<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
-------------------------------------------------
Commission File Number: 0-22374
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Fidelity National Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<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)
(404) 639-6500
- -----------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -----------------------------------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares Outstanding at October 31, 1999
--------------------------- ---------------------------------------------
Common Stock, no par value 8,778,741
<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 September 30, 1999,
(unaudited) and December 31, 1998 1
Consolidated Statements of Income (unaudited)
Three Months Ended September 30, 1999 and 1998, and
Nine Months Ended September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 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 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk (included in Part I Item 2) 8-9
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
. September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 28,841,808 $ 32,726,501
Interest-bearing deposits with banks 1,296,840 1,417,679
Federal funds sold 13,713,285 45,785,746
Investment securities available-for-sale 45,176,306 43,404,870
Investment securities held-to-maturity (approximate fair value of $35,234,155
and $29,755,873 at September 30, 1999, and December 31, 1998, respectively) 36,244,598 29,652,667
Loans held-for-sale 71,366,953 39,655,259
Loans 619,734,492 496,220,907
Allowance for loan losses (10,515,497) (11,910,601)
------------- -------------
Loans, net 609,218,995 484,310,306
Premises and equipment, net 18,574,317 19,643,697
Other real estate 907,340 1,093,264
Accrued interest receivable 5,320,911 4,560,617
Other assets 17,057,927 10,626,947
------------- -------------
Total assets $ 847,719,280 $ 712,877,553
============= =============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 111,965,805 $ 102,424,607
Interest-bearing deposits:
Demand and money market 134,326,634 128,053,878
Savings 26,220,256 21,867,183
Time deposits, $100,000 and over 153,054,991 107,599,557
Other time deposits 295,410,856 261,318,402
------------- -------------
Total deposits 720,978,542 621,263,627
Federal Home Loan Bank short-term borrowings 20,000,000 --
Other short-term borrowings 14,421,101 16,515,867
Long-term debt 29,650,000 15,650,000
Accrued interest payable 3,567,958 3,189,129
Other liabilities 3,464,175 1,703,450
------------- -------------
Total liabilities 792,081,776 658,322,073
------------- -------------
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 8,171,134 and
8,144,958; outstanding 8,160,042 and 8,133,866 in 1999 and 1998, respectively 35,347,153 35,124,941
Treasury stock (69,325) (69,325)
Accumulated other comprehensive (loss) income (1,076,187) 75,968
Retained earnings 15,285,863 13,273,896
------------- -------------
Total shareholders' equity 55,637,504 54,555,480
------------- -------------
Total liabilities and shareholders' equity $ 847,719,280 $ 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>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $45,376,026 $41,028,119 $16,157,028 $14,335,420
Investment securities 3,727,507 5,077,592 1,281,686 1,521,681
Federal funds sold 648,778 1,267,592 263,279 633,743
Deposits with other banks 42,246 99,651 11,451 87,398
----------- ----------- ----------- -----------
Total interest income 49,794,557 47,472,954 17,713,444 16,578,242
INTEREST EXPENSE
Deposits 19,738,871 18,930,060 7,177,504 6,797,264
Short-term borrowings 1,142,352 473,918 486,895 146,572
Long-term debt 1,423,540 1,077,030 545,270 354,059
----------- ----------- ----------- -----------
Total interest expense 22,304,763 20,481,008 8,209,669 7,297,895
----------- ----------- ----------- -----------
NET INTEREST INCOME 27,489,794 26,991,946 9,503,775 9,280,347
Provision for loan losses 5,800,000 6,750,000 2,000,000 2,000,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 21,689,794 20,241,946 7,503,775 7,280,347
NONINTEREST INCOME
Service charges on deposit accounts 2,038,745 1,728,821 674,541 611,151
Credit card fees 2,713,635 2,419,918 941,545 862,146
Mortgage banking activities 3,103,264 2,748,000 1,521,442 1,004,813
Brokerage activities 2,134,866 2,304,650 593,873 648,093
Indirect lending activities 2,301,663 2,434,496 506,416 1,066,834
Trust activities 1,278,307 769,500 390,000 256,500
Other 1,252,369 1,638,480 542,797 208,395
----------- ----------- ----------- -----------
Total noninterest income 14,822,849 14,043,865 5,170,614 4,657,932
NONINTEREST EXPENSE
Salaries and employee benefits 14,415,058 12,865,301 4,802,433 4,299,003
Furniture and equipment 2,334,110 2,010,383 799,002 753,594
Net occupancy 2,514,464 2,499,291 864,665 846,958
Credit card processing and transaction fees 2,413,785 2,297,469 815,629 782,156
Communication expenses 1,721,928 1,502,650 582,654 506,729
Professional and other services 2,126,133 2,040,337 654,640 908,991
Regulatory assessments 340,271 1,078,397 117,942 293,515
Amortization of mortgage servicing rights . 534,128 645,988 163,375 169,430
Other 4,922,778 4,080,070 1,560,250 1,530,692
----------- ----------- ----------- -----------
Total noninterest expense 31,322,655 29,019,886 10,360,590 10,091,068
----------- ----------- ----------- -----------
Income before income taxes 5,189,988 5,265,925 2,313,799 1,847,211
Income tax expense 1,831,180 1,917,723 800,761 680,313
----------- ----------- ----------- -----------
NET INCOME $ 3,358,808 $ 3,348,202 $ 1,513,038 $ 1,166,898
=========== =========== =========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 2,989,808 $ 2,979,202 $ 1,390,038 $ 1,043,898
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .37 $ .37 $ .17 $ .13
=========== =========== =========== ===========
DIVIDENDS DECLARED PER SHARE $ .12 $ -- $ .04 $ --
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,146,978 8,119,944 8,156,432 8,125,468
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,358,808 $ 3,348,202
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 5,800,000 6,750,000
Depreciation and amortization of premises and equipment 2,028,631 1,649,729
Amortization of mortgage servicing rights 534,128 645,988
Additions of originated mortgage servicing rights (632,286) (854,834)
Gain on loan sales (700,878) (1,349,235)
Proceeds from sale of other real estate 415,730 372,632
Net increase in loans held-for-sale (31,711,694) (30,687,611)
Net increase in accrued interest receivable (760,294) (547,353)
Net increase in accrued interest payable 378,829 175,493
Net (increase) decrease in other assets (6,430,980) 413,199
Net increase in other liabilities 1,760,725 475,297
Other 804,318 237,220
------------- -------------
Net cash flows used in operating activities (25,198,061) (19,328,175)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (10,154,596) (10,565,169)
Maturities of investment securities held-to-maturity 3,562,665 8,672,805
Purchases of investment securities available-for-sale (36,168,512) (22,994,168)
Maturities of investment securities available-for-sale 32,538,759 60,130,314
Net increase in loans (271,037,842) (189,273,265)
Purchases of premises and equipment (959,251) (927,117)
Proceeds from sale of loans 140,843,325 152,335,846
------------- -------------
Net cash flows used in investing activities (141,375,452) (2,620,754)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market accounts,
and savings accounts 20,167,027 51,459,685
Net increase (decrease) in time deposits 79,547,888 (2,585,164)
Net increase in short-term borrowings 17,905,234 12,722,521
Net increase (decrease) in long-term borrowings 14,000,000 (150,000)
Dividends paid (1,346,841) (369,000)
Proceeds from the issuance of common stock 222,212 171,890
------------- -------------
Net cash flows provided by financing activities 130,495,520 61,249,932
------------- -------------
Net (decrease) increase in cash and cash equivalents (36,077,993) 39,301,003
Cash and cash equivalents, beginning of period 79,929,926 69,261,541
------------- -------------
Cash and cash equivalents, end of period $ 43,851,933 $ 108,562,544
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 21,925,934 $ 20,615,445
============= =============
Income taxes $ 600,000 $ 1,400,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 nine month periods ended September 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 September 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 nine month period ended September 30, 1999, Fidelity declared and
paid dividends on its common stock of $.12 per share totaling approximately
$978,000 and on its Non-Cumulative 8% Convertible Preferred Stock, Series A,
Stated Value $6.25 per share ("Preferred Stock") totaling $369,000.
4
<PAGE> 7
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 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 third quarter total comprehensive income was $1,333,884 and for the
nine month period ended September 30, 1999, total comprehensive income was
$2,192,492. Total comprehensive income was $1,219,814 and $3,371,783,
respectively, for the comparable periods of 1998.
Note E - Subsequent Events
Fidelity National Corporation has exercised its rights under Paragraph II 5 of
the Articles of Incorporation to redeem all of the outstanding shares of
Non-Cumulative 8% Convertible Preferred Stock-Series A ("Series A Preferred
Stock") by paying in cash the sum of $6.25 per share plus any declared but
unpaid dividends ("Redemption Price"). The redemption occurred on
October 19, 1999, ("Redemption Date").
However, at any time prior to the October 19, 1999 Redemption Date, shareholders
could convert the Series A Preferred Stock into Common Stock of Fidelity
National Corporation at the conversion price of $7.19 per share of Common Stock.
Thus each 1,000 shares of Series A Preferred Stock was convertible into 869.26
shares of Common Stock. Shareholders owning 710,000 shares of Series A Preferred
Stock of the 984,000 shares outstanding elected to convert to Common Stock,
resulting in the issuance of 617,165 shares of Common Stock. Shareholders'
equity was reduced by $1.7 million as a result of the redemption of 274,000
preferred shares and the payment of fractional interests. See Liquidity and
Sources of Capital in Item 2. All fractional interests upon conversion were paid
in cash based upon the then current market value of the Common Stock.
The redemption of the preferred stock was initiated in conjunction with
Fidelity's intention to issue $20 million in trust preferred debt securities
during the fourth quarter of 1999 to further enhance the capital positions of
Fidelity and the Bank.
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 September 30, 1999, compared to December 31, 1998, and the results
of operations for the three and nine month periods ended September 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.
5
<PAGE> 8
ASSETS
Total assets were $848 million at September 30, 1999, compared to $713 million
at December 31, 1998, an increase of $135 million, or 18.9%. Loans increased
$124 million or 24.9% to $620 million, and loans held-for-sale increased $32
million or 80.0% to $71 million at September 30, 1999. The increase in total
loans was primarily a result of the growth in commercial loans of $20 million or
19.0% to $123 million, the growth in construction loans of $16 million or 25.5%
to $79 million, the growth in consumer loans of $72 million or 39.6% to $252
million and a $24 million increase in mortgage loans to $70 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 September 30, 1999,
and December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
TOTAL LOANS:
<S> <C> <C>
Loans $ 619,735 $ 496,221
Loans held-for-sale:
Mortgage loans 8,366 9,655
Indirect auto loans 63,000 30,000
------------- ------------
Total loans held-for-sale 71,366 39,655
------------- ------------
Total loans $ 691,101 $ 535,876
============= ============
</TABLE>
During the nine months ended September 30, 1999, Fidelity invested $7.5 million
in company owned life insurance policies on certain key members of management.
This investment is included in other assets.
ASSET QUALITY
The following schedule summarizes Fidelity's asset quality position at September
30, 1999, and December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Nonperforming assets:
Nonaccrual loans $ 2,541 $ 1,848
Other real estate owned 907 1,093
------------- ------------
Total nonperforming assets $ 3,448 $ 2,941
============= ============
Loans 90 days past due and still accruing $ 2,534 $ 4,393
============= ============
Allowance for loan losses $ 10,515 $ 11,911
============= ============
Ratio of past due loans to loans .37% .82%
============= ============
Ratio of nonperforming assets to loans
and other real estate owned .50% .55%
============= ============
Allowance to period-end loans 1.70% 2.40%
============= ============
Allowance to nonperforming loans
(coverage ratio) 4.14x 6.45x
============= ============
</TABLE>
The significant increase in nonaccrual loans is related to one credit
relationship discussed 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.
6
<PAGE> 9
DEPOSITS
Total deposits at September 30, 1999, were $721 million compared to $621 million
at December 31, 1998, a 16.0% increase. During this period, total liabilities
increased $134 million, or 20.3%, to $792 million due in part to $20 million and
$14 million in Federal Home Loan Bank ("FHLB") short-term and long-term
borrowings, respectively. The increase in deposits occurred in
noninterest-bearing demand deposits, which increased $10 million, or 9.3%;
interest bearing demand and money market accounts, which increased $6 million,
or 4.9%; savings, which increased $4 million or 19.9%; and, time deposits,
$100,000 and over, and other time deposits, which increased $46 million and $34
million, respectively, or 42.3% and 13.1%, respectively. The increases in time
deposits were due in part to the advertising of time deposit products to attract
deposits to support loan growth. There were no brokered deposits at September
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 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 nine months of 1999, the
Bank sold $141 million in newly originated and held-for-sale indirect automobile
loans compared to the sale of $152 million in the first nine months 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 $56 million at September 30, 1999, and $55 million at
December 31, 1998. Shareholders' equity as a percent of total assets was 6.6% at
September 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 $25 million, unpledged securities and money market assets of $16
million, a secured line of $15 million with a bank and FHLB and FRB lines of
credit, subject to available qualifying collateral, at September 30, 1999.
7
<PAGE> 10
At September 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 September 30, December 31,
Capital Ratio Capitalized Capitalized 1999 1998
- --------------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.50% 7.10%
Risk-Based Capital
Tier I 4.00 6.00 7.42 8.68
Total 8.00 10.00 10.06 11.65
</TABLE>
At September 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 September 30, December 31,
Capital Ratio Capitalized Capitalized 1999 1998
- --------------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.87% 7.57%
Risk-Based Capital
Tier I 4.00 6.00 7.83 9.25
Total 8.00 10.00 11.20 13.14
</TABLE>
For additional information, see page 4, Note B and page 5, note E of the Notes
to Consolidated Financial Statements. The redemption of 274,000 shares of
Preferred Stock for $1.7 million would have the effect of reducing the Tier 1
and total capital of Fidelity by approximately 24 basis points and reduce the
leverage ratio by approximately 21 basis points at September 30, 1999.
INTEREST RATE SENSITIVITY
The interest rate sensitivity structure within Fidelity's Statement of Condition
at September 30, 1999, reflects a net interest sensitivity liability gap of
13.0% when projecting forward one year. In the near term, defined as 90 days,
Fidelity has a net interest sensitivity asset gap of 15.7%. When projecting
forward six months, Fidelity has a net interest sensitivity asset gap of 6.6%.
This information represents a general indication of repricing characteristics
over time; however, the sensitivity of callable securities and certain deposit
products may vary during extreme swings in the interest rate cycle. Since all
interest rates and yields do not adjust at the same velocity, the interest rate
sensitivity gap is only a general indicator of the potential effects of interest
rate changes on net interest income.
At September 30, 1999, the 31-60 day asset maturity and repricing total included
$63 million of indirect automobile loans classified as held-for-sale. When these
loans are sold, Fidelity will become 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 three 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
8
<PAGE> 11
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
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 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 applications, none of
which are mission-critical, are in various stages of completion. It is
anticipated that these systems will be compliant by December 31, 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
has also developed contingency plans for its mission-critical systems if Y2K
renovations related to modifications 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 was developed for the week preceding and the week following
December 31, 1999, detailing contingency and back-up procedures addressing 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
9
<PAGE> 12
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 $395,000 and $816,000 related to Y2K
issues for the nine months ended September 30, 1999, and the year ended December
31, 1998, respectively, primarily consisting of consulting fees. It is
anticipated that the total expenses associated with the Y2K project during 1999
and 1998 will be approximately $1.4 million. In addition, approximately $182,000
and $170,000 was expended during 1999 and 1998, respectively, 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 September 30, 1999, was $1,513,000 compared to
net income of $1,167,000 for the comparable quarter of 1998, an increase of
29.7%. Basic and diluted earnings were $.17 per share for the third quarter of
1999, compared to $.13 per share for the same period in 1998.
Fidelity's net income was $3,359,000 for the nine months ended September 30,
1999, compared to net income of $3,348,000, for the nine months ended September
30, 1998, a .3% increase. Basic and diluted earnings were $.37 per share for the
nine month periods ended September 30, 1999, and 1998.
NET INTEREST INCOME
Net interest income for the third quarter of 1999 was $9.5 million compared to
$9.3 million for the same period in 1998. While the average balance of interest
earning assets increased $117.1 million to $762.6 million for the three months
ended September 30, 1999, when compared to the same period in 1998, the yield on
those assets declined 101 basis points to 9.20%. The yield on average loans
outstanding for the period declined 155 basis points to 9.76% when compared to
the same period in 1998 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. Partially
mitigating the lower yields on average loans outstanding was the $36.8 million
decline in lower yielding average investment securities, interest-bearing
deposits with banks and Federal funds sold which were replaced by higher
yielding loans during the third quarter of 1999, to $105.2 million when compared
to the same period in 1998.
The average balance of interest bearing liabilities increased $106.9 million
during the third quarter of 1999 to $655.4 million and the rate on these average
balances decreased 31 basis points to 5.00% when compared to the same period in
1998.
Net interest income for the first nine months of 1999 was $27.5 million compared
to $27.0 million for the same period in 1998. The average balance of interest
earning assets increased $93.4 million to $704.1 million for the nine months
ended September 30, 1999; however, the yield on average interest earning assets
declined 95 basis points to 9.45% when compared to the same period in 1998.
Reductions in the credit card portfolio resulted in a decline in average
balances outstanding by $11.1 million to $98.9 million for the nine month period
ended September 30, 1999, when compared to the same period in 1998, while the
average balances outstanding in total loans increased $128.7 million to $604.1
million for the same period in 1999 compared to 1998.
10
<PAGE> 13
The average balance of interest bearing liabilities increased $80.4 million to
$601.9 million during the nine months ended September 30, 1999, while the rate
on these average balances declined 30 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 nine months
and the third quarter of 1999 was $5.8 million and $2.0 million, respectively,
compared to $6.8 million and $2.0 million, respectively, for the comparable
periods in 1998. The reduction in the provision for the first nine months 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 filed for bankruptcy. The
loans related to this customer were placed on nonaccrual on June 30, 1999, and
approximately $537,000 was charged off during the third quarter. The remaining
loans meet the definition of impaired loans and have a related specific reserve
of $500,000 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 year to date
provision for loan losses relative to prior periods. Net charge-offs to average
loans on an annualized basis for the nine months ended September 30, 1999, were
1.75% compared to 2.69% 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>
Nine Months Ended Year Ended
September 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 569 22 28
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 1,882 1,942 2,444
Credit cards 6,122 9,427 12,092
---------- ---------- -------------
Total charge-offs 8,573 11,391 14,564
Recoveries:
Commercial, financial and agricultural 2 5 29
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 205 254 321
Credit cards 1,171 2,065 2,355
---------- ---------- -------------
Total recoveries 1,378 2,324 2,705
---------- ---------- -------------
Net charge-offs 7,195 9,067 11,859
Provision for loan losses 5,800 6,750 9,450
---------- ---------- -------------
Balance at end of period $ 10,516 $ 12,003 $ 11,911
========== ========== =============
</TABLE>
11
<PAGE> 14
NONINTEREST INCOME
Noninterest income was $5.2 million for the third quarter of 1999 compared to
$4.7 million for the same period in 1998. For the nine months ended September
30, 1999, noninterest income was $14.8 million compared to $14.0 million for the
same period in 1998. During the third quarter of 1999, gains on the sale of
mortgage servicing rights more than offset the decline in gains from the sale of
indirect automobile loans. A non-recurring gain of $654,000 and securities gains
of $134,000 were included in noninterest income for the nine month period ended
September 30, 1998. Excluding the non-recurring gain and securities gains in the
first nine months of 1998, noninterest income for the first nine months of 1999
rose $1.6 million or 11.8% over the comparable period of 1998.
Service charges on deposit accounts increased $63,000 and $310,000 to $675,000
and $2,039,000 during the third quarter and the first nine months of 1999,
respectively, when compared to the same periods last year, due primarily to
deposit growth. Credit card fees increased $79,000 and $294,000 to $942,000 and
$2,714,000 during the three month and nine month periods ended September 30,
1999, respectively, compared to the same periods last year, due primarily to
increases in merchant banking fees.
Income from mortgage banking activities increased $517,000 and $355,000 to
$1,521,000 and $3,103,000 for the third quarter and first nine months of 1999,
respectively, when compared to the same periods in 1998. These increases were
the result of the sale of all third party mortgage servicing rights in the third
quarter of 1999 for a gain of $788,000.
Income from brokerage activities declined $54,000 and $170,000 to $594,000 and
$2,135,000 for the three month and nine month periods ending September 30, 1999,
respectively, when compared to the same periods in 1998, as a result of a
decline in retail volume.
Income from indirect lending activities declined $560,000 to $506,000 for the
third 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 nine month period decreased
$133,000 to $2,302,000 when compared to the same period last year.
Income from trust activities increased $134,000 and $509,000 to $390,000 and
$1,278,000 for the third quarter and the first nine months of 1999,
respectively, compared to the similar periods in 1998. These were primarily the
result of adjusting fees charged for trust services provided.
NONINTEREST EXPENSE
Noninterest expense was $10.4 million and $31.3 million for the three month and
nine month periods ended September 30, 1999, respectively, compared to the same
periods in 1998, increases of 2.7% and 7.9%, respectively.
Salaries and benefit expenses increased $503,000 and $1,550,000 to $4,802,000
and $14,415,000 for the third quarter and first nine months of 1999,
respectively, compared to the same periods in 1998. The number of full-time
equivalent employees increased to 444 as of September 30, 1999, from 405 at
September 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, substantial growth in lending volumes and
balances in all lending portfolios other than credit cards, growth in mortgage
and merchant banking activities and general corporate growth.
Furniture and equipment expenses increased $45,000 and $324,000 to $799,000 and
$2,334,000 in the third quarter and first nine months 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
12
<PAGE> 15
provide new and/or enhanced services and purchases of furniture and equipment to
support staffing additions.
Professional and other outside service expenses decreased $254,000 to $655,000
the three month period ended September 30, 1999, compared to the same period in
1998, due to the declining 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. Professional services
increased $86,000 to $2,126,000 in the nine months ended September 30, 1999,
when compared to the same period in 1998, primarily due to Y2K costs in early
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 $176,000 and $738,000
to $118,000 and $340,000 in the third quarter and the first nine months 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 $30,000 and $843,000 to $1,560,000 and $4,923,000 in
the third quarter and the first nine months 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.
PROVISION FOR INCOME TAXES
The provision for income taxes for the third quarter and the first nine months
of 1999 was $801,000 and $1,831,000, respectively, compared to $680,000 and
$1,918,000 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.
13
<PAGE> 16
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 - Notice of Redemption of all the
outstanding shares of Non- cumulative 8% convertible Preferred Stock -
Series A.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY NATIONAL CORPORATION
(Registrant)
Date: November 10, 1999 BY: /s/ James B. Miller, Jr.
---------------------------------------
James B. Miller, Jr.
Chief Executive Officer
Date: November 10, 1999 BY: /s/ M. Howard Griffith, Jr.
---------------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 28,841,808
<INT-BEARING-DEPOSITS> 1,296,840
<FED-FUNDS-SOLD> 13,713,285
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,176,306
<INVESTMENTS-CARRYING> 36,244,598
<INVESTMENTS-MARKET> 35,234,155
<LOANS> 691,101,445
<ALLOWANCE> 10,515,497
<TOTAL-ASSETS> 847,719,280
<DEPOSITS> 720,978,542
<SHORT-TERM> 34,421,101
<LIABILITIES-OTHER> 7,032,133
<LONG-TERM> 29,650,000
0
6,150,000
<COMMON> 35,347,153
<OTHER-SE> 14,140,351
<TOTAL-LIABILITIES-AND-EQUITY> 847,719,280
<INTEREST-LOAN> 45,376,026
<INTEREST-INVEST> 3,727,507
<INTEREST-OTHER> 691,024
<INTEREST-TOTAL> 49,794,557
<INTEREST-DEPOSIT> 19,738,871
<INTEREST-EXPENSE> 22,304,763
<INTEREST-INCOME-NET> 27,489,794
<LOAN-LOSSES> 5,800,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 31,322,655
<INCOME-PRETAX> 5,189,988
<INCOME-PRE-EXTRAORDINARY> 3,358,808
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,358,808
<EPS-BASIC> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 9.45
<LOANS-NON> 2,541,246
<LOANS-PAST> 2,533,832
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,910,601
<CHARGE-OFFS> 8,572,953
<RECOVERIES> 1,377,849
<ALLOWANCE-CLOSE> 10,515,497
<ALLOWANCE-DOMESTIC> 10,515,497
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
