<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2000
--------------------------------------------------
Commission File Number: 0-22374
---------------------------------------------------------
Fidelity National Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Georgia 58-1416811
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3490 Piedmont Road, Suite 1550 Atlanta, GA 30305
- --------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
</TABLE>
(404) 639-6500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Shares Outstanding at April 30, 2000
------------------------- ------------------------------------------
Common Stock, no par value 8,781,628
<PAGE> 2
FIDELITY NATIONAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C> <C>
Part I. Financial Information
Item l. Financial Statements
Consolidated Balance Sheets March 31, 2000, (unaudited)
and December 31, 1999 1
Consolidated Statements of Income (unaudited)
Three Months Ended March 31, 2000 and 1999 2
Consolidated Statements of Cash Flows (unaudited) Three
Months Ended March 31, 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 5-11
Part II. Other Information 12
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 12
Signature Page 12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 28,528,279 $ 33,165,476
Interest-bearing deposits with banks 1,157,723 1,378,727
Federal funds sold 15,095,486 15,662,352
Investment securities available-for-sale 42,400,674 43,618,492
Investment securities held-to-maturity
(approximate fair value of $33,635,653
and $34,242,569 at March 31, 2000, and
December 31, 1999, respectively) 35,338,028 35,729,462
Loans held-for-sale 27,367,875 65,167,204
Loans 704,420,057 655,614,120
Allowance for loan losses (10,103,189) (10,253,541)
------------ ------------
Loans, net 694,316,868 645,360,579
Premises and equipment, net 18,070,257 18,464,276
Other real estate 1,390,302 900,990
Accrued interest receivable 5,745,119 5,825,844
Other assets 17,142,235 17,323,965
------------ ------------
Total assets $886,552,846 $882,597,367
============ ============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $107,684,252 $105,518,934
Interest-bearing deposits:
Demand and money market 161,866,433 142,024,365
Savings 25,930,341 29,710,668
Time deposits, $100,000 and over 158,689,629 155,656,275
Other time deposits 282,491,584 285,521,714
------------ ------------
Total deposits 736,662,239 718,431,956
Federal Home Loan Bank short-term borrowings 26,000,000 26,000,000
Other short-term borrowings 21,287,988 45,294,224
Trust preferred securities 10,500,000 --
Other long-term debt 29,000,000 29,600,000
Accrued interest payable 4,106,142 3,995,115
Other liabilities 3,529,718 4,665,699
------------ ------------
Total liabilities 831,086,087 827,986,994
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, no par value. Authorized
50,000,000; issued 8,792,720 and
8,789,020; outstanding 8,781,628 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 (1,621,970) (1,412,393)
Retained earnings 17,341,323 16,302,137
------------ ------------
Total shareholders' equity 55,466,759 54,610,373
------------ ------------
Total liabilities and
shareholders' equity $886,552,846 $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>
Three Months Ended
March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $17,100,743 $14,463,400
Investment securities 1,250,560 1,124,771
Federal funds sold 80,966 234,036
Deposits with other banks 14,213 16,995
----------- -----------
Total interest income 18,446,482 15,839,202
INTEREST EXPENSE
Deposits 7,817,826 6,329,005
Short-term borrowings 823,930 228,189
Long-term debt 567,714 357,359
----------- -----------
Total interest expense 9,209,470 6,914,553
----------- -----------
NET INTEREST INCOME 9,237,012 8,924,649
Provision for loan losses 1,500,000 1,700,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,737,012 7,224,649
NONINTEREST INCOME
Service charges on deposit accounts 724,452 661,426
Credit card fees 974,195 815,878
Mortgage banking activities 395,182 873,385
Brokerage activities 714,236 810,090
Indirect lending activities 1,119,411 907,166
Trust activities 388,231 363,500
Other 521,891 319,087
----------- -----------
Total noninterest income 4,837,598 4,750,532
NONINTEREST EXPENSE
Salaries and employee benefits 5,134,992 4,821,749
Furniture and equipment 695,140 734,338
Net occupancy 834,558 803,567
Credit card processing and transaction fees 853,018 661,078
Communication expenses 605,698 545,831
Professional and other services 528,011 724,891
Amortization of mortgage servicing rights -- 176,448
Other 1,647,790 1,827,772
----------- -----------
Total noninterest expense 10,299,207 10,295,674
----------- -----------
Income before income taxes 2,275,403 1,679,507
Income tax expense 797,132 611,509
----------- -----------
NET INCOME $ 1,478,271 $ 1,067,998
=========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 1,478,271 $ 944,998
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.17 $ 0.12
=========== ===========
DIVIDENDS DECLARED PER SHARE $ 0.05 $ 0.04
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,780,609 8,137,391
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
FIDELITY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,478,271 $ 1,067,998
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for loan losses 1,500,000 1,700,000
Depreciation and amortization
of premises and equipment 624,192 640,156
Amortization of mortgage servicing rights -- 176,448
Additions of originated mortgage
servicing rights -- (271,207)
Gain on loan sales (337,831) (362,034)
Proceeds from sale of other real estate -- 178,542
Net decrease in loans held-for-sale 37,799,329 4,499,905
Net decrease (increase) in accrued
interest receivable 80,725 (98,667)
Net increase (decrease) in accrued
interest payable 111,027 (228,693)
Net decrease (increase) in other
assets 181,730 (871,685)
Net (decrease) increase in other
liabilities (1,135,981) 884,848
Other increase (decrease) 152,040 (21,711)
------------ -----------
Net cash flows provided by
operating activities 40,453,502 7,293,900
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities
held-to-maturity -- (10,154,596)
Maturities of investment securities
held-to-maturity 391,434 1,393,270
Purchases of investment securities
available-for-sale -- (26,198,200)
Maturities of investment securities
available-for-sale 879,792 27,495,110
Net increase in loans (111,052,685) (92,178,831)
Purchases of premises and equipment (230,173) (491,017)
Proceeds from sale of loans 60,394,914 66,604,015
------------ -----------
Net cash flows used in investing
activities (49,616,718) (33,530,249)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market
accounts, and savings accounts 18,277,059 2,175,556
Net increase (decrease) in time deposits 3,224 (3,232,724)
Net (decrease) increase in short-term borrowings (24,006,236) 13,790,489
Net decrease in long-term borrowings (600,000) --
Issuance of trust preferred securities 10,500,000 --
Dividends paid (462,675) (436,941)
Proceeds from the issuance of common stock 26,777 53,037
------------ -----------
Net cash flows provided by financing
activities 3,738,149 12,349,417
------------ -----------
Net decrease in cash and cash equivalents (5,425,067) (13,886,932)
Cash and cash equivalents, beginning of period 50,206,555 79,929,926
------------ -----------
Cash and cash equivalents, end of period $ 44,781,488 $66,042,994
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,098,443 $ 7,143,246
============ ===========
Income taxes $ 475,000 $ --
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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 period ended March 31, 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 ("TRUPS" or "Trust Preferred Securities") of FNC
Capital Trust I with a liquidation value of $1,000 per share. The Trust
Preferred Securities 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 the 10
7/8% Trust Preferred Securities to purchase Junior Subordinated Debentures of
Fidelity. The $10.5 million is included in Tier I capital by Fidelity in the
calculation of regulatory capital ratios. Fidelity invested $9.5 million of the
net proceeds in $7.0 million of common stock and in $2.5 million of preferred
stock of the Bank to increase the Bank's capital levels. Fidelity intends to use
the remaining net proceeds for general corporate purposes.
Note C - 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 March 31, 2000, and December 31, 1999, Fidelity National
Corporation and the Bank exceeded the minimum capital requirements.
4
<PAGE> 7
On January 19, 2000, the Federal Reserve Bank of Atlanta ("FRB") cancelled the
agreement with Fidelity which, among other things, had prohibited Fidelity from
redeeming its capital stock, paying dividends on its common stock or incurring
debt without prior approval of the FRB.
During the three month period ended March 31, 2000, Fidelity declared and paid
dividends on its common stock of $.05 per share totaling approximately $439,000
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 ("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 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 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. 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 Income (Loss)
Fidelity's comprehensive income (loss) items are 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 first quarter of 2000 total comprehensive loss net
of taxes was $209,577. Total comprehensive loss net of taxes was $108,204 for
the same period 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 March 31, 2000, compared to December 31, 1999, and the results of
operations for the three month period ended March 31, 2000. These comments
should be read in conjunction with Fidelity's consolidated financial statements
and accompanying notes appearing in this report.
ASSETS
Total assets were $887 million at March 31, 2000, compared to $883 million at
December 31, 1999, an increase of $4 million, or .5%. Loans increased $49
million or 7.4% to $704 million, and loans held-for-sale decreased $38 million
or 58.0% to $27 million at March 31, 2000. The increase in total loans was
primarily a result of the growth in commercial loans of $4 million or 3.9% to
$107 million, the growth in construction loans of $4 million or 5.6% to $70
million, the growth in consumer loans of $32 million or 13.4% to $275 million
and a $13 million increase in mortgage loans to $157 million, offset in part by
a decline of $4 million in credit card loans to $95 million.
5
<PAGE> 8
The following schedule summarizes Fidelity 's total loans at March 31, 2000, and
December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- -----------
<S> <C> <C>
TOTAL LOANS:
Loans $704,420 $655,614
Loans held-for-sale:
Mortgage loans 2,368 4,167
Indirect auto loans 25,000 61,000
-------- --------
Total loans held-for-sale 27,368 65,167
-------- --------
Total loans $731,788 $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. Cash surrender values, included in other assets at March 31, 2000,
totaled $8 million. The increases in cash surrender values, totaling
approximately $108,000 for the quarter ended March 31, 2000, are included in
other noninterest income.
ASSET QUALITY
The following schedule summarizes Fidelity's asset quality position at March 31,
2000, and December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Nonperforming assets:
Nonaccrual loans $ 1,896 $ 2,498
Repossessions 486 621
Other real estate owned 1,390 901
------- -------
Total nonperforming assets $ 3,772 $ 4,020
======= =======
Loans 90 days past due and still accruing $ 2,139 $ 2,290
======= =======
Allowance for loan losses $10,103 $10,254
======= =======
Ratio of past due loans to loans .29% .32%
======= =======
Ratio of nonperforming assets to loans
and other real estate owned .51% .56%
======= =======
Allowance to period-end loans 1.43% 1.56%
======= =======
Allowance to nonperforming loans and
repossessions (coverage ratio) 4.24x 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 March 31, 2000, were $737 million compared to $718 million at
December 31, 1999, a 2.5% increase. During this period, total liabilities
increased $3 million, or .4%, to $831 million. The increase in deposits occurred
in noninterest-bearing demand deposits, which increased $2 million or 2.0%;
interest bearing demand and money market accounts, which increased $20 million
or 14.0%; offset in part a by a decline in savings, which decreased $4 million
or 12.7%. Time deposits $100,000 and over
6
<PAGE> 9
and other time deposits were $441 million at March 31, 2000 and December 31,
1999. There were no brokered deposits at March 31, 2000, or December 31, 1999.
OTHER BORROWINGS
Federal Home Loan Bank short-term borrowings totaled $26 million at March 31,
2000, and 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 $24 million or 53.0% to $21
million at March 31, 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 and totaled $29 million and $30
million at March 31, 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.
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; 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 three months of 2000, the
Bank sold $58 million in newly originated and held-for-sale indirect automobile
loans compared to the sale of $65 million in the first three 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.
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 $4
million, a secured line of $15 million with a bank and FHLB and FRB lines of
credit, subject to available qualifying collateral, at March 31, 2000.
7
<PAGE> 10
SHAREHOLDERS' EQUITY
Shareholders' equity was $55 million at March 31, 2000 and December 31, 1999.
Shareholders' equity as a percent of total assets was 6.26% at March 31, 2000,
compared to 6.19% at December 31, 1999. At March 31, 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 March 31, December 31,
Capital Ratios: Capitalized Capitalized 2000 1999
- --------------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 7.94% 6.80%
Risk-Based Capital
Tier I 4.00 6.00 9.10 7.78
Total 8.00 10.00 11.67 10.36
</TABLE>
At March 31, 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 March 31, December 31,
Capital Ratios: Capitalized Capitalized 2000 1999
- -------------------- ----------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.56% 6.49%
Risk-Based Capital
Tier I 4.00 6.00 8.90 7.42
Total 8.00 10.00 12.13 10.69
</TABLE>
For additional information, see page 4, Note C of the Notes to Consolidated
Financial Statements.
RISK EXPOSURE
Fidelity's primary risk exposures are interest rate risk and credit risk and, to
a lesser extent, liquidity risk. Fidelity is not aware of and anticipates no
significant adverse operating or financial conditions related to the Year 2000
situation, nor is it aware of and does not anticipate any significant Year 2000
problems associated with customers, suppliers, correspondents or counterparties.
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 six 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.
INTEREST RATE SENSITIVITY
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 March 31, 2000, reflects a net
interest sensitivity
8
<PAGE> 11
liability gap of 17.8% when projecting forward one year. In the near term,
defined as 90 days, Fidelity has a net interest sensitivity asset gap of 11.7%.
When projecting forward six months, Fidelity has a net interest sensitivity
asset gap of .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 March 31, 2000, the 0-60 day asset maturity and repricing total included $ 25
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.
EARNINGS
Net income for the quarter ended March 31, 2000, was $1.5 million compared to
net income of $1.1 million for the comparable quarter of 1999, an increase of
38.4%. Basic and diluted earnings were $.17 per share for the first quarter of
2000 compared to $.12 per share for the same period in 1999, an increase of
41.7%.
NET INTEREST INCOME
Net interest income for the first quarter of 2000 was $9.2 million compared to
$8.9 million for the same period in 1999. The average balance of interest
earning assets increased $150 million to $812 million for the three months ended
March 31, 2000, when compared to the same period in 1999 and more than offset
the decline in yield on those assets of 58 basis points to 9.1%. The yield on
average loans outstanding for the period declined 87 basis points to 9.5% when
compared to the same period in 1999 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 throughout much of 1999 and
competition by other lenders. Partially mitigating the lower yields on average
loans outstanding was the $9 million decline in lower yielding average
investment securities, interest-bearing deposits with banks and Federal funds
sold during the first quarter of 2000 to $85 million when compared to the same
period in 1999, which investments were replaced by higher yielding loans.
The average balance of interest bearing liabilities increased $147 million
during the first quarter of 2000 to $710 million and the rate on these average
balances increased 23 basis points to 5.21% 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
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 three months
of 2000 was $1.5 million compared to $1.7 million for the comparable period in
1999. The reduction in the provision for the first three months 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 three months
ended March 31, 2000, were .97% compared to 1.86% for the same period in 1999.
9
<PAGE> 12
The following schedule summarizes changes in the allowance for loan losses for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended
--------------------- December 31,
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 486 652 2,457
Credit cards 1,565 2,166 7,977
------- ------- -------
Total charge-offs 2,095 2,818 11,014
------- ------- -------
Recoveries:
Commercial, financial and agricultural 1 1 34
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 87 53 258
Credit cards 356 385 1,465
------- ------- -------
Total recoveries 444 439 1,757
------- ------- -------
Net charge-offs 1,651 2,379 9,257
Provision for loan losses 1,500 1,700 7,600
------- ------- -------
Balance at end of period $10,103 $11,232 $10,254
======= ======= =======
Ratio of net charge-offs to average loans .97% 1.86% 1.61%
======= ======= =======
</TABLE>
NONINTEREST INCOME
Noninterest income was $4.8 million for the first quarter of both 2000 and 1999.
Increases in all other categories of noninterest income substantially offset
declines in mortgage banking and brokerage revenues. A substantial portion of
the decline in mortgage banking revenues was attributable to the third quarter
1999 sale of Fidelity's mortgage servicing portfolio which eliminated servicing
and ancillary fees.
Service charges on deposit accounts increased $63,000 to $724,000 during the
first three months of 2000, compared to the same period last year, due primarily
to deposit growth. Credit card fees increased $158,000 to $974,000 during the
three month period ended March 31, 2000, compared to the same period last year,
due primarily to increases in merchant banking fees and credit card transaction
fees.
Income from mortgage banking activities decreased $478,000 to $395,000 for the
first quarter of 2000 when compared to the same period in 1999. The decline in
revenue from mortgage banking activities was primarily due to a reduction in
origination volume as a result of a rising interest rate environment and the
elimination of servicing and ancillary fee income as a result of the sale of the
mortgage servicing portfolio in the third quarter of 1999.
Income from brokerage activities declined $96,000 to $714,000 for the three
month period ended March 31, 2000, when compared to the same period in 1999 as a
result of a decline in retail volume.
Revenue from indirect lending activities increased $212,000 to $1,119,000 in the
first quarter of 2000 compared to the first quarter of 1999 because of increased
servicing fees and ancillary income from loans serviced for others.
Other noninterest income increased $203,000 to $522,000 in the first quarter of
2000 compared to the first quarter of 1999 primarily because of the revenue from
the increases in the cash surrender values of the corporate owned life insurance
policies purchased in mid-1999. Additional increases in the first quarter
10
<PAGE> 13
of 2000 compared to the first quarter of 1999 were realized from increased fees
and increased activity in various banking activities, i.e. international trade
revenue, ATM fees, check sales and credit life insurance.
NONINTEREST EXPENSE
Noninterest expense was $10.3 million for the three month periods ended March
31, 2000 and March 31, 1999.
Salaries and employee benefits expense increased 6.5% or $313,000 to $5,135,000
in the first quarter of 2000 compared to the first quarter of 1999. The increase
was primarily attributable to a 1.4% increase in full time employees and
increased compensation required to generate and support the 22.0% growth in
assets since March 31, 1999.
Credit card processing expense increased $192,000 to $853,000 in the first
quarter of 2000 compared to the first quarter of 1999 primarily because of
increased fees and increased volume, particularly in merchant services
processing and interchange expenses.
Professional and other services declined $197,000 to $528,000 in the first
quarter of 2000 compared to the first quarter of 1999 primarily because of a
substantial decline in Y2K related consulting fees in the first quarter of 2000
compared to the same period in 1999.
Other noninterest expense declined $180,000 in the first quarter of 2000 to
$1,648,000 compared to the first quarter of 1999 primarily because of a decline
in the amortization of the securitization asset in the first quarter of 2000,
offset in part by increases in expenses during the first quarter of 2000 for
items related to the growth in the assets and business of Fidelity, i.e.
lender's fees, credit reports, appraisals, bank security, education and training
materials and ATM fees.
PROVISION FOR INCOME TAXES
The provision for income taxes for the first quarter of 2000 was $797,000
compared to $612,000 for the same period 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 (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.
11
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 27. Financial Data Schedule (For SEC use only).
(B) 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: May 8, 2000 BY: /s/ James B. Miller, Jr.
-----------------------------
James B. Miller, Jr.
Chief Executive Officer
Date: May 8, 2000 BY: /s/ M. Howard Griffith, Jr.
-----------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 28,528,279
<INT-BEARING-DEPOSITS> 1,157,723
<FED-FUNDS-SOLD> 15,095,486
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,400,674
<INVESTMENTS-CARRYING> 35,338,028
<INVESTMENTS-MARKET> 33,635,653
<LOANS> 731,787,932
<ALLOWANCE> 10,103,189
<TOTAL-ASSETS> 886,552,846
<DEPOSITS> 736,662,239
<SHORT-TERM> 47,287,988
<LIABILITIES-OTHER> 7,635,860
<LONG-TERM> 39,500,000
0
0
<COMMON> 39,747,406
<OTHER-SE> 15,719,353
<TOTAL-LIABILITIES-AND-EQUITY> 886,552,846
<INTEREST-LOAN> 17,100,743
<INTEREST-INVEST> 1,250,560
<INTEREST-OTHER> 95,179
<INTEREST-TOTAL> 18,446,482
<INTEREST-DEPOSIT> 7,817,826
<INTEREST-EXPENSE> 9,209,470
<INTEREST-INCOME-NET> 9,237,012
<LOAN-LOSSES> 1,500,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,299,207
<INCOME-PRETAX> 2,275,403
<INCOME-PRE-EXTRAORDINARY> 1,478,271
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,478,271
<EPS-BASIC> .17
<EPS-DILUTED> .17
<YIELD-ACTUAL> 9.10
<LOANS-NON> 1,896,275
<LOANS-PAST> 2,139,163
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,253,541
<CHARGE-OFFS> 2,095,097
<RECOVERIES> 444,744
<ALLOWANCE-CLOSE> 10,103,188
<ALLOWANCE-DOMESTIC> 10,103,188
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 523,000
</TABLE>
