<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, 2000
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Commission File Number: 0-22374
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Fidelity National Corporation
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(Exact name of registrant as specified in its charter)
Georgia 58-1416811
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3490 Piedmont Road, Suite 1550 Atlanta, GA 30305
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(Address of principal executive offices) (Zip Code)
(404) 639-6500
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(Registrant's telephone number, including area code)
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(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 October 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 September 30, 2000, (unaudited)
and December 31, 1999 1
Consolidated Statements of Income (unaudited) Three Months
Ended September 30, 2000 and 1999, and Nine Months Ended
September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows (unaudited) Nine
Months Ended September 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)
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 27,279,925 $ 33,165,476
Interest-bearing deposits with banks 1,454,463 1,378,727
Federal funds sold 27,633,321 15,662,352
Investment securities available-for-sale 41,183,658 43,618,492
Investment securities held-to-maturity (approximate fair value of
$33,348,444 and $34,242,569 at September 30, 2000, and
December 31, 1999, respectively) 34,478,077 35,729,462
Loans held-for-sale 22,508,208 65,167,204
Loans 758,173,003 655,614,120
Allowance for loan losses (9,379,464) (10,253,541)
-------------- --------------
Loans, net 748,793,539 645,360,579
Premises and equipment, net 18,297,696 18,464,276
Other real estate 1,363,401 900,990
Accrued interest receivable 6,607,096 5,825,844
Other assets 17,554,798 17,323,965
-------------- --------------
Total assets $ 947,154,182 $ 882,597,367
============== ==============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 109,814,829 $ 105,518,934
Interest-bearing deposits:
Demand and money market 135,676,757 142,024,365
Savings 50,529,079 29,710,668
Time deposits, $100,000 and over 162,495,695 155,656,275
Other time deposits 340,976,693 285,521,714
-------------- --------------
Total deposits 799,493,053 718,431,956
Federal Home Loan Bank short-term borrowings 20,000,000 26,000,000
Other short-term borrowings 11,501,372 45,294,224
Trust preferred securities 20,500,000 --
Other long-term debt 29,000,000 29,600,000
Accrued interest payable 6,053,094 3,995,115
Other liabilities 2,312,034 4,665,699
-------------- --------------
Total liabilities 888,859,553 827,986,994
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 (1,064,097) (1,412,393)
Retained earnings 19,611,320 16,302,137
-------------- --------------
Total shareholders' equity 58,294,629 54,610,373
-------------- --------------
Total liabilities and shareholders' equity $ 947,154,182 $ 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>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $54,471,436 $45,376,026 $19,220,609 $16,157,028
Investment securities 3,699,029 3,727,507 1,218,441 1,281,686
Federal funds sold 467,447 648,778 295,741 263,279
Deposits with other banks 44,824 42,246 16,900 11,451
----------- ----------- ----------- -----------
Total interest income 58,682,736 49,794,557 20,751,691 17,713,444
INTEREST EXPENSE
Deposits 25,945,276 19,738,871 9,638,471 7,177,504
Short-term borrowings 2,342,798 1,142,352 705,660 486,895
Trust preferred securities 809,856 -- 492,833 --
Other long-term debt 1,592,323 1,423,540 527,735 545,270
----------- ----------- ----------- -----------
Total interest expense 30,690,253 22,304,763 11,364,699 8,209,669
----------- ----------- ----------- -----------
NET INTEREST INCOME 27,992,483 27,489,794 9,386,992 9,503,775
Provision for loan losses 4,200,000 5,800,000 1,200,000 2,000,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 23,792,483 21,689,794 8,186,992 7,503,775
NONINTEREST INCOME
Service charges on deposit accounts 2,300,619 2,038,745 786,875 674,541
Credit card fees 3,269,032 2,713,635 1,168,685 941,545
Mortgage banking activities 1,242,609 3,103,264 419,935 1,521,442
Brokerage activities 1,707,401 2,134,866 503,387 593,873
Indirect lending activities 3,237,977 2,301,663 1,146,976 506,416
Trust activities 1,025,198 1,278,307 295,000 390,000
Other 1,467,381 1,252,369 470,046 542,797
----------- ----------- ----------- -----------
Total noninterest income 14,250,217 14,822,849 4,790,904 5,170,614
NONINTEREST EXPENSE
Salaries and employee benefits 14,755,843 14,415,058 4,888,363 4,802,433
Furniture and equipment 2,189,921 2,334,110 792,119 799,002
Net occupancy 2,579,034 2,514,464 855,184 864,665
Credit card processing and transaction fees 2,550,415 2,413,785 867,026 815,629
Communication expenses 1,805,091 1,721,928 584,128 582,654
Professional and other services 2,152,808 2,126,133 861,970 654,640
Regulatory assessment 354,350 340,271 84,017 117,942
Amortization of mortgage servicing rights -- 534,128 -- 163,375
Other 4,521,517 4,922,778 1,624,757 1,560,250
----------- ----------- ----------- -----------
Total noninterest expense 30,908,979 31,322,655 10,557,564 10,360,590
----------- ----------- ----------- -----------
Income before income taxes 7,133,721 5,189,988 2,420,332 2,313,799
Income tax expense 2,507,139 1,831,180 851,371 800,761
----------- ----------- ----------- -----------
NET INCOME $ 4,626,582 $ 3,358,808 $ 1,568,961 $ 1,513,038
=========== =========== =========== ===========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 4,626,582 $ 2,989,808 $ 1,568,961 $ 1,390,038
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ .53 $ .37 $ .18 $ .17
=========== =========== =========== ===========
DIVIDENDS DECLARED PER SHARE $ .15 $ .12 $ .05 $ .04
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,782,326 8,146,978 8,783,062 8,156,432
=========== =========== =========== ===========
</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,
-------------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,626,582 $ 3,358,808
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 4,200,000 5,800,000
Depreciation and amortization of premises and equipment 1,884,321 2,028,631
Amortization of mortgage servicing rights -- 534,128
Additions of originated mortgage servicing rights -- (632,286)
Gain on loan sales (829,818) (700,878)
Proceeds from sale of other real estate -- 372,632
Net decrease (increase) in loans held-for-sale 42,658,996 (31,711,694)
Net increase in accrued interest receivable (781,252) (760,294)
Net increase in accrued interest payable 2,057,979 378,829
Net increase in other assets (230,833) (6,430,980)
Net (decrease) increase in other liabilities (2,353,665) 1,760,725
Other (189,884) 804,318
-------------- --------------
Net cash flows provided by (used in) operating activities 51,042,426 (25,198,061)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held-to-maturity (189,100) (10,154,596)
Maturities of investment securities held-to-maturity 1,440,485 3,562,665
Purchases of investment securities available-for-sale -- (36,168,512)
Maturities of investment securities available-for-sale 2,996,603 32,538,759
Net increase in loans (280,310,812) (271,037,842)
Purchases of premises and equipment (1,717,741) (959,251)
Proceeds from sale of loans 173,045,259 140,843,325
-------------- --------------
Net cash flows used in investing activities (104,735,306) (141,375,452)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, money market accounts, and
savings accounts 18,766,698 20,167,027
Net increase in time deposits 62,294,399 79,547,888
Net (decrease) increase in short-term borrowings (39,792,852) 17,905,234
Net (decrease) increase in long-term borrowings (600,000) 14,000,000
Issuance of trust preferred securities 20,500,000 --
Dividends paid (1,340,988) (1,346,841)
Proceeds from the issuance of common stock 26,777 222,212
-------------- --------------
Net cash flows provided by financing activities 59,854,034 130,495,520
-------------- --------------
Net increase (decrease) in cash and cash equivalents 6,161,154 (36,077,993)
Cash and cash equivalents, beginning of period 50,206,555 79,929,926
-------------- --------------
Cash and cash equivalents, end of period $ 56,367,709 $ 43,851,933
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 28,632,274 $ 21,925,934
============== ==============
Income taxes $ 3,025,000 $ 600,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
FIDELITY NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 nine month periods ended September 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 used the remaining
net proceeds for general corporate purposes.
On July 27, 2000, Fidelity issued $10.0 million of 11.045% Fixed Rate Capital
Trust Preferred Securities ("TPS") of Fidelity National Capital Trust I with a
liquidation value of $1,000 per share. The TPS were sold in a private
transaction exempt from registration under the Act and were not registered under
the Act. Fidelity National Capital Trust I used the proceeds from the sale of
the 11.045% TPS to purchase Junior Subordinated Debentures of Fidelity. The
$10.0 million is, to the extent allowable, included in Tier I capital by FNC in
the calculation of its regulatory capital ratios. Fidelity invested $5 million
of the net proceeds of the TPS in common stock of the Bank to increase the
Bank's capital levels. Fidelity retained the remaining net proceeds to
strengthen its liquidity position and for general corporate purposes.
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
4
<PAGE> 7
oversight of bank holding companies and nationally chartered banks. Each bank
holding company and each bank must maintain the minimum capital ratios set forth
in "Liquidity and Sources of Capital". At September 30, 2000, and December 31,
1999, Fidelity National Corporation and the Bank exceeded the minimum capital
requirements.
During the nine month period ended September 30, 2000, Fidelity declared and
paid dividends on its common stock of $.15 per share totaling approximately
$1,317,000 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 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. Fidelity had no derivative
instruments and was not engaged in hedging activities at September 30, 2000, and
December 31, 1999.
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 third quarter of 2000, total comprehensive gain net of taxes was
$457,305 and for the nine month period ended September 30, 2000, total
comprehensive gain net of taxes was $348,296. 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 September 30, 2000, compared to December 31, 1999, and compares the
results of operations for the three and nine month periods ended September 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 $947 million at September 30, 2000, compared to $883 million
at December 31, 1999, an increase of $64 million, or 7.3%. Loans increased $103
million or 15.6% to $758 million, and loans held-for-sale decreased $43 million
or 65.5% to $23 million at September 30, 2000. The increase in total loans was
primarily a result of the growth in commercial loans of $9 million or 11.1% to
$92 million, the growth in construction loans of $21 million or 29.7% to $90
million, the growth in consumer loans of $52
5
<PAGE> 8
million or 21.4% to $296 million and a $29 million or 17.9% increase in mortgage
loans to $189 million, offset in part by a decline of $8 million in credit card
loans to $91 million.
The following schedule summarizes Fidelity 's total loans at September 30, 2000,
and December 31, 1999, (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
TOTAL LOANS:
Credit cards $ 90,905 $ 99,112
Real estate - mortgage 189,003 160,258
Real estate - construction 89,847 69,254
Commercial, financial and agricultural 92,350 83,100
Consumer installment 296,068 243,890
---------- ----------
Loans 758,173 655,614
Loans held-for-sale:
Mortgage loans 2,508 4,167
Indirect auto loans 20,000 61,000
---------- ----------
Total loans held-for-sale 22,508 65,167
---------- ----------
Total loans $ 780,681 $ 720,781
========== ==========
</TABLE>
ASSET QUALITY
The following schedule summarizes Fidelity's asset quality position at September
30, 2000, and December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Nonperforming assets:
Nonaccrual loans $ 1,568 $ 2,498
Repossessions 559 621
Troubled debt restructuring 912 --
Other real estate owned 1,363 901
-------- --------
Total nonperforming assets $ 4,402 $ 4,020
======== ========
Loans 90 days past due and still accruing $ 2,045 $ 2,290
======== ========
Allowance for loan losses $ 9,379 $ 10,254
======== ========
Ratio of past due loans to loans .26% .32%
======== ========
Ratio of nonperforming assets to loans
and other real estate owned .56% .56%
======== ========
Allowance to period-end loans 1.24% 1.56%
======== ========
Allowance to nonperforming loans and repossessions
(coverage ratio) 3.09x 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.
6
<PAGE> 9
DEPOSITS
Total deposits at September 30, 2000, were $799 million compared to $718 million
at December 31, 1999, an 11.3% increase. During this period, total liabilities
increased $61 million, or 7.4%, to $889 million. The increase in deposits
occurred in noninterest-bearing demand deposits, which increased $4 million or
4.1% and savings, which increased $21 million or 70.0%, offset in part by
interest-bearing demand and money market accounts, which decreased $6 million or
4.5%. Time deposits $100,000 and over and other time deposits were $503 million
at September 30, 2000, an increase of $62 million, or 14.1%. 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 ("FHLB") short-term borrowings totaled $20 million at
September 30, 2000, a decrease of $6 million, or 23.1% 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 $34 million or 74.6% to $11.5 million at September 30, 2000,
compared to other short-term borrowings at December 31, 1999.
Other long-term debt consists of long-term borrowings from the FHLB and junior
subordinated capital notes which totaled $29 million and $30 million at
September 30, 2000, and December 31, 1999, respectively.
TRUST PREFERRED SECURITIES
On March 23 and July 27, 2000, Fidelity issued $10.5 million and $10.0 million
of trust preferred securities, respectively. No trust preferred securities were
outstanding at December 31, 1999. For additional information on trust preferred
securities, which are included, to the extent allowable, in Fidelity's 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 nine months of
2000, the Bank sold $166 million in newly originated and held-for-sale indirect
automobile loans compared to the sale of $141 million in the first nine months
of 1999.
7
<PAGE> 10
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 $13
million, a secured line of $15 million with a bank, an FHLB available line of
$23 million based on pledged collateral and additional FHLB and FRB lines of
credit, subject to available qualifying collateral, at September 30, 2000.
SHAREHOLDERS' EQUITY
Shareholders' equity was $58 million at September 30, 2000, compared to $55
million at December 31, 1999, a 6.7% increase. Shareholders' equity as a percent
of total assets was 6.15% at September 30, 2000, compared to 6.19% at December
31, 1999. At September 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 September 30, December 31,
Capital Ratios: Capitalized Capitalized 2000 1999
--------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 8.09% 6.80%
Risk-Based Capital
Tier I 4.00 6.00 9.42 7.78
Total 8.00 10.00 11.82 10.36
</TABLE>
At September 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 September 30, December 31,
Capital Ratios: Capitalized Capitalized 2000 1999
--------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Leverage 4.00% 5.00% 6.30% 6.49%
Risk-Based Capital
Tier I 4.00 6.00 9.76 7.42
Total 8.00 10.00 12.87 10.69
</TABLE>
For additional information, see page 4, Note C of the Notes to Consolidated
Financial Statements.
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 latest
analysis reflected the asset sensitivity of
8
<PAGE> 11
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.
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 September 30, 2000, reflects a net
interest sensitivity liability gap of 4.3% when projecting forward one year. In
the near term, defined as 90 days, Fidelity has a net interest sensitivity asset
gap of 12.2%. When projecting forward six months, Fidelity has a net interest
sensitivity asset gap of 6.5%. 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, 2000, the 31-60 day asset maturity and repricing total included
$20 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 periods 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 September 30, 2000, was $1.6 million compared
to net income of $1.5 million for the comparable quarter of 1999, an increase of
3.7%. Basic and diluted earnings were $.18 per share for the third quarter of
2000, compared to $.17 per share for the same period in 1999.
Fidelity's net income was $4.6 million for the nine months ended September 30,
2000, compared to net income of $3.4 million for the nine months ended
September 30, 1999, a 37.7% increase. Basic and diluted earnings were $.53 per
share for the nine month period ended September 30, 2000, compared to $.37 per
share for the same period in 1999.
NET INTEREST INCOME
Net interest income for the third quarter of 2000 was $9.4 million compared to
$9.5 million for the same period in 1999. The average balance of interest
earning assets increased $118 million to $880 million for the three months ended
September 30, 2000, when compared to the same period in 1999 and the yield on
those assets increased 18 basis points to 9.38%. The yield on average loans
outstanding for the period declined 1 basis point to 9.75% when compared to the
same period in 1999 as a result of lower average balances outstanding in high
yielding credit cards. The improvement in overall yield was due to a $10 million
decline in lower yielding average investment securities, interest-bearing
deposits with banks and Federal funds sold, which were replaced by higher
yielding loans, as well as a 158 basis point increase in the yield on Federal
funds sold because of increases in short-term interest rates since the
comparable period last year.
The average balance of interest-bearing liabilities increased $115 million
during the third quarter of 2000 to $770 million and the rate on these average
balances increased 88 basis points to 5.85% when compared to the same period in
1999 as a result of rising interest rates.
Net interest income for the first nine months of 2000 was $28.0 million compared
to $27.5 million for the same period in 1999. The average balance of interest
earning assets increased $141 million to $845 million for the nine months ended
September 30, 2000; however, the yield on average interest earning assets
declined 17 basis points to 9.28% when compared to the same period in 1999 as a
result of a 43
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basis point decline in yield on loans, primarily due to a decrease in higher
yielding credit card average balances, offset in part by a 148 basis point
increase in the yield on Federal funds sold.
The average balance of interest-bearing liabilities increased $136 million to
$738 million during the nine months ended September 30, 2000, while the rate on
these average balances increased 59 basis points to 5.54% when compared to the
same period in 1999 as a result of rising interest rates.
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 2000 was $4.2 million and $1.2 million, respectively,
compared to $5.8 million and $2.0 million, respectively, for the comparable
periods in 1999. The reduction in the provision for the first nine months of
2000 is primarily due to the continued improvement in the current aggregate
amount of credit card delinquencies and net charge-offs, as well as improvements
in delinquencies and net charge-offs in other consumer loan portfolios.
Net charge-offs to average loans on an annualized basis for the nine months
ended September 30, 2000, were .95% compared to 1.75% 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>
Nine Months Ended Year Ended
September 30, 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 388 569 580
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 1,624 1,882 2,457
Credit cards 4,594 6,122 7,977
--------- --------- ---------
Total charge-offs 6,606 8,573 11,014
--------- --------- ---------
Recoveries:
Commercial, financial and agricultural 2 2 34
Real estate-construction -- -- --
Real estate-mortgage -- -- --
Consumer installment 311 205 258
Credit cards 1,218 1,171 1,465
--------- --------- ---------
Total recoveries 1,531 1,378 1,757
--------- --------- ---------
Net charge-offs 5,075 7,195 9,257
Provision for loan losses 4,200 5,800 7,600
--------- --------- ---------
Balance at end of period $ 9,379 $ 10,516 $ 10,254
========= ========= =========
Ratio of net charge-offs to average loans .95% 1.75% 1.61%
========= ========= =========
</TABLE>
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NONINTEREST INCOME
Noninterest income was $4.8 million for the third quarter of 2000 compared to
$5.2 million for the same period in 1999. For the nine months ended September
30, 2000, noninterest income was $14.3 million compared to $14.8 million for the
same period in 1999. During the third quarter of 1999, Fidelity sold its
residential mortgage loan servicing portfolio for a gain of $788,000. Excluding
this non-recurring gain and the related servicing revenues from 1999,
noninterest income increased $546,000 or 12.9% and $642,000 or 4.7% over the
same third quarter and year-to-date periods of 1999.
Service charges on deposit accounts increased $112,000 and $262,000 to $787,000
and $2,301,000 during the third quarter and the first nine months of 2000,
respectively, when compared to the same periods last year, due primarily to
deposit growth. Credit card fees increased $227,000 and $555,000 to $1,169,000
and $3,269,000 during the three month and nine month periods ended September 30,
2000, respectively, compared to the same periods last year, due primarily to
increases in merchant banking fees and credit card transaction fees.
Income from mortgage banking activities declined $1,102,000 and $1,861,000 to
$420,000 and $1,243,000 for the third quarter and first nine months of 2000,
respectively, when compared to the same periods in 1999. These decreases 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 and a decline in mortgage loan
origination and sales volume in the third quarter and for the nine months ended
September 30, 2000, compared to the same periods in 1999.
Income from brokerage activities decreased $90,000 and $427,000 to $503,000 and
$1,707,000 for the three month and nine month periods ending September 30, 2000,
respectively, when compared to the same periods in 1999, as a result of a
decline in retail volume.
Income from indirect lending activities increased $641,000 and $936,000 to
$1,147,000 and $3,238,000 for the third quarter and the nine months ended
September 30, 2000, respectively, when compared to the same periods in 1999 as a
result of increases in servicing fees and related ancillary income and an
increase in gains on sales.
NONINTEREST EXPENSE
Noninterest expense was $10.6 million and $30.9 million for the three month and
nine month periods ended September 30, 2000, respectively, an increase of 2% and
a decrease of 1%, respectively, when compared to the same periods in 1999.
Salaries and benefit expenses increased $86,000 and $341,000 to $4,888,000 and
$14,756,000 for the third quarter and first nine months of 2000, respectively,
compared to the same periods in 1999. The number of full-time equivalent
employees decreased to 434 as of September 30, 2000, from 444 at September 30,
1999. The increase in salary and benefit expenses was directly related to
increases in compensation through annual merit increases, an increase in cash
incentives for superior performance and higher compensation for employees
filling vacant positions due to the tight labor market.
Professional and other outside service expenses increased $207,000 to $862,000
for the three month period ended September 30, 2000, compared to the same period
in 1999, primarily due to hiring consultants to assist with several major
software installations and system conversions.
Other expenses declined $401,000 to $4,522,000 in the first nine months of 2000
compared to the same period in 1999. This decline was primarily due to decreases
in advertising and promotion and the decreased amortization of Fidelity's only
securitization asset, offset in part by increases in operating expenses related
to corporate growth.
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PROVISION FOR INCOME TAXES
The provision for income taxes for the third quarter and the first nine months
of 2000 was $851,000 and $2,507,000, respectively, compared to $801,000 and
$1,831,000 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 (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
Exhibit 27. Financial Data Schedule (For SEC use only).
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 6, 2000 BY: /S/ James B. Miller, Jr.
---------------------------------------
James B. Miller, Jr.
Chief Executive Officer
Date: November 6, 2000 BY: /S/ M. Howard Griffith, Jr.
---------------------------------------
M. Howard Griffith, Jr.
Chief Financial Officer
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