,000 2,850,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 14,186,019 12,961,599 6,961,370 6,008,456
NONINTEREST INCOME
Service charges on deposit accounts 1,364,204 1,117,670 702,778 558,446
Credit card fees 1,772,090 1,557,772 956,212 841,608
Mortgage banking activities 1,581,822 1,743,187 708,437 916,879
Brokerage activities 1,540,993 1,656,558 730,903 855,051
Indirect lending activities 1,795,247 1,613,291 876,107 891,044
Trust activities 888,307 513,000 524,807 256,500
Other 709,572 1,184,455 402,459 974,178
----------- ----------- ----------- -----------
Total noninterest income 9,652,235 9,385,933 4,901,703 5,293,706
NONINTEREST EXPENSE
Salaries and employee benefits 9,612,625 8,566,298 4,790,876 4,365,430
Furniture and equipment 1,535,108 1,256,789 800,770 650,684
Net occupancy 1,649,799 1,652,333 846,232 835,329
Credit card processing and transaction fees 1,598,156 1,515,313 937,078 764,169
Communication expenses 1,139,274 995,922 593,443 511,103
Professional and other services 1,471,493 1,131,346 746,602 598,498
Regulatory assessments 222,329 784,883 107,382 399,205
Amortization of mortgage servicing rights 370,753 476,558 194,305 209,090
Other 3,362,528 2,549,376 1,649,703 1,229,690
----------- ----------- ----------- -----------
Total noninterest expense 20,962,065 18,928,818 10,666,391 9,563,198
----------- ----------- ----------- -----------
Income before income taxes 2,876,189 3,418,714 1,196,682 1,738,964
Income tax expense 1,030,419 1,237,410 418,910 622,785
----------- ----------- ----------- -----------
NET INCOME $ 1,845,770 $ 2,181,304 $ 777,772 $ 1,116,179
=========== =========== =========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 1,599,770 $ 1,935,304 $ 654,772 $ 993,179
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.20 $ 0.24 $ 0.08 $ 0.12
=========== =========== =========== ===========
DIVIDENDS DECLARED PER SHARE $ 0.08 $ -- $ 0.04 $ --
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,142,172 8,117,133 8,146,900 8,118,126
=========== =========== =========== ===========
</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,
----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,845,770 $ 2,181,304
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 3,800,000 4,750,000
Depreciation and amortization of premises and equipment 1,320,475 1,041,050
Amortization of mortgage servicing rights 370,753 476,558
Additions of originated mortgage servicing rights (384,118) (564,612)
Gain on loan sales (652,740) (684,994)
Proceeds from sale of other real estate 234,839 415,730
Net increase in loans held-for-sale (4,474,310) (26,521,066)
Net increase in accrued interest receivable (844,113) (400,407)
Net (decrease) increase in accrued interest payable (220,537) 128,302
Net (increase) decrease in other assets (7,304,429) 64,324
Net increase (decrease) in other liabilities 814,553 (323,129)
Other 609,724 92,660
------------- -------------
Net cash flows used in operating activities (4,884,133) (19,344,280)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (10,154,596) (586,950)
Maturities of investment securities held-to-maturity 2,664,212 1,280,876
Purchases of investment securities available-for-sale (36,169,524) (20,000,000)
Maturities of investment securities available-for-sale 30,772,755 51,590,520
Net increase in loans (186,590,212) (112,727,711)
Purchases of premises and equipment (682,501) (493,788)
Proceeds from sale of loans 119,921,380 92,947,702
------------- -------------
Net cash flows (used in) provided by investing activities (80,238,486) 12,010,649
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits,
money market accounts, and savings accounts 8,500,840 12,086,858
Net increase (decrease) in time deposits 33,629,697 (3,680,765)
Net increase (decrease) in short-term borrowings 13,856,732 (1,908,717)
Net increase (decrease) in long-term borrowings 14,000,000 (150,000)
Dividends paid (897,532) (246,000)
Proceeds from the issuance of common stock 146,173 51,021
------------- -------------
Net cash flows provided by financing activities 69,235,910 6,152,397
------------- -------------
Net decrease in cash and cash equivalents (15,886,709) (1,181,234)
Cash and cash equivalents, beginning of period 79,929,926 69,261,541
------------- -------------
Cash and cash equivalents, end of period $ 64,043,217 $ 68,080,307
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14,315,631 $ 13,364,741
============= =============
Income taxes $ 400,000 $ 900,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 and six month periods ended June 30, 1999,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. These statements and the related "Management's
Discussion and Analysis of Financial Condition and Results of Operations" should
be read in conjunction with the consolidated financial statements and notes
thereto included in Fidelity'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. The Bank 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 June 30, 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 June 30, 1999, Fidelity declared and paid dividends on
its common stock of $.08 per share totaling approximately $652,000 and 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
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
4
<PAGE> 7
accounting and reporting activities for derivatives. The standard requires all
derivatives to be measured 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. In June of 1999, the Financial Accounting Standards
Board elected to defer the effective date of this standard. Adoption of the
standard is required for Fidelity's December 31, 2001, financial statements with
early adoption allowed as of the beginning of any quarter after June 30, 1999.
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 second quarter total comprehensive loss was $89,530 and for the six
month period ended June 30, 1999, total comprehensive income was $858,608. Total
comprehensive income was $1,082,167 and $2,151,969, respectively, for the
comparable periods of 1998.
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 June 30, 1999, compared to December 31, 1998, and the results of
operations for the three and six month periods ended June 30, 1999, compared to
the same periods of 1998. These comments should be read in conjunction with
Fidelity 's consolidated financial statements and accompanying notes appearing
in this report and in conjunction with the consolidated financial statements and
notes thereto included in Fidelity's Annual Report on Form 10-K for the year
ended December 31, 1998.
ASSETS
Total assets were $784 million at June 30, 1999, and $713 million at December
31, 1998, an increase of $71 million, or 9.9%. Loans increased $63 million or
12.7% to $559 million, and loans held-for-sale increased $4 million or 11.3% to
$44 million at June 30, 1999. The increase in total loans was primarily a result
of the growth in commercial loans of $16 million or 15.1% to $119 million, the
growth in construction loans of $11 million or 17.5% to $74 million, the growth
in consumer loans of $34 million or 18.5% to $213 million and a $10 million
increase in mortgage loans to $55 million, offset in part by a decline of $8
million in credit card loans to $96 million.
The following schedule summarizes Fidelity 's total loans at June 30, 1999, and
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
TOTAL LOANS:
Loans $559,235 $496,221
Loans held-for-sale:
Mortgage loans 5,630 9,655
Indirect auto loans 38,500 30,000
-------- --------
Total loans held-for-sale 44,130 39,655
-------- --------
Total loans $603,365 $535,876
======== ========
</TABLE>
During the quarter ended June 30, 1999, Fidelity invested in company owned life
insurance policies on certain key members of management, resulting in a $7
million increase in other assets.
5
<PAGE> 8
ASSET QUALITY
The following schedule summarizes Fidelity's asset quality position at June 30,
1999, and December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- -------
<S> <C> <C>
Nonperforming assets:
Nonaccrual loans $ 3,961 $ 1,848
Other real estate owned 909 1,093
------- -------
Total nonperforming assets $ 4,870 $ 2,941
======= =======
Loans 90 days past due and still accruing $ 2,709 $ 4,393
======= =======
Allowance for loan losses $11,453 $11,911
======= =======
Ratio of past due loans to loans .45% .82%
======= =======
Ratio of nonperforming assets to loans
and other real estate owned .81% .55%
======= =======
Allowance to period-end loans 2.05% 2.40%
======= =======
Allowance to nonperforming loans
(coverage ratio) 2.89x 6.45x
======= =======
</TABLE>
The significant increase in nonaccrual loans is related to one credit
relationship discussed further in "Provision for Loan Losses". 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 June 30, 1999, were $663 million compared to $621 million at
December 31, 1998, a 6.8% increase. During this period, total liabilities
increased $71 million, or 10.7%, to $729 million due primarily to $20 and $14
million in Federal Home Loan Bank ("FHLB") short-term and long-term borrowings,
respectively, offset in part by a decline of $6 million in other short-term
borrowings. The increase in deposits occurred in noninterest-bearing demand
deposits, which increased $2 million, or 1.6%; savings, which increased $7
million or 32.0%; and, time deposits, $100,000 and over, and other time
deposits, which increased $25 million and $8 million, respectively, or 23.4% and
3.3%, respectively. There were no brokered deposits at June 30, 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 on a timely basis. Management measures the Bank's liquidity
position by giving consideration to both on and off-balance sheet sources of and
demands for funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities; investment
securities eligible for sale or pledging to secure borrowings from dealers and
customers pursuant to securities sold under agreements to repurchase
("repurchase
6
<PAGE> 9
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 Federal funds lines available
from correspondent banks; and, a collateralized line of credit at the Federal
Reserve Bank Discount Window. During the first six months of 1999, the Bank sold
$120 million in newly originated and held-for-sale indirect automobile loans
compared to the sale of $93 million in the first half 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 June 30, 1999, and December 31, 1998.
Shareholders' equity as a percent of total assets was 7.0% at June 30, 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 $17
million, a secured line of $15 million with a bank and FHLB and FRB lines of
credit, subject to available qualifying collateral, at June 30, 1999.
At June 30, 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 June 30, December 31,
Capital Ratios: Capitalized Capitalized 1999 1998
- --------------- ----------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 7.02% 7.10%
Risk-Based Capital
Tier I 4.00 6.00 8.21 8.68
Total 8.00 10.00 11.03 11.65
</TABLE>
At June 30, 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 June 30, December 31,
Capital Ratios: Capitalized Capitalized 1999 1998
- --------------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 7.40% 7.57%
Risk-Based Capital
Tier I 4.00 6.00 8.65 9.25
Total 8.00 10.00 12.29 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 June 30, 1999, reflects a net interest sensitivity liability gap of 11.82%
when projecting forward one year. In the near term, defined as 90 days, Fidelity
has a net interest sensitivity asset gap of 15.26%. When projecting forward six
months, Fidelity has a net interest sensitivity asset gap of 0.80%. 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 June 30, 1999, the 31-60 day asset maturity and repricing total included
$38.5 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 six 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 has primarily utilized 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 large majority of the other programs or
applications are compliant and the remaining programs or
8
<PAGE> 11
applications, none of which are mission-critical, are in various stages of
completion. It is anticipated that these systems will be compliant by September
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 $364,000 related to Y2K
issues for the year ended December 31, 1998, and the six months ended June 30,
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 or liabilities, which amounts cannot be
quantified.
EARNINGS
Net income for the quarter ended June 30, 1999, was $777,772 compared to net
income of $1,116,179 for the comparable quarter of 1998, a decrease of 30.3%.
Basic and diluted earnings were $.08 per share for the second quarter of 1999,
compared to $.12 per share for the same period in 1998.
Fidelity's net income was $1,845,770 for the six months ended June 30, 1999,
compared to net income of $2,181,304, for the six months ended June 30, 1998, a
15.4% decrease. Basic and diluted earnings were $.20 per share for the first
half of 1999 compared to $.24 per share for the comparable period of 1998.
NET INTEREST INCOME
Net interest income for the second quarter of 1999 was $9.1 million compared to
$8.9 million for the same period in 1998. While the average balance of interest
earning assets increased $92.2 million to $686.2 million for the three months
ended June 30, 1999, when compared to the same period in 1998, the yield on
those assets declined 92 basis points to 9.49%. The yield on average loans
outstanding for the period declined 140 basis points to 10.11% when compared to
the same period in 1998 as a result of
9
<PAGE> 12
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. Partially mitigating the lower yields on average
loans outstanding was the $19.0 million decline in lower yielding average
investment securities during the second quarter of 1999 to $86.2 million when
compared to the same period in 1998.
The average balance of interest bearing liabilities increased $78.8 million
during the second quarter of 1999 to $586.4 million and the rate on these
average balances decreased 31 basis points to 4.91% when compared to the same
period in 1998.
Net interest income for the first six months of 1999 was $18.0 million compared
to $17.7 million for the same period in 1998. The average balance of interest
earning assets increased $80.1 million to $674.5 million for the six months
ended June 30, 1999; however, the yield on average interest earning assets
declined 89 basis points to 9.59% when compared to the same period in 1998.
Reductions in the credit card portfolio resulted in a decline in average
balances outstanding by $11.9 million to $100.2 million for the six month period
ended June 30, 1999, when compared to the same period in 1998, while the average
balances outstanding in total loans increased $114.7 million to $576.9 million
for the same period in 1999 compared to 1998.
The average balance of interest bearing liabilities increased $59.8 million to
$574.7 million during the six months ended June 30, 1999, while the rate on
these average balances declined 20 basis points to 4.95% when 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 half and
second quarter of 1999 was $3.8 million and $2.1 million, respectively, compared
to $4.8 million and $2.9 million, respectively, for the comparable periods in
1998. The reduction in the provision for the first half and the second quarter
of 1999 is primarily due to the continued improvement in the current aggregate
amount of credit card delinquencies and net charge-offs.
In late June 1999, a significant commercial customer unexpectedly filed for
bankruptcy. The loans related to this customer were placed on nonaccrual on June
30, 1999. These loans meet the definition of impaired loans and have a related
specific reserve of $1.2 million included as part of the allowance for credit
losses. Because of the potential loss exposure on this relationship, Fidelity
was unable to take full advantage of the improving charge-off and delinquency
trends in other parts of the loan portfolio, which would have supported an
otherwise lower provision for loan losses relative to prior periods. Fidelity's
second quarter allowance and provision process resulted in recording an $800,000
higher provision than expected due to the deterioration in this credit
relationship. Net charge-offs to average loans on an annualized basis for the
six months ended June 30, 1999, were 1.62% compared to 3.10% for the same period
in 1998.
10
<PAGE> 13
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,
----------------------- ------------
1999 1998 1998
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period $11,911 $14,320 $14,320
Charge-offs:
Commercial, financing and agricultural -- 22 28
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 1,232 1,262 2,444
Credit cards 3,971 6,890 12,092
------- ------- -------
Total charge-offs 5,203 8,174 14,564
------- ------- -------
Recoveries:
Commercial, financial and agricultural 1 4 29
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 149 148 321
Credit cards 795 1,218 2,355
------- ------- -------
Total recoveries 945 1,370 2,705
------- ------- -------
Net charge-offs 4,258 6,804 11,859
Provision for loan losses 3,800 4,750 9,450
------- ------- -------
Balance at end of period $11,453 $12,266 $11,911
======= ======= =======
</TABLE>
NONINTEREST INCOME
Noninterest income was $4.9 million for the second quarter of 1999 compared to
$5.3 million for the same period in 1998. For the six months ended June 30,
1999, noninterest income was $9.7 million compared to the $9.4 million for the
same period in 1998. A non-recurring gain of $654,000 and securities gains of
$93,000 were included in noninterest income for the three and six month periods
ended June 30, 1998. Excluding the non-recurring gain and securities gains in
the first half of 1998, noninterest income for the second quarter and the first
half of 1999 rose $400,000 and $1.0 million or 7.8% and 11.7%, respectively,
over the comparable periods of 1998.
Service charges on deposit accounts increased $144,000 and $247,000 to $703,000
and $1,400,000 during the second quarter and the first half of 1999,
respectively, when compared to the same periods last year, due to deposit growth
and adjustments to fees. Credit card fees increased $115,000 and $214,000 to
$956,000 and $1,800,000 during the three month and six month periods ended June
30, 1999, respectively, compared to the same periods last year, due primarily to
increases in merchant banking fees.
Income from mortgage banking activities declined $208,000 and $161,000 to
$708,000 and $1,600,000 for the second quarter and first half of 1999,
respectively, when compared to the same periods in 1998. These declines were
primarily caused by decreases in marketing gains and origination fee income in
the second quarter of 1999 as a result of rising interest rates.
Income from brokerage activities declined $124,000 and $115,000 to $731,000 and
$1,541,000 for the three month and six month periods ending June 30, 1999,
respectively, when compared to the same periods in 1998, as a result of a
decline in retail volume during the second quarter of 1999.
11
<PAGE> 14
Income from indirect lending activities declined $15,000 to $876,000 for the
second quarter of 1999 when compared to the same period in 1998 due to reduced
profitability on sales during the quarter. The decline in profitability occurred
as a result of rising interest rates, offset in part by increases in servicing
fees and related ancillary income. Income for the six month period increased
$182,000 to $1,795,000 when compared to the same period last year, due to
increases in servicing fees and related ancillary income.
Income from trust activities increased $268,000 and $375,000 to $525,000 and
$888,000 for the second quarter and first half of 1999, respectively, compared
to the similar periods in 1998, primarily as a result of adjusting fees charged
for trust services provided.
Other income for the second quarter and first half of 1998 included a
non-recurring gain of $654,000 and securities gains of $93,000. Excluding these
gains, other income increased $175,000 and $272,000 to $402,000 and $710,000 in
the second quarter and the first half of 1999, respectively, when compared to
the same periods in 1998, primarily due to growth in fee-based activities such
as automated teller machine transactions.
NONINTEREST EXPENSE
Noninterest expense increased $1,103,000 and $2,033,000 to $10,666,000 and
$20,962,000 for the three month and six month periods ended June 30, 1999,
respectively, compared to the same periods in 1998, increases of 11.5% and
10.7%, respectively.
Salaries and benefit expenses increased $425,000 and $1,046,000 to $4,791,000
and $9,613,000 for the second quarter and first half of 1999, respectively,
compared to the same periods in 1998. The number of full-time equivalent
employees increased to 443 as of June 30, 1999, from 391 at June 30, 1998. The
increase in salary and benefit expenses was directly related to the increase in
full-time equivalent employees. The additional employees were hired as a 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 $150,000 and $278,000 to $801,000 and
$1,535,000 in the second quarter and first half of 1999, respectively, compared
to the same periods 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 $148,000 and $340,000 to $747,000 and
$1,471,000 in the three month and six month periods ending June 30, 1999,
respectively, compared to the same periods 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 $292,000 and $563,000
to $194,000 and $371,000 in the second quarter and the first half of 1999,
respectively, compared to the same periods in 1998 as a result of Fidelity's
improvements in capital ratios and other regulatory rating factors impacting
deposit insurance and assessment charges.
Other expenses increased $420,000 and $813,000 to $1,650,000 and $3,363,000 in
the second quarter and the first half of 1999, respectively, compared to the
same periods in 1998. These increases were primarily due to increases in
operating expenses related to corporate growth, increases in advertising and
promotion and the increased amortization of Fidelity's only securitization
asset.
12
<PAGE> 15
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter and the first half of 1999
was $419,000 and $1,030,000, respectively, compared to $623,000 and $1,237,000
for the same periods 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 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 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 - None.
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 10, 1999 BY: /s/ M. Howard Griffith, Jr.
--------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
Date: August 10, 1999 /s/ M. Howard Griffith, Jr.
--------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
(Principal Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 9
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 39,041,934
<INT-BEARING-DEPOSITS> 1,029,317
<FED-FUNDS-SOLD> 23,971,966
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,232,280
<INVESTMENTS-CARRYING> 37,143,051
<INVESTMENTS-MARKET> 36,341,230
<LOANS> 603,364,224
<ALLOWANCE> 11,453,042
<TOTAL-ASSETS> 783,580,249
<DEPOSITS> 663,394,164
<SHORT-TERM> 30,372,599
<LIABILITIES-OTHER> 5,486,595
<LONG-TERM> 29,650,000
0
6,150,000
<COMMON> 35,271,114
<OTHER-SE> 13,255,777
<TOTAL-LIABILITIES-AND-EQUITY> 783,580,249
<INTEREST-LOAN> 29,218,998
<INTEREST-INVEST> 2,445,821
<INTEREST-OTHER> 416,294
<INTEREST-TOTAL> 32,081,113
<INTEREST-DEPOSIT> 12,561,367
<INTEREST-EXPENSE> 14,095,094
<INTEREST-INCOME-NET> 17,986,019
<LOAN-LOSSES> 3,800,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 20,962,065
<INCOME-PRETAX> 2,876,189
<INCOME-PRE-EXTRAORDINARY> 1,845,770
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,845,770
<EPS-BASIC> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 9.59
<LOANS-NON> 3,960,528
<LOANS-PAST> 2,709,417
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,910,601
<CHARGE-OFFS> 5,203,026
<RECOVERIES> 945,467
<ALLOWANCE-CLOSE> 11,453,042
<ALLOWANCE-DOMESTIC> 11,453,042
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
