<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, 2000
------------------------------------------------
Commission File Number: 0-22374
--------------------------------------------------------
Fidelity National Corporation
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1416811
--------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3490 Piedmont Road, Suite 1550 Atlanta, GA 30305
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 639-6500
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding at July 31, 2000
--------------------------- -----------------------------------
Common Stock, no par value 8,783,062
<PAGE> 2
FIDELITY NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Part I. Financial Information
Item l. Consolidated Financial Statements
Consolidated Balance Sheets June 30, 2000, (unaudited) and
December 31, 1999 1
Consolidated Statements of Income (unaudited) Three Months
Ended June 30, 2000 and 1999, and Six Months Ended June 30,
2000 and 1999 2
Consolidated Statements of Cash Flows (unaudited) Six Months
Ended June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements (unaudited) 4-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk
(included in Part I Item 2) 8-9
Part II. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 32,772,946 $ 33,165,476
Interest-bearing deposits with banks 1,372,891 1,378,727
Federal funds sold 12,871,348 15,662,352
Investment securities available-for-sale 41,509,480 43,618,492
Investment securities held-to-maturity (approximate fair value of
$33,291,832 and $34,242,569 at June 30, 2000, and December
31, 1999, respectively) 35,049,883 35,729,462
Loans held-for-sale 33,074,948 65,167,204
Loans 742,222,130 655,614,120
Allowance for loan losses (10,143,666) (10,253,541)
-------------- --------------
Loans, net 732,078,464 645,360,579
Premises and equipment, net 18,556,770 18,464,276
Other real estate 1,376,551 900,990
Accrued interest receivable 6,488,313 5,825,844
Other assets 17,170,407 17,323,965
-------------- --------------
Total assets $ 932,322,001 $ 882,597,367
============== ==============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 118,566,771 $ 105,518,934
Interest-bearing deposits:
Demand and money market 144,720,435 142,024,365
Savings 24,141,955 29,710,668
Time deposits, $100,000 and over 154,322,855 155,656,275
Other time deposits 339,542,587 285,521,714
-------------- --------------
Total deposits 781,294,603 718,431,956
Federal Home Loan Bank short-term borrowings 32,500,000 26,000,000
Other short-term borrowings 15,718,060 45,294,224
Trust preferred securities 10,500,000 --
Other long-term debt 29,000,000 29,600,000
Accrued interest payable 4,461,167 3,995,115
Other liabilities 2,140,651 4,665,699
-------------- --------------
Total liabilities 875,614,481 827,986,994
SHAREHOLDERS' EQUITY
Common stock, no par value. Authorized 50,000,000; issued 8,794,154 and
8,789,020; outstanding 8,783,062 and 8,777,928 in 2000 and 1999,
respectively 39,816,731 39,789,954
Treasury stock (69,325)
(69,325)
Accumulated other comprehensive loss (1,521,402) (1,412,393)
Retained earnings 18,481,516 16,302,137
-------------- --------------
Total shareholders' equity 56,707,520 54,610,373
-------------- --------------
Total liabilities and shareholders' equity $ 932,322,001 $ 882,597,367
============== ==============
</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,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 35,250,827 $ 29,218,998 $ 18,150,084 $ 14,755,598
Investment securities 2,480,588 2,445,821 1,230,028 1,321,050
Federal funds sold 171,706 385,499 90,740 151,463
Deposits with other banks 27,924 30,795 13,711 13,800
------------ ------------ ------------ ------------
Total interest income 37,931,045 32,081,113 19,484,563 16,241,911
INTEREST EXPENSE
Deposits 16,306,805 12,561,367 8,488,979 6,232,362
Short-term borrowings 1,637,138 655,457 813,208 427,268
Trust preferred securities 317,023 -- 288,202 --
Other long-term debt 1,064,588 878,270 525,695 520,911
------------ ------------ ------------ ------------
Total interest expense 19,325,554 14,095,094 10,116,084 7,180,541
------------ ------------ ------------ ------------
NET INTEREST INCOME 18,605,491 17,986,019 9,368,479 9,061,370
Provision for loan losses 3,000,000 3,800,000 1,500,000 2,100,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 15,605,491 14,186,019 7,868,479 6,961,370
NONINTEREST INCOME
Service charges on deposit accounts 1,513,744 1,364,204 789,292 702,778
Credit card fees 2,100,347 1,772,090 1,126,152 956,212
Mortgage banking activities 822,674 1,581,822 427,492 708,437
Brokerage activities 1,204,014 1,540,993 489,778 730,903
Indirect lending activities 2,091,001 1,795,247 971,590 876,107
Trust activities 730,198 888,307 341,967 524,807
Other 997,335 709,572 475,444 402,459
------------ ------------ ------------ ------------
Total noninterest income 9,459,313 9,652,235 4,621,715 4,901,703
NONINTEREST EXPENSE
Salaries and employee benefits 9,867,480 9,612,625 4,732,488 4,790,876
Furniture and equipment 1,397,802 1,535,108 702,662 800,770
Net occupancy 1,723,850 1,649,799 889,292 846,232
Credit card processing and transaction fees 1,683,389 1,598,156 830,371 937,078
Communication expenses 1,220,963 1,139,274 615,265 593,443
Professional and other services 1,290,838 1,471,493 762,827 746,602
Regulatory assessment 270,333 222,329 134,469 107,382
Amortization of mortgage servicing rights -- 370,753 -- 194,305
Other 2,896,760 3,362,528 1,384,834 1,649,703
------------ ------------ ------------ ------------
Total noninterest expense 20,351,415 20,962,065 10,052,208 10,666,391
------------ ------------ ------------ ------------
Income before income taxes 4,713,389 2,876,189 2,437,986 1,196,682
Income tax expense 1,655,768 1,030,419 858,636 418,910
------------ ------------ ------------ ------------
NET INCOME $ 3,057,621 $ 1,845,770 $ 1,579,350 $ 777,772
============ ============ ============ ============
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,057,621 $ 1,599,770 $ 1,579,350 $ 654,772
============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE $ 0.35 $ 0.20 $ 0.18 $ .08
============ ============ ============ ============
DIVIDENDS DECLARED PER SHARE $ 0.10 $ 0.08 $ 0.05 $ .04
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,781,954 8,142,172 8,783,062 8,146,900
============ ============ ============ ============
</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,
----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,057,621 $ 1,845,770
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 3,000,000 3,800,000
Depreciation and amortization of premises and equipment 1,245,663 1,320,475
Amortization of mortgage servicing rights -- 370,753
Additions of originated mortgage servicing rights -- (384,118)
Gain on loan sales (516,214) (652,740)
Proceeds from sale of other real estate -- 234,839
Net decrease (increase) in loans held-for-sale 32,092,256 (4,474,310)
Net increase in accrued interest receivable (662,469) (844,113)
Net increase (decrease) in accrued interest payable 466,052 (220,537)
Net decrease (increase) in other assets 153,558 (7,304,429)
Net (decrease) increase in other liabilities (2,525,048) 814,553
Other 66,811 609,724
-------------- --------------
Net cash flows provided by (used in) operating activities 36,378,230 (4,884,133)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (189,100) (10,154,596)
Maturities of investment securities held-to-maturity 868,679 2,664,212
Purchases of investment securities available-for-sale -- (36,169,524)
Maturities of investment securities available-for-sale 1,933,192 30,772,755
Net increase in loans (197,651,723) (186,590,212)
Purchases of premises and equipment (1,338,157) (682,501)
Proceeds from sale of loans 107,974,491 119,921,380
-------------- --------------
Net cash flows used in investing activities (88,402,618) (80,238,486)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market accounts, and savings
accounts 10,175,194 8,500,840
Net increase in time deposits 52,687,453 33,629,697
Net (decrease) increase in short-term borrowings (23,076,164) 13,856,732
Net (decrease) increase in long-term borrowings (600,000) 14,000,000
Issuance of trust preferred securities 10,500,000 --
Dividends paid (878,242) (897,532)
Proceeds from the issuance of common stock 26,777 146,173
-------------- --------------
Net cash flows provided by financing activities 48,835,018 69,235,910
-------------- --------------
Net decrease in cash and cash equivalents (3,189,370) (15,886,709)
Cash and cash equivalents, beginning of period 50,206,555 79,929,926
-------------- --------------
Cash and cash equivalents, end of period $ 47,017,185 $ 64,043,217
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 18,859,502 $ 14,315,631
============== ==============
Income taxes $ 2,275,000 $ 400,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
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, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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, 1999.
Note B - Trust Preferred Securities
On March 23, 2000, Fidelity issued $10.5 million of 10 7/8% Fixed Rate Capital
Trust Pass-through Securities ("Trust Preferred Securities") of FNC Capital
Trust I with a liquidation value of $1,000 per share. The Trust Preferred
Securities were sold in a private transaction exempt from registration under the
Securities Act of 1933, as amended (the "Act") and were not registered under the
Act. FNC Capital Trust I used the proceeds from the sale of Trust Preferred
Securities to purchase Junior Subordinated Debentures of Fidelity. The $10.5
million is included in Tier I capital by Fidelity National Corporation ("FNC")
in the calculation of regulatory capital ratios. FNC invested $9.5 million of
the net proceeds in $7.0 million of common stock and in $2.5 million of
preferred stock of Fidelity National Bank ("the Bank"), a wholly owned
subsidiary of FNC, to increase the Bank's capital levels. FNC intends to use the
remaining net proceeds for general corporate purpose.
Note C - Shareholders' Equity
The Bank is a national banking association 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.
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, 2000, and December 31, 1999, Fidelity National
Corporation and the Bank exceeded the minimum capital requirements.
During the six month period ended June 30, 2000, Fidelity declared and paid
dividends on its common stock of $0.10 per share totaling approximately $878,000
and paid a final dividend which was declared in 1999 on its Non-Cumulative 8%
Convertible Preferred Stock, Series A, Stated Value $6.25 per share
4
<PAGE> 7
("Preferred Stock") totaling approximately $24,000. The Preferred Stock was
redeemed on October 19, 1999.
Note D - 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
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 balance sheet. 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 July 1999, the Financial Accounting Standards
Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
137 delays the effective date of SFAS No. 133 for one year. In June 2000, the
Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133." SFAS No. 138 amends certain provisions of SFAS No. 133.
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, 1998. Adoption is not expected to result in a material financial impact
based on Fidelity's limited use of derivatives.
Note E - Comprehensive Loss
Fidelity's comprehensive loss item is related to unrealized gains and losses on
investment securities classified as available-for-sale and reclassification
adjustments for gains and losses on securities sales and calls included in net
income. All comprehensive income (loss) items are tax effected at a rate of 38%.
During the second quarter of 2000, total comprehensive gain net of taxes was
$100,568 and for the six month period ended June 30, 2000, total comprehensive
loss was $109,009. The comprehensive loss net of taxes was $864,796 and $973,000
for the comparable periods of 1999.
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, 2000, compared to December 31, 1999, and compares the
results of operations for the three and six month periods ended June 30, 2000
and 1999. These comments should be read in conjunction with Fidelity's
consolidated financial statements and accompanying notes appearing in this
report.
ASSETS
Total assets were $932 million at June 30, 2000, compared to $883 million at
December 31, 1999, an increase of $50 million, or 5.6%. Loans increased $87
million or 13.2% to $742 million, and loans held-for-sale decreased $32 million
or 49.3% to $33 million at June 30, 2000. The increase in total loans was
primarily a result of the growth in commercial loans of $9 million or 10.4% to
$92 million, the growth in construction loans of $16 million or 22.6% to $85
million, the growth in consumer loans of $44 million or 18.2% to $28.8 million
and a $24 million or 15.3% increase in mortgage loans to $185 million, offset in
part by a decline of $6 million in credit card loans to $92 million.
The following schedule summarizes Fidelity 's total loans at June 30, 2000, and
December 31, 1999 (dollars in thousands):
5
<PAGE> 8
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
TOTAL LOANS:
Credit cards $ 92,551 $ 99,112
Real estate - mortgage 184,732 160,258
Real estate - construction 84,924 69,254
Commercial, financial and agricultural 91,724 83,100
Consumer installment 288,291 243,890
---------- ----------
Loans 742,222 655,614
Loans held-for-sale:
Mortgage loans 3,075 4,167
Indirect auto loans 30,000 61,000
---------- ----------
Total loans held-for-sale 33,075 65,167
---------- ----------
Total loans $ 775,297 $ 720,781
========== ==========
</TABLE>
During the second and third quarters of 1999, Fidelity invested in single
premium company owned life insurance policies on certain key members of
management.
ASSET QUALITY
The following schedule summarizes Fidelity's asset quality position at June 30,
2000, and December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Nonperforming assets:
Nonaccrual loans $ 1,853 $ 2,498
Repossessions 427 621
Troubled debt restructuring 912 --
Other real estate owned 1,377 901
-------- --------
Total nonperforming assets $ 4,569 $ 4,020
======== ========
Loans 90 days past due and still accruing $ 2,631 $ 2,290
======== ========
Allowance for loan losses $ 10,144 $ 10,254
======== ========
Ratio of past due loans to loans .34% .32%
======== ========
Ratio of nonperforming assets to loans
and other real estate owned .59% .56%
======== ========
Allowance to period-end loans 1.37% 1.56%
======== ========
Allowance to nonperforming loans and repossessions
(coverage ratio) 3.18x 3.29x
======== ========
</TABLE>
Management is not aware of any potential problem loans other than those
disclosed in the table above, which includes all loans recommended for
classification by regulators, which would have a material adverse impact on
asset quality.
DEPOSITS
Total deposits at June 30, 2000, were $781 million compared to $718 million at
December 31, 1999, an 8.8% increase. During this period, total liabilities
increased $48 million, or 5.8%, to $876 million. The
6
<PAGE> 9
increase in deposits occurred in noninterest-bearing demand deposits, which
increased $13 million or 12.4%; and interest bearing demand and money market
accounts, which increased $3 million or 1.9%; partially offsetting the decline
in savings, which decreased $5.6 million or 18.7%. Time deposits $100,000 and
over and other time deposits were $494 million at June 30, 2000, an increase of
$53 million, or 11.9%. Investment banking firms were utilized during the second
quarter of 2000 to obtain $50 million in insured time deposits under master
certificate agreements as additional funding for loan growth.
OTHER BORROWINGS
Federal Home Loan Bank short-term borrowings totaled $33 million at June 30,
2000, an increase of $7 million, or 25.0% compared to December 31, 1999. Other
short-term borrowings consist of overnight and term reverse repurchase
agreements and borrowings under both secured and unsecured short-term lines of
credit available with other financial institutions. Other short-term borrowings
declined $30 million or 65.3% to $16 million at June 30, 2000, compared to other
short-term borrowings at December 31, 1999.
Other long-term debt consists of long-term borrowings from the Federal Home Loan
Bank and junior subordinated capital notes which totaled $29 million and $30
million at June 30, 2000, and December 31, 1999, respectively.
TRUST PREFERRED SECURITIES
On March 23, 2000, Fidelity issued $10.5 million of trust preferred securities.
No trust preferred securities were outstanding at December 31, 1999. For
additional information on trust preferred securities, which are included in Tier
I capital in the calculation of regulatory capital ratios, see page 4, Note B of
the Notes to Consolidated Financial Statements (unaudited).
LIQUIDITY
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; nationally sourced insured time deposits
obtained through investment banking firms; 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
2000, the Bank sold $107 million in newly originated and held-for-sale indirect
automobile loans compared to the sale of $120 million in the first six months of
1999. In addition to interest rate sensitive deposits, the Bank's principal
demand for liquidity is anticipated fundings under credit commitments to
customers.
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.
7
<PAGE> 10
The Bank has unused sources of liquidity in the form of unused Federal funds
lines totaling $29 million, unpledged securities and money market assets of $7
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, 2000.
SHAREHOLDERS' EQUITY
Shareholders' equity was $57 million at June 30, 2000, compared to $55 million
at December 31, 1999, a 3.8% increase. Shareholders' equity as a percent of
total assets was 6.08% at June 30, 2000, compared to 6.19% at December 31, 1999.
At June 30, 2000, and December 31, 1999, 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 2000 1999
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 7.80% 6.80%
Risk-Based Capital
Tier I 4.00 6.00 8.72 7.78
Total 8.00 10.00 11.21 10.36
</TABLE>
At June 30, 2000, and December 31, 1999, 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 2000 1999
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.48% 6.49%
Risk-Based Capital
Tier I 4.00 6.00 8.54 7.42
Total 8.00 10.00 11.66 10.69
</TABLE>
For additional information, see page 4, Note C of the Notes to Consolidated
Financial Statements (unaudited).
INTEREST RATE SENSITIVITY
Fidelity's primary risk exposures are interest rate risk and credit risk and, to
a lesser extent, liquidity risk. 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. However, Fidelity believes that this analysis provides the most
meaningful measures of interest rate risk position and trends. The analysis
reflected the asset sensitivity of Fidelity over a five month time horizon and
its liability sensitivity 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 static gap analysis is a useful tool to measure interest rate sensitivity at
a point in time and is utilized in developing the more critical rate shock
analysis in assessing interest rate risk. The interest rate sensitivity
structure within Fidelity's Balance Sheet at June 30, 2000, reflects a net
interest sensitivity
8
<PAGE> 11
liability gap of 13.1% when projecting forward one year. In the near term,
defined as 90 days, Fidelity has a net interest sensitivity asset gap of 14.7%.
When projecting forward six months, Fidelity has a net interest sensitivity
liability gap of 2.2%. This information represents a general indication of
repricing characteristics over time; however, the sensitivity of callable
securities and certain deposit products may vary during extreme swings in the
interest rate cycle. Since all interest rates and yields do not adjust at the
same velocity, the interest rate sensitivity gap is only a general indicator of
the potential effects of interest rate changes on net interest income.
At June 30, 2000, the 0-30 day asset maturity and repricing total included $30
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 net interest
sensitivity 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.
EARNINGS
Net income for the quarter ended June 30, 2000, was $1.6 million compared to net
income of $.8 million for the comparable quarter of 1999, an increase of 103.1%.
Basic and diluted earnings were $.18 per share for the second quarter of 2000,
compared to $.08 per share for the same period in 1999.
Fidelity's net income was $3.1 million for the six months ended June 30, 2000,
compared to net income of $1.8 million, for the six months ended June 30, 1999,
a 65.7% increase. Basic and diluted earnings were $.35 per share for the first
half of 2000 compared to $.20 per share for the comparable period of 1999.
NET INTEREST INCOME
Net interest income for the second quarter of 2000 was $9.4 million compared to
$9.1 million for the same period in 1999. While the average balance of interest
earning assets increased $156 million to $842 million for the three months ended
June 30, 2000, when compared to the same period in 1999, the yield on those
assets declined 21 basis points to 9.3%. The yield on average loans outstanding
for the period declined 48 basis points to 9.6% when compared to the same period
in 1999, primarily as a result of lower average balances outstanding in high
yielding credit cards. Partially mitigating the lower yields on average loans
outstanding was the $16 million decline in lower yielding average investment
securities, interest-bearing deposits with banks and Federal funds sold during
the second quarter of 2000 to $84 million when compared to the same period in
1999, which investments were replaced with higher yielding loans.
The average balance of interest bearing liabilities increased $147 million
during the second quarter of 2000 to $733 million and the rate on these average
balances increased 62 basis points to 5.53% when compared to the same period in
1999.
Net interest income for the first six months of 2000 was $18.6 million compared
to $18.0 million for the same period in 1999. The average balance of interest
earning assets increased $153 million to $827 million for the six months ended
June 30, 2000, and more than offset the decline in the yield on average interest
earning assets of 40 basis points to 9.2% when compared to the same period in
1999. Reductions in the credit card portfolio resulted in a decline in average
balances outstanding by $6 million to $94 million for the six month period ended
June 30, 2000, when compared to the same period in 1999, while the average
balances outstanding in total loans increased $166 million to $743 million for
the same period in 2000 compared to 1999.
The average balance of interest bearing liabilities increased $147 million to
$721 million during the six months ended June 30, 2000, while the rate on these
average balances increased 42 basis points to 5.37% when compared to the same
period in 1999.
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
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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 2000 was $3.0 million and $1.5 million, respectively, compared
to $3.8 million and $2.1 million, respectively, for the same periods in 1999.
The reduction in the provision for the first half and the second quarter of 2000
is primarily due to the continued improvement in the current aggregate amount of
credit card delinquencies and net charge-offs.
Net charge-offs to average loans on an annualized basis for the six months ended
June 30, 2000, were .89% compared to 1.62% for the same period in 1999.
The following schedule summarizes changes in the allowance for loan losses for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended
------------------------- December 31,
2000 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Balance at beginning of period $ 10,254 $ 11,911 $ 11,911
Charge-offs:
Commercial, financing and agricultural 44 -- 580
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 1,070 1,232 2,457
Credit cards 3,078 3,971 7,977
-------- -------- --------
Total charge-offs 4,192 5,203 11,014
-------- -------- --------
Recoveries:
Commercial, financial and agricultural 1 1 34
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 177 149 258
Credit cards 904 795 1,465
-------- -------- --------
Total recoveries 1,082 945 1,757
-------- -------- --------
Net charge-offs 3,110 4,258 9,257
Provision for loan losses 3,000 3,800 7,600
-------- -------- --------
Balance at end of period $ 10,144 $ 11,453 $ 10,254
======== ======== ========
Ratio of net charge-offs to average loans .89% 1.62% 1.61%
======== ======== ========
</TABLE>
NONINTEREST INCOME
Noninterest income was $4.6 million for the second quarter of 2000 compared to
$4.9 million for the same period in 1999. For the six months ended June 30,
2000, noninterest income was $9.5 million compared to $9.7 million for the same
period in 1999. Noninterest income for the second quarter and the first half of
2000 declined 5.7% and 2.0%, respectively, compared to the same periods of 1999.
A substantial portion of the reduction was attributable to the decline in
mortgage banking revenues as a result of the sale of residential mortgage
servicing in the third quarter of 1999, as well as a decline in origination
volume in 2000 and a decline in brokerage revenues.
Service charges on deposit accounts increased $87,000 and $150,000 to $789,000
and $1,514,000 during the second quarter and the first half of 2000,
respectively, when compared to the same periods last year, due to deposit growth
and adjustments to fees. Credit card fees increased $170,000 and $328,000 to
$1,126,000 and $2,100,000 during the three month and six month periods ended
June 30, 2000, respectively, compared to the same periods last year, due
primarily to increases in merchant banking fees and credit card transaction
fees.
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Income from mortgage banking activities declined $281,000 and $759,000 to
$427,000 and $823,000 for the second quarter and first half of 2000,
respectively, when compared to the same periods in 1999. These declines were
primarily caused by the sale of the residential mortgage servicing portfolio on
September 30, 1999, and declining mortgage origination and sales volume in the
second quarter and first half of 2000 compared to the same periods in 1999.
Income from brokerage activities declined $241,000 and $337,000 to $490,000 and
$1,204,000 for the three month and six month periods ending June 30, 2000,
respectively, when compared to the same periods in 1999, as a result of a
decline in retail volume during the second quarter and first half of 2000.
Income from indirect lending activities increased $95,000 to $972,000 for the
second quarter of 2000 when compared to the same period in 1999. Income for the
six month period increased $300,000 to $2,091,000 when compared to the same
period last year. Increased income for the quarter and the six month period was
the result of increases in servicing fees and related ancillary income, offset
in part by a decline in gains on sales.
Other income increased $73,000 and $288,000 to $475,000 and $997,000 in the
second quarter and the first half of 2000, respectively, when compared to the
same periods in 1999, primarily due to growth in fee-based activities such as
automated teller machine transactions and income from the increases in cash
surrender values of the single premium company owned life insurance policies on
certain key members of management which were purchased in mid 1999.
NONINTEREST EXPENSE
Noninterest expense decreased $614,000 and $611,000 to $10.1 million and $20.4
million for the three month and six month periods ended June 30, 2000,
respectively, compared to the same periods in 1999, decreases of 5.8% and 2.9%,
respectively.
Salaries and benefit expenses increased $255,000 to $9,900,000 for first half of
2000, or 2.7% compared to the same period in 1999. The number of full-time
equivalent employees declined to 434 as of June 30, 2000, from 443 at June 30,
1999, primarily as a result of a decline in mortgage banking and brokerage
activity. The increase in salary and benefit expenses was directly related to
the increases in compensation through annual merit increases, increases in cash
incentives based on production and performance goals and increased costs to
attract and retain experienced employees, offset in part by a decline in the
number of full-time equivalent employees.
Professional and other services declined $180,000 to $1,291,000 in the six month
period ending June 30, 2000, compared to the same period in 1999, due primarily
to the elimination of the costs for Y2K review, testing and compliance
certification of operational and financial software and automated systems
incurred in 1999.
Other expenses declined $265,000 and $466,000 to $1,385,000 and $2,897,000 in
the second quarter and the first half of 2000, respectively, compared to the
same periods in 1999. These declines were primarily due to decreases in
advertising and promotion expenses and the decreased impact of the amortization
of Fidelity's only securitization asset.
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter and the first half of 2000
was $859,000 and $1,656,000, respectively, compared to $419,000 and $1,030,000
for the same periods in 1999. 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
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(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,
and (vi) 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 1999.
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 9, 2000 BY: /s/ James B. Miller, Jr.
----------------------------
James B. Miller, Jr.
Chief Executive Officer
Date: August 9, 2000 BY: /s/ M. Howard Griffith, Jr.
----------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
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