<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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 15,891
<INT-BEARING-DEPOSITS> 23,523
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 193,691
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 769,357
<ALLOWANCE> 2,147
<TOTAL-ASSETS> 1,045,692
<DEPOSITS> 791,179
<SHORT-TERM> 2,642
<LIABILITIES-OTHER> 25,511
<LONG-TERM> 140,586
0
0
<COMMON> 678
<OTHER-SE> 85,096
<TOTAL-LIABILITIES-AND-EQUITY> 1,045,692
<INTEREST-LOAN> 14,911
<INTEREST-INVEST> 187
<INTEREST-OTHER> 3,586
<INTEREST-TOTAL> 18,684
<INTEREST-DEPOSIT> 8,815
<INTEREST-EXPENSE> 2,035
<INTEREST-INCOME-NET> 7,834
<LOAN-LOSSES> 57
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,073
<INCOME-PRETAX> 3,494
<INCOME-PRE-EXTRAORDINARY> 3,494
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,010
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 3.41
<LOANS-NON> 3,634
<LOANS-PAST> 0
<LOANS-TROUBLED> 16
<LOANS-PROBLEM> 4,640
<ALLOWANCE-OPEN> 2,263
<CHARGE-OFFS> (19)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,147
<ALLOWANCE-DOMESTIC> 325
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,822
</TABLE>
