SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal
Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from to
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Commission File Number: 0-29040
FIDELITY BANKSHARES, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 65-0717085
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(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
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(Address of Principal Executive Offices) (Zip Code)
(561) 659-9900
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
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 twelve months (or for such
shorter period that the Registrant was required to file reports) and (2)
has been subject to such requirements for the past 90 days.
YES NO
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [ ]
-
As of February 28, 1997, there were issued and outstanding
6,755,491 shares of the Registrant's Common Stock. The aggregate value
of the voting stock held by non-affiliates of the Registrant, computed
by reference to the average bid and asked prices of the Common Stock as
of February 28, 1997 ($18.56) was $48,702,925.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year
ended December 31, 1996 (Parts II and IV).
2. Proxy Statement for the 1997 Annual Meeting of Stockholders
(Parts I and III).
PART I
ITEM 1. BUSINESS
General
Fidelity Bankshares, Inc.
Fidelity Bankshares, Inc. (the "Company") is a Delaware corporation
which was organized in May 1996. The only significant asset of the
Company is its investment in Fidelity Federal Savings Bank of Florida
(the "Bank"). The Company is majority owned by Fidelity Bankshares,
M.H.C., a federally-chartered mutual holding company (the "MHC"). On
January 29, 1997 the Company acquired all of the issued and outstanding
common stock of the Bank in connection with the Bank's reorganization
into the two-tier form of mutual holding company ownership. At that
time, each share of Bank common stock was automatically converted into
one share of Company common stock, par value $.l0 per share (the "Common
Stock"). 3,542,000 shares of Common Stock were issued to the MHC and
3,206,625 shares of Common Stock were issued to the Bank's public
stockholders.
Fidelity Federal Savings Bank of Florida
The Bank is a federally chartered savings bank headquartered in
West Palm Beach, Florida. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank was chartered
originally as a federal mutual savings and loan association in 1952, and
in 1983, amended its charter to become a federally chartered mutual
savings bank. On January 7, 1994, the Bank completed a reorganization
into a federally chartered mutual holding company. As part of the
reorganization, the Bank organized a new federally chartered stock
savings bank and transferred substantially all of its assets and
liabilities to the stock savings bank in exchange for a majority of the
common stock of the stock savings bank. The Bank is a member of the
Federal Home Loan Bank ("FHLB") System. At December 31, 1996, the Bank
had total assets of $873.6 million, total deposits of $694.7 million,
and stockholders' equity of $81.7 million.
The Bank is primarily engaged in the business of attracting
deposits from the general public in the Bank's market area, and
investing such deposits, together with other sources of funds, in loans
secured by one- to four-family residential real estate. To a lesser
extent, the Bank also originates construction loans and land loans for
single-family properties and invests in mortgage-backed securities
issued or guaranteed by the United States Government or agencies
thereof. In addition, the Bank invests a portion of its assets in
securities issued by the United States Government, cash and cash
equivalents including deposits in other financial institutions, and FHLB
stock. The Bank's principal sources of funds are deposits and principal
and interest payments on loans. Principal sources of income are
interest received from loans and investment securities. The Bank's
principal expense is interest paid on deposits and employee compensation
and benefits.
The Company's and the Bank's principal executive office is located
at 218 Datura Street, West Palm Beach, Florida, and its telephone number
at that address is (561) 659-9900.
Market Area
The Bank is headquartered in West Palm Beach, Florida, and operates
in Palm Beach and Martin Counties in Florida. The Bank has 20 offices
in its market area, three of which are located in Martin County, and 17
of which are located in Palm Beach County. Palm Beach and Martin
Counties, located in Southeastern Florida, have experienced considerable
growth and development since the 1960s, and had a total population of
approximately one million as of 1990 and 1.1 million as of 1995. Due to
significant growth controls established at the state and local
governmental levels, as well as a moderation of economic
growth and migration in the Bank's market area, management believes
growth of the local market area may be more moderate in the future.
The Bank's business and operating results are significantly
affected by the general economic conditions prevalent in its market
areas. The southeast Florida economy is significantly dependent upon
government, foreign trade, tourism, and its attraction as a retirement
area. Unemployment in Palm Beach County is higher than the national and
State of Florida averages. Major employers in the Bank's market area
include Pratt & Whitney, Motorola, St. Mary's Medical Center, Florida
Power and Light, Bell South and the Palm Beach County School Board.
Lending Activities
General. Historically, the principal lending activity of the Bank
has been the origination of fixed and adjustable rate mortgage loans
collateralized by one- to four-family residential properties located in
its market area. The Bank currently originates adjustable rate mortgage
(ARM) loans for retention in its portfolio, and fixed rate loans, the
majority of which are eligible for sale in the secondary mortgage
market. To a lesser extent, the Bank also originates loans secured by
commercial real estate and multi-family residential real estate,
construction loans, commercial business loans and consumer loans.
In an effort to manage interest rate risk, the Bank has sought to
make its interest-earning assets more interest rate sensitive by
originating adjustable rate loans, such as ARM loans, home equity loans,
and short- and medium-term consumer loans. The Bank also purchases
mortgage-backed securities which generally are secured by ARM loans. At
December 31, 1996, approximately $365.7 million, or 52.2%, of the Bank's
total gross loan portfolio, and $47.4 million, or 38.4%, of the Bank's
mortgage-backed securities portfolio, consisted of loans or securities
with adjustable interest rates. The Bank originates fixed rate mortgage
loans generally with 15- to 30-year terms to maturity, collateralized by
one- to four-family residential properties. One- to four-family fixed
rate residential mortgage loans generally are originated and
underwritten according to standards that allow the Bank to resell such
loans in the secondary mortgage market for purposes of managing interest
rate risk and liquidity. The Bank periodically sells a portion of its
fixed-rate loans which have terms to maturity exceeding fifteen years.
The Bank retains in its portfolio all consumer, commercial real estate
and multi-family residential real estate loans.
Analysis of Loan Portfolio. Set forth below are selected data
relating to the composition of the Bank's loan portfolio by type of loan
as of the dates indicated. Also set forth below is the aggregate amount
of the Bank's investment in mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---------------- ---------------- --------------- --------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family (1) $364,741 83.4% $363,229 83.5% $373,407 81.8% $432,387 81.2% $528,689 79.9%
Construction loans 13,272 3.0 14,678 3.4 24,086 5.3 40,522 7.6 58,493 8.8
Land loans 10,295 2.4 8,202 1.9 10,865 2.4 10,769 2.0 11,875 1.8
Commercial 34,292 7.8 34,091 7.8 32,773 7.2 31,359 5.9 29,030 4.4
Multi-family 11,579 2.6 12,300 2.8 13,081 2.8 13,748 2.6 13,781 2.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 434,179 99.2 432,500 99.4 454,212 99.5 528,785 99.3 641,868 97.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Non-real estate loans:
Consumer (2) 12,448 2.8 13,085 3.0 18,343 4.0 26,855 5.0 39,478 6.0
Commercial business 2,531 0.6 2,621 0.6 2,776 0.6 5,834 1.1 18,585 2.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total non-real estate loans 14,979 3.4 15,706 3.6 21,119 4.6 32,689 6.1 58,063 8.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable 449,158 102.6 448,206 103.0 475,331 104.1 561,474 105.4 699,931 105.8
Less:
Undisbursed loan proceeds 8,399 1.9 9,314 2.1 15,463 3.4 27,261 5.1 37,575 5.7
Unearned discount and
net deferred fees 1,371 0.3 1,060 0.2 759 0.2 (385) (0.1) (1,607) (0.2)
Allowance for loan losses 1,824 0.4 2,865 0.7 2,566 0.5 2,265 0.4 2,263 0.3
-------- ---- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable-net $437,564 100.0% $434,967 100.0% $456,543 100.0% $532,333 100.0% $661,700 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Mortgage-backed securities $ 64,558 $ 75,199 $126,807 $159,761 $123,599
======== ======== ======== ======== ========
</TABLE>
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(1) Includes participations of $13.4 million, $8.9 million, $6.6
million, $5.6 million, and $4.3 million at December 31, 1992, 1993,
1994, 1995, and 1996, respectively.
(2) Includes primarily home equity lines of credit, automobile
loans, boat loans and passbook loans. At December 31, 1996, the
disbursed portion of equity lines of credit totalled $13.7 million.
Loan and Mortgage-Backed Securities Maturity Schedule. The
following table sets forth certain information as of December 31, 1996,
regarding the dollar amount of loans and mortgage-backed securities
maturing in the Bank's portfolio based on their contractual terms to
maturity. The amounts shown represent outstanding principal balances
less loans in process and are not adjusted for premiums, discounts,
reserves, and unearned fees. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable and floating rate loans
are included in the period in which interest rates are next scheduled to
adjust rather than in which they contractually mature, and fixed rate
loans and mortgage-backed securities are included in the period in which
the final contractual repayment is due. Fixed rate mortgage-backed
securities are assumed to mature in the period in which the final
contractual payment is due on the underlying mortgage.
<TABLE>
<CAPTION>
Over 1 Over 3 Over 5 Over 10 Beyond
Within Year to 3 Years to 5 Years to 10 Years to 20 20
1 Year Years Years Years Years Years Total
-------- ------- ------- ------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential (1) $145,662 $74,152 $36,511 $55,645 $129,101 $109,151 $550,222
Commercial, multi-family and land 31,298 13,580 4,976 2,033 1,173 1,676 54,736
Consumer loans (2) 23,338 7,362 24,239 1,900 551 8 57,398
-------- ------- ------- ------- -------- -------- --------
Total loans receivable $200,298 $95,094 $65,726 $59,578 $130,825 $110,835 $662,356
======== ======= ======= ======= ======== ======== ========
Mortgage-backed securities $ 46,808 $ 2,783 $ - $ 18 $ 42,485 $ 30,012 $122,106
======== ======= ======= ======= ======== ======== ========
(1) Includes construction loans.
(2) Includes commercial business loans of $18.5 million.
</TABLE>
The following table sets forth at December 31, 1996, the
dollar amount of all fixed rate and adjustable rate loans due
or repricing after December 31, 1997.
<TABLE>
<CAPTION>
Fixed Adjustable Total
--------- ------------ -------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family residential $271,809 $132,751 $404,560
Commercial, multi-family and land 6,046 17,392 23,438
Consumer loans (1) 26,441 7,619 34,060
-------- -------- --------
Total $304,296 $157,762 $462,058
======== ======== ========
Mortgage-backed securities $ 75,298 $ - $ 75,298
======== ======== ========
(1) Includes commercial business loans of $11.0 million.
</TABLE>
One- to Four-Family Residential Real Estate Loans. The Bank's
primary lending activity consists of the origination of one- to four-
family, owner-occupied, residential mortgage loans secured by properties
located in the Bank's market area. During 1995, the Bank began to
originate one- to four-family residential loans on properties outside of
its market area. These loans which were originated through a network of
brokers throughout Florida, are subject to internal controls established
by the Bank, as well as the Bank's customary underwriting standards. At
December 31, 1996, $587.2 million, or 83.9%, of the Bank's total gross
loan portfolio consisted of one- to four-family residential mortgage
loans, including residential construction loans of which $26.0 million
were originated outside the Bank's market area.
The Bank currently offers one- to four-family residential mortgage
loans with terms typically ranging from 15 to 30 years, and with
adjustable or fixed interest rates. Originations of fixed rate mortgage
loans versus ARM loans are monitored on an ongoing basis and are
affected significantly by the level of market interest rates, customer
preference, the Bank's interest rate gap position, and loan products
offered by the Bank's competitors. ARM loan originations totalled
$107.5 million during the year ended December 31, 1996. Therefore, even
if management's strategy is to emphasize ARM loans, market conditions
may be such that there is greater demand for fixed rate mortgage loans.
The Bank's fixed rate loans generally are originated and
underwritten according to standards that permit sale in the secondary
mortgage market. Whether the Bank can or will sell fixed rate loans
into the secondary market, however, depends on a number of factors
including the yield and the term of the loan, market conditions, and the
Bank's current gap position. The Bank's fixed rate mortgage loans are
amortized on a monthly basis with principal and interest due each month.
One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual
terms because borrowers may refinance or prepay loans at their option.
The Bank currently offers ARM loans with initial interest rate
adjustment periods of one, five and seven years, based on changes in a
designated market index. After the initial interest rate adjustment,
each one year ARM loan adjusts annually with an annual interest rate
adjustment limitation of 200 basis points and with a maximum interest
rate of 11.5%, or 600 basis points above the initial rate, whichever is
greater. Interest rates on the Bank's ARM loans originated prior to
December 31, 1993 currently adjust with changes in the FHLB's Fourth
District Cost of Funds Index. ARM loans, through December 31, 1993,
were priced at 275 basis points above the Fourth District Cost of Funds
Index for owner-occupied one- to four-family mortgage loans. Higher
interest margins may be required on loans in excess of $500,000. The
interest rate on all non-owner-occupied one- to four-family mortgage
loans is 300 basis points above the Fourth District Cost of Funds Index.
Subsequent to December 31, 1993, the Bank began to use U.S. Treasury
securities for indices on newly originated ARMs. The Bank originates
ARM loans with initially discounted rates, which vary depending upon
whether the initial interest rate adjustment period is one, three, five
or seven years. The Bank determines whether a borrower qualifies for an
ARM loan based on the fully indexed rate of the ARM loan at the time the
loan is originated. One- to four-family residential ARM loans totalled
$281.9 million, or 40.2%, of the Bank's total gross loan portfolio at
December 31, 1996.
The primary purpose of offering ARM loans is to make the Bank's
loan portfolio more interest rate sensitive. However, as the interest
income earned on ARM loans varies with prevailing interest rates, such
loans may not offer the Bank as predictable cash flows as long-term,
fixed rate loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Asset and Liability
Management-Interest Rate Sensitivity Analysis" contained in the Bank's
1996 Annual Report to Stockholders (the "Annual Report"). ARM loans
carry increased credit risk associated with potentially higher monthly
payments by borrowers as general market interest rates increase. It is
possible, therefore, that during periods of rising interest rates, the
risk of default on ARM loans may increase due to the upward adjustment
of interest costs to the borrower.
The Bank's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Bank the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells or otherwise disposes
of the underlying real property serving as security for the loan. Due-
on-sale clauses are an important means of adjusting the rates on the
Bank's fixed rate mortgage loan portfolio, and the Bank has generally
exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Appraisals
are generally performed by the Bank's service corporation subsidiary.
Such regulations permit a maximum loan-to-value ratio of 97% for
residential property and 85% for all other real estate loans. The
Bank's lending policies generally limit the maximum loan-to-value ratio
on both fixed rate and ARM loans without private mortgage insurance to
80% of the lesser of the appraised value or the purchase price of the
property to serve as collateral for the loan.
The Bank makes one- to four-family real estate loans with loan-to-
value ratios in excess of 80%. For one- to four-family real estate
loans with loan-to-value ratios of between 80% and 90%, the Bank
generally requires the borrower to obtain private mortgage insurance.
For loans in excess of 90% the Bank requires the borrower to obtain
private mortgage insurance. The Bank requires fire and casualty
insurance, as well as a title guaranty regarding good title, on all
properties securing real estate loans made by the Bank.
In the past, the Bank has entered into loan participations secured
by one- to four-family residences. At December 31, 1996, the Bank's
loan portfolio included $4.3 million of loan participations.
Construction and Land Loans. The Bank currently offers fixed rate
and adjustable rate residential construction loans primarily for the
construction of owner-occupied single-family residences to builders who
have a contract for sale of the property or owners who have a contract
for construction. In addition, the Bank makes construction loans to
builders for homes held for sale which totalled $17.2 million at
December 31, 1996. Construction loans are generally structured to
become permanent loans, and are originated with terms of up to 30 years
with an allowance of up to one year for construction. During the
construction phase the loans made prior to December 31, 1996
predominately had an adjustable interest rate that adjusted annually and
converted into either a fixed rate or remained an adjustable rate
mortgage loan at the end of the construction period. Subsequent to
December 31, 1996, the Bank began making construction loans with fixed
rates of interest. Such loans become permanent one- to four-family
loans upon completion of construction. Advances are made as
construction is completed.
In addition, the Bank originates loans which are secured by
individual unimproved or improved lots. At December 31, 1996, $58.5
million, or 8.4%, and $11.9 million, or 1.7%, of the Bank's total loan
portfolio consisted of construction loans and land loans, respectively.
Land loans are currently offered with one-year adjustable rates for
terms of up to 15 years. The maximum loan-to-value ratio for the Bank's
land loans is 75%. Through December 31, 1993, land loans were offered
at 300 to 350 basis points over the Fourth District Cost of Funds Index
with an annual interest rate cap of 200 basis points and a lifetime
interest rate cap of the greater of 600 basis points over the initial
interest rate, or 6%. Subsequent to December 31, 1993 the Bank began
using the applicable U.S. Treasury securities as its index on newly
originated loans. Initial interest rates may be below the fully indexed
rate.
Construction lending generally involves a greater degree of credit
risk than one- to four-family residential mortgage lending. The
repayment of the construction loan is often dependent upon the
successful completion of the construction project. Construction delays
or the inability of the borrower to sell the property once construction
is completed may impair the borrower's ability to repay the loan.
Multi-Family Residential Real Estate Loans. Loans securing multi-
family real estate constituted approximately $13.8 million, or 2.0%, of
the Bank's total loan portfolio at December 31, 1996. At December 31,
1996, the Bank had a total of 77 loans secured by multi-family
properties. The Bank's multi-family real estate loans are secured by
multi-family residences, such as rental properties. At December 31,
1996, substantially all of the Bank's multi-family loans were secured by
properties located within the Bank's market area. At December 31, 1996,
the Bank's multi-family real estate loans had an average principal
balance of $179,000 and the largest multi-family real estate loan had a
principal balance of $1.5 million. Multi-family real estate loans
currently are offered with adjustable interest rates, although in the
past the Bank originated fixed rate multi-family real estate loans. The
terms of each multi-family loan are negotiated on a case-by- case basis.
Such loans typically have adjustable interest rates tied to a market
index with a 600 basis point lifetime interest rate cap and an interest
rate floor equal the initial rate, and amortize over 15 to 25 years. An
origination fee of 1 to 2% is usually charged on multi-family loans.
The Bank generally makes multi-family mortgage loans up to 80% of the
appraised value of the property securing the loan. The Bank may choose
to offer initial discount rates depending on market conditions, but
generally the initial interest rate on multi-family real estate loans
has been priced at the applicable U.S. Treasury securities as its index
on newly originated loans. The Bank's originations of multi-family
loans have been limited in recent years.
Loans secured by multi-family real estate generally involve a
greater degree of credit risk than one- to four-family residential
mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of
general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family and
commercial real estate is typically dependent upon the successful
operation of the related real estate property. If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.
Commercial Real Estate Loans. Loans secured by commercial real
estate constituted approximately $29.0 million, or 4.1%, of the Bank's
total loan portfolio at December 31, 1996. The Bank's commercial real
estate loans are secured by improved property such as offices, small
business facilities, strip shopping centers, warehouses and other non-
residential buildings. At December 31, 1996, substantially all of the
Bank's commercial real estate loans were secured by properties located
within the Bank's market area. At December 31, 1996, the Bank's
commercial real estate loans had an average principal balance of
$196,000. At that date, the largest commercial real estate loan had a
principal balance of $2.5 million, secured by an office and retail
building located in Palm Beach, Florida and was currently performing.
This was the largest commercial real estate lending relationship at the
Bank and was within the current loans-to-one borrower limits.
Commercial real estate loans currently are offered with adjustable
rates, although in the past the Bank has originated fixed rate
commercial real estate loans. The terms of each commercial real estate
loan are negotiated on a case-by-case basis, although such loans
typically have adjustable interest rates tied to a market index, with a
600 basis point lifetime interest rate cap, and a 200 basis point
interest rate floor below the initial interest rate. The Bank may
choose to offer initial discount rates depending on market conditions.
Through December 31, 1993, commercial real estate loans generally have
been priced at the Fourth District Cost of Funds Index plus 325 basis
points. Subsequent to December 31, 1993, the Bank began using the
applicable U.S. Treasuries as its index on newly originated loans. An
origination fee of up to 1 to 2% of the principal balance of the loan is
typically charged on commercial real estate loans. Commercial real
estate loans originated by the Bank generally amortize over 15 to 25
years.
The Bank's policy is generally to limit commercial real estate
loans to principal balances not exceeding $5.0 million, subject to
limited exceptions.
Loans secured by commercial real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the
repayment of loans secured by commercial real estate is typically
dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Consumer Loans. As of December 31, 1996, consumer loans totalled
$39.5 million, or 5.6%, of the Bank's total gross loan portfolio. The
principal types of consumer loans offered by the Bank are home equity
lines of credit, adjustable and fixed rate second mortgage loans,
automobile loans, unsecured personal loans, and loans secured by deposit
accounts. Consumer loans are offered on a fixed rate and adjustable
rate basis with maturities generally of less than ten years. The Bank's
home equity lines of credit are secured by the borrower's principal
residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans, of 80% or less (up
to 90% if the Bank has a first mortgage on the property). Such loans
are offered on an adjustable rate basis with terms of up to ten years.
At December 31, 1996, the disbursed portion of home equity lines of
credit totalled $13.7 million, or 34.7% of consumer loans. During 1996
the Bank sought to increase its consumer loan portfolio primarily by
emphasizing the origination of automobile loans.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an
assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary
employment, and additionally from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration; however,
the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount, and in the case of
home equity lines of credit, the Bank obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by assets that depreciate rapidly, such as
automobiles, mobile homes, boats, and recreational vehicles. In such
cases, repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan and the
remaining deficiency often does not warrant further substantial
collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly
reduced based upon the condition of the automobiles and the lack of
demand for used automobiles. The Bank adds a general provision on a
regular basis to its consumer loan loss allowance, based on general
economic conditions and prior loss experience. See "-Delinquencies and
Classified Assets-Non-Performing Assets," and "Delinquent Loans and Non-
Performing Assets-Classification of Assets" for information regarding
the Bank's loan loss experience and reserve policy.
Commercial Business Loans. The Bank currently offers commercial
business loans to finance small businesses in its market area.
Historically, the Bank offered commercial business loans as a customer
service to business account holders. At December 31, 1996, the Bank had
293 commercial business loans outstanding with an aggregate balance of
$18.5 million. The average commercial business loan balance was
approximately $63,000. Commercial business loans are generally offered
with adjustable interest rates only, which are tied to The Wall Street
Journal prime rate, plus up to 300 basis points. The loans are offered
with prevailing terms of five years but which may range up to 15 years.
In addition, the Bank offers Small Business Administration loans.
Underwriting standards employed by the Bank for commercial business
loans include a determination of the applicant's ability to meet
existing obligations and payments on the proposed loan for normal cash
flows generated by the applicant's business. The financial strength of
each applicant also is assessed through a review of financial statements
provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default
since their repayment is generally dependent on the successful operation
of the borrower's business. The Bank generally obtains personal
guarantees from the borrower or a third party as a condition to
originating its commercial business loans.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate
broker referrals, existing customers, borrowers, builders, attorneys,
and walk-in customers. Upon receiving a loan application, the Bank
obtains a credit report and employment verification to verify specific
information relating to the applicant's employment, income, and credit
standing. In the case of a real estate loan, an appraiser approved by
the Bank appraises the real estate intended to secure the proposed loan.
A loan processor in the Bank's loan department checks the loan
application file for accuracy and completeness, and verifies the
information provided. All loans of up to $214,600 may be approved by
any one of the Bank's senior lending officers; loans between $214,600
and $400,000 must be approved by any one of the Bank's designated senior
officers; loans between $400,000 and $650,000 must be approved by at
least two of the Bank's designated senior officers which includes the
Chief Executive Officer; and loans in excess of $650,000 must be
approved by at least three members of the Board of Directors acting as a
loan committee. The loan committee meets as needed to review and verify
that management's approvals of loans are made within the scope of
management's authority. Fire and casualty insurance is required at the
time the loan is made and throughout the term of the loan, and upon
request of the Bank, flood insurance may be required. After the loan is
approved, a loan commitment letter is promptly issued to the borrower.
At December 31, 1996, the Bank had commitments to originate $21.8
million of loans.
If the loan is approved, the commitment letter specifies the terms
and conditions of the proposed loan including the amount of the loan,
interest rate, amortization term, a brief description of the required
collateral, and required insurance coverage. The borrower must provide
proof of fire and casualty insurance on the property (and, as required,
flood insurance) serving as collateral, which insurance must be
maintained during the full term of the loan. Title insurance or an
opinion of title, based on a title search of the property, is required
on all loans secured by real property.
Borrowers who refinance must satisfy the Bank's underwriting
criteria at the time they apply to refinance their loan and have been
current in their loan payments for a minimum of one year. Approximately
20% of the Bank's loan originations during the year ended December 31,
1996 represented the refinancing of the Bank's existing loans.
Refinancings have resulted in a decrease in the Bank's interest rate
spread. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report to
Stockholders.
During 1996, the Bank in connection with local mortgage brokers
began a mortgage loan broker solicitation program to supplement the
Bank's internal originations of one- to four-family residential loans.
Under this program, which is limited to the origination of one- to four-
family residential loans, prospective borrowers complete loan
applications which are provided by mortgage brokers. The completed
applications are forwarded to the Bank. All loans obtained in this
manner are reviewed in accordance with the Bank's customary underwriting
standards. Total originations from all sources under the mortgage loan
broker solicitation program during 1996 were $87.0 million. The Bank
may expand this program in the future.
During 1994, the Bank entered into an agreement with the wholly-
owned mortgage subsidiary of a major South Florida builder-developer,
who has substantial operations in the Bank's local service area. Under
the terms of this agreement, the mortgage company originates, processes
and closes home mortgages resulting from the sale of the developer's
inventory of homes. The mortgage files are sent to the Bank by the
mortgage company for review and, if approved by the Bank, it issues a
commitment to purchase the loan from the mortgage company. Purchases
are accomplished by assignment of the mortgage from the mortgage company
to the Bank. The Bank purchased $20.8 million loans from this provider
in 1996.
The Bank's recently purchased loans are collateralized by
properties located primarily in Florida, although the Bank has in the
past purchased loans collateralized by properties located outside the
State of Florida. At December 31, 1996, $36.8 million, or 5.3%, of all
loans in the Bank's portfolio, were purchased from others. Of this
amount, $4.3 million represented the Bank's interest in purchased
participations. The Bank's largest loan participation was a $635,000
interest in a loan secured by one- to four-family residences. The
remaining loan participations consisted of loans secured by one- to
four-family residential properties with an average balance of $14,000.
<TABLE>
<CAPTION>
Origination, Purchase and Sale of Loans. The table below shows the
Bank's loan origination, purchase and sales activity for the periods
indicated.
Year Ended December 31,
--------------------------------------------
1994 1995 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Loan receivable-gross, beginning of period $448,206 $475,331 $561,474
Originations:
Real estate:
One- to four-family residential (1) 81,935 121,457 187,851
Land loans 2,896 3,096 3,207
Commercial 5,992 1,082 390
Multi-family 1,339 1,611 1,869
Non-real estate loans:
Consumer 12,674 19,185 23,761
Commercial Business 2,791 6,838 33,276
-------- -------- --------
Total originations 107,627 153,269 250,354
Transfer of mortgage loans to foreclosed real estate
and in-substance foreclosure (2,190) (1,318) (593)
Loan purchases 4,045 12,398 21,153
Repayments (79,545) (75,275) (115,440)
Loan sales (2,812) (2,931) (17,017)
-------- -------- --------
Net loan activity 27,125 86,143 138,457
-------- -------- --------
Total loans receivable-gross, end of period $475,331 $561,474 $699,931
======== ======== ========
- --------------------------------------
(1) Includes loans to finance the construction of one- to four-
family residential properties, and loans originated for sale in the
secondary market.
(2) This table is being presented on a gross loan receivable basis.
</TABLE>
Loan Origination Fees and Other Income. In addition to interest
earned on loans, the Bank generally receives loan origination fees. To
the extent that loans are originated or acquired for the Bank's
portfolio, SFAS 91 requires that the Bank defer loan origination fees
and costs and amortize such amounts as an adjustment of yield over the
life of the loan by use of the level yield method. Fees and costs
deferred under SFAS 91 are recognized into income immediately upon
prepayment or the sale of the related loan. At December 31, 1996, the
Bank had $1.1 million of deferred loan origination fees and $2.7 million
of deferred loan origination costs. Such fees vary with the volume and
type of loans and commitments made and purchased, principal repayments,
and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
The Bank also receives other fees, service charges, and other
income that consist primarily of deposit transaction account service
charges, late charges, credit card fees, and income from REO operations.
The Bank recognized fees and service charges of $2.2 million, $2.7
million and $3.2 million for the fiscal years ended December 31, 1994,
1995, and 1996, respectively.
Loans-to-One Borrower. Savings associations are subject to the
same loans-to-one borrower limits as those applicable to national banks,
which under current regulations restrict loans to one borrower to an
amount equal to 15% of unimpaired capital and unimpaired surplus on an
unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but
not real estate). At December 31, 1996, the Bank's largest outstanding
loan balance to one borrower totalled $4.3 million which was secured by
various residential properties located primarily in Broward County,
Florida. At that date, the Bank's second largest lending relationship
totalled $4.0 million and was secured by various residential properties.
The Bank's third largest lending relationship totalled $3.2 million and
was secured by various residential properties. The Bank's fourth
largest lending relationship totalled $3.0 million and was secured by
various residential properties. The Bank's fifth largest lending
relationship totalled $2.8 million and was secured by various commercial
properties. The Bank's regulatory limit on loans-to-one borrower was
$12.3 million at December 31, 1996.
Mortgage-Backed Securities
The Bank also invests in mortgage-backed securities issued or
guaranteed by the United States Government or agencies thereof. These
securities consist primarily of fixed-rate mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
Mortgage-backed securities totaled $122.3 million at December 31, 1996
and had a market value of $123.6 million. Effective December 31, 1993,
the Bank implemented SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities." As a result of the adoption of this
accounting principle, the Bank declared its investment in adjustable
rate, mortgage-backed securities as available for sale. In November
1995, FASB issued "A Guide to Implementation of SFAS 115 on Accounting
for Certain Investments in Debt and Equity Securities - Questions and
Answers" ("SFAS 115 Q & A Guide"). SFAS 115 Q & A Guide permits an
entity to conduct a one time reassessment of the classifications of all
securities held at that time. On November 28, 1995, in conformity with
the SFAS 115 Q & A Guide, management of the Bank classified all
securities as "Available for Sale". As a result, all such securities
are now presented at fair value, as determined by market quotations.
Since the SFAS 115 Q & A Guide cannot be retroactively applied, these
fixed-rate securities are presented at amortized cost for the year ended
1994.
The Bank's objectives in investing in mortgage-backed securities
varies from time to time depending upon market interest rates, local
mortgage loan demand, and the Bank's level of liquidity. The Bank's
mortgage-backed securities are more liquid than whole loans and can be
readily sold in response to market conditions and interest rates.
Mortgage-backed securities purchased by the Bank also have lower credit
risk than mortgage loans because principal and interest are either
insured or guaranteed by the United States Government or agencies
thereof.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of period $ 75,199 $126,807 $159,761
Purchases 68,133 45,625 9,962
Sales -- -- (19,641)
Repayments (14,510) (17,796) (23,608)
Discount (premium) amortization (579) (79) 3
Increase (decrease) in market value of securities held for
sale in accordance with SFAS 115 (1,436) 5,204 (2,878)
-------- -------- --------
Mortgage-backed securities at end of period $126,807 $159,761 $123,599
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the allocation of fixed and
adjustable rate mortgage-backed securities for the periods indicated.
At December 31,
-----------------------------------------------------------
1994 1995 1996
---------------- ---------------- ----------------
$ % $ % $ %
--- --- --- --- --- ---
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities, net:
Adjustable:
FHLMC $ 15,799 12.38% $ 13,244 8.24% $ 15,900 12.78%
FNMA 35,533 27.84 31,250 19.43 29,576 23.76
GNMA -- -- -- -- 1,963 1.58
-------- -------- -------- -------- -------- --------
Total adjustable 51,332 40.22 44,494 27.67 47,439 38.12
-------- -------- -------- -------- -------- --------
Fixed:
FHLMC 32,546 25.50 74,052 46.04 56,245 45.20
FNMA 15,674 12.28 14,019 8.72 11,771 9.46
GNMA 27,255 21.35 27,196 16.91 8,144 6.54
-------- -------- -------- -------- -------- --------
Total fixed 75,475 59.13 115,267 71.67 76,160 61.20
-------- -------- -------- -------- -------- --------
Accrued interest 834 0.65 1,067 0.66 842 0.68
-------- ------- ------- ------- ------- -------
Total mortgage-backed securities, net $127,641 100.0% $160,828 100.00% $124,441 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
Delinquencies and Classified Assets
Delinquencies. The Bank's collection procedures provide that when
a loan is 15 days past due, a computer-generated late charge notice is
sent to the borrower requesting payment, plus a late charge. If
delinquency continues, at 30 days a delinquent notice is sent and
personal contact efforts are attempted, either in person or by
telephone, to strengthen the collection process and obtain reasons for
the delinquency. Also, plans to arrange a repayment plan are made. If
a loan becomes 60 days past due, a collection letter is sent, personal
contact is attempted, and the loan becomes subject to possible legal
action if suitable arrangements to repay have not been made. In
addition, the borrower is given information which provides access to
consumer counseling services, to the extent required by regulations of
the Department of Housing and Urban Development ("HUD"). When a loan
continues in a delinquent status for 90 days or more, and a repayment
schedule has not been made or kept by the borrower, generally a notice
of intent to foreclose is sent to the borrower, giving 30 days to cure
the delinquency. If not cured, foreclosure proceedings are initiated.
Impaired Loans. A loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement.
Non-Performing Assets. Loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management,
the collection of additional interest is doubtful. Loans are placed on
non-accrual status when either principal or interest is 90 days or more
past due. Interest accrued and unpaid at the time a loan is placed on a
non-accrual status is charged against interest income. At December 31,
1996, the Bank had non-performing loans of $3.3 million, and a ratio of
non-performing loans to net loans receivable of .50%.
Real estate acquired by the Bank as a result of foreclosure or by
the deed in lieu of foreclosure is classified as real estate owned
("REO") until such time as it is sold. When real estate is acquired
through foreclosure or by deed in lieu of foreclosure, it is recorded at
its fair value, less estimated costs of disposal. If the value of the
property is less than the loan, less any related specific loan loss
provisions, the difference is charged against the Bank's earnings. Any
subsequent write-down of REO is also charged against earnings. At
December 31, 1996, the Bank had approximately $93,000 of property
acquired as the result of foreclosure and classified as REO. At
December 31, 1996, the Bank had non-performing assets of $3.4 million
and a ratio of non-performing assets to total assets of .39%.
Delinquent Loans and Non-Performing Assets
The following table sets forth information regarding the Bank's
non-accrual loans delinquent 90 days or more, and real estate acquired
or deemed acquired by foreclosure at the dates indicated. When a loan
is delinquent 90 days or more, the Bank fully reserves all accrued
interest thereon and ceases to accrue interest thereafter. For all the
dates indicated, the Bank did not have any material restructured loans
within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Delinquent Loans:
One- to four-family residential (1) $1,966 $3,091 $1,299 $1,513 $2,637
Commercial and multi-family real estate 1,070 379 335 201 461
Land -- -- 159 10 84
Consumer and commercial business loans 263 347 135 140 108
-------- -------- -------- -------- --------
Total Delinquent loans 3,299 3,817 1,928 1,864 3,290
Total REO and loans foreclosed in-substance 3,226 463 608 643 93
-------- -------- -------- -------- --------
Total nonperforming assets (2) $6,525 $4,280 $2,536 $2,507 $3,383
======== ======== ======== ======== ========
Total loans delinquent 90 days or more to net
loans receivable 0.75% 0.88% 0.42% 0.35% 0.50%
Total loans delinquent 90 days or more to
total assets 0.52% 0.56% 0.27% 0.24% 0.38%
Total nonperforming loans, loans foreclosed
in substance and REO to total assets 1.02% 0.63% 0.36% 0.32% 0.39%
- ------------------------------------
(1) At December 31, 1996, the Bank had no delinquent or non-
performing construction loans.
(2) Net of specific valuation allowances.
During the year ended December 31, 1996, gross interest income of
approximately $192,000 would have been recorded on loans accounted for
on a non-accrual basis if the loans had been current throughout the
period. No interest income on non-accrual loans was included in income
during 1996.
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth information with respect to loans
past due 60-89 days in the Bank's portfolio at the dates indicated.
At December 31,
--------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
One- to four-family residential (1) $ 4,496 $ 1,929 $ 1,554 $ 1,272 $ 2,038
Commercial real estate and multi-family 159 219 100 106 55
Consumer and commercial business loans 54 50 7 106 19
Land loans - 97 48 1 -
-------- -------- -------- -------- --------
Total past due 60-89 days $ 4,709 $ 2,295 $ 1,709 $ 1,485 $ 2,112
======== ======== ======== ======== ========
- -------------------------------------
(1) (Includes construction loans)
</TABLE>
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity
securities considered by the OTS to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct
possibility" that the savings institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard,"
with the added characteristic that these weaknesses make "collection or
liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets
classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment
of a specific loss reserve is not warranted. Assets that do not expose
the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses,
are designated "special mention" by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances
for loan losses in an amount deemed prudent by management. General
allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities, but
which, unlike specific allowances, have not been allocated to particular
problem assets. When a savings institution classifies problem assets as
"loss," it is required either to establish a specific allowance for
losses equal to 100% of the amount of the assets so classified, or to
charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances
is subject to review by the OTS, which can order the establishment of
additional general or specific loss allowances. The Bank regularly
reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
<TABLE>
<CAPTION>
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
At December 31,
----------------------------------------
1994 1995 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Substandard assets (1)(2) $ 5,227 $ 5,106 $ 3,207
Doubtful assets (2) - - -
Loss assets (2) 24 58 -
-------- -------- --------
Total classified assets (2) $ 5,251 $ 5,164 $ 3,207
======== ======== ========
- ---------------------------------------------------
(1) Includes REO and in-substance foreclosures.
(2) Net of specific valuation allowances.
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth information regarding the Bank's
delinquent loans, REO and loans foreclosed in-substance at
December 31, 1996.
Balance Number
------- ------
(Dollars In Thousands)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent $ 2,038 34
Loans more than 89 days delinquent 2,637 32
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent 55 1
Loans more than 89 days delinquent 461 1
Land loans:
Loans 60 to 89 days delinquent - -
Loans more than 89 days delinquent 84 3
Consumer and commercial business loans
60 days or more delinquent 127 12
REO 93 3
------- -------
Total $ 5,495 86
======= =======
</TABLE>
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's
evaluation of the potential losses that may be incurred. The Bank
regularly reviews its loan portfolio, including problem loans, to
determine whether any loans require classification or the establishment
of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers, among
other matters, the estimated net realizable value (or fair value, where
appropriate) of the underlying collateral. Other factors considered by
management include the size and risk exposure of each segment of the
loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in
future periods. Management calculates the general allowance for loan
losses in part based on past experience, and in part based on specified
percentages of loan balances. While both general and specific loss
allowances are charged against earnings, general loan loss allowances
are added back to capital in computing risk-based capital under OTS
regulations.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss
provisions may be deemed necessary. Management believes that the Bank's
current allowance for loan losses is adequate; however, there can be no
assurance that the allowance for loan losses will be adequate to cover
losses that may in fact be realized in the future or that additional
provisions for loan losses will not be required.
<TABLE>
<CAPTION>
Analysis of the Allowance For Loan Losses. The following table
sets forth the analysis of the allowance for loan losses for the periods
indicated.
At December 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total net loans receivable outstanding $ 437,564 $ 434,967 $ 456,543 $ 532,333 $ 661,700
========= ========= ========= ========= =========
Average net loans receivable outstanding $ 449,264 $ 434,522 $ 441,573 $ 490,088 $ 605,507
========= ========= ========= ========= =========
Allowance balance (at beginning of period) $ 1,600 $ 1,824 $ 2,865 $ 2,566 $ 2,265
Reclassification of valuation allowances
on in-substance foreclosure - 169 - - -
Provision for losses:
Real estate 299 1,201 73 (199) 133
Consumer and commercial business loans 31 35 39 (11) 31
Charge-offs:
Real estate (97) (362) (229) (89) (145)
Consumer and commercial business loans (9) (2) (182) (2) (21)
Recoveries:
Real estate - - - - -
Consumer and commercial business loans - - - - -
--------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 1,824 $ 2,865 $ 2,566 $ 2,265 $ 2,263
========= ========= ========= ========= =========
Allowance for loan losses as a percent of net
loans receivable at end of period 0.42% 0.66% 0.56% 0.43% 0.34%
Net loans charged off as a percent of average
loans outstanding 0.02% 0.08% 0.10% 0.02% 0.03%
Ratio of allowance for loan losses to total
non-performing loans at end of period (1) 55.29% 75.06% 132.61% 121.51% 68.78%
Ratio of allowance for loan losses to total
non-performing loans, REO and in-substance
foreclosures at end of period (1) 27.95% 66.94% 100.90% 90.35% 66.89%
- ---------------------------------
(1) Net of specific reserves.
</TABLE>
<TABLE>
<CAPTION>
Allocation of Allowance for Loan Losses. The following table sets
forth the allocation of allowance for loan losses by loan category for
the periods indicated. Management believes that the allowance can be
allocated by category only on an approximate basis. The allocation of
the allowance by category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any
category.
At December 31,
--------------------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family residential mortgage $ 1,462 83.62% $ 1,351 84.23% $ 1,095 83.89%
Commercial real estate and
multi-family residential 860 9.65 574 8.03 596 6.12
Land loans 84 2.29 91 1.92 119 1.70
Other 160 4.44 249 5.82 453 8.29
------- ------- ------- ------- ------- -------
Total allowance for loan losses $ 2,566 100.00% $ 2,265 100.00% $ 2,263 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
Investment Activities
In prior years, the Bank had increased the percentage of its assets
held in its investment portfolio as part of its strategy of maintaining
higher levels of liquidity which improve the Bank's interest rate risk
position. During 1995, in a declining interest rate environment, the
Bank began using this excess liquidity to fund a portion of its loan
production. The Bank's investment portfolio comprises investment
securities, FHLB Stock and interest earning deposits. The carrying
value of the Bank's investment securities totaled $41.7 million at
December 31, 1996, compared to $43.1 million at December 31, 1995. The
Bank's interest-bearing deposits due from other financial institutions
with original maturities of three months or less, totaled $27.1 million
at December 31, 1996, compared to $10.0 million at December 31, 1995.
The Bank is required under federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified short
term securities and certain other investments. See "Regulation-Federal
Regulations-Liquidity Requirements" below and "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity
and Capital Resources" in the Annual Report. The Bank generally has
maintained a portfolio of liquid assets that exceeds regulatory
requirements. Liquidity levels may be increased or decreased depending
upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of
yield that will be available in the future, as well as management's
projections as to the short term demand for funds to be used in the
Bank's loan origination and other activities.
Investment Portfolio. The following tables set forth the carrying
value of the Bank's investments at the dates indicated. At December 31,
1996, the market value of the Bank's investments was approximately $41.7
million. As allowed by SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Bank declared its investment in U.S.
Government and agency obligations as available for sale. As a result,
such securities are now presented at fair value, as determined by market
quotations. The market value of investments includes interest-earning
deposits and FHLB stock at book value, which approximates market value.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1994 1995 1996
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations $ 50,777 $ 26,546 $ 8,035
Municipal bonds 422 440 430
Interest-earning deposits 25,063 9,974 27,127
FHLB stock 6,148 6,148 6,148
-------- -------- --------
Total investments $ 82,410 $ 43,108 $ 41,740
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Investment Portfolio Maturities. The following table sets forth
the scheduled maturities, amortized cost, market values and average
yields for the Bank's investment securities at December 31, 1996. At
December 31, 1996, the Bank did not have any investment securities
maturing after three years.
At December 31, 1996
------------------------------------------------------------------------------------------
One Year or Less One to Three Years
---------------------- ----------------------
Annualized Annualized Annualized
Weighted Weighted Average Weighted
Amortized Average Amortized Average Amortized Market Life in Average
Cost Yield Cost Yield Cost Value Years (1) Yield
------- --------- ------- --------- --------- ------ ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government agency securities $ 2,000 5.82% $ 6,024 6.71% $ 8,024 $ 8,035 1.92 6.49%
Municipal bonds - - 419 5.49 419 430 2.66 5.49
FHLB stock 6,148 7.25 - - 6,148 6,148 - 7.25
Interest-earning deposits 27,127 5.20 - - 27,127 27,127 - 5.20
--------- --------- --------- --------- --------- --------- ------ -------
Total $ 35,275 5.59% $ 6,443 6.63% $ 41,718 $ 41,740 1.96 5.75%
========= ========= ========= ========= ========= ======== ====== =======
- ----------------------------------------------------------------------
(1) Total weighted average life in years calculated only on United
States Government agency securities and municipal bonds.
</TABLE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the
Bank derives funds from the amortization and prepayment of loans and
mortgage-backed securities, the maturity of investment securities,
operations and, if needed, advances from the FHLB. Scheduled loan
principal repayments are a relatively stable source of funds, while
deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a
longer term basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted
principally from within the Bank's market area through the offering of a
broad selection of deposit instruments including non-interest-bearing
demand accounts, NOW accounts, passbook savings, money market deposits,
term certificate accounts and individual retirement accounts. Deposit
account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest
rate, among other factors. The Bank regularly evaluates its internal
cost of funds, surveys rates offered by competing institutions, reviews
the Bank's cash flow requirements for lending and liquidity, and
executes rate changes when deemed appropriate. The Bank does not obtain
funds through brokers.
<TABLE>
<CAPTION>
Deposit Portfolio. The following table sets forth information
regarding interest rates, terms, minimum amounts and balances of the
Bank's deposit portfolio as of December 31, 1996.
Weighted Percentage
Average of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00 % None Non-interest-bearing demand $1,000 $ 26,406 3.80%
1.01 None NOW accounts 100 70,558 10.16
2.00 None Passbooks 100 87,534 12.60
2.50 None Money market accounts 2,500 44,012 6.34
Certificates of Deposit
-----------------------
4.75 0 - 3 months Fixed term, fixed rate 1,000 140,670 20.25
5.15 3 - 6 months Fixed term, fixed rate 1,000 90,970 13.09
5.50 6 - 12 months Fixed term, fixed rate 1,000 127,272 18.32
5.81 12 - 36 months Fixed term, fixed rate 1,000 79,894 11.50
6.00 36 - 60 months Fixed term, fixed rate 1,000 27,323 3.93
6.10 Over 60 months Fixed term, fixed rate 1,000 79 .01
--------- ---------
$ 694,718 100.00%
========= =========
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the change in dollar amount of
savings deposits in the various types of savings accounts offered
by the Bank between the dates indicated.
Balance Balance Deposit Incr. Balance Deposit Incr.
12/31/92 12/31/93 % (Decr) 12/31/94 % (Decr)
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
accounts $ 11,043 $ 14,630 2.5% $ 3,587 $ 19,551 3.6% $ 4,921
NOW, Super NOW and funds
transfer accounts 65,598 68,380 11.7 2,782 65,025 12.1 (3,355)
Passbook and statement accounts 101,684 128,530 21.9 26,846 99,198 18.4 (29,332)
Variable rate money market
accounts 68,107 67,661 11.5 (446) 55,516 10.3 (12,145)
Time Deposits:
Maturing within 12 months 279,895 256,560 43.7 (23,335) 243,557 45.3 (13,003)
Maturing within 12-36 months 47,290 23,388 4.0 (23,902) 34,405 6.4 11,017
Maturing beyond 36 months 6 27,378 4.7 27,372 20,983 3.9 (6,395)
--------- --------- --------- --------- --------- -------- ---------
Total $ 573,623 $ 586,527 100.00% $ 12,904 $ 538,235 100.00% $ (48,292)
========= ========= ========= ========= ========= ========= =========
Balance Deposit Incr. Balance Deposit Incr.
12/31/95 % (Decr) 12/31/96 % (Decr)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
accounts $ 21,430 3.6% $ 1,879 $ 26,406 3.8% $ 4,976
NOW, Super NOW and funds
transfer accounts 67,886 11.4 2,861 70,558 10.2 2,672
Passbook and statement accounts 86,471 14.5 (12,727) 87,534 12.6 1,063
Variable rate money market
accounts 44,677 7.5 (10,839) 44,012 6.3 (665)
Time Deposits:
Maturing within 12 months 294,202 47.4 38,676 358,912 51.7 64,710
Maturing within 12-36 months 57,236 12.7 41,018 79,894 11.5 22,658
Maturing beyond 36 months 23,278 2.9 (3,923) 27,402 3.9 4,124
--------- --------- --------- --------- --------- ---------
Total $ 595,180 100.00% $ 56,945 $ 694,718 100.00% $ 99,538
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the certificates of deposit in the
Bank classified by rates as of the dates indicated.
At December 31,
----------------------------------------
1994 1995 1996
--------- --------- ---------
Rate (In Thousands)
- ----
<S> <C> <C> <C>
1.01 - 2.00% $ 1,590 $ 834 $ 949
2.01 - 3.00% 1,699 2 2
3.01 - 4.00% 62,823 1,198 20
4.01 - 5.00% 137,818 49,308 34,308
5.01 - 6.00% 63,804 205,595 333,998
6.01 - 7.00% 24,998 109,737 93,788
7.00 - 8.00% 6,141 8,025 3,079
8.01 - 9.00% 72 17 64
--------- --------- ---------
$ 298,945 $ 374,716 $ 466,208
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1996.
Amount Due
-------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
-------- -------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate
1.01 - 2.00% $ 934 $ 15 $ - $ - $ - $ - $ 949
2.01 - 3.00% - 2 - - - - 2
3.01 - 4.00% 15 - 5 - - - 20
4.01 - 5.00% 32,673 610 945 48 - 32 34,308
5.01 - 6.00% 255,478 58,482 11,010 3,888 4,247 893 333,998
6.01 - 7.00% 30,047 15,739 16,643 13,095 17,620 644 93,788
7.01 - 8.00% 2,865 161 - - - 53 3,079
8.01 - 9.00% 30 34 - - - - 64
--------- --------- --------- -------- --------- --------- ---------
$ 322,042 $ 75,043 $ 28,603 $ 17,031 $ 21,867 $ 1,622 $ 466,208
========= ========= ========== ======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
The following table indicates the amount of the Bank's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 1996.
Remaining Maturity Amounts
------------------ --------------
(In Thousands)
<S> <C>
Three months or less $ 12,849
Three through six months 8,871
Six through twelve months 12,720
Over twelve months 19,240
------------
Total $ 53,680
============
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the net changes in the deposit
activities of the Bank for the periods indicated.
Year Ended December 31,
--------------------------------------------------
1994 1995 1996
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Deposits $ 1,903,691 $ 2,114,143 $ 2,557,621
Withdrawals 1,966,162 2,076,361 2,480,059
----------- ------------ ------------
Net increase (decrease) before interest credited (62,471) 37,782 77,562
Interest credited 14,179 19,163 21,976
----------- ------------ ------------
Net increase (decrease) in deposits $ (48,292) $ 56,945 $ 99,538
=========== ============ ============
</TABLE>
Borrowings
Savings deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes.
If the need arises, the Bank, may rely upon advances from the FHLB and
the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. Advances
from the FHLB typically are collateralized by the Bank's stock in the
FHLB and a portion of the Bank's first mortgage loans. At December 31,
1996, the Bank had $82.5 million in FHLB advances outstanding.
The FHLB functions as a central reserve bank providing credit for
the Bank and other member savings institutions and financial
institutions. As a member, the Bank is required to own capital stock in
the FHLB and is authorized to apply for advances on the security of such
stock and certain of its home mortgages and other assets (principally,
securities that are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met.
Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a
fixed percentage of a member institution's net worth or on the FHLB's
assessment of the institution's creditworthiness. All FHLB advances
have fixed interest rates and mature between two and 10 years.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1994 1995 1996
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Maximum month-end balance $ 86,659 $ 86,168 $ 91,135
Balance at end of period 86,659 85,169 82,517
Average balance 28,259 78,368 84,351
Weighted average interest rate on:
Balance at end of period 6.94% 6.86% 6.74%
Average balance for period 6.54% 7.00% 6.79%
</TABLE>
Competition
The Bank's market area in Southeast Florida has a large
concentration of financial institutions, many of which are significantly
larger and have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. As a result, the
Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition
for deposits has come historically from commercial banks, brokerage
houses, other savings associations, and credit unions in its market
area, and the Bank expects continued strong competition from such
financial institutions in the foreseeable future. The Bank's market
area includes branches of several commercial banks that are
substantially larger than the Bank in terms of state-wide deposits. The
Bank competes for savings by offering depositors a high level of
personal service and expertise together with a wide range of financial
services.
The competition for real estate and other loans comes principally
from commercial banks, mortgage banking companies, and other savings
associations. This competition for loans has increased substantially in
recent years as a result of the large number of institutions competing
in the Bank's market area as well as the increased efforts by commercial
banks to expand mortgage loan originations.
The Bank competes for loans primarily through the interest rates
and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers, and builders. Factors that
affect competition include general and local economic conditions,
current interest rate levels, and volatility of the mortgage markets.
Based on total assets as of June 1996, the Bank was the second
largest savings institution headquartered in Palm Beach County, and the
Bank held approximately 3.5% of all financial institution deposits in
Palm Beach County.
Subsidiary Activities
The Bank has one active wholly owned subsidiary, Fidelity Realty
and Appraisal Service, Inc., a Florida corporation ("FRAS"). FRAS is
primarily engaged in providing appraisal services for the Bank and
selling the Bank's REO. At December 31, 1996, the Bank had an equity
investment in FRAS of $207,000. For the year ended December 31, 1996,
FRAS had a net loss of $8,000.
Under FIRREA, SAIF-insured institutions are required to provide 30
days advance notice to the OTS and FDIC before establishing or acquiring
a subsidiary or conducting a new activity in a subsidiary. The insured
institution must also provide the FDIC and the OTS such information as
may be required by applicable regulations and must conduct the activity
in accordance with the rules and orders of the OTS. In addition to
other enforcement and supervision powers, the OTS may determine after
notice and opportunity for a hearing that the continuation of a savings
association's ownership of or relation to a subsidiary (i) constitutes a
serious risk to the safety, soundness or stability of the savings
association, or (ii) is inconsistent with the purposes of FIRREA. Upon
the making of such a determination, the OTS may order the savings
association to divest the subsidiary or take other actions.
Personnel
As of December 31, 1996, the Bank had 267 full-time and 31 part-
time employees. None of the Bank's employees is represented by a
collective bargaining group. The Bank believes its relationship with
its employees to be good.
Regulation
As a federally chartered, SAIF-insured savings association the Bank
is subject to examination, supervision and extensive regulation by the
OTS, and the FDIC. The Bank is a member of and owns stock in the FHLB
of Atlanta, which is one of the twelve regional banks in the Federal
Home Loan Bank System. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage
and is intended primarily for the protection of the insurance fund and
depositors.
The Bank also is subject to regulation by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") governing
reserves to be maintained against deposits and certain other matters.
The Holding Company will be subject to supervision and regulation by the
OTS.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that
they may find in the Bank's operations. The FDIC also examines the Bank
in its role as the administrator of the SAIF. The Bank's relationship
with its depositors and borrowers also is regulated to a great extent by
both federal and state laws especially in such matters as the ownership
of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, or
Congress, could have a material adverse impact on the Holding Company
and the Bank and their operations.
The Federal Deposit Insurance Corporation Improvement Act of 1991.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") primarily addresses the recapitalization of the BIF, which
insures the deposits of commercial banks and savings banks. In
addition, FDICIA established a number of new mandatory supervisory
measures for savings associations and banks.
Standards for Safety and Soundness. FDICIA requires the federal
bank regulatory agencies to prescribe regulatory standards for all
insured depository institutions and depository institution holding
companies relating to: (i) internal controls, information systems and
audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; and (vi) compensation,
fees and benefits. The compensation standards would prohibit employment
contracts, compensation or benefit arrangements, stock option plans, fee
arrangements or other compensatory arrangements that provide excessive
compensation, fees or benefits or could lead to material financial loss.
In addition the federal banking regulatory agencies are required to
prescribe by regulation standards specifying: (i) maximum classified
assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a
minimum ratio of market value to book value for publicly traded shares
of depository institutions and depository institution holding companies.
Financial Management Requirements. Pursuant to FDICIA, in May
1993, the FDIC adopted rules establishing annual independent audits and
financial reporting requirements for all depository institutions with
assets of more than $500 million, their management and their independent
auditors. The rules also establish new requirements for the
composition, duties, and authority of such institutions' audit
committees and boards of directors, effective in fiscal years beginning
after December 31, 1992. Among other things, all depository
institutions with assets in excess of $500 million are required to
prepare and make available to the public annual reports on their
financial condition and management, including statements of management's
responsibility under regulations relating to safety and soundness, and
an assessment of the institution's compliance with internal controls,
laws and regulations. The institution's independent auditors are
required to attest to these management assessments. Each such
institution also is required to have an audit committee composed of
independent directors. Audit Committees of large institutions
(institutions with assets exceeding $3.0 billion) must: (i) include
members with banking or related financial management experience; (ii)
have the ability to engage their own independent legal counsel; and
(iii) must not include any large customers (as defined) of the
institution.
Prompt Corrective Action Regulation. FDICIA establishes a system
of prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the OTS and the other banking
regulators are required to establish five capital categories ("well-
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized") and
to take certain mandatory supervisory actions (and are authorized to
take other discretionary actions) with respect to institutions in the
three undercapitalized categories, the severity of which will depend
upon the capital category in which the institution is placed.
Generally, FDICIA requires the requisite banking regulator to appoint a
receiver or conservator for an institution that is critically
undercapitalized.
Under the OTS rule implementing the prompt corrective action
provisions, a savings institution that: (i) has a total risk-based
capital ratio of 10.0% or greater, a Tier I (core) risk-based capital
ratio of 6.0% or greater and a leverage ratio of 5.0% or greater; and
(ii) is not subject to any written agreement, order, capital directive
or prompt corrective action directive issued by the OTS, is deemed to be
well-capitalized. An institution with a total risk-based capital ratio
of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater
and a leverage ratio of 4.0% or greater, is considered to be adequately
capitalized. A savings institution that has a total risk-based capital
ratio of less than 8.0%, a Tier I risk-based capital ratio of less than
4.0%, or a leverage ratio that is less than 4.0% is considered to be
undercapitalized. A savings institution that has a total risk-based
capital ratio of less than 6.0%, a Tier I risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0%, is considered
to be significantly undercapitalized. A savings institution that has a
tangible equity capital to assets ratio equal to or less than 2.0% is
deemed to be critically undercapitalized. For purposes of the
regulation, the term "tangible equity" includes core capital elements
counted as Tier I capital for purposes of the risk-based capital
standards plus the amount of outstanding cumulative perpetual preferred
stock (including related surplus), minus all intangible assets except
certain purchased mortgage servicing rights and qualifying supervisory
goodwill.
FDICIA authorizes the appropriate federal banking agency, after
notice and an opportunity for a hearing, to treat a well-capitalized,
adequately capitalized or undercapitalized insured depository
institution as if it had a lower capital classification if it is in an
unsafe or unsound condition or is engaging in an unsafe or unsound
practice. Thus, an adequately capitalized institution can be subjected
to the restrictions on undercapitalized institutions (provided that a
capital restoration plan cannot be required of the institution)
described below and an undercapitalized institution can be subjected to
the restrictions applicable to significantly undercapitalized
institutions described below.
Under FDICIA, an insured depository institution cannot make a
capital distribution (as broadly defined to include, among other things,
dividends, redemptions and other repurchases of stock) or pay management
fees to any person that controls the institution if thereafter it would
be undercapitalized. The appropriate federal banking agency, however,
may (after consultation with the FDIC) permit an insured depository
institution to repurchase, redeem, retire or otherwise acquire its
shares if such action: (i) is taken in connection with the issuance of
additional shares or obligations in at least an equivalent amount; and
(ii) will reduce the institution's financial obligations or otherwise
improve its financial condition. An undercapitalized institution
generally is prohibited form increasing its average total assets. An
undercapitalized institution also generally is prohibited from making
acquisitions, establishing any branches or engaging in any new line of
business except in accordance with an accepted capital restoration plan
or with the approval of the FDIC. In addition, the appropriate federal
banking agency is given authority with respect to any undercapitalized
depository institution to take any of the actions it is required to or
may take with respect to a significantly undercapitalized institution as
described below if it determines that such actions are necessary to
carry out the purpose of FDICIA.
Federal Regulations
Regulatory Capital. The capital requirements consist of a
"tangible capital requirement," a "leverage limit" and a "risk-based
capital requirement."
Under the tangible capital requirement, a savings association must
maintain tangible capital in an amount equal to at least 1.5% of
adjusted total assets. Tangible capital is defined as core capital less
all intangible assets (including supervisory goodwill), plus a specified
amount of purchased mortgage servicing rights. Further, the valuation
allowance applicable to the write-down of investments and mortgage-
backed securities in accordance with SFAS 115 is excluded from the
regulatory capital calculation.
The leverage limit adopted by the OTS requires that savings
associations maintain "core capital" in an amount equal to at least 3%
of adjusted total assets. The OTS, however, has proposed an amendment
to this requirement that would increase core capital requirements for
nearly all savings associations, as discussed below. Core capital is
defined as common stockholders' equity (including retained earnings),
non-cumulative perpetual preferred stock, and minority interests in the
equity accounts of consolidated subsidiaries, plus purchased mortgage
servicing rights valued at the lower of 90% of fair market value, 90% of
original cost or the current amortized book value as determined under
generally accepted accounting principles ("GAAP"), and "qualifying
supervisory goodwill," less non-qualifying intangible assets.
In addition, the OTS has proposed a rule that would limit the
amount of purchased mortgage servicing rights includable as core capital
to 50% of such capital. No assurance can be given as to the final form
of such regulation, the date of its effectiveness, or whether it will
differ materially from the proposal. The proposal, if adopted as
proposed, is not anticipated to have any immediate effect on the Bank.
In April 1991, the OTS published a proposed amendment to the
regulatory capital requirements applicable to all savings associations
to conform to Office of the Comptroller of the Currency ("OCC") capital
regulations applicable to national banks. Under the OTS proposal, those
savings associations receiving a CAMEL rating of "1", the best possible
rating on a scale of 1 to 5, will be required to maintain a ratio of
core capital to adjusted total assets of 3%. All other savings
associations will be required to maintain minimum core capital of 4% to
5% of total adjusted assets. In determining the required minimum core
capital ratio, the OTS will assess the quality of risk management and
the level of risk in each savings association on a case-by-case basis.
The OTS did not indicate in the proposed regulation the standards it
will use in establishing the appropriate core capital requirement for
savings associations not rated "1" under the CAMEL rating system. At
December 31, 1996, the Bank's ratio of core capital to total adjusted
assets was 9.2%. The OTS prohibits savings associations from disclosing
their CAMEL ratings.
A savings association that does not meet the minimum regulatory
capital requirements because of the new core capital requirement will be
required to submit a capital restoration plan to the OTS that sets forth
in reasonable detail the steps the association will take to be in
compliance. The capital plans will be required to be filed within 60
days of the effective date of the new regulation. If the OTS rejects a
savings association's capital plan, the OTS may require an amended
capital plan to be filed, or the OTS can take supervisory action against
the association. The Bank is unable to predict when such regulation
will be adopted, or, if adopted, the final form that such regulation
will take.
Under the risk-based capital requirement, a savings association
must maintain total capital (which is defined as core capital plus
supplementary capital) equal to at least 8.0% of risk-weighted assets.
A savings association must calculate its risk-weighted assets by
multiplying each asset and off-balance sheet item by various risk
factors, which range from 0% for cash and securities issued by the
United States Government or its agencies to 100% for repossessed assets
or loans more than 90 days past due. Supplementary capital may include,
among other items, cumulative perpetual preferred stock, perpetual
subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and general allowances for loan
losses. The allowance for loan losses includable in supplementary
capital is limited to 1.25% of risk-weighted assets. Supplementary
capital is limited to 100% of core capital.
Effective January 1, 1994, the OTS has amended its risk-based
capital requirements to require institutions with an "above normal"
level of interest rate risk to exclude certain amounts of capital to
take account of such risk in determining compliance with the risk-based
requirements. A savings institution will be considered to have a
"normal" level of interest rate risk if the decline in the market value
of its portfolio equity after an immediate 200 basis point increase or
decrease in market interest rates (whichever leads to the greater
decline) is less than two percent of the current estimated market value
of its assets. The market value of portfolio equity is defined as the
net present value of expected cash inflows and outflows from an
institution's assets, liabilities and off-balance sheet items. The
amount of additional capital that an institution with an above normal
interest rate risk would be required to maintain (the "interest rate
risk component") would equal one-half of the dollar amount by which its
measured interest rate risk exceeds the normal level of interest rate
risk. The interest rate risk component would be in addition to the
capital otherwise required to satisfy the risk-based capital
requirement. At December 31, 1996, the OTS had not implemented the
interest rate risk component. Had the interest rate risk component been
implemented as originally proposed, the Bank would not have been
required to allocate any of its excess risk-based capital for interest
rate risk purposes at December 31, 1996.
Certain exclusions from capital and assets are required to be made
for the purpose of calculating total capital, in addition to the
adjustments required for calculating core capital. Such exclusions
consist of equity investments (as defined by regulation) and that
portion of land loans and non-residential construction loans in excess
of an 80% loan-to-value ratio (these items are excluded on a sliding
scale through December 31, 1996, after which they must be excluded in
their entirety) and reciprocal holdings of qualifying capital
instruments.
The OTS and the FDIC generally are authorized to take enforcement
action against a savings association that fails to meet its capital
requirements, which action may include restrictions on operations and
banking activities, the imposition of a capital directive, a cease-and-
desist order, civil money penalties or harsher measures such as the
appointment of a receiver or conservator or a forced merger into another
institution. In addition, under current regulatory policy, a savings
association that fails to meet its capital requirements is prohibited
from paying any dividends. Except under certain circumstances, further
disclosure of final enforcement actions by the OTS is required.
Federal Home Loan Bank System. The Bank is a member of the Federal
Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional
FHLBs. As a member of the FHLB, the Bank is required to purchase and
maintain stock in the FHLB of Atlanta in an amount equal to the greater
of 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year, or 1/20
(or such greater fraction as established by the FHLB) of outstanding
FHLB advances. At December 31, 1996 the Bank had $6.1 million in FHLB
of Atlanta stock, which was in compliance with this requirement. In
past years the Bank has received dividends on its FHLB stock. Over the
past five years such dividends have averaged 6.50%, and was 7.25% for
the year ended December 31, 1996. Certain provisions of FIRREA require
all 12 FHLBs to provide financial assistance for the resolution of
troubled savings associations and to contribute to affordable housing
programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects.
These contributions could cause rates on the FHLB advances to increase
and could affect adversely the level of FHLB dividends paid and the
value of FHLB stock in the future.
Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of
the Federal Housing Finance Board (the "FHFB").
FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral consists of mortgage loans
less than 90 days delinquent or securities evidencing interests therein,
securities (including mortgage-backed securities) issued, insured, or
guaranteed by the federal government or any agency thereof, FHLB
deposits, and to a limited extent, real estate with readily
ascertainable value in which a perfected security interest may be
obtained. Other forms of collateral may be accepted as
collateralization under certain circumstances. All long-term advances
are required to be used to provide funds for residential home financing.
In addition, the FHFB has established standards of community service
that members must meet to maintain access to long-term advances. FHLBs
are authorized to make short-term liquidity advances to solvent
associations in poor financial condition but with prospects of
improving, upon the request of the OTS. In addition, pursuant to FHLB
regulations, each FHLB is required to establish programs for affordable
housing that involve interest subsidies from the FHLBs on advances to
members engaged in lending at subsidized interest rates for low- and
moderate-income, owner-occupied housing and affordable housing, and
certain other community purposes.
Qualified Thrift Lender Test. The qualified thrift lender ("QTL")
test requires that a savings institution maintain at least 65% of its
total portfolio assets in "qualified thrift investments" on an average
basis in nine out of every twelve months. For purposes of the test,
portfolio assets are defined as the total assets of the savings
institution minus: goodwill and other intangible assets, the value of
property used by the savings institution to conduct its business and
liquid assets not to exceed 20% of the savings institution's total
assets.
Under the QTL's statutory and regulatory provisions, all forms of
home mortgages, home improvement loans, home equity loans and loans on
the security of other residential real estate and mobile homes as well
as a designated percentage of consumer loans are "qualified thrift
investments," as are shares of stock of the FHLB, investments or
deposits in other insured institutions, securities issued by the FNMA,
FHLMC, GNMA or the RTC Financing Corporation and other mortgage-related
securities. Investments in nonsubsidiary corporations or partnerships
whose activities include servicing mortgages or real estate development
are also considered qualified thrift investments in proportion to the
amount of primary revenue such entities derive from housing-related
activities. Also included in qualified thrift investments are mortgage
servicing rights, whether such rights are purchased by the insured
institution or created when the institution sells loans and retains the
right to service such loans.
A savings institution that fails to become, or maintain its status
as, a qualified thrift lender must either become a bank (other than a
savings bank) or be subject to certain restrictions. A savings
institution that fails to meet the QTL test and does not convert to a
bank will be: (i) prohibited from making an investment or engaging in
activities that would not be permissible for national banks; (ii)
prohibited from establishing any new branch office where a national bank
located in the savings institution's home state would not be able to
establish a branch office; (iii) ineligible to obtain new advances from
any Federal Home Loan Bank; and (iv) subject to limitations on the
payment of dividends comparable to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a qualified
thrift lender, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for
a national bank and would be required to repay any outstanding advances
to any FHLB. A savings institution may requalify as a qualified thrift
lender if it thereafter complies with the QTL test.
As of December 31, 1996, the Bank was in compliance with the QTL
requirement. At December 31, 1996, 90.6% of the Bank's assets were
"qualified thrift investments."
Liquidity Requirements. Federally insured savings associations are
required to maintain an average daily balance of liquid assets equal to
a certain percentage of the sum of average daily balances of net
withdrawable deposit accounts and borrowings payable in one year or
less. The liquidity requirement may vary from time to time (between
4.0% and 10.0%) depending upon economic conditions and savings flows of
all savings associations. At the present time, the required liquid
asset ratio is 5.0%.
For purposes of this ratio, liquid assets include specified short-
term assets (such as cash, certain time deposits, certain bankers'
acceptances and short-term United States Treasury obligations), and
long-term assets such as United States Treasury obligations of more than
one and less than five years and federal agency obligations with a
minimum term of 18 months. The regulations governing liquidity
requirements include as liquid assets debt securities hedged with
forward commitments obtained from dealers in United States Government
securities or Associations whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial futures position, and
debt securities that provide the holder with a right to redeem the
security at par value, regardless of the stated maturities of such
securities. FIRREA also authorizes the OTS to designate as liquid
assets certain mortgage-related securities and certain mortgage loans
(qualifying as backing for certain mortgage-backed securities) with less
than one year to maturity. Short-term liquid assets currently must
constitute at least 1% of an association's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of the liquidity requirements.
The monthly average liquidity ratio of the Bank for December 1996 was
6.15% and exceeded the then applicable requirement of 5.0%.
Insurance of Accounts and Regulation by the FDIC. The Bank's
deposits are insured up to $100,000 per insured member (as defined by
law and regulation) by the SAIF. This insurance is backed by the full
faith and credit of the United States Government. The SAIF is
administered and managed by the FDIC. As insurer, the FDIC is
authorized to conduct examinations of and to require reporting by SAIF-
insured associations. It also may prohibit any SAIF-insured association
from engaging in any activity the FDIC determines by regulation or order
to pose a serious threat to the SAIF. The FDIC also has the authority
to initiate enforcement actions against savings associations, after
first giving the OTS an opportunity to take such action.
The minimum annual deposit insurance premiums are currently
assessed at the rate of .065% of deposits for all SAIF-insured members.
The FDIC, however, is authorized to raise premiums in certain
circumstances related to fund losses and severe economic circumstances
and has exercised this authority several times with respect to premiums
paid to the BIF by commercial banks and BIF-member savings associations.
In September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of
March 31, 1995. The assessment was 65.7 basis points per $100 in
deposits, payable on November 27, 1996. In addition, beginning January
1, 1997, pursuant to the legislation, interest payments on FICO bonds
issued in the late 1980's by the Financing Corporation to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation will be
paid jointly by BIF-insured institutions and SAIF-insured institutions.
The FICO assessment will be 1.29 basis points per $100 in BIF deposits
and 6.44 basis points per $100 in SAIF deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro rata by banks and
thrifts based on deposits (approximately 2.4 basis points per $100 in
deposits).
The legislation also provides for the merger of the BIF and SAIF on
January 1, 1999 if there are no more savings associations as of that
date. Several bills have been introduced in the current Congress that
would eliminate the federal thrift charter and OTS. The bills would
require that all federal savings associations convert to national banks
or state depository institutions by no later than January 1, 1998 in one
bill and June 30, 1998 in the other and would treat all state savings
associations as state banks for purposes of federal banking laws.
Subject to a narrow grandfathering, all savings and loan holding
companies would become subject to the same regulation as bank holding
companies under the pending legislative proposals. Under such
proposals, any lawful activity in which a savings association would be
permitted for up to two years following the effective date of its
conversion to the new charter, with two additional one-year extension
which may be granted at the discretion of the regulator. Additionally,
such proposals would grandfather existing thrift intrastate and
interstate branches which were operated as branches or in the process of
being established on January 1, 1997 or January 7, 1997, respectively.
The legislative proposals would also abolish the OTS and transfer its
functions to the federal bank regulators with respect to the
institutions and to the Federal Reserve Board with respect to the
regulation of holding companies. The Company is unable to predict
whether the legislation will be enacted or, given such uncertainty,
determine the extent to which the legislation, if enacted, would affect
its business. The Company is also unable to predict whether the SAIF
and BIF funds will eventually be merged.
Limitations on Capital Distributions. OTS regulations impose
limitations on all capital distributions by savings institutions.
Capital distributions include cash dividends, payments to repurchase or
otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash-out merger, and other
distributions charged against capital. The rule establishes three tiers
of institutions. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution
("Tier 1 Association") may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to (i)
100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its surplus capital at the beginning of
the calendar year or (ii) 75% of its net income over the most recent
four-quarter period. Any additional capital distributions would require
prior regulatory approval. An institution that meets its regulatory
capital requirement, but not its fully phased-in capital requirement
before or after its capital distribution ("Tier 2 Association") may,
after prior notice but without the approval of the OTS, make capital
distributions of: up to 75% of its net income over the most recent four
quarter period if it satisfies the risk-based capital requirement that
would be applicable to it on January 1, 1993, computed based on its
current portfolio; up to 50% of its net income over the most recent four
quarter period if it satisfies the risk based capital standard that was
applicable to it on January 1, 1991, computed based on its current
portfolio; and up to 25% of its net income over the most recent four
quarter period if it satisfies its current risk-based capital
requirement. In computing the institution's permissible percentage of
capital distributions, previous distributions made during the prior four
quarter period must be included. A savings institution that does not
meet its current regulatory capital requirement before or after payment
of a proposed capital distribution ("Tier 3 Association") may not make
any capital distributions without the prior approval of the OTS. In
addition, the OTS would prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if
the OTS determines that such distribution would constitute an unsafe or
unsound practice. In addition, FDICIA provides that, as a general rule,
a financial institution may not make a capital distribution if it would
be undercapitalized after making the capital distribution. Also, an
institution meeting the Tier 1 capital criteria which has been notified
that it needs more than normal supervision will be treated as a Tier 2
or Tier 3 Association unless the OTS deems otherwise. A recently
proposed OTS rule would amend the capital distribution regulation to
provide that a Tier 1 Association would be permitted to make capital
distributions under the Tier 1 standard or, consistent with the highest
Tier 2 standard, at 75% of its net income to date over the most recent
four quarter period. As of December 31, 1996, the Bank was a Tier 1
Association.
Investment Limitations. FIRREA generally provides that state-
chartered savings associations may not engage as principal in any type
of activity, or in any activity in any amount not permitted for
federally-chartered associations, or directly acquire or retain any
equity investment of a type or amount not permitted for federally-
chartered associations. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation
equity investments) if it determines no significant risk to the
insurance fund is posed by the amount of the investment or the activity
to be engaged in if the Bank is and continues to be in compliance with
fully phased-in standards. Among activity restrictions applicable to
federally-chartered institutions that are also applicable to the Bank is
the prohibition on investing directly in equity securities or real
estate (other than that used for offices and related facilities or
acquired through, or in lieu of, foreclosure). In addition, the Bank is
authorized to invest directly in service corporation to a maximum of 2%
of the Bank's assets, plus an additional 1% of assets if the amount over
2% is used for specified community or intercity development purposes.
Federal laws and regulations also impose certain limitations on
operations, including restrictions on loans to one borrower,
transactions with affiliates and affiliated persons and liability
growth.
FIRREA also imposed investment and lending restrictions that are
applicable to all federally- or state-chartered associations. FIRREA
provides that no savings association may invest in corporate debt
securities not rated in one of the four highest rating categories by a
nationally recognized rating organization. FIRREA and FDICIA amend the
authority of savings associations to engage in transactions with
affiliates or to make loans to certain insiders, by making such
transactions subject to Sections 23A, 23B, 22(g) and 22(h) of the
Federal Reserve Act. Among other things, these provisions generally
require that these transactions with affiliates be on terms and
conditions comparable to those for similar transactions with non-
affiliates. In addition, these affiliate transactions may be regulated
further by the OTS to address safety and soundness concerns.
Holding Company Regulation. The Company and the MHC are holding
companies within the meaning of the Home Owners' Loan Act of 1933, as
amended ("HOLA"). As such, the Company and the MHC are registered with
and is subject to OTS examination and supervision as well as certain
reporting requirements. In addition, the operations of the Company and
the MHC are subject to the Regulations as well as other regulations
promulgated by the OTS from time to time. As a SAIF-insured subsidiary
of a savings and loan holding company, the Bank is subject to certain
restrictions in dealing with the Company and MHC and with other persons
affiliated with the Company and the MHC and will continue to be subject
to examination and supervision by the OTS and the FDIC.
Transactions with Affiliates. Section 11 of HOLA provides that
transactions between an insured subsidiary of a holding company and an
affiliate thereof will be subject to the restrictions that apply to
transactions between banks that are members of the Federal Reserve
System and their affiliates pursuant to Sections 23A and 23B of the
Federal Reserve Act. Generally, Sections 23A and 23B: (i) limit the
extent to which a financial institution or its subsidiaries may engage
in "covered transactions" with an "affiliate," to an amount equal to 10%
of the institution's capital and surplus, and limit all "covered
transactions" in the aggregate with all affiliates to an amount equal
to 20% of such capital and surplus; and (ii) require that all
transactions with an affiliate, whether or not "covered transactions,"
be on terms substantially the same, or at least as favorable to the
institution or subsidiary as those provided to a non-affiliate. The
term "covered transaction" includes the making of loans, purchase of
assets, issuance of a guarantee and similar types of transactions.
Management believes that the Bank is in compliance with the requirements
of Sections 23A and 23B. In addition to the restrictions that apply to
financial institutions generally under Sections 23A and 23B, Section 11
of the HOLA places three other restrictions on savings associations,
including those that are part of a holding company organization. First,
savings associations may not make any loan or extension of credit to an
affiliate unless that affiliate is engaged only in activities
permissible for bank holding companies. Second, savings associations
may not purchase or invest in affiliate securities except for those of a
subsidiary. Finally, the Director is granted authority to impose more
stringent restrictions when justifiable for reasons of safety and
soundness.
Extensions of credit by the Bank to executive officers, directors,
and principal stockholders and related interests of such persons are
subject to Sections 22 (g) and 22(h) of the Federal Reserve Act and
Subpart A of the Federal Reserve Board's Regulation O. These rules
prohibit loans to any such individual where the aggregate amount exceeds
an amount equal to 15% of an institution's unimpaired capital and
surplus plus an additional 10% of unimpaired capital and surplus in the
case of loans that are fully secured by readily marketable collateral,
and/or when the aggregate amount outstanding to all such individuals
exceeds the institution's unimpaired capital and unimpaired surplus.
These rules also provide that no institution shall make any loan or
extension of credit in any manner to any of its executive officers or
directors, or to any person who directly or indirectly, or acting
through or in concert with one or more persons, owns, controls, or has
the power to vote more than 10% of any class of voting securities of
such institution ("Principal Stockholder"), or to a related interest
(i.e., any company controlled by such executive officer, director, or
Principal Stockholder), or to any political or campaign committee the
funds or services of which will benefit such executive officer,
director, or Principal Stockholder or which is controlled by such
executive officer, director, or Principal Stockholder, unless such loan
or extension of credit is made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, does not involve more
than the normal risk of repayment or present other unfavorable features,
and the institution follows underwriting procedures that are not less
stringent than those applicable to comparable transactions by the
institution with persons who are not executive officers, directors,
Principal Stockholders, or employees of the institution. A savings
association is therefore prohibited from making any new loans or
extensions or credit to the savings association's executive officers,
directors, and 10% stockholders at different rates or terms than those
offered to employees of the Bank generally. The rules identify limited
circumstances in which an institution is permitted to extend credit to
executive officers. Management believes that the Bank is in compliance
with Sections 22(g) and 22(h) of the Federal Reserve Act and Subpart A
of the Federal Reserve Board's Regulation O.
The Federal Reserve System. Federal Reserve Board regulations
require all depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and Super NOW
checking accounts) and non-personal time deposits. Reserves of 3% must
be maintained against total transaction accounts of $54.0 million or
less (after a $4.0 million exemption), and an initial reserve of 10%
(subject to adjustment by the Federal Reserve Board to a level between
8% and 14%) must be maintained against that portion of total transaction
accounts in excess of such amount. At December 31, 1996, the Bank was
in compliance with these reserve requirements. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the
OTS. See "-Federal Regulations-Liquidity Requirements."
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations
require savings associations to exhaust other reasonable alternative
sources of funds, including FHLB advances, before borrowing from the
Federal Reserve Bank.
Federal and State Taxation
Federal Taxation. For federal income tax purposes, the Company
files a federal income tax return on a calendar year basis. Because the
Mutual Holding Company owns less than 80% of the outstanding common
stock of the Bank, it is not permitted to file a consolidated federal
income tax return with the Bank. Because the Mutual Holding Company has
nominal assets other than the stock of the Bank, it will initially have
no material federal income tax liability.
Under recently enacted legislation, the percentage of taxable
income method has been repealed for years beginning after December 31,
1995, and "large" associations, i.e., the quarterly average of the
association's total assets or of the consolidated group of which it is a
member, exceeds $500 million for the year, may no longer be entitled to
use the experience method of computing additions to their bad debt
reserve. A "large" association must use the direct write-off method for
deducting bad debts, under which charge-offs are deducted and recoveries
are taken into taxable income as incurred. If the Bank is not a "large"
association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take
into income) over a six-year period its applicable excess reserves, i.e,
the balance of its reserves for losses on qualifying loans and
nonqualifying loans, as of the close of the last tax year beginning
before January 1, 1996, over the greater of (a) the balance of such
reserves as of December 31, 1987 (pre-1988 reserves) or (b) in the case
of a bank which is not a "large" association, an amount that would have
been the balance of such reserves as of the close of the last tax year
beginning before January 1, 1996, had the Bank always computed the
additions to its reserves using the experience method. Postponement of
the recapture is possible for a two-year period if an association meets
a minimum level of mortgage lending for 1996 and 1997.
If an association ceases to qualify as a "bank" (as defined in Code
Section 581) or converts to a credit union, the pre-1988 reserves and
the supplemental reserve are restored to income ratably over a six-year
period, beginning in the tax year the association no longer qualifies as
a bank. The balance of the pre-1988 reserves are also subject to
recapture in the case of certain excess distributions to (including
distributions on liquidation and dissolution), or redemptions of,
shareholders.
Delaware Taxation. As a Delaware holding company doing business in
another state, the Company is exempted from Delaware corporate income
tax but is required to file an annual report with and pay an annual fee
to the State of Delaware. The Company is also subject to an annual
franchise tax imposed by the State of Delaware.
Florida Taxation. Foreign corporations, like the Company, pay a
5_% tax on the portion of their net taxable income which is allocable to
the State of Florida.
The Company has not been audited by the Internal Revenue Service,
the State of Delaware or the State of Florida within the past five
years. See Notes 1 and 13 to the Financial Statements.
Executive Officers of the Registrant
Listed below is information, as of December 31, 1996, concerning
the Registrant's executive officers. There are no arrangements or
understandings between the Registrant and any of persons named below
with respect to which he or she was or is to be selected as an officer.
Name Age Position and Term
---- --- --------------------------------------
Vince A. Elhilow 57 President since 1987 and Chief
Executive Officer since 1992; Director
of the Bank since 1984
J. Robert McDonald 66 Executive Vice President of the Bank
as of December; 31, 1994; Manager of
the Appraisal Department since 1972;
President of Fidelity Realty &
Appraisal Service, Inc. since 1982
Richard D. Aldred 52 Executive Vice President as of
December 31, 1994; Treasurer and Chief
Financial Officer since 1985
Joseph C. Bova 52 Executive Vice President as of
December 31, 1994; Lending Operations
Manager
Robert L. Fugate 48 Executive Vice President as of
December 31, 1994; Banking Operations
Manager since 1982
Christopher H. Cook 53 Executive Vice President as of
December 31, 1996; Corporate Counsel
since 1996; Director of the Bank since
1993
David R. Hochstetler 52 Senior Vice President since 1984;
Director of Marketing since 1980; CRA
Officer since 1989
Janice R. Newlands 48 Senior Vice President since 1989;
Director of Human Resources Director
since 1986
Kenneth B. Stone, Jr. 46 Senior Vice President since 1989; Loan
Production Manager since 1984
Daniel F. Turk 42 Senior Vice President since 1991;
Property and Risk Manager since 1983
Patricia C. Clager 61 Vice President since 1990; Corporate
Secretary since 1987; Assistant to the
Chairman of the Board
Flora R. Schmidt 41 Senior Vice President since 1995;
Banking Administration Manager since
1984
Joseph B. Shearouse III 39 Senior Vice President since 1995;
Commercial Loan Manager since 1995
Brian C. Mahoney 36 Senior Vice President since December
31, 1995; Controller since 1988
ITEM 2. PROPERTIES
The Bank conducts its business through its main office located in
West Palm Beach, Florida, and 19 additional full service branch offices
located in Palm Beach and Martin counties. The following table sets
forth certain information concerning the main office and each branch
office of the Bank at December 31, 1996. The aggregate net book value
of the Bank's premises and equipment was $18.1 million at December 31,
1996.
LOCATION OPENING DATE OWNERSHIP ANNUAL RENT
- -------- ------------ --------- -----------
Main Office 12/22/52 Fee Simple/ $ 7,420
218 Datura St. Ground Lease
West Palm Beach, Florida
45th St. 10/23/60 Fee Simple -
4520 45th St.
West Palm Beach, Florida
Northlake 11/15/65 Fee Simple -
950 Northlake Blvd
Lake Park, Florida
Forest Hill 4/05/71 Fee Simple -
399 Forest Hill Blvd
West Palm Beach, Florida
Palm Beach 6/18/73 Fee Simple -
245 Royal Poinciana
Palm Beach, Florida
Century Corners 6/25/73 Fee Simple -
4835 Okeechobee Blvd
West Palm Beach, Florida
Singer Island 2/04/74 Fee Simple -
1200 E. Blue Heron
Riviera Beach, Florida
Jupiter/Tequesta 1/26/76 Ground Lease $ 13,250
171 Tequesta Dr
Tequesta, Florida
Royal Palm Beach 3/15/76 Fee Simple -
100 Royal Palm Beach Blvd
Royal Palm Beach, Florida
Boynton Beach 12/19/77 Lease $ 120,458
1501 Corporate Dr
Boynton Beach, Florida
West Lake Worth 12/03/79 Fee Simple -
6535 Lake Worth Rd
Lake Worth, Florida
Wellington 6/02/80 Fee Simple -
12000 W. Forest Hill Blvd
Wellington, Florida
Delray Beach 10/20/80 Ground Lease $ 68,916.
5017 W. Atlantic Ave
Delray Beach, Florida
Jensen Beach 9/14/81 Fee Simple -
1021 NE Jensen Beach Blvd
Jensen Beach, Florida
Bear Lakes 5/15/89 Lease $ 192,286
701 Village Blvd
West Palm Beach, Florida
Palm Beach Gardens 5/20/91 Lease $ 143,523
10973 N. Military Tr
Palm Beach Gardens, Florida
Kanner/Monterey 7/06/93 Fee Simple -
2401 S. Kanner Highway
Stuart, Florida
Stuart 12/13/93 Fee Simple -
2980 South Federal Highway
Stuart, Florida
West Forest Hill 9/30/96 Fee Simple -
3989 Forest Hill Blvd.
West Palm Beach, Florida
The Bank's accounting and record keeping activities are maintained
on the Florida Informanagement Services, Inc. (FIS) service bureau
system. FIS is owned by its participating members, of which the Bank is
one. The Bank's investment in FIS at December 31, 1996 was $96,000,
which represented a 9.88% interest in the Company. The Bank also owns
data processing equipment it uses for its internal processing needs. The
net book value of such data processing equipment and related software at
December 31, 1996, was approximately $950,000.
ITEM 3. LEGAL PROCEEDINGS
- -----------------------------
There are various claims and lawsuits in which the Bank is
periodically involved incident to the Bank's business. In the opinion
of management, no material loss is expected from any of such pending
claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------
No matters were submitted during the fourth quarter of the year
ended December 31, 1996 to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
- ------------------------------------------------------------
For information concerning the market for the Registrant's common
stock, the section captioned "Stockholder Information" of the
Registrant's Annual Report to Stockholders for the Year Ended December
31, 1996 (the "Annual Report to Stockholders") is incorporated herein by
reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- ----------------------------------------------------------
The "Selected Consolidated Financial and Other Data" section of the
Registrant's Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of the Registrant's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS
- --------------------------------
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ------------------------------------------------------------
There were no changes in or disagreements with accountants in the
Registrant's accounting and financial disclosure during 1996.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- -----------------------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the Registrant's definitive Proxy Statement
dated March 15, 1997 (the "Proxy Statement"), specifically the section
captioned "Proposal I-Election of Directors." In addition, see Item 1.
"Executive Officers of the Registrant" for information concerning the
Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
- -----------------------------------
Information concerning executive compensation is incorporated
herein by reference from the Registrant's Proxy Statement, specifically
the sections captioned "Proposal I-Election of Directors-Executive
Compensation," "-Directors' Compensation," and "-Benefits."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
- ------------------------------------------------------------
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Registrant's
Proxy Statement.
ITEM 13. CERTAIN TRANSACTIONS
- ---------------------------------
Information concerning relationships and transactions is
incorporated herein by reference from the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
- --------------------------------------------------------
The exhibits and financial statement schedules filed as a
part of this Form 10-K are as follows:
(a)(1) Financial Statements
--------------------
* Independent Auditors' Report
* Consolidated Statements of Financial Condition,
December 31, 1995 and 1996
* Consolidated Statements of Operations,
Years Ended December 31, 1994, 1995 and 1996
* Consolidated Statements of Changes in Stockholders'
equity, Years Ended December 31, 1994, 1995 and 1996
* Consolidated Statements of Cash Flows,
Years Ended December 31, 1994, 1995 and 1996
* Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
No financial statement schedules are filed because the
required information is not applicable or is included in
the consolidated financial statements or related notes.
(a)(3) Exhibits
--------
3.1 Federal Stock Charter of Fidelity Federal Savings Bank
of Florida (Incorporated by reference to Exhibit
2(C)(5) of the Bank's Form MHC-1, as amended)
3.2 Bylaws of Fidelity Federal Savings Bank of Florida
(Incorporated by reference to Exhibit 2(C)(6) of the
Bank's Form MHC-1, as amended)
4 Common Stock Certificate of the Bank (Incorporated
by reference to Exhibit 2(B)(1) of the Bank's Form
MHC-1, as amended)
10.1 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 2(D)(6) of the Bank's Form
MHC-1, as amended)
10.2 Stock Option Plan for Outside Directors
(Incorporated by reference to Exhibit 2(D)(7) of the
Bank's Form MHC-1, as amended)
10.3 Employment Agreement with Vince A. Elhilow,
President and Chief Executive Officer (Incorporated
by reference to Exhibit 2(D)(1) of the Bank's Form
10-K filed on March 29, 1994)
10.4 Recognition and Retention Plan for Employees
(Incorporated by reference to Exhibit 2(D)(4) of the
Bank's Form MHC-1, as amended)
10.5 Recognition and Retention Plan for Outside Directors
(Incorporated by reference to Exhibit 2(D)(5) of the
Bank's Form MHC-1, as amended)
10.6 Employee Severance Compensation Plan (Incorporated
by reference to Exhibit 2(D)(2) of the Bank's Form
MHC-1, as amended)
10.6.A Severance Agreement between the Bank and Richard D.
Aldred, Executive Vice President (Incorporated by
reference to Exhibit 10.6A of the Bank's Form 10-K
filed on March 29, 1994)
10.6.B Severance Agreement between the Bank and Joseph C.
Bova, Executive Vice President
10.6.C Severance Agreement between the Bank and Robert L.
Fugate, Executive Vice President
10.7 Employee Stock Ownership Plan (Incorporated by
reference to Exhibit 2(D)(3) of the Bank's Form
MHC-1, as amended)
10.8 Fidelity Federal Savings Bank of Florida Senior
Management Performance Incentive Award Plan
(Incorporated by reference to Exhibit 2(D)(8) of the
Bank's Form MHC-1, as amended)
13 1996 Annual Report to Stockholders
21 Subsidiaries of the Registrant
99.1 Proxy Statement for Annual Meeting of Stockholders
(b) Reports on Form 8-K:
-------------------
The Registrant filed no Current Report on Form 8-K
during the fourth quarter of fiscal 1996.
(c) The exhibits listed under (a)(3) above are filed
herewith.
(d) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 BANKSHARES, INC.
Date: March 25, 1997 By: /s/ Vince A. Elhilow
-- ---------------------------------
Vince A. Elhilow
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ Vince A. Elhilow By: /s/ Richard D. Aldred
----------------------------- ---------------------------------
Vince A. Elhilow President Richard D. Aldred, Executive Vice
and Chief Executive Officer President, Chief Financial
Officer and Treasurer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: March 25, 1997 Date: March 25, 1997
-- --
By: /s/ Joseph B. Shearouse By: /s/ Keith D. Beaty
----------------------------- ---------------------------------
Joseph B. Shearouse, Jr., Keith D. Beaty, Director
Chairman of the Board
Date: March 25, 1997 Date: March 25, 1997
-- --
By: /s/ F. Ted Brown By: /s/ Christopher H. Cook
----------------------------- ---------------------------------
F. Ted Brown, Jr., Director Christopher H. Cook, Director
Date: March 25, 1997 Date: March 25, 1997
-- --
By: /s/ Donald E. Warren
-----------------------------
Donald E. Warren, Director
Date: March 25, 1997
--
[GRAPHIC LOGO OMITTED: EAGLE ON A SHIELD]
Fidelity
Bankshares, Inc.
Annual Report
1996
Table of Contents
Message from the President & CEO 2
Our Community - Watch Us Grow 4
Financial Highlights 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Independent Auditors' Report 20
Consolidated Financial Statements 21
Management's Assertions
as to the Effectiveness of its Internal Control
Structure over Financial Reporting and
Compliance with Designated Laws and
Regulations 46
Independent Accountants' Report 47
Board of Directors and Officers 48
Office Locations 50
Corporate Information Inside Back Cover
A Message From the President & CEO
[GRAPHIC OMITTED: PHOTO OF VINCE A. ELHILOW]
Vince A. Elhilow
President
Chief Executive Officer
To our stockholders:
Our message this year is one of exciting new opportunities. We have
important developments to report on a number of fronts; including our
new mid-tier stock holding company, rapid growth in deposits, loans and
assets, and many exciting new services.
Before addressing these developments, however, we must acknowledge that
our satisfaction is tempered by a sense of loss, resulting from the
passing of Director Fred DeHon. Mr. DeHon had been a member of our
board of directors since 1978, and a resident of this area since the
very earliest days of our bank. Those of us who were privileged to work
with him will miss his wisdom and guidance. For those who did not know
him, I urge you to read the memorial on page 48, where you can learn
more about the remarkable life of this esteemed leader and friend.
Following Mr. DeHon's death, the board of directors voted to reduce the
size of its membership to six.
During 1996, Fidelity Federal took a leadership position in the
industry, becoming the first federally chartered mutual holding company
to form a mid-tier stock holding company. As a result of the
reorganization, Fidelity Federal Savings Bank is now a wholly-owned
subsidiary of Fidelity Bankshares, Inc., a Delaware corporation.
Fidelity Bankshares, Inc., in turn, is now majority-owned by Fidelity
Bankshares, MHC, the mutual holding company parent. As part of this
reorganization, each share of the Bank's outstanding common stock was
automatically converted into one share of Fidelity Bankshares, Inc.
common stock.
The reorganization into a two-tier structure provides us with greater
flexibility. We now have broader investment capability, including the
possibility of repurchasing Fidelity Bankshares, Inc. common stock. In
addition, through Fidelity Bankshares, Inc., we are better positioned to
take advantage of other business opportunities which may arise. The
increased flexibility this structure offers should benefit our
stockholders and further enhance stockholder value.
The overall positive outlook for the Bank is reflected in the continuing
growth of both assets and deposits in 1996, including a substantial
increase in volume in all loan categories. As of December 31, 1996,
total assets stood at just under $874 million, an increase of 12.0
percent over the previous year. The most notable aspect of this
achievement was the $100 million increase in overall loan volume that
was achieved during the year. Total mortgage volume increased by 53.5
percent to more than $214 million. As we continue to operate more like
a Commercial Bank, our consumer lending increased by 47 percent and our
commercial loans increased 367 percent. Concurrent with this growth in
assets, total deposits increased to more than $694 million, a 16.7
percent increase over 1995's year-end figure.
In terms of return to investors, Fidelity Bankshares, Inc. continues to
outperform the market. The chart on the top of page three analyzes the
Bank's total return performance compared to other U.S.-based NASDAQ
stocks, other banks of comparable size, and all OTC-traded banks. In
each case, Fidelity Bankshares, Inc. compares quite favorably.
Fidelity Federal Savings
Total Return Performance
Based on the combined effect of dividends
and appreciation in stock value.
[GRAPHIC WORM CHART OMITTED: TOTAL RETURN PERFORMANCE]
The following table was used to create the line graph on page 3.
Period Ending
-------------------------------------------------
Index 1/7/94 9/30/94 6/30/95 3/31/96 12/31/96
- ------------------------------------------------------------------------
Fidelity Federal Savings 100.00 145.37 129.86 159.23 221.11
Nasdaq - Total US 100.00 98.22 121.07 143.73 168.90
Banks ($500M to $1B) 100.00 111.15 117.94 151.00 177.70
OTC Traded Banks 100.00 107.59 119.76 155.85 197.66
We believe this excellent performance reflects the energy and dedication
of our officers and employees, as well as the underlying strength of the
South Florida economy. Because of our confidence in this market area,
we continue to enhance our services to the community, both in terms of
new offices and new products. In 1996 we moved both our West Boynton
Beach and West Forest Hill Offices into new full-service facilities, and
also opened our first loan production office (LPO) to serve the fast-
growing south Palm Beach County and northern Broward County markets. We
later established a satellite LPO in Coral Springs to better serve
northern Broward County. Later this year we will open a new office in
Jupiter, and several other offices are planned during the next few
years.
We continue to expand our ATM network to better serve our customers. In
late 1996 we began service with our first remote ATM at the South
Florida Fairgrounds. This venture was the result of our commercial
banking relationship with the South Florida Fair. Five more ATMs are
planned for 1997, bringing our network to fourteen.
We are very excited about several innovative new products introduced
during the year. These include our new PC Banking, Telephone Bill Pay
services, and the Visa Check Card. We believe these services are an
added convenience, using technology for our customers' benefit. Other
new products include the Eagle Account, a personal investment account,
as well as the Business Reserve Account which is designed to enhance
business customers' ability to manage their cash flow. Additionally,
the Bank established a Worldwide Website - www.fidfed.com - to provide
information to customers.
Another innovative addition is our new Count On Us Checking account,
which offers a large number of "value-added" features such as discounts
at local merchant stores. This account has attracted many new
depositors, and enhanced our relationships with local business partners
who offer discounts under the program.
As we continue to enhance our competitive position by diversifying our
portfolio, we recognize we must remain true to those attributes which
have made Fidelity Federal what it is today. We are committed to our
role as a local community bank, as we have been for nearly 45 years.
Moreover, we are committed to returning maximum value to our
shareholders by continuing to focus on our strengths, while using our
enhanced flexibility to respond quickly to new opportunities as they
arise.
/S/VINCE A. ELHILOW
Vince A. Elhilow
President and Chief Executive Officer
Our Community - Watch Us Grow
Founded in 1952, Fidelity Federal is now in its 45th year as a leading
financial institution located in Palm Beach and Martin counties in south
Florida. When the Bank first opened its doors, the area was still
considered a winter resort, with its population and economy changing
drastically with the change of seasons. Now, in the 1990s, the area has
developed a vibrant year-round economy.
Fidelity Federal has grown with the community, and now has a network of
20 offices, with more to come. The Bank staff is working to meet the
challenges of the rapidly changing community as we look to the beginning
of the 21st century.
The 1995 estimated population of Palm Beach and Martin counties was just
over 1 million people. By the year 2010, the University of Florida's
Bureau of Economic and Business Research projects the area will be home
to more than 1.4 million people - an increase of 32.2% in just 15 years!
Even more important than the population growth rate are the desirable
demographic and economic characteristics of the communities we serve.
Among all counties in Florida, Palm Beach and Martin counties have
ranked among the top three in per capita income in each of the past 10
years, and for seven of those years they ranked first and second.
Moreover, these counties continually post income figures that are among
the highest of all metropolitan areas in the nation.
[GRAPHIC PHOTO OMITTED: PALM TREES AND A FOUNTAIN]
CityPlace's Church Plaza
Illustration provided by
City Place Partners
One of the facets of the growth is urban revitalization, with a prime
example being CityPlace in downtown West Palm Beach. Planned for
construction on formerly blighted parcels of land adjacent to a major
thoroughfare, CityPlace has a mixed-use urban plan combining cultural
activities, retail stores, fine restaurants, entertainment and
residential living. The area will complement the existing fine arts
center with an opera house and convention center with hotel. Current
plans call for 480,000 square feet for residential use, including 582
residential units. Leasing for CityPlace has begun and will continue
through 1997, with groundbreaking scheduled for 1998 and the initial
phase completed in 1999.
Downtown West Palm Beach has been home to Fidelity Federal's
headquarters and main office for nearly 45 years. The Bank will be in a
prime position to serve the banking needs of CityPlace's future
merchants, retailers and residents.
[GRAPHIC PHOTO OMITTED: TREELINED STREET WITH BUILDINGS]
ABACOA's Workplace Campus
Illustration provided by
de Guardiola Development, Inc.
Another example of the growth is illustrated by the development of
previously rural land in Jupiter (northern Palm Beach County) into the
2,000-acre community of ABACOA. This community received its initial
approval in 1996, with more than 2,000 residential units expected by
1999 and a total of more than 6,000 units at completion. Office space
will encompass 2.2 million square feet, with an additional 1 million
square feet planned for regional, community and neighborhood retail.
ABACOA will also be home of the 135-acre northern campus of Florida
Atlantic University, an 18-hole championship golf course, a 23-acre
municipal recreation facility, and a 7,500 seat baseball stadium, which
will be the spring training facility for two major league baseball
clubs.
Fidelity Federal has been one of the major lenders in northern Palm
Beach County for over 40 years. The ABACOA community will offer another
tremendous opportunity for future expansion.
Ambitious, long-term projects such as these are excellent examples of
the outstanding long-term potential to be found in the Palm Beaches. As
a leading local financial institution, Fidelity Federal is ideally
positioned to play an active role in such endeavors, and to continue
building on its consistent record of loan and deposit growth.
Financial Highlights
On January 7, 1994, Fidelity Federal Savings Bank of Florida completed a
reorganization from a mutual savings bank, into a stock savings bank,
with the majority of its shares owned by a mutual holding company. As a
result, certain comparative, stockholder data is unavailable prior to
1994.
On January 29, 1997, Fidelity Federal Savings Bank of Florida
consummated a tax-free reorganization, by becoming a wholly-owned
subsidiary of a Delaware chartered, stock holding company known as
Fidelity Bankshares, Inc. Each stockholder's common stock in Fidelity
Federal Savings Bank of Florida was converted into shares of common
stock in Fidelity Bankshares, Inc., in the same proportionate ownership
interest the stockholder held before the reorganization. In addition,
the reorganization was accounted for in the same manner as a pooling of
interests transaction. Consequently, the consolidated financial
statements required no accounting adjustments.
Fidelity Bankshares, Inc. common stock currently trades on the Nasdaq
National Market system under the symbol "FFFL" as Fidelity Federal's did
before the reorganization.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
FOR THE YEAR (In Thousands)
<S> <C> <C> <C> <C> <C>
Interest income $50,387 $44,755 $43,420 $53,261 $60,240
Interest expense 23,171 18,415 17,776 28,095 32,131
Net interest income 27,216 26,340 25,644 25,166 28,109
Net income 8,554 6,497 5,262 4,815 3,550
PER COMMON SHARE (1)
Net Income:
Primary N/A N/A $0.80 $0.73 $0.53
Fully diluted N/A N/A 0.80 0.73 0.53
Book value N/A N/A 11.35 12.31 12.12
Stock price:
High N/A N/A 13.64 17.00 18.50
Low N/A N/A 9.09 10.23 11.75
Close N/A N/A 10.00 16.25 17.75
AVERAGE FOR THE YEAR (In Thousands)
Assets $623,814 $658,463 $669,506 $741,777 $824,025
Loans receivable, net 449,264 434,522 441,573 490,088 605,507
Mortgage-backed securities 60,685 75,325 83,550 145,405 135,973
Investments (2) 78,642 95,284 103,715 63,605 35,530
Deposits 563,516 568,470 553,184 567,493 636,297
Borrowed funds 8,254 15,758 30,231 79,905 85,608
Stockholders' equity 35,725 43,394 72,546 77,356 81,339
SELECTED PERFORMANCE RATIOS
Return on average assets 1.37% .99% .79% .65% .43%
Return on average equity 23.94% 14.97% 7.25% 6.22% 4.36%
Interest rate spread on average assets 4.57% 4.25% 3.85% 3.28% 3.30%
YEAR END (In Thousands)
Total assets $638,183 $678,928 $712,643 $779,620 $873,562
Investments (2) 95,505 127,154 82,410 43,108 41,740
Cash and amounts due from depository institutions 18,098 15,205 19,275 14,989 15,293
Loans receivable, net 437,564 434,967 456,543 532,333 661,700
Mortgage-backed securities 64,558 75,199 126,807 159,761 123,599
Deposits 573,623 586,527 538,235 595,180 694,718
Borrowed funds 12,412 15,934 88,319 86,549 83,621
Equity 40,002 46,786 74,404 81,266 81,723
</TABLE>
(1) All per share items retroactively adjusted to reflect 10% stock
dividend distributed November 30, 1995.
(2) Includes Government and Agency securities, interest-bearing deposits
and Federal Home Loan Bank stock.
[DIVIDER PAGE OMITTED. TITLE ON DIVIDER PAGE READS: Fidelity Bankshares,
Inc.]
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
On April 25, 1996, Fidelity Federal Savings Bank of Florida (the "Bank")
adopted an Agreement and Plan of Reorganization, (the "Plan") whereby
the Bank would become a wholly-owned subsidiary of a stock holding
company, Fidelity Bankshares, Inc. (the "Company"), a Delaware
corporation. Pursuant to the Plan, the Bank's mutual holding company
parent would continue to own a majority of the Company's outstanding
common stock. In addition, as part of the Plan, each share of the Bank's
outstanding stock would be converted into one share of Fidelity
Bankshares, Inc. common stock. Consequently, following the
reorganization, each stockholder of the Bank would have the same
ownership interest in Fidelity Bankshares, Inc. as the stockholder had
in the Bank. In November, 1996, the Bank received regulatory approval to
proceed with the reorganization and on January 21, 1997, the Bank's
stockholders approved the Plan. On January 29, 1997, the transaction was
consummated, resulting in the Company owning all the outstanding common
stock of the Bank.
The reorganization, which has been accounted for in the same manner as a
pooling of interests merger, will not result in any significant
accounting adjustments.
The Company conducts no business other than holding the common stock of
the Bank. Consequently, its net income is derived from the Bank's, which
is primarily dependent on its net interest income, which is the
difference between interest income earned on its investments in mortgage
loans and mortgage-backed securities, other investment securities and
loans, and its cost of funds consisting of interest paid on deposits and
borrowings. The Bank's net income also is affected by its provision for
loan losses, as well as by the amount of other income, including income
from fees and service charges, net gains and losses on sales of
investments, and operating expense such as employee compensation and
benefits, deposit insurance premiums, occupancy and equipment costs, and
income taxes. Earnings of the Bank also are affected significantly by
general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory
authorities, which events are beyond the control of the Bank. In
particular, the general level of market rates tends to be highly
cyclical. In periods of high interest rates, earnings of the Bank are
likely to be depressed, which in turn would be likely to have a
detrimental effect on the market value of any investment in the Bank's
common stock. In addition, legislative and regulatory actions may result
in diminishing the value of any investment in the Bank.
Business Strategy
The Bank's current business strategy is to operate as a well-
capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Bank has
sought to implement this strategy by emphasizing retail deposits as its
primary source of funds and maintaining a substantial part of its assets
in locally-originated residential first mortgage loans, in mortgage-
backed securities and in other liquid investment securities.
Specifically, the Bank's business strategy incorporates the following
elements: (1) operating as a community-oriented financial institution,
maintaining a strong core customer base by providing quality service and
offering customers the access to senior management and services that a
community-based institution can offer; (2) maintaining high levels of
asset quality by emphasizing investment in residential mortgage loans,
mortgage-backed securities and other securities issued or guaranteed by
the United States Government or agencies thereof; (3) managing interest
rate risk exposure by maintaining adequate levels of liquidity, while
achieving desirable levels of profitability; and (4) maintaining capital
in excess of regulatory requirements and growing only to the extent that
adequate capital levels and asset quality can be maintained.
Highlights of the Bank's business strategy are as follows:
Community-Oriented Institution. The Bank is the second largest savings
institution headquartered in Palm Beach County, which in recent years
has experienced a significant influx of commercial banks and offices of
savings institutions headquartered outside of Florida. The Bank is
committed to meeting the financial needs of the communities in which it
operates. The Bank believes it is large enough to provide a full range
of personal and business financial services, and yet is small enough to
be able to provide such services on a personalized and efficient basis.
Management believes that the Bank can be more effective in servicing its
customers than many of its non-local competitors because of the Bank's
ability to quickly and effectively provide senior management responses
to customer needs and inquiries. The Bank's ability to provide these
services is enhanced by the stability of the Bank's senior management.
The Bank intends to maintain its operation as a community-oriented,
independent savings institution.
Asset Quality and Emphasis on Residential Mortgage Lending. Since its
inception, the Bank has emphasized residential real estate financing as
a portfolio lender, and anticipates a continued commitment to financing
the purchase or improvement of residential real estate in its market
area. To supplement local mortgage loan originations, the Bank also
invests in mortgage-backed securities that are issued or guaranteed by
the United States Government or agencies thereof. At December 31, 1996,
83.3% of the Bank's total gross loan portfolio consisted of one- to-
four family residential mortgage loans, including residential
construction loans, and 15.1% of the Bank's total assets consisted of
mortgage-backed securities and investments that are issued or guaranteed
by the United States government or agencies thereof.
Generally, the yield on mortgage loans originated by the Bank is greater
than that of mortgage-backed securities purchased by the Bank. However,
due to the highly competitive market in which the Bank operates, the
Bank may, from time to time, not be able to originate a sufficient
number of new mortgage loans to offset the amortization and prepayments
of its existing loan portfolio. In addition, new real estate development
opportunities in the Bank's market area may diminish, as well as the
adoption of growth controls by local governments, which could further
diminish lending opportunities of the Bank in the future. As a result of
these factors, new loan originations could be reduced in the future,
which may require the Bank to increase its investment in mortgage-backed
securities.
The percentage of small commercial business loans and consumer loans in
the Bank's portfolio has been below the levels of its peers. As a
result, the Bank's yield on its loan portfolio has been below peer
levels. The Bank has begun to expand its offering of commercial and
consumer loan services, but expects to continue to adhere to the Bank's
relatively conservative loan underwriting standards.
Interest Rate Risk Management. Deposit accounts typically react more
quickly to changes in market interest rates than interest-earning assets
such as mortgage loans, because of the relatively shorter maturities of
deposits. When interest rates are rising, the repricing of a higher
volume of interest-bearing liabilities compared to interest-earning
assets will result in interest expense increasing more rapidly than
interest income, while in a falling interest rate environment net
interest income will be benefited. The difference between interest-
earning assets and interest-bearing liabilities expressed as a
percentage of total assets, is a measure of interest rate risk and is
referred to as an institution's interest rate gap. A gap is considered
negative if interest-bearing liabilities maturing or repricing in a
particular time period exceed interest-earning assets maturing or
repricing within the same time period. Management seeks to manage the
Bank's interest rate risk exposure by monitoring the levels of interest
rate sensitive assets and liabilities while maintaining an acceptable
interest rate spread. At December 31, 1996, total interest-bearing
liabilities maturing or repricing within one year exceeded total
interest-earning assets maturing or repricing in the same period by
$ 99.7 million, representing a cumulative one-year gap ratio of a
negative 11.41%.
To reduce the potential volatility of the Bank's earnings in a changing
interest rate environment, the Bank has sought to manage interest rate
risk by investing a substantial part of its assets in relatively short-
and medium- term United States Government and agency securities, and in
ARM loans and mortgage-backed securities with adjustable interest rates.
Of the Bank's total investment of $ 785.3 million in loans and mortgage-
backed securities at December 31, 1996, $ 413.1 million, or 52.6%, had
adjustable interest rates. Another part of the Bank's interest rate risk
management strategy has been to extend the maturity of interest-bearing
liabilities, including using FHLB advances as a source of funds.
Strong Retail Deposit Base. The Bank has had a relatively strong retail
deposit base drawn from the 20 full-service offices in its market area.
At December 31, 1996, 32.9% of its deposit base of $ 694.7 million
consisted of core deposits, which included non-interest demand accounts,
passbook accounts, NOW accounts, and money market demand deposit
accounts. Core deposits are considered to be a more stable and lower
cost source of funds than certificates of deposit or outside borrowings.
The Bank will continue to emphasize retail deposits by maintaining and
seeking to expand its network of full-service offices, providing
depositors with a full range of accounts.
Capital Strength and Controlled Growth. The Bank's total equity at
December 31, 1996, was $ 81.7 million. As a result, the Bank's ratio of
total equity to total assets was 9.4%. While the Bank intends to
continue to increase retained earnings and maintain high capital ratios,
the present level of capital will permit the Bank significantly greater
growth opportunities than experienced in prior years.
Results of Operations
The earnings of the Bank depend primarily on its level of net interest
income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of mortgage loans,
mortgage securities and other investment securities, and the interest
paid on interest-bearing liabilities, consisting primarily of deposits.
Net interest income is a function of the Bank's interest rate spread,
which is the difference between the average yield earned on interest-
earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-
earning assets as compared to interest-bearing liabilities. The Bank's
earnings also are affected by its level of operating expenses and
service charges as well as other expenses, including employee
compensation and benefits, occupancy and equipment costs, and deposit
insurance premiums.
General. The Bank had net income of $ 3.6 million, or $ .53 per share,
for the year ended December 31, 1996. Net income totaled $ 4.8 million,
or $ .73 per share, and $ 5.3 million, or $ .80 per share, for fiscal
1995 and 1994, respectively. The decrease in net income for the year
ended December 31, 1996, compared to 1995 resulted primarily from the
one-time special assessment of $ 3.6 million charged against the Bank's
income to recapitalize the Savings Association Insurance Fund (SAIF). If
this one-time special assessment had not been incurred, earnings per
share of common stock would have been $ .86 for the year ended December
31, 1996 compared to $ .73 for the prior year.
Interest Income. Interest income increased by $ 6.9 million, or 13.0%,
to $ 60.2 million for the year ended December 31, 1996 from $ 53.3
million for the year ended December 31, 1995. The increase in interest
income was principally attributable to an increase in the average
balance of the Bank's interest-earning assets to $ 777.0 million from $
699.1 million and an increase in the yield on the Bank's average
interest-earning assets to 7.75% from 7.62%. The increase in average
interest-earning assets was primarily the result of a $ 95.8 million
increase in the average balance of mortgage loans and a $ 19.6 million
increase in average consumer and other loans, which was partially offset
by declines in average balances of $ 9.4 million in mortgage-backed
securities and $ 25.0 million in investment securities.
Interest income on mortgage loans increased by $ 7.6 million, or 21.0%,
to $ 43.9 million for the year ended December 31, 1996 from $ 36.3
million for the year ended December 31, 1995 primarily because of an
increase in the average balance of these loans to $ 560.2 million from
$ 464.4 million. Interest income on consumer loans increased by $ 1.7
million in 1996 as compared to 1995. While the average yield on consumer
and other loans decreased to 9.00% in 1996 from 9.43% in 1995, this was
more than offset by an increase in the average balance of these loans to
$ 45.3 million in 1996 from $ 25.7 million in 1995. Interest income on
mortgage-backed securities declined by $ 769,000 due mainly to a
decrease in the average balance to $ 136.0 million at December 31, 1996
from $ 145.4 million at December 31, 1995. Interest income on investment
securities decreased by $ 1.3 million. While the average yield on
investment securities increased to 6.49% in 1996 from 5.74% in 1995,
this was more than offset by a decrease in the average balance of these
securities by $ 25.0 million to $ 12.4 million at December 31, 1996 from
$ 37.4 million at December 31, 1995.
Interest income increased by $ 9.8 million, or 22.7%, to $ 53.3 million
for the year ended December 31, 1995 from $ 43.4 million for the year
ended December 31, 1994. The increase in interest income was principally
attributable to an increase in the average yield on the Bank's average
interest-earning assets to 7.62% from 6.90%, and an increase in the
balance of average interest-earning assets of $ 70.3 million, to $ 699.1
million from $ 628.8 million. The increase in average interest-earning
assets was the result of a $ 61.9 million increase in average mortgage-
backed securities and a $ 39.8 million increase in average mortgage
loans. The increase in average yield on interest-earning assets was also
caused by the increase in the average balance of mortgage-backed
securities along with an increase in the average yield on those
securities to 7.37% for 1995 from 5.09% during 1994. Also contributing
to this increase was an increase in the average balance of consumer and
other loans of $ 8.7 million along with an increase in the average yield
on these loans to 9.43% for 1995 from 8.81% during 1994.
Interest income on mortgage loans increased by $ 3.0 million, or 9.0%,
to $ 36.3 million for the year ended December 31, 1995 from $ 33.3
million for the year ended December 31, 1994, primarily because of an
increase in the average balance of mortgage loans to $ 464.4 million
from $ 424.6 million in 1994. Interest income on consumer and other
loans increased by $ 928,000 in 1995, as compared to 1994. While the
average yield on consumer and other loans increased from 8.81% in 1994
to 9.43% in 1995, the principal reason for the increase in interest
income was a 51.6% increase in the average balance of such loans in
1995, as compared to 1994. Interest income on mortgage-backed securities
increased by $ 6.5 million to $ 10.7 million. The increase in interest
income on mortgage-backed securities was caused by an increase in the
average balance of such securities by $ 61.9 million to $ 145.4 million.
Also, the average yield on these mortgage-backed securities increased to
7.37% at December 31, 1995, compared to 5.09% in 1994. Interest income
on investment securities decreased by $ 840,000 as a result of a
decrease in the average balance of these securities to $ 37.4 million in
1995 compared to $ 69.8 million in 1994. Income from other investments,
consisting of interest-earning deposits in other financial institutions
and FHLB stock increased by $ 290,000 to $ 1.7 million for the year
ended December 31, 1995, compared to $ 1.4 million in 1994. The average
balances of these investments decreased by $ 7.7 million in 1995, or
22.7%, compared to 1994 but were offset by an increase in average yield
to 6.41% at December 31, 1995 compared to 4.10% in 1994.
Interest Expense. Interest expense increased by $ 4.0 million, or 14.4%,
to $ 32.1 million for the year ended December 31, 1996 from $ 28.1
million for the year ended December 31, 1995. The increase is due mainly
to an increase in the average cost of interest-bearing deposits to 4.29%
from 4.12% and an increase in the average balance of interest-bearing
deposits to $ 611.0 million for the year ended December 31, 1996 from $
546.4 million for the same period in 1995. The average balance of FHLB
advances increased by $ 5.7 million to $ 85.6 million in 1996 compared
to $ 79.9 million in 1995. The Bank increased its FHLB advances
principally for liquidity purposes.
Interest expense increased by $ 10.3 million, or 58.1%, to $ 28.1
million for the year ended December 31, 1995 from $ 17.8 million for the
year ended December 31, 1994. The increase was attributable to an
increase in the average cost of the Bank's interest-bearing deposits to
4.12% from 3.00% and an increase in the average balance of interest-
bearing deposits of $ 10.9 million. The average balance of FHLB advances
increased by $ 49.7 million to $ 79.9 million in 1995 compared to $ 30.2
million in 1994. The Bank increased its FHLB advances as part of its
interest rate risk strategy of extending the maturity of its interest-
bearing liabilities and for liquidity purposes.
Net Interest Income. Net interest income increased by $ 2.9 million, or
11.7%, to $ 28.1 million from $ 25.2 million for the years ended
December 31, 1996 and 1995, respectively. The principal reason for this
increase in net interest income was an increase in the Bank's loans
receivable to $ 661.7 million at December 31, 1996 from $ 532.3 million
at December 31, 1995 and an increase in the Bank's average interest rate
spread to 3.14% from 3.13%.
Net interest income decreased slightly to $ 25.2 million for the year
ended December 31, 1995 from $ 25.6 million for the same period in 1994,
representing a decrease of $ 478,000, or 1.9%. The principal reason for
the reduction in net interest income was a decrease in the Bank's
average interest rate spread to 3.28% from 3.85%. This was partially
offset by a slight improvement in the Bank's ratio of average interest-
earning assets to average interest-bearing liabilities.
Provision for Loan Losses. The Bank's provision for loan losses
increased to $ 164,000 for the year ended December 31, 1996 compared to
a negative $ 210,000 for the year ended December 31, 1995. The 1995
negative provision was principally the result of reversing provisions on
two loans based on new appraisals performed during that year, while the
1996 provision reflects more normal circumstances. The Bank's total
allowance for loan losses at December 31, 1996 of $ 2.3 million was
deemed adequate by management, in light of the risks inherent in the
Bank's loan portfolio.
The Bank had a negative provision for loan losses of $ 210,000 for the
year ended December 31, 1995 compared to a positive $ 112,000 for the
year ended December 31, 1994. This was principally the result of
reversing specific valuation allowances for loan losses on two of the
Bank's significant loans, based on new appraisals performed during the
year.
The financial statements of the Bank are prepared in accordance with
generally accepted accounting principles and, accordingly, allowances
for loan losses are based on management's estimate of the fair value of
collateral, as applicable, and the Bank's actual loss experience and
standards applied by the OTS and FDIC. The Bank provides both general
valuation allowances (for unspecified, potential losses) and specific
valuation allowances (for known losses) in its loan portfolio. General
valuation allowances are added to the Bank's capital for purposes of
computing the Bank's regulatory risk-based capital. The Bank regularly
reviews its loan portfolio, including impaired loans, to determine
whether any loans require classification or the establishment of
appropriate valuation allowances.
Other Income. Other income increased by $ 1,855,000, or 61.4%, to $ 4.9
million for the year ended December 31, 1996 from $ 3.0 million for the
same period in 1995. This increase in other income was primarily the
result of a $ 1.2 million increase in gain on sale of loans, mortgage-
backed securities and investments. Also contributing to this increase,
were increases in the Bank's fee income and other income of $ 532,000
and $ 113,000, respectively.
Other income increased by $ 524,000, or 21.0%, to $ 3.0 million for the
year ended December 31, 1995, from $ 2.5 million for the same period in
1994. The increase in other income resulted primarily from an increase
in fee income of $ 518,000 and an increase in other income of $ 16,000
which was partially offset by a decrease in the gain on sale of loans,
mortgage-backed securities and investments of $ 10,000.
Operating Expense. Operating expense increased by $ 6.3 million, or
30.6%, to $ 26.7 million for the year ended December 31, 1996 from
$ 20.4 million for the same period in 1995. Employee compensation and
benefits represent $ 2.0 million, or 19.1%, of this increase. This
resulted primarily from additional personnel hired for the creation of a
legal department and loan production, including employees in the Bank's
Loan Production Office (LPO) opened in January, 1996 and the expansion
of a branch office in April, 1996. The Bank's occupancy and equipment
cost for the year ended December 31, 1996 was $ 456,000 more than
experienced in 1995, primarily as a result of opening the LPO office in
January, 1996 and operating and upgrading the previously mentioned
branch office. Federal deposit insurance premiums increased by $ 3.7
million to $ 4,958,000 for the year ended December 31, 1996 compared to
$ 1,279,000 in 1995. This increase resulted from the SAIF one-time
special assessment discussed earlier. Other operating expense increased
by $ 188,000 for the year ended December 31, 1996 when compared to the
1995. These increases were only partially offset by an increase in gain
on real estate owned of $ 98,000 and a decrease in marketing expense of
$ 13,000 for the year ended December 31, 1996 compared to 1995.
Operating expense increased by $ 1.1 million, or 5.5%, to $ 20.4 million
for the year ended December 31, 1995. Employee compensation and benefits
increased by $ 56,000 in 1995 to $ 10.7 million, representing an
increase of .52%. The Bank's employee compensation increased by
$ 406,000, largely as a result of an increase in personnel, principally in
loan originations, of 3.9%. In addition, the Bank's hospitalization
costs increased by $ 244,000. These costs were offset by decreases in
stock based compensation and officer incentives of $ 137,000 and
allocation of employee costs to the Bank's mutual holding company of
$ 299,000. Of the $ 555,000 increase in occupancy and equipment costs,
$ 327,000 is attributable to data processing expenses, resulting from the
installation and operation of new equipment, $ 114,000 represents an
increase in property taxes and the balance of the increase is due to
operating two new offices for the entire 1995 year compared to only four
months in 1994. Miscellaneous expense increased by $ 431,000 which is
comprised of an increase of $ 173,000 in audit and consulting fees, an
increase of $ 145,000 in goodwill amortization relating to the Bank's
acquisition of deposits from the RTC during the summer of 1994 and an
increase in temporary help expense of $ 108,000.
Income Taxes. Federal and state income taxes decreased by $ 571,000 to
$ 2.6 million for the year ended December 31, 1996 compared to $ 3.1
million for the year ended December 31, 1995. Lower taxes resulted from
the decline in income before provision for income taxes to $ 6.1 million
in 1996 from $ 7.9 million in 1995.
Income taxes for the year ended December 31, 1995 were $ 3.1 million, a
decrease of $ 259,000 for the comparable period in 1994 which was
attributable to a decrease in income before tax to $ 7.9 million from $
8.7 million.
Average Balance Sheet
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated and the
average yields earned and rates paid. Such yields and costs are derived
by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances
are derived from month-end balances.
Management does not believe that the use of month-end balances instead
of daily average balances has caused any material difference in the
information presented.
<TABLE>
<CAPTION>
Average Balance Sheet
At December 31, 1995 At December 31, 1996 For the Year Ended December 31, 1994
Actual Actual Average Average
Balance Yield/Cost Balance Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $500,461 7.88% $604,614 7.88% $424,626 $33,298 7.84%
Consumer and other loans 31,872 9.12% 57,086 8.64% 16,947 1,493 8.81%
Mortgage-backed securities 159,761 7.56% 123,599 7.29% 83,550 4,253 5.09%
Investment securities 26,986 6.44% 8,465 6.30% 69,773 2,984 4.28%
Other investments (1) 16,122 6.23% 33,275 5.58% 33,942 1,392 4.10%
--------- --------- --------- ---------
Total interest-earning
assets 735,202 7.78% 827,039 7.74% 628,838 43,420 6.90%
Non-interest-earning assets 44,418 46,523 40,668
--------- --------- ---------
Total assets $779,620 $873,562 $669,506
========= ========= =========
Interest-bearing liabilities:
Deposits $573,750 4.13% $668,312 4.26% $535,559 $16,059 3.00%
Borrowed funds 86,549 6.89% 83,621 6.76% 30,231 1,717 5.68%
Total interest-bearing --------- --------- --------- ---------
liabilities 660,299 4.48% 751,933 4.54% 565,790 17,776 3.14%
Non-interest-bearing liabilities 38,055 39,906 31,170 ---------
--------- --------- ---------
Total liabilities 698,354 791,839 596,960
Net worth 81,266 81,723 72,546
--------- --------- ---------
Total liabilities and
net worth $779,620 $873,562 $669,506
========= ========= =========
Net interest income: $25,644
Net interest rate spread (2) 3.30% 3.20% ======= 3.76%
Net yield on interest-earning ======== ========= =======
assets (3) 3.63% 3.61% 4.08%
Ratio of average interest-earning ======== ========= =======
assets to average interest-bearing
liabilities 107.84% 109.99% 111.14%
======== ========= =======
(1) Includes interest-bearing deposits in other financial institutions and FHLB stock.
(2) Net interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a percentage of
average interest-earning assets.
</TABLE>
<TABLE>
<CAPTION>
Average Balance Sheet
For the Years Ended December 31,
1995 1996
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $464,392 $36,296 7.82% $560,233 $43,923 7.84%
Consumer and other loans 25,696 2,421 9.43% 45,274 4,074 9.00%
Mortgage-backed securities 145,405 10,718 7.37% 135,973 9,949 7.32%
Investment securities 37,380 2,144 5.74% 12,391 804 6.49%
Other investments (1) 26,225 1,682 6.41% 23,139 1,490 6.44%
Total interest-earning --------- --------- --------- ---------
assets 699,098 53,261 7.62% 777,010 60,240 7.75%
Non-interest-earning assets 42,679 47,015
--------- ---------
Total assets $741,777 $824,025
========= =========
Interest-bearing liabilities:
Deposits $546,453 $22,515 4.12% $611,031 $26,239 4.29%
Borrowed funds 79,905 5,580 6.98% 85,608 5,892 6.88%
Total interest-bearing --------- --------- --------- ---------
liabilities 626,358 28,095 4.49% 696,639 32,131 4.61%
Non-interest-bearing liabilities 38,063 --------- 46,047 ---------
--------- ---------
Total liabilities 664,421 742,686
Net worth 77,356 81,339
Total liabilities --------- ---------
and net worth $741,777 $824,025
========= =========
Net interest income $25,166 $28,109
Net interest rate spread (2) ========= 3.13% ======== 3.14%
-------- --------
Net yield on interest-earning
assets (3) 3.60% 3.62%
Ratio of average interest-earning ======== --------
assets to average interest-
bearing liabilities 111.61% 111.54%
======== ========
(1) Includes interest-bearing deposits in other financial institutions and FHLB stock.
(2) Net interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a percentage of
average interest-earning assets.
</TABLE>
Rate Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods
indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to
(i) changes in average volume (changes in average volume multiplied by
old rate); (ii) changes in rate (change in rate multiplied by old
average volume); and (iii) the net change.
<TABLE>
<CAPTION>
Years Ended December 31,
1995 vs 1994 1996 vs 1995
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage loans $3,118 $(110) $(10) $2,998 $7,491 $113 $23 $7,627
Consumer and other loans 771 103 54 928 1,845 (109) (83) 1,653
Mortgage-backed securities 3,148 1,906 1,411 6,465 (695) (79) 5 (769)
Investment securities (1,385) 1,018 (473) (840) (1,433) 281 (188) (1,340)
Other investments (317) 785 (178) 290 (198) 7 (1) (192)
-------- -------- -------- -------- -------- ------- ----- -------
Total interest-earning
assets 5,335 3,702 804 9,841 7,010 213 (244) 6,979
======== ======== ======== ======== ======== ======= ===== =======
Interest expense:
Deposits 327 6,007 122 6,456 2,661 951 112 3,724
Borrowed funds 2,822 394 647 3,863 398 (81) (5) 312
-------- -------- -------- -------- -------- ------- ----- -------
Total interest-bearing
liabilities 3,149 6,401 769 10,319 3,059 870 107 4,036
-------- -------- -------- -------- -------- ------- ----- ------
Change in net interest
income $2,186 $(2,699) $35 $(478) $3,951 $(657) $(351) $2,943
======== ======== ======= ======== ======= ======= ===== ======
</TABLE>
Asset and Liability Management - Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity
"gap." An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets and interest-
bearing liabilities maturing or repricing within that time period. A gap
is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. During a
period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to positively
affect net interest income. Similarly, during a period of falling
interest rates, a negative gap would tend to positively affect net
interest income while a positive gap would tend to adversely affect net
interest income.
The Bank's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its
interest rate sensitive assets and liabilities and by originating ARM
loans and other adjustable rate or short-term loans, as well as by
purchasing short-term investments. However, particularly in a low
interest rate environment borrowers typically prefer fixed rate loans to
ARM loans. The Bank seeks to lengthen the maturities of its deposits by
promoting longer-term certificates. The Bank does not solicit high-rate
jumbo certificates or brokered funds.
At December 31, 1996, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $ 99.7 million, representing
a cumulative one-year gap ratio of a negative 11.41%. The Bank has an
Asset-Liability Management Committee which is responsible for reviewing
the Bank's assets and liability policies. The Committee meets weekly and
reports monthly to the Board of Directors on interest rate risks and
trends, as well as liquidity and capital ratio requirements.
Gap Table
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996, which
are expected to reprice or mature, based upon certain assumptions, in
each of the future time periods shown. Except as stated below, the
amounts of assets and liabilities shown that reprice or mature during a
particular period were determined in accordance with the earlier of the
term of repricing or the contractual terms of the asset or liability.
The Bank has assumed that its passbook savings, interest-bearing NOW,
and money market accounts, which totaled $ 202.1 million at December 31,
1996, are withdrawn at the annual percentage rates set forth in the
table on the next page. For information regarding the contractual
maturities of the Bank's loans, investments, and deposits, see Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
Within 3 6 Months to
Months 3-6 Months 1 Year 1-3 Years 3-5 Years Over 5 Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest -earning assets:
Real estate loans:
Residential one-to four-family:
Current market index ARMs $24,437 $15,095 $22,736 $48,648 $26,726 $15,559 $153,201
Lagging market index ARMs 24,558 23,616 34,763 26,948 137 - 110,022
Fixed rate 22,284 10,920 18,582 61,816 46,597 126,933 287,132
Commercial and
multi-family:
ARMs 15,404 6,406 9,793 11,977 3,384 145 47,109
Fixed rate 1,095 650 964 1,851 902 2,074 7,536
Consumer and commercial
business 32,040 2,525 4,202 11,838 6,106 614 57,325
Investment securities 27,127 - 2,000 6,444 - - 35,571
FHLB stock 6,148 - - - - - 6,148
Mortgage-backed
securities:
Adjustable 44,168 1,906 735 - - - 46,809
Fixed 2,059 2,010 3,883 16,093 11,150 40,100 75,295
-------- -------- -------- -------- -------- -------- --------
Total interest-
earning assets (1) 199,320 63,128 97,658 185,615 95,002 185,425 826,148
-------- -------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Passbook accounts 15,074 9,033 14,060 31,251 11,469 6,647 87,534
NOW accounts 7,707 7,497 3,910 13,068 9,749 28,627 70,558
Money market accounts 1,932 708 1,372 5,046 4,409 30,545 44,012
Certificate accounts 140,670 90,969 127,272 79,893 27,323 81 466,208
Borrowed funds 13,844 25,393 359 29,824 6,411 7,791 83,622
-------- -------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities 179,227 133,600 146,973 159,082 59,361 73,691 751,934
-------- -------- -------- -------- -------- -------- --------
Interest-earning assets
less interest-
bearing liabilities
("interest rate
sensitivity gap") $20,093 $(70,472) $(49,315) $26,533 $35,641 $111,734 $74,214
======== ======== ======== ======== ======== ======== ========
Cumulative excess (deficiency) of
interest-sensitive
assets over interest-
sensitive liabilities $20,093 $(50,379) $(99,694) $(73,161) $(37,520) $74,214 $74,214
======== ======== ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap to
total assets 2.30% (5.77)% (11.41)% (8.38)% (4.30)% 8.50% 8.50%
======= ======== ======= ======= ======= ======== ========
Cumulative ratio of
interest-earning
assets to interest-bearing
liabilities 111.21% 83.90% 78.32% 88.18% 94.47% 109.87% 109.87%
======= ======== ======== ======= ======= ======== ========
</TABLE>
(1) The above table shows expected cash flows within the time
periods presented. Accordingly, the balances do not reflect
adjustments for premiums, discounts, and market value adjustments.
In preparing the table above, it has been assumed, based on the Bank's
own internal calculation of loan prepayment rates, that the Bank's loan
portfolio will prepay at rates averaging 10%. It is also assumed that
mortgage-backed securities will prepay at rates ranging from 8.00% to
20.00% and NOW, passbook and money market accounts will decay, based on
a study of the Bank's actual experience, at the following rates:
<TABLE>
<CAPTION>
Over 6
Months Over 1 Over 3 Over 5 Over 10
6 Months Through Through Through Through Through Over 20
or Less 1 Year 3 Years 5 Years 10 Years 20 Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
NOW accounts 38.08% 13.63% 13.63% 13.63% 13.63% 13.63% 13.63%
Passbook, club accounts 46.32% 39.42% 39.42% 39.42% 39.42% 39.42% 39.42%
Money market deposit accounts 9.23% 6.52% 6.52% 6.52% 6.52% 6.52% 6.52%
</TABLE>
The above assumptions are annual percentages based on remaining balances
and should not be regarded as indicative of the actual prepayments and
withdrawals that may be experienced by the Bank in any given period.
Moreover, certain shortcomings are inherent in the analysis presented by
the foregoing tables. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates.
Also, interest rates on certain types of assets and liabilities may
fluctuate in advance of or lag behind changes in market interest rates.
Additionally, certain assets, such as ARM loans, have features that
restrict changes in interest rates on a short-term basis and over the
life of the assets. Moreover, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. For
information regarding the contractual maturities of the Bank's loans,
investments, and deposits, see Notes to Consolidated Financial
Statements.
Under OTS risk-based capital regulations, savings associations are
required to calculate the market value of their portfolio equity (MVPE).
These calculations are based upon data concerning interest-earning
assets, interest-bearing liabilities and other rate sensitive assets and
liabilities provided to the OTS on schedule CMR of the Quarterly Thrift
Financial Report. Commencing March 31, 1994, for purposes of measuring
interest rate risk, the OTS began using the MVPE calculations which
essentially discount the cash flows from an institution's assets and
liabilities to present value, using current market rates.
The amendments to the risk-based capital regulations require
institutions to hold additional risk-based capital in an amount equal to
one-half the amount an institution's interest rate risk exceeds the
normal amount of interest rate risk. Normal interest rate risk is
defined as 2% of the MVPE at static interest rates. If, after applying a
rate shock of 200 basis points ("bp") (one basis point equals .01%) of
either a decline or increase in rates, the resultant negative change in
MVPE exceeds 2% of MVPE at static interest rates, an institution is
deemed to have excess interest rate risk. At December 31, 1996, the Bank
was not required to hold additional risk-based capital for interest rate
risk.
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to
time depending upon economic conditions and deposit flows, is based upon
a percentage of deposits and short-term borrowings. The required ratio
currently is 5.0%. The Bank's liquidity ratio averaged 6.15% during the
month of December 1996 and 8.4% during the month of December 1995.
Liquidity ratios averaged 6.78% and 11.8% for the years ended December
31, 1996 and 1995, respectively. The Bank adjusts its liquidity levels
in order to meet funding needs of deposit outflows, payment of real
estate taxes on mortgage loans, repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its
asset and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of
investment securities and other short-term investments, and earnings and
funds provided from operations. While scheduled principal repayments on
loans and mortgage-backed securities are a relatively predictable source
of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. The Bank
manages the pricing of its deposits to maintain a desired deposit
balance. In addition, the Bank invests excess funds in short-term
interest-earning and other assets, which provide liquidity to meet
lending requirements. Short-term interest-bearing deposits with the FHLB
of Atlanta amounted to $ 27.0 million and $ 9.8 million at December 31,
1996 and 1995, respectively. Other assets qualifying for liquidity
outstanding at December 31, 1996, and 1995, amounted to $ 19.8 million
and $ 40.1 million, respectively. For additional information about cash
flows from the Bank's operating, financing, and investing activities,
see Consolidated Statements of Cash Flows included in the Financial
Statements.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing and
financing activities. The primary sources of cash were net income,
principal repayments on loans and mortgage-backed securities, and
increases in deposit accounts along with advances from the Federal Home
Loan Bank.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate
them internally, borrowing agreements exist with the FHLB which provide
an additional source of funds. At December 31, 1996, the Bank had $ 82.5
million in advances from the FHLB. The Bank engages in borrowing from
the FHLB in order to reduce interest rate risk, and for liquidity
purposes.
At December 31, 1996, the Bank had outstanding loan commitments of
$ 21.8 million to originate and/or purchase mortgage loans. This amount
does not include the unfunded portion of loans in process. Certificates
of deposit scheduled to mature in less than one year at December 31,
1996, totaled $ 322.0 million. Based on prior experience, management
believes that a significant portion of such deposits will remain with
the Bank, although their rates could increase.
Changes in Financial Condition
During 1996, the Bank's assets increased by $ 93.9 million. Loans
receivable increased in the amount of $ 129.4 million. Cash and cash
equivalents also increased by $ 17.5 million. These increases were
partially offset by a decline of $ 54.7 million in assets available for
sale. Of this decrease, $ 19.5 million resulted from the sale of
mortgage-backed securities. The Bank experienced deposit inflows during
1996 of $ 99.5 million, as a result of a more aggressive pricing of its
certificates of deposit, which together with an increase in equity, net
of the change in unrealized increase in fair value of assets available
for sale, of $ 2.3 million, provided the principal funds for the Bank's
asset growth.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Bank and notes thereto,
presented elsewhere herein, have been prepared in accordance with
generally accepted accounting principles, which require the measurement
of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power
of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Bank
are monetary. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the
same extent as the price of goods and services.
Impact of New Accounting Standards
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 122, "Accounting
for Mortgage Servicing Rights." The Statement, which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," requires mortgage
banking enterprises that acquire mortgage servicing rights through
either the purchase of or origination of mortgage loans and sell or
securitize those loans with servicing rights retained to allocate the
total cost of the mortgage loans to the mortgage servicing rights and
the loans based on their relative fair values. Mortgage banking
enterprises include commercial banks and thrift institutions that
conduct operations substantially similar to the primary operations of a
mortgage banking enterprise. SFAS No. 122 applies prospectively in
fiscal years beginning after December 15, 1995 to sales of mortgage
loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those
purchased before the adoption of this Statement. Management of the Bank
implemented SFAS No. 122, prospectively, as required. The adoption of
this accounting principle had the effect of increasing income before tax
by $ 196,000 for the fiscal year ended December 31, 1996.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement requires certain disclosures about stock-
based employee compensation arrangements, regardless of the method used
to account for them, defines a fair value based method of accounting for
an employee stock option or similar equity instrument, and encourages
all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for stock-based compensation plans
using the intrinsic value method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share, as if
the fair value method of accounting defined in this Statement had been
applied. Under the fair value method, compensation cost is measured at
the grant date based on the value of the award and is recognized over
the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the
stock. The disclosure requirements of this Statement are effective for
financial statements for fiscal years beginning after December 15, 1995.
Pro forma disclosures required for entities that elect to continue to
measure compensation cost using APB Opinion No. 25 must include the
effects of all awards granted in fiscal years that begin after December
15, 1994. Management has determined that the Bank will continue the
accounting set forth in APB Opinion No. 25 and will make such pro forma
disclosures as are required beginning with the year ended December 31,
1996. There were no stock options awarded during 1995 or 1996.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on a financial-components approach that focuses on control. Statement
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is
to be prospectively applied. Management of the Bank does not expect the
adoption of this promulgation to have a material effect on the Bank's
consolidated financial statements.
Independent Auditors' Report
Board of Directors of
Fidelity Bankshares, Inc.:
We have audited the accompanying consolidated statements of financial
position of Fidelity Bankshares, Inc. (the "Company") and its wholly
owned subsidiary, Fidelity Federal Savings Bank of Florida, as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Fidelity Bankshares,
Inc. and subsidiary at December 31, 1995 and 1996 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting
Standard No. 122, "Accounting for Mortgage Servicing Rights," in 1996.
/S/Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, FL
February 21, 1997
CONSOLIDATED STATEMANTS OF FINANCIAL POSITION
AT DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
ASSETS (In Thousands)
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions $ 14,989 $ 15,293
Interest-bearing deposits 9,974 27,127
-------- --------
Total cash and cash equivalents (Note 1, 19) 24,963 42,420
ASSETS AVAILABLE FOR SALE (At Fair Value):
(Notes 1, 2, 3, 19)
Government and agency securities 26,986 8,465
Mortgage-backed securities 159,761 123,599
-------- --------
Total assets available for sale 186,747 132,064
LOANS RECEIVABLE, Net of allowance for loan losses - 1995, $2,265;
1996, $2,263 (Notes 1, 4, 19) 532,333 661,700
OFFICE PROPERTIES AND EQUIPMENT, Net (Notes 1, 5) 15,563 18,092
FEDERAL HOME LOAN BANK STOCK, At cost 6,148 6,148
REAL ESTATE OWNED, Net (Notes 1, 6) 643 93
ACCRUED INTEREST RECEIVABLE (Note 7) 4,627 4,614
OTHER ASSETS (Note 1, 11) 8,596 8,431
-------- --------
TOTAL ASSETS $ 779,620 $ 873,562
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS (Note 8, 19) $ 595,180 $ 694,718
ADVANCES FROM FEDERAL HOME LOAN BANK (Note 9, 19) 85,169 82,517
ESOP LOAN (Note 10, 19) 1,380 1,104
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 2,734 2,448
DRAFTS PAYABLE (Note 1) 3,663 2,957
OTHER LIABILITIES (Notes 1, 12) 7,368 7,209
DEFERRED INCOME TAXES (Notes 1, 11) 2,860 886
-------- --------
TOTAL LIABILITIES 698,354 791,839
COMMITMENTS AND CONTINGENCIES (Note 1, 15) ======== ========
STOCKHOLDERS' EQUITY (Notes 1, 11, 12, 13, 14, 17):
PREFERRED STOCK, 2,000,000 shares authorized, none issued - -
COMMON STOCK ($.10 par value) 8,200,000 authorized shares:
outstanding 6,717,821 and 6,744,689 at December 31, 1995 and 1996, respectively
672 675
ADDITIONAL PAID IN CAPITAL 37,170 37,397
RETAINED EARNINGS - substantially restricted 42,764 44,184
COMMON STOCK PURCHASED BY:
Employee stock ownership plan (1,644) (1,315)
Recognition and retention plan (280) -
NET UNREALIZED INCREASE IN FAIR VALUE OF ASSETS AVAILABLE FOR SALE
(Net of applicable income taxes) (Notes 1, 2, 3) 2,584 782
-------- --------
TOTAL STOCKHOLDERS' EQUITY 81,266 81,723
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 779,620 $ 873,562
========= =========
</TABLE>
See Notes To Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
(In Thousands)
<S> <C> <C> <C>
Interest income:
Loans $ 34,791 $ 38,717 $ 47,997
Investment securities 2,984 2,144 804
Other investments 1,392 1,682 1,490
Mortgage-backed securities 4,253 10,718 9,949
-------- -------- --------
Total interest income 43,420 53,261 60,240
-------- -------- --------
Interest expense:
Deposits (Note 8) 16,059 22,515 26,239
Advances from Federal Home Loan Bank and other borrowings 1,717 5,580 5,892
-------- -------- --------
Total interest expense 17,776 28,095 32,131
-------- -------- --------
Net interest income 25,644 25,166 28,109
Provision for loan losses (Note 4) 112 (210) 164
-------- -------- --------
Net interest income after provision for loan losses 25,532 25,376 27,945
-------- -------- --------
Other income:
Servicing income and other fees 2,151 2,669 3,201
Net gain on sale of loans, mortgage-backed securities and
investments 15 5 1,215
Miscellaneous 331 347 460
-------- -------- --------
Total other income 2,497 3,021 4,876
Operating expense:
Employee compensation and benefits 10,672 10,728 12,776
Occupancy and equipment 3,637 4,192 4,648
Loss (gain) on real estate owned (1) 29 (69)
Marketing 588 617 604
Federal deposit insurance premium 1,306 1,279 4,958
Miscellaneous 3,173 3,604 3,792
-------- -------- --------
Total operating expense 19,375 20,449 26,709
-------- -------- --------
Income before provision for income taxes 8,654 7,948 6,112
-------- -------- --------
Provision (benefit) for income taxes: (Note 11)
Current 3,183 3,194 3,417
Deferred 209 (61) (855)
-------- -------- --------
Total provision for income taxes 3,392 3,133 2,562
-------- -------- --------
Net income $ 5,262 $ 4,815 $ 3,550
======= ======= =======
Earnings per share, primary and fully diluted (Note 18) $ .80 $ .73 $ .53
======= ======= =======
</TABLE>
See Notes To Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Net
Unrealized
Increase
(Decrease)
Retained Employee Recognition in Fair
Additional Earnings- Stock and Value of
Common Paid In Substantially Ownership Retention Assets
Stock Capital Restricted Plan Plan Available
for Sale Total
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1993 $ - $ - $ 46,499 $ - $ - $ 287 $ 46,786
Net Income for the year ended
December 31, 1994 - - 5,262 - - - 5,262
Issuance of Common Stock,
pursuant to
Reorganization, net of costs
of issuance of $1,344,000 579 23,745 - - - - 24,324
Purchase of shares by Employee Stock
Ownership Plan 19 1,913 - (1,932) - - -
Distribution of Common Stock to
Management
Recognition and Retention Plan 11 1,093 - - (1,104) - -
Assets distributed to Mutual Holding
Company
pursuant to Reorganization - - (530) - - - (530)
Recognition of unrealized decrease
in fair value of assets
available for sale, net of
income taxes, pursuant to
SFAS 115 - - - - - (1,152) (1,152)
Amortization of deferred
compensation - Employee Stock
Ownership Plan and Recognition
and Retention Plan - 85 - 276 496 - 857
Cash dividends declared - - (1,143) - - - (1,143)
Balance - December 31, 1994 609 26,836 50,088 (1,656) (608) (865) 74,404
Net Income for the year ended
December 31, 1995 - - 4,815 - - - 4,815
Stock Options exercised (Note 16) 2 15 - - - - 17
Effect of Reclassification of
assets held to maturity
to available for sale, net
of taxes - - - - - 2,253 2,253
Recognition of unrealized
increase in fair value
of assets available for
sale, net of income taxes,
pursuant to SFAS 115 - - - - - 1,196 1,196
Amortization of deferred
compensation - Employee
Stock Ownership Plan and
Recognition and Retention
Plan - 109 - 289 328 - 726
Refund of Reorganization costs - 13 - - - - 13
Distribution of 10% Stock dividend 61 10,197 (9,981) (277) - - -
Cash dividends declared - - (2,158) - - - (2,158)
Balance - December 31, 1995 672 37,170 42,764 (1,644) (280) 2,584 81,266
Net Income for the year ended
December 31, 1996 - - 3,550 - - - 3,550
Stock Options exercised 5 387 - - - - 392
Common Stock retired (2) (285) - - - - (287)
Recognition of unrealized
decrease in fair
value of assets
available for sale, net
of income taxes, pursuant
to SFAS 115 - - - - - (1,802) (1,802)
Amortization of deferred
compensation -
Employee Stock Ownership Plan
and Recognition and Retention
Plan - 125 - 329 280 - 734
Cash dividends declared - - (2,130) - - - (2,130)
Balance - December 31, 1996 $ 675 $ 37,397 $ 44,184 $ (1,315) $ - $ 782 $ 81,723
</TABLE>
See Notes To Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income $ 5,262 $ 4,815 $ 3,550
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,048 1,108 1,238
ESOP and Recognition and Retention Plan Compensation expense 857 726 734
Accretion of discounts, amortization of premiums, and other
deferred yield items 801 (1,018) (1,122)
Provision for loan losses 112 (210) 164
Provisions for losses and net losses on sales of real estate owned (96) (29) (110)
Net (gain) loss on sale of:
Loans (34) (17) (340)
Investment securities 20 12 -
Mortgage-backed securities - - (875)
Other assets 12 - -
(Increase) decrease in accrued interest receivable (424) (525) (13)
(Increase) decrease in other assets 2,441 (446) 165
Increase (decrease) in drafts payable 1,753 1,170 (706)
Increase (decrease) in deferred income taxes (471) 2,145 (1,974)
Increase (decrease) in other liabilities (2,055) 1,681 (321)
------- ------- -------
Net cash from operating activities 9,226 9,412 416
------- ------- -------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans (25,405) (66,196) (124,601)
Principal payments received on mortgage-backed securities 14,510 17,796 23,608
Purchases of:
Loans (573) (12,398) (21,153)
Mortgage-backed securities (68,133) (45,625) (9,962)
Investment securities (41,440) (22,318) (10,029)
Office properties and equipment (2,712) (2,116) (3,985)
Proceeds from sales of:
Loans 2,846 2,914 17,357
Investment securities available for sale 37,891 5,981 -
Real estate acquired in settlement of loans and held for investment 2,191 1,318 1,195
Mortgage-backed securities available for sale - - 20,516
Office properties and equipment - 67 -
Proceeds from maturities of investment securities 24,000 41,000 28,490
Other (1,103) (2,323) 1,147
------- ------- -------
Net cash used for investing activities (57,928) (81,900) (77,417)
------- ------- -------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock 27,445 - -
Common stock options exercised - 100 105
Purchase of stock for ESOP (1,932) - -
Purchase of stock for RRP (1,104) - -
Cash dividends paid (707) (2,106) (1,971)
Deposits acquired from Resolution Trust Corporation
NOW accounts, demand deposits and savings accounts 3,509 - -
Certificates of deposit 21,501 - -
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts (43,420) (18,826) 8,046
Certificates of deposit (29,882) 75,771 91,492
Advances from Federal Home Loan Bank 70,725 (1,490) (2,652)
ESOP Loan 1,660 (280) (276)
Stock subscriptions payable (18,435) - -
Advances by borrowers for taxes and insurance (39) (56) (286)
------- ------- -------
Net cash from financing activities 29,321 53,113 94,458
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,381) (19,375) 17,457
CASH AND CASH EQUIVALENTS, Beginning of year 63,719 44,338 24,963
CASH AND CASH EQUIVALENTS, End of year $ 44,338 $ 24,963 $ 42,420
======== ======== ========
</TABLE>
See Notes To Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fidelity Bankshares, Inc. ("the Company") became the parent of Fidelity
Federal Savings Bank of Florida ("the Bank") on January 29, 1997, as a
result of a tax-free reorganization, accounted for in the same manner as
a pooling of interests merger (See Note 17). Consequently, the Bank is
now a wholly-owned subsidiary of the Company. This transaction is
reflected in the accompanying financial statements as though it had
occurred on December 31, 1996. Separate holding company financial
statements have not been presented, as the Company had no operations in
any period presented.
The accounting and reporting policies of the Company and its subsidiary
conform, in all material respects, to generally accepted accounting
principles. The following summarizes the more significant of these
policies:
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, the Bank and the Bank's wholly-
owned subsidiary, Fidelity Realty and Appraisal Services, Inc. ("FRAS").
All significant intercompany balances and transactions have been
eliminated. Neither the Bank nor its subsidiary are or have been
involved in any joint ventures during any periods presented.
FRAS, principally, performs appraisals for and sells real estate owned
by the Bank.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents - For presentation purposes in both the consolidated
statements of financial position and the consolidated statements of cash
flows, the Bank considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
Assets Available for Sale - Securities available for sale are carried at
fair value, based upon market quotations. Deferred income taxes are
provided on any unrealized appreciation or decline in value. Such
appreciation or decline in value, net of deferred taxes is reflected as
an adjustment of equity. Gain or loss on sale of such securities is
based on the specific identification method. Debt securities are
classified as either available for sale or held for investment based on
management's intent.
Interest Rate Risk - The Bank is engaged principally in providing first
mortgage loans (both adjustable rate and fixed rate mortgage loans) to
individuals (see Note 4 for the composition of the mortgage loan
portfolio at December 31, 1995 and 1996). Mortgage loans and investment
securities are funded primarily with short-term liabilities which have
interest rates that vary with market rates over time. Net interest
income and the market value of net interest-earning assets will
fluctuate based on changes in interest rates and changes in the levels
of interest-sensitive assets and liabilities. The actual duration of
interest-earning assets and interest-bearing liabilities may differ
significantly from the stated duration as a result of prepayment, early
withdrawals, and similar factors.
Provisions for Loan Losses - Provisions for loan losses, which increase
the allowance for loan losses, are established by charges to income.
Such allowance represents the amounts which, in management's judgment,
are adequate to absorb charge-offs of existing loans which may become
uncollectible. The adequacy of the allowance is determined by
management's continuing evaluation of the loan portfolio in light of
past loss experience, present economic conditions, and other factors
considered relevant by management at the financial statement date.
Anticipated changes in economic factors which may influence the level of
the allowance are considered in the evaluation by management when the
likelihood of the changes can be reasonably determined. In estimating
the allowance for possible losses, consideration is given to asset
performance, the financial condition of borrowers or guarantors,
additional collateral provided, current and anticipated economic
conditions, appraisals, cost of disposal, and holding costs. While
management uses the best information available to make such evaluations,
future adjustments to the allowance may be necessary, which may be
material, if economic conditions differ substantially from the
assumptions used in the evaluation. If additions to the original
estimate of the allowance for loan losses are deemed necessary, they
will be reported in earnings in the period in which they become
reasonably estimable.
Uncollected Interest - The Bank reverses all accrued interest against
interest income when a loan is more than 90 days delinquent and ceases
accruing interest thereafter. Such interest ultimately collected is
credited to income in the period of recovery.
Real Estate Owned - Properties acquired through foreclosure, or a deed
in lieu of foreclosure are carried at the lower of fair value less
estimated costs to sell, or cost. If the fair value less the estimated
cost to sell an individual property declines below the cost of such
property, a provision for losses is charged to operations.
Subsequent costs relating to the improvement of property are
capitalized in amounts not to exceed the property's fair value. Costs
relating to holding the property are charged to expense when incurred.
The amounts the Bank could ultimately recover from property acquired by
foreclosure or deed in lieu of foreclosure, could differ materially from
the amounts used in arriving at the net carrying value of the assets
because of future market factors beyond the Bank's control or changes in
the Bank's strategy for recovering its investment.
Office Properties and Equipment - Office properties and equipment are
carried at cost less accumulated depreciation. Land is carried at cost.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets, which range from three to fifty years for
buildings and improvements and three to ten years for furniture and
equipment.
Goodwill - Goodwill resulting from the acquisition of deposits from the
Resolution Trust Corporation ("RTC") is being amortized on a straight-
line basis over five years. The balance of goodwill, included in other
assets at December 31, 1995 and 1996 was $ 1,057,000 and $ 755,000,
respectively.
Drafts Payable - Drafts payable represent checks drawn by the Bank on a
third party payer, for savings account withdrawals and payment of the
Bank's expenses. Under the agreement between the Bank and its third
party payer, the Bank funds the checks written on the day following
their issuance.
Loan Origination Fees and Costs - Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment
of the yield of the related loan. Deferred loan fees and costs are
amortized to income over the estimated life of the loans using the
interest method.
Unearned discounts on consumer loans are amortized to income using the
interest method.
Commitment Fees - Non-refundable fees received for commitments to make
or purchase loans in the future, net of direct costs of underwriting the
commitments, are deferred and, if the commitment is exercised,
recognized over the life of the loan as an adjustment of yield. If the
commitment expires unexercised, income is recognized upon expiration of
the commitment. Direct loan origination costs incurred to make a
commitment to originate a loan are offset against any related commitment
fee and the net amount recognized.
Pension and Retirement Plans - Benefits are accounted for in accordance
with Statement of Financial Accounting Standards No. 87, entitled
"Employers' Accounting for Pensions" ("SFAS No. 87"). Net periodic
pension costs (income) are actuarially determined.
Income Taxes - The Bank and its subsidiary file consolidated federal and
state income tax returns. Income taxes are allocated to the Bank and its
subsidiary as though separate tax returns are being filed. ( See Note
11).
Deferred income taxes are provided on items recognized for financial
reporting purposes in periods different than such items are recognized
for income tax purposes in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109").
Earnings Per Common Share - Primary earnings per common share is
computed by dividing net income by the weighted average number of shares
of common stock outstanding and common stock equivalents, after giving
retroactive effect to the stock dividend in 1995, assumed outstanding
during the year less the weighted average unallocated ESOP and
Management Recognition Plan shares of common stock.
Fully diluted shares outstanding includes the maximum dilutive effect of
stock issuable upon exercise of common stock options and unallocated
ESOP and Management Recognition Plan shares of common stock.
Impact of New Accounting Issues - In May 1995, FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." The Statement, which amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities,"
requires mortgage banking enterprises that acquire mortgage servicing
rights through either the purchase of or origination of mortgage loans
and sell or securitize those loans with servicing rights retained to
allocate the total cost of the mortgage loans to the mortgage servicing
rights and the loans based on their relative fair values. Mortgage
banking enterprises include commercial banks and thrift institutions
that conduct operations substantially similar to the primary operations
of a mortgage banking enterprise. SFAS No. 122 applies prospectively in
fiscal years beginning after December 15, 1995 to sales of mortgage
loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those
purchased before the adoption of this Statement. Management of the Bank
implemented SFAS No. 122, prospectively, as required. The adoption of
this accounting principle had the effect of increasing income before tax
by $ 196,000 for the fiscal year ended December 31, 1996.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement requires certain disclosures about stock-
based employee compensation arrangements, regardless of the method used
to account for them, defines a fair value based method of accounting for
an employee stock option or similar equity instrument, and encourages
all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for stock-based compensation plans
using the intrinsic value method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share, as if
the fair value method of accounting defined in this Statement had been
applied. Under the fair value method, compensation cost is measured at
the grant date based on the value of the award and is recognized over
the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the
stock. The disclosure requirements of this Statement are effective for
financial statements for fiscal years beginning after December 15, 1995.
Pro forma disclosures required for entities that elect to continue to
measure compensation cost using APB Opinion No. 25 must include the
effects of all awards granted in fiscal years that begin after December
15, 1994. Management has determined that the Bank will continue the
accounting set forth in APB Opinion No. 25. Pro forma disclosures are
not required because no stock options were granted during 1995 or 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities
based on a financial-components approach that focuses on control. SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is
to be prospectively applied. Management of the Bank does not expect the
adoption of this promulgation to have a material effect on the Bank's
consolidated financial statements.
Reclassifications - Certain amounts in the 1994 and 1995 consolidated
financial statements have been reclassified to conform to the 1996
presentation.
2. GOVERNMENT AND AGENCY SECURITIES AVAILABLE FOR SALE
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1995:
Municipal Bonds $ 421 $ 19 $ - $ 440
United States Government and agency securities 26,441 105 - 26,546
------- ------- ------- -------
Total $ 26,862 $ 124 $ - $ 26,986
======= ======= ======= =======
Weighted average interest rate 6 76%
=======
December 31, 1996:
Municipal Bonds $ 419 $ 11 $ - $ 430
United States Government and agency securities 8,024 30 19 8,035
------- ------- ------- -------
Total $ 8,443 $ 41 $ 19 $ 8,465
======= ======= ======= =======
Weighted average interest rate 6.30%
=======
</TABLE>
The following table sets forth the contractual maturity of the Bank's
securities available for
sale at December 31, 1995 and 1996
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1996
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 19,954 $ 20,034 $ 2,000 $ 1,995
Due after one year, through two years 6,908 6,952 6,443 6,470
-------- -------- -------- --------
Total $ 26,862 $ 26,986 $ 8,443 $ 8,465
======== ======== ======== ========
</TABLE>
The Bank had total Government and Agency securities available for sale
pledged at December 31, 1995 and 1996 of $ 2,300,000 and $ 2,515,000,
respectively. Of the $ 2,515,000 of securities pledged at December 31,
1996, $ 515,000 was pledged for customer accounts that exceeded $
100,000 and the remaining $ 2,000,000 was pledged as collateral for
"Treasury, Tax and Loan" (TT&L) accounts held for the benefit of the
federal government.
Proceeds from the sale of securities available for sale were
$ 37,891,000 and $ 5,981,000 during the years ended December 31, 1994 and
1995. During the years ended December 31, 1994 and 1995, sales resulted
in gross realized gains of $ 0 and $ 18,000 and gross realized losses of
$ 12,000 and $ 38,000, respectively. There were no sales of securities
during the year ended December 31, 1996.
3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale at December 31, 1995 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1995:
FHLMC-fixed rate $ 72,386 $ 1,747 $ 81 $ 74,052
FNMA-fixed rate 13,865 201 47 14,019
GNMA-fixed rate 25,017 2,179 - 27,196
FHLMC-adjustable rate 13,256 19 31 13,244
FNMA-adjustable rate 31,054 211 15 31,250
-------- -------- -------- --------
Total $ 155,578 $ 4,357 $ 174 $ 159,761
========= ========= ========= =========
December 31, 1996:
FHLMC-fixed rate $ 55,832 $ 856 $ 443 $ 56,245
FNMA-fixed rate 11,804 97 130 11,771
GNMA-fixed rate 7,670 474 - 8,144
FHLMC-adjustable rate 15,605 295 - 15,900
FNMA-adjustable rate 29,449 222 95 29,576
GNMA-adjustable rate 1,935 28 - 1,963
-------- -------- -------- --------
Total $ 122,295 $ 1,972 $ 668 $ 123,599
========= ========= ========= =========
</TABLE>
There were no sales of mortgage-backed securities classified as
available for sale during the year ended December 31, 1995. There were
$ 19.6 million in sales of mortgage-backed securities classified as
available for sale during the year ended December 31, 1996. Proceeds
from the sale of mortgage-backed securities were $ 20.5 million for the
year ended December 31, 1996 which included gross realized gains of
$ 875,000 and no gross realized losses.
At December 31, 1995 and 1996, the Bank had $ 104,378,000 and
$ 94,913,000, respectively, of mortgage-backed securities available for
sale pledged as collateral for advances from the Federal Home Loan Bank
(See Note 9).
4. LOANS RECEIVABLE
Loans receivable at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
(In Thousands)
<S> <C> <C>
One-to-four single family, residential real estate mortgages $ 426,823 $ 524,434
Commercial real estate mortgages 45,107 42,811
Real estate construction-primarily residential 40,522 58,493
Participations-primarily residential 5,564 4,255
Land loans-primarily residential 10,769 11,875
-------- --------
Total first mortgage loans 528,785 641,868
Deposit account loans 244 158
Consumer and commercial business loans 32,445 57,905
-------- --------
Total gross loans 561,474 699,931
Less:
Undisbursed portion of loans in process 27,261 37,575
Unearned discounts, premiums and deferred loan fees (costs), net (385) (1,607)
Allowance for loan losses 2,265 2,263
--------- ---------
Loans receivable-net $ 532,333 $ 661,700
========= =========
</TABLE>
The amount of loans on which the Bank has ceased accruing interest or
does not charge interest aggregated approximately $ 1,864,000 and
$ 3,035,000, net of specific valuation allowances of $ 128,000 and
$ 274,000, at December 31, 1995 and 1996, respectively. The amount of
interest not accrued relating to these loans was approximately $ 100,000
and $ 192,000 at December 31, 1995 and 1996, respectively. Management
believes the allowance for possible loan losses is adequate.
An analysis of the changes in the allowance for loan losses for the
years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 2,865 $ 2,566 $ 2,265
Current provision 112 (210) 164
Charge-offs (411) (91) (166)
Recoveries - - -
------- ------- -------
Ending balance $ 2,566 $ 2,265 $ 2,263
======= ======= =======
</TABLE>
The Bank originates both adjustable and fixed rate mortgage loans.
Included in the loans receivable at December 31, 1996 are $ 245,000 of
loans held for sale. These loans are recorded at the lower of cost or
market. There were no loans held for sale at December 31, 1995.
A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. An analysis of
the recorded investment in impaired loans owned by the Bank at December
31, 1995 and 1996 and the related allowance for those loans is as
follows:
<TABLE>
<CAPTION>
1995 1996
(In Thousands)
Loan Related Loan Related
Balance Allowance Balance Allowance
<S> <C> <C> <C> <C>
Impaired loan balances and related allowances:
Loans performing in conformity with contractual terms $ 2,908 $ 316 $ 984 $ 164
Loans for which interest income is not being recognized 292 128 667 277
------- ------- ------- -------
Total $ 3,200 $ 444 $ 1,651 $ 441
======= ======= ======= =======
</TABLE>
The Bank's policy on interest income on impaired loans is to reverse all
accrued interest against interest income if a loan becomes more than 90
days delinquent and cease accruing interest thereafter. Such interest
ultimately collected is credited to income in the period of recovery.
At December 31, 1996, the composition and maturity or repricing of the
mortgage loan portfolio is presented below:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
Term of Maturity Book Value Term to Rate Adjustment Book Value
(In Thousands) (In Thousands)
<S> <C> <C> <C>
1 year or less $ 41,100 1 year or less $ 191,865
1 year-3 years 4,344 1 year-3 years 90,750
3 years-5 years 13,297 3 years-5 years 52,429
5 years-10 years 29,551 5 years-10 years 30,027
10 years-20 years 132,361 10 years-20 years 66
Over 20 years 113,611 Over 20 years 530
--------- ---------
Total $ 334,264 Total $ 365,667
========= =========
</TABLE>
Adjustable rate mortgage loans originated prior to December 31, 1993
have interest rate adjustment limitations and are generally indexed to
the monthly weighted-average cost of funds for Savings Association
Insurance Fund ("SAIF") insured institutions headquartered in the Fourth
Federal Home Loan Bank ("FHLB") District. Adjustable rate mortgage loans
originated subsequent to December 31, 1993 are indexed to comparable
term U.S. Treasury securities. Future market factors may affect the
correlation of the interest rate adjustment with the rates the Bank pays
on the short-term deposits which have been primarily utilized to fund
those loans.
The Bank makes fixed rate loan commitments for periods generally not
exceeding sixty days. At December 31, 1995 and 1996 the Bank had
commitments outstanding to originate fixed rate mortgage loans as
follows:
<TABLE>
<CAPTION>
1995 1996
(In Thousands)
<S> <C> <C>
15 Years to Maturity
6.76 - 7.00 $ 82 $ -
7.01 - 7.25 383 -
7.26 - 7.50 301 666
7.51 - 7.75 133 360
7.76 - 8.00 88 215
8.01 - 8.25 - 98
8.26 - 8.50 - 30
8.51 - 8.75 - -
8.76 - 9.00 - -
9.01 - 9.25 - 842
30 Years to Maturity
7.26 - 7.50 462 107
7.51 - 7.75 891 97
7.76 - 8.00 1,022 930
8.01 - 8.25 471 921
8.26 - 8.50 - 611
8.51 - 8.75 86 -
8.76 - 9.00 - -
9.01 - 9.25 - -
Over 9.25 - 100
-------- --------
Totals $ 3,919 $ 4,977
======== ========
</TABLE>
Because the above commitments generally are funded within sixty days,
management of the Bank feels that related interest rate risk of the
commitments is minimal.
The Bank's lending markets are primarily concentrated in Palm Beach,
Martin and St. Lucie counties in Southeast Florida.
Commercial Real Estate Lending - The Bank originates and purchases
commercial real estate loans, which totaled $ 45,107,000 and
$ 42,811,000 at December 31, 1995 and 1996, respectively. These loans are
considered by management to be of somewhat greater risk of
uncollectibility due to the dependency on income production or future
development of the real estate. Accordingly, Bank management establishes
greater provisions for probable but not yet identified losses on these
loans than on less risky residential mortgage loans. The composition of
commercial real estate loans and its primary collateral at December 31,
1995 and 1996 are approximately as follows:
<TABLE>
<CAPTION>
1995 1996
(In Thousands)
<S> <C> <C>
Office buildings $ 10,522 $ 9,576
Retail buildings 10,214 9,517
Warehouses 9,665 9,032
Rental property 13,748 13,781
Hotels and motels 65 60
Other property improvements 332 300
Other 561 545
-------- --------
Total $ 45,107 $ 42,811
======== ========
</TABLE>
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), a federally chartered savings and loan association's
aggregate commercial real estate loans may not exceed 400% of its
capital as determined under the capital standards provisions of FIRREA.
The Bank is federally chartered and subject to this limitation. FIRREA
does not require divestiture of any loan that was lawful when it was
originated. At December 31, 1996, the Bank estimates that, while
complying with this limitation, it could originate an additional $ 284.0
million of commercial real estate loans, though the Bank's current
business plan indicates no intentions to do so.
Loans to One Borrower Limitation - The Bank may not make real estate
loans to one borrower in excess of 15% of its unimpaired capital and
surplus except for loans not to exceed $ 500,000. This 15% limitation
results in a dollar limitation of approximately $ 12.3 million at
December 31, 1996. At December 31, 1996, the Bank met the loans to one
borrower limitation under current existing regulations.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial position. The unpaid balances of
these loans at December 31, 1995 and 1996 were $ 33,941,000 and
$ 45,539,000, respectively. Custodial escrow balances maintained in
connection with the foregoing loan servicing were $ 186,078 and
$ 186,343 at December 31, 1995 and 1996, respectively.
The Bank offers loans to its employees, including Directors and Senior
Management at prevailing market interest rates. These loans are made in
the ordinary course of business and on substantially the same terms and
collateral requirements as those of comparable transactions prevailing
at the time.
The loans to Directors, Executive Officers, and associates of such
persons amounted to $ 1,246,000 and $ 1,184,000 at December 31, 1995 and
1996, respectively, which did not exceed 5% of retained earnings.
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
(In Thousands)
<S> <C> <C>
Land $ 4,839 $ 5,657
Buildings and improvements 11,321 13,627
Furniture and equipment 7,280 7,710
-------- --------
Total 23,440 26,994
Less accumulated depreciation 7,877 8,902
-------- --------
Office properties and equipment - net $ 15,563 $ 18,092
======== ========
</TABLE>
6. REAL ESTATE OWNED
Real estate owned at December 31, 1995 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1995 1996
(In Thousands)
<S> <C> <C>
Real estate owned $ 643 $ 93
Valuation allowance - -
----- ----
Real estate owned - net $ 643 $ 93
===== =====
</TABLE>
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1995 and 1996 consists of
the following:
<TABLE>
<CAPTION>
1995 1996
(In Thousands)
<S> <C> <C>
Loans $ 2,891 $ 3,474
Investments 669 298
Mortgage-backed securities 1,067 842
------- -------
Accrued interest receivable $ 4,627 $ 4,614
======= =======
</TABLE>
8. DEPOSITS
The weighted-average interest rates on deposits at December 31, 1995 and
1996 were 4.13% and 4.26%, respectively. Deposit accounts, by type and
range of rates at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
Account Type and Rate 1995 1996
(In Thousands)
<S> <C> <C>
Non-interest-bearing NOW accounts $ 21,430 $ 26,406
NOW, Super NOW and funds transfer accounts
1995 and 1996, 1.00 % and 1.02 %, respectively. 67,886 70,558
Passbook and statement accounts
1995 and 1996, 1.99 % and 2.05 %, respectively. 86,471 87,534
Variable-rate money market accounts
1995 and 1996, 2.47 % and 2.51 %, respectively. 44,677 44,012
-------- --------
Total non-certificate accounts 220,464 228,510
-------- --------
Certificates:
1.01% - 2.00% 834 949
2.01% - 3.00% 2 2
3.01% - 4.00% 1,198 20
4.01% - 5.00% 49,308 34,308
5.01% - 6.00% 205,595 333,998
6.01% - 7.00% 109,737 93,788
7.01% - 8.00% 8,025 3,079
8.01% - 9.00% 17 64
-------- --------
Total certificates 374,716 466,208
-------- --------
Total $ 595,180 $ 694,718
========= =========
</TABLE>
Individual deposits greater than $ 100,000 at December 31, 1995 and 1996
aggregated approximately $ 37,571,000 and $ 53,680,000, respectively.
Interest on deposit accounts, presented in the consolidated statements
of operations, is net of interest forfeited by depositors on early
withdrawal of certificate accounts of approximately $ 74,000, $ 115,000
and $ 106,000, for the years ended December 31, 1994, 1995 and 1996,
respectively.
Scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
December 31,
1995 1996
Amount Percent Amount Percent
Maturity (Dollars In Thousands)
<S> <C> <C> <C> <C>
Less than 1 year $ 275,749 73.59% $ 322,042 69.08%
1 year-2 years 51,148 13.65 75,043 16.10
2 years-3 years 16,925 4.52 28,603 6.13
3 years-4 years 11,503 3.07 17,031 3.65
4 years-5 years 17,469 4.66 21,867 4.69
Thereafter 1,922 .51 1,622 .35
--------- --------- -------- -------
Totals $ 374,716 100.00% $ 466,208 100.00%
========= ========= ========= =======
</TABLE>
Under FIRREA, any insured depository institution that does not meet its
applicable minimum capital requirements may not accept brokered deposits
after December 7, 1992. This prohibition includes renewals and rollovers
of existing brokered deposits and deposit solicitations at higher than
prevailing interest rates paid by institutions in the Bank's normal
market area. Even though the Bank meets all of the applicable minimum
capital requirements at December 31, 1996, the Bank had no brokered
deposits.
Interest expense on deposits consists of the following during the years
ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
(In Thousands)
<S> <C> <C> <C>
Passbook accounts $ 1,848 $ 1,812 $ 1,723
NOW accounts 828 812 937
Money market accounts 1,255 1,139 1,075
Certificate accounts 12,128 18,752 22,504
-------- -------- --------
Total $ 16,059 $ 22,515 $ 26,239
======== ======== ========
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank had outstanding advances from the FHLB of $ 85,169,000 with
interest rates ranging from 5.21% to 8.21% and $ 82,517,000 with
interest rates ranging from 5.21% to 8.21% at December 31, 1995 and
1996, respectively. The advances at December 31, 1996 are repayable as
follows:
Years Ending
December 31, Amount
(In Thousands)
1997 $ 37,779
1998 -
1999 28,349
2000 56
2001 6,327
Thereafter 10,006
--------
Total $ 82,517
========
The Bank has entered into a security agreement with the FHLB under which
the Bank is required to maintain as collateral for its advances,
securities in an amount at least equal to 100% of the Bank's total
advances outstanding from the FHLB. Pledged assets to secure FHLB
advances at December 31, 1995 and 1996 include FHLMC and FNMA securities
totaling $ 104,378,000 and $ 94,913,000 respectively (See Note 3).
10. EMPLOYEE STOCK OWNERSHIP PLAN LOAN
In connection with the Bank's plan of reorganization into a mutual
holding company, which was consummated January 7, 1994, the Bank
established an Employee Stock Ownership Plan (ESOP) which was funded by
proceeds from a loan with an unrelated financial institution in the
original amount of $ 1,932,000. Terms of the loan require equal
quarterly payments, together with interest, for seven years, with a
right of prepayment of the loan after three years. The loan bears
interest at .25% below the New York prime rate (8.25% at December 31,
1996).
Collateral for the loan will be released and allocated to employee
accounts proportional to the payments on the loan. The collateral for
this loan at December 31, 1996 is 121,440 shares of the Company's stock
held and owned by the ESOP. In addition, the loan contains several
restrictive covenants requiring certain minimum levels of financial
performance be maintained by the Bank. The Bank is in compliance with
these covenants.
Although the loan contains only minimal guarantees by Fidelity
Bankshares M.H.C. (the Company's mutual holding company), as was
permitted by the OTS, the Bank intends to make contributions to the ESOP
trust for the repayment of the loan in accordance with its terms.
The balance of this loan at December 31, 1996 was $ 1,104,000.
11. INCOME TAXES
In accordance with SFAS No. 109, deferred income tax assets and
liabilities are computed annually for differences between financial
statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable for the
period adjusted for the change during the period in deferred tax assets
and liabilities.
The components of the provisions for income taxes for the years ended
December 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
(In Thousands)
<S> <C> <C> <C>
Current - federal $ 2,723 $ 2,784 $ 2,993
Current - state 460 410 424
------- ------- -------
Total current 3,183 3,194 3,417
Deferred - federal and state 209 (61) (855)
------- ------- -------
Total $ 3,392 $ 3,133 $ 2,562
======= ======= =======
</TABLE>
The Bank's provision for income taxes differs from the amounts
determined by applying the statutory federal income tax rate to income
before income taxes for the following reasons:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996
Amount % Amount % Amount %
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 3,029 35.0% $ 2,781 35.0% $ 2,139 35.0%
State income taxes, net of federal
income tax benefits
327 3.8 265 3.3 220 3.6
Benefit of graduated rates (87) (1.0) (79) (1.0) (61) (1.0)
Other 123 1.4 166 1.8 264 4.3
-------- -------- -------- -------- -------- --------
Total provision and effective tax rate $ 3,392 39.2% $ 3,133 39.1% $ 2,562 41.9%
======== ======== ======== ======== ======== ========
</TABLE>
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
1995 1996
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 824 $ 978
Loan fee income 1,242 1,304
FHLB stock dividends 1,050 1,102
Unrealized appreciation in securities 1,662 543
Excess of tax bad debt reserve over book reserve 531 513
Deferred compensation 92 -
----- -----
Gross deferred tax liabilities 5,401 4,440
----- -----
Deferred tax assets:
Executive death benefit 283 347
Amortization 118 205
Retirement plan 1,461 2,182
Deferred compensation 591 686
Deferred state taxes - 17
Other 123 117
----- -----
Gross deferred tax assets 2,576 3,554
Less valuation allowances for deferred tax assets (35) -
----- -----
Net deferred tax assets 2,541 3,554
----- -----
Net deferred tax liability $ 2,860 $ 886
======= =======
</TABLE>
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31,
1995. Section 593 allowed thrift institutions, including the Bank, to
use the percentage-of-taxable income bad debt accounting method, if more
favorable than the specific charge-off method, for Federal income tax
purposes. The excess reserves (deduction based on the percentage-of-
taxable income less the deduction based on the specific charge-off
method) accumulated post 1987 are required to be recaptured ratably over
a six year period beginning in 1996. The recapture has no effect on the
Company's statement of operations as taxes were provided for in prior
years in accordance with SFAS 109, "Accounting for Income Taxes." The
timing of this recapture may be delayed for a one or two year period to
the extent that the Bank originates more residential loans that the
average originations in the past six years. The Bank will meet the
origination requirement for 1996 and, therefore, will delay recapture at
least until the six year period beginning in 1997. The recapture amount
of $ 3.7 million will result in payments totaling $ 1.4 million which
has been previously accrued. The same legislation forgave the tax
liability on pre-1987 accumulated bad debt reserves which would have
penalized any thrift choosing to adopt a bank charter because the tax
would have become due and payable. The unrecorded potential liability
that was forgiven approximated $ 2.9 million.
12. PENSION AND EMPLOYEE BENEFIT PLANS
Pension Plan - The Bank's employees participate in the Bank's, qualified
defined benefit pension plan covering substantially all employees. The
plan calls for benefits to be paid to eligible employees at retirement
based primarily upon years of service with the Bank and compensation
rates during those years. Currently, the Bank's policy is to fund the
qualified retirement plan in an amount that falls between the minimum
contribution required by the Employee Retirement Income Security Act and
the maximum tax deductible contribution. Plan assets consist primarily
of common stock, U.S. Government obligations and certificates of
deposit.
Pension expense for the plan includes the following components:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1994 1995 1996
(In Thousands)
<S> <C> <C> <C>
Service cost $ 344 $ 325 $ 410
Interest cost 436 554 535
Return on assets 270 (1,066) (816)
Net amortization and deferral (709) 680 433
----- ----- -----
Net periodic pension cost $ 341 $ 493 $ 562
===== ===== =====
</TABLE>
For the years ended December 31, 1994, 1995 and 1996, pension expense
amounts were based upon actuarial computations.
In accordance with the actuarially determined computation under SFAS No.
87, the Bank funded $ 746,000 as required for the 1996 plan year.
The following sets forth the funded status of the qualified plan at
December 31:
<TABLE>
<CAPTION>
1995 1996
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 4,565 $ 3,569
Non-vested benefits 279 302
------- -------
Accumulated benefit obligation 4,844 3,871
Effect of anticipated future compensation levels
and other events 2,103 3,319
------- -------
Projected benefit obligation 6,947 7,190
Fair value of assets held in the plan (estimated) 5,169 6,284
------- -------
Unfunded plan assets over projected benefit obligation $ 1,778 $ 906
======= =======
The unfunded plan assets under projected benefit
obligation consists of the following:
Accrued pension cost (benefit) $ 445 $ 261
Unrecognized net loss due to changes in assumptions 1,607 889
Other, net (274) (244)
------- -------
Total $ 1,778 $ 906
======= =======
</TABLE>
The weighted-average discount rate used to measure the projected benefit
obligation is 7.75% pre-retirement and 6.00% post-retirement in 1996,
compared to 7.25% pre-retirement and 6.00% post-retirement in 1995 and
8.50% pre-retirement and 6.50% post-retirement in 1994. The rate of
increase in future compensation levels is 6.50% in all years, and the
expected long-term rate of return on assets is 8.00% in all years.
Savings Plan - Effective January 1, 1988, the Board of Directors
approved a 401(k) deferred savings plan for all Bank employees who are
21 years of age with one or more years of service. The 401(k) deferred
savings plan allows qualified employees to save from 1% to 10% of their
income. Presently, one-half of an employee's contribution is matched by
the Bank, up to 3% of the employee's salary. The Bank's matching
percentage will be determined annually by the Board of Directors after
taking into consideration such factors as profit performance and ability
to meet capital requirements. The Bank's contribution to the plan
totaled $ 103,000, $ 145,000 and $ 170,000 for the years ended December
31, 1994, 1995 and 1996, respectively.
Retirement Plans - During 1989, the Bank established non-qualified
defined benefit plans for certain officers and directors. The director's
plan became effective on January 1, 1991. For the years ended December
31, 1994, 1995 and 1996, the net periodic pension expense for the
Supplemental Executive Retirement Plan for Officers totaled $ 626,000,
$ 615,000 and $ 964,000, respectively. The projected benefit obligation
as of December 31, 1994, 1995 and 1996, was estimated at $ 3,704,000,
$ 5,791,000 and $ 5,217,000, respectively. For 1994, 1995 and 1996,
respectively, the discount rates used to measure the projected benefit
obligation were 7.00%, 6.50% and 7.75%. The rate of increase in future
compensation levels in all years was 5.00%. For the years ended December
31, 1994, 1995 and 1996, the net periodic pension expense for the
Retirement Plan for the Director's totaled $ 337,000, $ 257,000 and
$ 273,000, respectively. The projected benefit obligation for the
Retirement Plan for Directors as of December 31, 1994, 1995 and 1996 was
estimated at $ 1,494,000, $ 1,678,000 and $ 1,514,000, respectively. For
1994, 1995 and 1996, the discount rates used to measure that projected
benefit obligation were 7.00%, 6.50% and 7.75%, respectively. The rate
of increase in future compensation levels for the Retirement Plan for
Directors was 5.00% in all years. The provisions of SFAS No. 87 require
recognition in the statement of financial position of the additional
minimum liability and related intangible asset for a retirement plan
with accumulated benefits in excess of plan assets. This resulted in the
recognition at December 31, 1995, of an additional liability and an
intangible asset of $ 2,050,000. There was no material effect on
earnings or cash requirements to fund the retirement plans. At December
31, 1996, the Bank recognized an additional liability of $ 592,000 and
an intangible asset of an equal amount. The additional liability and
intangible asset amounts as of December 31, 1995 and 1996 are recorded
in the account balances captioned other liabilities and other assets,
respectively, in the accompanying consolidated statements of financial
position.
Incentive Program - The Bank also has a Senior Management Performance
Incentive Award Program to provide the opportunity for those executives
to be rewarded in future earnings growth. A designated percentage of
income at December 31 of each year is used to determine the award fund
contribution. This percentage will be determined annually by the Board
of Directors after taking into consideration such factors as profit
performance and ability to meet capital requirements. Awards amounting
to $ 170,000, $ 164,000 and $ 120,000, were made during the calendar
years 1994, 1995 and 1996, respectively, for distribution in subsequent
years.
Employee Stock Ownership Plan - On January 7, 1994, in connection with
the Bank's Plan of Reorganization into a Mutual Holding Company (See
Note 17), the Bank adopted a tax qualified Employee Stock Ownership Plan
("ESOP") for all eligible employees. The ESOP purchased 193,200 shares
of the Bank's stock at the date of the Reorganization. The funds used to
purchase the shares were borrowed from a third party lender (See Note
10). The Bank will contribute to the ESOP sufficient funds to pay the
principal and interest on this loan over seven years. Benefits generally
become 100% vested after five years of credited service. However,
contributions to the ESOP and shares allocated among participants
proportional to repayment of the seven year ESOP loan will be allocated
among participants on the basis of compensation in the year of
allocation, subject to regulatory maximum limitations. The Bank
recognized $ 361,000, $ 398,000 and $ 462,000, by a charge against
income in 1994, 1995 and 1996, respectively, under this plan.
Bank Recognition and Retention Plans - On January 7, 1994, in connection
with the Bank's Plan of Reorganization into a Mutual Holding Company
(See Note 17), the Bank adopted two Recognition and Retention Plans to
encourage key employees and Directors to remain with the Bank. Both
plans, consisting of a total of 121,440 shares of restricted stock after
the 10% stock dividend, were awarded and will vest and be allocated to
the affected employees and Directors ratably over three years, subject
to various conditions requiring their acceleration. The Bank recognized
$ 496,000, $ 328,000 and $ 280,000 by a charge against income in 1994,
1995 and 1996, respectively, under this plan.
13. STOCK OPTION PLAN
The Bank has adopted stock option plans which granted options with an
exercise price equal to the market value of the stock at the date of
grant, to Directors and officers. The Directors may exercise their
options at any time up to ten years, while officer's options are
exercisable at a rate of twenty percent per year, not to exceed ten
years. Under these plans, after retroactively adjusting for the 10%
stock dividend distributed in November 1995, the Bank reserved 303,600
shares of authorized but unissued common stock for future issuance. The
following table shows a summary of transactions.
<TABLE>
<CAPTION>
Options Price
Average
Number of Exercise
Options Price Per Aggregate
Outstanding Share Price
Options Outstanding
<S> <C> <C> <C>
Balance - December 31, 1993 - - -
------- ------- ---------
Granted 303,600 $ 9.09 $ 2,759,724
Exercised - - -
Cancelled - - -
------- ------- ---------
Balance - December 31, 1994 303,600 9.09 2,759,724
------- ------- ---------
Granted - - -
Exercised (37,950) 9.09 (344,966)
Cancelled - - -
------- ------- ---------
Balance - December 31, 1995 265,650 9.09 2,414,758
------- ------- ---------
Granted - - -
Exercised (43,117) 9.09 (391,934)
Cancelled - - -
------- ------- ---------
Balance - December 31, 1996 222,533 $ 9.09 $ 2,022,824
======= ======= =========
</TABLE>
14. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to
meet minimum capital requirements can initiate certain mandatory and
possible discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are
also subject to qualitative judgments by regulators about components,
risk-weighting and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
Tangible capital of not less than 1.5% of adjusted total assets, Total
capital to risk-weighted assets of not less than 8%, Tier I capital of
not less than 3.0% of adjusted total assets, and Tier I capital to risk-
weighted assets of 4.0% (as defined in the regulations). As of December
31, 1996, the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1996 the Bank is categorized as "Well Capitalized"
under the framework for prompt corrective action. To be considered well
capitalized under Prompt Corrective Action Provisions, the Bank must
maintain total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the following table.
The Bank's actual capital amounts and ratios are presented in the
following table:
<TABLE>
<CAPTION>
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provisions
Ratio Amount Ratio Amount Ratio Amount
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Stockholders'
Equity and ratio
to total assets 10.4% $ 81,266
=========
Unrealized increase in
market value of
assets available
for sale (net of
applicable income
taxes) (2,584)
Goodwill (1,057)
Tangible capital and --------
ratio to adjusted
total assets 10.0% $ 77,625 1.5% $ 11,600
Tier I (core) capital ========= ========= ========= =========
and ratio to
adjusted total
assets 10.0% $ 77,625 3.0% $ 23,199 5.0% $ 38,666
Tier I (core) capital ========= ========= ========= ========= ========= =========
and ratio to
risk-weighted total
assets 21.0% $ 77,625 6.0% $ 22,173
========= ========= =========
General loan valuation
allowances 1,821
Equity investments (217)
--------
Tier 2 capital $ 1,604
--------
Total risk-based capital
and ratio to
risk-weighted total
assets 21.4% $ 79,229 8.0% $ 29,564 10.0% $ 36,955
========= ========= ========= ========= ========= =========
Total assets $ 779,620
=========
Adjusted total assets $ 773,314
=========
Risk-weighted assets $ 369,554
=========
As of December 31, 1996
Stockholders' Equity
and ratio to total
assets 9.4% $ 81,723
=========
Unrealized increase in
market value of
assets available
for sale (net of
applicable income
taxes) (782)
Goodwill (755)
Tangible capital and ---------
ratio to adjusted
total assets 9.2% $ 80,186 1.5% $ 13,072
Tier I (core) capital and ========= ========= ========= =========
ratio to adjusted
total assets 9.2% $ 80,186 3.0% $ 26,144 5.0% $ 43,574
Tier I (core) capital and ========= ========= ========= ========= ========= =========
ratio to risk-
weighted total
assets 17.9% $ 80,186 6.0% $ 26,915
========= ========= =========
General loan valuation
allowances 1,822
Equity investments (97)
--------
Tier 2 capital $ 1,725
Total risk-based =========
capital and ratio
to risk-weighted
total assets 18.3% $ 81,911 8.0% $ 35,886 10.0% $ 44,858
========= ======== ========= ========= ========= =========
Total assets $ 873,562
========
Adjusted total assets $ 871,472
=========
Risk-weighted assets $ 448,579
=========
</TABLE>
At periodic intervals, both the OTS and the FDIC routinely examine the
Bank's financial statements as part of their legally proscribed
oversight of the savings and loan industry. Based on these examinations,
the regulators can direct that the Bank's financial statements be
adjusted in accordance with their findings.
During the year ended December 31, 1996, an OTS examination resulted in
no significant adjustments to the consolidated financial statements.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes commitments to extend
credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established
in the contract. The interest rates on both fixed and variable rate
mortgage loans are generally based on the market rates in effect on the
date the loan application is taken. Commitments generally have fixed
expiration dates of no longer than 60 days and other termination clauses
and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained by the Bank upon extension of credit is
based on management's credit evaluation of the customer. Collateral held
varies but may include single-family homes, marketable securities and
income-producing residential and commercial properties. Credit losses
may occur when one of the parties fails to perform in accordance with
the terms of the contract. The Bank's exposure to credit risk is
represented by the contractual amount of the commitments to extend
credit. At December 31, 1996, the Bank had commitments to extend credit
for or purchase mortgage loans of $ 21,799,000 ($ 4,977,000 in fixed
rate commitments, see Note 4, and the balance of commitments in either
variable rate or for which rates had not yet been set). The Bank also
has a pre-approval program which commits dollar amounts to potential
loan customers based on their credit history. This program, however,
does not commit to locked in rates. No fees are received in connection
with such commitments.
The Bank leases various property for original periods ranging from one
to seventy-two years. Rent expense for the years ended December 31,
1994, 1995 and 1996, was approximately $ 568,000, $ 623,000 and
$ 682,000, respectively. At December 31, 1996, future minimum lease
payments under these operating leases are as follows:
Years Ending December 31, Amount
(In Thousands)
1997 $ 619,127
1998 606,237
1999 624,594
2000 656,754
2001 582,895
Thereafter 3,684,339
-----------
Total $ 6,773,946
===========
In connection with the Bank's reorganization in 1994, the Bank entered
into a three year employment agreement with its Chief Executive Officer.
This agreement, among other matters, would provide for severance
payments of up to three years salary in the event of termination for
reasons other than cause. In addition, the Bank has entered into
severance agreements with four of its executive officers. The severance
agreements would provide for payments of up to three years salary for
these executives, but only in the event of change of control of the
Bank.
<TABLE>
<CAPTION>
For the Years Ended December 31,
1994 1995 1996
Supplemental Disclosure of Cash Flow Information: (In Thousands)
<S> <C> <C> <C>
Cash paid for income taxes $ 3,540 $ 3,223 $ 2,810
======== ======== ========
Cash paid for interest on deposits and other borrowings $ 17,822 $ 27,906 $ 31,879
======== ======== ========
Supplemental Schedule of Noncash Investing and Financing Activities:
Real estate acquired in settlement of loans $ 2,191 $ 1,326 $ 593
======== ======== ========
</TABLE>
17. CONVERSION TO HOLDING COMPANY
On April 25, 1996, Fidelity Federal Savings Bank of Florida (the "Bank")
adopted an Agreement and Plan of Reorganization, (the "Plan") whereby
the Bank would become a wholly-owned subsidiary of a stock holding
company, Fidelity Bankshares, Inc. (the "Company"), a Delaware
corporation. Pursuant to the Plan, the Bank's mutual holding company
parent would continue to own a majority of the Company's outstanding
common stock. In addition, as part of the Plan, each share of the Bank's
outstanding one dollar par value common stock would be converted into
one share of Fidelity Bankshares, Inc. ten cent par value common stock.
Consequently, following the reorganization, each stockholder of the Bank
would have the same ownership interest in Fidelity Bankshares, Inc. as
the stockholder had in the Bank.
In November, 1996, the Bank received regulatory approval to proceed with
the reorganization and on January 21, 1997, the Bank's stockholders
approved the Plan. On January 29, 1997, the transaction was consummated,
resulting in the Company owning all the outstanding common stock of the
Bank. The reorganization was completed as a tax-free transaction. In
addition, since the reorganization was accounted for in the same manner
as a pooling of interests merger, no significant accounting adjustments
were necessary to the consolidated financial statements. Common stock
and additional paid in capital reflect the change in par value described
above.
18. EARNINGS PER SHARE
The weighted-average number of shares, including the adjustments for the
Bank's leveraged Employee Stock Ownership Plan (ESOP), Management
Recognition Plan (MRP) and stock options for the years ended December
31, 1995 and 1996, retroactively adjusted to reflect the 10% stock
dividend distributed on November 30, 1995, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Primary Shares:
Shares Outstanding 6,699,440 6,709,492 6,723,409
Adjustments to reflect:
Uncommitted ESOP shares (200,786) (170,619) (140,291)
Unearned MRP shares (treasury stock method) (16,542) (9,031) -
Common stock options (treasury stock method) 75,089 77,894 84,380
--------- --------- ---------
Total 6,557,201 6,607,736 6,667,498
========= ========= =========
</TABLE>
The computations of fully diluted shares outstanding is the same as for
primary shares, above.
Pursuant to Statement of Position 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants, ESOP shares that have not been committed to be released are
not considered to be outstanding.
19. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107 ("SFAS No. 107"), "Disclosure About Fair Value of
Financial Instruments," as amended by SFAS 119, requires additional
disclosures of fair values of financial instruments in the notes to the
consolidated financial statements. Fair values of financial instruments
that are not actively traded are based on market prices of similar
instruments and/or valuation techniques using market assumptions.
Although management uses its best judgment in estimating the fair value
of these financial instruments, there are inherent limitations in any
estimation technique. Therefore, the fair value estimates presented
herein are not necessarily indicative of the amounts which the Bank
could realize in a current transaction.
<TABLE>
<CAPTION>
December 31,
1995 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets: (In Thousands)
<S> <C> <C> <C> <C>
Cash and amounts due from depository institutions $ 14,989 $ 14,989 $ 15,293 $ 15,293
Interest-bearing deposits 9,974 9,974 27,127 27,127
Assets available for sale 186,747 186,747 132,064 132,064
Loans receivable (net) 532,333 542,483 661,700 664,667
Liabilities:
Deposits 595,180 595,835 694,718 697,163
Advances from the Federal Home Loan Bank 85,169 87,273 82,517 84,859
ESOP loan 1,380 1,380 1,104 1,104
</TABLE>
The following methods and assumptions were used to estimate fair value
of each major class of financial instrument at December 31, 1995 and
1996.
Cash and Amounts due from Depository Institutions and Interest-Bearing
Deposits - The carrying amount of these assets is a reasonable estimate
of their fair value.
Assets Available for Sale - The fair value of these securities are based
on quoted market prices.
Loans Receivable - The fair value of loans is estimated by discounting
the future cash flows of the loans using the current rates at which
similar loans would be made to borrowers with similar credit rating for
the same remaining maturities.
Deposits - The fair value of demand deposits, savings accounts and money
market accounts are equal to the amount payable on demand at the
reporting date. The fair values of fixed maturity certificate accounts
are estimated by discounting the future cash flows of the certificates
using the current rates for advances from the Federal Home Loan Bank
with similar maturities.
Advances from the Federal Home Loan Bank - The fair value of these
advances is estimated by discounting the future cash flows of these
advances using the current rates at which similar term advances could be
obtained.
ESOP Loan - The carrying amount of this loan is a reasonable estimate of
fair market value.
Commitments to Extend Credit and Standby Letters of Credit - The fair
value of these commitments is insignificant.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Interest income $ 12,277 $ 12,924 $ 13,839 $ 14,221
Interest expense 6,013 6,842 7,617 7,623
-------- -------- -------- --------
Net interest income 6,264 6,082 6,222 6,598
-------- -------- -------- --------
Provision for loan losses (278) 16 (7) 59
Non-interest income 680 660 808 873
Non-interest expenses 4,938 5,025 5,099 5,387
Income taxes 884 663 762 824
-------- -------- -------- --------
Net Income $ 1,400 $ 1,038 $ 1,176 $ 1,201
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Interest income $ 14,333 $ 14,709 $ 15,377 $ 15,821
Interest expense 7,579 7,591 8,247 8,714
-------- -------- -------- --------
Net interest income 6,754 7,118 7,130 7,107
-------- -------- -------- --------
Provision for loan losses 76 (16) 54 50
Non-interest income 1,420 864 968 1,624
Non-interest expenses 5,552 5,649 9,585 5,923
Income taxes 1,050 974 (617) 1,155
-------- -------- -------- --------
Net Income $ 1,496 $ 1,375 $ (924) $ 1,603
======== ======== ======== ========
</TABLE>
Management's Assertions
as to the Effectiveness of its Internal Control Structure Over Financial
Reporting and Compliance with Designated Laws and Regulations
To the Stockholders:
Financial Statements
Management of Fidelity Bankshares, Inc. (the "Company") and its
subsidiary, Fidelity Federal Savings Bank of Florida (the "Bank"), is
responsible for the preparation, integrity and fair presentation of its
published financial statements and all other information presented in
this annual report. The financial statements have been prepared in
accordance with generally accepted accounting principles and, as such,
include amounts based on judgments and estimates made by management.
The financial statements have been audited by the independent accounting
firm, Deloitte & Touche LLP, which was given unrestricted access to all
financial records and related data, including minutes of all meetings of
stockholders, the Board of Directors and committees of the board.
Management believes that all representations made to the independent
auditors during their audit were valid and appropriate. The independent
auditors report accompanies the Company's audited financial statements.
Internal Control
Management is responsible for and does maintain a structure of internal
control over financial reporting, which is designed to provide
reasonable assurance to the Company's management and Board of Directors
regarding the preparation of reliable published financial statements,
including the Bank's reports to the Office of Thrift Supervision which
are based on both generally accepted accounting principles and
instructions for Thrift Financial Reports (TFR instructions). The
structure includes a documented organizational structure and division of
responsibility, established policies and procedures including a code of
conduct to foster a strong ethical climate, which are communicated
throughout the Bank, and the careful selection, training and development
of our people. Internal auditors monitor the operation of the internal
control system and report findings and recommendations to management and
the Board of Directors, and corrective actions are taken to address
control deficiencies and other opportunities for improving the system as
they are identified. The Board, operating through its audit committee,
which is composed entirely of directors who are not officers or
employees of the Company nor the Bank, provides oversight to the
financial reporting process.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control structure can provide only reasonable assurance with
respect to financial statement preparation. Furthermore, the
effectiveness of an internal control structure can change with
circumstances.
Management assessed its internal control structure over financial
reporting presented in conformity with both generally accepted
accounting principles and TFR instructions as of December 31, 1996 in
relation to criteria for effective internal control over financial
reporting described in "Internal Control--Integrated Framework" issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Management believes the Company and the Bank maintained an effective
internal control structure over financial reporting, presented in
conformity with generally accepted accounting principles and TFR
instructions, as of December 31, 1996.
Compliance with Designated Laws and Regulations
Management is also responsible for compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws
and regulations concerning dividend restrictions, both of which are
designated by the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with the designated safety and
soundness laws and regulations and has maintained records of its
determinations and assessments as required by the FDIC. Based on this
assessment, management believes that the Company and the Bank has
complied, in all material respects, with the designated safety and
soundness laws and regulations for the year ended December 31, 1996.
by:/S/Vince A. Elhilow by:/S/Richard D. Aldred
President and Chief Executive Officer Executive Vice President-
Chief Financial Officer
February 3, 1997
Independent Accountants' Report
To the Audit Committee
Fidelity Federal Savings Bank of Florida
West Palm Beach, Florida
We have examined management's assertion that, as of December 31, 1996,
Fidelity Federal Savings Bank of Florida maintained an effective
internal control structure over financial reporting presented in
conformity with both generally accepted accounting principles and the
Office of Thrift Supervision Instructions for Thrift Financial Reports
included in the accompanying Report on Management's Assertions as to the
Effectiveness of its Internal Control Structure over Financial Reporting
and Compliance with Designated Laws and Regulations.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly,
included obtaining an understanding of the internal control structure
over financial reporting, testing, and evaluating the design and
operating effectiveness of the internal control structure over financial
reporting, and such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable
basis for our opinion.
Because of inherent limitations in any internal control structure,
errors or irregularities may occur and not be detected. Also,
projections of any evaluation of the internal control structure over
financial reporting to future periods are subject to the risk that the
internal control structure may become inadequate because of changes in
conditions, or that the degree of compliance with the policies may
deteriorate.
In our opinion, management's assertion that, as of December 31, 1996,
Fidelity Federal Savings Bank of Florida maintained an effective
internal control structure over financial reporting presented in
conformity with both generally accepted accounting principles and the
Office of Thrift Supervision Instructions for Thrift Financial Reports
is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, FL
February 21, 1997
Fidelity Bankshares, Inc.
Board of Directors
[GRAPHIC PHOTO OMITTED: JOS. B. SHEARHOUSE, JR.]
Jos. B. Shearouse, Jr.
Chairman of the Board
[GRAPHIC PHOTO OMITTED: VINCE A. ELHILOW]
Vince A. Elhilow
President
Chief Executive Officer
[GRAPHIC PHOTO OMITTED: KEITH D. BEATY]
Keith D. Beaty
Chief Executive Officer
Implant Innovations, Inc.
[GRAPHIC PHOTO OMITTED: F. TED BROWN, JR.]
F. Ted Brown, Jr.
President
Ted Brown Real Estate, Inc.
[GRAPHIC PHOTO OMITTED: CHRISTOPHER H. COOK]
Christopher H. Cook
Executive Vice President
Corporate Counsel
[GRAPHIC PHOTO OMITTED: DONALD E. WARREN, M.D]
Donald E. Warren, M.D.
Retired Physician
[GRAPHIC PHOTO OMITTED: FREDERIC T. DEHON]
Frederic T. DeHon
Certified Public
Accountant
Frederic T. DeHon, a member of the Board of Directors of Fidelity
Federal Savings Bank of Florida, passed away on Tuesday, January 8,
1997. Mr. DeHon, a 1950 graduate of the University of Florida, had been
a practicing CPA in the West Palm Beach area since 1952, and a Director
of the Bank since 1978.
Mr. DeHon served in the US Navy during World War II as a carrier-based
fighter pilot and continued his military service as a Lieutenant in the
United States Naval Reserve through 1953 with a fighter unit and a
Carrier-based helicopter unit. He began his accounting career with Himes
& Himes, CPAs, in 1950, and was a partner in Holyfield, Elliott and
DeHon, P.A. at the time of his passing.
Mr. Dehon was a founding board member of Florida Atlantic University, a
member of the West Palm Beach Rotary Club for more than 30 years, and
was an active member of many other civic and social organization.
In his eighteen years on Fidelity Federal's Board of Directors, Mr.
DeHon served as Chairman of the Audit Committee, Chairman of the
Executive Compensation Committee and on many other committees and was
actively involved in all of the major decisions concerning the Bank
during his service on the Board.
We are grateful to Mr. DeHon for his valuable contribution to Fidelity
Federal and his community, and extend sympathies to his family and
friends.
Officers
Richard D. Aldred
Executive Vice President
Chief Financial Officer
Joseph C. Bova
Executive Vice President
Robert L. Fugate
Executive Vice President
Patricia C. Clager
Corporate Secretary
Fidelity Federal Savings Bank of Florida
Directors
Jos. B. Shearouse, Jr.
Chairman of the Board
Vince A. Elhilow
President
Chief Executive Officer
Christopher H. Cook
Executive Vice President
Corporate Counsel
Keith D. Beaty
Chief Executive Officer
Implant Innovations, Inc.
F. Ted Brown
President
Ted Brown Real Estate, Inc.
Donald E. Warren, M. D.
Retired Physician
Directors Emerti
Carl H. Anthony
President
Anthony Groves
Louis B. Bills, Sr.
Louis B. Bills Enterprises
George B. Preston
Chairman Emeritus
Raymond C. Tylander
President
Tylander Realty Corporation
Officers
EXECUTIVE OFFICER
Vince A. Elhilow
President
Chief Executive Officer
EXECUTIVE VICE PRESIDENTS
Richard D. Aldred
Chief Financial Officer
Joseph C. Bova
Lending Operations Manager
Christopher H. Cook
Corporate Counsel
Robert L. Fugate
Banking Operations Manager
J. Robert McDonald
President, Fidelity Realty & Appraisal Services, Inc.
VICE PRESIDENT/CORPORATE SECRETARY
Patricia C. Clager
Administrative Assistant to the Chairman
SENIOR VICE PRESIDENTS
David R. Hochstetler
Director of Marketing/CRA Officer
Brian C. Mahoney
Controller
Janice R. Newlands
Director of Human Resources
Debra K. Schiavone
Mortgage Loan Administration
Shellie R. Schmidt
Banking Administration
Joseph B. Shearouse, III
Commercial Loan Manager
Kenneth B. Stone, Jr.
Mortgage Loan Production
Daniel F. Turk
Property and Risk Management
VICE PRESIDENT/ASSISTANT SECRETARY
Arlene Metz
Administrative Assistant to the President
Martin County Advisory Board
Richard Q. Pennick, M.D., Chairman
Retired Physician
J. David Girlinghouse, D.D.S.
Dentist
C. Norris Tilton, Esq.
Attorney
Owen C. Schwaderer
President
Jensen Beach Land Company
Francis X. Wilson
President
Wilson Builders
Palm Beach County Offices
[GRAPHIC OMITTED: MAP OF FLORIDA BRANCH OFFICES]
MAIN OFFICE
218 Datura Street
West Palm Beach, FL 33401
(561) 659-9900
45th Street
4520 Broadway
West Palm Beach, FL 33407
(561) 848-5577
Bear Lakes
701 Village Blvd.
West Palm Beach, FL 33409
(561) 689-8800
Boynton Beach
At I-95 & Woolbright Road
1501 Corporate Drive
Boynton Beach, FL 33426
(561) 734-3300
Century Corners
4835 Okeechobee Blvd.
West Palm Beach, FL 33417
(561) 689-5305
Forest Hill
399 Forest Hill Blvd.
West Palm Beach, FL 33405
(561) 585-5552
Northlake
950 Northlake Blvd.
Lake Park, FL 33408
(561) 842-4266
Palm Beach
245 Royal Poinciana Way
Palm Beach, FL 33480
(561) 659-0666
Palm Beach Gardens
Garden Square Shoppes
10973 North Military Trail
Palm Beach Gardens, FL 33410
(561) 775-7600
Royal Palm Beach
100 Royal Palm Beach Blvd.
Royal Palm Beach, FL 33411
(561) 793-3270
Singer Island
1200 East Blue Heron Blvd.
Riviera Beach, FL 33404
(561) 848-8675
Tequesta
171 Tequesta Drive
Tequesta, FL 33469
(561) 747-5100
Wellington
12000 W. Forest Hill Blvd.
West Palm Beach, FL 33414
(561) 793-4501
West Boynton Beach
9875 Jog Road
Boynton Beach, FL 33437
(561) 731-2122
West Delray Beach
5017 West Atlantic Avenue
Delray Beach, FL 33484
(561) 499-7002
West Forest Hill
3989 Forest Hill Blvd.
West Palm Beach, FL 33406
(561) 969-3333
West Lake Worth
6535 Lake Worth Road
Lake Worth, FL 33467
(561) 968-1040
Martin County Offices
Jensen Beach
1021 N.E. Jensen Beach Blvd.
Jensen Beach, FL 34957
(561) 334-1600
Martin Square
2980 S. Federal Highway
Stuart, FL 34994
(561) 287-6600
Kanner/Monterey
2401 South Kanner Highway
Stuart, FL 34994
(561) 288-6767
STOCK PRICE INFORMATION
Fidelity Bankshares, Inc.'s
common stock is traded on the Nasdaq
National Market under the symbol "FFFL".
Newspaper stock tables list the holding company as "Fidelbksh". The
Bank's common stock has been trading since January 7, 1994.
INVESTOR RELATIONS
Vince A. Elhilow, President & CEO
Richard D. Aldred, Executive Vice President & CFO
Fidelity Federal Savings Bank of Florida
218 Datura Street
West Palm Beach, Florida 33401
(561) 659-9900
SHAREHOLDER SERVICES &
DIVIDEND REINVESTMENT PLAN
Fidelity Federal Savings Bank of Florida
David R. Hochstetler, Senior Vice President
Lucy A. Carr, Assistant Secretary
218 Datura Street
West Palm Beach, Florida 33401
(561) 659-9931
ANNUAL REPORT ON FORM 10-K
A copy of the Company's report on Form 10-K, as filed with the
Securities and Exchange Commission, is available without charge by
written request addressed as set forth under Shareholder Services above.
DATE AND PLACE OF ANNUAL MEETING
April 15, 1997, 10:00 a.m. (EDT)
Omni Hotel
1601 Belvedere Road
West Palm Beach, Florida 33401
GENERAL COUNSEL
Brackett, Sned, Welch, D'Angio, Tucker & Farach P.A.
218 Datura Street
West Palm Beach, Florida 33401
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1645 Palm Beach Lakes Blvd., Suite 900
West Palm Beach, Florida 33401
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449
STOCKHOLDER INFORMATION
- -----------------------------------------------------------
Quarter Ended
-------------
3/31/96 6/30/96 9/30/96 12/31/96
Stock Price
- -----------
High $ 16.50 $ 14.50 $ 15.50 $ 18.50
---------------------------------------
Low $ 13.25 $ 12.75 $ 11.75 $ 15.00
Dividends
declared $ .15 $ .15 $ .20 $ .20
- -----------------------------------------------------------
ELECTRONIC COMMUNICATIONS
News releases issued through PR Newswire are
available through Company News On-Call via fax
(1-800-758-5804, ext. 281429) or Internet website
(http://www.prnewswire.com).
[GRAPHIC OMITTED: BACK COVER TEXT]
2516FIDO.fil PAGE 79 TO FIDELITY
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent Company Subsidiary Company State of Incorporation
- -------------- ------------------- ----------------------
Fidelity Fidelity Federal Savings Florida
Bankshares, Bank of Florida
Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FIDELITY BANKSHARES, INC. AND SUBSIDIARY
Exhibit 27 - FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR TWELVE MONTHS ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 42,420
<SECURITIES> 132,064
<RECEIVABLES> 663,963
<ALLOWANCES> 2,263
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 26,994
<DEPRECIATION> 8,902
<TOTAL-ASSETS> 873,562
<CURRENT-LIABILITIES> 791,839
<BONDS> 0
0
0
<COMMON> 675
<OTHER-SE> 81,048
<TOTAL-LIABILITY-AND-EQUITY> 873,562
<SALES> 0
<TOTAL-REVENUES> 65,116
<CGS> 0
<TOTAL-COSTS> 59,004
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 164
<INTEREST-EXPENSE> 32,131
<INCOME-PRETAX> 6,112
<INCOME-TAX> 2,562
<INCOME-CONTINUING> 3,550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,550
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.53
</TABLE>
