<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 March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- -------------------
Secuities 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 6,765,653 shares of
the Registrant's common stock outstanding as of April 30, 1997.
<PAGE>
FIDELITY BANKSHARES, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................... 1
Consolidated Statements of Financial Condition as
of December 31, 1996 and March 31, 1997............ 2
Consolidated Statements of Operations for the
quarters ended March 31, 1996 and 1997............. 3
Consolidated Statements of Cash Flows for the
quarters ended March 31, 1996 and 1997............. 4
Notes to Consolidated Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 10
PART II. OTHER INFORMATION.......................................... 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------------------------------------------------
Unaudited
December 31, March 31,
1996 1997
================================
(In Thousands)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................... $ 15,293 $ 18,613
Interest-bearing deposits................................................... 27,127 26,168
-------- --------
Total cash and cash equivalents..................................... 42,420 44,781
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities............................................ 8,465 10,975
Mortgage-backed securities.................................................. 123,599 143,660
-------- --------
Total assets available for sale..................................... 132,064 154,635
LOANS RECEIVABLE, Net (Notes 2, 3).................................................. 661,700 688,298
OFFICE PROPERTIES AND EQUIPMENT, Net ............................................... 18,092 18,844
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.................... 6,148 6,659
REAL ESTATE OWNED, Net.............................................................. 93 853
ACCRUED INTEREST RECEIVABLE......................................................... 4,614 4,836
OTHER ASSETS........................................................................ 8,431 7,985
-------- --------
TOTAL ASSETS........................................................................ $873,562 $926,891
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS............................................................................ $694,718 $743,850
REPURCHASE AGREEMENTS............................................................... - 2,776
ADVANCES FROM FEDERAL HOME LOAN BANK................................................ 82,517 80,069
ESOP LOAN........................................................................... 1,104 1,035
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE....................................... 2,448 5,303
DRAFTS PAYABLE...................................................................... 2,957 3,821
OTHER LIABILITIES................................................................... 7,209 7,944
DEFERRED INCOME TAXES............................................................... 886 338
-------- --------
TOTAL LIABILITIES........................................................... 791,839 845,136
======== ========
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued............................ - -
COMMON STOCK ($ .10 par value) 8,200,000 authorized shares,
6,744,689 shares outstanding at December 31, 1996, and
6,765,653 shares outstanding at March 31, 1997............................... 675 677
ADDITIONAL PAID IN CAPITAL........................................................... 37,397 37,625
RETAINED EARNINGS - substantially restricted......................................... 44,184 44,798
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN.............................. (1,315) (1,234)
NET UNREALIZED INCREASE (DECREASE) IN FAIR VALUE OF
ASSETS AVAILABLE FOR SALE ( Net of applicable income taxes).................. 782 (111)
TOTAL STOCKHOLDERS' EQUITY (Note 4).......................................... 81,723 81,755
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $873,562 $926,891
======== ========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Unaudited
For the Quarters Ended
March 31,
1996 1997
================================
(In Thousands, except per share amounts)
<S> <C> <C>
Interest income:
Loans.......................................... $ 10,880 $ 13,378
Investment securities.......................... 333 159
Other investments.............................. 288 530
Mortgage-backed securities..................... 2,832 2,230
---------- ----------
Total interest income....................... 14,333 16,297
---------- ----------
Interest expense:
Deposits....................................... 6,120 7,572
Advances from Federal Home Loan Bank and other
borrowings................................... 1,459 1,395
---------- ----------
Total interest expense...................... 7,579 8,967
---------- ----------
Net interest income............................... 6,754 7,330
Provision for loan losses......................... 76 51
---------- ----------
Net interest income after provision for loan
losses.......................................... 6,678 7,279
---------- ----------
Other income:
Servicing income and other fees................ 792 796
Net gain on sale of loans, investments
and mortgage-backed securities.............. 537 4
Miscellaneous.................................. 91 102
---------- ----------
Total other income.......................... 1,420 902
---------- ----------
Operating expense:
Employee compensation and benefits............. 3,052 3,414
Occupancy and equipment........................ 1,185 1,165
Loss (gain) on real estate owned............... (58) 21
Marketing...................................... 180 179
Federal deposit insurance premium.............. 336 109
Other.......................................... 857 1,153
---------- ----------
Total operating expense..................... 5,552 6,041
---------- ----------
Income before provision for income taxes.......... 2,546 2,140
---------- ----------
Provision for income taxes:
Current........................................ 974 833
Deferred....................................... 76 73
---------- ----------
Total provision for income taxes............ 1,050 906
---------- ----------
Net income........................................ $ 1,496 $ 1,234
========== ==========
Earnings per share (Note 5):
Primary........................................ $ 0.22 $ 0.18
========== ==========
Fully Diluted.................................. $ 0.22 $ 0.18
========== ==========
Dividends declared per share of common stock...... $ 0.15 $ 0.20
========== ==========
</TABLE>
3
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED
MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
UNAUDITED
FOR THE QUARTERS ENDED
MARCH 31,
1996 1997
===========================
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 1,496 $ 1,234
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization...................................... 293 310
ESOP and Recognition and Retention Plan compensation expense....... 179 152
Accretion of discounts, amortization of premiums, and other
deferred yield items (272) (167)
Provision for loan losses.......................................... 76 51
Provisions for gains and net gains on sales of real estate owned... (52) (13)
Net gain on sale of:
Mortgage-backed securities...................................... (537) -
Loans........................................................... - (4)
Decrease (increase) in accrued interest receivable..................... 220 (222)
Decrease in other assets............................................... 614 446
Increase in drafts payable............................................. 1,769 864
Decrease in deferred income taxes...................................... (841) (548)
Increase in other liabilities.......................................... 1,005 731
-------- --------
Net cash from operating activities.............................. 3,950 2,834
-------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (32,678) (23,026)
Principal payments received on mortgage-backed securities.............. 8,296 4,113
Purchases of:
Loans.............................................................. (10,528) (4,526)
Mortgage-backed securities......................................... - (25,667)
Federal Home Loan Bank stock....................................... - (511)
Investment securities.............................................. - (4,568)
Office properties and equipment.................................... (1,313) (1,070)
Proceeds from sales of:
Loans.............................................................. 4,528 316
Real estate acquired in settlement of loans........................ 375 75
Proceeds from maturities of investment securities available for sale... 16,490 2,000
Other.................................................................. 869 543
-------- --------
Net cash used for investing activities.......................... (13,961) (52,321)
-------- --------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock........................... 22 218
Cash dividends......................................................... (453) (616)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts................ 7,383 7,184
Certificates of deposit............................................ 8,764 41,948
Advances from Federal Home Loan Bank............................... (8,440) (2,448)
ESOP loan.......................................................... (69) (69)
Repurchase agreements.............................................. - 2,776
Advances by borrowers for taxes and insurance...................... 2,896 2,855
-------- --------
Net cash from financing activities.............................. 10,103 51,848
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 92 2,361
CASH AND CASH EQUIVALENTS, Beginning of period......................... 24,963 42,420
-------- --------
CASH AND CASH EQUIVALENTS, End of period............................... $ 25,055 $ 44,781
========= ========
</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 (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 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 March 31, 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.
Certain amounts in the financial statements have been reclassified to conform
with the March 31, 1997 presentation.
2. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and March 31, 1997, consist of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
=========================
(In Thousands)
<S> <C> <C>
One-to-four single family, residential real estate
mortgages.......................................... $ 524,434 $ 578,119
Commercial real estate mortgages..................... 42,811 42,832
Real estate contruction-primarily residential........ 58,493 25,242
Participations-primarily residential................. 4,255 4,045
Land loans-primarily residential..................... 11,875 12,091
---------- ----------
Total first mortgage loans..................... 641,868 662,329
Consumer and commercial business loans............... 58,063 60,989
---------- ----------
Total gross loans.............................. 699,931 723,318
Less:
Undisbursed portion of loans in process........ 37,575 34,721
Unearned discounts, premiums and deferred loan
fees, net.................................... (1,607) (1,831)
Allowance for loan losses 2,263 2,130
---------- ----------
Loans receivable-net................................. $ 661,700 $ 688,298
========== ==========
</TABLE>
5
<PAGE>
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 quarters ended March 31, 1996 and 1997, is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE QUARTERS
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1996 1997
=================================
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.......... $2,265 $2,265 $2,263
Current provision....................... 164 76 51
Charge-offs............................. (166) (10) (184)
------ ------ ------
Ending balance.......................... $2,263 $2,331 $2,130
====== ====== ======
</TABLE>
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 MARCH 31, 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 $ 979 $164
Loans for which interest income is
not being recognized............... 667 277 201 124
------ ---- ------ ----
Total.......................... $1,651 $441 $1,180 $288
====== ==== ====== ====
</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.
6
<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 March 31, 1996 Stockholders' Equity
and ratio to total assets...................... 10.2% $ 81,076
======
Net unrealized increase in market value of assets
available for sale (net of applicable
income taxes).................................. (1,159)
Goodwill............................................... (981)
---------
Tangible capital and ratio to adjusted total assets.... 10.0% $ 78,936 1.5% $ 11,834
====== ========= ===== =========
Tier 1 (core) capital and ratio to adjusted
total assets................................... 10.0% $ 78,936 3.0% $ 23,669 5.0% $ 39,448
====== ========= ===== ========= ====== =========
Tier 1 (core) capital and ratio to risk-weighted
total assets................................... 19.5% $ 78,936 6.0% $ 24,277
====== ====== =========
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................................... 19.9% $ 80,540 8.0% $ 32,370 10.0% $ 40,462
====== ========= ===== ========= ====== =========
Total assets........................................... $ 791,892
=========
Adjusted total assets.................................. $ 788,957
=========
Risk-weighted assets................................... $ 404,619
=========
As of March 31, 1997 Stockholders' Equity
and ratio to total assets...................... 8.8% $ 81,579
======
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes).................................. 111
Goodwill............................................... (679)
---------
Tangible capital and ratio to adjusted total assets.... 8.8% $ 81,011 1.5% $ 13,895
====== ========= ===== =========
Tier 1 (core) capital and ratio to adjusted
total assets................................... 8.8% $ 81,011 3.0% $ 27,790 5.0% $ 46,316
====== ========= ===== ========= ===== =========
Tier 1 (core) capital and ratio to risk-weighted
total assets................................... 17.4% $ 81,011 6.0% $ 28,005
====== ========= ===== =========
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................................... 17.7% $ 82,736 8.0% $ 37,340 10.0% $ 46,674
====== ========= ===== ========= ====== =========
Total assets........................................... $ 926,891
=========
Adjusted total assets.................................. $ 926,323
=========
Risk-weighted assets................................... $ 466,744
=========
</TABLE>
7
<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 March 31, 1996 and 1997, are
as follows:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-----------------------------------
MARCH 31, 1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Net income.......................................... $ 1,496,000 $ 1,234,000
============== ==============
Primary Shares:
Shares Outstanding................................ 6,718,115 6,756,353
Adjustments to reflect:
Uncommitted ESOP shares........................ (151,717) (121,356)
Unearned MRP shares (treasury stock method).... (8,882) -
Common stock option (treasury stock method).... 101,205 102,571
-------------- --------------
Total....................................... 6,658,721 6,737,568
============== ==============
Earnings per share.................................. $ 0.22 $ 0.18
============== ==============
</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 Plan," 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.
8
<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 Quarter Ended March 31, 1996
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------ ---------
<S> <C> <C> <C>
Net income..................... $ 1,496,000
=============
Basic EPS
Income available to
common stockholders.... $ 1,496,000 6,566,398 $ 0.23
=========
Common stock options... 101,205
------------- ------------
Diluted EPS
Income available to
common stockholders.... $ 1,496,000 6,667,603 $ 0.22
============= ============ =========
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1997
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------ ---------
<S> <C> <C> <C>
Net income..................... $ 1,234,000
=============
Basic EPS
Income available to
common stockholders.... $ 1,234,000 6,634,997 $ 0.19
=========
Effect of Dilutive Shares
Common stock options... 102,571
------------- ------------
Diluted EPS
Income available to
common stockholders.... $ 1,234,000 6,737,568 $ 0.18
============= ============ =========
</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.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
10
<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, 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.
RESULTS OF OPERATIONS.
Net income for the quarter ended March 31, 1997 was $1.2 million, representing a
$262,000 decrease from the comparable quarter in 1996. The reasons for this
decrease, as more fully described later, herein, was an increase in interest
expense of $1.4 million, a decrease in other income of $518,000 and an increase
in operating expenses of $489,000. Offsetting these factors was an increase in
interest income of $2.0 million and a decrease in the provision for income taxes
of $144,000.
INTEREST INCOME.
Interest income for the quarter ended March 31, 1997, totaled $16.3 million, an
increase of $2.0 million or 13.7% 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 $674.7 million for the quarter ended March 31, 1997
compared to $549.0 million for the comparable 1996 quarter. Partially
offsetting this increase was a decrease in interest income from mortgage-backed
securities of $602,000. This decline was the result of a decrease in the
average balance of these securities to $129.0 million from $151.6 million and a
decrease in the average yield to 6.91% from 7.47% for the quarters ended March
31, 1997 and 1996, respectively. Interest income from investment securities
also
11
<PAGE>
decreased by $174,000 caused mainly by a decrease in the average balance of
these securities to $10.1 million for the quarter ended March 31, 1997 compared
to $19.7 million for the same quarter in 1996. The decrease in the average
balance of investment securities was primarily the result of the use of the
proceeds from maturing securities, during the previous year, to fund a portion
of the Bank's increased loan production.
INTEREST EXPENSE.
Interest expense was $9.0 million for the quarter ended March 31, 1997,
representing a $1.4 million or 18.3% increase when compared to the same quarter
in 1996. The principal cause for this increase was an increase in the cost of
deposits of $1.5 million. This resulted from an increase in the average balance
of these deposits to $687.1 million for the quarter ended March 31, 1997
compared to $577.2 million for the same quarter in 1996 and an increase in the
average yield on these deposits to 4.41% from 4.24% for the quarters ended March
31, 1997 and 1996, respectively. Interest expense on borrowed funds decreased
$64,000, caused primarily by a decrease in the average yield on such funds to
6.81% for the quarter ended March 31, 1997 compared to 7.08% for the same
quarter in 1996. The average balance on borrowed funds also decreased slightly
to $81.9 million from $82.4 million for the quarters ended March 31, 1997 and
1996, respectively.
NET INTEREST INCOME.
While the Bank's interest income increased by $2.0 million for the quarter ended
March 31, 1997, compared to the same quarter in 1996, interest expense also
increased by $1.4 million, resulting in net interest income of $7.3 million for
the quarter ended March 31, 1997. This represents a $576,000 or 8.5% increase
for the quarter ended March 31, 1997 compared to the same quarter in 1996.
PROVISION FOR LOAN LOSSES.
The Bank's provision for loan losses was $51,000 for the quarter ended March 31,
1997, representing a $25,000 decrease when compared to $76,000 for the quarter
ended March 31, 1996. During the quarter ended March 31, 1996, the Bank
reversed provisions on two loans based on new appraisals performed during the
year. The provision for loan losses for the quarter ended March 31, 1997 is
deemed adequate by management in light of the Bank's historical loan loss
experience. The Bank's total allowance for loan losses at March 31, 1997 of
$2,130,000 was deemed adequate by management, in light of the risks inherent in
the Bank's loan portfolio.
OTHER INCOME.
Other income for the quarter ended March 31, 1997 was $902,000 or $518,000 less
than the same quarter in 1996. This decrease is due primarily to a decrease of
$533,000 in gain on sale of loans, investments and mortgage-backed securities,
as a result of increased sales of such instruments in 1996. This decline was
only partially offset by an increase in the Bank's servicing income and other
fees of $4,000 and an increase in miscellaneous income of $11,000 for the
quarters ended March 31, 1997 and 1996, respectively.
OPERATING EXPENSE.
Operating expenses increased by $489,000 to $6.0 million for the quarter ended
March 31, 1997 as compared to the quarter ended March 31, 1996. Employee
compensation and benefits increased by $362,000 for the quarter ended March 31,
1997 when compared to the same 1996 quarter. Of this increase, approximately
$117,000 is attributable to expanded operations at two of the Bank's offices,
together with its LPO office. In addition, lower loan production in 1997
compared to 1996 resulted in $70,000 less being allocated to deferred loan
costs. The increase in other operating expenses of $296,000 for the quarter
ended March 31, 1997 compared to the same quarter in 1996, was due largely to
expensing most of the organizing costs of creating the mid-tier holding company.
Loss on real estate owned increased by $79,000. These increases were
12
<PAGE>
partially offset by a decrease in the Bank's occupancy and equipment expense of
$20,000 and a decrease in Federal deposit insurance premium of $227,000, due
primarily to the resolution of the Savings Association Insurance Fund (SAIF)
disparity by a one-time special assessment charged in the third quarter of 1996.
INCOME TAXES.
The income tax provision decreased to $906,000 for the quarter ended March 31,
1997 from $1,050,000 for the same 1996 quarter. 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 March 31, 1997, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $107.2 million, representing a cumulative one-year gap ratio
of a negative 11.57%. 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 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 9.00% during the month of March, 1997.
Liquidity ratios averaged 8.02% for the quarter ended March 31, 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, and
earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Bank manages
the pricing of its deposits to maintain a desired deposit balance. In addition,
the Bank invests excess funds in short-term interest-earning and other assets,
which provide liquidity to meet lending requirements. Short-term interest-
bearing deposits with the FHLB of Atlanta amounted to $26.1 million and $27.0
million at March 31, 1997 and December 31, 1996, respectively. Other assets
qualifying for liquidity at March 31, 1997 and December 31, 1996, amounted to
$26.8 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, and increases in deposit accounts.
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 March 31, 1997, the Bank had $80.1 million in advances from
the FHLB. At March 31, 1997, the Bank had commitments outstanding to originate
or purchase loans of $60.7 million. This amount does not include the unfunded
portion of loans in process. Certificates of deposit scheduled to
13
<PAGE>
mature in less than one year at March 31, 1997, totaled $383.6 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 $53.3 million from December 31, 1996 to March
31, 1997. Loans receivable-net increased by $26.6 million. Funds for the
increase in total assets were provided partially by an increase in the Bank's
deposits and repurchase agreements of $52.0 million. The Bank's advances from
the FHLB decreased by $2.4 million to $80.1 million at March 31, 1997 from $82.5
million at December 31, 1996. The Company's equity at March 31, 1997 increased
by $32,000 from December 31, 1996 as a result of net income for the quarter of
$1.2 million which was offset by a $893,000 decrease in the fair value of assets
available for sale, net of applicable income taxes, and dividends declared for
the quarter of $620,000.
14
<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
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
On January 21, 1997, the following resolution was submitted to the
security holders of Fidelity Federal Savings Bank of Florida, in
connection with an Agreement and Plan of Reorganization into a mid-tier
holding company, which provided for the establishment of Fidelity
Bankshares, Inc. as a stock holding company parent of the Bank, all of
which were set forth in the Bank's proxy materials.
Resolution No. 1
----------------
There were 6,744,689 outstanding votes eligible to be cast at the
Special Meeting of Stockholders. There were represented by proxy
5,093,578 votes. The voting as to Resolution No. 1 was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
Number of Votes 5,081,001 9,347 3,228
Item 5 Other Information
None.
15
<PAGE>
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 Consolidated
Financial Statements (pages 5 through 9) and Management's
Discussion and Analysis of Operations (pages 10 through 14), and
are incorporated by reference, herein.
(b) There were no reports filed on Form 8-K
16
<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: May 12, 1997 By: /s/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: May 12, 1997 By: /s/ Richard D. Aldred
-------------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 18,613
<INT-BEARING-DEPOSITS> 26,168
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 154,635
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 688,298
<ALLOWANCE> 2,130
<TOTAL-ASSETS> 926,891
<DEPOSITS> 743,850
<SHORT-TERM> 2,776
<LIABILITIES-OTHER> 17,406
<LONG-TERM> 81,104
0
0
<COMMON> 677
<OTHER-SE> 81,078
<TOTAL-LIABILITIES-AND-EQUITY> 926,891
<INTEREST-LOAN> 13,378
<INTEREST-INVEST> 159
<INTEREST-OTHER> 2,760
<INTEREST-TOTAL> 16,297
<INTEREST-DEPOSIT> 7,572
<INTEREST-EXPENSE> 1,395
<INTEREST-INCOME-NET> 7,330
<LOAN-LOSSES> 51
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,041
<INCOME-PRETAX> 2,140
<INCOME-PRE-EXTRAORDINARY> 2,140
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,234
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<YIELD-ACTUAL> 3.57
<LOANS-NON> 2,016
<LOANS-PAST> 0
<LOANS-TROUBLED> 20
<LOANS-PROBLEM> 3,568
<ALLOWANCE-OPEN> 2,263
<CHARGE-OFFS> (184)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,130
<ALLOWANCE-DOMESTIC> 308
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<ALLOWANCE-UNALLOCATED> 1,822
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