<PAGE>
As filed with the Securities and Exchange Commission on December 24, 1997
Registration No. 333-
--------------
Registration No. 333-
--------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIDELITY BANKSHARES, INC. FIDELITY CAPITAL TRUST I
------------------------- ------------------------
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
<TABLE>
<S> <C> <C> <C>
Delaware 65-0717085 Delaware Applied For
------------------- --------------- --------------- ----------------
(State of Incorporation (I.R.S. Employer (State of Incorporation (I.R.S. Employer
or Organization) Identification Number) or Organization) Identification Number)
</TABLE>
218 Datura Street
West Palm Beach, Florida 33401-5679
(561) 659-9900
------------------------------------
(Address, including ZIP Code, and telephone number
including area code, of registrants' principal
executive offices)
Vince A. Elhilow
President and Chief Executive Officer
Fidelity Bankshares, Inc.
218 Datura Street
West Palm Beach, Florida 33401-5079
---------------------------------------
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
Copies to:
Alan Schick, Esq. Alison W. Miller, Esq.
Ned Quint, Esq. Michael I. Keyes, Esq.
Luse Lehman Gorman Pomerenk & Schick, P.C. Stearns Weaver Miller Weissler
5335 Wisconsin Avenue, N.W., Suite 400 Alhadeff & Sitterson, P.A.
Washington, D.C. 20015 150 West Flagler Street, Suite 2200
(202) 274-2000 Miami, Florida 33130
(305) 789-3200
- -------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC. As soon as
practicable after the effective date of this Registration Statement.
<PAGE>
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [_].
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box [X].
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering [_].
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [_].
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Proposed Proposed
maximum maximum
Title of each class of security Amount to be offering price aggregate Amount of
to be registered(4) registered per share offering price registration fee(5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Preferred Securities, of Fidelity 2,875,000(1) $10.00 $28,750,000 $8,482
Capital Trust I
- ------------------------------------------------------------------------------------------------------------------------------------
Junior Subordinated Deferrable Interest 2,875,000 100% N/A N/A
Debentures of Fidelity Bankshares, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Bankshares, Inc. Guarantee with N/A N/A N/A N/A
respect to Trust Preferred Securities(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,875,000 $10.00 $28,750,000 $8,482
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes up to 375,000 additional Trust Preferred Securities which may be
acquired by the Underwriter to cover over-allotments, if any.
(2) The ___% Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures") will be purchased by Fidelity Capital Trust I
with the proceeds of the sale of the Trust Preferred Securities (the
"Preferred Securities"). No separate consideration will be received for the
Junior Subordinated Debentures distributed upon any liquidation of Fidelity
Capital Trust I.
(3) No separate consideration will be received for the Fidelity Bankshares,
Inc. Guarantee (the "Guarantee").
(4) This Registration Statement is deemed to cover the Junior Subordinated
Debentures under the Indenture, the rights of holders of Preferred
Securities of Fidelity Capital Trust I under a trust agreement and the
rights of holders of the Preferred Securities under the Guarantee and the
Expense Agreement entered into by Fidelity Bankshares, Inc. as described
herein.
(5) Previously filed.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
SUBJECT TO COMPLETION, DATED DECEMBER 24, 1997
$25,000,000
FIDELITY CAPITAL TRUST I
% CUMULATIVE TRUST PREFERRED SECURITIES
[LOGO]
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
2,500,000 PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
FIDELITY BANKSHARES, INC.
The % Cumulative Trust Preferred Securities (the "Preferred Securities")
offered hereby represent beneficial interests in Fidelity Capital Trust I, a
statutory business trust created under the laws of the State of Delaware (the
"Trust Issuer"). Fidelity Bankshares, Inc., a Delaware corporation ("Fidelity"
or the "Company"), will own all of the beneficial interests represented by
common securities of the Trust Issuer (the "Common Securities" and,
collectively with the Preferred Securities, the "Trust Securities"). The Bank
of New York is the Property Trustee of the Trust Issuer. The Trust Issuer
exists for the sole purpose of issuing the Trust Securities and investing the
proceeds from the sale thereof in % Junior Subordinated Deferrable Interest
Debentures (the "Junior Subordinated Debentures") to be issued by the Company.
The Junior Subordinated Debentures will mature on , 2028 (the "Stated
Maturity"). The Preferred Securities will have a preference over the Common
Securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise. See "Description of
the Preferred Securities--Subordination of the Common Securities."
Application has been made to list the Preferred Securities for quotation on
the Nasdaq Stock Market's National Market under the symbol "FFFLP." See "Risk
Factors--Absence of Prior Public Market for the Preferred Securities; Trading
Price and Tax Considerations."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR THE BANK INSURANCE FUND
OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) ISSUER(2)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security.................. $10.00 (2) $10.00
- --------------------------------------------------------------------------------
Total(4)................................ $25,000,000 (2) $25,000,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Trust Issuer and Fidelity have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debentures of
Fidelity, Fidelity has agreed to pay the Underwriter, as compensation for
its arranging the investment of such proceeds in the Junior Subordinated
Debentures, $ per Preferred Security, or $ in the aggregate ($ in
the aggregate if the over-allotment option is exercised in full). See
"Underwriting."
(3) Before deducting expenses payable by Fidelity, estimated to be
approximately $ .
(4) The Trust Issuer and Fidelity have granted the Underwriter a 30-day option
to purchase up to 375,000 additional Preferred Securities on the same terms
and conditions set forth above solely to cover over-allotments, if any. If
this option is exercised in full, the total Price to Public and Proceeds to
Issuer will be $28,750,000. See "Underwriting."
The Preferred Securities are offered by the Underwriter subject to receipt
and acceptance by it, prior sale and the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Preferred Securities will be made
in book-entry form through the book-entry facilities of The Depository Trust
Company on or about against payment therefor in immediately available
funds.
[LOGO]
The Date of this Prospectus is , 1998.
<PAGE>
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Commission(l) Issuer(2)(3)
----------- --------------- ---------------
<S> <C> <C> <C>
Per Preferred Security $ 10.00 (2) $ 10.00
Total(4) $25,000,000 (2) $25,000,000
</TABLE>
(1) The Trust Issuer and Fidelity have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debentures of
Fidelity, Fidelity has agreed to pay the Underwriter, as compensation for
its arranging the investment of such proceeds in the Junior Subordinated
Debentures, $____ per Preferred Security, or $_________ in the aggregate
($_________ in the aggregate if the over-allotment option is exercised in
full). See "Underwriting."
(3) Before deducting expenses payable by Fidelity, estimated to be
approximately $_______.
(4) The Trust Issuer and Fidelity have granted the Underwriter a 30-day option
to purchase up to 375,000 additional Preferred Securities on the same terms
and conditions set forth above solely to cover over-allotments, if any. If
this option is exercised in full, the total Price to Public and Proceeds to
Issuer will be $28,750,000. See "Underwriting."
The Preferred Securities are offered by the Underwriter subject to receipt
and acceptance by it, prior sale and the Underwriter's right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Preferred Securities will be made in book-
entry form through the book-entry facilities of The Depository Trust Company on
or about ________________ against payment therefor in immediately available
funds.
RYAN, BECK & CO.
The Date of this Prospectus is ____________, 1998.
---------------
<PAGE>
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depository ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of
Preferred Securities," Preferred Securities in definitive form will not be
issued and owners of beneficial interests in the global securities will not be
considered holders of the Preferred Securities. Settlement for the Preferred
Securities will be made in immediately available funds. The Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and, therefore,
secondary market trading activity for the Preferred Securities will settle in
immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from the date of
original issuance and payable quarterly in arrears on __________, __________,
__________, and __________ of each year, commencing __________, 1998, at the
annual rate of ____% of the Liquidation Amount (as defined herein) of $10 per
Preferred Security ("Distributions"). Subject to certain exceptions, Fidelity
has the right to defer payment of interest on the Junior Subordinated Debentures
at any time or from time to time for a period not exceeding 20 consecutive
quarters with respect to each deferral period (each, an "Extension Period"),
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all interest then accrued and unpaid (together with
interest thereon at the rate of ____%, compounded quarterly, to the extent
permitted by applicable law), Fidelity may elect to begin a new Extension Period
subject to the requirements set forth herein. If interest payments on the
Junior Subordinated Debentures are so deferred, Distributions on the Preferred
Securities also will be deferred, and Fidelity will not be permitted, subject to
certain exceptions described herein, to declare or pay any cash distributions
with respect to the capital stock of Fidelity or debt securities of Fidelity
that rank pari passu with or junior to the Junior Subordinated Debentures.
During an Extension Period, interest on the Junior Subordinated
Debentures would continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled would accumulate) at the rate
of ____% per annum, compounded quarterly, and holders of the Preferred
Securities would be required to include interest income in their gross income
for United States federal income tax purposes in advance of receipt of the cash
distributions with respect to such deferred interest payments. Fidelity
believes that the mere existence of its right to defer interest payments should
not cause the Preferred Securities to be issued with original issue discount for
federal income tax purposes. However, it is possible that the Internal Revenue
Service could take the position that the likelihood of deferral was not a remote
contingency within the meaning of applicable Treasury Regulations. See
"Description of the Junior Subordinated Debentures-Right to Defer Interest
Payment Obligation" and "Certain Federal Income Tax Consequences--Interest
Income and Original Issue Discount."
Fidelity and the Trust Issuer believe that, taken together, the
obligations of Fidelity under the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement (each as
defined herein), constitute in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of all of the Trust Issuer's
obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures, the Expense Agreement
and the Guarantee--Full and Unconditional Guarantee." The Guarantee of Fidelity
(the "Guarantee") guarantees the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Trust Issuer, as described herein. See
"Description of the Guarantee." If Fidelity does not make interest payments on
the Junior Subordinated Debentures held by the Trust Issuer, the Trust Issuer
will have insufficient funds to pay Distributions on the Preferred Securities.
The Guarantee does not cover payment of Distributions when the Trust Issuer does
not have sufficient funds to pay such Distributions. In such event, a holder of
the Preferred Securities may institute a legal proceeding directly against
Fidelity to enforce payment of amounts equal to such Distributions to such
holder. See "Description of the Junior Subordinated Debentures-Enforcement of
Certain Rights by Holders of the Preferred Securities."
The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or their earlier redemption. Subject to regulatory approval, if then
ii
<PAGE>
required under applicable capital guidelines or regulatory policies, the Junior
Subordinated Debentures are redeemable prior to their Stated Maturity at the
option of the Company (i) on or after __________, 2003, in whole at any time or
in part from time to time, or (ii) at any time, in whole (but not in part), upon
the occurrence and continuation of a Tax Event, an Investment Company Event or a
Capital Treatment Event (each as defined herein) at a redemption price (the
"Redemption Price") equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption plus 100%
of the principal amount thereof. Notwithstanding the foregoing, if Fidelity
Bankshares, MHC (the "Mutual Holding Company"), the mutual holding company
parent of Fidelity completes a Conversion Transaction (as defined herein)
pursuant to which Fidelity or its successor sells to eligible subscribers and
the public the shares of common stock currently held by the Mutual Holding
Company, then Fidelity shall have the right to redeem the Junior Subordinated
Debentures, in whole but not in part, prior to __________, 2003, but not prior
to __________, 2000. Under such circumstances the Junior Subordinated
Debentures, may be redeemed at a price equal to the accrued and unpaid interest
to the date fixed for redemption plus 107% of the principal amount thereof. See
"Risk Factors -- Optional Redemption in the Event of a Conversion Transaction,"
and "Description of the Junior Subordinated Debentures- Redemption or Exchange."
The obligations of Fidelity under the Guarantee and the Junior
Subordinated Debentures will be unsecured and are subordinate and junior in
right of payment to all Senior Indebtedness (as defined in "Description of the
Junior Subordinated Debentures--Subordination") of Fidelity. At September 30,
1997, Fidelity had no outstanding Senior Indebtedness. There is no limitation
on Fidelity's ability to incur Senior Indebtedness or additional indebtedness
which is pari passu with the Junior Subordinated Debentures. See "Description
of the Junior Subordinated Debentures--Subordination."
Fidelity, as the holder of the Common Securities, will have the right
at any time to dissolve the Trust Issuer. The ability of Fidelity to do so may
be subject to Fidelity's prior receipt of regulatory approval. In the event of
the dissolution of the Trust Issuer, after satisfaction of liabilities to
creditors of the Trust Issuer as required by applicable law, the holders of the
Preferred Securities will be entitled to receive a Liquidation Amount of $10 per
Preferred Security plus accumulated and unpaid Distributions thereon to the date
of payment, which may be in the form of a distribution of such amount in Junior
Subordinated Debentures, subject to certain exceptions. See "Description of the
Preferred Securities--Liquidation Distribution upon Termination."
----------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
PREFERRED SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING
TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. ANY OF
THE FOREGOING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME
WITHOUT NOTICE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
iii
<PAGE>
[MAP INDICATING FIDELITY FEDERAL'S BRANCH OFFICES]
iv
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite
1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
The Company and the Trust Issuer have filed with the Commission a
Registration Statement on Form S-2 (together with all amendments thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. In addition, certain documents
filed by the Company with the Commission have been incorporated in this
Prospectus by reference. See "Incorporation of Certain Documents by Reference."
For further information with respect to the Company, the Trust Issuer, the
Preferred Securities and the Junior Subordinated Debentures, reference is made
to the Registration Statement, including the exhibits thereto and the documents
incorporated herein by reference. Any statements contained herein concerning
the provisions of any document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission or incorporated by reference herein are
not necessarily complete, and, in each instance, reference is made to the copy
of such document so filed for a more complete description of the matter
involved. Each such statement is qualified in its entirety by such reference.
The Registration Statement may be inspected without charge at the principal
office of the Commission in Washington, D.C., and copies of all or part of it
may be obtained from the Commission upon payment of the prescribed fees.
No separate financial statements of the Trust Issuer have been
included herein. The Company does not consider that such financial statements
would be material to holders of Preferred Securities because (i) all of the
voting securities of the Trust Issuer will be owned by the Company, a reporting
company under the Exchange Act, (ii) the Trust Issuer has no independent
operations but exists for the sole purpose of issuing securities representing
undivided beneficial interests in the assets of the Trust Issuer and investing
the proceeds thereof in Junior Subordinated Debentures issued by the Company,
and (iii) the obligations of the Company described herein (to provide certain
indemnities in respect of, and be responsible for certain costs, expenses, debts
and liabilities of, the Trust Issuer under the Indenture and pursuant to the
Trust Agreement, the guarantee issued by the Company with respect to the
Preferred Securities, the Junior Subordinated Debentures purchased by the Trust
Issuer, the related Indenture and the Expense Agreement), taken together,
constitute, in the belief of the Company and the Trust Issuer, a full and
unconditional guarantee of payments due on the Preferred Securities. See
"Description of the Junior Subordinated Debentures" and "Description of the
Guarantee."
The Trust Issuer is not currently subject to the information reporting
requirements of the Exchange Act and the Company does not expect that the Trust
Issuer will file reports, proxy statements and other information under the
Exchange Act with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated into this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (attached hereto as Appendix A);
v
<PAGE>
2. The Company's Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1997 (attached hereto as Appendix B), June 30,
1997 and March 31, 1997; and
3. The Company's Current Report on Form 8-K dated August 25, 1997,
the Company's Current Report on Form 8 K/A dated October 6, 1997 and
the Company's Current Report on Form 8-K dated December 12, 1997.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of the Registration Statement and this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein, modified or
superseded such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
As used herein, the terms "Prospectus" and "herein" means this
Prospectus, including the documents incorporated or deemed to be incorporated
herein by reference, as the same may be amended, supplemented or otherwise
modified from time to time. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein do not purport to
be complete, and where reference is made to the particular provisions of such
contract or other document, such provisions are qualified in all respects by
reference to all of the provisions of such contract or other document.
The Company will provide without charge to any person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated by reference herein (other
than exhibits, unless such exhibits are specifically incorporated by reference
in such documents). Requests for such documents should be directed to Corporate
Secretary, Fidelity Bankshares, Inc., 218 Datura Street, West Palm Beach,
Florida 33401 (Telephone (561) 659-9900).
The Company will provide to the holders of the Preferred Securities
quarterly reports containing unaudited financial statements and annual reports
containing financial statements audited by the Company's independent auditors.
The Company will also furnish annual reports on Form 10-K and quarterly reports
on Form 10-Q free of charge to holders of the Preferred Securities who so
request in writing to the Company.
vi
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the underwriters' over-allotment option will not be
exercised.
THE MUTUAL HOLDING COMPANY, THE COMPANY AND THE BANK
The Mutual Holding Company Structure
Fidelity Bankshares, Inc. ("Fidelity" or the "Company") is part of a
mutual holding company structure that is subject to regulation and oversight by
the Office of Thrift Supervision ("OTS"). Fidelity Bankshares, MHC (the "Mutual
Holding Company") owns approximately 52.2% of the common stock of the Company,
and is required to own at least a majority of the voting stock of the Company so
long as the Mutual Holding Company remains in existence. The Company owns 100%
of the common stock of Fidelity Federal Savings Bank of Florida (the "Bank").
The Mutual Holding Company has the authority, subject to regulatory approval; to
engage in a Conversion Transaction which would eliminate the Mutual Holding
Company and result in public stockholders owning 100% of the common stock of the
Company. A Conversion Transaction would also enable the Company to redeem the
Junior Subordinated Debentures prior to __________, 2003 but not prior to
___________, 2000. See "Risk Factors -- Optional Redemption in the Event of a
Conversion Transaction," and "Description of the Junior Subordinated Debentures-
- -Redemption or Exchange." The current mutual holding company structure is as
follows:
---------------------- ----------------------
Fidelity Bankshares, Public
MHC Stockholders
---------------------- ----------------------
52.2% of 47.8% of
the the
Common Common
Stock Stock
----------------------------------------------------
Fidelity Bankshares, Inc.
----------------------------------------------------
100% of the
Common Stock
----------------------------------------------------
Fidelity Federal Savings Bank
----------------------------------------------------
The principal executive offices of the Mutual Holding Company, the
Company and the Bank are located at 218 Datura Street, West Palm Beach, Florida,
and their telephone number at that address is (561) 659-9900.
Fidelity Bankshares, MHC
The Mutual Holding Company is chartered under Federal law by the OTS.
The Mutual Holding Company may engage in any business activity permissible for
Federal mutual holding companies, which generally include all activities
permissible for Federal savings banks (other than accepting deposits), as well
as certain additional activities such as real estate development and investing
in the equity securities of other companies. The primary business activity of
the Mutual Holding Company at the present time is the ownership of a majority of
the Company's common stock.
1
<PAGE>
Fidelity Bankshares, Inc.
The Company is a Delaware corporation which was organized in May 1996.
The only significant asset of Fidelity is its investment in the Bank. A
majority of the Company's common stock is owned by the Mutual Holding Company.
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 the Company's
common stock, par value $.l0 per share. As part of the two-tier mutual holding
company reorganization, 3,542,000 shares of common stock were issued to the
Mutual Holding Company and 3,206,625 shares of common stock were issued to the
Bank's public stockholders in exchange for the shares of the Bank's common stock
held by them. At September 30, 1997, the Company had total assets of $1.0
billion, total deposits of $791.2 million, and stockholders' equity of $85.8
million.
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 from a mutual savings bank into a federally chartered
mutual holding company with a subsidiary stock savings bank. As part of the
reorganization, the Bank was organized as a federally chartered stock savings
bank and as the successor to the Bank in its previous mutual form. The Bank is
a member of the Federal Home Loan Bank ("FHLB") System.
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 one- to four-family residential
mortgage loans, consumer loans and commercial business loans. 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, and in 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.
On December 5, 1997 the Bank completed its acquisition of BankBoynton,
a Federal Savings Bank ("BankBoynton"). At December 5, 1997, BankBoynton's
assets, deposits and stockholders' equity were approximately $54.7 million,
$41.7 million and $3.1 million, respectively. The Bank paid an aggregate of
$5.6 million for all the issued and outstanding Common Stock of BankBoynton.
Management believes that the acquisition of BankBoynton will be accretive to
earnings in 1998.
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 goal of the Bank's business
strategy is to address the following: (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 residential mortgage lending and
investing in mortgage-backed securities and other securities issued or
guaranteed by the United States Government or agencies thereof; (3) managing
interest rate risk exposure; 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.
2
<PAGE>
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 branches 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 lending, 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
September 30, 1997, 78.3% of the Bank's total gross loan portfolio consisted of
one- to four-family residential mortgage loans, including residential
construction loans, and 18.5% 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.
Historically, the percentage of small commercial business loans and
consumer loans in the Bank's portfolio has been below the levels of its peers.
However, the Bank is seeking to expand its offering of commercial business and
consumer loan services while attempting to adhere to its 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. The
difference between 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 September 30, 1997 total interest-bearing
liabilities maturing or repricing within one year exceeded total interest-
earning assets maturing or repricing in the same period by $17.7 million,
representing a cumulative one-year gap ratio of a negative 9.75%. A negative
gap will generally enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment.
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 adjustable
rate mortgage ("ARM") loans and mortgage-backed securities with adjustable
interest rates. Of the Bank's total investment of $950.8 million in loans and
mortgage-backed securities at September 30, 1997, $485.3 million, or 47.2%, had
adjustable interest rates. Another aspect of the Bank's interest rate risk
management strategy has been to extend the maturity of interest-bearing
liabilities, including the utilization of FHLB advances as a source of funds.
Additionally, the Bank has classified its mortgage-backed and investment
portfolios as available for sale. As a result, mortgage-backed securities and
investments are carried at fair value based upon market quotations. Management
believes that by classifying its investment and mortgage-backed securities as
available for sale, the Bank will have the flexibility to restructure its
investment and mortgage-backed portfolio in response to changes in interest
rates.
Strong Retail Deposit Base. The Bank has had a relatively strong
retail deposit base drawn from the 21 full-service offices in its market area.
At September 30, 1997, management estimated that 30.6% of the Bank's $791.2
million deposit base consisted of core deposits, which included non-interest
demand accounts, passbook accounts, NOW accounts, and money market demand
deposit accounts. Core deposits are generally considered to be a more stable
and
3
<PAGE>
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. The Bank's total equity at September 30, 1997 was
$85.8 million, and its ratio of total equity to total assets at that date was
8.20%.
THE TRUST ISSUER
The Trust Issuer is a statutory business trust created under Delaware
law pursuant to (i) the Trust Agreement executed by the Company, as depositor,
Bank of New York, as Property Trustee, Bank of New York (Delaware), as Delaware
Trustee, and the Administrative Trustees named therein, and (ii) the filing of a
certificate of trust with the Delaware Secretary of State on December 10, 1997.
The trust agreement will be amended and restated in its entirety (as so amended,
the "Trust Agreement"). All of the Common Securities will be owned by the
Company. The Company will acquire Common Securities in an aggregate Liquidation
Amount equal to 3% of the total capital of the Trust Issuer. The Trust Issuer
exists for the exclusive purposes of (i) issuing and selling the Trust
Securities, (ii) using the proceeds from the sale of the Trust Securities to
acquire Junior Subordinated Debentures issued by the Company and (iii) engaging
in only those other activities necessary, advisable or incidental thereto (such
as registering the transfer of the Trust Securities). Accordingly, the Junior
Subordinated Debentures will be the sole assets of the Trust Issuer, and
payments under the Junior Subordinated Debentures will be the sole revenue of
the Trust Issuer. The principal executive office of the Trust Issuer is 218
Datura Street, West Palm Beach, Florida 33401 and its telephone number is (561)
659-9900.
THE OFFERING
The Trust Issuer................. Fidelity Capital Trust I, a Delaware
statutory business trust (the "Trust
Issuer"). The sole assets of the Trust Issuer
will be the Junior Subordinated Debentures.
Securities Offered............... 2,500,000 shares of ____% Cumulative Trust
Preferred Securities (the "Preferred
Securities"), evidencing preferred undivided
beneficial interests in the assets of the
Trust Issuer, which will consist only of the
Junior Subordinated Debentures.
Offering Price................... $10 per Preferred Security (Liquidation
Amount $10).
Distributions.................... Holders of the Preferred Securities will be
entitled to receive cumulative cash
Distributions at an annual rate of ____% of
the Liquidation Amount of $10 per Preferred
Security, accumulating from the date of
original issuance and payable quarterly in
arrears on __________, __________, __________
and __________ of each year, commencing on
__________, 1998. The distribution rate and
the distribution and other payment dates for
the Preferred Securities will correspond to
the interest rate and interest and other
payment dates on the Junior Subordinated
Debentures. See "Description of the Preferred
Securities."
Junior Subordinated Debentures... The Trust Issuer will invest the proceeds
from the issuance of the Trust Securities in
an equivalent amount of the Junior
Subordinated Debentures. The Junior
Subordinated Debentures will mature on
__________, 2028. The Junior Subordinated
Debentures will rank subordinate and junior
in right of payment to all Senior
4
<PAGE>
Indebtedness of Fidelity. At September 30,
1997, Fidelity had no outstanding Senior
Indebtedness. There is no limitation on the
amount of Senior Indebtedness, or
Subordinated Debt (as defined in "Description
of Junior Subordinated Debentures-
Subordination") which is pari passu with the
Junior Subordinated Debentures, which
Fidelity may issue. Fidelity may from time to
time, incur indebtedness constituting Senior
Indebtedness. In addition, because Fidelity
is a holding company, Fidelity's obligations
under the Junior Subordinated Debentures will
be subordinated to all existing and future
liabilities and obligations of its
subsidiaries, including the Bank. See "Risk
Factors-- Subordination of the Guarantee and
the Junior Subordinated Debentures," "Risk
Factors--Source of Payments to Holders of
Preferred Securities" and "Description of the
Junior Subordinated Debentures--
Subordination."
Guarantee........................ Payments of Distributions out of funds held
by the Trust Issuer, and payments on
liquidation of the Trust Issuer or the
redemption of the Preferred Securities, are
guaranteed by Fidelity to the extent the
Trust Issuer has funds available therefor.
Fidelity and the Trust Issuer believe that,
taken together, the obligations of Fidelity
under the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures, the Indenture
and the Expense Agreement, constitute, in the
aggregate, a full and unconditional
guarantee, on a subordinated basis, of all of
the Trust Issuer's obligations under the
Preferred Securities. See "Description of the
Guarantee" and "Relationship Among the
Preferred Securities, the Junior Subordinated
Debentures, the Expense Agreement and the
Guarantee." The obligations of Fidelity under
the Guarantee are subordinate and junior in
right of payment to all Senior Indebtedness
of Fidelity. See "Risk Factors--Subordination
of the Guarantee and the Junior Subordinated
Debentures" and "Description of the
Guarantee."
Right to Defer Interest Payments.. So long as no event of default under the
Indenture has occurred and is continuing,
Fidelity has the right under the Indenture at
any time during the term of the Junior
Subordinated Debentures to defer the payment
of interest at any time or from time to time
for a period not exceeding 20 consecutive
quarters with respect to each Extension
Period, provided that no Extension Period may
extend beyond the Stated Maturity of the
Junior Subordinated Debentures. If interest
payments on the Junior Subordinated
Debentures are so deferred, Distributions on
the Preferred Securities also will be
deferred. At the end of such Extension
Period, Fidelity must pay all interest then
accrued and unpaid (together with interest
thereon at the annual rate of ____%,
compounded quarterly, to the extent permitted
by applicable law). During an Extension
Period, interest will continue to accrue on
the Junior Subordinated Debentures (and the
amount of Distributions to which holders of
the Preferred Securities are entitled would
accumulate), and holders of the Junior
Subordinated Debentures (or holders of the
Preferred Securities, while outstanding) will
be required to accrue interest income for
United States federal income tax purposes in
advance of receipt of payment
5
<PAGE>
of such deferred interest. See "Certain
Federal Income Tax Consequences--Interest
Income and Original Issue Discount").
During any such Extension Period, Fidelity
may not, and may not permit any subsidiary of
Fidelity to: (i) declare or pay any dividends
or distributions on, or redeem, purchase,
acquire or make a liquidation payment with
respect to, any of Fidelity's capital stock
(other than (a) the reclassification of any
class of Fidelity's capital stock into
another class of capital stock, (b) dividends
or distributions payable in common stock of
Fidelity, (c) any declaration of a dividend
in connection with the implementation of a
stockholders' rights plan, the issuance of
stock under any such plan in the future or
the redemption or repurchase of any such
rights pursuant thereto, (d) payments under
the Guarantee and (e) purchases of common
stock related to the issuance of common stock
or rights under any of Fidelity's benefit
plans for its directors, officers or
employees); (ii) make any payment of
principal, interest or premium, if any, on,
or repay, repurchase or redeem, any debt
securities of Fidelity that rank pari passu
with or junior in right of payment to the
Junior Subordinated Debentures, or make any
guarantee payments with respect to any
guarantee by Fidelity of the debt securities
of any subsidiary of Fidelity if such
guarantee ranks pari passu with or junior in
right of payment to the Junior Subordinated
Debentures other than payments pursuant to
the Guarantee; or (iii) redeem, purchase or
acquire less than all of the outstanding
Junior Subordinated Debentures or any of the
Preferred Securities. Prior to the
termination of any such Extension Period,
Fidelity may further defer the payment of
interest on the Junior Subordinated
Debentures, provided that no Extension Period
may exceed 20 consecutive quarters or extend
beyond the Stated Maturity of the Junior
Subordinated Debentures. There is no
limitation on the number of times that
Fidelity may elect to begin an Extension
Period. See "Description of the Junior
Subordinated Debentures--Right to Defer
Interest Payment Obligation" and "Certain
Federal Income Tax Consequences--Interest
Income and Original Issue Discount."
Fidelity has no current intention of
exercising its right to defer payments of
interest by extending the interest payment
period on the Junior Subordinated Debentures.
However, should Fidelity elect to exercise
such right in the future, the market price of
the Preferred Securities is likely to be
adversely affected. As a result of the
existence of Fidelity's right to defer
interest payments, the market price of the
Preferred Securities may be more volatile
than the market prices of other similar
securities that do not provide for such
optional deferrals.
Optional Redemption.............. The Junior Subordinated Debentures are
subject to redemption prior to their Stated
Maturity at the option of Fidelity (i) on or
after __________, 2003, in whole at any time
or in part from time to time, or (ii) at any
time, in whole (but not in part), within 180
days following the occurrence and
continuation of a Tax Event, an
6
<PAGE>
Investment Company Event or a Capital
Treatment Event (each as defined herein) in
each case at a redemption price equal to 100%
of the principal amount of the Junior
Subordinated Debentures so redeemed, together
with any accrued and unpaid interest to the
date fixed for redemption.
Redemption of Preferred
Securities....................... If the Junior Subordinated Debentures are
redeemed prior to their Stated Maturity, the
Trust Issuer must apply the proceeds of such
redemption, including premium and accrued and
unpaid interest, if any, to redeem a Like
Amount (as defined herein) of the Preferred
Securities and the Common Securities. The
Preferred Securities will be redeemed upon
repayment of the Junior Subordinated
Debentures at their Stated Maturity. See
"Description of the Preferred Securities--
Redemption."
Optional Redemption Upon
Conversion Transaction........... If the Mutual Holding Company completes a
Conversion Transaction, then Fidelity shall
have the right to redeem the Junior
Subordinated Debentures prior to
________________ 2003, but not prior to
_________________, 2000. Under such
circumstances the Junior Subordinated
Debentures may be redeemed at a price equal
to the accrued and unpaid interest to the
date fixed for redemption plus 107% of the
principal amount thereof and holders of the
Preferred Securities will receive 107% of the
Liquidation Amount plus accumulated and
unpaid Distributions. In addition, under such
circumstances if any Junior Subordinated
Debentures are redeemed all of the Junior
Subordinated Debentures must be redeemed. See
"Risk Factors-Optional Redemption In the
Event of a Conversion Transaction," and
"Description of Junior Subordinated
Debentures--Redemption or Exchange."
Distribution of the Junior....... Fidelity will have the right at any time to
Liquidation of the Trust Issuer dissolve the Trust Issuer and, after
Subordinated Debentures upon satisfaction of creditors of the Trust
Issuer, if any, as provided by applicable
law, cause the Junior Subordinated Debentures
to be distributed to the holders of the
Preferred Securities and the Common
Securities in exchange therefor upon
liquidation of the Trust Issuer. The ability
of Fidelity to do so may be subject to
Fidelity's prior receipt of regulatory
approval.
In the event of the liquidation of the Trust
Issuer, after satisfaction of the claims of
creditors of the Trust Issuer, if any, as
provided by applicable law, the holders of
the Preferred Securities will be entitled to
receive a Liquidation Amount of $10 per
Preferred Security plus accumulated and
unpaid Distributions thereon to the date of
payment, which may be in the form of a
distribution of a Like Amount (as defined
herein) of the Junior Subordinated
Debentures, subject to certain exceptions as
described herein. See "Description of the
Preferred Securities--Liquidation of the
Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders."
7
<PAGE>
Voting Rights.................... Except in limited circumstances, the holders
of the Preferred Securities will have no
voting rights. See "Description of the
Preferred Securities--Voting Rights;
Amendment of Trust Agreement."
Use of Proceeds.................. All of the proceeds from the sale of the
Preferred Securities will be used by the
Trust Issuer to purchase Junior Subordinated
Debentures from Fidelity. Fidelity intends
that the net proceeds from the sale of such
Junior Subordinated Debentures will be used
for general corporate purposes, including,
but not limited to, acquisitions by either
the Company or the Bank (although there
presently exist no agreements or
understandings with respect to any such
acquisitions), capital contributions to the
Bank to support growth and for working
capital, and the possible repurchase of
shares of Fidelity's common stock, subject to
acceptable market conditions.
Risk Factors..................... An investment in the Preferred Securities
involves substantial risks that should be
considered by prospective purchasers. In
addition, because holders of the Preferred
Securities may receive Junior Subordinated
Debentures on dissolution of the Trust
Issuer, and because payments on the Junior
Subordinated Debentures are the sole source
of funds for Distributions on and redemptions
of the Preferred Securities, prospective
purchasers of the Preferred Securities are
also making an investment decision with
regard to the Junior Subordinated Debentures
and should carefully review all of the
information regarding the Junior Subordinated
Debentures contained herein. See "Risk
Factors" and "Description of the Junior
Subordinated Debentures."
Nasdaq National Market Symbol.... Application has been made to have the
Preferred Securities approved for listing on
The Nasdaq Stock Market's National Market
under the symbol "FFFLP."
ERISA Considerations............. For a discussion of certain restrictions on
purchases, see "ERISA Considerations."
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The Summary Consolidated Financial Data presented below has been
derived in part from the audited Consolidated Financial Statements of the
Company as well as unaudited financial information of the Company and should be
read in conjunction with the Company's consolidated financial statements and
notes. For additional information about the Company, reference is made to
"Managements Discussion and Analysis of Financial Condition and Results of
Operations," contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, copies of which are attached as appendices A and B to
this Prospectus, respectively.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets........................... $ 638,183 $ 680,154 $ 712,643 $ 779,620 $ 873,562
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
Investment securities.................. 95,505 127,154 82,410 43,108 41,740
Deposits............................... 573,493 586,527 538,235 595,180 694,718
Total borrowings....................... 12,412 15,934 88,319 86,549 83,621
Stockholders' equity................... 40,002 46,786 74,404 81,266 81,723
Book value per common share............ N/A N/A 11.11 12.10 12.12
Tangible book value per common share... N/A N/A 11.03 11.56 11.89
<CAPTION>
(unaudited)
At September 30,
----------------------------
1996 1997
---------- ----------
(In thousands, except per share amounts)
<S> <C> <C>
Selected Financial Condition Data:
Total assets........................... $ 857,366 $1,045,692
Loans receivable, net.................. 641,171 769,357
Mortgage-backed securities............. 133,208 181,413
Investment securities.................. 42,786 31,501
Deposits............................... 662,993 791,179
Total borrowings....................... 84,140 143,228
Stockholders' equity................... 80,316 85,774
Book value per common share............ 12.09 12.65
Tangible book value per common share... 11.73 12.15
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------
1992 1993 1994 1995 1996/(1)/
-------- -------- -------- ---------- ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
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
Provision for loan losses.............. 330 1,236 112 (210) 164
-------- -------- -------- ---------- ------------
Net interest income after
provision for loan losses............. 26,886 25,104 25,532 25,376 27,945
-------- -------- -------- ---------- ------------
Other income:
Service charges...................... 1,924 2,089 2,151 2,669 3,201
Net gain (loss) on sales of
loans and investment securities..... 160 309 15 5 1,215
Miscellaneous........................ 341 285 331 347 460
-------- -------- -------- ---------- ------------
Total non-interest income......... 2,425 2,683 2,497 3,021 4,876
-------- -------- -------- ---------- ------------
Noninterest expenses................... 15,783 16,971 19,375 20,449 26,709/(1)/
-------- -------- -------- ---------- ------------
Income before taxes.................... 13,528 10,816 8,654 7,948 6,112
Income tax expense..................... 4,974 4,319 3,392 3,133 2,562
-------- -------- -------- ---------- ------------
Net income........................... $ 8,554 $ 6,497 $ 5,262 $ 4,815 $ 3,550/(1)/
======== ======== ======== ========== ============
Net income per common share:
Primary................................ N/A/(2)/ N/A/(2)/ $ 0.80 $ 0.73 $ 0.53/(1)/
======== ======== ======== ========== ============
Fully Diluted.......................... N/A/(2)/ N/A/(2)/ $ 0.80 $ 0.73 $ 0.53/(1)/
======== ======== ======== ========== ============
<CAPTION>
(unaudited)
For the Nine Months
Ended September 30,
-------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Selected Operating Data:
Interest income........................ $ 44,419 $ 52,398
Interest expense....................... 23,417 29,716
------------ ----------
Net interest income.................... 21,002 22,682
Provision for loan losses.............. 114 129
------------ ----------
Net interest income after
provision for loan losses............. 20,888 22,553
------------ ----------
Other income:
Service charges...................... 2,381 2,562
Net gain (loss) on sales of
loans and investment securities..... 555 808
Miscellaneous........................ 316 325
------------ ----------
Total non-interest income......... 3,252 3,695
------------ ----------
Noninterest expenses................... 20,786/(1)/ 18,081
------------ ----------
Income before taxes.................... 3,354 8,167
Income tax expense..................... 1,407 3,458
------------ ----------
Net income........................... $ 1,947/(1)/ $ 4,709
============ ==========
Net income per common share:
Primary................................ $ 0.29/(1)/ $ 0.70
Fully Diluted.......................... $ 0.29/(1)/ $ 0.70
</TABLE>
- --------------------
/(1)/ Fiscal 1996 includes the effect of a one-time SAIF recapitalization
assessment of approximately $3.6 million, or $2.2 million net of taxes.
Excluding this non-recurring assessment, total non-interest expenses would
have been $17.2 million, net income would have been $4.1 million, primary
earnings per share would have been $.62 and fully diluted earnings per
share would have been $.62.
/(2)/ The Bank completed its reorganization from a mutual savings bank into a
mutual holding company with a subsidiary stock savings bank and its
minority offering of common stock on January 7, 1994. As a result,
comparative stockholder data is unavailable prior to 1994.
9
<PAGE>
<TABLE>
<CAPTION>
At and for the Nine
At and for the Years ended December 31, Ended September 30,
------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996/(1)/ 1996/(1)(3)/ 1997/(3)/
--------- -------- -------- ------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios
and Other Data:
Return on average assets
(ratio of net income to
average total assets)........ 1.37% 0.99% 0.79% 0.65% 0.43% 0.32%/(1)/ 0.66%
Return on average stockholders'
equity (ratio of net income
to average stockholders'
equity)...................... 23.94% 14.97% 7.25% 6.22% 4.36% 3.20%/(1)/ 7.53%
Net interest rate spread
during the period............ 4.51% 4.25% 3.76% 3.13% 3.14% 3.19% 2.90%
Net interest margin (net
interest income to average
interest earning assets)..... 4.62% 4.35% 4.08% 3.60% 3.62% 2.75% 2.50%
Ratio of average interest-
earning assets to average
interest-bearing liabilities. 102.94% 103.58% 111.14% 111.61% 111.54% 111.78% 109.89%
Asset Quality Ratios:
Non-accruing loans to total
loans at end of period....... 1.51% 0.88% 0.42% 0.35% 0.46% 0.47% 0.45%
Allowance for loan losses to
non-accruing loans at end of
period....................... 27.58% 74.09% 132.61% 121.45% 74.54% 73.51% 61.59%
Allowance for loan losses to
total loans at end of
period....................... 0.42% 0.66% 0.56% 0.43% 0.34% 0.35% 0.28%
Non-performing assets to
total assets at end of
period....................... 1.54% 0.63% 0.36% 0.32% 0.36% 0.40% 0.38%
Ratio of net charge-offs
during the period to average
loans outstanding during the
period....................... 0.02% 0.08% 0.10% 0.02% 0.03% 0.03% 0.03%
Capital Ratios:
Stockholders' equity to total
assets at end of period...... 6.27% 6.89% 10.44% 10.42% 9.36% 9.37% 8.20%
Average stockholders' equity
to average total assets...... 5.73% 6.59% 10.84% 10.43% 9.87% 10.03% 8.70%
Tangible capital to tangible
assets at end of period/(2)/. 6.24% 6.88% 10.36% 10.04% 9.20% 9.22% 7.91%
Core capital to adjusted
tangible assets at end of
period/(2)/.................. 6.24% 6.88% 10.36% 10.04% 9.20% 9.22% 7.91%
Risk-based capital to risk-
weighted assets at end of
period/(2)/.................. 14.37% 15.18% 23.20% 21.44% 18.26% 18.42% 15.76%
Other Data:
Number of branch offices at
end of period................ 16 18 19 20 20 20 21
Number of deposit accounts at
end of period................ 61,119 62,344 61,950 64,262 69,833 68,227 76,334
</TABLE>
- -----------------
/(1)/ Fiscal 1996 includes the effect of a one-time SAIF recapitalization
assessment of approximately $3.6 million, or $2.2 million net of taxes.
Excluding this non-recurring assessment, return on average assets would
have been .68% and return on average stockholders' equity would have been
6.73%.
/(2)/ Represents regulatory capital ratios for the Bank only.
/(3)/ Ratios are annualized where appropriate.
10
<PAGE>
RISK FACTORS
An investment in the Preferred Securities involves a high degree of
risk. Prospective investors should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following factors in evaluating the Company, its business and the Trust Issuer
before purchasing the Preferred Securities offered hereby. Prospective
investors should note, in particular, that this Prospectus contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial
risks and uncertainties. When used in this Prospectus, or in the documents
incorporated by reference herein, the words "anticipate," "believe," "estimate,"
"may," "intend" and "expect" and similar expressions identify certain of such
forward-looking statements. Actual results, performance or achievements could
differ materially from those contemplated, expressed or implied by the forward-
looking statements contained herein. The considerations listed below represent
certain important factors the Company believes could cause such results to
differ. These considerations are not intended to represent a complete list of
the general or specific risks that may affect the Company and the Trust Issuer.
It should be recognized that other risks, including general economic factors and
expansion strategies, may be significant, presently or in the future, and the
risks set forth below may affect the Company and the Trust Issuer to a greater
extent than indicated.
RISK FACTORS RELATING TO THE OFFERING
Subordination of the Guarantee and the Junior Subordinated Debentures
The obligations of Fidelity under the Guarantee issued by Fidelity for
the benefit of the holders of the Preferred Securities and under the Junior
Subordinated Debentures issued to the Trust Issuer will be unsecured and will
rank subordinate and junior in right of payment to all Senior Indebtedness of
Fidelity. At September 30, 1997, Fidelity had no outstanding Senior
Indebtedness. There is no limitation on the amount of Senior Indebtedness, or
subordinated debt which is pari passu with the Junior Subordinated Debentures,
which Fidelity may issue. Because Fidelity is a holding company, the right of
Fidelity to participate in any distribution of assets of any subsidiary,
including the Bank, upon such subsidiary's liquidation or reorganization or
otherwise (and thus the ability of holders of the Preferred Securities to
benefit indirectly from such distribution), is subject to the prior claims of
creditors of that subsidiary (including depositors in the Bank), except to the
extent that Fidelity may itself be recognized as a creditor of that subsidiary.
If Fidelity is a creditor of a subsidiary, the claims of Fidelity would be
subject to any prior security interest in the assets of the subsidiary and any
indebtedness of the subsidiary senior to that of Fidelity. Accordingly, the
Junior Subordinated Debentures and the Guarantee will be subordinated to all
existing and future liabilities of Fidelity's subsidiaries, including the Bank.
At September 30, 1997 the Bank had liabilities of $959.9 million (including
$791.2 million of deposits). Only the capital stock of Fidelity is currently
junior in right of payment to the Junior Subordinated Debentures to be issued to
the Trust Issuer. Holders of the Junior Subordinated Debentures will be able to
look only to the assets of Fidelity for payments on the Junior Subordinated
Debentures. None of the Indenture, the Guarantee, the Expense Agreement or the
Trust Agreement places any limitation on the amount of secured or unsecured
debt, including Senior Indebtedness, that may be incurred by Fidelity. Fidelity
may, from time to time, incur indebtedness constituting Senior Indebtedness or
indebtedness which is pari passu with the Junior Subordinated Debentures. See
"Description of the Guarantee--Status of the Guarantee" and "Description of the
Junior Subordinated Debentures--Subordination."
Source of Payments to Holders of Preferred Securities
As a savings and loan holding company, Fidelity conducts its
operations principally through its subsidiaries and, therefore, its principal
source of cash, other than its investing and financing activities, is the
receipt of dividends from the Bank. Since Fidelity is without significant
assets other than the capital stock of the Bank, the ability of Fidelity to pay
interest on the principal of the Junior Subordinated Debentures to the Trust
Issuer (and consequently, the Trust Issuer's ability to pay Distributions on the
Preferred Securities and Fidelity's ability to pay its obligations under the
Guarantee) will be dependent on the ability of the Bank to pay dividends to
Fidelity in amounts sufficient to service
11
<PAGE>
Fidelity's obligations. Fidelity may become obligated to make other payments
with respect to securities issued by Fidelity in the future which are pari passu
or have a preference over the Junior Subordinated Debentures issued to the Trust
Issuer with respect to the payment of principal, interest or dividends. There
is no restriction on the ability of Fidelity to issue, or limitations on the
amount of securities which Fidelity may issue, which are pari passu or have a
preference over the Junior Subordinated Debentures issued to the Trust Issuer,
nor is there any restriction on the ability of the Bank to issue additional
capital stock or incur additional indebtedness.
There are legal limitations on the source and amount of dividends that
a savings bank such as the Bank is permitted to pay. The current OTS regulation
applicable to the payment of dividends or other capital distributions by savings
institutions imposes limits on capital distributions based on an institution's
regulatory capital levels and net income. A savings bank that meets or exceeds
all of its capital requirements (both before and after giving effect to the
distribution) and is not in need of more than normal supervision would be a
"Tier 1 association." A Tier 1 association generally may make capital
distributions during a calendar year of up to the greater of (i) 100% of net
income for the current calendar year plus 50% of the amount by which the lesser
of the association's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year or (ii) 75% of its net income over the most
recent four quarters. At September 30, 1997, the Bank could have paid dividends
totaling approximately $25.0 million. Any additional capital distributions
would require prior regulatory approval. The Bank currently exceeds its fully
phased-in capital requirements and qualifies as a Tier 1 association under the
regulation, but there is no assurance that the Bank will continue to so qualify.
See "Regulation-Regulatory Capital Requirements."
An institution that meets the minimum regulatory capital requirements
but does not meet the fully phased-in capital requirements would be a "Tier 2
association," which may make capital distributions of between 25% and 75% of its
net income over the most recent four-quarter period, depending on the
institution's risk-based capital level. A "Tier 3 association" is defined as an
institution that does not meet all of the minimum regulatory capital
requirements and therefore may not make any capital distributions without the
prior approval of the OTS.
Savings institutions must provide the OTS with at least 30 days
written notice before making any capital distributions. All such capital
distributions are also subject to the OTS' right to object to a distribution on
safety and soundness grounds.
Right to Defer Interest Payment Obligation; Tax Consequences; Market Price
Consequences
So long as no event of default under the Indenture has occurred and is
continuing, Fidelity has the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures, at any time or from time to
time, for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities by the Trust
Issuer also would be deferred (and the amount of Distributions to which holders
of the Preferred Securities are entitled would accumulate additional
Distributions thereon at the rate of ____% per annum, compounded quarterly from
the relevant payment date for such Distributions) during any such Extension
Period. During any such Extension Period, Fidelity may not, and may not permit
any subsidiary of Fidelity to: (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of Fidelity's capital stock, (other than (a) the reclassification of
Fidelity's capital stock into another class of capital stock, (b) dividends or
distributions payable in common stock of Fidelity, (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (d) payments under the Guarantee
and (e) purchases of common stock related to the issuance of common stock or
rights under any of Fidelity's benefit plans for its directors, officers or
employees); (ii) make any payment of principal, interest or premium on, or
repay, repurchase or redeem any debt securities of Fidelity that rank pari passu
with or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by Fidelity of the debt
securities of any subsidiary of Fidelity if such guarantee ranks pari passu with
or junior in interest to the Junior
12
<PAGE>
Subordinated Debentures other than payments pursuant to the Guarantee; or (iii)
redeem, purchase or acquire less than all of the outstanding Junior Subordinated
Debentures or any of the Preferred Securities. Prior to the termination of any
such Extension Period, Fidelity may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarters or extend
beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the
termination of any Extension Period and the payment of all interest then accrued
and unpaid on the Junior Subordinated Debentures (together with interest thereon
at the annual rate of ____%, compounded quarterly from the relevant payment date
for such interest, to the extent permitted by applicable law), Fidelity may
elect to begin a new Extension Period subject to the above requirements. There
is no limitation on the number of times that Fidelity may elect to begin an
Extension Period so long as no event of default under the Indenture has occurred
and is continuing. See "Description of the Preferred Securities--Distributions"
and "Description of the Junior Subordinated Debentures--Right to Defer Interest
Payment Obligation."
If an Extension Period were to occur, a holder of the Preferred
Securities would continue to accrue income (in the form of original issue
discount) for United States federal income tax purposes in respect of its pro
rata share of the interest accruing on the Junior Subordinated Debentures held
by the Trust Issuer. As a result, a holder of the Preferred Securities would be
required to include such income in gross income for United States federal income
tax purposes in advance of the receipt of cash and would not receive the cash
related to such income from the Trust Issuer if the holder disposed of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount" and "--Sales or Redemption of the Preferred Securities."
Fidelity has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures. However, should
Fidelity elect to exercise such right in the future, the market price of the
Preferred Securities would likely be affected adversely. A holder that disposed
of its Preferred Securities during an Extension Period, therefore, might not
receive the same return on its investment as a holder that continued to hold its
Preferred Securities. In addition, as a result of the existence of Fidelity's
right to defer interest payments, the market price of the Preferred Securities
may be more volatile than the market prices of other similar securities that are
not subject to such deferrals.
Optional Redemption After 2003
Fidelity has the right to redeem the Junior Subordinated Debentures
prior to their stated Maturity on or after __________, 2003 in whole at one time
or in part from time to time. The exercise of such right may be subject to
Fidelity having received prior regulatory approval. See "Description of the
Junior Subordinated Debentures--General."
Optional Redemption in the Event of a Conversion Transaction
The Mutual Holding Company is a mutual corporation that owns a
majority of the common stock of the Company. Under Federal law and regulations
of the OTS, the Mutual Holding Company may, subject to receipt of prior
regulatory approval, convert to stock form (a "Conversion Transaction"). In a
Conversion Transaction, the Mutual Holding Company would be eliminated by
merging into the Company, the Bank or a successor to the Company, and all of the
shares of common stock of the Company held by the Mutual Holding Company would
be cancelled and depositors and others will be offered shares on a priority
basis in a subscription and community offering at a price based on their
aggregate pro forma market value as determined by an independent appraisal at
the time the Conversion Transaction is completed.
In the event of a Conversion Transaction, the Company has the right to
redeem the Junior Subordinated Debentures prior to _______________ 2003 but not
prior to _______________ 2000. In the event that Fidelity chooses to redeem the
Junior Subordinated Debentures, such redemption shall be at 107% of the
principal amount of the Junior Subordinated Debentures plus accrued and unpaid
interest thereon, and holders of the Preferred Securities would have
13
<PAGE>
their securities redeemed at a price equal to 107% of the Liquidation Amount
plus accumulated and unpaid Distributions. See "Description of the Junior
Subordinated Debentures--Redemption or Exchange."
Redemption Due to Tax Event, Investment Company Event or Capital Treatment Event
Fidelity has the right, but not the obligation, to redeem the Junior
Subordinated Debentures in whole (but not in part) within 180 days following the
occurrence of a Tax Event, an Investment Company Event or a Capital Treatment
Event (whether occurring before or after __________, 2003), and, therefore,
cause a mandatory redemption of the Preferred Securities. The exercise of such
right may be subject to Fidelity having received prior regulatory approval.
A "Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Preferred
Securities under the Trust Agreement, there is more than an insubstantial risk
that (i) the Trust Issuer is, or will be within 90 days of the date of such
opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by Fidelity on the Junior Subordinated Debentures is not, or within 90 days of
the date of such opinion will not be, deductible by Fidelity, in whole or in
part, for United States federal income tax purposes or (iii) the Trust Issuer
is, or will be within 90 days of the date of such opinion, subject to more than
a de minimis amount of other taxes, duties or other governmental charges. The
Trust Issuer or Fidelity must request and receive an opinion with regard to such
matters within a reasonable period of time after it becomes aware of the
possible occurrence of any of the events described in clauses (i) through (iii)
above.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be considered an "investment company"
that is required to be registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), which change occurs or becomes effective
on or after the date of original issuance of the Preferred Securities.
"Capital Treatment Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that as a result of any amendment to, or change
(including any proposed change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or such proposed change, pronouncement, action or decision
is announced on or after the date of original issuance of the Preferred
Securities, there is more than an insubstantial risk that the Preferred
Securities would not constitute Tier 1 Capital (or the then equivalent thereof)
applied as if Fidelity (or its successor) were a bank holding company for
purposes of applicable capital adequacy guidelines of the Federal Reserve (or
any successor regulatory authority with jurisdiction over bank holding
companies), or any capital adequacy guidelines as then in effect and applicable
to Fidelity.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as are being opined upon.
Exchange of Preferred Securities for Junior Subordinated Debentures; Redemption
and Tax Consequences
Fidelity has the right at any time to dissolve the Trust Issuer and,
after the satisfaction of liabilities to creditors of the Trust Issuer as
required by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities in exchange therefor in
liquidation of the Trust Issuer. The exercise of such right may be subject to
Fidelity having received prior regulatory approval. Fidelity will also have the
right, in certain
14
<PAGE>
circumstances, to redeem the Junior Subordinated Debentures in whole or in part,
in which event the Trust Issuer will redeem the Preferred Securities on a pro
rata basis to the same extent as the Junior Subordinated Debentures are redeemed
by Fidelity. Any such distribution or redemption prior to the Stated Maturity
will be subject to prior regulatory approval if then required under applicable
capital guidelines or regulatory policies. See "Description of the Preferred
Securities--Liquidation of the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders" and "Description of the Junior Subordinated
Debentures--Redemption or Exchange."
Under current United States federal income tax law, a distribution of
Junior Subordinated Debentures upon the dissolution of the Trust Issuer would
not be a taxable event to holders of the Preferred Securities. If, however, the
Trust Issuer were characterized as an association taxable as a corporation at
the time of the dissolution of the Trust Issuer, the distribution of the Junior
Subordinated Debentures would constitute a taxable event to holders of Preferred
Securities. Moreover, any redemption of the Preferred Securities for cash would
be a taxable event to such holders. See "Certain Federal Income Tax
Consequences--Distribution of the Junior Subordinated Debentures to Holders of
the Preferred Securities" and "--Sales or Redemption of the Preferred
Securities."
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities upon a dissolution or liquidation of the Trust
Issuer. The Preferred Securities or the Junior Subordinated Debentures may
trade at a discount to the price that the investor paid to purchase the
Preferred Securities offered hereby. Because holders of Preferred Securities
may receive Junior Subordinated Debentures as a result of the dissolution of the
Trust, and because payments on the Junior Subordinated Debentures are the sole
source of funds for Distributions and redemptions of the Preferred Securities,
prospective purchasers of Preferred Securities are also making an investment
decision with regard to the Junior Subordinated Debentures and should carefully
review all the information regarding the Junior Subordinated Debentures
contained herein.
If the Junior Subordinated Debentures are distributed to the holders
of Preferred Securities upon the dissolution of the Trust Issuer, Fidelity will
use its reasonable efforts to list the Junior Subordinated Debentures on the
Nasdaq Stock Market's National Market or SmallCap Market or such stock
exchanges, if any, on which the Preferred Securities are then listed.
Rights under the Guarantee
The Guarantee guarantees to the holders of the Preferred Securities
the following payments, to the extent not paid by the Trust Issuer: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the redemption price with respect to any Preferred
Securities called for redemption, to the extent that the Trust Issuer has funds
on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities in exchange therefor), the lesser of (a) the aggregate of the
Liquidation Amount and all accumulated and unpaid Distributions to the date of
payment, to the extent that the Trust Issuer has funds on hand available
therefor at such time, and (b) the amount of assets of the Trust Issuer
remaining available for distribution to holders of the Preferred Securities
after payment of creditors of the Trust Issuer as required by applicable law.
If Fidelity were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Trust Issuer would lack funds for
the payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust power conferred
upon the Guarantee Trustee under the Guarantee. Any holder of the Preferred
Securities may institute a legal proceeding directly against Fidelity to enforce
its rights under the Guarantee without first instituting a legal proceeding
against the
15
<PAGE>
Trust Issuer, the Guarantee Trustee or any other person or entity. In the event
an event of default under the Indenture shall have occurred and be continuing
and such event is attributable to the failure of Fidelity to pay interest on or
principal of the Junior Subordinated Debentures on the applicable payment date,
a holder of the Preferred Securities may institute a legal proceeding directly
against Fidelity for enforcement of payment to such holder of the principal of
or interest on such Junior Subordinated Debentures having a principal amount
equal to the aggregate Liquidation Amount of the Preferred Securities of such
holder (a "Direct Action"). The exercise by Fidelity of its right, as described
herein, to defer the payment of interest on the Junior Subordinated Debentures
does not constitute an event of default under the Indenture. In connection with
any Direct Action, Fidelity will have a right of set-off under the Indenture to
the extent of any payment made by Fidelity to such holder of the Preferred
Securities in the Direct Action. Except as described herein, holders of the
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Junior Subordinated Debentures or assert
directly any other rights in respect of the Junior Subordinated Debentures. Bank
of New York will act as the guarantee trustee under the Guarantee (the
"Guarantee Trustee") and will hold the Guarantee for the benefit of the holders
of the Preferred Securities. Bank of New York will also act as Debenture
Trustee for the Junior Subordinated Debentures and as Property Trustee, and Bank
of New York (Delaware) will act as Delaware Trustee under the Trust Agreement.
See "Description of the Junior Subordinated Debentures--Enforcement of Certain
Rights by Holders of the Preferred Securities," "Description of the Junior
Subordinated Debentures--Debenture Events of Default" and "Description of the
Guarantee." The Trust Agreement provides that each holder of the Preferred
Securities by acceptance thereof agrees to the provisions of the Guarantee and
the Indenture.
Limited Covenants
The covenants in the Indenture are limited and there are no covenants
in the Trust Agreement. As a result, neither the Indenture nor the Trust
Agreement protects holders of Junior Subordinated Debentures or Preferred
Securities, respectively, in the event of a material adverse change in
Fidelity's financial condition or results of operations or limits the ability of
Fidelity or any subsidiary to incur or assume additional indebtedness or other
obligations. Additionally, neither the Indenture nor the Trust Agreement
contains any financial ratios or specified levels of liquidity to which Fidelity
must adhere. Therefore, the provisions of these governing instruments should
not be considered a significant factor in evaluating whether Fidelity will be
able to or will comply with its obligations under the Junior Subordinated
Debentures or the Guarantee.
Limited Voting Rights
Holders of the Preferred Securities will generally have limited voting
rights relating only to the modification of the Preferred Securities and the
exercise of the Trust Issuer's rights as holder of the Junior Subordinated
Debentures and the Guarantee. Holders of the Preferred Securities will not be
entitled to vote to appoint, remove or replace the Property Trustee, the
Delaware Trustee or the Administrative Trustees, as such voting rights are
vested exclusively in Fidelity, as the holder of the Common Securities (except,
with respect to the Property Trustee and the Delaware Trustee, upon the
occurrence of certain events described herein). The Property Trustee, the
Administrative Trustees and Fidelity may amend the Trust Agreement without the
consent of holders of the Preferred Securities to ensure that the Trust Issuer
will be classified for United States federal income tax purposes as a grantor
trust even if such action adversely affects the interests of such holders. See
"Description of the Preferred Securities--Voting Rights; Amendment of the Trust
Agreement" and "--Removal of the Trust Issuer Trustees."
Absence of Prior Public Market for the Preferred Securities; Trading Price and
Tax Considerations
There is no current public market for the Preferred Securities.
Application has been made to list the Preferred Securities on the Nasdaq Stock
Market's National Market. However, one of the requirements for listing and
continued listing is the presence of two market makers for the Preferred
Securities. Fidelity has been advised that the Underwriter intends to make a
market in the Preferred Securities. However, the Underwriter is not obligated
to do so and such market making may be discontinued at any time. Therefore,
there is no assurance that an active trading market will develop for the
Preferred Securities or, if such market develops, that it will be maintained or
that the market price will
16
<PAGE>
equal or exceed the public offering price set forth on the cover page of this
Prospectus. Accordingly, holders of Preferred Securities may experience
difficulty reselling them or may be unable to sell them at all. The public
offering price for the Preferred Securities has been determined through
negotiations between Fidelity and the Underwriter. Prices for the Preferred
Securities will be determined in the marketplace and may be influenced by many
factors, including prevailing interest rates, the liquidity of the market for
the Preferred Securities, investor perceptions of Fidelity and general industry
and economic conditions.
Further, should Fidelity exercise its option to defer any payment of
interest on the Junior Subordinated Debentures, the Preferred Securities would
be likely to trade at prices that do not fully reflect the value of accrued but
unpaid interest with respect to the underlying Junior Subordinated Debentures.
In the event of such a deferral, a holder of Preferred Securities that disposed
of its Preferred Securities between record dates for payments of Distributions
(and consequently did not receive a Distribution from the Trust Issuer for the
period prior to such disposition) would nevertheless be required to include
accrued but unpaid interest on the Junior Subordinated Debentures through the
date of disposition in income as ordinary income and to add such amount to the
adjusted tax basis of the Preferred Securities disposed of. Upon disposition of
the Preferred Securities, such holder would recognize a capital loss to the
extent the selling price (which might not fully reflect the value of accrued but
unpaid interest) was less than its adjusted tax basis (which would include all
accrued but unpaid interest). Subject to certain limited exceptions, capital
losses cannot be applied to offset ordinary income for United States federal
income tax purposes. See "Certain Federal Income Tax Consequences--Sales or
Redemption of the Preferred Securities."
Possible Tax Law Changes Affecting the Preferred Securities
Under current law, Fidelity will be able to deduct interest on the
Junior Subordinated Debentures. However, there is no assurance that future
legislation will not affect the ability of the Company to deduct interest on the
Junior Subordinated Debentures. Such a change would give rise to a Tax Event.
A Tax Event would permit Fidelity, upon receipt of regulatory approval if then
required under applicable capital guidelines or regulatory policies, to cause a
redemption of the Preferred Securities before, as well as after, __________,
2003. See "Description of the Junior Subordinated Debentures--Redemption or
Exchange."
RISK FACTORS RELATING TO THE COMPANY
Growth of the Bank
The Bank has experienced significant growth over the past five years.
Net assets have increased $361.8 million, or 56.7% from $638.2 million at
December 31, 1992 to $1.0 billion at September 30, 1997. As part of its growth,
the Bank has expanded its branch network. Within the past two years the Bank
has opened two loan production offices and one branch office, and on December 5,
1997, the Bank completed its acquisition of BankBoynton, a Federal Savings Bank.
The Bank is currently constructing a branch facility and expects to
significantly increase its branch network through the construction or purchase
of two additional branches over the next 18 months. There can be no assurance
that the Bank will be able to adequately and profitably manage such growth. The
costs incurred to start-up the new branch facilities, as well as the additional
costs associated with operating the additional branch facilities, are expected
to significantly increase the Bank's noninterest expense and decrease earnings
in the short-term.
Costs to Modernize Computer Technology
Like many companies, the Bank relies on computers for the daily
conduct of business and for data processing generally. There is concern that on
January 1, 2000 computers will be unable to "read" the new year and as a
consequence there may be widespread computer malfunctions. Management has
reviewed this issue, established internal committees to implement necessary
changes, and has been advised by the Bank's data processing service center that
this issue has been addressed but will require the Bank to update and modernize
its data processing hardware and software. This modernization is being
accelerated in light of the need to address year 2000 issue. Management has
17
<PAGE>
concluded that the cost of modernizing the Bank's computer hardware and software
will cost approximately $2.5 million. It is expected that this cost will be
capitalized and expensed in conformity with generally accepted accounting
principles.
Potential Impact of Changes in Interest Rates
The Bank's profitability is dependent to a large extent on its net
interest income, which is the difference between its income on interest-earning
assets and its expense on interest-bearing liabilities. The Bank, like most
financial institutions, is affected by changes in general interest rate levels
and by other economic factors beyond its control. Interest rate risk arises in
part from mismatches (i.e., the interest sensitivity gap) between the dollar
amount of repricing or maturing interest earning assets and liabilities, and is
measured in terms of the ratio of the interest rate sensitivity gap to total
assets. More interest earning assets than interest bearing liabilities
repricing or maturing over a given time period is considered asset-sensitive and
is reflected as a positive gap, and more liabilities than assets repricing or
maturing over a given time period is considered liability-sensitive and is
reflected as a negative gap. A liability-sensitive position (i.e., a negative
gap) may generally enhance earnings in a falling interest rate environment and
reduce earnings in a rising interest rate environment, while an asset-sensitive
position (i.e., a positive gap) may generally enhance earnings in a rising
interest rate environment and will reduce earnings in a falling interest rate
environment. Fluctuations in interest rates are not predictable or
controllable. Periodically, but not less than annually, management calculates
the decay rates of the Bank's core deposits based upon the Bank's actual
experience. Similarly, management calculates the prepayment rates of all loans
in the Bank's loan and mortgage-backed securities portfolios on a quarterly
basis. These factors are then used to calculate the Bank's gap position. At
September 30, 1997, based on management's assumptions derived from its
experience, the Bank had a one year cumulative negative gap of 9.75%. This
negative one year gap position may, as noted above, have a negative impact on
earnings in a rising interest rate environment. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Interest Rate Risk
Management" in Fidelity's Annual Report on Form 10-K, a copy of which is
attached as Appendix A to this Prospectus and "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Asset and
Liability Management-Interest Rate Sensitivity Analysis" in Fidelity's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, a copy of which is
attached hereto as Appendix B.
Changes in interest rates also affect the average life of loans and
mortgage-backed securities. The relatively lower interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-backed
securities, as borrowers have refinanced their mortgages to reduce their
borrowing costs. Under these circumstances, the Bank is subject to reinvestment
risk to the extent that it is not able to reinvest such prepayments at rates
which are comparable to the rates on the prepaid loans or securities.
Allowance for Loan Losses
Industry experience indicates that a portion of the Company's loans
will become delinquent and a portion of the loans will require partial or entire
charge-off. Regardless of the underwriting criteria used by the Company, losses
may be experienced as a result of various factors beyond the Company's control,
including, among other things, changes in market conditions affecting the value
of properties and problems affecting the credit of the borrower. The Company's
determination of the adequacy of its allowance for loan losses is based on
various considerations, including an analysis of the risk characteristics of
various classifications of loans, previous loan loss experience, specific loans
which would have loan loss potential, delinquency trends, estimated fair value
of the underlying collateral, current economic conditions, the views of the
Company's regulators (who have the authority to require additional reserves),
and geographic and industry loan concentration. However, if delinquency levels
were to increase as a result of adverse general economic conditions, the loan
loss reserve so determined by the Company may not be adequate. Although
management believes the allowance to be adequate, there can be no assurance that
the allowance will be adequate to cover loan losses or that the Company will not
experience significant losses in its loan portfolios which may require
significant increases to the allowance for loan losses in the future. At
September 30, 1997, the Company's allowance for loan losses totaled $2.1 million
which was 0.26% of total gross loans. See "Management's Discussion and Analysis
18
<PAGE>
of Financial Condition and Results of Operations-Provision for Loan Losses" in
Appendix A and "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Provision for Loan Losses" in Fidelity's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, included
as Appendix B.
Risks Associated with Increased Consumer and Commercial Lending
The Bank has attempted to diversify its loan portfolio by originating
loans secured by collateral other than one-to four-family real estate. In
particular, the Bank is currently seeking to emphasize the origination of
consumer loans and commercial business loans. At September 30, 1997, $44.8
million, or 5.82% of the Bank's total loan portfolio consisted of consumer
loans, and $44.7 million, or 5.81% of the Bank's total loan portfolio consisted
of commercial business loans. Consumer loans and commercial business loans
typically have higher interest rates than one-to four-family mortgage loans
because of the higher credit risks associated with such loans. Consumer loans
may be unsecured or secured by rapidly depreciating assets. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide adequate
sources of repayment for the outstanding loan balance. In addition, consumer
loan collections are dependent upon the borrower's financial stability and are
more likely to be affected by adverse personal circumstances. Repayment of
commercial business loans is dependent upon the successful operation of the
borrower's business. Consequently if the cash flow from the borrower's business
is reduced, the ability to repay the loan may be impaired.
Geographic Concentration of Loans
The Bank's real estate mortgage loans are secured by properties
located primarily in South Florida. Moreover, substantially all of the Bank's
consumer loans and commercial business loans are made to borrowers who live or
conduct business in Florida. A weakening of the South Florida real estate
market or in the local or national economy could result in an increase in the
number of borrowers who default on their loans and a reduction in the value of
the collateral securing the loans, which in turn could have a material adverse
effect on the Bank and its results of operations.
Regulatory Oversight
The Bank is subject to extensive regulation, supervision and
examination by the OTS as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Bank is a member of the FHLB of Atlanta and is subject to certain limited
regulation by the Federal Reserve Board. As the holding company of the Bank,
Fidelity is also subject to regulation and oversight by the OTS. Such
regulation and supervision governs the activities in which a savings bank or
holding company may engage and is intended primarily for the protection of the
FDIC insurance funds and depositors. Regulatory authorities also have extensive
discretion in connection with their supervisory and enforcement activities. Any
change in the regulatory structure or the applicable statutes or regulations
could have a material adverse impact on the Company, the Bank and their
operations and financial condition. See "Business-Regulation" in Fidelity's
Annual Report on Form 10-K for the year ended December 31, 1996, included as
Appendix A.
Competition
The Company faces substantial competition in purchasing and
originating real estate loans and in attracting deposits. The Company's
competition in originating real estate loans is principally from banks, other
savings institutions, mortgage banking companies, real estate financing
conduits, and small insurance companies. In purchasing real estate loans the
Company competes with other participants in the secondary mortgage market. Many
entities competing with the Company have competitive advantages over the Company
in terms of prior business relationships, wide geographic presence or more
accessible branch office locations, the ability to offer additional services or
more favorable pricing alternatives, or a lower origination and operating cost
structure. The Company does not have a significant market share of the real
estate lending activities in the areas in which it conducts operations.
Increased competition in those areas from traditional or new competitors may
result in a decrease in the origination or purchase of mortgage loans, and may
adversely affect the Company's results of operations and financial condition.
In its deposit
19
<PAGE>
gathering activities, the Company competes with insured depository institutions
such as savings institutions, credit unions, and banks, as well as uninsured
investment alternatives including money market funds. These competitors may
offer higher interest rates than the Company, which could result in the Company
either attracting fewer deposits or in requiring the Company to increase the
rates it pays to attract deposits. Increased deposit competition may adversely
affect the Company's ability to generate the funds necessary for its lending
operations and may adversely affect the Company's results of operations.
USE OF PROCEEDS
All of the proceeds from the sale of the Preferred Securities will be
invested by the Trust Issuer in Junior Subordinated Debentures. The net
proceeds to the Company from the sale of the Junior Subordinated Debentures are
estimated to be approximately $____ million ($____ million if the Underwriter's
over-allotment option is exercised in full), after deduction of the underwriting
discount and estimated expenses. Fidelity intends to use the net proceeds from
the sale of the Junior Subordinated Debentures for general corporate purposes,
including, but not limited to, acquisitions by either the Company or the Bank
(although there presently exist no agreements or understandings with respect to
any such acquisitions), capital contributions to the Bank to support growth and
for working capital, and possible repurchase of shares of Fidelity's common
stock, subject to acceptable market conditions.
MARKET FOR THE PREFERRED SECURITIES
Application has been made to list the Preferred Securities on the
Nasdaq Stock Market's National Market under the symbol "FFFLP." Although the
Underwriter has informed the Company that it presently intends to make a market
in the Preferred Securities, the Underwriter is not obligated to do so and any
such market making may be discontinued at any time. Accordingly, there is no
assurance that an active and liquid trading market will develop or, if
developed, that such a market will be sustained. The offering price and
distribution rate have been determined by negotiations among representatives of
the Company and the Underwriter, and the offering price of the Preferred
Securities may not be indicative of the market price following the offering. See
"Underwriting."
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust Issuer will be treated as
a subsidiary of the Company and, accordingly, the Trust Issuer's financial
statements will be included in the consolidated financial statements of the
Company. The Preferred Securities will be presented as a separate line item in
the consolidated statements of financial condition of the Company under the
caption "Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures" and appropriate disclosures about the Preferred
Securities will be included in the notes to the consolidated financial
statements. For financial reporting purposes, the Company will record
distributions payable on the Preferred Securities as an interest expense in the
consolidated statements of operations.
In its future financial reports, the Company will: (i) present the
Preferred Securities on the Company's statements of financial condition as a
separate line item entitled "Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures;" (ii) include in a footnote to the
financial statements disclosure that the sole assets of the Trust Issuer are the
Junior Subordinated Debentures specifying the principal amount, interest rate
and maturity date of Junior Subordinated Debentures held; and (iii) if Staff
Accounting Bulletin No. 53 treatment is sought, include, in an audited footnote
to the financial statements, disclosure that (a) the Trust Issuer is wholly
owned, (b) the sole assets of the Trust Issuer are its Junior Subordinated
Debentures, and (c) the obligations of the Company under the Junior Subordinated
Debentures, the Indenture, the Trust Agreement and the Guarantee, in the
aggregate, constitute a full and unconditional guarantee by the Company of the
Trust Issuer's obligations under the Preferred Securities.
20
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets for the Company's consolidated ratios of
earnings to fixed charges for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
------------------------------------ ---------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings to Fixed Charges:
Including interest on deposits.. 1.58x 1.59x 1.49x 1.28x 1.19x 1.14x 1.27x
Excluding interest on deposits.. 25.78x 12.10x 6.04x 2.42x 2.04x 1.75x 2.63x
</TABLE>
For purposes of computing the ratios of earnings to fixed charges,
earnings represent income from continuing operations before income taxes plus
fixed charges. Fixed charges represent total interest expense, including and
excluding interest on deposits, as applicable, as well as the interest component
of rental expense.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997, as adjusted to give effect to the consummation
of the offering of the Preferred Securities. The following data should be read
in conjunction with the Consolidated Financial Statements and Notes thereto of
the Company included at Appendices A and B.
<TABLE>
<CAPTION>
Actual As Adjusted
----------- ------------
(In thousands)
<S> <C> <C>
Deposits............................................ $ 791,179 $ 791,179
Borrowings:
FHLB of Atlanta advances............................ 139,689 139,689
Other borrowings.................................... 3,539 3,539
---------- ----------
Total deposits and borrowed funds.................. 934,407 934,407
---------- ----------
Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures/(1)/...... -- 25,000
---------- ----------
Stockholders' equity:
Serial Preferred Stock, $.01 par value; 2,000,000
authorized shares; no shares issued................ -- --
Common stock, $.10 par value, 8,200,000 shares
authorized, 6,782,879 shares issued and
outstanding at September 30, 1997.................. 678 678
Additional paid-in capital.......................... 37,932 37,932
Retained earnings, partially restricted............. 46,942 46,942
Reduction for Employee Stock Ownership Plan Trust
debt............................................... (1,068) (1,068)
Net unrealized increase in fair value of assets
available for sale (net of applicable income taxes) 1,290 1,290
---------- ----------
Total stockholders' equity......................... $ 85,774 $ 85,774
========== ==========
Total capitalization............................... $1,020,181 $1,045,181
========== ==========
</TABLE>
- ------------------
(1) Preferred Securities of the Trust Issuer representing beneficial interests
in $25,000,000 aggregate principal amount of the Junior Subordinated
Debentures issued by the Company to the Trust Issuer. The Junior
Subordinated Debentures will bear interest at the annual rate of ____% of
the principal amount thereof, payable quarterly and will mature on
_________1, 2028. The Company owns all of the Common Securities of the
Trust Issuer.
21
<PAGE>
DESCRIPTION OF THE PREFERRED SECURITIES
General
The following is a summary of certain terms and provisions of the
Preferred Securities. This summary of certain terms and provisions of the
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Trust Agreement. The form of the
Trust Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. Unless otherwise expressly stated or the
context otherwise requires, all references to the "Company" appearing under this
caption "Description of the Preferred Securities" and under the caption
"Description of the Junior Subordinated Debentures" shall mean Fidelity
Bankshares, Inc. excluding its consolidated subsidiaries.
Distributions
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Trust Issuer. Distributions on such Preferred
Securities will be payable at the annual rate of ____% of the stated Liquidation
Amount of $10, payable quarterly in arrears on __________, ________, _______ and
__________ of each year, to the holders of the Preferred Securities on the
relevant record dates. The record date will be the 15th day of the month in
which the relevant Distribution payment date occurs. Distributions will
accumulate from the date of the initial issuance of the Preferred Securities and
are cumulative. The first Distribution payment date for the Preferred
Securities will be __________, 1998. The amount of Distributions payable for
any period will be computed on the basis of a 360-day year of twelve 30-day
months. In the event that any date on which Distributions are payable on the
Preferred Securities is not a Business Day, then payment of the Distributions
payable on such date will be made on the next succeeding day that is a Business
Day (and without any additional Distributions or other payment in respect of any
such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable (each date on which Distributions are payable in
accordance with the foregoing, a "Distribution Date"). A "Business Day" shall
mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in the City of New York are authorized or required by law or
executive order to remain closed or a day on which the principal corporate trust
office of the Property Trustee or the Debenture Trustee is closed for business.
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture to defer the payment
of interest on the Junior Subordinated Debentures at any time or from time to
time for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral of interest, quarterly Distributions on the Preferred Securities by the
Trust Issuer will also be deferred during any such Extension Period.
Distributions to which holders of the Preferred Securities are entitled will
accumulate additional Distributions thereon at the rate per annum of ____%
thereof, compounded quarterly from the relevant payment date for such
Distributions. The term "Distributions" as used herein, shall include any such
additional Distributions. During any such Extension Period, the Company may
not, and may not permit any subsidiary of the Company to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock (other
than (a) the reclassification of any class of the Company's capital stock into
another class of capital stock, (b) dividends or distributions payable in
common stock of the Company, (c) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future or the redemption or repurchase of any such
rights pursuant thereto, (d) payments under the Guarantee and (e) purchases of
common stock related to the issuance of common stock or rights under any of the
Company's benefit plans for its directors, officers or employees); (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company that rank pari passu with or junior in
interest to the Junior Subordinated Debentures or make any guarantee payments
with respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior in
interest to the Junior Subordinated Debentures other than payments pursuant to
the Guarantee or (iii)
22
<PAGE>
redeem, purchase or acquire less than all the outstanding Junior Subordinated
Debentures or any of the Preferred Securities. Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest on
the Junior Subordinated Debentures, provided that no Extension Period may exceed
20 consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the rate of _____%, compounded quarterly, to the extent permitted by
applicable law), the Company may elect to begin a new Extension Period. There
is no limitation on the number of times that the Company may elect to begin an
Extension Period. See "Description of the Junior Subordinated Debentures--Right
to Defer Interest Payment Obligation" and "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
The revenue of the Trust Issuer available for distribution to holders
of its Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Trust Issuer will invest the proceeds from
the issuance and sale of its Trust Securities. See "Description of the Junior
Subordinated Debentures." If the Company does not make interest payments on the
Junior Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Preferred Securities. The payment of
Distributions (if and to the extent the Trust Issuer has funds legally available
for the payment of such Distributions and cash sufficient to make such payments)
is guaranteed by the Company on a limited basis as set forth herein under
"Description of the Guarantee."
The Company has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures.
Subordination of the Common Securities
Payment of Distributions on, and the Redemption Price of, the
Preferred Securities and Common Securities, as applicable, shall be made pro
rata based on the Liquidation Amount of the Preferred Securities and the Common
Securities; provided, however, that if on any Distribution Date or Redemption
Date an event of default under the Indenture shall have occurred and be
continuing, no payment of any Distribution on, or Redemption Price of, any of
the Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Common Securities, shall be made unless
payment in full in cash of all accumulated and unpaid Distributions on all of
the outstanding Preferred Securities for all Distribution periods terminating on
or prior thereto, or, in the case of payment of the Redemption Price, the full
amount of such Redemption Price on all of the outstanding Preferred Securities
then called for redemption shall have been made or provided for, and all funds
available to the Property Trustee shall first be applied to the payment in full
in cash of all Distributions on, or Redemption Price of, the Preferred
Securities then due and payable.
In the case of any event of default under the Trust Agreement
resulting from an event of default under the Indenture, the Company as holder of
the Common Securities will be deemed to have waived any right to act with
respect to any such event of default under the Trust Agreement until the effect
of all such events of default with respect to the Preferred Securities shall
have been cured, waived or otherwise eliminated. Until any such events of
default under the Trust Agreement shall have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the holders of
the Preferred Securities and not on behalf of the Company as holder of the
Common Securities, and only the holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.
Redemption
The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or earlier redemption as provided in the Indenture. The proceeds from
such repayment or redemption shall be applied by the Property Trustee to redeem
a Like Amount (as defined below) of the Preferred Securities upon not less than
30 nor more than 60 days notice prior to the date fixed for repayment or
redemption, at a redemption price equal to the aggregate Liquidation Amount of
such Preferred Securities plus accumulated and unpaid Distributions thereon (the
"Redemption Price") to the date of redemption (the "Redemption
23
<PAGE>
Date"); provided, however, that in the event the Preferred Securities are
redeemed following a Conversion Transaction the holders of the Preferred
Securities shall receive 107% of the Liquidation Amount plus accumulated and
unpaid Distributions thereon. For a description of the Stated Maturity and
redemption provisions of the Junior Subordinated Debentures, see "Description of
the Junior Subordinated Debentures--General" and "--Redemption or Exchange."
The Company has the option to redeem the Junior Subordinated
Debentures prior to maturity on or after __________, 2003, in whole at any time
or in part from time to time, and thereby cause a mandatory redemption of a Like
Amount of the Preferred Securities. See "Description of the Junior Subordinated
Debentures--Redemption or Exchange." Any time that a Tax Event, an Investment
Company Event or a Capital Treatment Event (each as defined below) shall occur
and be continuing, the Company has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of the Preferred Securities in whole (but not in part). See "Description of the
Junior Subordinated Debentures--Redemption or Exchange."
In addition, in the event that the Mutual Holding Company completes a
Conversion Transaction, Fidelity shall have the right to redeem the Junior
Subordinated Debentures prior to _____________, 2003, but not prior to
_______________, 2000 in whole (but not in part) and thereby cause a mandatory
redemption of the Preferred Securities in whole (but not in part). Under such
circumstances the Junior Subordinated Debentures may be redeemed at a price
equal to 107% of the principal amount thereof plus the amount of accrued and
unpaid interest. See "Description of the Junior Subordinated Debentures--
Redemption or Exchange."
Redemption Procedures
Preferred Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the applicable proceeds from the
contemporaneous redemption of a Like Amount of the Junior Subordinated
Debentures. Redemptions of the Preferred Securities shall be made and the
Redemption Price shall be paid on each Redemption Date only to the extent that
the Trust Issuer has funds on hand available for the payment of such Redemption
Price. See also "Description of the Preferred Securities--Subordination of the
Common Securities."
If the Trust Issuer gives a notice of redemption in respect of the
Preferred Securities, then, by 10:00 a.m., New York City time, on the Redemption
Date, to the extent funds are available, the Property Trustee will deposit
irrevocably with the DTC funds sufficient to pay the applicable Redemption Price
and will give DTC irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing
such Preferred Securities. Notwithstanding the foregoing, Distributions payable
on or prior to the Redemption Date for the Preferred Securities called for
redemption shall be payable to the holders of the Preferred Securities on the
relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then, upon the
date of such deposit, all rights of the holders of such Preferred Securities so
called for redemption will cease, except the right of the holders of such
Preferred Securities to receive the Redemption Price, but without interest on
such Redemption Price, and such Preferred Securities will cease to be
outstanding.
In the event that any date fixed for redemption of the Preferred
Securities is not a Business Day, then payment of the Redemption Price payable
on such date will be made on the next succeeding day which is a Business Day
(and without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will be
made on the immediately preceding Business Day. In the event that payment of
the Redemption Price in respect of the Preferred Securities called for
redemption is improperly withheld or refused and not paid either by the Trust
Issuer or by the Company pursuant to the Guarantee as described under
"Description of the Guarantee," Distributions on such Preferred Securities will
continue to accrue at the then applicable rate, from the Redemption Date
originally established by the Trust Issuer for such Preferred Securities to the
date such Redemption Price is actually paid, in which case the actual payment
date will be the date fixed for redemption for purposes of calculating the
Redemption Price.
24
<PAGE>
Subject to applicable law (including, without limitation, United
States federal securities law), the Company or its subsidiaries may at any time
and from time to time purchase outstanding Preferred Securities by private
agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of the Junior Subordinated Debentures to holders of the Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for the Preferred Securities on the relevant record date, which
date shall be one business day prior to the relevant Redemption Date, however,
in the event the Preferred Securities do not remain in book entry form, the
relevant record date shall be the date at least 15 days prior to the Redemption
Date or liquidation date, as applicable.
If less than all of the Preferred Securities and Common Securities
issued by the Trust Issuer are to be redeemed on a Redemption Date, then the
aggregate Liquidation Amount of the Preferred Securities and Common Securities
to be redeemed shall be allocated pro rata to the Preferred Securities and the
Common Securities based upon the relative Liquidation Amounts of such classes.
The particular Preferred Securities to be redeemed shall be selected not more
than 60 days prior to the Redemption Date by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, or if the
Preferred Securities are then held in the form of a global preferred security in
accordance with DTC's customary procedures. The Property Trustee shall promptly
notify the trust registrar in writing of the Preferred Securities selected for
redemption and, in the case of any Preferred Securities selected for partial
redemption, the Liquidation Amount thereof to be redeemed. For all purposes of
the Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of the Preferred Securities shall relate, in the case
of the Preferred Securities redeemed or to be redeemed only in part, to the
portion of the aggregate Liquidation Amount of the Preferred Securities which
has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each holder of the Preferred
Securities to be redeemed at its registered address. Unless the Company
defaults in payment of the Redemption Price on the Junior Subordinated
Debentures, on and after the Redemption Date interest will cease to accrue on
the Junior Subordinated Debentures or portions thereof called for redemption.
Liquidation of the Trust Issuer and Distribution of the Junior Subordinated
Debentures to Holders
The Company has the right at any time to dissolve the Trust Issuer
and, after satisfaction of the liabilities of creditors of the Trust Issuer as
provided by applicable law, cause Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities and Common Securities in
exchange therefor upon liquidation of the Trust Issuer.
After the liquidation date fixed for any distribution of the Junior
Subordinated Debentures for Preferred Securities (i) such Preferred Securities
will no longer be deemed to be outstanding, and (ii) DTC or its nominee, as
the registered holder of Preferred Securities, will receive a registered global
certificate or certificates representing the Junior Subordinated Debentures to
be delivered upon such distribution with respect to Preferred Securities held by
DTC or its nominee, (iii) any certificates representing the Preferred Securities
not held by DTC or its nominee will be deemed to represent Junior Subordinated
Debentures having a principal amount equal to the stated Liquidation Amount of
such Preferred Securities, and bearing accrued and unpaid interest in an amount
equal to the accumulated and unpaid Distributions on such series of the
Preferred Securities until such certificates are presented to the Administrative
Trustees or their agent for transfer or reissuance.
Under current United States federal income tax law and
interpretations, a distribution of the Junior Subordinated Debentures should not
be a taxable event to holders of the Preferred Securities. Should there be a
change in law, a change in legal interpretation, a Tax Event or other
circumstances, however, the distribution could be a taxable event to holders of
the Preferred Securities. See "Certain Federal Income Tax Consequences--
Distribution of the Junior Subordinated Debentures to Holders of the Preferred
Securities."
25
<PAGE>
Liquidation Distribution upon Dissolution
Pursuant to the Trust Agreement, the Trust Issuer shall automatically
dissolve upon expiration of its term and shall dissolve on the first to occur of
(i) certain events of bankruptcy, dissolution or liquidation of the Company,
subject in certain instances to any such event remaining in effect for a period
of 90 consecutive days; (ii) written direction to the Property Trustee from the
Company to dissolve the Trust Issuer (which direction is optional and wholly
within the discretion of the Company, as depositor); (iii) redemption of all of
the Preferred Securities as described under "Description of the Preferred
Securities-Redemption;" and (iv) the entry of an order for the dissolution of
the Trust Issuer by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or
(iv) of the preceding paragraph, the Trust Issuer shall be liquidated by the
Trust Issuer Trustees as expeditiously as the Trust Issuer Trustees determine to
be possible by distributing, after satisfaction of liabilities to creditors of
the Trust Issuer, if any, as provided by applicable law, to the holders of the
Preferred Securities a Like Amount of the Junior Subordinated Debentures, unless
such distribution is determined by the Property Trustee not to be practical, in
which event such holders will be entitled to receive out of the assets of the
Trust Issuer available for distribution to holders, after satisfaction of
liabilities to creditors of the Trust Issuer, if any, as provided by applicable
law, an amount equal to, in the case of holders of the Preferred Securities, the
aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust Issuer has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust Issuer on Preferred Securities shall be paid on a pro rata basis. The
Company, as the holder of the Common Securities, will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the
Preferred Securities, except that if an event of default under the Indenture has
occurred and is continuing, the Preferred Securities shall have a priority over
the Common Securities with respect to any such distributions.
Events of Default; Notice
Any one of the following events constitutes an "Event of Default"
under the Trust Agreement (an "Event of Default") with respect to the Preferred
Securities issued thereunder (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) the occurrence of an event of default under the Indenture
(see "Description of the Junior Subordinated Debentures--Debenture
Events of Default"); or
(ii) default in the payment of any Distribution when it becomes
due and payable, and continuation of such default for a period of 30
days; or
(iii) default in the payment of any Redemption Price of any
Preferred Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material
respect, of any covenant or warranty of the Trust Issuer Trustees in
the Trust Agreement (other than a covenant or warranty a default in
the performance of which or the breach of which is dealt with in
clause (ii) or (iii) above), and continuation of such default or
breach for a period of 60 days after there has been given, by
registered or certified mail, to the defaulting Trust Issuer Trustee
or Trustees by the holders of at least 25% in aggregate Liquidation
Amount of the outstanding Preferred Securities, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" under the Trust
Agreement; or
26
<PAGE>
(v) the occurrence of certain events of bankruptcy or insolvency
with respect to the Property Trustee and the failure by the Company to
appoint a successor Property Trustee within 60 days thereof.
Within 90 days after the occurrence of any Event of Default actually
known to the Property Trustee, the Property Trustee shall transmit notice of
such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default shall have been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If an event of default under the Indenture has occurred and is
continuing, the Preferred Securities shall have a preference over the Common
Securities as described above. See "Description of the Preferred Securities--
Subordination of the Common Securities" and "--Liquidation Distribution Upon
Termination". The existence of an event of default does not entitle the holders
of the Preferred Securities to accelerate the payment thereof.
Removal of the Trust Issuer Trustees
Unless an event of default under the Indenture shall have occurred and
be continuing, any Trust Issuer Trustee may be removed at any time by the holder
of the Common Securities. If an event of default under the Indenture has
occurred and is continuing, the Property Trustee and the Delaware Trustee may be
removed at such time by the holders of a majority in Liquidation Amount of the
outstanding Preferred Securities. In no event will the holders of the Preferred
Securities have the right to vote to appoint, remove or replace the
Administrative Trustees, which voting rights are vested exclusively in the
Company as the holder of the Common Securities. No resignation or removal of
any Trust Issuer Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Trust Agreement.
Co-trustees and Separate Property Trustee
Unless an Event of Default shall have occurred and be continuing, at
any time or times, for the purpose of meeting the legal requirements of the
Trust Indenture Act, if applicable, or of any jurisdiction in which any part of
the Trust Property (as defined in the Trust Agreement) may at the time be
located, the Company, as the holder of the Common Securities, shall have power
to appoint one or more persons either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such property, in either case with such powers as may be
provided in the instrument of appointment, and to vest in such person or persons
in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Trust Agreement. In the event an
event of default under the Indenture has occurred and is continuing, the
Property Trustee alone shall have power to make such appointment.
Merger or Consolidation of the Trust Issuer Trustees
Any entity into which the Property Trustee, the Delaware Trustee or
any Administrative Trustee that is not a natural person may be merged or
converted or with which it may be consolidated, or any entity resulting from any
merger, conversion or consolidation to which such Trustee shall be a party or
any entity succeeding to all or substantially all the corporate trust business
of such Trustee, shall be the successor of such Trustee under the Trust
Agreement, provided such entity shall be otherwise qualified and eligible.
27
<PAGE>
Mergers, Consolidations, Amalgamations or Replacements of the Trust Issuer
The Trust Issuer may not merge with or into, consolidate, amalgamate,
be replaced by, convey, transfer or lease its properties and assets
substantially as an entirety to any entity or other Person, except as described
below or as otherwise described in the Trust Agreement. The Trust Issuer may,
at the request of the Company, with the consent of the Administrative Trustees
and without the consent of the holders of the Preferred Securities, the Property
Trustee or the Delaware Trustee, merge with or into, consolidate, amalgamate, be
replaced by, convey, transfer or lease its properties and assets substantially
as an entirety to, a trust organized as such under the laws of any State:
provided, that (i) such successor entity either (a) expressly assumes all of the
obligations of the Trust Issuer with respect to the Preferred Securities or (b)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Preferred Securities (the "Successor Securities") so long
as the Successor Securities rank the same as the Preferred Securities in
priority with respect to Distributions and payments upon liquidation, redemption
and otherwise, (ii) the Company expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Junior Subordinated Debentures, (iii) the Successor Securities are
registered or listed, or any Successor Securities will be registered or listed
upon notification of issuance, on any national securities exchange or other
organization on which the Preferred Securities are then registered or listed
(including, if applicable, the Nasdaq Stock Market's National Market), if any,
(iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose substantially identical to that of the Trust Issuer, (vii) prior to such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
the Company has received an opinion from independent counsel to the Trust Issuer
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust Issuer nor such successor entity will be
required to register as an investment company under the Investment Company Act
of 1940, as amended (the "Investment Company Act") and (viii) the Company or any
permitted successor or assignee owns all of the common securities or its
equivalent of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Trust Issuer shall not,
except with the consent of holders of 100% in Liquidation Amount of the
Preferred Securities, consolidate, amalgamate, merge with or into or be replaced
by or convey, transfer or lease its properties and assets substantially as an
entirety to any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Trust Issuer or the successor entity to be classified as other than a grantor
trust for United States federal income tax purposes.
Voting Rights; Amendment of the Trust Agreement
Except as provided below and under "Description of the Guarantee--
Amendments and Assignment" and as otherwise required by law and the Trust
Agreement, the holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company,
the Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities, (i) with respect to acceptance of
appointment of a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement or (iii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that the Trust Issuer will be classified for United States
federal income tax purposes as a grantor trust at all times that the Preferred
Securities are outstanding or to ensure that the Trust Issuer will not be
required to register as an "investment company" under the Investment Company
Act; provided, however, that in the case of clause (ii), such
28
<PAGE>
action shall not adversely affect in any material respect the interests of any
holder of the Preferred Securities, and any such amendments of the Trust
Agreement shall become effective when notice thereof is given to the holders of
the Preferred Securities. The Trust Agreement may be amended by the Trust
Issuer Trustees and the Company with (i) the consent of holders representing not
less than a majority (based upon Liquidation Amounts) of the outstanding
Preferred Securities and (ii) receipt by the Trust Issuer Trustees of an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Trust Issuer Trustees in accordance with such amendment will not
affect the Trust Issuer's status as a grantor trust for United States federal
income tax purposes or the Trust Issuer's exemption from status as an
"investment company" under the Investment Company Act, provided that without the
consent of each holder of the Preferred Securities, the Trust Agreement may not
be amended to (a) change the amount or timing of any Distribution on the
Preferred Securities or otherwise adversely affect the amount of any
Distribution required to be made in respect of the Preferred Securities as of a
specified date or (b) restrict the right of a holder of the Preferred Securities
to institute suit for the enforcement of any such payment on or after such date.
So long as the Junior Subordinated Debentures are held by the Property
Trustee, the Trust Issuer Trustees shall not (i) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee or executing any trust or power conferred on the Property Trustee with
respect to the Junior Subordinated Debentures, (ii) waive any past default that
is waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or termination
of the Indenture or the Junior Subordinated Debentures, where such consent shall
be required, without, in each case, obtaining the prior approval of the holders
of a majority in aggregate Liquidation Amount of all outstanding Preferred
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of the Junior Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of each holder of the Preferred Securities. The Trust Issuer
Trustees shall not revoke any action previously authorized or approved by a vote
of the holders of the Preferred Securities except by subsequent vote of the
holders of the Preferred Securities. The Property Trustee shall notify each
holder of the Preferred Securities of any notice of default with respect to the
Junior Subordinated Debentures. In addition to obtaining the foregoing
approvals of the holders of the Preferred Securities, prior to taking any of the
foregoing actions, the Trust Issuer Trustees shall obtain an opinion of counsel
experienced in such matters to the effect that the Trust Issuer will not be
classified as an association taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of the Preferred Securities may be
given at a meeting of holders of the Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a
notice of any meeting at which holders of the Preferred Securities are entitled
to vote, or of any matter upon which action by written consent of such holders
is to be taken, to be given to each holder of record of the Preferred Securities
in the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Preferred Securities will be
required for the Trust Issuer to redeem and cancel the Preferred Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trust Issuer Trustees or
any affiliate of the Company or the Trust Issuer Trustees shall, for purposes of
such vote or consent, be treated as if they were not outstanding.
Liquidation Value
The amount payable on the Preferred Securities in the event of any
liquidation of the Trust Issuer is $10 per Preferred Security plus accumulated
and unpaid Distributions, which may be in the form of a distribution of such
amount in Junior Subordinated Debentures, subject to certain exceptions. See
"Description of the Preferred Securities--Liquidation Distribution Upon
Dissolution."
29
<PAGE>
Expenses and Taxes
In the Indenture, the Company, as borrower, has agreed to pay all
debts and other obligations (other than with respect to the Preferred
Securities) and all costs and expenses of the Trust Issuer (including costs and
expenses relating to the organization of the Trust Issuer, the fees and expenses
of the Trust Issuer Trustee and the costs and expenses relating to the operation
of the Trust Issuer) and to pay any and all taxes and all costs and expenses
with respect thereto (other than United States withholding taxes) to which the
Trust Issuer might become subject. The foregoing obligations of the Company
under the Indenture are for the benefit of, and shall be enforceable by, any
person to whom any such debts, obligations, costs, expenses and taxes are owed
(a "Creditor") whether or not such Creditor has received notice thereof. Any
such Creditor may enforce such obligations of the Company directly against the
Company, and the Company has irrevocably waived any right or remedy to require
that any such Creditor take any action against the Trust Issuer or any other
person before proceeding against the Company. The Company has also agreed in
the Indenture to execute such additional agreements as may be necessary or
desirable to give full effect to the foregoing.
Book Entry, Delivery and Form
The Preferred Securities will be issued in the form of one or more
fully registered global securities which will be deposited with, or on behalf
of, DTC and registered in the name of DTC's nominee. Unless and until it is
exchangeable in whole on in part for the Preferred Securities in definitive
form, a global security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of such Depository or a nominee of such
successor.
Ownership of beneficial interests in a global security will be limited
to persons that have accounts with DTC or its nominee ("Participants") or
persons that may hold interests through Participants. The Company expects that,
upon the issuance of a global security, DTC will credit, on its book-entry
registration and transfer system, the Participants' accounts with their
respective principal amounts of the Preferred Securities represented by such
global security. Ownership of beneficial interests in such global security will
be shown on, and the transfer of such ownership interests will be effected only
through, records maintained by DTC (with respect to interests of Participants)
and on the records of Participants (with respect to interests of Persons held
through Participants). Beneficial owners will not receive written confirmation
from DTC of their purchase, but are expected to receive written confirmations
from the Participants through which the beneficial owner entered into the
transaction. Transfers of ownership interests will be accomplished by entries
on the books of Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Trust Agreement and the Junior Subordinated Debenture
Indenture. Except as provided below, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of the Preferred
Securities in definitive form and will not be considered the owners or holders
thereof under the Trust Agreement and the Junior Subordinated Debenture
Indenture. Accordingly, each person owning a beneficial interest in such a
global security must rely on the procedures of DTC and, if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest, to exercise any rights of a holder of Preferred Securities under
the Trust Agreement and the Junior Subordinated Debenture Indenture. The
Company understands that, under DTC's existing practices, in the event that the
Company requests any action of holders, or an owner of a beneficial interest in
such a global security desires to take any action which a holder is entitled to
take under the Junior Subordinated Indenture, DTC would authorize the
Participants holding the relevant beneficial interests to take such action, and
such Participants would authorize beneficial owners owning through such
Participants to take such action or would otherwise act upon the instructions of
beneficial owners owning through them. Redemption notices will also be sent to
DTC. If less than all of the Preferred Securities are being redeemed, the
Company understands that it is DTC's existing practice to determine by lot the
amount of the interest of each Participant to be redeemed.
30
<PAGE>
Distributions on the Preferred Securities registered in the name of
DTC or its nominee will be made to DTC or its nominee, as the case may be, as
the registered owner of the global security representing such Preferred
Securities. None of the Company, the Trust Issuer Trustee, the Administrators,
any Paying Agent or any other agent of the Company or the Trust Issuer Trustees
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date.
Payments by Participants to beneficial owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such Participant and not of DTC, the Company, the
Trust Issuer Trustees, the Paying Agent or any other agent of the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
DTC may discontinue providing its services as securities depository
with respect to the Preferred Securities at any time by giving reasonable notice
to the Company or the Trust Issuer Trustees. If DTC notifies the Company that
it is unwilling to continue as such, or if it is unable to continue or ceases to
be a clearing agency registered under the Exchange Act and a successor
depository is not appointed by the Company within ninety days after receiving
such notice or becoming aware that DTC is no longer so registered, the Company
will issue the Preferred Securities in definitive form upon registration of
transfer of, or in exchange for, such global security. In addition, the Company
may at any time and in its sole discretion determine not to have the Preferred
Securities represented by one or more global securities and, in such event, will
issue Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
DTC has advised the Company and the Trust Issuer as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Certain of such Participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
Participant, either directly or indirectly.
Same-Day Settlement and Payment
Settlement for the Preferred Securities will be made by the
Underwriter in immediately available funds.
Secondary trading in preferred securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the
Preferred Securities will trade in DTC's Same-Day Funds Settlement System, and
secondary market trading activity in the Preferred Securities will therefore be
required by DTC to settle in immediately available funds. No assurance can be
given as to the effect, if any, of settlement in immediately available funds on
trading activity in the Preferred Securities.
Payment and Paying Agency
Payments in respect of the Preferred Securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the Preferred Securities are not held by DTC, such payments will be
made by check mailed to the address of the holder entitled thereto as such
address appears on the securities register for the Trust Securities. The paying
agent (the "Paying Agent") will initially be the Property Trustee and any co-
paying
31
<PAGE>
agent chosen by the Property Trustee and acceptable to the Administrative
Trustees. The Paying Agent will be permitted to resign as Paying Agent upon 30
days' written notice to the Property Trustee and the Administrative Trustees.
If the Property Trustee is no longer the Paying Agent, the Property Trustee will
appoint a successor (which must be a bank or trust company reasonably acceptable
to the Administrative Trustees) to act as Paying Agent.
Registrar and Transfer Agent
The Property Trustee will act as the registrar and the transfer agent
for the Preferred Securities. Registration of transfers of Preferred Securities
will be effected without charge by or on behalf of the Trust Issuer, except for
the payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. In the event of any redemption, the
Trust Issuer will not be required to (i) issue, register the transfer of, or
exchange any Preferred Securities during a period beginning at the opening of
business 15 days before the date of mailing of a notice of redemption of any
Preferred Securities called for redemption and ending at the close of business
on the day of such mailing; or (ii) register the transfer of or exchange any
Preferred Securities so selected for redemption, in whole or in part, except the
unredeemed portion of any such Preferred Securities being redeemed in part.
Information Concerning the Property Trustee
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee will take such action as it deems advisable and in the best interests of
the holders of the Preferred Securities and will have no liability except for
its own bad faith, negligence or willful misconduct.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust Issuer in such a way that the Trust Issuer
will not be deemed to be an "investment company" required to be registered under
the Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of the Company for
United States federal income tax purposes. In this connection, the Company and
the Administrative Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Trust Issuer or the Trust
Agreement, that the Company and the Administrative Trustees determine in their
discretion to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar
rights.
The Trust Agreement and the Preferred Securities will be governed by,
and construed in accordance with, the laws of the State of Delaware.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued as an unsecured
debt obligation under an Indenture (the "Indenture") between the Company and The
Bank of New York, as trustee (the "Debenture Trustee"). The Indenture will be
qualified as an Indenture under the Trust Indenture Act. This summary of
certain terms and provisions of the Junior
32
<PAGE>
Subordinated Debentures and the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture, and
to the Trust Indenture Act. Wherever particular defined terms of the Indenture
are referred to, but not defined herein, such defined terms are incorporated
herein by reference. The form of the Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
General
Concurrently with the issuance of the Preferred Securities, the Trust
Issuer will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures.
The Junior Subordinated Debentures will bear interest at the annual rate of
____%, payable quarterly in arrears on __________, ________, _______, and
__________ of each year (each, an "Interest Payment Date"), commencing
__________, 1998, to the person in whose name each Junior Subordinated Debenture
is registered, subject to certain exceptions, at the close of business on the
Business Day next preceding such Interest Payment Date. It is anticipated that,
until the liquidation, if any, of the Trust Issuer, the Junior Subordinated
Debentures will be held in the name of the Property Trustee in trust for the
benefit of the holders of the Preferred Securities. The amount of interest
payable for any period will be computed on the basis of a 360-day year of twelve
30-day months. In the event that any date on which interest is payable on the
Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment shall be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment was
originally payable. Accrued interest that is not paid on the applicable
Interest Payment Date will bear additional interest on the amount thereof (to
the extent permitted by law) at the rate per annum of ____% thereof, compounded
quarterly from the relevant Interest Payment Date. The term "interest" as used
herein shall include quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional
Interest (as defined below), as applicable.
The Junior Subordinated Debentures will mature on __________, 2028
(the "Stated Maturity"). The Junior Subordinated Debentures will not be subject
to any sinking fund.
The Junior Subordinated Debentures will be unsecured and will rank
junior and be subordinate in right of payment to all Senior Debt and
Subordinated Debt (collectively "Senior Indebtedness") of the Company. Because
the Company is a holding company, the right of the Company to participate in any
distribution of assets of any subsidiary, including the Bank, upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the prior
claims of creditors of that subsidiary, except to the extent that the Company
may itself be recognized as a creditor of that subsidiary. Accordingly, the
Junior Subordinated Debentures will be effectively subordinated to all existing
and future liabilities of the Company's subsidiaries, and holders of the Junior
Subordinated Debentures should look only to the assets of the Company for
payments on the Junior Subordinated Debentures. The Indenture does not limit
the incurrence or issuance of other secured or unsecured debt of the Company,
including Senior Debt and Subordinated Debt, whether under the Indenture or any
existing or other indenture that the Company may enter into in the future or
otherwise.
Right to Defer Interest Payment Obligation
So long as no event of default under the Indenture has occurred and is
continuing, the Company has the right under the Indenture at any time or from
time to time during the term of the Junior Subordinated Debentures to defer the
payment of interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. At the end of each Extension Period, the
Company must pay all interest then accrued and unpaid on the Junior Subordinated
Debentures (together with interest on such unpaid interest at the annual rate of
____%, compounded quarterly from the relevant Interest Payment Date, to the
extent permitted by applicable law, referred to herein as "Compounded
Interest"). During an Extension Period, interest would continue to accrue and
33
<PAGE>
holders of the Junior Subordinated Debentures would be required to accrue
interest income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not, and may not
permit any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) the
reclassification of any class of the Company's capital stock into another class
of capital stock, (b) dividends or distributions payable in common stock of the
Company, (c) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, the issuance of stock under any such plan in the
future or the redemption or repurchase of any such rights pursuant thereto, (d)
payments under the Guarantee and (e) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans for
its directors, officers or employees); (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in right of
payment to the Junior Subordinated Debentures or make any guarantee payments
with respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks pari passu with or junior in
interest to the Junior Subordinated Debentures other than payments pursuant to
the Guarantee; or (iii) redeem, purchase or acquire less than all the
outstanding Junior Subordinated Debentures or any of the Preferred Securities.
Prior to the termination of any such Extension Period, the Company may further
defer the payment of interest, provided that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the rate of ____%, compounded quarterly, to the extent permitted by
applicable law), the Company may elect to begin a new Extension Period subject
to the above requirements. No interest shall be due and payable during an
Extension Period, except at the end thereof. The Company must give the Property
Trustee, the Administrative Trustees and the Debenture Trustee notice of its
election of such Extension Period at least one Business Day prior to the earlier
of (i) the date interest on the Junior Subordinated Debentures would have been
payable except for the election to begin such Extension Period or (ii) the date
the Administrative Trustees are required to give notice of the record date, or
the date such Distributions are payable, to the Nasdaq Stock Market's National
Market or other applicable self-regulatory organization or to holders of the
Preferred Securities as of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Debenture Trustee shall give notice of the Company's election to
begin a new Extension Period to the holders of the Preferred Securities. There
is no limitation on the number of times that the Company may elect to begin an
Extension Period.
Additional Interest
If the Trust Issuer or the Property Trustee is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Company will pay such additional amounts (the "Additional Interest")
on the Junior Subordinated Debentures as shall be required so that the
Distributions payable by the Trust Issuer shall not be reduced as a result of
any such additional taxes, duties or other governmental charges.
Redemption or Exchange
The Company will have the right to redeem the Junior Subordinated
Debentures prior to maturity (i) on or after __________, 2003, in whole at any
time or in part from time to time, or (ii) at any time in whole (but not in
part), within 180 days following the occurrence of a Tax Event, an Investment
Company Event or a Capital Treatment Event, in each case at a redemption price
equal to the accrued and unpaid interest on the Junior Subordinated Debentures
so redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. Any such redemption prior to the Stated Maturity will be subject to
prior regulatory approval if then required.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be
34
<PAGE>
considered an "investment company" that is required to be registered under the
Investment Company Act, which change becomes effective on or after the date of
original issuance of the Preferred Securities.
"Capital Treatment Event" means the receipt by the Trust of an Opinion
of Counsel to the effect that, as a result of any amendment to, or change
(including any proposed change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or such proposed change, pronouncement, action or decision
is announced on or after the date of original issuance of the Preferred
Securities, there is more than an insubstantial risk that the Preferred
Securities would not constitute Tier 1 Capital (or the then equivalent thereof)
applied as if the Company (or its successor) were a bank holding company for
purposes of the capital adequacy guidelines of the Federal Reserve (or any
successor regulatory authority with jurisdiction over bank holding companies),
or any capital adequacy guidelines as then in effect and applicable to the
Company. There are currently no capital adequacy guidelines applicable to
savings bank holding companies such as the Company.
"Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which pronouncement or
decision is announced on or after the date of issuance of the Preferred
Securities under the Trust Agreement, there is more than an insubstantial risk
that (i) the Trust Issuer is, or will be within 90 days of the date of such
opinion, subject to United Stated federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the date of such opinion will not be, deductible by the Company, in whole or
in part, for United States federal income tax purposes or (iii) the Trust
Issuer is, or will be within 90 days of the date of such opinion, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as being opined upon, that is delivered to
the Trustee.
"Additional Interest" means the additional amounts as may be necessary
in order that the amount of Distributions then due and payable by the Trust
Issuer on the outstanding Preferred Securities and Common Securities shall not
be reduced as a result of any additional taxes, duties and other governmental
charges to which the Trust Issuer has become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of the Preferred
Securities, Preferred Securities having a Liquidation Amount equal to that
portion of the principal amount of the Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities pro rata based upon the
relative Liquidation Amounts of such Preferred Securities and the proceeds of
which will be used to pay the Redemption Price of such Preferred Securities and
(ii) with respect to a distribution of the Junior Subordinated Debentures to
holders of the Preferred Securities in exchange therefor in connection with a
dissolution or liquidation of the Trust Issuer, Junior Subordinated Debentures
having a principal amount equal to the Liquidation Amount of the Preferred
Securities of the holder to whom such Junior Subordinated Debentures would be
distributed.
In addition, the Company will have the right to redeem the Junior
Subordinated Debentures prior to __________ 2003, but not prior to __________
2000 following a Conversion Transaction at a redemption price equal the accrued
but unpaid interest on the Junior Subordinated Debentures, plus 107% of the
principal amount thereof. Under such circumstances the Junior Subordinated
Debentures may be redeemed in whole but not in part. Any such redemption will
be subject to prior regulatory approval if then required.
35
<PAGE>
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the redemption date to each Holder of the Junior
Subordinated Debentures to be redeemed at its registered address. Unless the
Company defaults in payment of the redemption price, on and after the redemption
date interest ceases to accrue on the Junior Subordinated Debentures or portions
thereof called for redemption.
Registration, Denomination and Transfer
The Junior Subordinated Debentures will initially be registered in the
name of the Trust Issuer. If the Junior Subordinated Debentures are distributed
to holders of Preferred Securities, it is anticipated that the depository
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede & Co., the nominee for DTC, as the registered
holder of the Junior Subordinated Debentures, as described under "Description of
Preferred Securities -- Book Entry, Delivery and Form." If Junior Subordinated
Debentures are issued in certificated form, principal and interest will be
payable, the transfer of the Junior Subordinated Debentures will be registrable,
and Junior Subordinated Debentures will be exchangeable for Junior Subordinated
Debentures of other authorized denominations of a like aggregate principal
amount, at the corporate trust office of the Debenture Trustee in New York, New
York or at the offices of any Paying Agent or transfer agent appointed by the
Company, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto. However,
a holder of $1 million or more in aggregate principal amount of Junior
Subordinated Debentures may receive payments of interest (other than interest
payable at the Stated Maturity) by wire transfer of immediately available funds
upon written request to the Debenture Trustee not later than 15 calendar days
prior to the date on which the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as
provided above, and may be presented for registration of transfer (with the form
of transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Indenture or at the office of any transfer agent designated by the Company for
such purpose without service charge and upon payment of any taxes and other
governmental charges as described in the Indenture. The Company will appoint
the Debenture Trustee as securities registrar under the Indenture. The Company
may at any time designate additional transfer agents with respect to the Junior
Subordinated Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent,
or then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and
36
<PAGE>
remaining unclaimed for two years after such principal (and premium, if any) or
interest has become due and payable shall, at the request of the Company, be
repaid to the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
Restrictions on Certain Payments
The Company will also covenant, as to the Junior Subordinated
Debentures, that it will not, and will not permit any subsidiary of the Company
to, (i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock (other than (a) the reclassification of any class of the Company's
capital stock into another class of capital stock, (b) dividends or
distributions payable in common stock of the Company, (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
the issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (d) payments under the Guarantee
and (e) purchases of common stock related to the issuance of common stock or
rights under any of the Company's benefit plans for its directors, officers or
employees), (ii) make any payment of principal, interest or premium, if any, on
or repay or repurchase or redeem any debt securities of the Company that rank
pari passu with or junior in interest to the Junior Subordinated Debentures or
make any guarantee payments with respect to any guarantee by the Company of the
debt securities of any subsidiary of the Company if such guarantee ranks pari
passu with or junior in right of payment to the Junior Subordinated Debentures
other than payments pursuant to the Guarantee or (iii) redeem, purchase or
acquire less than all the outstanding Junior Subordinated Debentures or any of
the Preferred Securities if at such time (i) there shall have occurred an Event
of Default under the Indenture with respect to the Junior Subordinated
Debentures, (ii) if the Junior Subordinated Debentures are held by the Trust
Issuer, the Company shall be in default with respect to its payment of any
obligations under the Guarantee relating to such Preferred Securities or (iii)
the Company shall have given notice of its selection of an Extension Period as
provided in the Indenture with respect to the Junior Subordinated Debentures and
shall not have rescinded such notice, or such Extension Period, or any extension
thereof, shall be continuing.
Modification of Indenture
From time to time the Company and the Debenture Trustee may, without
the consent of the holders of the Junior Subordinated Debentures, amend, waive
or supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, provided that any such
action does not materially adversely affect the interest of the holders of the
Junior Subordinated Debentures or the ability to qualify, or maintain the
qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of the
Junior Subordinated Debentures affected, to modify the Indenture in a manner
affecting the rights of the holders of the Junior Subordinated Debentures,
provided that no such modification may, without the consent of the holder of
each outstanding Subordinated Debenture so affected, (i) extend the Stated
Maturity of the Junior Subordinated Debentures, reduce the principal amount
thereof or reduce the rate or extend the time of payment of interest thereon or
(ii) reduce the percentage of principal amount of the Junior Subordinated
Debentures, the holders of which are required to consent to any such
modification of the Indenture.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default":
(i) failure for 30 days to pay interest (including
Additional Interest or Compounded Interest, if any) on the Junior
Subordinated Debentures when due (subject to the deferral of certain
due dates in the case of an Extension Period); or
37
<PAGE>
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due, whether at maturity, upon declaration of
acceleration of maturity or otherwise; or
(iii) failure to observe or perform certain other covenants
contained in the Indenture for 90 days after written notice to the
Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of the outstanding Junior
Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or
reorganization of the Company, subject in certain instances to any
such event remaining in effect for a period of 60 consecutive days.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee. The Debenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon a Debenture Event of Default.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures may annul such declaration and waive the default
if the default (other than the non-payment of the principal of the Junior
Subordinated Debentures which has become due solely by such acceleration) has
been cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Subordinated Debenture. The Company is required to
file annually with the Debenture Trustee a certificate as to whether or not the
Company is in compliance with all the conditions and covenants applicable to it
under the Indenture.
Enforcement of Certain Rights by Holders of the Preferred Securities
If a Debenture Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay interest or
principal on the Junior Subordinated Debentures on the date such interest or
principal is otherwise payable, a holder of the Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on the Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). The Company may not amend the Indenture to remove the foregoing right
to bring a Direct Action without the prior written consent of the holders of all
of the Preferred Securities. If the right to bring a Direct Action is removed,
the Trust Issuer may become subject to the reporting obligations under the
Exchange Act. The Company shall have the right under the Indenture to set-off
any payment made to such holder of the Preferred Securities by the Company in
connection with a Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures. See
"Description of the Preferred Securities--Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that the Company shall not consolidate with or
merge into any other entity or convey, transfer or lease its properties and
assets substantially as an entirety to any entity, and no entity shall
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the
38
<PAGE>
Company, unless: (i) in the event the Company consolidates with or merges into
another entity or conveys or transfers its properties and assets substantially
as an entirety to any entity, the successor entity is organized under the laws
of the United States or any state or the District of Columbia, and such
successor entity expressly assumes the Company's obligations on the Junior
Subordinated Debentures issued under the Indenture; (ii) immediately after
giving effect thereto, no Debenture Event of Default, and no event which, after
notice or lapse of time or both, would become a Debenture Event of Default,
shall have occurred and be continuing; and (iii) certain other conditions as
prescribed by the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged or
other transaction involving the Company that may adversely affect holders of the
Junior Subordinated Debentures.
Satisfaction and Discharge
The Indenture provides that when, among other things, all of the
Junior Subordinated Debentures not previously delivered to the Debenture Trustee
for cancellation (i) have become due and payable or (ii) will become due and
payable at their Stated Maturity within one year, and the Company deposits or
causes to be deposited with the Debenture Trustee funds, in trust, for the
purpose and in an amount in the currency or currencies in which the Junior
Subordinated Debentures are payable sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Debenture Trustee for cancellation, for the principal and interest to the
date of the deposit or to the Stated Maturity, as the case may be, then the
Indenture will cease to be of further effect (except as to the Company's
obligations to pay all other sums due pursuant to the Indenture and to provide
the officers' certificates and opinions of counsel described therein), and the
Company will be deemed to have satisfied and discharged the Indenture.
Subordination
In the Indenture, the Company has covenanted and agreed that the
Junior Subordinated Debentures issued thereunder will be subordinate and junior
in right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon the
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Indebtedness will
first be entitled to receive payment in full of principal of (and premium, if
any) and interest, if any, on such Senior Indebtedness before the holders of the
Junior Subordinated Debentures, or the Property Trustee on behalf of the
holders, will be entitled to receive or retain any payment in respect of the
principal of or interest, if any, on the Junior Subordinated Debentures.
In the event of the acceleration of the maturity of any of the Junior
Subordinated Debentures, the holders of all Senior Indebtedness outstanding at
the time of such acceleration will first be entitled to receive payment in full
of all amounts due thereon (including any amounts due upon acceleration) before
the holders of the Junior Subordinated Debentures will be entitled to receive or
retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of
the Junior Subordinated Debentures may be made if there shall have occurred and
be continuing a default in any payment with respect to Senior Indebtedness or an
event of default with respect to any Senior Indebtedness resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
"Debt" means with respect to any Person, whether recourse is to all or
a portion of the assets of such Person and whether or not contingent: (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection
39
<PAGE>
with the acquisition of property, assets or businesses; (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person; (iv) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business); (v) every
capital lease obligation of such Person; (vi) all indebtedness of such Person
whether incurred on or prior to the date of the Indenture or thereafter
incurred, for claims in respect of derivative products, including interest rate,
foreign exchange rate and commodity forward contracts, options and swaps and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another Person and all dividends of another Person
the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise.
"Senior Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior Debt shall not be deemed to include:
(i) any Debt of the Company which when incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, and (iii) any Debt to any employee of the Company.
"Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other Debt of the Company (other than the Junior Subordinated Debentures),
except that Subordinated Debt shall not include debentures sold by the Company
to the Trust.
The Indenture places no limitation on the amount of Senior
Indebtedness, that may be incurred by the Company. The Company may from time to
time incur indebtedness constituting Senior Indebtedness.
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed
by and construed in accordance with the laws of the State of New York, without
regard to conflicts of laws principles thereof.
Information Concerning the Debenture Trustee
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of the Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
Distribution of the Junior Subordinated Debentures
As described under "Description of the Preferred Securities--
Liquidation of the Trust Issuer and Distribution of the Junior Subordinated
Debentures to Holders," under certain circumstances involving the termination of
the Trust Issuer, Junior Subordinated Debentures may be distributed to the
holders of the Preferred Securities in exchange therefor
40
<PAGE>
upon liquidation of the Trust Issuer, after satisfaction of liabilities to
creditors of the Trust Issuer as provided by applicable law. Any such
distribution will be subject to receipt of prior regulatory approval if then
required. If the Junior Subordinated Debentures are distributed to the holders
of Preferred Securities upon the liquidation of the Trust Issuer, the Company
will use its best efforts to list the Junior Subordinated Debentures on the
Nasdaq Stock Market's National Market or such stock exchanges, if any, on which
the Preferred Securities are then listed. There can be no assurance as to the
market price of any Junior Subordinated Debentures that may be distributed to
the holders of the Preferred Securities.
Payment and Paying Agents
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the offices of the Debenture Trustee in the city of
New York or at the offices of such Paying Agent or Paying Agents as the Company
may designate from time to time, except that at the option of the Company
payment of any interest may be made (i) by check mailed to the address of the
Person entitled thereto as such address shall appear in the Securities Register
or (ii) by transfer to an account maintained by the Person entitled thereto as
specified in the Securities Register, provided that proper transfer instructions
have been received by the Regular Record Date. Payment of any interest on the
Junior Subordinated Debentures will be made to the Person in whose name the
Junior Subordinated Debenture is registered at the close of business on the
Regular Record Date for such interest, except in the case of Defaulted Interest.
The Company may at any time designate additional Paying Agents or rescind the
designation of any Paying Agent; however, the Company will at all times be
required to maintain a Paying Agent in each Place of Payment for the Junior
Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent,
or then held by the Company in trust, for the payment of the principal of or
interest on the Junior Subordinated Debentures and remaining unclaimed for two
years after such principal or interest has become due and payable shall be
repaid to the Company upon written request of the Company on May 31 of each year
or (if then held in trust by the Company) will be discharged from such trust and
the holders of the Junior Subordinated Debentures shall thereafter look, as
general unsecured creditors, only to the Company for payment thereof.
Registrar and Transfer Agent
The Debenture Trustee will act as the registrar and the transfer agent
for the Junior Subordinated Debentures. Junior Subordinated Debentures may be
presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed) at the
office of the registrar. The Company may at any time rescind the designation of
any such transfer agent or approve a change in the location through which any
such transfer agent acts; provided that the Company maintains a transfer agent
in the Place of Payment. The Company may at any time designate additional
transfer agents with respect to the Junior Subordinated Debentures. In the
event of any redemption, neither the Company nor the Debenture Trustee will be
required to (i) issue, register the transfer of or exchange Junior Subordinated
Debentures during a period beginning at the opening of business 15 days before
the day of selection for redemption of Junior Subordinated Debentures and ending
at the close of business on the day of mailing of the relevant notice of
redemption, or (ii) transfer or exchange any Junior Subordinated Debentures so
selected for redemption, except, in the case of any Junior Subordinated
Debentures being redeemed in part, any portion thereof not to be redeemed.
DESCRIPTION OF THE GUARANTEE
A Guarantee will be executed and delivered by the Company concurrently
with the issuance of the Preferred Securities for the benefit of the holders
from time to time of such Preferred Securities (the "Guarantee"). Bank of New
York will act as trustee ("Guarantee Trustee") under the Guarantee. This
summary of certain provisions of the Guarantee does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Guarantee. Wherever particular defined terms of the Guarantee
are referred to, but not defined herein,
41
<PAGE>
such defined terms are incorporated herein by reference. The form of the
Guarantee has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
General
The Company will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined below)
to the holders of the Preferred Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust Issuer may have or
assert other than the defense of payment. The following payments with respect
to the Preferred Securities, to the extent not paid by or on behalf of the Trust
Issuer (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accrued and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the Redemption Price with respect to any Preferred
Securities called for redemption, to the extent that the Trust Issuer has funds
on hand available therefor at such time, or (iii) upon a voluntary or
involuntary dissolution, winding up or termination of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities), the lesser of (a) the Liquidation Distribution, to the extent that
the Trust Issuer has funds available therefor at such time, and (b) the amount
of assets of the Trust Issuer remaining available for distribution to holders of
the Preferred Securities after satisfaction of liabilities to creditors of the
Trust Issuer as required by applicable law. The Company's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Company to the holders of the Preferred Securities or by causing the Trust
Issuer to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis
of the Trust Issuer's obligations under the Preferred Securities, but will apply
only to the extent that the Trust Issuer has funds sufficient to make such
payments, and is not a guarantee of collection.
If the Company does not make interest payments on the Junior
Subordinated Debentures held by the Trust Issuer, the Trust Issuer will not be
able to pay Distributions on the Preferred Securities and will not have funds
legally available therefor. The Guarantee will rank subordinate and junior in
right of payment to all Senior Indebtedness of the Company. See "Description of
the Guarantee--Status of the Guarantee." Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that subsidiary, except
to the extent the Company may itself be recognized as a creditor of that
subsidiary. Accordingly, the Company's obligations under the Guarantee will be
effectively subordinated to all existing and future liabilities of the Company's
subsidiaries, and claimants should look only to the assets of the Company for
payments thereunder. The Guarantee does not limit the incurrence or issuance of
other secured or unsecured debt of the Company, including Senior Indebtedness,
whether under the Indenture, any other indenture that the Company may enter into
in the future, or otherwise. The Company may from time to time to incur
indebtedness constituting Senior Indebtedness.
The Company and the Trust Issuer believe that the Company has, through
the Guarantee, the Trust Agreement, the Junior Subordinated Debentures, the
Indenture and the Expense Agreement, taken together, fully, irrevocably and
unconditionally guaranteed all of the Trust Issuer's obligations under the
Preferred Securities, on a subordinated basis. No single document standing alone
or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and unconditional
guarantee of the Trust Issuer's obligations under the Preferred Securities. See
"Relationship Among the Preferred Securities, the Junior Subordinated
Debentures, the Expense Agreement and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company
and will rank subordinate and junior in right of payment to all Senior
Indebtedness of the Company in the same manner as the Junior Subordinated
Debentures.
42
<PAGE>
The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Preferred Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Trust
Issuer or upon distribution to the holders of the Preferred Securities of the
Junior Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Preferred Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of such outstanding Preferred Securities. The manner of obtaining any such
approval will be as set forth under "Description of the Preferred Securities--
Voting Rights; Amendment of the Trust Agreement." All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of
the Company to perform any of its payments or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of such Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
The Company, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and
continuance of a default by the Company in the performance of the Guarantee,
undertakes to perform only such duties as are specifically set forth in the
Guarantee and, after default with respect to the Guarantee, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of the Preferred Securities unless it is
offered reasonable indemnity by such holder against the costs, expenses and
liabilities that might be incurred thereby. The Guarantee Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Guarantee Trustee reasonably
believes repayment or adequate indemnity is not reasonably assured to it.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect
upon (a) full payment of the Redemption Price of the Preferred Securities, (b)
full payment of the amounts payable upon liquidation of the Trust Issuer, or (c)
distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities in exchange therefor. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Preferred Securities must restore payment of any sums paid under the
Preferred Securities or the Guarantee.
43
<PAGE>
Governing Law
The Guarantee will be governed by and construed in accordance with the
laws of the State of New York, without regard to conflicts of laws principles
thereof.
The Expense Agreement
Pursuant to the Expense Agreement entered into by the Company under
the Trust Agreement (the "Expense Agreement"), the Company will irrevocably and
unconditionally guarantee to each person or entity to whom the Trust Issuer
becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust Issuer, other than obligations of the Trust Issuer to
pay to the holders of the Preferred Securities the amounts due such holders
pursuant to the terms of the Preferred Securities. Third party creditors of
the Trust Issuer may proceed directly against the Company under the Expense
Agreement, regardless of whether such creditors had notice of the Expense
Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES, THE EXPENSE
AGREEMENT AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Trust Issuer has funds available for the payment
of such Distributions) are irrevocably guaranteed by the Company as and to the
extent set forth under "Description of the Guarantee." The Company and the
Trust Issuer believe that, taken together, the Company's obligations under the
Junior Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payments of Distributions and other amounts due on
the Preferred Securities, on a subordinated basis. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and unconditional
guarantee of the Trust Issuer's obligations under the Preferred Securities. If
and to the extent that the Company does not make payments on the Junior
Subordinated Debentures, the Trust Issuer will not pay Distributions or other
amounts due on its Preferred Securities. The Guarantee does not cover payment
of Distributions when the Trust Issuer does not have sufficient funds to pay
such Distributions. In such event, the remedy of a holder of the Preferred
Securities is to institute a Direct Action against the Company for enforcement
of payment of such Distributions to such holder. The obligations of the Company
under the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
Sufficiency of Payments
As long as payments of interest and other payments are made when due
on the Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because: (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate stated Liquidation Amount
of the Preferred Securities and Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
Preferred Securities; (iii) the Company shall pay for all and any costs,
expenses and liabilities of the Trust Issuer except the Trust Issuer's
obligations to holders of its Preferred Securities; and (iv) the Trust Agreement
further provides that the Trust Issuer will not engage in any activity that is
not consistent with the limited purposes of the Trust Issuer.
Notwithstanding anything to the contrary in the Indenture, the Company
has the right to set off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of making such payment, a payment under the Guarantee.
44
<PAGE>
Enforcement Rights of Holders of the Preferred Securities
A holder of a Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Trust
Issuer or any other person or entity.
A default or event of default under any Senior Indebtedness of the
Company would not constitute a default or event of default under the Indenture.
However, in the event of payment defaults under, or acceleration of, Senior
Indebtedness of the Company, the subordination provisions of the Indenture
provide that no payments may be made in respect of the Junior Subordinated
Debentures until such Senior Indebtedness has been paid in full or any payment
default thereunder has been cured or waived. Failure to make required payments
on the Junior Subordinated Debentures would constitute an event of default under
the Indenture.
Limited Purpose of the Trust Issuer
The Preferred Securities evidence a preferred undivided beneficial
interest in the Trust Issuer, and the Trust Issuer exists for the sole purpose
of issuing its Preferred Securities and Common Securities and investing the
proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Preferred Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from the Company the principal amount of and interest
accrued on Junior Subordinated Debentures held, while a holder of the Preferred
Securities is entitled to receive Distributions from the Trust Issuer (or from
the Company under the Guarantee) if, and to the extent, the Trust Issuer has
funds available for the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution, winding-up or
liquidation of the Trust Issuer involving the liquidation of the Junior
Subordinated Debentures, after satisfaction of liabilities to creditors of the
Trust Issuer, if any, as provided by applicable law, the holders of the
Preferred Securities will be entitled to receive, out of assets held by the
Trust Issuer, the Liquidation Distribution in cash. See "Description of the
Preferred Securities-Liquidation Distribution Upon Dissolution." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the Company, subordinated in right of payment to all
Senior Indebtedness as set forth in the Indenture, but entitled to receive
payment in full of principal and interest, before any stockholders of the
Company receive payments or distributions. Since the Company is the guarantor
under the Guarantee and has agreed to pay for all costs, expenses and
liabilities of the Trust Issuer (other than the Trust Issuer's obligations to
the holders of its Preferred Securities), the positions of a holder of such
Preferred Securities and a holder of the Junior Subordinated Debentures relative
to other creditors and to stockholders of the Company in the event of
liquidation or bankruptcy of the Company are expected to be substantially the
same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal
income tax consequences of the purchase, ownership and disposition of the
Preferred Securities. This summary addresses only the tax consequences to a
person that acquires Preferred Securities on their original issue at the stated
offering price and does not address the tax consequences to persons that may be
subject to special treatment under United States federal income tax law, such as
banks, insurance companies, savings institutions, regulated investment
companies, real estate investment trusts, employee benefit plans, tax-exempt
organizations, dealers in securities or currencies, persons that will hold
Preferred Securities as part of a position in a "straddle" or as part of a
"hedging", "conversion" or other integrated investment transaction for federal
income tax purposes, persons whose functional currency is not the United States
dollar or persons that do not hold Preferred Securities as capital assets.
45
<PAGE>
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., special
tax counsel to the Company and the Trust Issuer. This summary is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
Internal Revenue Service rulings and pronouncements and judicial decisions now
in effect, all of which are subject to change at any time. Such changes may be
applied retroactively in a manner that could cause the tax consequences to vary
substantially from the consequences described below, possibly adversely
affecting a beneficial owner of the Preferred Securities. The authorities on
which this summary is based are subject to various interpretations, and it is
therefore possible that the United States federal income tax treatment of the
purchase, ownership and disposition of the Preferred Securities may differ from
the treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE UNITED STATES
FEDERAL TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
PREFERRED SECURITIES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX
LAWS.
Classification of the Trust Issuer and the Junior Subordinated Debentures
In the opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. for
United States federal income tax purposes under current law, (i) the Trust
Issuer will not be classified as an association taxable as a corporation, and
(ii) the Junior Subordinated Debentures will be classified as indebtedness. As
a result, each beneficial owner of Preferred Securities (a "Securityholder")
will be required to include in its gross income its pro rata share of the
interest (or accrued original issue discount) in addition to any interest and
other income (if any) with respect to the Junior Subordinated Debentures. See
"--Interest Income and Original Issue Discount." No amount included in income
with respect to the Preferred Securities will be eligible for the dividends-
received deduction. This opinion is based in part upon certain factual
assumptions and upon certain representations made by the Company, which
representations Luse Lehman Gorman Pomerenk & Schick, P.C. has relied upon and
assumed to be true, correct and complete. If such representations are
inaccurate, this opinion could be adversely affected.
Interest Income and Original Issue Discount
Under applicable Treasury regulations, currently Section 1.1275-2(h)
(the "Regulations"), if the terms and conditions of a debt instrument make the
likelihood that stated interest will not be timely paid a "remote" contingency,
such contingency will be ignored in determining whether the debt instrument is
issued with original issue discount ("OID"). The Company believes that the
likelihood of its exercising its option to defer payments of interest on the
Junior Subordinated Debentures is remote, since exercising that option would
prevent it from declaring dividends on any class of its stock. Based on the
foregoing, the Company intends to take the position that the Junior Subordinated
Debentures were not issued with OID and, accordingly, a Securityholder
purchasing the Preferred Securities at the stated price should be required to
include in gross income only such Securityholder's pro rata share of stated
interest on the Junior Subordinated Debentures in accordance with such
Securityholder's method of tax accounting.
The Regulations have not yet been addressed in any rulings or other
published interpretations by the Internal Revenue Service (the "IRS"). In the
opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., it is not unreasonable
for the Company to take the position that the Junior Subordinated Debentures
will not be issued with OID. However, it is possible the IRS could take the
position that the likelihood of deferral was not a remote contingency within the
meaning of the Regulations.
Under the Regulations, if the Company were to exercise its option to
defer payments of interest after treating the Junior Subordinated Debentures as
issued without OID, the Junior Subordinated Debentures would be treated as re-
issued with OID at that time, and all stated interest (and de minimis OID, if
any) on the Junior Subordinated Debentures would thereafter be treated as OID as
long as the Junior Subordinated Debentures remained outstanding. In such event,
all of a Securityholder's interest income with respect to the Junior
Subordinated Debentures would be
46
<PAGE>
accounted for as OID on an economic accrual basis regardless of such
Securityholder's method of tax accounting, and actual distributions of stated
interest related thereto would not be includable in gross income. Consequently,
a Securityholder would be required to include OID in gross income even though
the Company would not make and the Securityholder would not receive any actual
cash payments during an Extension Period.
A Securityholder that disposed of Preferred Securities prior to the
record date for the payment of Distributions following an Extension Period would
include OID in gross income but would not receive any cash related thereto from
the Trust Issuer. Any amount of OID included in a Securityholder's gross income
(whether or not during an Extension Period) would increase such Securityholder's
tax basis in its Preferred Securities, and the amount of Distributions not
includable in gross income would reduce such Securityholder's tax basis in its
Preferred Securities.
Distribution of the Junior Subordinated Debentures to Holders of the Preferred
Securities
Under current United States federal income tax law and provided that
the Trust Issuer is not treated as an association taxable as a corporation, a
distribution by the Trust Issuer of the Junior Subordinated Debentures as
described under the caption "Description of the Preferred Securities-Liquidation
of the Trust Issuer and Distribution of the Junior Subordinated Debentures to
Holders" will be nontaxable to the Securityholders and will result in a
Securityholder receiving its pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Trust Issuer, with a holding
period and aggregate tax basis equal to the holding period and aggregate tax
basis such Securityholder had in its Preferred Securities before such
distribution. If, however, the Trust Issuer were characterized as an
association taxable as a corporation at the time of the dissolution of the Trust
Issuer and distribution of the Junior Subordinated Debentures, such distribution
would constitute a taxable event to holders of Preferred Securities. A
Securityholder will account for interest in respect of the Junior Subordinated
Debentures received from the Trust Issuer in the manner described above under
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount," including any accrual of OID (if any) attributed to the Junior
Subordinated Debentures upon the distribution.
Sales or Redemption of the Preferred Securities
Gain or loss will be recognized by a Securityholder on the sale of
Preferred Securities (including a redemption for cash or other consideration) in
an amount equal to the difference between the amount realized on the sale (or
redemption) and the Securityholder's adjusted tax basis in the Preferred
Securities sold or so redeemed. Gain or loss recognized by a Securityholder on
Preferred Securities held for more than one year will generally be taxable as
long-term capital gain or loss. Pursuant to the Taxpayer Relief Act of 1997,
Preferred Securities constituting a capital asset which are acquired by an
individual after July 28, 1997, and held for more than 18 months are accorded a
maximum United States federal capital gains tax rate of 20% (or a rate of 10%,
if the individual taxpayer is in the 15% tax bracket). Effective in 2001, the
20% rate drops to 18% (and the 10% rate drops to 8%) for capital assets acquired
after the year 2000 and held more than five years; however, the requirement that
the capital asset be acquired after the year 2000 does not apply to the 8% rate.
Preferred Securities held by an individual for more than one year, but not more
than 18 months, are accorded a United States federal capital gains tax rate of
28%.
If the Company were to exercise its option to defer payments of
interest on the Junior Subordinated Debentures, the Preferred Securities might
trade at a price that did not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debentures. A
Securityholder that disposed of its Preferred Securities between record dates
for payments of Distributions (and consequently did not receive a Distribution
from the Trust Issuer for the period prior to such disposition) would
nevertheless be required to include in income as ordinary income accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition and to add such amount to its adjusted tax basis in its Preferred
Securities disposed of. Such Securityholder would recognize a capital loss on
the disposition of its Preferred Securities to the extent the selling price
(which might not fully reflect the value of accrued but unpaid interest) was
less than the Securityholder's adjusted tax basis in the Preferred Securities
(which would include accrued but unpaid interest). Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
47
<PAGE>
United States Alien Holders
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership or a non-resident fiduciary of a foreign estate or trust.
Under current United States federal income tax law: (i) payments by
the Trust Issuer or any of its paying agents to any Securityholder who or which
is a United States Alien Holder will not be subject to United States federal
withholding tax provided that (a) the Securityholder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, (b) the Securityholder is not a
controlled foreign corporation that is related to the Company through stock
ownership and (c) either (A) the Securityholder certifies to the Trust Issuer or
its agent, under penalties of perjury, that it is not a United States holder and
provides its name and address or (B) a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution") certifies to the
Trust Issuer or its agent, under penalties of perjury, that such statement has
been received from the Securityholder by it or by a Financial Institution
holding such security for the Securityholder and furnishes the Trust Issuer or
its agent with a copy thereof, and (ii) a United States Alien Holder of a
Preferred Security will not be subject to United States federal withholding tax
on any gain realized upon the sale or other disposition of a Preferred Security.
Proposed Treasury regulations (the "Proposed Regulations") would
provide alternative methods for satisfying the certification requirement
described in clause (i)(c) above. The Proposed Regulations also would require,
in the case of Preferred Securities held by a foreign partnership, that (x) the
certification described in clause (i)(c) above be provided by the partners
rather than by the foreign partnership and (y) the partnership provide certain
information, including a United States taxpayer identification number. A look-
through rule would apply in the case of tiered partnerships. The Proposed
Regulations are proposed to be effective for payments made after December 31,
1997. There can be no assurance that the Proposed Regulations will be adopted
or as to the provisions that they will include if and when adopted in temporary
or final form. The Trust Issuer will issue a Form 1042 or Form 1042-S, where
appropriate.
Information Reporting to Securityholders
Generally, income on the Preferred Securities will be reported to
Securityholders on Forms 1099-INT, which will be mailed to Securityholders by
January 31 following each calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the Securityholder
complies with certain certification requirements. Any withheld amounts will be
allowed as a credit against the Securityholder's United States federal income
tax, provided the required information is provided to the Internal Revenue
Service on a timely basis.
ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or a "disqualified person"
within the meaning of Section 4975 of the Code with respect to many employee
benefit plans ("Plans") that are subject to ERISA. The purchase of the
Preferred Securities by a Plan that is subject to the fiduciary responsibility
provisions of ERISA or the prohibited transaction provisions of Section
4975(e)(1) of the Code and with respect to which the Company, or any affiliate
of the Company, is a service provider (or otherwise is a party in interest or a
disqualified person) may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless the
48
<PAGE>
Preferred Securities are acquired pursuant to and in accordance with an
applicable exemption. Any pension or other employee benefit plan proposing to
acquire any Preferred Securities should consult with its counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated __________, 1997, among the Company, the Trust
Issuer and Ryan, Beck & Co., Inc. (the "Underwriter"), the Trust Issuer has
agreed to sell to the Underwriter, and the Underwriter has agreed to purchase
from the Trust Issuer, 2,500,000 Preferred Securities at the public offering
price subject to the underwriting commissions set forth on the cover page of
this Prospectus.
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and that the Underwriter
will purchase all of the Preferred Securities offered hereby if any of such
Preferred Securities are purchased.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Preferred Securities to the public and other dealers at
the public offering price set forth on the cover page of this Prospectus and
will share with certain dealers from its commission a concession not in excess
of $___ per Preferred Security. After the public offering, the offering price
and such concessions terms may be changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional 375,000 of the Preferred Securities at the public offering price.
The Underwriter may exercise such option only to cover over-allotments made in
connection with the sale of the Preferred Securities offered hereby. To the
extent that the Underwriter exercises its option to purchase additional
Preferred Securities, the Trust Issuer will issue and sell to the Company
additional Common Securities and the Company will issue and sell to the Trust
Issuer Junior Subordinated Debentures in an aggregate principal amount equal to
the total aggregate Liquidation Amount of the additional Preferred Securities
being purchased pursuant to the option and the additional Common Securities.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $____ per Preferred Security. The Company has also agreed
to reimburse the Underwriter for its reasonable out-of-pocket expenses,
including legal fees and expenses relating to the Offering of the Preferred
Securities.
In connection with the offering of the Preferred Securities, the
Underwriter and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriter
creates a short position for its own account by selling more Preferred
Securities than it is committed to purchase from the Trust Issuer. In such a
case, to cover all or part of the short position, the Underwriter may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriter also may engage in stabilizing transactions in
which it bids for, and purchases, shares of the Preferred Securities at a level
above that which might otherwise prevail in the open market for the purpose of
preventing or retarding a decline in the market price of the Preferred
Securities. The Underwriter also may reclaim any selling concessions allowed to
a dealer if the Underwriter repurchases shares distributed by the dealer. Any of
the foregoing transactions may result in the maintenance of a price for the
Preferred Securities at a level above that which might otherwise prevail in the
open market. Neither the Company nor the Underwriter makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Preferred Securities.
The Underwriter is not required to engage in any of the foregoing transactions
and, if commenced, such transactions may be discontinued at any time without
notice.
49
<PAGE>
Because the National Association of Securities Dealers, Inc. ("NASD")
is expected to view the Preferred Securities as interests in a direct
participation program, the offering of the Preferred Securities is being made in
compliance with the applicable provisions of Rule 2810 of the NASD's Conduct
Rules.
The Preferred Securities are a new issue of securities with no
established trading market. The Company and the Trust Issuer have been advised
by the Underwriter that it intends to make a market in the Preferred Securities.
However, the Underwriter is not obligated to do so and such market making may be
interrupted or discontinued at any time without notice at the sole discretion of
the Underwriter. Application has been made by the Company to list the Preferred
Securities on the Nasdaq National Market, but one of the requirements for
listing and continuing listing is the presence of two market makers for the
Preferred Securities, and the presence of a second market maker cannot be
assured. Accordingly, no assurance can be given as to the development or
liquidity of any market for the Preferred Securities.
The Company and the Trust Issuer have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
The Underwriter has in the past and may in the future perform various
services for the Company, including investment banking services, for which it
has and will receive customary fees for such services.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the
Preferred Securities, and the creation of the Trust Issuer will be passed upon
by Morris, Nichols, Arsht & Tunnell, special Delaware counsel to the Company and
the Trust Issuer. The validity of the Guarantee and the Junior Subordinated
Debentures will be passed upon for the Company by Luse Lehman Gorman Pomerenk &
Schick, P.C. Certain legal matters will be passed upon for the Underwriters by
Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., Miami, Florida.
Certain matters relating to the United States federal income tax considerations
will be passed upon for the Company by Luse Lehman Gorman Pomerenk & Schick,
P.C.
EXPERTS
The consolidated financial statements of the Company included and
incorporated in this Prospectus by reference from the Company's Annual Report on
Form 10-K and Annual Report to Security Holders for the year ended December 31,
1996 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their reports (which express an unqualified opinion and include an
explanatory paragraph referring to the adoption of Statement of Financial
Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights"), which
are included and incorporated herein by reference, and have been so included and
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
50
<PAGE>
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
-------------- ----------------
Commission File Number: 0-29040
FIDELITY BANKSHARES, INC.
------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 65-0717085
-------------------------- ------------------
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
- ----------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(561) 659-9900
------------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
------
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
--------------------------------------------
(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
------ ------
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. [X]
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).
<PAGE>
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
<PAGE>
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.
2
<PAGE>
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>
_____________________________
(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.
3
<PAGE>
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
======== ======= ======= ======= ======== ======== ========
</TABLE>
(1) Includes construction loans.
(2) Includes commercial business loans of $18.5 million.
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
======== ======== ========
</TABLE>
- -------------------------------------
(1) Includes commercial business loans of $11.0 million.
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
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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.
8
<PAGE>
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
9
<PAGE>
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.
Origination, Purchase and Sale of Loans. The table below shows the Bank's
loan origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
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
======== ======== ========
</TABLE>
______________________________________
(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.
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.
10
<PAGE>
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.
11
<PAGE>
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>
The following table sets forth the allocation of fixed and adjustable rate
mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
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
12
<PAGE>
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%
</TABLE>
____________________________________
(1) At December 31, 1996, the Bank had no delinquent or non-performing
construction loans.
(2) Net of specific valuation allowances.
13
<PAGE>
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.
The following table sets forth information with respect to loans past due
60-89 days in the Bank's portfolio at the dates indicated.
<TABLE>
<CAPTION>
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
======== ======== ======== ======== ========
</TABLE>
_____________________________________
(1) (Includes construction loans)
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.
14
<PAGE>
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
<TABLE>
<CAPTION>
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
======== ======== ========
</TABLE>
___________________________________________________
(1) Includes REO and in-substance foreclosures.
(2) Net of specific valuation allowances.
The following table sets forth information regarding the Bank's delinquent
loans, REO and loans foreclosed in-substance at December 31, 1996.
<TABLE>
<CAPTION>
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.
15
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
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%
</TABLE>
- ---------------------------------
(1) Net of specific reserves.
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.
<TABLE>
<CAPTION>
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>
16
<PAGE>
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>
17
<PAGE>
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.
<TABLE>
<CAPTION>
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%
========= ========= ========= ========= ========= ======== ====== =======
</TABLE>
- ----------------------------------------------------------------------
(1) Total weighted average life in years calculated only on United States
Government agency securities and municipal bonds.
18
<PAGE>
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.
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.
<TABLE>
<CAPTION>
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>
19
<PAGE>
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.
<TABLE>
<CAPTION>
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)
========= ========= ========= ========= ========= ========= =========
<CAPTION>
Balance Deposit Incr. Balance Deposit Incr.
12/31/95 % (Decr) 12/31/96 % (Decr)
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<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>
20
<PAGE>
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
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>
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1996.
<TABLE>
<CAPTION>
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>
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.
<TABLE>
<CAPTION>
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>
21
<PAGE>
The following table sets forth the net changes in the deposit activities of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
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>
22
<PAGE>
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.
23
<PAGE>
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
24
<PAGE>
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
25
<PAGE>
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.
26
<PAGE>
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
27
<PAGE>
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
28
<PAGE>
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.
29
<PAGE>
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
30
<PAGE>
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
31
<PAGE>
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
32
<PAGE>
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.
33
<PAGE>
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
34
<PAGE>
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
35
<PAGE>
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
36
<PAGE>
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.
37
<PAGE>
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.
38
<PAGE>
(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)
39
<PAGE>
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.
40
<PAGE>
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
<PAGE>
EXHIBIT 13
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
[LOGO OF FIDELITY BANKSHARES, INC. APPEARS HERE]
Annual Report
1996
<PAGE>
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
<PAGE>
A Message From the President & CEO
[PHOTO OF VINCE A. ELHILOW APPEARS HERE]
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.
2
<PAGE>
Total Return Performance
Based on the combined effect of dividends
and appreciation in stock value.
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Period Ending
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
3
<PAGE>
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
4
<PAGE>
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.
5
<PAGE>
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.
6
<PAGE>
7
<PAGE>
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.
8
<PAGE>
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
9
<PAGE>
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
10
<PAGE>
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
11
<PAGE>
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 in sale of loans, mortgage-backed securities and investments.
Also contribution 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.
12
<PAGE>
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.
13
<PAGE>
Average Balance Sheet
<TABLE>
<CAPTION>
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%
======== ========= =======
</TABLE>
(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.
Average Balance Sheet (continued)
<TABLE>
<CAPTION>
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%
======== ========
</TABLE>
(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.
14
<PAGE>
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.
15
<PAGE>
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.
16
<PAGE>
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
17
<PAGE>
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
18
<PAGE>
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.
19
<PAGE>
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
20
<PAGE>
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.
21
<PAGE>
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.
22
<PAGE>
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 Consloidated Financial Statements
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
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.
24
<PAGE>
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
25
<PAGE>
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.
26
<PAGE>
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
27
<PAGE>
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.
28
<PAGE>
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).
29
<PAGE>
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>
30
<PAGE>
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.
31
<PAGE>
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.
32
<PAGE>
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>
33
<PAGE>
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.
34
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ending
December 31, Amount
(In Thousands)
<S> <C>
1997 $ 37,779
1998 -
1999 28,349
2000 56
2001 6,327
Thereafter 10,006
--------
Total $ 82,517
========
</TABLE>
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.
35
<PAGE>
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>
36
<PAGE>
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..................................................... - -
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.
37
<PAGE>
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
38
<PAGE>
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.
39
<PAGE>
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
<S> <C> <C> <C>
Options Outstanding
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.
40
<PAGE>
The Bank's capital amounts and ratios are represented 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>
41
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
(In Thousands)
<S> <C>
1997 $ 619,127
1998 606,237
1999 624,594
2000 656,754
2001 582,895
Thereafter 3,684,339
-----------
Total $ 6,773,946
===========
</TABLE>
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.
42
<PAGE>
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
<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.
43
<PAGE>
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.
44
<PAGE>
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>
45
<PAGE>
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,
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
46
<PAGE>
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
47
<PAGE>
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
48
<PAGE>
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
49
<PAGE>
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
50
<PAGE>
Corporate Information
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
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent Company Subsidiary Company State of Incorporation
- -------------- ------------------- ----------------------
Fidelity Fidelity Federal Savings Florida
Bankshares, Bank of Florida
Inc.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- --------------
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0717085
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
--------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check [X] whether the Registrant has filed all reports required
to be filed by Sections 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: There were 6,784,958 shares of
the Registrant's common stock outstanding as of November 1, 1997.
<PAGE>
FIDELITY BANKSHARES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements............................... 1
Consolidated Statements of Financial Condition as
of December 31, 1996 and September 30, 1997........ 2
Consolidated Statements of Operations for the
three and nine months ended
September 30, 1996 and 1997........................ 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1997........... 4
Notes to Consolidated Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 11
PART II. OTHER INFORMATION........................................... 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
DECEMBER 31, September 30,
1996 1997
============ ==============
(In Thousands)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions..................... $ 15,293 $ 15,891
Interest-bearing deposits............................................. 27,127 23,523
------------ --------------
Total cash and cash equivalents....................................... 42,420 39,414
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities...................................... 8,465 12,278
Mortgage-backed securities............................................ 123,599 181,413
------------ --------------
Total assets available for sale....................................... 132,064 193,691
LOANS RECEIVABLE, Net (Notes 2, 3)........................................... 661,700 769,357
OFFICE PROPERTIES AND EQUIPMENT, Net......................................... 18,092 20,835
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market............. 6,148 6,985
REAL ESTATE OWNED, Net....................................................... 93 483
ACCRUED INTEREST RECEIVABLE.................................................. 4,614 5,696
OTHER ASSETS................................................................. 8,431 9,231
TOTAL ASSETS................................................................. $ 873,562 $ 1,045,692
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS..................................................................... $ 694,718 $ 791,179
REPURCHASE AGREEMENTS........................................................ - 2,642
ADVANCES FROM FEDERAL HOME LOAN BANK......................................... 82,517 139,689
ESOP LOAN.................................................................... 1,104 897
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................ 2,448 12,599
DRAFTS PAYABLE............................................................... 2,957 3,489
OTHER LIABILITIES............................................................ 7,209 7,923
DEFERRED INCOME TAXES........................................................ 886 1,500
TOTAL LIABILITIES..................................................... 791,839 959,918
------------ --------------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued.................... - -
COMMON STOCK ($ .10 par value) 8,200,000 authorized shares,
6,744,689 shares outstanding at December 31, 1996, and
6,782,879 shares outstanding at September 30, 1997.................... 675 678
ADDITIONAL PAID IN CAPITAL................................................... 37,397 37,932
RETAINED EARNINGS - substantially restricted................................. 44,184 46,942
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN...................... (1,315) (1,068)
NET UNREALIZED INCREASE IN FAIR VALUE OF
ASSETS AVAILABLE FOR SALE ( Net of applicable income taxes)........... 782 1,290
TOTAL STOCKHOLDERS' EQUITY (Note 4)................................... 81,723 85,774
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 873,562 $ 1,045,692
============ ==============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited Unaudited
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
========================== =========================
<S> <C> <C> <C> <C>
(In Thousands, except per share amounts)
Interest income:
Loans.................................................. $ 12,451 $ 14,911 $ 35,155 $ 42,452
Investment securities.................................. 187 187 666 538
Other investments...................................... 405 465 1,006 1,419
Mortgage-backed securities............................. 2,334 3,121 7,592 7,989
-------- -------- -------- --------
Total interest income.................................. 15,377 18,684 44,419 52,398
-------- -------- -------- --------
Interest expense:
Deposits............................................... 6,726 8,815 18,963 24,707
Advances from Federal Home Loan Bank and other
borrowings............................................ 1,521 2,035 4,454 5,009
-------- -------- -------- --------
Total interest expense................................. 8,247 10,850 23,417 29,716
-------- -------- -------- --------
Net interest income......................................... 7,130 7,834 21,002 22,682
Provision for loan losses................................... 54 57 114 129
-------- -------- -------- --------
Net interest income after provision for loan losses......... 7,076 7,777 20,888 22,553
-------- -------- -------- --------
Other income:
Servicing income and other fees........................ 785 899 2,381 2,562
Net gain on sale of loans, investments
and mortgage-backed securities......................... 40 796 555 808
Miscellaneous.......................................... 143 95 316 325
-------- -------- -------- --------
Total other income..................................... 968 1,790 3,252 3,695
-------- -------- -------- --------
Operating expense:
Employee compensation and benefits..................... 3,299 3,579 9,391 10,395
Occupancy and equipment................................ 1,155 1,227 3,511 3,612
Gain on real estate owned.............................. (12) (145) (68) (94)
Marketing.............................................. 154 150 465 498
Federal deposit insurance premium...................... 4,001 117 4,678 338
Other.................................................. 988 1,145 2,809 3,332
-------- -------- -------- --------
Total operating expense................................ 9,585 6,073 20,786 18,081
-------- -------- -------- --------
Income (loss) before provision for income taxes............. (1,541) 3,494 3,354 8,167
-------- -------- -------- --------
Provision (benefit) for income taxes:
Current................................................ (570) 1,377 1,307 3,197
Deferred............................................... (47) 107 100 261
-------- -------- -------- --------
Total provision (benefit) for income taxes............. (617) 1,484 1,407 3,458
-------- -------- -------- --------
Net income (loss)........................................... $ (924) $ 2,010 $ 1,947 $ 4,709
======== ======== ======== ========
Earnings per share (Note 5):
Primary................................................ $ (0.14) $ 0.30 $ 0.29 $ 0.70
======== ======== ======== ========
Fully Diluted.......................................... $ (0.14) $ 0.30 $ 0.29 $ 0.70
======== ======== ======== ========
Dividends declared per share of common stock................ $ 0.200 $ 0.225 $ 0.500 $ 0.625
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAUDITED
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
======== =========
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income........................................................................................ $ 1,947 $ 4,709
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization............................................................. 914 956
ESOP and Recognition and Retention Plan compensation expense.............................. 538 518
Accretion of discounts, amortization of premiums, and other deferred yield items.......... (897) (526)
Provision for loan losses and real estate losses.......................................... 114 129
Provisions for losses and net (gains) losses on sales of real estate owned................ (87) (115)
Net gain on sale of:
Other assets............................................................. - (702)
Mortgage-backed securities............................................... (511) -
Loans.................................................................... (44) (106)
Increase in accrued interest receivable........................................................... (5) (1,082)
Increase in other assets.......................................................................... (2,400) (800)
Increase (decrease) in drafts payable............................................................. (493) 532
Increase (decrease) in deferred income taxes...................................................... (1,194) 614
Increase in other liabilities..................................................................... 5,860 625
-------- ---------
Net cash from operating activities....................................... 3,742 4,752
-------- ---------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans................................................. (99,078) (91,526)
Principal payments received on mortgage-backed securities......................................... 19,331 14,882
Purchases of:
Loans..................................................................................... (19,137) (22,633)
Mortgage-backed securities................................................................ (9,962) (72,076)
Federal Home Loan Bank stock.............................................................. - (837)
Investment securities..................................................................... (6,002) (7,782)
Office properties and equipment........................................................... (3,572) (3,755)
Proceeds from sales of:
Loans..................................................................................... 9,947 5,713
Real estate acquired in settlement of loans............................................... 973 1,165
Mortgage-backed securities................................................................ 14,516 -
Proceeds from maturities of investment securities................................................. 22,490 4,000
Other............................................................................................. 1,124 467
-------- ---------
Net cash used for investing activities................................... (69,370) (172,382)
-------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock...................................................... 57 263
Cash dividends.................................................................................... (1,514) (1,858)
Net increase (decrease) in:
NOW accounts demand deposits, and savings accounts........................................ (3,116) 13,490
Certificates of deposit................................................................... 70,929 82,971
Advances from Federal Home Loan Bank...................................................... (2,202) 57,172
ESOP loan................................................................................. (207) (207)
Repurchase agreements..................................................................... - 2,642
Advances by borrowers for taxes and insurance............................................. 9,119 10,151
-------- ---------
Net cash from financing activities........................................................ 73,066 164,624
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................................. 7,438 (3,006)
CASH AND CASH EQUIVALENTS, Beginning of period.................................................... 24,963 42,420
-------- ---------
CASH AND CASH EQUIVALENTS, End of period.......................................................... $ 32,401 $ 39,414
======== =========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Savings Bank of Florida (the
"Bank") conform to generally accepted accounting principles and to predominant
practices within the thrift industry. The Company has not changed its
accounting and reporting policies from those disclosed in its 1996 Annual Report
on Form 10-K.
On April 25, 1996, Fidelity Federal Savings Bank of Florida 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., 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 interest merger, did 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. In the opinion of
the Company's management, all adjustments necessary to fairly present the
consolidated financial position of the Company at September 30, 1997 and the
results of its consolidated operations and cash flows for the period then ended,
all of which are of a normal and recurring nature, have been included.
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income", which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and No. 131 "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Adoption of
these statements will not impact the Bank's consolidated financial position,
results of operations or cash flows, and any effect will be limited to the form
and content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Certain amounts in the financial statements have been reclassified to conform
with the September 30, 1997 presentation.
On August 18, 1997, the Bank reached a definitive agreement to acquire
BankBoynton, a Federal Savings Bank based in Boynton Beach, Florida with $57.6
million in assets. The agreement has been approved by the board of directors of
both companies and BankBoynton's stockholders. The agreement is subject to the
approval of the appropriate regulatory agencies. The acquisition of BankBoynton
is expected to be completed during the fourth quarter of 1997. Following the
acquisition, BankBoynton's three offices are expected to closed and deposit
accounts existing at the BankBoynton facilities will be merged into Fidelity
Federal's existing branch network.
The BankBoynton acquisition will be accounted for as a purchase. Fidelity
Bankshares, Inc. will acquire all the outstanding common stock of BankBoynton
for $9.00 per share, cash. The total purchase price of approximately $5.6
million is one and one half times BankBoynton's net book value at July 31, 1997.
5
<PAGE>
2. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and September 30, 1997, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
================ ================
<S> <C> <C>
(IN THOUSANDS)
One-to-four single family, residential real estate
mortgages....................................................... $ 524,434 $ 636,022
Commercial real estate mortgages........................................ 42,811 41,747
Real estate construction-primarily residential.......................... 58,493 34,958
Participations-primarily residential.................................... 4,255 3,351
Land loans-primarily residential........................................ 11,875 11,093
---------------- ----------------
Total first mortgage loans...................................... 641,868 727,171
Consumer and commercial business loans 58,063 89,512
---------------- ----------------
Total gross loans............................................... 699,931 816,683
Less:
Undisbursed portion of loans in process......................... 37,575 47,402
Unearned discounts, premiums and deferred loan fees, net........ (1,607) (2,223)
Allowance for loan losses....................................... 2,263 2,147
Loans receivable-net.................................................... $ 661,700 $ 769,357
================ ================
</TABLE>
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 1996 and the three and nine months ended September 30, 1996 and
1997, is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR For the Three Months For the Nine Months
ENDED Ended Ended
DECEMBER 31, September 30, September 30,
1996 1996 1997 1996 1997
============ ==================== ========================
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....... $ 2,265 $ 2,225 $ 2,109 $ 2,265 $ 2,265
Current provision.................... 164 54 57 114 114
Charge-offs.......................... (166) (59) (19) (159) (159)
------------ -------- -------- --------- ---------
Ending balance....................... $ 2,263 $ 2,220 $ 2,147 $ 2,220 $ 2,220
============ ======== ======== ========= =========
</TABLE>
6
<PAGE>
An analysis of the recorded investment in impaired loans owned by the Company at
the end of each period and the related specific valuation allowance for those
loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
======================= ==========================
LOAN RELATED LOAN RELATED
BALANCE ALLOWANCE BALANCE ALLOWANCE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Impaired loan balances and related
specific valuation allowances:
Loans performing in conformity with
contractual terms................ $ 984 $ 164 $ 941 $ 160
Loans for which interest income is
not being recognized............. 667 277 740 165
--------- ---------- ---------- ---------
Total............................ $ 1,651 $ 441 $ 1,681 $ 325
========= ========== ========== =========
</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.
7
<PAGE>
4. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Savings Bank of Florida, is a
regulated financial institution. Its regulatory 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, 1996 Stockholders' Equity
and ratio to total assets....................... 9.4% $ 81,723
====
Net 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 1 (core) capital and ratio to adjusted
total assets.................................... 9.2% $ 80,186 3.0% $26,144 5.0% $43,574
==== ========== === ======= ==== =======
Tier 1 (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
==========
As of September 30, 1997 Stockholders' Equity
and ratio to total assets....................... 8.1% $ 84,294
====
Net unrealized increase in market value of assets
available for sale (net of applicable
income taxes)................................... (1,290)
Goodwill............................................. (543)
Disallowed servicing assets and deferred tax assets.. (24)
----------
Tangible capital and ratio to adjusted total assets.. 7.9% $ 82,437 1.5% $15,642
==== ========== === =======
Tier 1 (core) capital and ratio to adjusted
total assets.................................... 7.9% $ 82,437 3.0% $31,285 5.0% $52,142
==== ========== === ======= ==== =======
Tier 1 (core) capital and ratio to risk-weighted
total assets.................................... 15.4% $ 82,437 6.0% $32,082
==== ==== =======
General loan valuation allowances.................... 1,822
Equity investments................................... (1)
----------
Tier 2 capital....................................... $ 1,821
==========
Total risk-based capital and ratio to risk-weighted
total assets.................................... 15.8% $ 84,258 8.0% $42,776 10.0% $53,471
==== ========== === ======= ==== =======
Total assets......................................... $1,044,688
==========
Adjusted total assets................................ $1,042,831
==========
Risk-weighted assets................................. $ 534,705
==========
</TABLE>
8
<PAGE>
5. 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 three months ended September 30, 1996 and 1997,
are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Net income................................................ $ (924,000) $ 2,010,000
================= ===================
Primary Shares:
Shares Outstanding.................................... 6,721,078 6,775,466
Adjustments to reflect:
Uncommitted ESOP shares........................... (136,538) (106,178)
Unearned MRP shares (treasury stock method)....... (2,497) -
Common stock options (treasury stock method)...... 84,133 110,762
------------------- -------------------
Total 6,666,176 6,780,050
=================== ===================
Earnings per share.................................... $ (0.14) $ 0.30
=================== ===================
</TABLE>
The computations of fully diluted shares outstanding is the same as for primary
shares, above.
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 nine months ended September 30, 1996 and 1997,
are as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Net income $ 1,947,000 $ 4,709,000
================== ==================
Primary Shares:
Shares Outstanding.................................. 6,719,820 6,766,858
Adjustments to reflect:
Uncommitted ESOP shares........................ (144,099) (113,711)
Unearned MRP shares (treasury stock method).... (2,675) -
Common stock options (treasury stockmethod).... 90,106 99,549
------------------- -------------------
Total 6,663,152 6,752,696
=================== ===================
Earnings per share.................................. $ 0.29 $ 0.70
=================== ===================
</TABLE>
The computations of fully diluted shares outstanding is the same as for primary
shares, above.
Pursuant to Statement of Position (SOP), 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
(AICPA), ESOP shares that have not been committed to be released are not
considered to be outstanding.
9
<PAGE>
PRO FORMA EARNINGS PER SHARE
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share". This statement,
which changes the method of calculating earnings per share, is effective for
financial statements beginning after December 15, 1997. While earlier
application is not allowed, the Company is permitted to disclose pro forma
earnings per share in the notes to financial statements in periods prior to the
required adoption. The following table shows pro forma earnings per share as
though this statement had been adopted.
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
September 30, 1996 September 30, 1997
-------------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------ --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss).......... $(924,000) $2,010,000
========= ==========
BASIC EPS
Income (loss) available to
common stockholders...... $(924,000) 6,584,540 (0.14) $2,010,000 6,669,288 0.30
====== =====
EFFECT OF DILUTIVE SHARES
Common stock options..... 84,133 110,762
--------- ---------
DILUTED EPS
Income (loss) available to
common stockholders...... $(924,000) 6,668,673 $(0.14) $2,010,000 6,780,050 $0.30
========= ========= ====== ========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
September 30, 1996 September 30, 1997
-------------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------ --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income................. $1,947,000 $4,709,000
========== ==========
BASIC EPS
Income available to
common stockholders...... $1,947,000 6,575,721 0.30 $4,709,000 6,653,147 0.71
===== =====
EFFECT OF DILUTIVE SHARES
Common stock options..... 90,106 99,549
--------- ---------
DILUTED EPS
Income available to
common stockholders...... $1,947,000 6,665,827 $0.29 $4,709,000 6,752,696 $0.70
========== ========= ===== ========== ========= =====
</TABLE>
The guidance in AICPA, SOP 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" continues to apply to earnings per share calculations under
Statement No. 128. Therefore, the weighted average shares outstanding in the
table above do not include uncommitted ESOP shares.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
11
<PAGE>
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, did 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. The Bank's net
income, 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.
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
- -----------------------------
Board issued Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income", which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and No. 131 "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Adoption of
these statements will not impact the Bank's consolidated financial position,
results of operations or cash flows, and any effect will be limited to the form
and content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
RECENT DEVELOPMENTS.
On August 1, 1997, the Bank entered into a contract to sell the property it owns
in downtown West Palm Beach, Florida for $7.2 million. The prospective buyer
has concluded its due diligence procedures and posted the necessary deposit.
The closing on the contract is scheduled for April 1999.
12
<PAGE>
On August 18, 1997, the Bank reached a definitive agreement to acquire
BankBoynton, a Federal Savings Bank based in Boynton Beach, Florida with $57.6
million in assets. The agreement has been approved by the board of directors of
both companies and BankBoynton's stockholders. The agreement is subject to the
approval of the appropriate regulatory agencies. The acquisition of BankBoynton
is expected to be completed during the fourth quarter of 1997. Following the
acquisition, BankBoynton's three offices are expected to closed and deposit
accounts existing at the BankBoynton facilities will be merged into Fidelity
Federal's existing branch network.
The BankBoynton acquisition will be accounted for as a purchase. Fidelity
Bankshares, Inc. will acquire all the outstanding common stock of BankBoynton
for $9.00 per share, cash. The total purchase price of approximately $5.6
million is one and one half times BankBoynton's net book value at July 31, 1997.
RESULTS OF OPERATIONS.
Net income for the nine months ended September 30, 1997 was $4.7 million,
representing an increase of $2.8 million when compared to $1.9 million for the
same period ended September 30, 1996. The primary reason for decreased earnings
in 1996, as more fully described later herein, was a one-time special assessment
of $3.6 million (approximately $2.2 million, after tax) to more adequately
capitalize the Savings Association Insurance Fund (SAIF). Had this one-time
special assessment not been incurred, net income for the nine months ended
September 30, 1996 would have been $4.2 million.
Net income for the quarter ended September 30, 1997 was $2.0 million,
representing an increase of $2.9 million from the comparable quarter in 1996.
The Bank incurred a net loss for the quarter ended September 30, 1996 of
$924,000 due predominantly to the SAIF one-time special assessment discussed
above. Had this charge not been incurred, the Bank's net income for the quarter
would have been $1.3 million.
INTEREST INCOME.
Interest income for the nine months ended September 30, 1997, totaled $52.4
million, an increase of $8.0 million or 18.0% from the same period in 1996. The
principal cause of this increase was an increase in interest income on the
Bank's loans of $7.3 million. This increase resulted from an increase in the
average balance of these loans to $713.7 million for the nine months ended
September 30, 1997 compared to $590.7 million from the comparable 1996 period.
Interest income from other investments for the nine months ended September 30,
1997 increased by $413,000 compared to the same period in 1996. The principal
reason for this increase was an increase in the average balance of these
investments to $29.3 million for the nine months ended September 30, 1997 from
$20.6 million for the nine months ended September 30, 1996. Interest income
from mortgage-backed securities also increased to $8.0 million for the nine
months ended September 30, 1997 from $7.6 million for the same 1996 period.
This increase was due primarily to an increase in the average balance of these
securities to $153.2 million from $138.0 million. Partially offsetting these
increases was a decrease in interest income from investment securities of
$128,000. This decline was the result of a decrease in the average yield on
these securities to 6.20% from 6.45% and a decrease in the average balance to
$11.6 million from $13.8 million for the nine months ended September 30, 1997
and 1996, respectively.
Interest income for the quarter ended September 30, 1997, totaled $18.7 million,
an increase of $3.3 million or 21.5% from the same quarter in 1996. The
principal cause of this increase was an increase in interest income on loans of
$2.5 million. This increase resulted from an increase in the average balance of
the Bank's loan portfolio to $751.2 million for the quarter ended September 30,
1997 compared to $629.1 million for the comparable 1996 quarter. Interest
income from mortgage-backed securities for the quarter ended September 30, 1997
was $3.1 million, an increase of $787,000 or 33.7% compared to $2.3 million for
the same quarter in 1996. The primary reason for this increase was an increase
in the average balance of these securities to $179.2 million for the quarter
ended September 30, 1997 from $128.7 million for the same quarter in 1996, which
was offset by a decline in the average rate of such investments of 7.25% in 1996
to 6.96% in 1997.
13
<PAGE>
Interest income also increased on other investments by
$60,000. This increase resulted from an increase in the average balance of
other investments to $28.2 million from $23.9 million for the quarters ended
September 30, 1997 and 1996, respectively.
INTEREST EXPENSE.
Interest expense was $29.7 million for the nine months ended September 30, 1997,
representing a $6.3 million or 26.9% increase when compared to the same period
in 1996. The principal cause of this increase was an increase in the cost of
deposits of $5.7 million. This resulted from an increase in the average balance
of interest-bearing deposits to $722.8 million for the nine months ended
September 30, 1997 compared to $596.5 million for the same period in 1996 and an
increase in the average yield on deposits to 4.56% from 4.24% for the periods
ended September 30, 1997 and 1996, respectively. Interest expense on borrowed
funds increased by $555,000, caused primarily by an increase in the average
balance on such funds to $103.3 million for the nine months ended September 30,
1997 compared to $86.1 million for the same period in 1996. The average yield
on borrowed funds decreased to 6.47% from 6.90% for the nine months ended
September 30, 1997 and 1996, respectively.
Interest expense was $10.9 million for the quarter ended September 30, 1997,
representing a $2.6 million or 31.6% increase when compared to the same quarter
in 1996. The principal cause for this increase was an increase in the cost of
deposits of $2.1 million. This resulted from an increase in the average balance
of deposits to $754.5 million for the quarter ended September 30, 1997 compared
to $620.0 million for the same quarter in 1996 and an increase in the average
yield on deposits to 4.67% from 4.34% for the quarters ended September 30, 1997
and 1996, respectively. Interest expense on borrowed funds also increased by
$514,000, caused primarily by a increase in the average balance on such funds to
$129.0 million for the quarter ended September 30, 1997 compared to $88.6
million for the same quarter in 1996. The average yield on borrowed funds
decreased to 6.31% for the quarter ended September 30, 1997 from 6.87% for the
comparable 1996 quarter.
NET INTEREST INCOME.
While the Bank's interest income increased by $8.0 million for the nine months
ended September 30, 1997, compared to the same period in 1996, interest expense
also increased by $6.3 million, resulting in net interest income of $22.7
million for the nine months ended September 30, 1997. This represents a $1.7
million or 8.0% increase when compared to the same period in 1996.
During the quarter ended September 30, 1997, the Bank's interest income
increased by $3.3 million compared to the same quarter in 1996, while interest
expense increased by $2.6 million, resulting in net interest income of $7.8
million for the quarter ended September 30, 1997, $704,000 or 9.9% more than
realized in 1996.
PROVISION FOR LOAN LOSSES.
The Bank's provision for loan losses was $129,000 for the nine months ended
September 30, 1997, representing a $15,000 increase when compared to $114,000
for the nine months ended September 30, 1996. The provision for loan losses for
the nine months ended September 30, 1997 was determined adequate by management
in light of the Bank's historical loan loss experience. The Bank's total
allowance for loan losses at September 30, 1997 of $2.1 million was deemed
adequate by management, in light of the risks inherent in the Bank's loan
portfolio.
The provision for loan losses was $57,000 for the quarter ended September 30,
1997, representing a $3,000 increase when compared to $54,000 for the quarter
ended September 30, 1996. The provision for the quarter ended September 30,
1997 is deemed adequate by management in light of the Bank's historical loan
loss experience.
14
<PAGE>
OTHER INCOME.
Other income for the nine months ended September 30, 1997 was $3.7 million, an
increase of $443,000 from the comparable period in 1996. This increase is
attributable to an increase in servicing income and other fees of $181,000 and
an increase in gain on sale of loans, investments and mortgage-backed securities
of $253,000.
Other income for the quarter ended September 30, 1997 was $1.8 million, an
increase of $822,000 compared to the same quarter in 1996. This increase is due
primarily to an increase of $756,000 in net gain on sale of loans, investments
and mortgage-backed securities. This increase was also attributable to an
increase in servicing income and other fees of $113,000 for the quarter ended
September 30, 1997 compared to the same quarter in 1996.
OPERATING EXPENSE.
Operating expenses decreased by $2.7 million to $18.1 million for the nine
months ended September 30, 1997 as compared to the nine months ended September
30, 1996. This decline is the result of a decrease in federal deposit insurance
premium of $4.3 million, due primarily to the resolution of the SAIF issue
through a one-time special assessment charged in the third quarter of 1996.
Offsetting this decline, employee compensation and benefits increased by $1.0
million for the nine months ended September 30, 1997 when compared to the same
1996 period. Of this increase, approximately $225,000 is attributable to
expanded operations at two of the Bank's offices, together with its LPO office.
In addition, hospitalization insurance costs have increased by $170,000, ESOP
costs have increased by $191,000 due to an increase in the market value of the
company's stock and the amount allocated to the cost of loan originations under
SFAS 91 have decreased by $111,000. The Bank's occupancy and equipment cost for
the nine months ended September 30, 1997 was $101,000 more than experienced in
1996. Marketing expense increased by $33,000 for the nine months ended
September 30, 1997 when compared to the 1996 period. Other operating expenses
increased by $523,000 due largely to increased stock costs and legal fees of
$272,000 relating to the Bank's newly formed stock holding company. These
increases were only partially offset by an increase in gain on real estate owned
of $26,000 for the nine months ended September 30, 1997 compared to 1996.
Operating expenses decreased by $3.5 million for the quarter ended September 30,
1997 compared to the same quarter ended September 30, 1996. As previously
discussed, this decrease is the direct result of a decrease in Federal deposit
insurance premium of $3.9 million due to the SAIF one-time special assessment
charged in the third quarter of 1996. Employee compensation and benefits
increased by $280,000 to $3.6 million for the quarter ended September 30, 1997
from $3.3 million for the comparable 1996 quarter. The Bank's occupancy and
equipment expense increased to $1,227,000 from $1,155,000 for the quarters ended
September 30, 1997 and 1996, respectively. Other operating expenses also
increased by $157,000. Slightly offsetting these increases was an increase in
gain on real estate owned of $133,000 for the quarter ended September 30, 1997
compared to the 1996 quarter.
INCOME TAXES.
The income tax provision was $3.5 million for the nine months ended and $1.5
million for the quarter ended September 30, 1997, respectively. These expenses
approximate the rates paid by the Company for Federal and State income taxes
applied to the Company's pre-tax income.
ASSET AND LIABILITY MANAGEMENT-INTEREST RATE SENSITIVITY ANALYSIS.
At September 30, 1997, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $17.7 million, representing a cumulative one-year gap ratio
of a negative 9.75%. This compares to a negative gap ratio of 11.41% at
December 31, 1996, at which date the Bank had total interest bearing liabilities
maturing or repricing within one year that
15
<PAGE>
exceeded total interest-earning assets maturing or repricing during the same
period by $99.7 million. 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 ratios and requirements.
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 6.03% during the month of September, 1997. Liquidity
ratios averaged 6.31% for the quarter ended September 30, 1997. The Bank adjusts
its liquidity levels in order to meet funding needs of deposit outflows, payment
of real estate taxes on mortgage loans, and 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 and other short-term investments, as well
as 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 $23.5 million and $27.0
million at September 30, 1997 and December 31, 1996, respectively. Other assets
qualifying for liquidity at September 30, 1997 and December 31, 1996, amounted
to $26.3 million and $19.8 million, respectively. For additional information
about cash flows from the Company'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, increases in deposit accounts and
additional advances from the FHLB.
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 September 30, 1997, the Bank had $139.7 million in advances
from the FHLB. At September 30, 1997, the Bank had commitments outstanding to
originate or purchase loans of $40.8 million. This amount does not include the
unfunded portion of loans in process. Certificates of deposit scheduled to
mature in less than one year at September 30, 1997, totaled $416.3 million.
Based on prior experience, management believes that a significant portion of
such deposits will remain with the Bank.
CHANGES IN FINANCIAL CONDITION.
The Company's assets increased by $172.1 million from December 31, 1996 to
September 30, 1997. Loans receivable-net increased by $107.7 million and assets
available for sale, principally mortgage-backed securities, increased by $61.6
million. Funds for the increase in assets were provided by an increase in the
Bank's deposits and repurchase agreements of $99.1 million, advances from the
FHLB of $57.2 million and increases in all other liabilities of $11.8 million.
The Company's equity at September 30, 1997 increased by $4.1 million from
December 31, 1996 as a result of net income for the nine months of $4.7 million
plus a change in the fair value of assets available for sale, net of applicable
income taxes. This amount was offset by dividends declared for the nine months
of $1.9 million.
16
<PAGE>
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor
is the Company aware of any pending litigation, other than legal
proceedings incident to the business of the Company, such as foreclosure
actions filed on behalf of the Company. Management, therefore, believes
the results of any current litigation would be immaterial to the
consolidated financial condition or results of operation of the Company.
Item 2 Changes in Securities
Not applicable.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under Consolidated
Financial Statements (pages 2 through 4), Notes to Unaudited
Consolidated Financial Statements (pages 5 through 10) and
Management's Discussion and Analysis of Financial Condition and
Results of Operations (pages 11 through 16), and are incorporated
by reference, herein.
(b) On August 22, 1997, the Company filed the disclosure of its
acquisition of BankBoynton, a Federal Savings Bank on Form 8-K.
This matter is more fully described in Part 1, Item 1, "Notes to
Unaudited Consolidated Financial Statements" under General and Part
1, Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations" under Recent Developments.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIDELITY BANKSHARES, INC.
Date: November 7, 1997 By: /s/ Vince A. Elhilow
------------------------
Vince A. Elhilow
President and Chief
Executive Officer
Date: November 7, 1997 By: /s/ Richard D. Aldred
------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE TRUST ISSUER
OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICI-
TATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES
TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 1
Fidelity Bankshares, Inc.................................................. 2
Summary Consolidated Financial Information and Other Data................. 9
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 20
Market for the Preferred Securities....................................... 20
Accounting Treatment...................................................... 20
Capitalization............................................................ 21
Description of the Preferred Securities................................... 22
Description of the Junior Subordinated Debentures......................... 32
Description of the Guarantee.............................................. 41
Relationship Among the Preferred Securities, the Junior Subordinated
Debentures, the Expense Agreement and the Guarantee...................... 44
Certain Federal Income Tax Consequences................................... 45
ERISA Considerations...................................................... 48
Underwriting.............................................................. 49
Validity of Securities.................................................... 50
Experts................................................................... 50
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO]
$25,000,000
FIDELITY CAPITAL TRUST I
% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
FIDELITY BANKSHARES, INC.
---------------
PROSPECTUS
---------------
[LOGO OF RYAN, BECK & CO. APPEARS HERE]
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
Amount
------
<S> <C> <C>
* Legal Fees and Expenses...................... $ 75,000
* Printing and Mailing......................... 25,000
* Accounting Fees and Expenses................. 55,000
* Marketing Fees and Expenses.................. 1,033,750
* Filing Fees.................................. 8,500
Nasdaq Listing Fee........................... 17,500
* Other Expenses............................... 20,000
----------
* Total........................................ $1,234,750
==========
</TABLE>
- --------------
* Estimated
Item 15. Indemnification of Directors and Officers
Article TENTH of the Certificate of Incorporation of Fidelity Bankshares,
Inc. (the "Company") provides for indemnification of directors and officers of
the Company as follows:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director of Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring
II-1
<PAGE>
suit against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met any applicable standard for indemnification set forth in the
Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
Under the Trust Agreement of the Trust Issuer, Fidelity Bankshares, Inc.
will agree to indemnify each of the Trustees of the Trust Issuer or any
predecessor trustee for the Trust Issuer, and to hold harmless against, any
loss, damage, claim, liability or expense incurred without negligence or bad
faith on its part, arising out of or in connection with the acceptance or
administration of the Trust Agreement, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties under the Trust Agreement.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows:
(a) List of Exhibits
<TABLE>
<S> <C>
1.1 Engagement letter between Fidelity Bankshares, Inc. and Ryan, Beck & Co.*
1.2 Form of Underwriting Agreement*
2 Plan of acquisition, reorganization, arrangement, liquidation or
succession**
3.1 Certificate of Incorporation of Fidelity Bankshares, Inc.**
3.2 Bylaws of Fidelity Bankshares, Inc.**
4.1 Form of Indenture with respect to Fidelity Bankshares, Inc.'s ____% Junior
Subordinated Deferrable Interest Debentures*
4.2 Form of Specimen ___% Junior Subordinated Deferrable Interest Debenture
(included as an exhibit to Exhibit 4.1)*
4.3 Certificate of Trust of Fidelity Capital Trust I*
4.4 Trust Agreement of Fidelity Capital Trust I*
4.5 Form of Amended and Restated Trust Agreement of Fidelity Capital Trust I*
4.6 Form of Guarantee Agreement for Fidelity Capital Trust I*
4.7 Form of Agreement as to Expenses and Liabilities (included as an exhibit
to Exhibit 4.5)*
4.8 Form of Certificate Evidencing Preferred Securities of Fidelity Capital
Trust I (included as an exhibit to Exhibit 4.5)
5.1 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. as to the validity
of the Guarantee and the issuance of the ___% Junior Subordinated
Deferrable Interest Debentures to be issued by Fidelity Capital Trust I.*
5.2 Opinion of Morris, Nichols, Arsht & Tunnell as to the validity of the
Preferred Securities to be issued by Fidelity Capital Trust I******
8.1 Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.*
10.1 Employment Agreement with Vince A. Elhilow**
10.2 Severance Agreement with Richard D. Aldred**
10.3 Severance Agreement with Robert Fugate**
10.4 Severance Agreement with Joseph Bova**
10.5 1994 Stock Option Plan for Outside Directors**
10.6 1994 Incentive Stock Option Plan**
10.7 Recognition and Retention Plan for Employees**
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.8 Recognition Plan for Outside Directors**
12 Statements re: calculations of ratios*
13.1 Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996
(included in Part I of the Registration Statement)
13.2 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended March 31,
1997***
13.3 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended June 30,
1997****
13.4 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended September 30,
1997 (included in Part I of this Registration Statement)*
23.1 Consent of Deloitte & Touche, LLP*
23.2 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (set forth in
Exhibit 5.1)
23.3 Consent of Morris, Nichols, Arsht & Tunnell (set forth in Exhibit 5.2)
24 Power of attorney (set forth on the signature pages to this Registration
Statement)
25.1 Form T-1: Statement of Eligibility of The Bank of New York to act as
trustee under the Indenture*
25.2 Form T-1: Statement of Eligibility of The Bank of New York to act as
trustee under the Amended and Restated Trust Agreement*
25.3 Form T-1: Statement of Eligibility of The Bank of New York to act as
trustee under the Guarantee Agreement for Fidelity Capital Trust I*
27 Financial Data Schedule*****
</TABLE>
- --------------------
* Previously filed.
** Filed as exhibits to the Company's Registration Statement on Form S-4
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on December 12, 1996 (Registration No. 333-17737). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
*** Filed with the Securities and Exchange Commission on May 13, 1997.
**** Filed with the Securities and Exchange Commission on August 14, 1997.
***** Filed as exhibits to the Company's Form 10-K under the Securities Act of
1934, filed with Securities and Exchange Commission on March 28, 1997.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
****** To be filed supplementally or by amendment.
(b) 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.
II-4
<PAGE>
Item 17. Undertakings
Each of the undersigned Registrant hereby undertakes:
(a) that, for purposes of determining any liability under the
Securities Act of 1933, each filing of Fidelity Bankshares, Inc.'s annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in this Registration Statement shall be deemed to
be a new registration statement relating to the securities offered herein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c)(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrants pursuant to Rule 424 (b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Fidelity
Bankshares, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in West Palm Beach, Florida on the 23rd day of December , 1997.
FIDELITY BANKSHARES, INC.
By: /s/ Vince A. Elhilow
------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Fidelity Bankshares,
Inc. (the "Company") hereby severally constitute and appoint Vince A. Elhilow as
our true and lawful attorney and agent, to do any and all things in our names in
the capacities indicated below which said Vince A. Elhilow may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-2 relating
to the offering of the Company's Preferred Securities, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below the registration statement and any and all amendments
(including post-effective amendments) thereto; and we hereby approve, ratify and
confirm all that said Vince A. Elhilow shall do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Vince A. Elhilow President, Chief Executive December 23, 1997
- ---------------------------- Officer and Director (Principal
Vince A. Elhilow Executive Officer)
/s/ Richard D. Aldred Executive Vice President, Chief December 23, 1997
- ---------------------------- Financial Officer and Treasurer
Richard D. Aldred (Principal Financial and
Accounting Officer)
/s/ Joseph B. Shearouse, Jr. Chairman of the Board December 23, 1997
- ----------------------------
Joseph B. Shearouse, Jr.
/s/ Keith D. Beaty Director December 23, 1997
- ----------------------------
Keith D. Beaty
/s/ F. Ted Brown, Jr. Director December 23, 1997
- ----------------------------
F. Ted Brown, Jr.
</TABLE>
II-6
<PAGE>
<TABLE>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Christopher H. Cook
- ----------------------------
Christopher H. Cook Director December 23, 1997
/s/ Donald E. Warren Director December 23, 1997
- ----------------------------
Donald E. Warren
</TABLE>
II-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, Fidelity
Capital Trust I certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in West Palm Beach, Florida, on the 23rd day of December
1997.
FIDELITY CAPITAL TRUST I
By: /s/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
Administrative Trustee
By: /s/ Richard D. Aldred
-------------------------------------
Richard D. Aldred
Administrative Trustee
By: /s/ Christopher H. Cook
-------------------------------------
Christopher H. Cook
Administrative Trustee
We, the undersigned administrative trustees of Fidelity Capital Trust
I (the "Trust Issuer") hereby severally constitute and appoint Vince A. Elhilow
as our true and lawful attorney and agent, to do any and all things in our names
in the capacities indicated below which said Vince A. Elhilow may deem necessary
or advisable to enable the Company to comply with the Securities Act of 1933,
and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-2 relating
to the offering of the Trust Issuer's Preferred Securities, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the registration statement and any and
all amendments (including post-effective amendments) thereto; and we hereby
approve, ratify and confirm all that said Vince A. Elhilow shall do or cause to
be done by virtue thereof.
FIDELITY CAPITAL TRUST I
By: /s/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
Administrative Trustee
By: /s/ Richard D. Aldred
-------------------------------------
Richard D. Aldred
Administrative Trustee
By: /s/ Christopher H. Cook
-------------------------------------
Christopher H. Cook
Administrative Trustee
II-8
<PAGE>
As filed with the Securities and Exchange Commission on December 12, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-2
--------------------
FIDELITY BANKSHARES, INC.
FIDELITY CAPITAL TRUST I
================================================================================
<PAGE>
EXHIBIT INDEX
=============
<TABLE>
<S> <C>
1.1 Engagement letter between Fidelity Bankshares, Inc. and Ryan, Beck & Co.*
1.2 Form of Underwriting Agreement*
2 Plan of acquisition, reorganization, arrangement, liquidation or
succession**
3.1 Certificate of Incorporation of Fidelity Bankshares, Inc.**
3.2 Bylaws of Fidelity Bankshares, Inc.**
4.1 Form of Indenture with respect to Fidelity Bankshares, Inc.'s ____% Junior
Subordinated Deferrable Interest Debentures*
4.2 Form of Specimen ___% Junior Subordinated Deferrable Interest Debenture
(included as an exhibit to Exhibit 4.1)*
4.3 Certificate of Trust of Fidelity Capital Trust I*
4.4 Trust Agreement of Fidelity Capital Trust I*
4.5 Form of Amended and Restated Trust Agreement of Fidelity Capital Trust I*
4.6 Form of Guarantee Agreement for Fidelity Capital Trust I*
4.7 Form of Agreement as to Expenses and Liabilities (included as an exhibit to
Exhibit 4.5)*
4.8 Form of Certificate Evidencing Preferred Securities of Fidelity Capital
Trust I (included as an exhibit to Exhibit 4.5)*
5.1 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. as to the validity of
the Guarantee and the issuance of the ___% Junior Subordinated Deferrable
Interest Debentures to be issued by Fidelity Capital Trust I.*
5.2 Opinion of Morris, Nichols, Arsht & Tunnell as to the validity of the
Preferred Securities to be issued by Fidelity Capital Trust I.******
8.1 Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.*
10.1 Employment Agreement with Vince A. Elhilow**
10.2 Severance Agreement with Richard D. Aldred**
10.3 Severance Agreement with Robert Fugate**
10.4 Severance Agreement with Joseph Bova**
10.5 1994 Stock Option Plan for Outside Directors**
10.6 1994 Incentive Stock Option Plan**
10.7 Recognition and Retention Plan for Employees**
10.8 Recognition Plan for Outside Directors**
12.1 Statements re: calculations of ratios*
13.1 Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996
(included in Part I of the Registration Statement)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
13.2 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended March 31,
1997***
13.3 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended June 30,
1997****
13.4 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended September 30,
1997 (included in Part I of this Registration Statement)*
23.1 Consent of Deloitte & Touche, LLP*
23.2 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (set forth in Exhibit
5.1)
23.3 Consent of Morris, Nichols, Arsht & Tunnell (set forth in Exhibit 5.2)
24 Power of attorney (set forth on the signature pages to this Registration
Statement)
25.1 Form T-1: Statement of Eligibility of The Bank of New York to act as
trustee under the Indenture*
25.2 Form T-1: Statement of Eligibility of The Bank of New York to act as
trustee under the Amended and Restated Trust Agreement*
25.3 Form T-1: Statement of Eligibility of The Bank of New York to act as
trustee under the Guarantee Agreement for Fidelity Capital Trust I*
27 Financial Data Schedule*****
</TABLE>
- --------------------
* Previously filed.
** Filed as exhibits to the Company's Registration Statement on Form S-4
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on December 12, 1996 (Registration No. 333-17737). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
*** Filed with the Securities and Exchange Commission on May 13, 1997.
**** Filed with the Securities and Exchange Commission on August 14, 1997.
***** Filed as an exhibit to the Company's Form 10-K under the Securities Act
of 1934, filed with Securities and Exchange Commission on March 28, 1997.
Such previously filed document is hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
****** To be filed supplementally or by amendment.
