Rebuilding CreditChartered in 1974, Fidelity's early strategy was to build its credit card business. In 1995, the company aggressively sought credit card accounts by soliciting new homebuyers nationwide. Although the plan initially worked -- Fidelity earned $1.01 a share in 1995 -- bad credit card debt soared. The company took charge-offs of more than $14 million and reported a $1.24 per-share loss in 1996. On the brink, Fidelity reached an agreement with regulators to shrink its balance sheet, slash its dividend and raise additional capital. Plus, the bank shifted its focus to non-credit card assets. Credit card loans now represent only 10% of its portfolio, vs. nearly 40% in 1995.
|At a Glance
|Market Cap||91.3 million|
|Avg. Daily Volume||21,681|
|Corporate Web site||www.fidelitynational.com|
|Source: Market Guide, TSC Research|
Profitable OpportunitiesFidelity's asset mix is what you'd expect from a community bank: Loans make up 87% of the earning assets, and interest income is 61% of total revenue. Its loan portfolio is about 50% consumer debt. Residential mortgages are about 20%, and commercial and construction loans are just over 20% of the portfolio. Real opportunity lies in growing its commercial lending, primarily to middle markets. Commercial credits are typically $750,000 to $1 million, and construction loans are largely made to developers selling single-family homes for $150,000 to $250,000. "Given the improving economy, low base of about $160 million [in commercial loans] and the large market opportunity in Atlanta, we are expecting 15%-plus growth in this category," says SunTrust Robinson Humphrey banking analyst Jennifer Demba. She rates the stock a buy with a $15 price target. Her firm has not provided banking services for Fidelity. Fidelity shares were lately trading at roughly $10.50. "Operating revenue should increase 15% in 2002, based on solid loan growth, margin expansion and fee income enhancements," she adds. "Our operating earnings estimate for 2002 is 50 cents, implying almost 100% year-over-year growth in operating earnings per share." She also notes the company is evaluating a number of marginal and higher-risk business lines that may be jettisoned, further improving margins.
|Banking on Growth
Fidelity National gets ready to rumble
|Operating Revenue (in millions)||EPS|
Source: Thomson Financial, SunTrust Robinson Humphrey, company reports.
Steering ClearOf course, a prolonged economic slowdown could lead to decreased loan demand and more problem loans. In addition, potential shareholders should note two risks unique to Fidelity.
Regulatory risk: Although Fidelity seems to be near a clean bill of health, it has come close before only to find new problems. A late-summer or early-fall bank examination will be key to increasing Fidelity's attractiveness.
Indirect auto lending: The bank is a significant player in the business of buying auto loans from car dealers and packaging them for resale to large credit institutions. This type of consumer lending makes up 42% of the company's loan portfolio. Rising interest rates could affect both volume of auto lending and the margins at which Fidelity could resell loan portfolios.
However, as Fidelity continues to rework the mix of its lending portfolio, the relative size of auto lending should decline.
Barrel BreakAs I work on compiling the quarterly earnings of all stocks in the Barrel portfolio, Barrelology is taking a one-week hiatus. I'll be back next week with more insight and a slightly redesigned presentation of historical results. Stay tuned!
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