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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from ___________________ to -___________________
Commission File Number: 0-29040
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FIDELITY BANKSHARES, INC.
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(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
Delaware 65-0717085
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
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(Address of Principal Executive Offices) (Zip Code)
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(561) 659-9900
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of February 27, 1998, there were issued and outstanding 6,798,283 shares
of the Registrant's Common Stock. The aggregate value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the average bid
and asked prices of the Common Stock as of February 27, 1998 ($32.75) was
$88,345,450.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (Parts II and IV).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders (Parts I and
III).
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PART I
ITEM 1. BUSINESS
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General
Fidelity Bankshares, Inc.
Fidelity Bankshares, Inc. (the "Company") is a Delaware corporation which
was organized in May 1996. The only significant asset of the Company is its
investment in Fidelity Federal Savings Bank of Florida (the "Bank"). The
Company is majority owned by Fidelity Bankshares, M.H.C., a federally-chartered
mutual holding company (the "Mutual Holding Company"). On January 29, 1997 the
Company acquired all of the issued and outstanding common stock of the Bank in
connection with the Bank's reorganization into the two-tier form of mutual
holding company ownership. At that time, each share of Bank common stock was
automatically converted into one share of Company common stock, par value $.l0
per share (the "Common Stock"). 3,542,000 shares of Common Stock were issued
to the Mutual Holding Company and 3,206,625 shares of Common Stock were issued
to the Bank's public stockholders.
In December 1997 the Company incorporated Fidelity Capital Trust I, a
statutory business trust created under the laws of the State of Delaware
("Fidelity Capital"). Fidelity Capital was formed for the purpose of issuing
8.375% Cumulative Trust Preferred Securities (the "Preferred Securities") which
represent beneficial interests in Fidelity Capital. On January 21, 1998,
Fidelity Capital completed the offer and sale of $28.375 million in Preferred
Securities. In connection with the offer and sale of the Preferred Securities,
the Company issued a principal amount of 8.375% Junior Subordinated Deferrable
Interest Debentures which were sold to Fidelity Capital for the equivalent of
the net proceeds of $27.1 from the sale of the Preferred Securities. The Junior
Subordinated Deferrable Interest Debentures are scheduled to mature on January
31, 2028.
Fidelity Federal Savings Bank of Florida
The Bank is a federally chartered savings bank headquartered in West Palm
Beach, Florida. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank was chartered originally as a federal
mutual savings and loan association in 1952, and in 1983, amended its charter to
become a federally chartered mutual savings bank. On January 7, 1994, the Bank
completed a reorganization into a federally chartered mutual holding company.
As part of the reorganization, the Bank organized a new federally chartered
stock savings bank and transferred substantially all of its assets and
liabilities to the stock savings bank in exchange for a majority of the common
stock of the stock savings bank. The Bank is a member of the Federal Home Loan
Bank ("FHLB") System. At December 31, 1997, the Bank had total assets of $1.2
billion, total deposits of $872.8 million, and stockholders' equity of $85.6
million.
The Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area, and investing such deposits,
together with other sources of funds, in loans secured by one- to four-family
residential real estate. To a lesser extent, the Bank also originates
construction loans and land loans for single-family properties and invests in
mortgage-backed securities issued or guaranteed by the United States Government
or agencies thereof. In addition, the Bank invests a portion of its assets in
securities issued by the United States Government, cash and cash equivalents
including deposits in other financial institutions, and FHLB stock. The Bank's
principal sources of funds are deposits and principal and interest payments on
loans. Principal sources of income are interest received from loans and
investment securities. The Bank's principal expense is interest paid on
deposits and employee compensation and benefits.
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On December 5, 1997 the Bank completed its acquisition of BankBoynton, a
Federal Savings Bank ("Bank Boynton"). At December 5, 1997, BankBoynton's
assets, deposits and stockholders' equity were approximately $55.0 million,
$41.7 million and $3.4 million, respectively. The Bank paid an aggregate of
$5.7 million for all the issued and outstanding Common Stock of BankBoynton.
Management believes that the acquisition of BankBoynton will be accretive to
earnings in 1998.
The Company's and the Bank's principal executive office is located at 218
Datura Street, West Palm Beach, Florida, and its telephone number at that
address is (561) 659-9900.
Market Area
The Bank is headquartered in West Palm Beach, Florida, and operates in Palm
Beach and Martin Counties in Florida. The Bank has 21 offices in its market
area, 3 of which are located in Martin County, and 18 of which are located in
Palm Beach County. Palm Beach and Martin Counties, located in Southeastern
Florida, have experienced considerable growth and development since the 1960s,
and had a total population of approximately one million as of 1990 and 1.1
million as of 1996. Due to significant growth controls established at the state
and local governmental levels, as well as a moderation of economic growth and
migration in the Bank's market area, management believes growth of the local
market area may be more moderate in the future.
The Bank's business and operating results are significantly affected by the
general economic conditions prevalent in its market areas. The southeast
Florida economy is significantly dependent upon government, foreign trade,
tourism, and its attraction as a retirement area. Unemployment in Palm Beach
County is higher than the national and State of Florida averages. Major
employers in the Bank's market area include Pratt & Whitney, Motorola, St.
Mary's Medical Center, Florida Power and Light, Bell South and the Palm Beach
County School Board.
Lending Activities
General. Historically, the principal lending activity of the Bank has been
the origination of fixed and adjustable rate mortgage loans collateralized by
one- to four-family residential properties located in its market area. The Bank
currently originates adjustable rate mortgage (ARM) loans for retention in its
portfolio, and fixed rate loans, the majority of which are eligible for sale in
the secondary mortgage market. To a lesser extent, the Bank also originates
loans secured by commercial real estate and multi-family residential real
estate, construction loans, commercial business loans and consumer loans.
In an effort to manage interest rate risk, the Bank has sought to make its
interest-earning assets more interest rate sensitive by originating adjustable
rate loans, such as ARM loans, home equity loans, and short-and medium-term
consumer loans. The Bank also purchases both fixed and adjustable rate
mortgage-backed securities. At December 31, 1997, approximately $461.1 million,
or 50.3%, of the Bank's total gross loan portfolio, and $93.9 million, or 40%,
of the Bank's mortgage-backed securities portfolio, consisted of loans or
securities with adjustable interest rates. The Bank originates fixed rate
mortgage loans generally with 15- to 30-year terms to maturity, collateralized
by one- to four-family residential properties. One- to four-family fixed rate
residential mortgage loans generally are originated and underwritten according
to standards that allow the Bank to resell such loans in the secondary mortgage
market for purposes of managing interest rate risk and liquidity. The Bank
periodically sells a portion of its fixed-rate loans which have terms to
maturity exceeding fifteen years. The Bank retains in its portfolio all
consumer, commercial real estate and multi-family residential real estate loans.
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Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Bank's loan portfolio by type of loan as of the dates
indicated. Also set forth below is the aggregate amount of the Bank's
investment in mortgage-backed securities at the dates indicated.
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At December 31,
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1993 1994 1995 1996 1997
------------------ ------------------ ------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family (1).... $363,229 83.5% $373,407 81.8% $432,387 81.2% $528,689 79.9% $720,782 83.7%
Construction loans......... 14,678 3.4 24,086 5.3 40,522 7.6 58,493 8.8 38,577 4.5
Land loans................. 8,202 1.9 10,865 2.4 10,769 2.0 11,875 1.8 12,116 1.4
Commercial................. 34,091 7.8 32,773 7.2 31,359 5.9 29,030 4.4 26,947 3.1
Multi-family............... 12,300 2.8 13,081 2.8 13,748 2.6 13,781 2.1 12,999 1.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans... 432,500 99.4 454,212 99.5 528,785 99.3 641,868 97.0 811,421 94.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Non-real estate loans:
Consumer (2)............... 13,085 3.0 18,343 4.0 26,855 5.0 39,478 6.0 47,758 5.5
Commercial business........ 2,621 0.6 2,776 0.6 5,834 1.1 18,585 2.8 57,289 6.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total non-real estate
loans.................... 15,706 3.6 21,119 4.6 32,689 6.1 58,063 8.8 105,047 12.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable.... 448,206 103.0 475,331 104.1 561,474 105.4 699,931 105.8 916,468 106.4
Less:
Undisbursed loan proceeds.. 9,314 2.1 15,463 3.4 27,261 5.1 37,575 5.7 54,471 6.3
Unearned discount and net
deferred fees (costs)..... 1,060 0.2 759 0.2 (385) (0.1) (1,607) (0.2) (2,554) (0.3)
Allowance for loan losses.. 2,865 0.7 2,566 0.5 2,265 0.4 2,263 0.3 3,294 0.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans
receivable--net.......... $434,967 100.0% $456,543 100.0% $532,333 100.0% $661,700 100.0% $861,257 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Mortgage-backed securities.. $ 75,199 $126,807 $159,761 $123,599 $234,132
======== ======== ======== ======== ========
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(1) Includes participations of $8.9 million, $6.6 million, $5.6 million, $4.3
million and $3.2 at December 31, 1993, 1994, 1995, 1996 and 1997,
respectively.
(2) Includes primarily home equity lines of credit, automobile loans, boat loans
and passbook loans. At December 31, 1997, the disbursed portion of equity
lines of credit totaled $15.8 million.
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LOAN AND MORTGAGE-BACKED SECURITIES MATURITY SCHEDULE. The following table
sets forth certain information as of December 31, 1997, regarding the dollar
amount of loans and mortgage-backed securities maturing in the Bank's portfolio
based on their contractual terms to maturity. The amounts shown represent
outstanding principal balances less loans in process and are not adjusted for
premiums, discounts, reserves, and unearned fees. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due. Fixed rate mortgage-backed securities are assumed
to mature in the period in which the final contractual payment is due on the
underlying mortgage.
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Over 1 Over 3 Over 5 Over 10 Beyond
Within Year to 3 Years to 5 Years to 10 Years to 20 20
1 Year Years Years Years Years Years Total
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(In Thousands)
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Real estate loans:
One- to four-family residential (1).. $182,551 $ 96,023 $54,364 $65,200 $138,397 $172,889 $709,424
Commercial, multi-family and land.... 48,547 11,189 4,169 3,841 2,765 171 70,682
Consumer loans (2).................... 35,027 11,133 23,205 6,500 4,745 495 81,105
-------- -------- ------- ------- -------- -------- --------
Total loans receivable............... $266,125 $118,345 $81,738 $75,541 $145,907 $173,555 $861,211
-------- -------- ------- ------- -------- -------- --------
Mortgage-backed securities............ $ 98,139 $ 2,200 $ -- $ -- $ 44,767 $ 84,202 $229,308
-------- -------- ------- ------- -------- -------- --------
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(1) Includes construction loans.
(2) Includes commercial business loans of $31.5 million.
The following table sets forth at December 31, 1997, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
1998.
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Fixed Adjustable Total
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(In Thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family residential.... $354,642 $172,231 $526,873
Commercial, multi-family and land.. 6,881 15,254 22,135
Consumer loans (1).................. 34,628 11,450 46,078
-------- -------- --------
Total............................ $396,151 $198,935 $595,086
-------- -------- --------
Mortgage-backed securities.......... $131,169 $ -- $131,169
-------- -------- --------
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(1) Includes commercial business loans of $17.0 million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank's primary
lending activity consists of the origination of one- to four-family, owner-
occupied, residential mortgage loans secured by properties located in the Bank's
market area. During 1995, the Bank began to originate one- to four-family
residential loans on properties outside of its market area. These loans which
were originated through a network of brokers throughout Florida, are subject to
internal controls established by the Bank, as well as the Bank's customary
underwriting standards. At December 31, 1997, $759.4 million, or 82.9%, of the
Bank's total gross loan portfolio consisted of one- to four-family residential
mortgage loans, including residential construction loans of which $253.6 million
were originated outside the Bank's market area.
The Bank currently offers one- to four-family residential mortgage loans
with terms typically ranging from 15 to 30 years, and with adjustable or fixed
interest rates. Originations of fixed rate mortgage loans versus ARM loans are
monitored on an ongoing basis and are affected significantly by the level of
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market interest rates, customer preference, the Bank's interest rate gap
position, and loan products offered by the Bank's competitors. ARM loan
originations totaled $35.8 million during the year ended December 31, 1997.
Therefore, even if management's strategy is to emphasize ARM loans, market
conditions may be such that there is greater demand for fixed rate mortgage
loans.
The Bank's fixed rate loans generally are originated and underwritten
according to standards that permit sale in the secondary mortgage market.
Whether the Bank can or will sell fixed rate loans into the secondary market,
however, depends on a number of factors including the yield and the term of the
loan, market conditions, and the Bank's current gap position. The Bank's fixed
rate mortgage loans are amortized on a monthly basis with principal and interest
due each month. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option.
The Bank currently offers ARM loans with initial interest rate adjustment
periods of one, five and seven years, based on changes in a designated market
index. After the initial interest rate adjustment, each one year ARM loan
adjusts annually with an annual interest rate adjustment limitation of 200 basis
points and with a maximum interest rate of 11.5%, or 600 basis points above the
initial rate, whichever is greater. Interest rates on the Bank's ARM loans
originated prior to December 31, 1993 currently adjust with changes in the
FHLB's Fourth District Cost of Funds Index. ARM loans, through December 31,
1993, were priced at 275 basis points above the Fourth District Cost of Funds
Index for owner-occupied one- to four-family mortgage loans. Higher interest
margins may be required on loans in excess of $500,000. The interest rate on
all non-owner-occupied one- to four-family mortgage loans is 300 basis points
above the Fourth District Cost of Funds Index. Subsequent to December 31, 1993,
the Bank began to use U.S. Treasury securities for indices on newly originated
ARMs. The Bank originates ARM loans with initially discounted rates, which vary
depending upon whether the initial interest rate adjustment period is one,
three, five or seven years. The Bank determines whether a borrower qualifies for
an ARM loan based on the fully indexed rate of the ARM loan at the time the loan
is originated. One- to four-family residential ARM loans totaled $332.3
million, or 36.3%, of the Bank's total gross loan portfolio at December 31,
1997.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans may not offer the
Bank as predictable cash flows as long-term, fixed rate loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management-Interest Rate Sensitivity Analysis"
contained in the Bank's 1997 Annual Report to Stockholders (the "Annual
Report"). ARM loans carry increased credit risk associated with potentially
higher monthly payments by borrowers as general market interest rates increase.
It is possible, therefore, that during periods of rising interest rates, the
risk of default on ARM loans may increase due to the upward adjustment of
interest costs to the borrower.
The Bank's one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed rate mortgage loan portfolio, and the
Bank has generally exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Appraisals are generally performed
by the Bank's service corporation subsidiary. Such regulations permit a maximum
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loan-to-value ratio of 97% for residential property and 85% for all other real
estate loans. The Bank's lending policies generally limit the maximum loan-to-
value ratio on both fixed rate and ARM loans without private mortgage insurance
to 80% of the lesser of the appraised value or the purchase price of the
property to serve as collateral for the loan.
The Bank makes one- to four-family real estate loans with loan-to-value
ratios in excess of 80%. For one- to four-family real estate loans with loan-to-
value ratios of between 80% and 90%, the Bank generally requires the borrower to
obtain private mortgage insurance. For loans in excess of 90% the Bank requires
the borrower to obtain private mortgage insurance. The Bank requires fire and
casualty insurance, as well as a title guaranty regarding good title, on all
properties securing real estate loans made by the Bank.
In the past, the Bank has entered into loan participations secured by one-
to four-family residences. At December 31, 1997, the Bank's loan portfolio
included $3.2 million of loan participations.
CONSTRUCTION AND LAND LOANS. The Bank currently offers fixed rate and
adjustable rate residential construction loans primarily for the construction of
owner-occupied single-family residences to builders who have a contract for sale
of the property or owners who have a contract for construction. In addition,
the Bank makes construction loans to builders for homes held for sale which
totaled $21.0 million at December 31, 1997. Construction loans are generally
structured to become permanent loans, and are originated with terms of up to 30
years with an allowance of up to one year for construction. During the
construction phase the loans made prior to December 31, 1997 predominately had
an adjustable interest rate that adjusted annually and converted into either a
fixed rate or remained an adjustable rate mortgage loan at the end of the
construction period. Subsequent to December 31, 1997, the Bank began making
construction loans with fixed rates of interest. Such loans become permanent
one- to four-family loans upon completion of construction. Advances are made as
construction is completed.
In addition, the Bank originates loans which are secured by individual
unimproved or improved lots. At December 31, 1997, $38.6 million, or 4.2%, and
$12.1 million, or 1.3%, of the Bank's total loan portfolio consisted of
construction loans and land loans, respectively. Land loans are currently
offered with one-year adjustable rates for terms of up to 15 years. The maximum
loan-to-value ratio for the Bank's land loans is 75%. Through December 31,
1993, land loans were offered at 300 to 350 basis points over the Fourth
District Cost of Funds Index with an annual interest rate cap of 200 basis
points and a lifetime interest rate cap of the greater of 600 basis points over
the initial interest rate, or 6%. Subsequent to December 31, 1993 the Bank
began using the applicable U.S. Treasury securities as its index on newly
originated loans. Initial interest rates may be below the fully indexed rate.
Construction lending generally involves a greater degree of credit risk
than one- to four-family residential mortgage lending. The repayment of the
construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. Loans securing multi-family
real estate constituted approximately $13.0 million, or 1.4%, of the Bank's
total loan portfolio at December 31, 1997. At December 31, 1997, the Bank had a
total of 71 loans secured by multi-family properties. The Bank's multi-family
real estate loans are secured by multi-family residences, such as rental
properties. At December 31, 1997, substantially all of the Bank's multi-family
loans were secured by properties located within the Bank's market area. At
December 31, 1997, the Bank's multi-family real estate loans had an average
principal balance of $183,000 and the largest multi-family real estate loan had
a principal balance of $1.4 million. Multi-family
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real estate loans currently are offered with adjustable interest rates, although
in the past the Bank originated fixed rate multi-family real estate loans. The
terms of each multi- family loan are negotiated on a case-by-case basis. Such
loans typically have adjustable interest rates tied to a market index with a 600
basis point lifetime interest rate cap and an interest rate floor equal the
initial rate, and amortize over 15 to 25 years. An origination fee of 1 to 2% is
usually charged on multi-family loans. The Bank generally makes multi-family
mortgage loans up to 80% of the appraised value of the property securing the
loan. The Bank may choose to offer initial discount rates depending on market
conditions, but generally the initial interest rate on multi-family real estate
loans has been priced at the applicable U.S. Treasury securities as its index on
newly originated loans. The Bank's originations of multi-family loans have been
limited in recent years.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family and
commercial real estate is typically dependent upon the successful operation of
the related real estate property. If the cash flow from the project is reduced,
the borrower's ability to repay the loan may be impaired.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate
constituted approximately $39.9 million, or 4.4%, of the Bank's total loan
portfolio at December 31, 1997. The Bank's commercial real estate loans are
secured by improved property such as offices, small business facilities, strip
shopping centers, warehouses and other non-residential buildings. At December
31, 1997, substantially all of the Bank's commercial real estate loans were
secured by properties located within the Bank's market area. At December 31,
1997, the Bank's commercial real estate loans had an average principal balance
of $192,000. At that date, the largest commercial real estate loan had a
principal balance of $1.6 million, secured by a shopping center located in West
Palm Beach, Florida and was currently performing. This was the largest
commercial real estate lending relationship at the Bank and was within the
current loans-to-one borrower limits. Commercial real estate loans currently
are offered with adjustable rates, although in the past the Bank has originated
fixed rate commercial real estate loans. The terms of each commercial real
estate loan are negotiated on a case-by-case basis, although such loans
typically have adjustable interest rates tied to a market index, with a 600
basis point lifetime interest rate cap, and a 200 basis point interest rate
floor below the initial interest rate. The Bank may choose to offer initial
discount rates depending on market conditions. Through December 31, 1993,
commercial real estate loans generally have been priced at the Fourth District
Cost of Funds Index plus 325 basis points. Subsequent to December 31, 1993, the
Bank began using the applicable U.S. Treasuries as its index on newly originated
loans. An origination fee of up to 1 to 2% of the principal balance of the loan
is typically charged on commercial real estate loans. Commercial real estate
loans originated by the Bank generally amortize over 15 to 25 years.
The Bank's policy is generally to limit commercial real estate loans to
principal balances not exceeding $5.0 million, subject to limited exceptions.
Loans secured by commercial real estate generally involve a greater degree
of risk than one- to four-family residential mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial
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real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
CONSUMER LOANS. As of December 31, 1997, consumer loans totaled $47.8
million, or 5.2%, of the Bank's total gross loan portfolio. The principal types
of consumer loans offered by the Bank are home equity lines of credit,
adjustable and fixed rate second mortgage loans, automobile loans, unsecured
personal loans, and loans secured by deposit accounts. Consumer loans are
offered on a fixed rate and adjustable rate basis with maturities generally of
less than ten years. The Bank's home equity lines of credit are secured by the
borrower's principal residence with a maximum loan-to-value ratio, including the
principal balances of both the first and second mortgage loans, of 80% or less
(up to 90% if the Bank has a first mortgage on the property). Such loans are
offered on an adjustable rate basis with terms of up to ten years. At December
31, 1997, the disbursed portion of home equity lines of credit totaled $15.8
million, or 33.2% of consumer loans. Beginning in 1996 and continuing in 1997
the Bank sought to increase its consumer loan portfolio by emphasizing the
origination of automobile loans.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history and an assessment of ability
to meet existing obligations and payments on the proposed loan. The stability
of the applicant's monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable
secondary income. Creditworthiness of the applicant is of primary consideration;
however, the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount, and in the case of home
equity lines of credit, the Bank obtains a title guarantee or an opinion as to
the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Bank adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience. See "--Delinquencies and Classified Assets--Non-Performing
Assets," and "Delinquent Loans and Non-Performing Assets--Classification of
Assets" for information regarding the Bank's loan loss experience and reserve
policy.
COMMERCIAL BUSINESS LOANS. The Bank currently offers commercial business
loans to finance small businesses in its market area. Historically, the Bank
offered commercial business loans as a customer service to business account
holders. At December 31, 1997, the Bank had 332 commercial business loans
outstanding with an aggregate balance of $57.3 million. The average commercial
business loan balance was approximately $173,000. Commercial business loans are
generally offered with adjustable interest rates only, which are tied to The
Wall Street Journal prime rate, plus up to 300 basis points. The loans are
offered with prevailing terms of five years but which may range up to 15 years.
In addition, the Bank offers Small Business Administration loans.
Underwriting standards employed by the Bank for commercial business loans
include a determination of the applicant's ability to meet existing obligations
and payments on the proposed loan for normal cash flows generated by the
applicant's business. The financial strength of each applicant also is assessed
through a review of financial statements provided by the applicant.
8
<PAGE>
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Bank generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Bank obtains a credit report
and employment verification to verify specific information relating to the
applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Bank appraises the real estate
intended to secure the proposed loan. A loan processor in the Bank's loan
department checks the loan application file for accuracy and completeness, and
verifies the information provided. All loans of up to $227,150 may be approved
by any one of the Bank's senior lending officers; loans between $227,150 and
$400,000 must be approved by any one of the Bank's designated senior officers;
loans between $400,000 and $750,000 must be approved by at least two of the
Bank's designated senior officers which includes the Chief Executive Officer;
and loans in excess of $750,000 must be approved by at least three members of
the Board of Directors acting as a loan committee. The loan committee meets as
needed to review and verify that management's approvals of loans are made within
the scope of management's authority. Fire and casualty insurance is required at
the time the loan is made and throughout the term of the loan, and upon request
of the Bank, flood insurance may be required. After the loan is approved, a
loan commitment letter is promptly issued to the borrower. At December 31,
1997, the Bank had commitments to originate $55.2 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance or an opinion of title, based on a title search of the property,
is required on all loans secured by real property.
Borrowers who refinance must satisfy the Bank's underwriting criteria at
the time they apply to refinance their loan and have been current in their loan
payments for a minimum of one year. Approximately 14% of the Bank's loan
originations during the year ended December 31, 1997 represented the refinancing
of the Bank's existing loans. Refinancings have resulted in a decrease in the
Bank's interest rate spread. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1997 Annual Report to
Stockholders.
During 1997, the Bank in connection with local mortgage brokers began a
mortgage loan broker solicitation program to supplement the Bank's internal
originations of one- to four-family residential loans. Under this program, which
is limited to the origination of one- to four-family residential loans,
prospective borrowers complete loan applications which are provided by mortgage
brokers. The completed applications are forwarded to the Bank. All loans
obtained in this manner are reviewed in accordance with the Bank's customary
underwriting standards. Total originations from all sources under the mortgage
loan broker solicitation program during 1997 were $108.2 million. The Bank may
expand this program in the future.
During 1994, the Bank entered into an agreement with the wholly-owned
mortgage subsidiary of a major South Florida builder-developer, who has
substantial operations in the Bank's local service area. Under the terms of this
agreement, the mortgage company originates, processes and closes home mortgages
9
<PAGE>
resulting from the sale of the developer's inventory of homes. The mortgage
files are sent to the Bank by the mortgage company for review and, if approved
by the Bank, it issues a commitment to purchase the loan from the mortgage
company. Purchases are accomplished by assignment of the mortgage from the
mortgage company to the Bank. The Bank purchased $30.5 million loans from this
provider in 1997.
The Bank's recently purchased loans are collateralized by properties
located primarily in Florida, although the Bank has in the past purchased loans
collateralized by properties located outside the State of Florida. At December
31, 1997, $60.5 million, or 6.6%, of all loans in the Bank's portfolio, were
purchased from others. Of this amount, $3.2 million represented the Bank's
interest in purchased participations. The Bank's largest loan participation was
a $89,000 interest in a loan secured by one- to four-family residences. The
remaining loan participations consisted of loans secured by one- to four-family
residential properties with an average balance of $13,000.
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the Bank's
loan origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Loan receivable-gross, beginning of period............ $475,331 $ 561,474 $ 699,931
Originations:
Real estate:
One- to four-family residential (1)............... 121,457 187,851 177,111
Land loans........................................ 3,096 3,207 30,908
Commercial........................................ 1,082 390 5,664
Multi-family...................................... 1,611 1,869 7,227
Non-real estate loans:
Consumer.......................................... 19,185 23,761 29,276
Commercial Business............................... 6,838 33,276 61,383
-------- --------- ---------
Total originations................................. 153,269 250,354 311,569
Acquired as part of acquisition of BankBoynton........ -- -- 52,957
Transfer of mortgage loans to foreclosed real estate
and in-substance foreclosure....................... (1,318) (593) (2,403)
Loan purchases........................................ 12,398 21,153 35,647
Repayments............................................ (75,275) (115,440) (169,599)
Loan sales............................................ (2,931) (17,017) (11,634)
-------- --------- ---------
Net loan activity..................................... 86,143 138,457 216,537
-------- --------- ---------
Total loans receivable-gross, end of period........... $561,474 $ 699,931 $ 916,468
======== ========= =========
</TABLE>
- --------------
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
(2) This table is being presented on a gross loan receivable basis.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on
loans, the Bank generally receives loan origination fees. To the extent that
loans are originated or acquired for the Bank's portfolio, SFAS 91 requires that
the Bank defer loan origination fees and costs and amortize such amounts as an
adjustment of yield over the life of the loan by use of the level yield method.
Fees and costs deferred under SFAS 91 are recognized into income immediately
upon prepayment or the sale of the related loan. At December 31, 1997, the Bank
had $1.5 million of deferred loan origination fees and $4.1 million of deferred
loan origination costs. Such fees vary with the volume and type of loans and
commitments made and purchased, principal repayments, and competitive conditions
in the mortgage markets, which in turn respond to the demand and availability of
money.
10
<PAGE>
The Bank also receives other fees, service charges, and other income that
consist primarily of deposit transaction account service charges, late charges,
credit card fees, and income from REO operations. The Bank recognized fees and
service charges of $2.7 million, $3.2 million and $3.6 for the years ended
December 31, 1995, 1996, and 1997, respectively.
LOANS-TO-ONE BORROWER. Savings associations are subject to the same loans-
to-one borrower limits as those applicable to national banks, which under
current regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral (generally, financial
instruments and bullion, but not real estate). At December 31, 1997, the Bank's
largest outstanding loan balance to one borrower totaled $12.0 million which was
secured by residential property under development in northern Palm Beach County,
Florida. At that date, the Bank's second largest lending relationship totaled
$9.5 million and was secured by various residential properties. The Bank's third
largest lending relationship totaled $9.3 million and was secured by various
residential properties. The Bank's fourth largest lending relationship totaled
$5.5 million and was secured by various residential properties. The Bank's
fifth largest lending relationship totaled $3.4 million and was secured by
various commercial properties. The Bank's regulatory limit on loans-to-one
borrower was $12.8 million at December 31, 1997.
Mortgage-Backed Securities
The Bank also invests in mortgage-backed securities issued or guaranteed by
the United States Government or agencies thereof. These securities consist
primarily of fixed-rate mortgage-backed securities issued or guaranteed by the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"). Mortgage-backed securities totaled $231.8 million at
December 31, 1997 and had a market value of $234.1 million. Effective December
31, 1993, the Bank implemented SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities." As a result of the adoption of this accounting
principle, the Bank declared its investment in adjustable rate, mortgage-backed
securities as available for sale. In November 1995, FASB issued "A Guide to
Implementation of SFAS 115 on Accounting for Certain Investments in Debt and
Equity Securities - Questions and Answers" ("SFAS 115 Q & A Guide"). SFAS 115 Q
& A Guide permits an entity to conduct a one time reassessment of the
classifications of all securities held at that time. On November 28, 1995, in
conformity with the SFAS 115 Q & A Guide, management of the Bank classified all
securities as "Available for Sale". As a result, all such securities are now
presented at fair value, as determined by market quotations. Since the SFAS 115
Q & A Guide cannot be retroactively applied, these fixed-rate securities are
presented at amortized cost for the year ended 1994.
11
<PAGE>
The Bank's objectives in investing in mortgage-backed securities varies
from time to time depending upon market interest rates, local mortgage loan
demand, and the Bank's level of liquidity. The Bank's mortgage-backed
securities are more liquid than whole loans and can be readily sold in response
to market conditions and interest rates. Mortgage-backed securities purchased
by the Bank also have lower credit risk than mortgage loans because principal
and interest are either insured or guaranteed by the United States Government or
agencies thereof.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of period................... $126,807 $159,761 $123,599
Purchases........................................................... 45,625 9,962 131,956
Acquired as part of Acquisition of BankBoynton...................... -- -- 205
Sales............................................................... -- (19,641) --
Repayments.......................................................... (17,796) (23,608) (22,325)
Discount (premium) amortization..................................... (79) 3 (304)
Increase (decrease) in market value of securities held for sale in
accordance with SFAS 115........................................... 5,204 (2,878) 1,001
-------- -------- --------
Mortgage-backed securities at end of period......................... $159,761 $123,599 $234,132
======== ======== ========
</TABLE>
The following table sets forth the allocation of fixed and adjustable rate
mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
$ % $ % $ %
-------- ------- -------- ------- -------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities, net:
Adjustable:
FHLMC................................ $ 13,244 8.24% $ 15,900 12.78% $ 48,469 20.57%
FNMA................................. 31,250 19.43 29,576 23.76 43,825 18.60
GNMA................................. -- -- 1,963 1.58 1,586 0.67
-------- ------ -------- ------ -------- ------
Total adjustable.................... 44,494 27.67 47,439 38.12 93,882 39.84
-------- ------ -------- ------ -------- ------
Fixed:
FHLMC................................ 74,052 46.04 56,245 45.20 83,326 35.36
FNMA................................. 14,019 8.72 11,771 9.46 26,497 11.24
GNMA................................. 27,196 16.91 8,144 6.54 30,429 12.91
-------- ------ -------- ------ -------- ------
Total fixed......................... 115,267 71.67 76,160 61.20 140,252 59.51
-------- ------ -------- ------ -------- ------
Accrued interest........................ 1,067 0.66 842 0.68 1,530 0.65
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities, net.. $160,828 100.00% $124,441 100.00% 235,662 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
Delinquencies and Classified Assets
DELINQUENCIES. The Bank's collection procedures provide that when a loan
is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. If delinquency continues, at
30 days a delinquent notice is sent and personal contact efforts are attempted,
either in person or by telephone, to strengthen the collection process and
obtain reasons for the delinquency. Also, plans to arrange a repayment plan are
made. If a loan becomes 60 days past due, a collection letter is sent, personal
contact is attempted, and the loan becomes subject to possible legal action if
suitable arrangements to repay have not been made. In addition, the borrower is
given information which provides access to consumer counseling services, to the
extent required by regulations of the Department of Housing and Urban
Development ("HUD"). When a loan continues in a delinquent status for 90 days
or more, and a repayment schedule has not been made or kept by the borrower,
generally a notice of intent to foreclose
12
<PAGE>
is sent to the borrower, giving 30 days to cure the delinquency. If not cured,
foreclosure proceedings are initiated.
IMPAIRED LOANS. A loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
NON-PERFORMING ASSETS. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Loans are placed on non-accrual
status when either principal or interest is 90 days or more past due. Interest
accrued and unpaid at the time a loan is placed on a non-accrual status is
charged against interest income. At December 31, 1997, the Bank had non-
performing loans of $3.2 million, and a ratio of non-performing loans to net
loans receivable of .38%.
Real estate acquired by the Bank as a result of foreclosure or by the deed
in lieu of foreclosure is classified as real estate owned ("REO") until such
time as it is sold. When real estate is acquired through foreclosure or by deed
in lieu of foreclosure, it is recorded at its fair value, less estimated costs
of disposal. If the value of the property is less than the loan, less any
related specific loan loss provisions, the difference is charged against the
Bank's earnings. Any subsequent write-down of REO is also charged against
earnings. At December 31, 1997, the Bank had approximately $967,000 of property
acquired as the result of foreclosure and classified as REO. At December 31,
1997, the Bank had non-performing assets of $4.2 million and a ratio of non-
performing assets to total assets of .35%.
Delinquent Loans and Non-Performing Assets
The following table sets forth information regarding the Bank's non-accrual
mortgage loans delinquent 90 days or more, non-accrual consumer and commercial
business loans delinquent 60 days or more, and real estate acquired or deemed
acquired by foreclosure at the dates indicated. When a loan is delinquent 90
days or more, the Bank fully reserves all accrued interest thereon and ceases to
accrue interest thereafter. For all the dates indicated, the Bank did not have
any material restructured loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Delinquent Loans:
One- to four-family residential (1)........... $3,091 $1,299 $1,513 $2,637 $2,610
Commercial and multi-family real estate....... 379 335 201 461 140
Land.......................................... -- 159 10 84 187
Consumer and commercial business loans (3).... 347 135 140 108 312
------ ------ ------ ------ ------
Total Delinquent loans......................... 3,817 1,928 1,864 3,290 3,249
Total REO and loans foreclosed in-substance.... 463 608 643 93 967
------ ------ ------ ------ ------
Total nonperforming assets (2).............. $4,280 $2,536 $2,507 $3,383 $4,216
====== ====== ====== ====== ======
Total loans delinquent 90 days or more to net
loans receivable (3).......................... 0.88% 0.42% 0.35% 0.50% 0.38%
Total loans delinquent 90 days or more to
total assets (3).............................. 0.56% 0.27% 0.24% 0.38% 0.27%
Total nonperforming loans, loans foreclosed
in substance and REO to total assets.......... 0.63% 0.36% 0.32% 0.39% 0.35%
</TABLE>
- -----------
(1) At December 31, 1997, the Bank had no delinquent or non-performing
construction loans.
(2) Net of specific valuation allowances.
(3) Includes consumer and commercial business loans delinquent 60 days or more.
13
<PAGE>
During the year ended December 31, 1997, gross interest income of
approximately $168,000 would have been recorded on loans accounted for on a non-
accrual basis if the loans had been current throughout the period. No interest
income on non-accrual loans was included in income during 1997.
The following table sets forth information with respect to loans past due
60-89 days in the Bank's portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
One- to four-family residential (1)...... $1,929 $1,554 $1,272 $2,038 $3,014
Commercial real estate and multi-family.. 219 100 106 55 54
Consumer and commercial business loans... 50 7 106 19 83
Land loans............................... 97 48 1 -- --
------ ------ ------ ------ ------
Total past due 60-89 days............... $2,295 $1,709 $1,485 $2,112 $3,151
====== ====== ====== ====== ======
</TABLE>
- ---------------------
(1) (Includes construction loans)
CLASSIFICATION OF ASSETS. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that these weaknesses make "collection or liquidation in full,"
on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances. The Bank regularly reviews the problem
loans in its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
14
<PAGE>
The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------
1995 1996 1997
------- ------ ------
(In Thousands)
<S> <C> <C> <C>
Substandard assets (1)(2)............ $5,106 $3,207 $3,961
Doubtful assets (2).................. -- -- --
Loss assets (2)...................... 58 -- --
------ ----- -----
Total classified assets
(2).............................. $5,164 $3,207 $3,961
====== ====== ======
</TABLE>
- ----------------
(1) Includes REO and in-substance foreclosures.
(2) Net of specific valuation allowances.
The following table sets forth information regarding the Bank's delinquent
loans, REO and loans foreclosed in-substance at December 31, 1997.
<TABLE>
<CAPTION>
Balance Number
----------- ---------
(Dollars In Thousands)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent........... $3,014 38
Loans more than 89 days delinquent....... 2,610 32
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent........... 54 1
Loans more than 89 days delinquent....... 140 2
Land loans:
Loans 60 to 89 days delinquent........... -- --
Loans more than 89 days delinquent....... 187 3
Consumer and commercial business loans
60 days or more delinquent.............. 312 22
REO....................................... 967 7
------ ---
Total.................................. $7,284 105
====== ===
</TABLE>
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Bank regularly reviews its loan
portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans of which full
collectibility of interest and principal may not be reasonably assured,
considers, among other matters, the estimated net realizable value (or fair
value, where appropriate) of the underlying collateral. Other factors
considered by management include the size and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. Management calculates the general allowance for loan losses in part
based on past experience, and in part based on specified percentages of loan
balances. While both general and specific loss allowances are charged against
earnings, general loan loss allowances are added back to capital in computing
risk-based capital under OTS regulations.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. Management believes that the Bank's current allowance for
loan losses is adequate; however, there can be no assurance that the allowance
for loan losses will be adequate to cover losses that may in fact be realized in
the future or that additional provisions for loan losses will not be required.
15
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total net loans receivable outstanding........... $434,967 $456,543 $532,333 $661,700 $861,257
======== ======== ======== ======== ========
Average net loans receivable outstanding......... $434,522 $441,573 $490,088 $605,507 $735,949
======== ======== ======== ======== ========
Allowance balance (at beginning of period)....... $ 1,824 $ 2,865 $ 2,566 $ 2,265 $ 2,263
Reclassification of valuation allowances
on in-substance foreclosure.................... 169 -- -- -- --
Acquired as part of Acquisition of BankBoynton:
Real estate..................................... -- -- -- -- 208
Consumer........................................ -- -- -- -- 959
Provision for losses:
Real estate..................................... 1,201 73 (199) 133 165
Consumer and commercial business loans.......... 35 39 (11) 31 5
Charge-offs:
Real estate..................................... (362) (229) (89) (145) (98)
Consumer and commercial business loans.......... (2) (182) (2) (21) (208)
Recoveries:
Real estate..................................... -- -- -- -- --
Consumer and commercial business loans.......... -- -- -- -- --
-------- -------- -------- -------- --------
Allowance balance (at end of period)......... $ 2,865 $ 2,566 $ 2,265 $ 2,263 $ 3,294
======== ======== ======== ======== ========
Allowance for loan losses as a percent of net
loans receivable at end of period............. 0.66% 0.56% 0.43% 0.34% 0.38%
Net loans charged off as a percent of average
loans outstanding............................... 0.08% 0.10% 0.02% 0.03% 0.04%
Ratio of allowance for loan losses to total
non-performing loans at end of period (1)....... 75.06% 132.61% 121.51% 68.78% 101.39%
Ratio of allowance for loan losses to total
non-performing loans, REO and in-substance
foreclosures at end of period (1)............... 66.94% 100.90% 90.35% 66.89% 78.13%
</TABLE>
- ----------------------------
(1) Net of specific reserves.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is
not necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1995 1996 1997
------------------------- -------------------------- --------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
----------- ------------ ----------- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Balance at end of period applicable to:
One- to four-family residential mortgage.. $1,351 84.23% $1,095 83.89% $1,547 82.86%
Commercial real estate and
multi-family residential................. 574 8.03 571 6.12 441 4.36
Land loans................................ 91 1.92 119 1.70 209 1.32
Other..................................... 249 5.82 478 8.29 1,097 11.46
------ ------ ------ ------ ------ ------
Total allowance for loan losses.......... $2,265 100.00% $2,263 100.00% $3,294 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
16
<PAGE>
Investment Activities
In prior years, the Bank had increased the percentage of its assets held in
its investment portfolio as part of its strategy of maintaining higher levels of
liquidity which improve the Bank's interest rate risk position. The Bank's
investment portfolio comprises investment securities, FHLB Stock and interest
earning deposits. The carrying value of the Bank's investment securities
totaled $61.7 million at December 31, 1997, compared to $41.7 million at
December 31, 1996. The Bank's interest-bearing deposits due from other
financial institutions with original maturities of three months or less, totaled
$33.7 million at December 31, 1997, compared to $27.1 million at December 31,
1996.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short term securities and
certain other investments. See "Regulation--Federal Regulations--Liquidity
Requirements" below and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" in the
Annual Report. The Bank generally has maintained a portfolio of liquid assets
that exceeds regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of yield that
will be available in the future, as well as management's projections as to the
short term demand for funds to be used in the Bank's loan origination and other
activities.
INVESTMENT PORTFOLIO. The following tables set forth the carrying value of
the Bank's investments at the dates indicated. At December 31, 1997, the market
value of the Bank's investments was approximately $61.7 million. As allowed by
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities,"
the Bank declared its investment in U.S. Government and agency obligations as
available for sale. As a result, such securities are now presented at fair
value, as determined by market quotations. The market value of investments
includes interest-earning deposits and FHLB stock at book value, which
approximates market value.
<TABLE>
<CAPTION>
At December 31,
-------------------------
1995 1996 1997
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations.. $26,546 $ 8,035 $13,861
Municipal bonds......................... 440 430 2,216
Interest-earning deposits............... 9,974 27,127 33,688
FHLB stock.............................. 6,148 6,148 11,955
------- ------- -------
Total investments.................... $43,108 $41,740 $61,720
======= ======= =======
</TABLE>
17
<PAGE>
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, amortized cost, market values and average yields for the
Bank's investment securities at December 31, 1997. At December 31, 1997, the
Bank did not have any investment securities maturing after three years.
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------------------------------------------------------------------------
One Year or Less One to Three Years Total
------------------------------- --------------------- ---------------------
Annualized Annualized Annualized
Weighted Weighted Average Weighted
Amortized Average Amortized Average Amortized Market Life in Average
Cost Yield Cost Yield Cost Value Years (1) Yield
--------------- -------------- --------- ---------- --------- ---------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government agency
securities................ $ -- --% $13,798 6.19% $13,798 $13,861 1.85 6.19%
Municipal bonds............ 660 3.71 1,542 4.28 2,202 2,216 1.58 4.11
FHLB stock................. 11,955 7.25 -- -- 11,955 11,955 -- 7.25
Interest-earning deposits.. 33,688 4.50 -- -- 33,688 33,688 -- 4.50
------- ---- ------- ---- ------- ------- ---- ----
Total................... $46,303 5.20% $15,340 6.00% $61,643 $61,720 -- 5.40%
======= ==== ======= ======= ======= ==== ====
</TABLE>
- -------------------------
(1) Total weighted average life in years calculated only on United States
Government agency securities and municipal bonds.
18
<PAGE>
Sources of Funds
GENERAL. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, the Bank derives funds from
the amortization and prepayment of loans and mortgage-backed securities, the
maturity of investment securities, operations and, if needed, advances from the
FHLB. Scheduled loan principal repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources or on a longer term basis for general business
purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including non-interest-bearing demand accounts, NOW
accounts, passbook savings, money market deposits, term certificate accounts and
individual retirement accounts. Deposit account terms vary according to the
minimum balance required, the period of time during which the funds must remain
on deposit, and the interest rate, among other factors. The Bank regularly
evaluates its internal cost of funds, surveys rates offered by competing
institutions, reviews the Bank's cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate. The Bank does not
obtain funds through brokers.
DEPOSIT PORTFOLIO. The following table sets forth information regarding
interest rates, terms, minimum amounts and balances of the Bank's deposit
portfolio as of December 31, 1997.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minumum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- --------------- -------------- ----------------------------- -------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00 % None Non-interest-bearing demand $ 0 $ 35,888 4.11%
1.01 None NOW accounts 100 82,152 9.42
2.00 None Passbooks 100 105,082 12.04
2.50 None Money market accounts 2,500 42,135 4.83
Certificates of Deposit
-----------------------
4.77 0 - 3 months Fixed term, fixed rate 1,000 4,020 .46
4.97 3 - 6 months Fixed term, fixed rate 1,000 55,663 6.38
5.49 6 - 12 months Fixed term, fixed rate 1,000 238,091 27.29
5.92 12 - 36 months Fixed term, fixed rate 1,000 201,848 23.14
6.08 36 - 60 months Fixed term, fixed rate 1,000 107,461 12.33
-------- -----
$872,340 100.00%
======== ======
</TABLE>
19
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
Balance Balance Deposit Incr. Balance Deposit Incr. Balance Deposit Incr.
12/31/93 12/31/94 % (Decr) 12/31/95 % (Decr) 12/31/96 % (Decr)
--------- --------- ------- ------- --------- ------- -------- --------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
accounts................... $ 14,630 $ 19,551 3.6% $ 4,921 $ 21,430 3.6% $ 1,879 $ 26,406 3.8% $ 4,976
NOW, Super NOW and funds
transfer accounts.......... 68,380 65,025 12.1 (3,355) 67,886 11.4 2,861 70,558 10.2 2,672
Passbook and statement
accounts.................... 128,530 99,198 18.4 (29,332) 86,471 14.5 (12,727) 87,534 12.6 1,063
Variable rate money market
accounts................... 67,661 55,516 10.3 (12,145) 44,677 7.5 (10,839) 44,012 6.3 (665)
Time Deposits:
Maturing within 12 months.. 256,560 243,557 45.3 (13,003) 294,202 47.4 38,676 358,912 51.7 64,710
Maturing within 12-36
months.................... 23,388 34,405 6.4 11,017 57,236 12.7 41,018 79,894 11.5 22,658
Maturing beyond 36 months.. 27,378 20,983 3.9 (6,395) 23,278 2.9 (3,923) 27,402 3.9 4,124
-------- -------- ------ -------- -------- ------ ------- -------- ------ -------
Total.................. $586,527 $538,235 100.00% $(48,292) $595,180 100.00% $56,945 $694,718 100.00% $99,538
======== ======== ====== ======== ======== ====== ======= ======== ====== =======
<CAPTION>
Balance Deposit Incr.
12/31/97 % (Decr)
--------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Noninterest bearing demand
accounts...................... $ 35,888 4.1% $ 9,482
NOW, Super NOW and funds
transfer accounts............. 82,152 9.4 11,594
Passbook and statement
accounts....................... 105,082 12.1 17,548
Variable rate money market
accounts...................... 42,135 4.8 (1,877)
Time Deposits:
Maturing within 12 months..... 387,511 44.4 28,599
Maturing within 12-36
months....................... 169,228 19.4 89,334
Maturing beyond 36 months..... 50,344 5.8 22,942
--------- ------ --------
Total..................... $ 872,340 100.00% $177,622
========= ====== ========
</TABLE>
20
<PAGE>
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1995 1996 1997
-------- -------- --------
Rate (In Thousands)
- ----
<S> <C> <C> <C>
1.01 - 2.00%........ $ 834 $ 949 $ 895
2.01 - 3.00%........ 2 2 301
3.01 - 4.00%........ 1,198 20 6
4.01 - 5.00%........ 49,308 34,308 11,225
5.01 - 6.00%........ 205,595 333,998 441,810
6.01 - 7.00%........ 109,737 93,788 152,453
7.01 - 8.00%........ 8,025 3,079 353
8.01 - 9.00%........ 17 64 40
-------- -------- --------
$374,716 $466,208 $607,083
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1997.
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
--------- -------- ------- ------- ------- ------- --------
(In Thousands)
Rate
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
1.01 - 2.00%.......... $ 895 $ -- $ -- $ -- $ -- $ -- $ 895
2.01 - 3.00%.......... 301 -- -- -- -- -- 301
3.01 - 4.00%.......... -- 6 -- -- -- -- 6
4.01 - 5.00%.......... 10,037 1,098 50 -- -- 40 11,225
5.01 - 6.00%.......... 331,914 80,722 23,032 3,813 2,141 188 441,810
6.01 - 7.00%.......... 44,152 30,481 33,708 18,290 23,869 1,953 152,453
7.01 - 8.00%.......... 172 -- 131 -- 50 -- 353
8.01 - 9.00%.......... 40 -- -- -- -- -- 40
-------- -------- ------- ------- ------- ------ --------
$387,511 $112,307 $56,921 $22,103 $26,060 $2,181 $607,083
======== ======== ======= ======= ======= ====== ========
</TABLE>
The following table indicates the amount of the Bank's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1997.
<TABLE>
<CAPTION>
Remaining Maturity Amounts
- ------------------ -------
(In Thousands)
<S> <C>
Three months or less............................ $ 15,880
Three through six months........................ 8,816
Six through twelve months....................... 31,461
Over twelve months.............................. 40,491
----------
Total.......................................... $ 96,648
==========
</TABLE>
21
<PAGE>
The following table sets forth the net changes in the deposit activities of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Deposits................................................................................... $2,114,143 $2,557,621 $3,353,672
Acquired as part of Acquisition of BankBoynton............................................. -- -- 41,730
Withdrawals................................................................................ 2,076,361 2,480,059 3,250,906
---------- ---------- ----------
Net increase (decrease) before interest credited........................................... 37,782 77,562 144,496
Interest credited.......................................................................... 19,163 21,976 33,126
---------- ---------- ----------
Net increase (decrease) in deposits........................................................ $ 56,945 $ 99,538 $ 177,622
========== ========== ==========
</TABLE>
Borrowings
Savings deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. If the need
arises, the Bank, may rely upon advances from the FHLB and the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB typically are
collateralized by the Bank's stock in the FHLB and a portion of the Bank's first
mortgage loans. At December 31, 1997, the Bank had $239.1 million in FHLB
advances outstanding.
The FHLB functions as a central reserve bank providing credit for the Bank
and other member savings institutions and financial institutions. As a member,
the Bank is required to own capital stock in the FHLB and is authorized to apply
for advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed by,
the United States) provided certain standards related to creditworthiness have
been met. Advances are made pursuant to several different programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. All FHLB advances have fixed interest rates
and mature between two and 10 years.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
FHLB advances:
Maximum month-end balance.......... $86,168 $91,135 $239,091
Balance at end of period........... 85,169 82,517 239,091
Average balance.................... 78,368 84,351 119,759
Weighted average interest rate on:
Balance at end of period........... 6.86% 6.74% 6.41%
Average balance for period......... 7.00% 6.79% 6.27%
</TABLE>
Competition
The Bank's market area in Southeast Florida has a large concentration of
financial institutions, many of which are significantly larger and have greater
financial resources than the Bank, and all of which are competitors of the Bank
to varying degrees. As a result, the Bank encounters strong competition both in
attracting deposits and in originating real estate and other loans. Its most
direct competition for deposits has come historically from commercial banks,
brokerage houses, other savings associations, and credit unions in its market
area, and the Bank expects continued strong competition from such financial
institutions in the
22
<PAGE>
foreseeable future. The Bank's market area includes branches of several
commercial banks that are substantially larger than the Bank in terms of state-
wide deposits. The Bank competes for savings by offering depositors a high level
of personal service and expertise together with a wide range of financial
services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Bank's market area
as well as the increased efforts by commercial banks to expand mortgage loan
originations.
The Bank competes for loans primarily through the interest rates and loan
fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Based on total assets as of June 1997, the Bank was the second largest
savings institution headquartered in Palm Beach County, and the Bank held
approximately 4.2% of all financial institution deposits in Palm Beach County.
Subsidiary Activities
The Bank has one active wholly owned subsidiary, Fidelity Realty and
Appraisal Service, Inc., a Florida corporation ("FRAS"). FRAS is primarily
engaged in providing appraisal services for the Bank and selling the Bank's REO.
At December 31, 1997, FRAS had a cumulative deficit of $66,000. For the year
ended December 31, 1997, FRAS had a net loss of $8,000.
Under FIRREA, SAIF-insured institutions are required to provide 30 days
advance notice to the OTS and FDIC before establishing or acquiring a subsidiary
or conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC and the OTS such information as may be required by applicable
regulations and must conduct the activity in accordance with the rules and
orders of the OTS. In addition to other enforcement and supervision powers, the
OTS may determine after notice and opportunity for a hearing that the
continuation of a savings association's ownership of or relation to a subsidiary
(i) constitutes a serious risk to the safety, soundness or stability of the
savings association, or (ii) is inconsistent with the purposes of FIRREA. Upon
the making of such a determination, the OTS may order the savings association to
divest the subsidiary or take other actions.
Personnel
As of December 31, 1997, the Bank had 281 full-time and 47 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.
Regulation
As a federally chartered, SAIF-insured savings association the Bank is
subject to examination, supervision and extensive regulation by the OTS, and the
FDIC. The Bank is a member of and owns stock in the FHLB of Atlanta, which is
one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors.
23
<PAGE>
The Bank also is subject to regulation by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") governing reserves to be
maintained against deposits and certain other matters. The Holding Company will
be subject to supervision and regulation by the OTS.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that they may
find in the Bank's operations. The FDIC also examines the Bank in its role as
the administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation,
whether by the FDIC, OTS, or Congress, could have a material adverse impact on
the Holding Company and the Bank and their operations.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
primarily addresses the recapitalization of the BIF, which insures the deposits
of commercial banks and savings banks. In addition, FDICIA established a number
of new mandatory supervisory measures for savings associations and banks.
Standards for Safety and Soundness. FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits or could lead
to material financial loss. In addition the federal banking regulatory agencies
are required to prescribe by regulation standards specifying: (i) maximum
classified assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of depository
institutions and depository institution holding companies.
Financial Management Requirements. Pursuant to FDICIA, in May 1993, the
FDIC adopted rules establishing annual independent audits and financial
reporting requirements for all depository institutions with assets of more than
$500 million, their management and their independent auditors. The rules also
establish new requirements for the composition, duties, and authority of such
institutions' audit committees and boards of directors, effective in fiscal
years beginning after December 31, 1992. Among other things, all depository
institutions with assets in excess of $500 million are required to prepare and
make available to the public annual reports on their financial condition and
management, including statements of management's responsibility under
regulations relating to safety and soundness, and an assessment of the
institution's compliance with internal controls, laws and regulations. The
institution's independent auditors are required to attest to these management
assessments. Each such institution also is required to have an audit committee
composed of independent directors. Audit Committees of large institutions
(institutions with assets exceeding $3.0 billion) must: (i) include members
with banking or related financial management experience; (ii) have the ability
to engage their own independent legal counsel; and (iii) must not include any
large customers (as defined) of the institution.
Prompt Corrective Action Regulation. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the OTS and the other banking regulators are required to
establish five capital categories ("well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") and to take certain mandatory supervisory actions (and are
authorized to take other discretionary actions) with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital
24
<PAGE>
category in which the institution is placed. Generally, FDICIA requires the
requisite banking regulator to appoint a receiver or conservator for an
institution that is critically undercapitalized.
Under the OTS rule implementing the prompt corrective action provisions, a
savings institution that: (i) has a total risk-based capital ratio of 10.0% or
greater, a Tier I (core) risk-based capital ratio of 6.0% or greater and a
leverage ratio of 5.0% or greater; and (ii) is not subject to any written
agreement, order, capital directive or prompt corrective action directive issued
by the OTS, is deemed to be well-capitalized. An institution with a total risk-
based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of
4.0% or greater and a leverage ratio of 4.0% or greater, is considered to be
adequately capitalized. A savings institution that has a total risk-based
capital ratio of less than 8.0%, a Tier I risk-based capital ratio of less than
4.0%, or a leverage ratio that is less than 4.0% is considered to be
undercapitalized. A savings institution that has a total risk-based capital
ratio of less than 6.0%, a Tier I risk-based capital ratio of less than 3.0% or
a leverage ratio that is less than 3.0%, is considered to be significantly
undercapitalized. A savings institution that has a tangible equity capital to
assets ratio equal to or less than 2.0% is deemed to be critically
undercapitalized. For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier I capital for purposes of the
risk-based capital standards plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets except
certain purchased mortgage servicing rights and qualifying supervisory goodwill.
FDICIA authorizes the appropriate federal banking agency, after notice and
an opportunity for a hearing, to treat a well-capitalized, adequately
capitalized or undercapitalized insured depository institution as if it had a
lower capital classification if it is in an unsafe or unsound condition or is
engaging in an unsafe or unsound practice. Thus, an adequately capitalized
institution can be subjected to the restrictions on undercapitalized
institutions (provided that a capital restoration plan cannot be required of the
institution) described below and an undercapitalized institution can be
subjected to the restrictions applicable to significantly undercapitalized
institutions described below.
Under FDICIA, an insured depository institution cannot make a capital
distribution (as broadly defined to include, among other things, dividends,
redemptions and other repurchases of stock) or pay management fees to any person
that controls the institution if thereafter it would be undercapitalized. The
appropriate federal banking agency, however, may (after consultation with the
FDIC) permit an insured depository institution to repurchase, redeem, retire or
otherwise acquire its shares if such action: (i) is taken in connection with
the issuance of additional shares or obligations in at least an equivalent
amount; and (ii) will reduce the institution's financial obligations or
otherwise improve its financial condition. An undercapitalized institution
generally is prohibited form increasing its average total assets. An
undercapitalized institution also generally is prohibited from making
acquisitions, establishing any branches or engaging in any new line of business
except in accordance with an accepted capital restoration plan or with the
approval of the FDIC. In addition, the appropriate federal banking agency is
given authority with respect to any undercapitalized depository institution to
take any of the actions it is required to or may take with respect to a
significantly undercapitalized institution as described below if it determines
that such actions are necessary to carry out the purpose of FDICIA.
Federal Regulations
Regulatory Capital. The capital requirements consist of a "tangible
capital requirement," a "leverage limit" and a "risk-based capital requirement."
Under the tangible capital requirement, a savings association must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing
25
<PAGE>
rights. Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS 115 is
excluded from the regulatory capital calculation.
The leverage limit adopted by the OTS requires that savings associations
maintain "core capital" in an amount equal to at least 3% of adjusted total
assets. The OTS, however, has proposed an amendment to this requirement that
would increase core capital requirements for nearly all savings associations, as
discussed below. Core capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock, and
minority interests in the equity accounts of consolidated subsidiaries, plus
purchased mortgage servicing rights valued at the lower of 90% of fair market
value, 90% of original cost or the current amortized book value as determined
under generally accepted accounting principles ("GAAP"), and "qualifying
supervisory goodwill," less non-qualifying intangible assets.
In addition, the OTS has proposed a rule that would limit the amount of
purchased mortgage servicing rights includable as core capital to 50% of such
capital. No assurance can be given as to the final form of such regulation, the
date of its effectiveness, or whether it will differ materially from the
proposal. The proposal, if adopted as proposed, is not anticipated to have any
immediate effect on the Bank.
In April 1991, the OTS published a proposed amendment to the regulatory
capital requirements applicable to all savings associations to conform to Office
of the Comptroller of the Currency ("OCC") capital regulations applicable to
national banks. Under the OTS proposal, those savings associations receiving a
CAMEL rating of "1", the best possible rating on a scale of 1 to 5, will be
required to maintain a ratio of core capital to adjusted total assets of 3%.
All other savings associations will be required to maintain minimum core capital
of 4% to 5% of total adjusted assets. In determining the required minimum core
capital ratio, the OTS will assess the quality of risk management and the level
of risk in each savings association on a case-by-case basis. The OTS did not
indicate in the proposed regulation the standards it will use in establishing
the appropriate core capital requirement for savings associations not rated "1"
under the CAMEL rating system. At December 31, 1997, the Bank's ratio of core
capital to total adjusted assets was 6.7%. The OTS prohibits savings
associations from disclosing their CAMEL ratings.
A savings association that does not meet the minimum regulatory capital
requirements because of the new core capital requirement will be required to
submit a capital restoration plan to the OTS that sets forth in reasonable
detail the steps the association will take to be in compliance. The capital
plans will be required to be filed within 60 days of the effective date of the
new regulation. If the OTS rejects a savings association's capital plan, the
OTS may require an amended capital plan to be filed, or the OTS can take
supervisory action against the association. The Bank is unable to predict when
such regulation will be adopted, or, if adopted, the final form that such
regulation will take.
Under the risk-based capital requirement, a savings association must
maintain total capital (which is defined as core capital plus supplementary
capital) equal to at least 8.0% of risk-weighted assets. A savings association
must calculate its risk-weighted assets by multiplying each asset and off-
balance sheet item by various risk factors, which range from 0% for cash and
securities issued by the United States Government or its agencies to 100% for
repossessed assets or loans more than 90 days past due. Supplementary capital
may include, among other items, cumulative perpetual preferred stock, perpetual
subordinated debt, mandatory convertible subordinated debt, intermediate-term
preferred stock, and general allowances for loan losses. The allowance for loan
losses includable in supplementary capital is limited to 1.25% of risk-weighted
assets. Supplementary capital is limited to 100% of core capital.
The OTS and the FDIC generally are authorized to take enforcement action
against a savings association that fails to meet its capital requirements, which
action may include restrictions on operations and banking activities, the
imposition of a capital directive, a cease-and-desist order, civil money
penalties or harsher measures such as the appointment of a receiver or
conservator or a forced merger into another
26
<PAGE>
institution. In addition, under current regulatory policy, a savings association
that fails to meet its capital requirements is prohibited from paying any
dividends. Except under certain circumstances, further disclosure of final
enforcement actions by the OTS is required.
Federal Home Loan Bank System. The Bank is a member of the Federal Home
Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional FHLBs. As a
member of the FHLB, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year, or 1/20 (or such greater fraction as established by
the FHLB) of outstanding FHLB advances. At December 31, 1997 the Bank had $12.0
million in FHLB of Atlanta stock, which was in compliance with this requirement.
In past years the Bank has received dividends on its FHLB stock. Over the past
five years such dividends have averaged 6.72%, and was 7.25% for the year ended
December 31, 1997. Certain provisions of FIRREA require all 12 FHLBs to provide
financial assistance for the resolution of troubled savings associations and to
contribute to affordable housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and moderate-
income housing projects. These contributions could cause rates on the FHLB
advances to increase and could affect adversely the level of FHLB dividends paid
and the value of FHLB stock in the future.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board (the "FHFB").
FHLB advances must be fully secured by sufficient collateral as determined
by the FHLB. Eligible collateral consists of mortgage loans less than 90 days
delinquent or securities evidencing interests therein, securities (including
mortgage-backed securities) issued, insured, or guaranteed by the federal
government or any agency thereof, FHLB deposits, and to a limited extent, real
estate with readily ascertainable value in which a perfected security interest
may be obtained. Other forms of collateral may be accepted as collateralization
under certain circumstances. All long-term advances are required to be used to
provide funds for residential home financing. In addition, the FHFB has
established standards of community service that members must meet to maintain
access to long-term advances. FHLBs are authorized to make short-term liquidity
advances to solvent associations in poor financial condition but with prospects
of improving, upon the request of the OTS. In addition, pursuant to FHLB
regulations, each FHLB is required to establish programs for affordable housing
that involve interest subsidies from the FHLBs on advances to members engaged in
lending at subsidized interest rates for low- and moderate-income, owner-
occupied housing and affordable housing, and certain other community purposes.
Qualified Thrift Lender Test. The qualified thrift lender ("QTL") test
requires that a savings institution maintain at least 65% of its total portfolio
assets in "qualified thrift investments" on an average basis in nine out of
every twelve months. For purposes of the test, portfolio assets are defined as
the total assets of the savings institution minus: goodwill and other
intangible assets, the value of property used by the savings institution to
conduct its business and liquid assets not to exceed 20% of the savings
institution's total assets.
Under the QTL's statutory and regulatory provisions, all forms of home
mortgages, home improvement loans, home equity loans and loans on the security
of other residential real estate and mobile homes as well as a designated
percentage of consumer loans are "qualified thrift investments," as are shares
of stock of the FHLB, investments or deposits in other insured institutions,
securities issued by the FNMA, FHLMC, GNMA or the RTC Financing Corporation and
other mortgage-related securities. Investments in nonsubsidiary corporations or
partnerships whose activities include servicing mortgages or real estate
27
<PAGE>
development are also considered qualified thrift investments in proportion to
the amount of primary revenue such entities derive from housing-related
activities. Also included in qualified thrift investments are mortgage
servicing rights, whether such rights are purchased by the insured institution
or created when the institution sells loans and retains the right to service
such loans.
A savings institution that fails to become, or maintain its status as, a
qualified thrift lender must either become a bank (other than a savings bank) or
be subject to certain restrictions. A savings institution that fails to meet
the QTL test and does not convert to a bank will be: (i) prohibited from making
an investment or engaging in activities that would not be permissible for
national banks; (ii) prohibited from establishing any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) ineligible to obtain new advances from any
Federal Home Loan Bank; and (iv) subject to limitations on the payment of
dividends comparable to the statutory and regulatory dividend restrictions
applicable to national banks. Also, beginning three years after the date on
which the savings institution ceases to be a qualified thrift lender, the
savings institution would be prohibited from retaining any investment or
engaging in any activity not permissible for a national bank and would be
required to repay any outstanding advances to any FHLB. A savings institution
may requalify as a qualified thrift lender if it thereafter complies with the
QTL test.
As of December 31, 1997, the Bank was in compliance with the QTL
requirement. At December 31, 1997, 89.48% of the Bank's assets were "qualified
thrift investments."
Liquidity Requirements. Federally insured savings associations are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of average daily balances of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement may vary from time to time (between 4.0% and 10.0%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the required liquid asset ratio is 4.0%.
For purposes of this ratio, liquid assets include specified short-term
assets (such as cash, certain time deposits, certain bankers' acceptances and
short-term United States Treasury obligations), and long-term assets such as
United States Treasury obligations of more than one and less than five years and
federal agency obligations with a minimum term of 18 months. The regulations
governing liquidity requirements include as liquid assets debt securities hedged
with forward commitments obtained from dealers in United States Government
securities or Associations whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial futures position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of such securities. FIRREA also
authorizes the OTS to designate as liquid assets certain mortgage-related
securities and certain mortgage loans (qualifying as backing for certain
mortgage-backed securities) with less than one year to maturity. Short-term
liquid assets currently must constitute at least 1% of an association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of the liquidity
requirements. The monthly average liquidity ratio of the Bank for December 1997
was 5.91% and exceeded the then applicable requirement of 4.0%.
Insurance of Accounts and Regulation by the FDIC. The Bank's deposits are
insured up to $100,000 per insured member (as defined by law and regulation) by
the SAIF. This insurance is backed by the full faith and credit of the United
States Government. The SAIF is administered and managed by the FDIC. As
insurer, the FDIC is authorized to conduct examinations of and to require
reporting by SAIF-insured associations. It also may prohibit any SAIF-insured
association from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the SAIF. The FDIC also has the authority to
initiate enforcement actions against savings associations, after first giving
the OTS an opportunity to take such action.
28
<PAGE>
The minimum annual deposit insurance premiums are currently assessed at the
rate of .065% of deposits for all SAIF-insured members. The FDIC, however, is
authorized to raise premiums in certain circumstances related to fund losses and
severe economic circumstances and has exercised this authority several times
with respect to premiums paid to the BIF by commercial banks and BIF-member
savings associations.
In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
27, 1996. In addition, beginning January 1, 1997, pursuant to the legislation,
interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by BIF-insured institutions and SAIF-insured
institutions. The FICO assessment will be 1.29 basis points per $100 in BIF
deposits and 6.44 basis points per $100 in SAIF deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro rata by banks and thrifts
based on deposits (approximately 2.4 basis points per $100 in deposits).
The legislation also provides for the merger of the BIF and SAIF on January
1, 1999 if there are no more savings associations as of that date. Several
bills have been introduced in the current Congress that would eliminate the
federal thrift charter and OTS. The bills would require that all federal
savings associations convert to national banks or state depository institutions
by no later than January 1, 1998 in one bill and June 30, 1998 in the other and
would treat all state savings associations as state banks for purposes of
federal banking laws. Subject to a narrow grandfathering, all savings and loan
holding companies would become subject to the same regulation as bank holding
companies under the pending legislative proposals. Under such proposals, any
lawful activity in which a savings association would be permitted for up to two
years following the effective date of its conversion to the new charter, with
two additional one-year extension which may be granted at the discretion of the
regulator. Additionally, such proposals would grandfather existing thrift
intrastate and interstate branches which were operated as branches or in the
process of being established on January 1, 1997 or January 7, 1997,
respectively. The legislative proposals would also abolish the OTS and transfer
its functions to the federal bank regulators with respect to the institutions
and to the Federal Reserve Board with respect to the regulation of holding
companies. The Company is unable to predict whether the legislation will be
enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Company is also unable
to predict whether the SAIF and BIF funds will eventually be merged.
Limitations on Capital Distributions. OTS regulations impose limitations
on all capital distributions by savings institutions. Capital distributions
include cash dividends, payments to repurchase or otherwise acquire the savings
association's shares, payments to stockholders of another institution in a cash-
out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions. An institution that exceeds all fully
phased-in capital requirements before and after a proposed capital distribution
("Tier 1 Association") may, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year up to (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its surplus capital at the beginning of the calendar year or (ii) 75%
of its net income over the most recent four-quarter period. Any additional
capital distributions would require prior regulatory approval. An institution
that meets its regulatory capital requirement, but not its fully phased-in
capital requirement before or after its capital distribution ("Tier 2
Association") may, after prior notice but without the approval of the OTS, make
capital distributions of: up to 75% of its net income over the most recent four
quarter period if it satisfies the risk-based capital requirement that would be
applicable to it on January 1, 1993, computed based on its current portfolio; up
to 50% of its net income over the most recent four quarter period if it
satisfies the risk based capital standard that was applicable to it on January
1, 1991, computed based on its current portfolio; and up to 25% of its net
income over the most recent four quarter period if it satisfies its current
risk-based capital requirement. In computing the institution's permissible
percentage of capital distributions, previous distributions made during the
prior four quarter period must be included. A
29
<PAGE>
savings institution that does not meet its current regulatory capital
requirement before or after payment of a proposed capital distribution ("Tier 3
Association") may not make any capital distributions without the prior approval
of the OTS. In addition, the OTS would prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In addition, FDICIA provides that, as a general rule, a financial
institution may not make a capital distribution if it would be undercapitalized
after making the capital distribution. Also, an institution meeting the Tier 1
capital criteria which has been notified that it needs more than normal
supervision will be treated as a Tier 2 or Tier 3 Association unless the OTS
deems otherwise. A recently proposed OTS rule would amend the capital
distribution regulation to provide that a Tier 1 Association would be permitted
to make capital distributions under the Tier 1 standard or, consistent with the
highest Tier 2 standard, at 75% of its net income to date over the most recent
four quarter period. As of December 31, 1997, the Bank was a Tier 1 Association.
Investment Limitations. FIRREA generally provides that state-chartered
savings associations may not engage as principal in any type of activity, or in
any activity in any amount not permitted for federally-chartered associations,
or directly acquire or retain any equity investment of a type or amount not
permitted for federally-chartered associations. The FDIC has authority to grant
exceptions from these prohibitions (other than with respect to non-service
corporation equity investments) if it determines no significant risk to the
insurance fund is posed by the amount of the investment or the activity to be
engaged in if the Bank is and continues to be in compliance with fully phased-
in standards. Among activity restrictions applicable to federally-chartered
institutions that are also applicable to the Bank is the prohibition on
investing directly in equity securities or real estate (other than that used for
offices and related facilities or acquired through, or in lieu of, foreclosure).
In addition, the Bank is authorized to invest directly in service corporation to
a maximum of 2% of the Bank's assets, plus an additional 1% of assets if the
amount over 2% is used for specified community or intercity development
purposes. Federal laws and regulations also impose certain limitations on
operations, including restrictions on loans to one borrower, transactions with
affiliates and affiliated persons and liability growth.
FIRREA also imposed investment and lending restrictions that are applicable
to all federally- or state-chartered associations. FIRREA provides that no
savings association may invest in corporate debt securities not rated in one of
the four highest rating categories by a nationally recognized rating
organization. FIRREA and FDICIA amend the authority of savings associations to
engage in transactions with affiliates or to make loans to certain insiders, by
making such transactions subject to Sections 23A, 23B, 22(g) and 22(h) of the
Federal Reserve Act. Among other things, these provisions generally require
that these transactions with affiliates be on terms and conditions comparable to
those for similar transactions with non-affiliates. In addition, these
affiliate transactions may be regulated further by the OTS to address safety and
soundness concerns.
Holding Company Regulation. The Company and the MHC are holding companies
within the meaning of the Home Owners' Loan Act of 1933 ("HOLA"). As such, the
Company and the MHC are registered with and is subject to OTS examination and
supervision as well as certain reporting requirements. In addition, the
operations of the Company and the MHC are subject to the Regulations as well as
other regulations promulgated by the OTS from time to time. As a SAIF-insured
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in dealing with the Company and MHC and with other persons
affiliated with the Company and the MHC and will continue to be subject to
examination and supervision by the OTS and the FDIC.
Transactions with Affiliates. Section 11 of HOLA provides that
transactions between an insured subsidiary of a holding company and an affiliate
thereof will be subject to the restrictions that apply to transactions between
banks that are members of the Federal Reserve System and their affiliates
pursuant to Sections 23A and 23B of the Federal Reserve Act. Generally,
Sections 23A and 23B: (i) limit the extent to
30
<PAGE>
which a financial institution or its subsidiaries may engage in "covered
transactions" with an "affiliate," to an amount equal to 10% of the
institution's capital and surplus, and limit all "covered transactions" in the
aggregate with all affiliates to an amount equal to 20% of such capital and
surplus; and (ii) require that all transactions with an affiliate, whether or
not "covered transactions," be on terms substantially the same, or at least as
favorable to the institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions. Management believes
that the Bank is in compliance with the requirements of Sections 23A and 23B. In
addition to the restrictions that apply to financial institutions generally
under Sections 23A and 23B, Section 11 of the HOLA places three other
restrictions on savings associations, including those that are part of a holding
company organization. First, savings associations may not make any loan or
extension of credit to an affiliate unless that affiliate is engaged only in
activities permissible for bank holding companies. Second, savings associations
may not purchase or invest in affiliate securities except for those of a
subsidiary. Finally, the Director is granted authority to impose more stringent
restrictions when justifiable for reasons of safety and soundness.
Extensions of credit by the Bank to executive officers, directors, and
principal stockholders and related interests of such persons are subject to
Sections 22 (g) and 22(h) of the Federal Reserve Act and Subpart A of the
Federal Reserve Board's Regulation O. These rules prohibit loans to any such
individual where the aggregate amount exceeds an amount equal to 15% of an
institution's unimpaired capital and surplus plus an additional 10% of
unimpaired capital and surplus in the case of loans that are fully secured by
readily marketable collateral, and/or when the aggregate amount outstanding to
all such individuals exceeds the institution's unimpaired capital and unimpaired
surplus. These rules also provide that no institution shall make any loan or
extension of credit in any manner to any of its executive officers or directors,
or to any person who directly or indirectly, or acting through or in concert
with one or more persons, owns, controls, or has the power to vote more than 10%
of any class of voting securities of such institution ("Principal Stockholder"),
or to a related interest (i.e., any company controlled by such executive
officer, director, or Principal Stockholder), or to any political or campaign
committee the funds or services of which will benefit such executive officer,
director, or Principal Stockholder or which is controlled by such executive
officer, director, or Principal Stockholder, unless such loan or extension of
credit is made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, does not involve more than the normal risk of repayment or
present other unfavorable features, and the institution follows underwriting
procedures that are not less stringent than those applicable to comparable
transactions by the institution with persons who are not executive officers,
directors, Principal Stockholders, or employees of the institution. A savings
association is therefore prohibited from making any new loans or extensions or
credit to the savings association's executive officers, directors, and 10%
stockholders at different rates or terms than those offered to employees of the
Bank generally. The rules identify limited circumstances in which an
institution is permitted to extend credit to executive officers. Management
believes that the Bank is in compliance with Sections 22(g) and 22(h) of the
Federal Reserve Act and Subpart A of the Federal Reserve Board's Regulation O.
The Federal Reserve System. Federal Reserve Board regulations require all
depository institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and non-
personal time deposits. Reserves of 3% must be maintained against total
transaction accounts of $54.0 million or less (after a $4.0 million exemption),
and an initial reserve of 10% (subject to adjustment by the Federal Reserve
Board to a level between 8% and 14%) must be maintained against that portion of
total transaction accounts in excess of such amount. At December 31, 1997, the
Bank was in compliance with these reserve requirements. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy liquidity requirements that may be imposed by the OTS. See
"--Federal Regulations--Liquidity Requirements."
31
<PAGE>
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from the Federal Reserve Bank.
Federal and State Taxation
Federal Taxation. For federal income tax purposes, the Company files a
federal income tax return on a calendar year basis. Because the Mutual Holding
Company owns less than 80% of the outstanding common stock of the Bank, it is
not permitted to file a consolidated federal income tax return with the Bank.
Because the Mutual Holding Company has nominal assets other than the stock of
the Bank, it will initially have no material federal income tax liability.
Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, and "large"
associations, i.e., the quarterly average of the association's total assets or
of the consolidated group of which it is a member, exceeds $500 million for the
year, may no longer be entitled to use the experience method of computing
additions to their bad debt reserve. A "large" association must use the direct
write-off method for deducting bad debts, under which charge-offs are deducted
and recoveries are taken into taxable income as incurred. If the Bank is not a
"large" association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take into
income) over a six-year period its applicable excess reserves, i.e, the balance
of its reserves for losses on qualifying loans and nonqualifying loans, as of
the close of the last tax year beginning before January 1, 1996, over the
greater of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would have been the balance of such reserves as of the close of the
last tax year beginning before January 1, 1996, had the Bank always computed the
additions to its reserves using the experience method. Postponement of the
recapture is possible for a two-year period if an association meets a minimum
level of mortgage lending for 1996 and 1997.
If an association ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the association no longer qualifies as a bank. The balance of the pre-
1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.
Delaware Taxation. As a Delaware holding company doing business in another
state, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual fee to the State of
Delaware. The Company is also subject to an annual franchise tax imposed by the
State of Delaware.
Florida Taxation. Foreign corporations, like the Company, pay a 5 1/2% tax
on the portion of their net taxable income which is allocable to the State of
Florida.
The Company has not been audited by the Internal Revenue Service, the State
of Delaware or the State of Florida within the past five years. See Notes 1 and
13 to the Financial Statements.
32
<PAGE>
Executive Officers of the Registrant
Listed below is information, as of December 31, 1997, concerning the
Registrant's executive officers. There are no arrangements or understandings
between the Registrant and any of persons named below with respect to which he
or she was or is to be selected as an officer.
<TABLE>
<CAPTION>
Name Age Position and Term
- ---- --- ---------------------------------------------------------
<S> <C> <C>
Vince A. Elhilow 58 President since 1987 and Chief Executive Officer since
1992; Director of the Bank since 1984
Richard D. Aldred 53 Executive Vice President as of December 31, 1994;
Treasurer and Chief Financial Officer since 1985
Joseph C. Bova 53 Executive Vice President as of December 31, 1994; Lending
Operations Manager
Robert L. Fugate 49 Executive Vice President as of December 31, 1994; Banking
Operations Manager since 1982
Christopher H. Cook 54 Executive Vice President as of December 31, 1996;
Corporate Counsel since 1996; Director of the Bank since
1993
Patricia C. Clager 62 Vice President since 1990; Corporate Secretary since 1987;
Assistant to the Chairman of the Board
</TABLE>
33
<PAGE>
ITEM 2. PROPERTIES
The Bank conducts its business through its main office located in West Palm
Beach, Florida, and 20 additional full service branch offices located in Palm
Beach and Martin counties and two loan production offices located in Palm Beach
and Broward counties. The following table sets forth certain information
concerning the main office and each branch office of the Bank at December 31,
1997. The aggregate net book value of the Bank's premises and equipment was
$21.4 million at December 31, 1997.
<TABLE>
<CAPTION>
LOCATION OPENING DATE OWNERSHIP ANNUAL RENT
- -------- ------------ ------------ -----------
<S> <C> <C> <C>
Main Office 12/22/52 Fee Simple/ $ 7,420
218 Datura St. Ground Lease
West Palm Beach, Florida
45th St. 10/23/60 Fee Simple --
4520 45th St.
West Palm Beach, Florida
Northlake 11/15/65 Fee Simple --
950 Northlake Blvd
Lake Park, Florida
Forest Hill 4/05/71 Fee Simple --
399 Forest Hill Blvd
West Palm Beach, Florida
Palm Beach 6/18/73 Fee Simple --
245 Royal Poinciana
Palm Beach, Florida
Century Corners 6/25/73 Fee Simple --
4835 Okeechobee Blvd
West Palm Beach, Florida
Singer Island 2/04/74 Fee Simple --
1200 E. Blue Heron
Riviera Beach, Florida
Jupiter/Tequesta 1/26/76 Ground Lease $ 13,250
171 Tequesta Dr
Tequesta, Florida
Royal Palm Beach 3/15/76 Fee Simple --
100 Royal Palm Beach Blvd
Royal Palm Beach, Florida
Boynton Beach 12/19/77 Lease $120,458
1501 Corporate Dr
Boynton Beach, Florida
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C> <C>
West Lake Worth 12/03/79 Fee Simple --
6535 Lake Worth Rd
Lake Worth, Florida
Wellington 6/02/80 Fee Simple --
12000 W. Forest Hill Blvd
Wellington, Florida
Delray Beach 10/20/80 Ground Lease $68,916
5017 W. Atlantic Ave
Delray Beach, Florida
Jensen Beach 9/14/81 Fee Simple --
1021 NE Jensen Beach Blvd
Jensen Beach, Florida
Bear Lakes 5/15/89 Lease $192,286
701 Village Blvd
West Palm Beach, Florida
Palm Beach Gardens 5/20/91 Lease $143,523
10973 N. Military Tr
Palm Beach Gardens, Florida
Kanner/Monterey 7/06/93 Fee Simple --
2401 S. Kanner Highway
Stuart, Florida
Stuart 12/13/93 Fee Simple --
2980 South Federal Highway
Stuart, Florida
West Boynton Beach 4/24/95 Fee Simple --
9875 Jog Road
Boynton Beach, Florida
Boynton Beach Loan Production Office 1/02/96 Lease $ 4,210
2240 Woolbright Road, Suite 350
Boynton Beach, Florida
West Forest Hill 9/30/96 Fee Simple --
3989 Forest Hill Blvd.
West Palm Beach, Florida
Coral Springs Loan Production Office 6/03/96 Lease $ 1,080
4641 University Drive
Coral Springs, Florida
Jupiter
1240 W. Indiantown Road 6/23/97 Fee Simple --
Jupiter, Florida
</TABLE>
35
<PAGE>
The Bank's accounting and record keeping activities are maintained on the
Fiserv Solutions, Inc. (Fiserv) service bureau system. The Bank also owns data
processing equipment it uses for its internal processing needs. The net book
value of such data processing equipment and related software at December 31,
1997, was approximately $770,000.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
There are various claims and lawsuits in which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted during the fourth quarter of the year ended
December 31, 1997 to a vote of securityholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
For information concerning the market for the Company's common stock, the
section captioned "Stockholder Information" in the Company's Annual Report to
Stockholders for the Year Ended December 31, 1997 (the "Annual Report to
Stockholders") is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- --------------------------------------------------------
The "Selected Consolidated Financial and Other Data" section of the
Company's Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS
- ------------------------------
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ----------------------------------------------------------
There were no changes in or disagreements with accountants in the Company's
accounting and financial disclosure during 1997.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- --------------------------------------------------
Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement dated March 20, 1998
(the "Proxy Statement"), specifically the section captioned "Proposal I--
Election of Directors." In addition, see Item 1. "Executive Officers of the
Registrant" for information concerning the Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference from the Registrant's Proxy Statement, specifically the sections
captioned "Proposal I--Election of Directors--Executive Compensation,"
"--Directors' Compensation," and "--Benefits."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
- ---------------------------------------------------------
Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement.
ITEM 13. CERTAIN TRANSACTIONS
- ------------------------------
Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
- -----------------------------------------------------
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) Financial Statements
--------------------
. Independent Auditors' Report
. Consolidated Statements of Financial Condition,
December 31, 1996 and 1997
. Consolidated Statements of Operations,
Years Ended December 31, 1995, 1996 and 1997
. Consolidated Statements of Changes in Stockholders' equity,
Years Ended December 31, 1995, 1996 and 1997
. Consolidated Statements of Cash Flows,
Years Ended December 31, 1995, 1996 and 1997
. Notes to Consolidated Financial Statements.
37
<PAGE>
(a)(2) Financial Statement Schedules
-----------------------------
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated
financial statements or related notes.
(a)(3) Exhibits
--------
*3.1 Certificate of Incorporation of Fidelity Banckshares, Inc.
*3.2 Bylaws of Fidelity Banckshares, Inc.
*4 Common Stock Certificate of the Bank
*10.1 Incentive Stock Option Plan
*10.2 Stock Option Plan for Outside Directors
*10.3 Employment Agreement with Vince A. Elhilow, President and
Chief Executive Officer
*10.4 Recognition and Retention Plan for Employees
*10.5 Recognition and Retention Plan for Outside Directors
*10.6 Employee Severance Compensation Plan
*10.6.A Severance Agreement between the Bank and Richard D. Aldred,
Executive Vice President
*10.6.B Severance Agreement between the Bank and Joseph C. Bova,
Executive Vice President
*10.6.C Severance Agreement between the Bank and Robert L. Fugate,
Executive Vice President
38
<PAGE>
*10.7 Employee Stock Ownership Plan
*10.8 Fidelity Federal Savings Bank of Florida Senior Management
Performance Incentive Award Plan
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant
99.1 Proxy Statement for Annual Meeting of Stockholders
- -------------------
* Previously filed under cover of Registration Statement on Form S-4 filed
on December 12, 1996-Registration No. 333-17737
(b) Reports on Form 8-K:
-------------------
On August 22, 1997 the Company filed a current Report on Form 8-K to
report under Item 2. Acquisition or Disposition of Assets the entering
into a Merger Agreement to acquire BankBoynton, a Federal Savings
Bank. On October 6, 1997, the Company filed a current Report on
Form 8-K/A to file Under Item 7 pro forma financial information
relating to the above referenced merger.
On December 11, 1997, the Company filed a Current Report on Form 8-K
to report under Item 2. Acquisition or Disposition of Assets the
Completion of the acquisition of BankBoynton, A Federal Savings Bank.
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIDELITY BANKSHARES, INC.
Date: March 28, 1998 By: /s/ Vince A. Elhilow
----------------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Vince A. Elhilo By: /s/ Richard D. Aldred
--------------------------------- ----------------------------------
Vince A. Elhilow, President Richard D. Aldred, Executive Vice
and Chief Executive Officer President, Chief Financial Officer
(Principal Executive Officer) and Treasurer (Principal Financial
and Accounting Officer)
Date: March 28, 1998 Date: March 28, 1998
By: /s/ Joseph B. Shearouse, Jr. By: /s/ Keith D. Beaty
--------------------------------- ----------------------------------
Joseph B. Shearouse, Jr., Keith D. Beaty, Director
Chairman of the Board
Date: March 28, 1998 Date: March 28, 1998
By: /s/ F. Ted Brown, Jr. By: /s/ Christopher H. Cook
--------------------------------- ----------------------------------
F. Ted Brown, Jr., Director Christopher H. Cook, Director
Date: March 28, 1998 Date: March 28, 1998
By: /s/ Donald E. Warren
---------------------------------
Donald E. Warren, Director
Date: March 28, 1998
<PAGE>
EXHIBIT 13
1997 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Table of Contents
Message from the President & CEO.................... 2
Banking "Beyond the Walls".......................... 5
Board of Directors and Officers..................... 8
Office Locations.................................... 10
Corporate Information............................... 11
Financial Highlights................................ 12
Management's Discussion and Analysis
of Financial Condition and Results of Operations.. 13
Independent Auditors' Report........................ 27
Consolidated Financial Statements................... 28
Management's Assertions
as to the Effectiveness of its Internal Control
Structure over Financial Reporting and
Compliance with Designated Laws and
Regulations....................................... 56
Independent Accountants' Report..................... 57
1
<PAGE>
Report to Shareholders
[PHOTO APPEARS HERE]
Vince A. Elhilow
President and
Chief Executive Officer
In recent years, this annual message has been characterized by several evolving
themes: In the first year after our reorganization, our message was one of
potential and a vision of the future. In subsequent years, we moved on to
address new challenges and to identify new opportunities for our organization in
the midst of a robust economy and a fast-growing market.
This year, I am pleased to note, our message is one of milestones - including
major financial achievements in the last 12 months, along with other successes
which will enable us to further strengthen our relationships with our customers
and our communities in the years to come.
The most obvious financial achievement of 1997 was the attainment of $1 billion
in assets by mid-summer. This was a major milestone in our 45-year history. Yet,
as the second half of the year demonstrated, it was only the precursor for even
more dramatic growth to come, leading us to a level of $1.2 billion in assets as
of December 31, 1997.
[GRAPH APPEARS HERE]
- ------------------------------------------------------------------------------
The most obvious financial achievement
of 1997 was the attainment of $1 billion in
assets, a major milestone in our 45-year history
- ------------------------------------------------------------------------------
Other financial measures in 1997 were equally satisfying. Net income for the
year was $6.4 million, or $0.96 per share. This was an increase of 78 percent
over 1996 levels, which reflected a one-time special assessment to recapitalize
the Savings Association Insurance Fund. However, even if the special assessment
is set aside, earnings per share increased by more than 10 percent from 1996 to
1997.
The year also saw continued growth in loan production, with production for the
year totaling $331 million. This growth was led by a 100 percent increase in
consumer and commercial lending, as Fidelity Federal's operations continue to
evolve into those more characteristic of a commercial bank.
2
<PAGE>
I am especially pleased to note our continued uninterrupted record of dividend
payments, culminating in our returning $0.225 per share in each of the last two
quarters. This continues our pattern of maintaining a stable balance between
dividends and growth, enabling us to achieve major growth targets while
concurrently establishing a pattern of continued dividend growth since our
conversion in 1994.
Beyond its satisfying financial results, 1997 also was a year of other
achievements. The first of these was the successful reorganization into a mid-
tier holding company format in January. With the reorganization, Fidelity
Federal Savings Bank is now a wholly-owned subsidiary of Fidelity Bankshares,
Inc., which, in turn, is the majority-owned subsidiary of Fidelity Bankshares,
MHC, the mutual holding company parent. This structure offers added management
flexibility, including more favorable stock repurchase capability and, even more
importantly, the opportunity to pursue additional permitted activities and
acquisitions. We believe Fidelity was the first OTS-regulated institution to
establish such a structure, although others have since followed our lead.
Building on the advantages of this new structure, in mid-year Fidelity commenced
the acquisition of BankBoynton, a locally based thrift which brought $57.6
million in assets to the organization, as well as a significant presence in the
key Boynton Beach and Lake Worth markets, where Fidelity Federal has
demonstrated continued success in recent years. The acquisition, which was
completed in December, produced an immediate positive effect on earnings.
Moreover, we were able to achieve significant economies by incorporating
BankBoynton's three branches into our own existing offices, while retaining most
of their employees.
In December, Fidelity filed a registration statement with the Securities and
Exchange Commission to sell cumulative trust preferred securities through
Fidelity Capital Trust I, a newly formed trust subsidiary. This transaction,
which closed January 21, 1998, enabled Fidelity Bankshares to access over $28
million of additional capital for the bank at reasonable cost, and will further
enhance our ability to respond to acquisition and market consolidation
opportunities which may arise.
- ---------------------------------
Beyond its satisfying financial
results, 1997 also was a year of
other achievements.
- ---------------------------------
The year's financial success has been accompanied by physical changes, as well,
most notably a series of transactions involving downtown West Palm Beach
properties. These transactions provide further evidence of our continuing
commitment to downtown. Even more important, they lay a foundation for the
continued resurgence of the area - a movement that has taken off with remarkable
speed in the past year.
On August 1, the bank entered into a contract to sell a significant part of its
downtown property to Renaissance Management Corp. Shortly after this contract
was completed, Fidelity began negotiations to acquire the building which
currently houses the operations center of Barnett Bank, across Datura Street
from Fidelity Federal's headquarters. This $6.5 million purchase, completed
shortly after year-end, reaffirms Fidelity Federal's intention to maintain a
major downtown presence as it has since its beginning. The 65,000-square-foot,
four-story structure will continue to house the merged Barnett/NationsBank
operations
3
<PAGE>
under a two-year leaseback arrangement, after which Fidelity will undertake
renovations to convert the building to a new corporate headquarters.
The bank also continued steady branch growth, opening our 21st branch, on
Indiantown Road in Jupiter, in June. The next new branch, located in Jupiter
Farms, is scheduled for opening by the second quarter of 1998, with
approximately six more new branches anticipated within the next two years.
This pattern reflects continued solid growth in Fidelity Federal's local
markets, as well as knowledge of the marketplace. Among the notable successes
have been the continued growth of our southern Palm Beach County operations,
including our specialized loan production offices. We note, as well, the
continued strong growth projections in northern Palm Beach County, as well as
the very promising potential of Martin and St. Lucie County activities.
For example, by the year 2010, the combined population of Palm Beach and Martin
counties is projected to exceed 1.4 million - a 46 percent increase since 1990.
St. Lucie County's growth will be even more remarkable, increasing by 59 percent
in the same 20-year period. These patterns further reinforce our ongoing
attention to growth in the northern parts of our service area, and our continued
expansion into St. Lucie County.
Finally, in addition to financial and physical milestones, Fidelity Federal also
achieved significant growth in the range of its services during 1997. Plans were
completed during the year to introduce the new financial services in early 1998,
beginning in four offices full-time, and by appointment in other branches. This
new product is made possible by a strategic partnership with INVEST, a financial
corporation which will provide Fidelity customers with convenient access to
stocks, bonds, mutual funds and annuities, along with financial planning and
portfolio services. This represents an exciting new opportunity and an added
level of service for our customers, providing them with the broadest possible
range of financial services and products.
The year also saw continued growth in our consumer and commercial account
activities, along with continued innovation in the ways in which the bank and
its customers interact and communicate. These advances, described in more detail
in the commentary which follows, reflect both the growing size and
sophistication of our markets.
As we reflect on the milestones achieved in 1997, we see every reason for
continued optimism about the future of our market, our community and our
institution. With a strong management team and an experienced, dedicated staff
to lead us into an exciting new era, we look forward to continued success in
terms of financial results, physical growth, and expanded services and
capabilities.
/s/ Vince A. Elhilow
Vince A. Elhilow
President and Chief Executive Officer
4
<PAGE>
Banking "Beyond the Walls"
Fidelity Federal's evolution into a comprehensive financial services
organization has occurred at a time of dramatic change in the industry. Our new
role not only permits us to offer a wide array of new services, it also requires
that we do so.
To put it another way, Fidelity Federal's continued expansion into innovative
new areas is in part due to the need to remain competitive. At the same time,
however, broadening our reach and expanding our services are also fundamental
elements of our charter as a community-oriented bank. By remaining responsive to
community needs and desires, we not only serve our customers better, but also
enhance shareholder value. Even more importantly, such continued innovation
helps position Fidelity Federal for the future - a future that will see even
more sophisticated services and methods of access.
Fidelity Federal's financial products and services meet a broad array of
customer needs, both personal and business. These include traditional deposit
services such as savings accounts and certificates, as well as personal and
business demand accounts. Even in such a traditional realm, however, innovation
and new methods of access are rapidly changing the way banking is done.
For example, Fidelity Federal today offers a broad range of checking accounts,
with a variety of features to meet the needs of an ever-changing customer base.
Among the most popular are the premium-return Eagle savings account and the
highly attractive Money Market savings account, which offers tiered interest
compounded daily. Fidelity's innovative "Count on Us" checking account, which
offers a wide range of discounts and special purchase programs, and the premier
Money Management checking account, with its premium interest and minimal fees,
help meet the needs of today's sophisticated banking customers.
In addition to these consumer products, Fidelity Federal has also achieved
steady growth in its commercial banking services, including traditional business
checking and its specialized small business checking programs. A particular
success is the Business Reserve account, designed to provide business owners a
vehicle for short-term investment.
On the lending side, Fidelity Federal remains unmatched in terms of mortgage
lending experience in its market. This exceptional local knowledge, along with
local decision-making capabilities, enable the bank to respond quickly with a
variety of service-oriented mortgage lending programs, including both fixed-rate
and adjustable-rate mortgages, construction and permanent financing, and home
equity loans and lines of credit.
- ------------------------------
Fidelity Federal's financial
products and services meet a
broad array of customer needs,
both personal and business.
- ------------------------------
5
<PAGE>
For all its innovation, Fidelity Federal remains remarkably true to its heritage
in this area, with an unwavering commitment to extending the benefits of home
ownership to a broader and wider customer base than ever before. In this regard,
Fidelity Federal was honored with a Special Merit Award in the Federal Home Loan
Bank of Atlanta's Partnership Excellence Awards Program, which recognizes
organizations that help meet critical affordable housing and economic
development needs. Only 11 such awards were presented during 1997, and Fidelity
Federal was one of only two banks in Florida to receive one, in recognition of
its partnership with the Community Financing Consortium, a not-for-profit
lending organization that helps secure financing for low- and moderate-income
families.
Among Fidelity Federal's most remarkable successes of the past year has been its
100 percent increase in consumer, commercial business and commercial real estate
lending. The dramatic growth in these areas has been instrumental in helping to
accelerate Fidelity's evolution into a more characteristic commercial banking
profile. Moreover, it was a major contributor to the bank's growth to the
billion-dollar level during 1997.
- ---------------------------------
The unique combination of
a broad outlook with a local
focus has helped Fidelity Federal
achieve a unique place
in the industry.
- ---------------------------------
In this arena, Fidelity Federal's local experience and expertise again provide
an inherent strength, enabling the bank to move quickly to arrange financing for
local commercial enterprises. At the same time, its continued growth has helped
Fidelity Federal achieve the size and sophistication needed to access the most
demanding financing requirements.
Moving beyond traditional deposit and lending services, Fidelity Federal is now
positioned to participate in the next phase of the financial service industry's
growth - the development of comprehensive single-source financial planning and
investment services. 1998 will see the introduction of new financial services
through an in-branch brokerage program, which was referred to in the Report to
Stockholders. This new service will enable Fidelity Federal to respond to
growing consumer expectations for even greater sophistication and more
convenient access to diverse financial markets.
Moreover, the addition of brokerage services helps underscore the importance of
establishing stronger, more complete customer relationships - a long-term trend
that began years earlier with the introduction of IRAs, SEP programs and other
retirement planning services, all of which have been mutually successful for the
bank and its customers.
Finally, beyond the actual services it offers, Fidelity Federal continues to
evolve in terms of the ways in which customers access these services.
Convenience features and specialized financial services let us touch our
customers' lives in many new ways; again, the goal is a stronger, more complete
relationship, reinforced by such conveniences as Telephone Billpay, which brings
similar convenience to customers using an ordinary telephone for secure access,
6
<PAGE>
and the upcoming PC banking, which will give customers new levels of control
over their finances from their own computers.
In the same way, Fidelity Federal's expanded physical presence brings added
convenience. New branches - including an additional half-dozen or more in the
coming two years - will make it even easier to access the bank's services, while
programs such as 24-hour Bank-Line and continued expansion of the ATM network
provide round-the-clock convenience.
With sophisticated new services and convenient new ways of accessing them,
Fidelity Federal is ideally positioned for the future of the financial services
industry. Yet, even as banking continues to expand beyond its traditional
"walls," Fidelity Federal also remains true to its heritage as a community-
oriented, locally-managed bank. This unique combination - a broad outlook with a
local focus - has helped Fidelity Federal achieve its unique place in the
industry today, and will continue to form the basis for its success in the
future.
7
<PAGE>
Fidelity Bankshares, Inc.
Board of Directors______________________________________________________________
[PHOTO APPEARS HERE] [PHOTO APPEARS HERE] [PHOTO APPEARS HERE]
Jos. B. Shearouse, Jr. Vince A. Elhilow Christopher H. Cook
Chairman of the Board President Executive Vice President
Chief Executive Officer Corporate Counsel
[PHOTO APPEARS HERE] [PHOTO APPEARS HERE] [PHOTO APPEARS HERE]
Keith D. Beaty F. Ted Brown, Jr. Donald E. Warren, M.D.
Chief Executive Officer President Retired Physician
Implant Innovations, Inc. Ted Brown Real Estate, Inc.
Officers________________________________________________________________________
Richard D. Aldred Joseph C. Bova
Executive Vice President Executive Vice President
Chief Financial Officer
Robert L. Fugate Patricia C. Clager
Executive Vice President Corporate Secretary
8
<PAGE>
Fidelity Federal Savings Bank of Florida
Directors_______________________________________________________________________
Jos. B. Shearouse, Jr. Vince A. Elhilow Christopher H. Cook
Chairman of the Board President Executive Vice President
Chief Executive Officer Corporate Counsel
Keith D. Beaty F. Ted Brown Donald E. Warren, M. D.
Chief Executive Officer President Retired Physician
Implant Innovations, Inc. Ted Brown Real Estate, Inc.
Directors Emeriti_______________________________________________________________
Louis B. Bills, Sr. George B. Preston Raymond C. Tylander
Louis B. Bills Enterprises Chairman Emeritus President
Tylander Realty Corporation
Officers________________________________________________________________________
EXECUTIVE OFFICER
Vince A. Elhilow
President
Chief Executive Officer
EXECUTIVE VICE PRESIDENTS
Richard D. Aldred
Chief Financial Officer
Joseph C. Bova
Lending Operations Manager
Christopher H. Cook
Corporate Counsel
Robert L. Fugate
Banking Operations Manager
J. Robert McDonald
President, Fidelity Realty & Appraisal Services, Inc.
SENIOR VICE PRESIDENTS
David R. Hochstetler
Director of Marketing/CRA Officer
Brian C. Mahoney
Controller
Janice R. Newlands
Director of Human Resources
Debra K. Schiavone
Mortgage Loan Administration
Shellie R. Schmidt
Banking Administration
Joseph B. Shearouse, III
Commercial Loan Manager
Kenneth B. Stone, Jr.
Mortgage Loan Production
Daniel F. Turk
Property and Risk Management
VICE PRESIDENT/CORPORATE SECRETARY
Patricia C. Clager
Administrative Assistant to the Chairman
VICE PRESIDENT/ASSISTANT SECRETARY
Arlene Metz
Administrative Assistant to the President
Martin County Advisory Board____________________________________________________
Richard Q. Pennick, M.D., Chairman Owen C. Schwaderer
Retired Physician President
Jensen Beach Land Company
J. David Girlinghouse, D.D.S.
Dentist Francis X. Wilson
President
C. Norris Tilton, Esq. Wilson Builders
Attorney
9
<PAGE>
LOCATIONS
[MAP APPEARS HERE]
PALM BEACH COUNTY OFFICES
MAIN OFFICE Palm Beach Gardens
281 Dutura Street Garden Square Shoppes
West Palm Beach, FL 33401 10973 North Military Trail
(561) 659-9900 Palm Beach Gardens, FL 33410
(516) 775-7600
45th Street
4520 Broadway Royal Palm Beach
West Palm Beach, FL 33407 100 Royal Palm Beach Blvd.
(561) 848-5577 Royal Palm Beach, FL 33411
(561) 793-3270
Bear Lakes
701 Village Blvd. Singer Island
West Palm Beach, FL 33409 1200 East Blue Heron Blvd.
(561) 689-8800 Riviera Beach, FL 33404
(561) 848-8675
Boynton Beach
At I-95 & Woolbright Road Tequesta
1501 Corporate Drive 171 Tequesta Drive
Boynton Beach, FL 33426 Tequesta, FL 33469
(561) 734-3300 (561) 747-5100
Century Corners Wellington
4835 Okeechobee Blvd. 12000 W. Forest Hill Blvd.
West Palm Beach, FL 33417 West Palm Beach, FL 33414
(561) 689-5305 (561) 793-4501
Forest Hill West Boynton Beach
399 Forest Hill Blvd. 9875 Jog Road
West Palm Beach, FL 33405 Boynton Beach, FL 33437
(561) 585-5552 (561) 731-2122
Jupiter West Delray Beach
1240 W. Indiantown Rd. 5017 West Atlantic Avenue
Jupiter, FL 33458 Delray Beach, FL 33484
(561) 748-9121 (561) 499-7002
Northlake West Forest Hill
950 Northlake Blvd. 3989 Forest Hill Blvd.
Lake Park, FL 33408 West Palm Beach, FL 33406
(561) 842-4266 (561) 969-3333
Palm Beach West Lake Worth
245 Royal Poinciana Way 6535 Lake Worth Road
Palm Beach, FL 33480 Lake Worth, FL 33467
(561) 659-0666 (561) 968-1040
MARTIN COUNTY OFFICES
Jensen Beach Martin Square
1021 N.E. Jensen Beach Blvd. 2980 S. Federal Highway
Jensen Beach, FL 34957 Stuart, FL 14994
(561) 334-1600 (561) 287-6600
Kanner/Monterey
2401 South Kanner Highway
Stuart, FL 34994
(561) 288-6767
10
<PAGE>
CORPORATE INFORMATION
STOCK PRICE INFORMATION
Fidelity Bankshares, Inc.'s
common stock is traded on the Nasdaq
National Market under the symbol "FFFL".
Newspaper stock tables list the holding company as
"Fidelbksh". The Bank's common stock has been
trading since January 7, 1994.
INVESTOR RELATIONS
Vince A. Elhilow, President & CEO
Richard D. Aldred, Executive Vice President & CFO
Fidelity Federal Savings Bank of Florida
218 Datura Street
West Palm Beach, Florida 33401
(561) 659-9900
SHAREHOLDER SERVICES &
DIVIDEND REINVESTMENT PLAN
Fidelity Federal Savings Bank of Florida
David R. Hochstetler, Senior Vice President
Lucy A. Carr, Assistant Vice President
218 Datura Street
West Palm Beach, Florida 33401
(561) 659-9931
ANNUAL REPORT ON FORM 10-K
A copy of the Company's report on Form 10-K, as
filed with the Securities and Exchange Commission, is
available without charge by written request addressed
as set forth under Shareholder Services above.
DATE AND PLACE OF ANNUAL MEETING
April 21, 1998, 10:00 a.m. (EDT)
Omni Hotel
1601 Belvedere Road
West Palm Beach, Florida 33401
GENERAL COUNSEL
Brackett, Sned, Welch, D'Angio, Tucker & Farach
P.A.
218 Datura Street
West Palm Beach, Florida 33401
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1645 Palm Beach Lakes Blvd., Suite 900
West Palm Beach, Florida 33401
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449
STOCKHOLDER INFORMATION
Quarter Ended
-------------
3/31/97 6/30/97 9/30/97 12/31/97
Stock Price
- ---------------------------------------------------------
High $20.00 $20.25 $29.50 $33.00
Low $17.50 $18.75 $19.75 $25.25
Dividends
declared $ .20 $ .20 $ .225 $ .225
ELECTRONIC COMMUNICATIONS
News releases issued through PR Newswire are
available through Company News On-Call via fax
(1-800-758-5804, ext. 281429) or Internet website
(http://www.prnewswire.com).
11
<PAGE>
FINANCIAL HIGHLIGHTS
On January 7, 1994, Fidelity Federal Savings Bank of Florida completed a
reorganization from a mutual savings bank, into a stock savings bank, with the
majority of its shares owned by a mutual holding company. As a result, certain
comparative, stockholder data is unavailable prior to 1994.
Fidelity Bankshares, Inc. common stock currently trades on the Nasdaq National
Market system under the symbol "FFFL."
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
FOR THE YEAR (In Thousands)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 44,755 $ 43,420 $ 53,261 $ 60,240 $ 72,272
Interest expense 18,415 17,776 28,095 32,131 41,606
Net interest income 26,340 25,644 25,166 28,109 30,666
Net income 6,497 5,262 4,815 3,550 6,418
PER COMMON SHARE (1)
- -------------------------------------------------------------------------------------------------------------------
Net Income:
Basic N/A $ 0.81 $ 0.74 $ 0.54 $ 0.96
Diluted N/A 0.80 0.73 0.53 0.95
Book value N/A 11.35 12.31 12.12 12.86
Stock price:
High N/A 13.64 17.00 18.50 33.00
Low N/A 9.09 10.23 11.75 17.50
Close N/A 10.00 16.25 17.75 32.50
AVERAGE FOR THE YEAR (In Thousands)
- -------------------------------------------------------------------------------------------------------------------
Assets $658,463 $669,506 $741,777 $824,025 $ 995,528
Loans receivable, net 434,522 441,573 490,088 605,507 735,949
Mortgage-backed securities 75,325 83,550 145,405 135,973 163,250
Investments (2) 95,284 103,715 63,605 35,530 44,146
Deposits 568,470 553,184 567,493 636,297 768,892
Borrowed funds 15,758 30,231 79,905 85,608 122,898
Stockholders' equity 43,394 72,546 77,356 81,339 84,217
SELECTED PERFORMANCE RATIOS
- -------------------------------------------------------------------------------------------------------------------
Return on average assets .99% .79% .65% .43% .64%
Return on average equity 14.97% 7.25% 6.22% 4.36% 7.62%
Interest rate spread on average assets 4.25% 3.85% 3.28% 3.30% 2.83%
YEAR END (In Thousands)
- -------------------------------------------------------------------------------------------------------------------
Total assets $678,928 $712,643 $779,620 $873,562 $1,220,267
Investments (2) 127,154 82,410 43,108 41,740 61,720
Cash and amounts due from depository institutions 15,205 19,275 14,989 15,293 22,136
Loans receivable, net 434,967 456,543 532,333 661,700 861,257
Mortgage-backed securities 75,199 126,807 159,761 123,599 234,132
Deposits 586,527 538,235 595,180 694,718 872,340
Borrowed funds 15,934 88,319 86,549 83,621 242,871
Equity 46,786 74,404 81,266 81,723 87,387
</TABLE>
(1) All per share items retroactively adjusted to reflect 10% stock dividend
distributed November 30, 1995.
(2) Includes Government and Agency securities, interest-bearing deposits and
Federal Home Loan Bank stock.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
When used in this Annual Report the words of phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any forward
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
On January 29, 1997, Fidelity Federal Savings Bank of Florida (the "Bank")
consummated a tax-free reorganization, by becoming a wholly-owned subsidiary of
a Delaware chartered, stock holding company known as Fidelity Bankshares, Inc.
(the "Company"). Each outstanding share of common stock in Fidelity Federal
Savings Bank of Florida was converted into a share of common stock in Fidelity
Bankshares, Inc., in the same proportionate ownership interest the stockholder
held before the reorganization. In addition, the reorganization was accounted
for in the same manner as a pooling of interests transaction. Consequently, the
consolidated financial statements required no accounting adjustments.
On January 21, 1998 the Company issued $ 28.375 million of mandatorily
redeemable, Preferred Securities out of a grantor trust, Fidelity Capital Trust
I, a Delaware statutory trust, which was created by the Company for this sole
purpose. As its only asset, the trust holds junior subordinated debentures due
January 31, 2028 of the Company, purchased with the proceeds of the preferred
security's issuance. Interest from the junior subordinated debt securities is
payable quarterly at a rate of 8.375%, annually. The interest will be used to
fund distributions on the preferred securities. As a result of the above, the
Preferred Securities of the trust are considered fully and unconditionally
guaranteed by the Company.
Distributions on the Preferred Securities are cumulative and are payable at the
same rate as the junior subordinated debentures, described above. The junior
subordinated debentures are redeemable in whole, in the event the Company's
mutual holding company parent converts to stock form beginning January 31, 2000
at 107% of principal amount and in any event the junior subordinated debentures
are redeemable at 100% of principal amount in whole or in part, commencing
January 31, 2003. The preferred securities are subject to mandatory redemption,
in whole or in part as applicable, upon the repayment of the junior subordinated
debentures. The proceeds from the securities, to the extent invested in common
stock of the Bank, are considered to be Tier 1 capital for regulatory purposes.
Of the net proceeds of $ 27.1 million from the sale of the preferred securities,
the Company invested $ 25 million in common stock of the Bank. The preferred
securities are traded on the Nasdaq National Market system under the symbol
"FFFLP."
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of 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
13
<PAGE>
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 Company's common stock. In addition, legislative and
regulatory actions may result in diminishing the value of any investment in the
Company.
BUSINESS STRATEGY
The Bank's current business strategy is to operate as a well-capitalized,
profitable and independent community-oriented savings bank dedicated to
providing quality customer service. Generally, the Bank has sought to implement
this strategy by emphasizing retail deposits as its primary source of funds and
maintaining a substantial part of its assets in locally-originated residential
first mortgage loans, in mortgage-backed securities and in other liquid
investment securities. Specifically, the Bank's business strategy incorporates
the following elements: (1) operating as a community-oriented financial
institution, maintaining a strong core customer base by providing quality
service and offering customers the access to senior management and services that
a community-based institution can offer; (2) maintaining high levels of asset
quality by emphasizing investment in residential mortgage loans, mortgage-backed
securities and other securities issued or guaranteed by the United States
Government or agencies thereof; (3) managing interest rate risk exposure by
maintaining adequate levels of liquidity, while achieving desirable levels of
profitability; and (4) maintaining adequate capital levels and asset quality.
Highlights of the Bank's business strategy are as follows:
COMMUNITY-ORIENTED INSTITUTION. The Bank is the second largest savings
institution headquartered in Palm Beach County, which in recent years has
experienced a significant influx of commercial banks and offices of savings
institutions headquartered outside of Florida. The Bank is committed to meeting
the financial needs of the communities in which it operates. The Bank believes
it is large enough to provide a full range of personal and business financial
services, and yet is small enough to be able to provide such services on a
personalized and efficient basis. Management believes that the Bank can be more
effective in servicing its customers than many of its non-local competitors
because of the Bank's ability to quickly and effectively provide senior
management responses to customer needs and inquiries. The Bank's ability to
provide these services is enhanced by the stability of the Bank's senior
management. The Bank intends to maintain its operation as a community-oriented,
independent savings institution.
On December 5, 1997, the Bank acquired BankBoynton, a local savings institution
having three offices, $ 55 million in assets and $ 41.7 million in deposits, for
$ 5.7 million in cash. Using the purchase method of accounting, the transaction
resulted in an excess of cost over net assets of approximately $ 2.3 million,
which will be charged against operations over a period of fifteen years, using
the straight-line method of amortization. As the offices of BankBoynton were
located in the vicinity of existing Fidelity offices, the BankBoynton offices
were closed and the deposits transferred to the Bank's existing offices.
Subsequent to year end, on January 30, 1998, the Bank acquired an office
building in downtown West Palm Beach for $ 6.6 million from Barnett
Bank/NationsBank. While the seller has leased back most of the building for a
period of up to two years, it is the intent of the Company to locate its
corporate headquarters in this building in an effort to better serve the
community.
ASSET QUALITY AND EMPHASIS ON RESIDENTIAL MORTGAGE LENDING. Since its inception,
the Bank has emphasized residential real estate financing as a portfolio lender,
and anticipates a continued commitment to financing the
14
<PAGE>
purchase or improvement of residential real estate in its market area. To
supplement local mortgage loan originations, the Bank also invests in mortgage-
backed securities that are issued or guaranteed by the United States Government
or agencies thereof. At December 31, 1997, 82.5% of the Bank's total gross loan
portfolio consisted of one- to- four family residential mortgage loans,
including residential construction loans, and 20.5% of the Bank's total assets
consisted of mortgage-backed securities and investments that are issued or
guaranteed by the United States Government or agencies thereof.
Generally, the yield on mortgage loans originated by the Bank is greater than
that of mortgage-backed securities purchased by the Bank. However, due to the
highly competitive market in which the Bank operates, the Bank may, from time to
time, not be able to originate a sufficient number of new mortgage loans to
offset the amortization and prepayments of its existing loan portfolio. In
addition, new real estate development opportunities in the Bank's market area
may diminish, as well as the adoption of growth controls by local governments,
which could further diminish lending opportunities of the Bank in the future. As
a result of these factors, new loan originations could be reduced in the future,
which may require the Bank to increase its investment in mortgage-backed
securities.
The percentage of small commercial business loans and consumer loans in the
Bank's portfolio has been below the levels of its peers. As a result, the Bank's
yield on its loan portfolio has been below peer levels. The Bank has begun to
expand its offering of commercial business and consumer loan services, but
expects to continue to adhere to the Bank's relatively conservative loan
underwriting standards. At December 31, 1997, the Bank had $ 105.0 million in
commercial business and consumer loans, compared to $ 58.1 million at December
31, 1996.
INTEREST RATE RISK MANAGEMENT. Deposit accounts typically react more quickly to
changes in market interest rates than interest-earning assets such as mortgage
loans, because of the relatively shorter maturities of deposits. When interest
rates are rising, the repricing of a higher volume of interest-bearing
liabilities compared to interest-earning assets will result in interest expense
increasing more rapidly than interest income, while in a falling interest rate
environment net interest income will be benefited. The difference between
interest-earning assets and interest-bearing liabilities expressed as a
percentage of total assets, is a measure of interest rate risk and is referred
to as an institution's interest rate gap. A gap is considered negative if
interest-bearing liabilities maturing or repricing in a particular time period
exceed interest-earning assets maturing or repricing within the same time
period. Management seeks to manage the Bank's interest rate risk exposure by
monitoring the levels of interest rate sensitive assets and liabilities while
maintaining an acceptable interest rate spread. At December 31, 1997, total
interest-bearing liabilities maturing or repricing within one year exceeded
total interest-earning assets maturing or repricing in the same period by $
126.6 million, representing a cumulative one-year gap ratio of a negative 10.4%.
To reduce the potential volatility of the Bank's earnings in a changing interest
rate environment, the Bank has sought to manage interest rate risk by investing
a substantial part of its assets in relatively short- and medium- term United
States Government and agency securities, and in ARM loans and mortgage-backed
securities with adjustable interest rates. Of the Bank's total investment of $
1.1 billion in loans and mortgage-backed securities at December 31, 1997, $
555.0 million, or 50.7%, had adjustable interest rates. Another part of the
Bank's interest rate risk management strategy has been to extend the maturity of
interest-bearing liabilities, including using FHLB advances as a source of
funds.
STRONG RETAIL DEPOSIT BASE. The Bank has had a relatively strong retail deposit
base drawn from the 21 full-service offices in its market area. At December 31,
1997, 30.4% of its deposit base of $ 872.3 million consisted of core deposits,
which included non-interest demand accounts, passbook accounts, NOW accounts,
and money market demand deposit accounts. Core deposits are considered to be a
more stable and lower cost source of funds than certificates of deposit or
outside borrowings. The Bank will continue to emphasize retail deposits by
maintaining and seeking to expand its network of full-service offices, providing
depositors with a full range of accounts.
15
<PAGE>
CAPITAL STRENGTH. The Bank's total equity at December 31, 1997, was $ 85.6
million. As a result, the Bank's ratio of total equity to total assets was 7.0%.
The Bank intends to continue to increase stockholders' equity and maintain
adequate capital ratios. As a result of the previously mentioned investment of $
25.0 million by the Company in common stock of the Bank, the Bank's capital and
ratio of equity to total assets at December 31, 1997 would have been $ 110.6
million and 8.9%, respectively, on a proforma basis.
RESULTS OF OPERATIONS
The earnings of the Bank depend primarily on its level of net interest income,
which is the difference between interest earned on the Bank's interest-earning
assets, consisting primarily of mortgage loans, mortgage-backed securities and
other investment securities, and the interest paid on interest-bearing
liabilities, consisting primarily of deposits. Net interest income is a function
of the Bank's interest rate spread, which is the difference between the average
yield earned on interest-earning assets and the average rate paid on interest-
bearing liabilities, as well as a function of the average balance of interest-
earning assets as compared to interest-bearing liabilities. The Bank's earnings
also are affected by its level of operating expenses and service charges as well
as other expenses, including employee compensation and benefits, occupancy and
equipment costs, and deposit insurance premiums.
GENERAL. The Company had net income of $ 6.4 million, or basic earnings per
share of $ .96, for the year ended December 31, 1997. Net income totaled $ 3.6
million, or basic earnings per share of $ .54, and $ 4.8 million, or basic
earnings per share of $ .74, for fiscal 1996 and 1995, respectively. The
decrease in net income for the year ended December 31, 1996 resulted primarily
from the one-time special assessment of $ 3.6 million (approximately $ 2.2
million, after tax) charged against the Bank's income to recapitalize the
Savings Association Insurance Fund (SAIF). If this one-time special assessment
had not been incurred, basic earnings per share of common stock would have been
$ .87 for the year ended December 31, 1996.
INTEREST INCOME. Interest income increased by $ 12.0 million, or 20.0%, to $
72.3 million for the year ended December 31, 1997 from $ 60.2 million for the
year ended December 31, 1996. The increase in interest income was principally
attributable to an increase in the average balance of interest-earning assets of
$ 166.4 million, to $ 943.4 million from $ 777.0 million. The increase in
average interest-earning assets was primarily the result of a $ 100.3 million
increase in average mortgage loans and a $ 30.1 million increase in average
consumer and other loans. Also contributing to this increase was an increase in
the average balance of mortgage-backed securities of $ 27.3 million. While the
average balance on mortgage-backed securities increased to $ 163.3 million in
1997 from $ 136.0 million in 1996, this was more than offset by a decrease in
the average yield on these securities to 6.84% at December 31, 1997 from 7.32%
at December 31, 1996.
Interest income on mortgage loans increased by $ 7.6 million, or 17.4%, to $
51.5 million for the year ended December 31, 1997 from $ 43.9 million for the
year ended December 31, 1996, primarily because of an increase in the average
balance of mortgage loans to $ 660.5 million from $ 560.2 million in 1996. The
increase in average loan balances includes, for the month of December, 1997, the
effect of acquiring $ 50.9 million of loans in the BankBoynton acquisition.
Interest income on consumer and other loans increased by $ 2.8 million in 1997,
as compared to 1996. While the average yield on consumer and other loans
increased from 9.00% in 1996 to 9.07% in 1997, the principal reason for the
increase in interest income was a 66.6% increase in the average balance of such
loans in 1997, as compared to 1996. Interest income on mortgage-backed
securities increased by $ 1.2 million to $ 11.2 million. The increase in
interest income on mortgage-backed securities was caused by an increase in the
average balance of such securities by $ 27.3 million to $ 163.3 million which
was partially offset by a decrease in the average yield to 6.84% for the year
ended December 31, 1997 from 7.32% for the year ended December 31, 1996.
Interest income on investment securities decreased by $ 46,000 as a result of a
decrease in the average balance of these securities to $ 12.3 million in 1997
compared to $ 12.4 million in 1996. Income from other investments, consisting of
interest-earning deposits in other financial institutions and FHLB Stock
increased by $ 479,000 to $ 2.0 million for the year ended December 31, 1997
compared to $ 1.5 million in 1996. The increase in income from other investments
is due to the average balances of these investments increasing by $ 8.7 million
in 1997, or 37.5%, compared to 1996 but were partially offset by a decrease in
the average yield to 6.19% for the year ended December 31, 1997 compared to
6.44% for the year ended December 31, 1996.
16
<PAGE>
Interest income increased by $ 6.9 million, or 13.0%, to $ 60.2 million for the
year ended December 31, 1996 from $ 53.3 million for the year ended December 31,
1995. The increase in interest income was principally attributable to an
increase in the average balance of the Bank's interest-earning assets to $ 777.0
million from $ 699.1 million and an increase in the yield on the Bank's average
interest-earning assets to 7.75% from 7.62%. The increase in average interest-
earning assets was primarily the result of a $ 95.8 million increase in the
average balance of mortgage loans and a $ 19.6 million increase in average
consumer and other loans, which was partially offset by declines in average
balances of $ 9.4 million in mortgage-backed securities and $ 25.0 million in
investment securities.
Interest income on mortgage loans increased by $ 7.6 million, or 21.0%, to $
43.9 million for the year ended December 31, 1996 from $ 36.3 million for the
year ended December 31, 1995 primarily because of an increase in the average
balance of these loans to $ 560.2 million from $ 464.4 million. Interest income
on consumer loans increased by $ 1.7 million in 1996 as compared to 1995. While
the average yield on consumer and other loans decreased to 9.00% in 1996 from
9.43% in 1995, this was more than offset by an increase in the average balance
of these loans to $ 45.3 million in 1996 from $ 25.7 million in 1995. Interest
income on mortgage-backed securities declined by $ 769,000 due mainly to a
decrease in the average balance to $ 136.0 million at December 31, 1996 from $
145.4 million at December 31, 1995. Interest income on investment securities
decreased by $ 1.3 million. While the average yield on investment securities
increased to 6.49% in 1996 from 5.74% in 1995, this was more than offset by a
decrease in the average balance of these securities by $ 25.0 million to $ 12.4
million at December 31, 1996 from $ 37.4 million at December 31, 1995.
INTEREST EXPENSE. Interest expense increased by $ 9.5 million or 29.5%, to $
41.6 million for the year ended December 31, 1997 from $ 32.1 million for the
year ended December 31, 1996. The increase was attributable to an increase in
the average cost of the Bank's deposits to 4.59% from 4.29% and an increase in
the average balance of interest-bearing deposits of $ 127.2 million. This
increase in average deposit balances includes the effect of the acquisition of $
41.7 million of BankBoynton deposits for the month of December, 1997. The
average balance of FHLB advances and other borrowings increased by $ 37.3
million to $ 122.9 million in 1997 compared to $ 85.6 million in 1996. The Bank
increased its FHLB advances primarily for liquidity purposes.
Interest expense increased by $ 4.0 million, or 14.4%, to $ 32.1 million for the
year ended December 31, 1996 from $ 28.1 million for the year ended December 31,
1995. The increase is due mainly to an increase in the average cost of interest-
bearing deposits to 4.29% from 4.12% and an increase in the average balance of
interest-bearing deposits to $ 611.0 million for the year ended December 31,
1996 from $ 546.4 million for the same period in 1995. The average balance of
FHLB advances and other borrowings increased by $ 5.7 million to $ 85.6 million
in 1996 compared to $ 79.9 million in 1995. The Bank increased its FHLB advances
primarily for liquidity purposes.
NET INTEREST INCOME. Net interest income increased to $ 30.7 million for the
year ended December 31, 1997 from $ 28.1 million for the same period in 1996,
representing an increase of $ 2.6 million, or 9.1%. This increase in net
interest income resulted from an increase in loans receivable to $ 861.3 million
at December 31, 1997 from $ 661.7 million at December 31, 1996. This was
partially offset by a decrease in the Bank's average interest rate spread to
2.83% from 3.14% at December 31, 1997 and 1996, respectively.
Net interest income increased by $ 2.9 million, or 11.7%, to $ 28.1 million from
$ 25.2 million for the years ended December 31, 1996 and 1995, respectively. The
principal reason for this increase in net interest income was an increase in the
Bank's loans receivable to $ 661.7 million at December 31, 1996 from $ 532.3
million at December 31, 1995 and an increase in the Bank's average interest rate
spread to 3.14% from 3.13%.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased
slightly to $ 170,000 for the year ended December 31, 1997 from $ 164,000 for
the year ended December 31, 1996. The Bank's total allowance for loan losses at
December 31, 1997 of $ 3.3 million was deemed adequate by management, in light
of the risks inherent in the Bank's loan portfolio.
17
<PAGE>
The Bank's provision for loan losses increased to $ 164,000 for the year ended
December 31, 1996 compared to a negative $ 210,000 for the year ended December
31, 1995. The 1995 negative provision was principally the result of reversing
provisions on two loans based on new appraisals performed during that year,
while the 1996 provision reflects more normal circumstances. The provision at
December 31, 1996 is deemed adequate by management in light of the Bank's
historical loan loss experience.
The financial statements of the Company are prepared in accordance with
generally accepted accounting principles and, accordingly, allowances for loan
losses are based on management's estimate of the fair value of collateral, as
applicable, and the Bank's actual loss experience and standards applied by the
OTS and FDIC. The Bank provides both general valuation allowances (for
unspecified, potential losses) and specific valuation allowances (for known
losses) in its loan portfolio. General valuation allowances are added to the
Bank's capital for purposes of computing the Bank's regulatory risk-based
capital. The Bank regularly reviews its loan portfolio, including impaired
loans, to determine whether any loans require classification or the
establishment of appropriate valuation allowances.
OTHER INCOME. Other income for the year ended December 31, 1997 was $ 4.9
million, a $ 34,000 increase when compared to 1996. The increase in other income
resulted entirely from an increase in servicing income and other fees of $
405,000. This increase was offset by decreases in net gain on sale of loans,
mortgage-backed securities and investments of $ 323,000 and other miscellaneous
income of $ 48,000.
Other income increased by $ 1.9 million, or 61.4%, to $ 4.9 million for the year
ended December 31, 1996 from $ 3.0 million for the same period in 1995. This
increase in other income was primarily the result of a $ 1.2 million increase in
gain on sale of loans, mortgage-backed securities and investments. Also
contributing to this increase, were increases in the Bank's fee income and other
miscellaneous income of $ 532,000 and $ 113,000, respectively.
OPERATING EXPENSE. Operating expense decreased by $ 2.5 million or 9.3% to $
24.2 million for the year ended December 31, 1997 as compared to the year ended
December 31, 1996. This decline is composed of a decrease in federal deposit
insurance premium of $ 4.5 million, resulting from the resolution of the SAIF
issue through a one-time special assessment charged in the third quarter of
1996, which was partially offset by an increase in all other operating expenses
of $ 2.0 million. Employee compensation and benefits represent $ 1.1 million of
this increase. Hospitalization costs increased by $ 263,000 while ESOP costs
have increased by $ 303,000 due to an increase in the market value of the
Company's common stock. The remaining increase in employee compensation and
benefits expense of $ 558,000 is principally attributable to additional staffing
in the Bank's offices and loan production offices, together with normal salary
increases. The Bank's occupancy and equipment cost for the year ended December
31, 1997 increased by $ 260,000 when compared to the same period in 1996.
Marketing expense was $ 29,000 more than experienced in 1996. Of the $ 691,000
increase in other operating expense, $ 273,000 was attributable to increased
stock costs and legal fees relating to the formation of the Company and the mid-
tier reorganization. These increases were only partially offset by an increase
in gain on real estate owned of $ 84,000 for the year ended December 31, 1997
compared to the 1996 period.
Operating expense increased by $ 6.3 million, or 30.6%, to $ 26.7 million for
the year ended December 31, 1996 from $ 20.4 million for the same period in
1995. Employee compensation and benefits represent $ 2.0 million, or 19.1%, of
this increase. This resulted primarily from additional personnel hired for the
creation of a legal department and loan production, including employees in the
Bank's Loan Production Office (LPO) opened in January, 1996 and the expansion of
a branch office in April, 1996. The Bank's occupancy and equipment cost for the
year ended December 31, 1996 was $ 456,000 more than experienced in 1995,
primarily as a result of opening the LPO office in January, 1996 and operating
and upgrading the previously mentioned branch office. Federal deposit insurance
premiums increased by $ 3.7 million to $ 4,958,000 for the year ended December
31, 1996 compared to $ 1,279,000 in 1995. This increase resulted from the SAIF
one-time special assessment discussed earlier. Other operating expense increased
by $ 188,000 for the year ended December 31, 1996 when compared to the 1995.
These increases were only partially offset by an increase in gain on real estate
owned of $ 98,000 and a decrease in marketing expense of $ 13,000 for the year
ended December 31, 1996 compared to 1995.
18
<PAGE>
INCOME TAXES. Federal and state income taxes increased by $ 2.2 million to $ 4.8
million for the year ended December 31, 1997 compared to $ 2.6 million in 1996.
This increase was attributable to an increase in income before provision for
income tax of $ 5.1 million to $ 11.2 million in 1997 from $ 6.1 million in
1996.
Federal and state income taxes decreased by $ 571,000 to $ 2.6 million for the
year ended December 31, 1996 compared to $ 3.1 million for the year ended
December 31, 1995. Lower taxes resulted from the decline in income before
provision for income taxes to $ 6.1 million in 1996 from $ 7.9 million in 1995.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material difference in the information
presented.
19
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
===================================================================================================================================
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/ BALANCE INTEREST YIELD/ BALANCE INTEREST YIELD/
COST COST COST
===================================================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans............ $464,392 $36,296 7.82% $560,233 $43,923 7.84% $660,537 $51,545 7.80%
Consumer and other
loans.................... 25,696 2,421 9.43% 45,274 4,074 9.00% 75,412 6,841 9.07%
Mortgage-backed
securities............... 145,405 10,718 7.37% 135,973 9,949 7.32% 163,250 11,159 6.84%
Investment securities..... 37,380 2,144 5.74% 12,391 804 6.49% 12,337 758 6.14%
Other investments (1)..... 26,225 1,682 6.41% 23,139 1,490 6.44% 31,809 1,969 6.19%
-------- ------- -------- ------- -------- -------
Total
interest-earning
assets................ 699,098 53,261 7.62% 777,010 60,240 7.75% 943,345 72,272 7.66%
Non-interest-earning assets..... 42,679 47,015 52,183
-------- -------- --------
Total assets........... $741,777 $824,025 $995,528
======== ======== ========
Interest-bearing liabilities:
Deposits.................. $546,453 $22,515 4.12% $611,031 $26,239 4.29% $738,219 $33,856 4.59%
Borrowed funds............ 79,905 5,580 6.98% 85,608 5,892 6.88% 122,898 7,750 6.31%
-------- ------- -------- ------- -------- -------
Total
interest-bearing
liabilities........... 626,358 28,095 4.49% 696,639 32,131 4.61% 861,117 41,606 4.83%
------- ------- -------
Non-interest-bearing
liabilities.................... 38,063 46,047 50,194
-------- -------- --------
Total liabilities...... 664,421 742,686 911,311
Net worth....................... 77,356 81,339 84,217
-------- -------- --------
Total liabilities
and net worth......... $741,777 $824,025 $995,528
======== ======== ========
Net interest income............. $25,166 $28,109 $30,666
======= ======= =======
Net interest rate spread (2).... 3.13% 3.14% 2.83%
====== ====== ======
Net yield on interest-earning
assets (3)..................... 3.60% 3.62% 3.25%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing
liabilities.................... 111.61% 111.54% 109.55%
====== ====== ======
(1) Includes interest-bearing deposits in other financial institutions and FHLB stock.
(2) Net interest-rate spread represents the difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning
assets.
</TABLE>
The following table shows the yields on interest earning assets and interest
bearing liabilities as of the dates indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------
AT DECEMBER 31, 1996 AT DECEMBER 31, 1997
==================================================================
ACTUAL ACTUAL
BALANCE YIELD/COST BALANCE YIELD/COST
==================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans............................ $604,614 7.88% $ 759,212 7.85%
Consumer and other loans.................. 57,086 8.64% 102,045 8.95%
Mortgage-backed securities................ 123,599 7.29% 234,132 7.11%
Investment securities..................... 8,465 6.30% 16,077 6.16%
Other investments (1)..................... 33,275 5.58% 45,643 6.34%
-------- ----------
Total interest-earning assets.......... 827,039 7.74% 1,157,109 7.71%
Non-interest-earning assets...................... 46,523 63,158
-------- ----------
Total assets........................... $873,562 $1,220,267
======== ==========
Interest-bearing liabilities:
Deposits.................................. $668,312 4.26% $ 836,452 4.50%
Borrowed funds............................ 83,621 6.76% 242,871 6.42%
-------- ----------
Total interest-bearing liabilities..... 751,933 4.54% 1,079,323 4.93%
Non-interest-bearing liabilities................. 39,906 53,557
-------- ----------
Total liabilities...................... 791,839 1,132,880
Net worth........................................ 81,723 87,387
-------- ----------
Total liabilities and net worth........ $873,562 $1,220,267
======== ==========
Net interest rate spread......................... 3.20% 2.78%
==== ====
</TABLE>
(1) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
20
<PAGE>
RATE VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rate (change
in rate multiplied by old average volume); and (iii) the net change.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1996 VS. 1995 1997 VS. 1996
----------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
--------------------------------- TOTAL -------------------------------------- TOTAL
RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Mortgage loans................. $ 7,491 $ 113 $ 23 $ 7,627 $ 7,864 $ (205) $ (37) $ 7,622
Consumer and other loans....... 1,845 (109) (83) 1,653 2,712 33 22 2,767
Mortgage-backed securities..... (695) (79) 5 (769) 1,996 (655) (131) 1,210
Investment securities.......... (1,433) 281 (188) (1,340) (4) (42) -- (46)
Other investments.............. (198) 7 (1) (192) 559 (58) (22) 479
------- ----- ----- ------- ------- ------- ----- -------
Total interest-earning assets.. 7,010 213 (244) 6,979 13,127 (927) (168) 12,032
------- ----- ----- ------- ------- ------- ----- -------
INTEREST EXPENSE:
Deposits....................... 2,661 951 112 3,724 5,462 1,784 371 7,617
Borrowed funds................. 398 (81) (5) 312 2,566 (493) (215) 1,858
------- ----- ----- ------- ------- ------- ----- -------
Total interest-bearing
liabilities................... 3,059 870 107 4,036 8,028 1,291 156 9,475
------- ----- ----- ------- ------- ------- ----- -------
Change in net interest income... $ 3,951 $(657) $(351) $ 2,943 $ 5,099 $(2,218) $(324) $ 2,557
======= ===== ===== ======= ======= ======= ===== =======
</TABLE>
ASSET AND LIABILITY MANAGEMENT - INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
and interest-bearing liabilities maturing or repricing within that time period.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. During a period of
rising interest rates, a negative gap would tend to adversely affect net
interest income while a positive gap would tend to positively affect net
interest income. Similarly, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income.
The Bank's policy in recent years has been to reduce its exposure to interest
rate risk generally by better matching the maturities of its interest rate
sensitive assets and liabilities and by originating ARM loans and other
adjustable rate or short-term loans, as well as by purchasing short-term
investments. However, particularly in a low interest rate environment borrowers,
typically prefer fixed rate loans to ARM loans. The Bank seeks to lengthen the
maturities of its deposits by promoting longer-term certificates. The Bank does
not solicit high-rate jumbo certificates or brokered funds.
At December 31, 1997, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $ 126.6 million, representing a cumulative one-year gap ratio
of a negative 10.4%. The Bank has an Asset-Liability Management Committee which
is responsible for reviewing the Bank's assets and liability policies. The
Committee meets weekly and reports monthly to the Board of Directors on interest
rate risks and trends, as well as liquidity and capital ratio requirements.
21
<PAGE>
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
expected to reprice or mature, based upon certain assumptions, in each of the
future time periods shown. Except as stated below, the amounts of assets and
liabilities shown that reprice or mature during a particular period were
determined in accordance with the earlier of the term of repricing or the
contractual terms of the asset or liability. The Bank has assumed that its
passbook savings, interest-bearing NOW, and money market accounts, which totaled
$ 265.3 million at December 31, 1997, are withdrawn at the annual percentage
rates set forth in the table on the next page. For information regarding the
contractual maturities of the Bank's loans, investments, and deposits, see Notes
to Consolidated Financial Statements.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING
---------------------------------------------------------------------------------------------------
WITHIN 3 6 MONTHS TO
MONTHS 3-6 MONTHS 1 YEAR 1-3 YEARS 3-5 YEARS OVER 5 YEARS TOTAL
===================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Residential one- to
four-family:
Current market index ARMs.. $ 41,894 $ 28,619 $ 40,366 $ 88,322 $ 28,928 $ 8,916 $ 237,045
Lagging market index ARMs.. 29,025 23,480 32,090 10,084 627 -- 95,306
Fixed rate................. 31,846 15,873 25,776 84,814 65,014 153,750 377,073
Commercial and multi-family:
ARMs....................... 27,923 8,053 13,206 8,630 1,259 -- 59,071
Fixed rate................. 5,709 1,101 1,572 2,540 547 142 11,611
Consumer and commercial
business...................... 32,700 12,257 18,090 14,825 2,889 344 81,105
Investment securities.......... 33,188 -- 660 15,339 -- -- 49,187
FHLB stock..................... 11,955 -- -- -- -- -- 11,955
Mortgage-backed securities:
Adjustable................... 82,484 15,054 -- -- -- -- 97,538
Fixed........................ 5,276 5,079 9,611 33,709 23,441 54,051 131,167
-------- -------- --------- -------- --------- -------- ----------
Total
interest-earning
assets (1).............. 302,000 109,516 141,371 258,263 122,705 217,203 1,151,058
-------- -------- --------- -------- --------- -------- ----------
Non interest-bearing
liabilities:
Non interest-bearing
deposits...................... 3,357 3,357 6,714 13,677 5,365 3,463 35,933
-------- -------- --------- -------- --------- -------- ----------
Interest-bearing liabilities:
Passbook accounts.............. 47,704 16,185 32,372 2,448 1,769 4,605 105,083
NOW accounts................... 12,468 12,024 24,048 11,407 7,536 14,670 82,153
Money market accounts.......... 13,614 5,766 11,530 7,205 2,809 1,796 42,720
Certificate accounts........... 149,991 87,408 193,822 141,125 34,636 101 607,083
Borrowed funds................. 50,077 3,012 6,070 49,246 133,157 1,312 242,874
-------- -------- --------- -------- --------- -------- ----------
Total
interest-bearing
liabilities............. 273,854 124,395 267,842 211,431 179,907 22,484 1,079,913
-------- -------- --------- -------- --------- -------- ----------
Interest sensitivity gap........ $ 24,789 $(18,236) $(133,185) $ 33,155 $ (62,567) $191,256 $ 35,212
======== ======== ========= ======== ========= ======== ==========
Cumulative
interest-sensitive gap......... $ 24,789 $ 6,553 $(126,632) $(93,477) $(156,044) $ 35,212 $ 35,212
======== ======== ========= ======== ========= ======== ==========
Cumulative interest
sensitivity gap to
total assets................... 2.03% 0.54% (10.38)% (7.66)% (12.79)% 2.89% 2.89%
======== ======== ========= ======== ========= ======== ==========
Cumulative ratio of
interest-earning
assets to interest-bearing
liabilities.................... 110.28% 103.33% 83.00% 92.44% 88.31% 106.59% 106.59%
======== ======== ========= ======== ========= ======== ==========
</TABLE>
(1) The above table shows expected cash flows within the time periods
presented. Accordingly, the balances do not reflect adjustments for
premiums, discounts, and market value adjustments.
22
<PAGE>
In preparing the table above, the Bank's prepayment rates for its loans are
based on the most recent assumptions used by the OTS as of December 31, 1997.
The OTS assumptions could vary substantially from the actual prepayment rates
experienced by the Bank. The assumptions are as follows:
<TABLE>
<CAPTION>
ANNUAL
PREPAYMENT
TYPE RATE
- --------------------------------------------------------
<S> <C>
ARM loans-current market index 11%-24%
ARM loans-lagging market index 11%-24%
Fixed-rate one- to four-family loans
with maturities
equal to or greater than five years:
Below 7% interest rate 7%
7.00% to 7.99% 9%
8.00% to 8.99% 12%
9.00% to 9.99% 18%
10.00% and over 29%
Mortgage-backed and related securities
with maturities
equal to or greater than five years:
Below 7% interest rate 8%
7.00% to 7.99% 10%
8.00% to 8.99% 14%
9.00% to 9.99% 23%
10.00% and over 33%
Other residential and all non-residential loans 10%-47%
</TABLE>
Decay rates indicate an assumed annual rate at which an interest-bearing
liability will be withdrawn in favor of an account with a more favorable
interest rate. Decay rates have been assumed for demand deposits, NOW accounts,
passbook and money market deposits. The following decay rates are based on the
most recent assumptions used by the OTS as of December 31, 1997.
<TABLE>
<CAPTION>
6 MONTHS 1 YEAR 3 YEARS 5 YEARS
THROUGH THROUGH THROUGH THROUGH OVER 10
0-6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS YEARS
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts 59% 59% 19% 19% 19% 19%
Passbook, club accounts 88% 88% 15% 15% 15% 15%
Money market deposit accounts 66% 66% 38% 38% 38% 38%
</TABLE>
The above assumptions are annual percentages based on remaining balances and
should not be regarded as indicative of the actual prepayments and withdrawals
that may be experienced by the Bank in any given period. Moreover, certain
shortcomings are inherent in the analysis presented by the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, interest rates on certain types of assets and liabilities
may fluctuate in advance of or lag behind changes in market interest rates.
Additionally, certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the assets.
Moreover, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. For information regarding the contractual maturities of
the Bank's loans, investments, and deposits, see Notes to Consolidated Financial
Statements.
Under OTS risk-based capital regulations, savings associations are required to
calculate the market value of their portfolio equity (MVPE). These calculations
are based upon data concerning interest-earning assets, interest-bearing
liabilities and other rate sensitive assets and liabilities provided to the OTS
on schedule CMR of the quarterly Thrift Financial Report. Commencing March 31,
1994, for purposes of measuring interest rate risk, the OTS began using the MVPE
calculations which essentially discount the cash flows from an institution's
assets and liabilities to present value, using current market rates.
23
<PAGE>
The amendments to the risk-based capital regulations require institutions to
hold additional risk-based capital in an amount equal to one-half the amount an
institution's interest rate risk exceeds the normal amount of interest rate
risk. Normal interest rate risk is defined as 2% of the MVPE at static interest
rates. If, after applying a rate shock of 200 basis points ("bp") (one basis
point equals .01%) of either a decline or increase in rates, the resultant
negative change in MVPE exceeds 2% of MVPE at static interest rates, an
institution is deemed to have excess interest rate risk. At December 31, 1997,
the Bank was not required to hold additional risk-based capital for interest
rate risk-purposes.
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 4.0%. The Bank's
liquidity ratio averaged 5.91% during the month of December 1997 and 6.15%
during the month of December 1996. Liquidity ratios averaged 7.05% and 6.78% for
the years ended December 31, 1997 and 1996, respectively. The Bank adjusts its
liquidity levels in order to meet funding needs of deposit outflows, payment of
real estate taxes on mortgage loans, repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities and
other short-term investments, and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions, and
competition. The Bank manages the pricing of its deposits to maintain a desired
deposit balance. In addition, the Bank invests excess funds in short-term
interest-earning and other assets, which provide liquidity to meet lending
requirements. Short-term interest-bearing deposits with the FHLB of Atlanta
amounted to $ 32.4 million and $ 27.0 million at December 31, 1997 and 1996,
respectively. Other assets qualifying for liquidity outstanding at December 31,
1997, and 1996, amounted to $ 24.8 million and $ 19.8 million, respectively. For
additional information about cash flows from the Bank's operating, financing,
and investing activities, see Consolidated Statements of Cash Flows included in
the Financial Statements.
A major portion of the Bank's liquidity consists of cash and cash equivalents,
which are a product of its operating, investing and financing activities. The
primary sources of cash were net income, principal repayments on loans and
mortgage-backed securities, and increases in deposit accounts along with
advances from the Federal Home Loan Bank.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At December 31, 1997, the Bank had $ 239.1 million in advances
from the FHLB. The Bank engages in borrowing from the FHLB in order to reduce
interest rate risk, and for liquidity purposes.
At December 31, 1997, the Bank had outstanding loan commitments of $ 44.7
million to originate and/or purchase mortgage loans. This amount does not
include the unfunded portion of loans in process. Certificates of deposit
scheduled to mature in less than one year at December 31, 1997, totaled $ 387.5
million. Based on prior experience, management believes that a significant
portion of such deposits will remain with the Bank, although there can be no
assurance that the deposits will remain with the Bank and their rates could
increase.
CHANGES IN FINANCIAL CONDITION
During 1997, the Company's assets increased by $ 346.7 million. Investment in
mortgage-backed securities increased by $ 110.5 million, while loans receivable
increased in the amount of $ 199.6 million. Cash and cash equivalents increased
by $ 13.4 million. In addition, the Bank increased its investment in Federal
Home Loan Bank stock by $ 5.8 million, increased its investment in office
properties and equipment, primarily for new office
24
<PAGE>
sites, by $ 3.3 million, while all other assets increased by $ 14.1 million. The
Bank continued to experience deposit inflows during 1997 of $ 177.6 million,
principally as a result of continued aggressive pricing of its certificates of
deposit, which together with an increase in equity, net of the change in
unrealized increase in fair value of assets available for sale, of $ 5.0 million
and additional borrowings from the Federal Home Loan Bank of $ 156.6 million,
provided the principal funds for the Company's asset growth.
During 1996, the Bank's assets increased by $ 93.9 million. Loans receivable
increased in the amount of $ 129.4 million. Cash and cash equivalents also
increased by $ 17.5 million. These increases were partially offset by a decline
of $ 54.7 million in assets available for sale. Of this decrease, $ 19.5 million
resulted from the sale of mortgage-backed securities. The Bank experienced
deposit inflows during 1996 of $ 99.5 million, as a result of commencement of a
more aggressive pricing of its certificates of deposit, which together with an
increase in equity, net of the change in unrealized increase in fair value of
assets available for sale, of $ 2.3 million, provided the principal funds for
growth.
YEAR 2000 ISSUE
The Bank formed a Year 2000 Committee in March 1997, which meets regularly to
review the Bank's plan to achieve compliance with the issues associated with the
year 2000 and progress to date and report such progress to the Board of
Directors. The Bank's Year 2000 Project Plan includes five phases; assessment,
evaluation, renovation, validation and implementation. While in some instances
the Bank is in the final stages of assessment, certain applications are in the
renovation and validation stages. Management of the Bank believes all "mission
critical" applications have been identified. To the extent application suppliers
assert their applications are year 2000 ready, the Bank is currently validating
their claims, while working toward solutions with others. While most
improvements would have been implemented over the next three to five years,
management has concluded that the cost of modernizing the Bank's computer
hardware and software, on an accelerated basis, will cost approximately $ 2.3
million. These costs are expected to be capitalized and expensed in conformity
with generally accepted accounting principles.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Bank's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Bank are monetary. As a result, interest rates have a
greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The Statement, which
amends SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," supersedes SFAS No. 122, "Accounting for Mortgage Servicing
Rights." This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
No. 125 requires that servicing assets and liabilities be subsequently measured
by (a) amortization in proportion to and over the period of estimated net
servicing income or loss and (b) assessment for asset impairment or increased
obligation based on their fair values. SFAS No. 125 also requires that debtors
reclassify
25
<PAGE>
financial assets pledged as collateral and that secured parties recognize those
assets and their obligation to return them in certain circumstances in which the
secured party has taken control of those assets. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. During the year ended December 31, 1997, the
Company sold $ 9.6 million of loans and retained the loan servicing rights. The
gain on the sale was determined in accordance with SFAS No. 125.
In February 1997, FASB issued SFAS No. 128, "Earnings per Share." This statement
simplifies the standards for computing earnings per share previously required
under Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share,"
and makes the computation comparable to international EPS standards. Basic EPS
(formerly primary EPS) excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period EPS data presented. The Company
implemented SFAS 128 effective December 31, 1997 and restated all prior period
EPS data, as required.
In June 1997, the FASB issued SFAS 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 SFAS 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 Company'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. The Company will
adopt these promulgations and implement them as required.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Fidelity Bankshares, Inc.:
We have audited the accompanying consolidated statements of financial position
of Fidelity Bankshares, Inc. (the "Company") and its wholly owned subsidiary,
Fidelity Federal Savings Bank of Florida, as of December 31, 1996 and 1997, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Fidelity Bankshares, Inc. and
subsidiary at December 31, 1996 and 1997 and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Certified Public Accountants
West Palm Beach, FL
February 20, 1998
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AT DECEMBER 31, 1996 AND 1997
- -----------------------------------------------------------------------------------------------------
1996 1997
========================
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions..................... $ 15,293 $ 22,136
Interest-bearing deposits............................................. 27,127 33,688
-------- ----------
Total cash and cash equivalents (Notes 1, 21)..................... 42,420 55,824
ASSETS AVAILABLE FOR SALE (At Fair Value):
(Notes 1, 2, 3, 21)
Government and agency securities...................................... 8,465 16,077
Mortgage-backed securities............................................ 123,599 234,132
-------- ----------
Total assets available for sale................................... 132,064 250,209
LOANS RECEIVABLE, Net of allowance for loan losses - 1996, $2,263;
1997, $3,294 (Notes 1, 4, 21)......................................... 661,700 861,257
OFFICE PROPERTIES AND EQUIPMENT, Net (Notes 1, 5)........................ 18,092 21,440
FEDERAL HOME LOAN BANK STOCK, At cost.................................... 6,148 11,955
REAL ESTATE OWNED, Net (Notes 1, 6)...................................... 93 967
ACCRUED INTEREST RECEIVABLE (Note 7)..................................... 4,614 6,404
OTHER ASSETS (Notes 1, 11)............................................... 8,431 12,211
-------- ----------
TOTAL ASSETS............................................................. $873,562 $1,220,267
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS (Notes 8, 21)................................................... $694,718 $ 872,340
OTHER BORROWED FUNDS..................................................... -- 3,780
ADVANCES FROM FEDERAL HOME LOAN BANK (Note 9)............................ 82,517 239,091
ESOP LOAN (Notes 10, 21)................................................. 1,104 --
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE............................ 2,448 2,783
DRAFTS PAYABLE (Note 1).................................................. 2,957 5,349
OTHER LIABILITIES (Notes 1, 12).......................................... 7,209 9,038
DEFERRED INCOME TAXES (Notes 1, 11)...................................... 886 499
-------- ----------
TOTAL LIABILITIES..................................................... 791,839 1,132,880
-------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 16, 19, 21)
STOCKHOLDERS' EQUITY (Notes 1, 11, 12, 13, 14, 18):
PREFERRED STOCK, 2,000,000 shares authorized, none issued................ -- --
COMMON STOCK ($.10 par value) 8,200,000 authorized shares:
outstanding 6,744,689 and 6,784,958 at December 31, 1996
and 1997, respectively................................................ 675 678
ADDITIONAL PAID IN CAPITAL............................................... 37,397 38,347
RETAINED EARNINGS - substantially restricted............................. 44,184 47,943
COMMON STOCK PURCHASED BY:
Employee stock ownership plan......................................... (1,315) (986)
NET UNREALIZED INCREASE IN FAIR VALUE OF ASSETS
AVAILABLE FOR SALE
(Net of applicable income taxes) (Notes 1, 2, 3)...................... 782 1,405
-------- ----------
TOTAL STOCKHOLDERS' EQUITY............................................ 81,723 87,387
-------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $873,562 $1,220,267
======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- -----------------------------------------------------------------------------------
1995 1996 1997
====================================
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Loans.................................. $38,717 $ 47,997 $ 58,386
Investment securities.................. 2,144 804 758
Other investments...................... 1,682 1,490 1,969
Mortgage-backed securities............. 10,718 9,949 11,159
------- -------- ----------
Total interest income................ 53,261 60,240 72,272
------- -------- ----------
Interest expense:
Deposits (Note 8)...................... 22,515 26,239 33,856
Advances from Federal Home Loan Bank... 5,580 5,892 7,750
and other borrowings.................. ------- -------- ----------
Total interest expense............... 28,095 32,131 41,606
------- -------- ----------
Net interest income..................... 25,166 28,109 30,666
Provision for loan losses (Note 4)...... (210) 164 170
------- -------- ----------
Net interest income after provision for
loan losses............................ 25,376 27,945 30,496
------- -------- ----------
Other income:
Servicing income and other fees........ 2,669 3,201 3,606
Net gain on sale of loans,
mortgage-backed securities and
investments........................... 5 1,215 892
Miscellaneous.......................... 347 460 412
------- -------- ----------
Total other income................... 3,021 4,876 4,910
------- -------- ----------
Operating expense:
Employee compensation and benefits..... 10,728 12,776 13,900
Occupancy and equipment................ 4,192 4,648 4,908
Loss (gain) on real estate owned....... 29 (69) (153)
Marketing.............................. 617 604 633
Federal deposit insurance premium...... 1,279 4,958 464
Miscellaneous.......................... 3,604 3,792 4,483
------- -------- ----------
Total operating expense.............. 20,449 26,709 24,235
------- -------- ----------
Income before provision for income
taxes.................................. 7,948 6,112 11,171
------- -------- ----------
Provision (benefit) for income taxes:
(Note 11)
Current................................ 3,194 3,417 5,573
Deferred............................... (61) (855) (820)
------- -------- ----------
Total provision for income taxes..... 3,133 2,562 4,753
------- -------- ----------
Net income......................... $ 4,815 $ 3,550 $ 6,418
======= ======== ==========
Earnings per share: (Note 20)
Basic.................................. $ .74 $ .54 $ .96
======= ======== ==========
Diluted................................ $ .73 $ .53 $ .95
======= ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------------------------------------------------------
NET
UNREALIZED
INCREASE
(DECREASE)
IN FAIR
RETAINED EMPLOYEE RECOGNITION VALUE OF
ADDITIONAL EARNINGS STOCK AND ASSETS
COMMON PAID IN SUBSTANTILLY OWNERSHIP RETENTION AVAILABLE
STOCK CAPITAL RESTRICTED PLAN PLAN FOR SALE TOTAL
========================================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994.............. $609 $26,836 $50,088 $(1,656) $(608) $ (865) $74,404
Net Income for the year ended
December 31, 1995..................... -- -- 4,815 -- -- -- 4,815
Stock Options exercised (Note 13)........ 3 342 -- -- -- -- 345
Common Stock retired..................... (1) (327) -- -- -- -- (328)
Effect of Reclassification of assets
held to maturity to available for
sale, net of taxes.................... -- -- -- -- -- 2,253 2,253
Recognition of unrealized increase
fair value of assets available
for sale, net of income taxes,
pursuant to SFAS 115................... -- -- -- -- -- 1,196 1,196
Amortization of deferred compensation -
Employee Stock Ownership Plan and
Recognition and Retention Plan........ -- 109 -- 289 328 -- 726
Refund of Reorganization costs........... -- 13 -- -- -- -- 13
Distribution of 10% Stock dividend....... 61 10,197 (9,981) (277) -- -- --
Cash dividends declared.................. -- -- (2,158) -- -- -- (2,158)
-----------------------------------------------------------------------------------------
Balance - December 31, 1995.............. 672 37,170 42,764 (1,644) (280) 2,584 81,266
Net Income for the year ended
December 31, 1996..................... -- -- 3,550 -- -- -- 3,550
Stock Options exercised (Note 13)........ 5 387 -- -- -- -- 392
Common Stock retired..................... (2) (285) -- -- -- -- (287)
Recognition of unrealized decrease in
fair vales of assets available for
sale, net of income taxes, pursuant
to SFAS 115........................... -- -- -- -- -- (1,802) (1,802)
Amortization of deferred compensation -
Employee Stock Ownership Plan and
Recognition and Retention Plan........ -- 125 -- 329 280 -- 734
Cash dividends declared.................. -- -- (2,130) -- -- -- (2,130)
-----------------------------------------------------------------------------------------
Balance - December 31, 1996.............. 675 37,397 44,184 (1,315) -- 782 81,723
Net Income for the year ended
December 31, 1997....................... -- -- 6,418 -- -- -- 6,418
Stock Options exercised (Note 13)........ 4 525 -- -- -- -- 529
Common Stock retired..................... (1) (142) -- -- -- -- (143)
Recognition of unrealized increase in
fair value of assets available for
sale, net of income taxes, pursuant
to SFAS 115............................ -- -- -- -- -- 623 623
Amortization of deferred compensation -
Employee Stock Ownership Plan......... -- 567 -- 329 -- -- 896
Cash dividends declared.................. -- -- (2,659) -- -- -- (2,659)
------------------------------------------------------------------------------------------
Balance - December 31, 1997.............. $678 $38,347 $47,943 $ (986) $ -- $1,405 $87,387
==========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- ----------------------------------------------------------------------------------------------------
1995 1996 1997
=================================
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income.......................................... $ 4,815 $ 3,550 $ 6,418
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization...................... 1,108 1,238 1,258
ESOP and Recognition and Retention Plan
compensation expense.............................. 726 734 765
Accretion of discounts, amortization
of premiums, and other deferred yield items....... (1,018) (1,122) (731)
Provision for loan losses.......................... (210) 164 170
Provisions for losses and net (gains)
losses on sales of real estate owned.............. (29) (110) (189)
Net (gain) loss on sale of:
Loans............................................ (17) (340) (190)
Investment securities............................ 12 -- --
Mortgage-backed securities....................... -- (875) --
Other assets..................................... -- -- (702)
(Increase) decrease in accrued interest
receivable......................................... (525) 13 (1,507)
(Increase) decrease in other assets................. (446) 165 (3,409)
Increase (decrease) in drafts payable............... 1,170 (706) 2,392
Increase (decrease) in deferred income
taxes.............................................. 2,145 (1,974) (387)
Increase (decrease) in other liabilities............ 1,681 (321) 661
-------- --------- ---------
Net cash from operating activities............... 9,412 416 4,549
-------- --------- ---------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on
loans.............................................. (66,196) (124,601) (125,911)
Principal payments received on mortgage-backed
securities......................................... 17,796 23,608 22,325
Purchases of:
Loans.............................................. (12,398) (21,153) (35,647)
Mortgage-backed securities......................... (45,625) (9,962) (131,956)
Investment securities.............................. (22,318) (10,029) (13,566)
Federal Home Loan Bank stock....................... -- -- (5,283)
Office properties and equipment.................... (2,116) (3,985) (4,724)
Proceeds from sales of:
Loans.............................................. 2,914 17,357 11,824
Investment securities available for sale........... 5,981 -- --
Real estate acquired in settlement of
loans and held for investment..................... 1,318 1,195 1,647
Mortgage-backed securities available for sale...... -- 20,516 --
Office properties and equipment.................... 67 -- --
Other assets....................................... -- -- 798
Proceeds from maturities of investment
securities......................................... 41,000 28,490 7,000
Cash used to purchase BankBoynton, a Federal
Savings Bank, net of cash received relating to
purchase........................................... -- -- (4,367)
Other............................................... (2,323) 1,147 2,321
-------- --------- ---------
Net cash used for investing
activities...................................... (81,900) (77,417) (275,539)
-------- --------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Common stock options exercised...................... 100 105 308
Cash dividends paid................................. (2,106) (1,971) (2,566)
Net increase (decrease) in:
NOW accounts, demand deposits and savings
accounts.......................................... (18,826) 8,046 27,858
Certificates of deposit............................ 75,771 91,492 108,033
Other borrowed funds............................... -- -- 3,780
Advances from Federal Home Loan Bank............... (1,490) (2,652) 147,874
ESOP Loan.......................................... (280) (276) (1,104)
Advances by borrowers for taxes and insurance...... (56) (286) 211
-------- --------- ---------
Net cash from financing activities............... 53,113 94,458 284,394
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (19,375) 17,457 13,404
CASH AND CASH EQUIVALENTS, Beginning of year........ 44,338 24,963 42,420
-------- --------- ---------
CASH AND CASH EQUIVALENTS, End of year.............. $ 24,963 $ 42,420 $ 55,824
======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fidelity Bankshares, Inc. ("the Company") became the parent of Fidelity Federal
Savings Bank of Florida ("the Bank") on January 29, 1997, as a result of a tax-
free reorganization, accounted for in the same manner as a pooling of interests
merger (See Note 18). Consequently, the Bank is now a wholly-owned subsidiary of
the Company.
The accounting and reporting policies of the Company and its subsidiary conform,
in all material respects, to generally accepted accounting principles. The
following summarizes the more significant of these policies:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company, the Bank and the Bank's wholly-owned subsidiary,
Fidelity Realty and Appraisal Services, Inc. ("FRAS"). All significant
intercompany balances and transactions have been eliminated. Neither the Bank
nor its subsidiary are or have been involved in any joint ventures during any
periods presented.
FRAS, principally, performs appraisals for and sells real estate owned by the
Bank.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH EQUIVALENTS - For presentation purposes in both the consolidated statements
of financial position and the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
ASSETS AVAILABLE FOR SALE - Securities available for sale are carried at fair
value, based upon market quotations. Deferred income taxes are provided on any
unrealized appreciation or decline in value. Such appreciation or decline in
value, net of deferred taxes is reflected as an adjustment of equity. Gain or
loss on sale of such securities is based on the specific identification method.
Debt securities are classified as either available for sale or held for
investment based on management's intent.
INTEREST RATE RISK - The Bank is engaged principally in providing first mortgage
loans (both adjustable rate and fixed rate mortgage loans) to individuals (See
Note 4 for the composition of the mortgage loan portfolio at December 31, 1996
and 1997). Mortgage loans and investment securities are funded primarily with
short-term liabilities which have interest rates that vary with market rates
over time. Net interest income and the market value of net interest-earning
assets will fluctuate based on changes in interest rates and changes in the
levels of interest-sensitive assets and liabilities. The actual duration of
interest-earning assets and interest-bearing liabilities may differ
significantly from the stated duration as a result of prepayment, early
withdrawals, and similar factors.
PROVISIONS FOR LOAN LOSSES - Provisions for loan losses, which increase the
allowance for loan losses, are established by charges to income. Such allowance
represents the amounts which, in management's judgment, are adequate to absorb
charge-offs of existing loans which may become uncollectible. The adequacy of
the allowance is determined by management's continuing evaluation of the loan
portfolio in light of past loss experience, present economic conditions, and
other factors considered relevant by management at the financial statement date.
Anticipated changes in economic factors which may influence the level of the
allowance are considered in the evaluation by management when the likelihood of
the changes can be reasonably determined. In estimating the allowance for
possible losses, consideration is given to asset performance, the financial
condition of borrowers or guarantors, additional collateral provided, current
and anticipated economic conditions, appraisals, cost of
32
<PAGE>
disposal, and holding costs. While management uses the best information
available to make such evaluations, future adjustments to the allowance may be
necessary, which may be material, if economic conditions differ substantially
from the assumptions used in the evaluation. If additions to the original
estimate of the allowance for loan losses are deemed necessary, they will be
reported in earnings in the period in which they become reasonably estimable.
Effective December 31, 1993, the Bank adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Recognition and Disclosures,"
an amendment of SFAS No. 114. These standards address the accounting for
impairment of certain loans when it is probable that all amounts due pursuant to
the contractual terms of the loan will not be collected. Adoption of these
standards included the identification of commercial, business and commercial
real estate loans which are considerd impaired under provisions of SFAS No. 114.
Groups of smaller-balance homogeneous loans (generally residential mortgage and
consumer installment and other loans) are collectively evaluated for impairment.
Adoption of these statements did not have a material impact on the Bank's
financial position or results of operations.
Under the provisions of these standards a loan is impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Individually identified impaired loans are measured based on the
present value of payments expected to be received, using the historical
effective loan rates as the discount rate. Alternatively, measurement may also
be based on observable market prices, or for loans that are solely dependent on
the collateral for repayment, measurement may be based on the fair value of the
collateral. Loans that are to be foreclosed are measured based on the fair value
of the collateral. If the recorded investment in the impaired loan exceeds the
measure of fair value, a valuation is required as a component of the allowance
for loan losses. Changes to the valuation allowance are recorded as a component
of the provision for loan losses.
UNCOLLECTED INTEREST - The Bank reverses all accrued interest against interest
income when a loan is more than 90 days delinquent and ceases accruing interest
thereafter. Such interest ultimately collected is credited to income in the
period of recovery.
REAL ESTATE OWNED - Properties acquired through foreclosure, or a deed in lieu
of foreclosure are carried at the lower of fair value less estimated costs to
sell, or cost. If the fair value less the estimated cost to sell an individual
property declines below the cost of such property, a provision for losses is
charged to operations.
Subsequent costs relating to the improvement of property are capitalized in
amounts not to exceed the property's fair value. Costs relating to holding the
property are charged to expense when incurred.
The amounts the Bank could ultimately recover from property acquired by
foreclosure or deed in lieu of foreclosure, could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the Bank's control or changes in the Bank's
strategy for recovering its investment.
OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are carried at
cost less accumulated depreciation. Land is carried at cost. Depreciation is
computed on the straight-line method over the estimated useful lives of the
assets, which range from three to fifty years for buildings and improvements and
three to ten years for furniture and equipment.
GOODWILL - Goodwill resulting from the acquisition of deposits from the
Resolution Trust Corporation ("RTC") is being amortized on a straight-line basis
over five years. Goodwill resulting from the acquisition of BankBoynton, a
federal savings bank, is being amortized on a straight line basis over fifteen
years. The balance of goodwill, included in other assets at December 31, 1996
and 1997 was $ 755,000 and $ 2,796,000, respectively.
33
<PAGE>
DRAFTS PAYABLE - Drafts payable represent checks drawn by the Bank on a third
party payer, for savings account withdrawals and payment of the Bank's expenses.
Under the agreement between the Bank and its third party payer, the Bank funds
the checks written on the day following their issuance.
LOAN ORIGINATION FEES AND COSTS - Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
of the related loan. Deferred loan fees and costs are amortized to income over
the estimated life of the loans using the interest method.
Unearned discounts on consumer loans are amortized to income using the interest
method.
COMMITMENT FEES - Non-refundable fees received for commitments to make or
purchase loans in the future, net of direct costs of underwriting the
commitments, are deferred and, if the commitment is exercised, recognized over
the life of the loan as an adjustment of yield. If the commitment expires
unexercised, income is recognized upon expiration of the commitment. Direct loan
origination costs incurred to make a commitment to originate a loan are offset
against any related commitment fee and the net amount recognized.
PENSION AND RETIREMENT PLANS - Benefits are accounted for in accordance with
Statement of Financial Accounting Standards No. 87, entitled "Employers'
Accounting for Pensions" ("SFAS No. 87"). Net periodic pension costs (income)
are actuarially determined.
INCOME TAXES - The Company and its subsidiary file consolidated federal and
state income tax returns. Income taxes are allocated to the Company and its
subsidiary as though separate tax returns are being filed (See Note 11).
Deferred income taxes are provided on items recognized for financial reporting
purposes in periods different than such items are recognized for income tax
purposes in accordance with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
EARNINGS PER COMMON SHARE - Basic earnings per common share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period after giving retroactive effect
to the stock dividend in 1995, less the weighted average unallocated ESOP shares
of common stock.
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued.
IMPACT OF NEW ACCOUNTING ISSUES - In June 1996, Financial Accounting Standards
Board (FASB) issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The Statement, which
amends SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," supersedes SFAS No. 122, "Accounting for Mortgage Servicing
Rights." This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
No. 125 requires that servicing assets and liabilities be subsequently measured
by (a) amortization in proportion to and over the period of estimated net
servicing income or loss and (b) assessment for asset impairment or increased
obligation based on their fair values. SFAS No. 125 also requires that debtors
reclassify financial assets pledged as collateral and that secured parties
recognize those assets and their obligation to return them in certain
circumstances in which the secured party has taken control of those assets. SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. During the
year ended
34
<PAGE>
December 31, 1997, the Company sold $ 9.6 million of loans and retained the loan
servicing rights. The gain on the sale was determined in accordance with SFAS
No. 125.
In February 1997, FASB issued SFAS No. 128, "Earnings per Share." This statement
simplifies the standards for computing earnings per share previously required
under Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share,"
and makes the computation comparable to international EPS standards. Basic EPS
(formerly primary EPS) excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior period EPS data presented. The Company
implemented SFAS No. 128 effective December 31, 1997 and restated all prior
period data, as required.
In June 1997, the FASB issued SFAS 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 SFAS 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 Company'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. The Company will
adopt these promulgations and implement them as required.
RECLASSIFICATIONS - Certain amounts in the 1995 and 1996 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
2. GOVERNMENT AND AGENCY SECURITIES AVAILABLE FOR SALE
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
===================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1996:
Municipal Bonds................................... $ 419 $11 $ - $ 430
United States Government and agency securities.... 8,024 30 19 8,035
------- --- --- -------
Total............................................. $ 8,443 $41 $19 $ 8,465
======= === === =======
Weighted average interest rate.................... 6.30%
=======
December 31, 1997:
Municipal Bonds.................................... $ 2,202 $14 $ - $ 2,216
United States Government and agency securities..... 13,798 63 -- 13,861
------- --- --- -------
Total.............................................. $16,000 $77 $ - $16,077
======= === --- =======
Weighted average interest rate..................... 5.90%
=======
</TABLE>
35
<PAGE>
The following table sets forth the contractual maturity of the Bank's securities
available for sale at December 31, 1996 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------------------------------------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
===============================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less........................... $2,000 $1,995 $ 660 $ 661
Due after one year, through two years............. 6,443 6,470 15,340 15,416
------ ------ ------- -------
Total.......................................... $8,443 $8,465 $16,000 $16,077
====== ====== ======= =======
</TABLE>
The Bank had total Government and Agency securities available for sale pledged
at December 31, 1996 and 1997 of $2,517,000 and $12,175,000, respectively. Of
the $12,175,000 of securities pledged at December 31, 1997, $102,000 was
pledged for customer accounts that exceeded $100,000, $2,002,000 was pledged
as collateral for "Treasury, Tax and Loan" (TT&L) accounts held for the benefit
of the federal government, $4,023,000 was pledged to the State of Florida as
collateral for certificates of deposit, and the remaining $6,048,000 was
pledged as collateral for customer repurchase agreements.
Proceeds from the sale of securities available for sale was $5,981,000 during
the year ended December 31, 1995 resulting in gross realized gains of $18,000
and gross realized losses of $38,000. There were no sales of securities during
the years ended December 31, 1996 and 1997.
3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale at December 31, 1996 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZE FAIR
COST GAINS LOSSES VALUE
==========================================================
(IN THOUSANDS)
December 31, 1996:
<S> <C> <C> <C> <C>
FHLMC-fixed rate....................... $ 55,832 $ 856 $443 $ 56,245
FNMA-fixed rate........................ 11,804 97 130 11,771
GNMA-fixed rate........................ 7,670 474 -- 8,144
FHLMC-adjustable rate.................. 15,605 295 -- 15,900
FNMA-adjustable rate................... 29,449 222 95 29,576
GNMA-adjustable rate................... 1,935 28 -- 1,963
-------- ------ ---- --------
Total............................. $122,295 $1,972 $668 $123,599
======== ====== ==== ========
December 31, 1997:
FHLMC-fixed rate....................... $ 77,304 $1,273 $332 $ 78,245
FNMA-fixed rate........................ 26,429 150 82 26,497
GNMA-fixed rate........................ 29,840 653 64 30,429
FHLMC CMO-fixed rate................... 5,087 -- 6 5,081
FHLMC-adjustable rate.................. 20,303 284 2 20,585
FNMA-adjustable rate................... 24,880 268 29 25,119
GNMA-adjustable rate................... 1,553 33 -- 1,586
FNMA CMO-adjustable rate............... 18,558 148 -- 18,706
FHLMC CMO-adjustable rate.............. 27,874 38 28 27,884
-------- ------ ---- --------
Total............................. $231,828 $2,847 $543 $234,132
======== ====== ==== ========
</TABLE>
There were $19.6 million in sales of mortgage-backed securities classified as
available for sale during the year ending December 31, 1996 resulting in
proceeds of $20.5 million, gross realized gains of $875,000 and no gross
36
<PAGE>
realized losses. There were no sales of mortgage-backed securities classified as
available for sale during 1995 and 1997.
At December 31, 1996 the Bank had pledged $94,913,000 of mortgage-backed
securities available for sale as collateral for advances from the Federal Home
Loan Bank (FHLB). At December 31, 1997 the Bank was no longer using mortgage-
backed securities as collateral for advances from the FHLB (See Note 9), however
$7.6 million was pledged to the State of Florida as collateral for certificates
of deposit.
4. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
=========================
(IN THOUSANDS)
<S> <C> <C>
One-to-four single family, residential
real estate mortgages.................................. $524,434 $717,610
Commercial real estate mortgages........................ 42,811 39,946
Real estate construction-primarily residential.......... 58,493 38,577
Participations-primarily residential.................... 4,255 3,172
Land loans-primarily residential........................ 11,875 12,116
-------- --------
Total first mortgage loans.............................. 641,868 811,421
Consumer and commercial business loans.................. 58,063 105,047
-------- --------
Total gross loans....................................... 699,931 916,468
Less:
Undisbursed portion of loans in process.............. 37,575 54,471
Unearned discounts, premiums and deferred loan
fees (costs), net.................................. (1,607) (2,554)
Allowance for loan losses............................ 2,263 3,294
-------- --------
Loans receivable-net.................................... $661,700 $861,257
======== ========
</TABLE>
The amount of loans on which the Bank has ceased accruing interest or does not
charge interest aggregated approximately $3,035,000 and $2,995,000, net of
specific valuation allowances of $274,000 and $235,000, at December 31, 1996
and 1997, respectively. The amount of interest not accrued relating to these
loans was approximately $192,000 and $168,000 at December 31, 1996 and 1997,
respectively. Management believes the allowance for possible loan losses is
adequate.
An analysis of the changes in the allowance for loan losses for the years ended
December 31, 1995, 1996 and 1997 is as follows. There were no recoveries during
the years presented.
<TABLE>
<CAPTION>
1995 1996 1997
============================
<S> <C> <C> <C>
(IN THOUSANDS)
Balance at beginning of period........... $2,566 $2,265 $2,263
Increase in allowance due to purchase
of BankBoynton.......................... -- -- 1,167
Current provision........................ (210) 164 170
Charge-offs.............................. (91) (166) (306)
------ ------ ------
Ending balance........................... $2,265 $2,263 $3,294
====== ====== ======
</TABLE>
The Bank originates both adjustable and fixed rate mortgage loans. Included in
the loans receivable at December 31, 1997 are $3.0 million of loans held for
sale. These loans are recorded at the lower of cost or market. Loans held for
sale at December 31, 1996 amounted to $245,000.
37
<PAGE>
A loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. An analysis of the recorded investment
in impaired loans owned by the Bank at December 31, 1995, 1996 and 1997 and the
related allowance for those loans is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
==================================================================
(IN THOUSANDS)
LOAN RELATED LOAN RELATED LOAN RELATED
BALANCE ALLOWANCE BALANCE ALLOWANCE BALANCE ALLOWANCE
<S> <C> <C> <C> <C> <C> <C>
Impaired loan balances and related
allowances:
Loans with related allowance for loan
losses................................... $ 270 $105 $ 646 $256 $ 500 $235
Loans without related allowance for
loan losses.............................. 3,912 -- 2,725 -- 2,730 --
------ ---- ------ --------- ------ ---------
$4,182 $105 $3,371 $256 $3,230 $235
------ ---- ------ --------- ------ ---------
Average balance of impaired loans......... $1,817 $3,777 $3,301
====== ====== ======
</TABLE>
No interest income was recorded on impaired loans during the impairment periods
shown.
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. Any interest ultimately collected is
credited to income in the period of recovery.
At December 31, 1997, the composition and maturity or repricing of the mortgage
loan portfolio is presented below:
<TABLE>
<CAPTION>
...................FIXED RATE................ .......ADJUSTABLE RATE...................
TERM OF MATURITY BOOK VALUE TERM TO RATE BOOK VALUE
(IN THOUSANDS) ADJUSTMENT (IN THOUSANDS)
<S> <C> <C> <C>
1 year or less $ 74,556 1 year or less $241,026
1 year-3 years 4,064 1 year-3 years 115,608
3 years-5 years 14,971 3 years-5 66,767
years
5 years-10 years 40,174 5 years-10 35,770
years
10 years-20 years 144,562 10 years-20 1,345
years
Over 20 years 177,047 Over 20 years 578
-------- --------
Total $455,374 Total $461,094
======== ========
</TABLE>
Adjustable rate mortgage loans originated prior to December 31, 1993 have
interest rate adjustment limitations and are generally indexed to the monthly
weighted-average cost of funds for Savings Association Insurance Fund ("SAIF")
insured institutions headquartered in the Fourth Federal Home Loan Bank ("FHLB")
District. Adjustable rate mortgage loans originated subsequent to December 31,
1993 are indexed to comparable term U.S. Treasury securities. Future market
factors may affect the correlation of the interest rate adjustment with the
rates the Bank pays on the short-term deposits which have been primarily
utilized to fund those loans.
38
<PAGE>
The Bank makes fixed rate loan commitments for periods generally not exceeding
sixty days. At December 31, 1996 and 1997 the Bank had commitments outstanding
to originate fixed rate mortgage loans as follows:
<TABLE>
<CAPTION>
1996 1997
==========================
(IN THOUSANDS)
<S> <C> <C>
15 Years to Maturity
6.51 - 6.75................ $ -- $ 175
6.76 - 7.00................ -- 349
7.01 - 7.25................ -- 472
7.26 - 7.50................ 666 667
7.51 - 7.75................ 360 120
7.76 - 8.00................ 215 135
8.01 - 8.25................ 98 199
8.26 - 8.50................ 30 480
8.51 - 8.75................ -- --
8.76 - 9.00................ -- 30
9.01 - 9.25................ 842 --
16 - 30 Years to Maturity
6.26 - 6.50................ -- 80
6.51 - 6.75................ -- --
6.76 - 7.00................ -- 60
7.01 - 7.25................ -- 285
7.26 - 7.50................ 107 3,668
7.51 - 7.75................ 97 1,282
7.76 - 8.00................ 930 1,187
8.01 - 8.25................ 921 312
8.26 - 8.50................ 611 651
8.51 - 8.75................ -- 150
8.76 - 9.00................ -- --
9.01 - 9.25................ -- --
Over 9.25.................. 100 --
------ -------
Total.................,........... $4,977 $10,302
====== =======
</TABLE>
Because the above commitments generally are funded within sixty days, management
of the Bank feels that related interest rate risk of the commitments is minimal.
The Bank's lending markets are primarily concentrated in Palm Beach, Martin and
St. Lucie counties in Southeast Florida.
COMMERCIAL REAL ESTATE LENDING - The Bank originates and purchases commercial
real estate loans, which totaled $42,811,000 and $39,946,000 at December 31,
1996 and 1997, respectively. These loans are considered by management to be of
somewhat greater risk of uncollectibility due to the dependency on income
production or future development of the real estate. Accordingly, Bank
management establishes greater provisions for probable but not yet identified
losses on these loans than on less risky residential mortgage loans. The
composition of commercial real estate loans and its primary collateral at
December 31, 1996 and 1997 are approximately as follows:
<TABLE>
<CAPTION>
1996 1997
===========================
(IN THOUSANDS)
<S> <C> <C>
Office buildings............... $ 9,576 $ 8,553
Retail buildings............... 9,517 9,033
Warehouses..................... 9,032 8,260
Rental property................ 13,781 12,999
Hotels and motels.............. 60 54
Other property improvements.... 300 269
Other.......................... 545 778
------- -------
Total.......................... $42,811 $39,946
======= =======
</TABLE>
39
<PAGE>
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a federally chartered savings and loan association's aggregate
commercial real estate loans may not exceed 400% of its capital as determined
under the capital standards provisions of FIRREA. The Bank is federally
chartered and subject to this limitation. FIRREA does not require divestiture of
any loan that was lawful when it was originated. At December 31, 1997, the Bank
estimates that, while complying with this limitation, it could originate an
additional $302.2 million of commercial real estate loans, though the Bank's
current business plan indicates no intentions to do so.
LOANS TO ONE BORROWER LIMITATION - The Bank may not make real estate loans to
one borrower in excess of 15% of its unimpaired capital and surplus except for
loans not to exceed $500,000. This 15% limitation results in a dollar
limitation of approximately $12.8 million at December 31, 1997. At December 31,
1997, the Bank met the loans to one borrower limitation under current existing
regulations.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial position. The unpaid balances of these
loans at December 31, 1996 and 1997 were $45,539,000 and $59,911,000,
respectively. Custodial escrow balances maintained in connection with the
foregoing loan servicing were $186,343 and $228,781 at December 31, 1996 and
1997, respectively.
The Bank offers loans to its employees, including Directors and Senior
Management at prevailing market interest rates. These loans are made in the
ordinary course of business and on substantially the same terms and collateral
requirements as those of comparable transactions prevailing at the time.
The loans to Directors, Executive Officers, and associates of such persons
amounted to $1,184,000 and $1,185,000 at December 31, 1996 and 1997,
respectively, which did not exceed 5% of retained earnings.
COLLATERAL FOR ADVANCES FROM THE FEDERAL HOME LOAN BANK - The terms of a new
security agreement with the FHLB entered into in 1997 include a blanket floating
lien that requires the Bank to maintain qualifying first mortgage loans as
pledged collateral in an amount equal to, when discounted at 75% of the unpaid
principal balances, the advances (See Note 9).
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1996 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
================================
(IN THOUSANDS)
<S> <C> <C>
Land.......................................... $ 5,657 $ 5,681
Buildings and improvements.................... 13,627 17,194
Furniture and equipment....................... 7,710 8,868
------- -------
Total......................................... 26,994 31,743
Less accumulated depreciation................. 8,902 10,303
------- -------
Office properties and equipment - net......... $18,092 $21,440
======= =======
</TABLE>
6. REAL ESTATE OWNED
Real estate owned at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
=======================
(IN THOUSANDS)
<S> <C> <C>
Real estate owned............................. $ 93 $ 967
Valuation allowance........................... -- --
------- -------
Real estate owned - net....................... $ 93 $ 967
======= =======
</TABLE>
40
<PAGE>
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
===================
<S> <C> <C>
(IN THOUSANDS)
Loans............................. $3,474 $4,421
Investments....................... 298 453
Mortgage-backed securities........ 842 1,530
------ ------
Accrued interest receivable....... $4,614 $6,404
====== ======
</TABLE>
8. DEPOSITS
The weighted-average interest rates on deposits at December 31, 1996 and 1997
were 4.26% and 4.50%, respectively. Deposit accounts, by type and range of rates
at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
ACCOUNT TYPE AND RATE 1996 1997
=========================
(IN THOUSANDS)
<S> <C> <C>
Non-interest-bearing NOW accounts........................ $ 26,406 $ 35,888
NOW, Super NOW and funds transfer accounts
1996 and 1997, 1.02% and 1.05%, respectively............ 70,558 82,152
Passbook and statement accounts
1996 and 1997, 2.05% and 2.58%, respectively............ 87,534 105,082
Variable-rate money market accounts
1996 and 1997, 2.51% and 2.83%, respectively............ 44,012 42,135
-------- --------
Total non-certificate accounts........................... 228,510 265,257
-------- --------
Certificates:
1.01% - 2.00%........................................... 949 895
2.01% - 3.00%........................................... 2 301
3.01% - 4.00%........................................... 20 6
4.01% - 5.00%........................................... 34,308 11,225
5.01% - 6.00%........................................... 333,998 441,810
6.01% - 7.00%........................................... 93,788 152,453
7.01% - 8.00%........................................... 3,079 353
8.01% - 9.00%........................................... 64 40
-------- --------
Total certificates....................................... 466,208 607,083
-------- --------
Total.................................................... $694,718 $872,340
======== ========
</TABLE>
Individual deposits greater than $100,000 at December 31, 1996 and 1997
aggregated approximately $53,680,000 and $96,648,000, respectively.
Interest on deposit accounts, presented in the consolidated statements of
operations, is net of interest forfeited by depositors on early withdrawal of
certificate accounts of approximately $115,000, $106,000 and $128,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
41
<PAGE>
Scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997
---------- ----------
AMOUNT PERCENT AMOUNT PERCENT
=============================================
MATURITY (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Less than 1 year..... $322,042 69.08% $387,511 63.83%
1 year-2 years....... 75,043 16.10% 112,307 18.50%
2 years-3 years...... 28,603 6.13% 56,921 9.38%
3 years-4 years...... 17,031 3.65% 22,103 3.64%
4 years-5 years...... 21,867 4.69% 26,060 4.29%
Thereafter........... 1,622 .35% 2,181 .36%
-------- ------ -------- ------
Total................ $466,208 100.00% $607,083 100.00%
======== ====== ======== ======
</TABLE>
Under FIRREA, any insured depository institution that does not meet its
applicable minimum capital requirements may not accept brokered deposits after
December 7, 1992. This prohibition includes renewals and rollovers of existing
brokered deposits and deposit solicitations at higher than prevailing interest
rates paid by institutions in the Bank's normal market area. Even though the
Bank meets all of the applicable minimum capital requirements at December 31,
1997, the Bank had no brokered deposits.
Interest expense on deposits consists of the following during the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
====================================
<S> <C> <C> <C>
(IN THOUSANDS)
Passbook accounts........ $ 1,812 $ 1,723 $ 1,892
NOW accounts............. 812 937 730
Money market accounts.... 1,139 1,075 901
Certificate accounts..... 18,752 22,504 30,333
------- ------- -------
Total.................... $22,515 $26,239 $33,856
======= ======= =======
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank had outstanding advances from the FHLB of $ 82,517,000 with interest
rates ranging from 5.21% to 8.21% and $ 239,091,000 with interest rates ranging
from 5.21% to 8.21% at December 31, 1996 and 1997, respectively. The advances at
December 31, 1997 are repayable as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
=========================
<S> <C>
1998 $ 43,300
1999 28,349
2000 25,040
2001 5,340
2002 127,500
Thereafter 9,562
--------
Total $239,091
========
</TABLE>
At December 31, 1996 the Bank had entered into a security agreement with the
FHLB under which the Bank was required to maintain as collateral for its
advances, securities in an amount at least equal to 100% of the Bank's total
advances outstanding from the FHLB. Pledged assets to secure FHLB advances at
December 31, 1996 included FHLMC and FNMA securities totaling $ 94,913,000. At
December 31, 1997 the Bank was no longer
42
<PAGE>
using mortgage-backed securities as collateral for advances from the FHLB. The
terms of a new security agreement with the FHLB entered into in 1997 include a
blanket floating lien that requires the bank to maintain qualifying first
mortgage loans as pledged collateral in an amount equal to, when discounted at
75% of the unpaid principal balances, the advances (See Notes 3 and 4).
10. EMPLOYEE STOCK OWNERSHIP PLAN LOAN
In connection with the Bank's plan of reorganization into a mutual holding
company, which was consummated January 7, 1994, the Bank established an Employee
Stock Ownership Plan (ESOP) which was funded by proceeds from a loan with an
unrelated financial institution in the original amount of $ 1,932,000. Terms of
the loan require equal quarterly payments, together with interest, for seven
years, with a right of prepayment of the loan after three years.
Collateral for the loan will be released and allocated to employee accounts in
proportion to the payments on the loan. The collateral for this loan at December
31, 1997 is 91,080 shares of the Company's stock held and owned by the ESOP. In
addition, the loan contains several restrictive covenants requiring certain
minimum levels of financial performance be maintained by the Bank. The Bank is
in compliance with these covenants.
Effective June 30, 1997 the loan was purchased and is now held by Fidelity
Bankshares, Inc. The Bank intends to make contributions to the ESOP trust for
the repayment of the loan in accordance with its terms. The loan bears interest
at 25 basis points below the New York prime rate (8.50% at December 31, 1997).
As a result of this purchase by Fidelity Bankshares, Inc., the ESOP loan has
been eliminated in consolidation at December 31, 1997.
11. INCOME TAXES
In accordance with SFAS No. 109, deferred income tax assets and liabilities are
computed annually for differences between financial statement and tax basis of
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable for
the period adjusted for the change during the period in deferred tax assets and
liabilities.
The components of the provisions for income taxes for the years ended December
31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
==============================
(IN THOUSANDS)
<S> <C> <C> <C>
Current - federal............... $2,784 $2,993 $4,872
Current - state................. 410 424 701
------ ------ ------
Total current................... 3,194 3,417 5,573
Deferred - federal and state.... (61) (855) (820)
------ ------ ------
Total........................... $3,133 $2,562 $4,753
====== ====== ======
</TABLE>
43
<PAGE>
The Company's provision for income taxes differs from the amounts determined by
applying the statutory federal income tax rate to income before income taxes for
the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
========================================================
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Tax at federal tax rate................. $2,781 35.0% $2,139 35.0% $3,910 35.0%
State income taxes, net of federal
income tax benefits..................... 265 3.3 220 3.6 375 3.3
Benefit of graduated rates.............. (79) (1.0) (61) (1.0) (101) (0.9)
Employee stock ownership plan........... -- -- -- -- 190 1.7
Other................................... 166 1.8 264 4.3 379 3.4
------ ---- ------ ---- ------ ----
Total provision and effective tax rate.. $3,133 39.1% $2,562 41.9% $4,753 42.5%
====== ==== ====== ==== ====== ====
</TABLE>
The tax effect of temporary differences that give rise to deferred tax assets
and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
========================
<S> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Depreciation............................ $ 978 $ 847
Loan fee income......................... 1,304 1,938
FHLB stock dividends.................... 1,102 1,115
Unrealized appreciation in securities... 543 976
Excess of tax bad debt reserve over
book reserve........................... 513 174
Deferred compensation................... -- 25
------ ------
Gross deferred tax liabilities.......... 4,440 5,075
------ ------
Deferred tax assets:
Executive death benefit................. 347 409
Amortization............................ 205 287
Retirement plan......................... 2,182 2,849
Deferred compensation................... 686 853
Deferred state taxes.................... 17 --
Other................................... 117 178
------ ------
Gross deferred tax assets............... 3,554 4,576
Less valuation allowances for deferred
tax assets............................. -- --
------ ------
Net deferred tax assets................. 3,554 4,576
------ ------
Net deferred tax liabilities............ $ 886 $ 499
====== ======
</TABLE>
During 1996, a law was enacted that repealed Section 593 of the Internal Revenue
Code for taxable years beginning after December 31, 1995. Section 593 allowed
thrift institutions, including the Bank, to use the percentage-of-taxable income
bad debt accounting method, if more favorable than the specific charge-off
method, for Federal income tax purposes. The excess reserves (deduction based on
the percentage-of-taxable income less the deduction based on the specific
charge-off method) accumulated post-1987 are required to be recaptured ratably
over a six year period beginning in 1996. The recapture has no effect on the
Company's statement of operations as taxes were provided for in prior years in
accordance with SFAS 109, "Accounting for Income Taxes." The timing of this
recapture may be delayed for a one or two year period to the extent that the
Bank originates more residential loans than the average originations in the past
six years. The Bank will meet the origination requirement for 1997 and,
therefore, will delay recapture until the six year period beginning in 1998. The
recapture amount of $ 3.7 million will result in payments to the IRS totaling $
1.4 million which has been previously accrued. The same legislation forgave the
tax liability on pre-1987 accumulated bad debt reserves which would have
penalized any thrift choosing to adopt a bank charter because the tax would have
become due and payable. The unrecorded potential liability that was forgiven
approximated $ 2.9 million.
44
<PAGE>
12. PENSION AND EMPLOYEE BENEFIT PLANS
PENSION PLAN - The Bank's employees participate in the Bank's, qualified defined
benefit pension plan covering substantially all employees. The plan calls for
benefits to be paid to eligible employees at retirement based primarily upon
years of service with the Bank and compensation rates during those years.
Currently, the Bank's policy is to fund the qualified retirement plan in an
amount that falls between the minimum contribution required by the Employee
Retirement Income Security Act and the maximum tax deductible contribution. Plan
assets consist primarily of common stock, U.S. Government obligations and
certificates of deposit.
Pension expense for the plan includes the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
=====================================
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost............................ $ 325 $ 410 $ 498
Interest cost........................... 554 535 575
Return on assets........................ (1,066) (816) (1,154)
Net amortization and deferral........... 680 433 651
------- ----- -------
Net periodic pension cost............... $ 493 $ 562 $ 570
======= ===== =======
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, pension expense amounts
were based upon actuarial computations.
In accordance with the actuarially determined computation under SFAS No. 87, the
Bank funded $ 405,000 as required for the 1997 plan year.
The following sets forth the funded status of the qualified plan at December 31:
<TABLE>
<CAPTION>
1996 1997
=====================
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits......................... $3,569 $4,769
Non-vested benefits..................... 302 1,109
------ ------
Accumulated benefit obligation.......... 3,871 5,878
Effect of anticipated future
compensation levels and other events... 3,319 2,089
------ ------
Projected benefit obligation............ 7,190 7,967
Fair value of assets held in the plan
(estimated)............................ 6,284 7,804
Unfunded plan assets under projected.... ------ ------
benefit obligation..................... $ 906 $ 163
====== ======
The unfunded plan assets under projected
benefit obligation consists of the
following:
Accrued pension cost.................... $ 261 $ 427
Unrecognized net (gain) loss due to
changes in assumptions................. 889 (50)
Other, net.............................. (244) (214)
------ ------
Total................................... $ 906 $ 163
====== ======
</TABLE>
The weighted-average discount rate used to measure the projected benefit
obligation is 7.25% pre-retirement and 6.00% post-retirement in 1997, compared
to 7.75% pre-retirement and 6.00% post-retirement in 1996 and 7.25% pre-
retirement and 6.00% post-retirement in 1995. The rate of increase in future
compensation levels is 6.50% and 5.00% for 1996 and 1997, respectively, and the
expected long-term rate of return on assets is 8.00% in all years.
SAVINGS PLAN - Effective January 1, 1988, the Board of Directors approved a
401(k) deferred savings plan for all Bank employees who are 21 years of age with
one or more years of service. The 401(k) deferred savings plan allows qualified
employees to save from 1% to 15% of their income. Presently, one-half of an
employee's contribution is matched by the Bank, up to 3% of the employee's
salary. The Bank's matching percentage will be determined annually by the Board
of Directors after taking into consideration such factors as profit performance
45
<PAGE>
and ability to meet capital requirements. The Bank's contribution to the plan
totaled $ 145,000, $ 170,000 and $ 183,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
RETIREMENT PLANS - During 1989, the Bank established non-qualified defined
benefit plans for certain officers and directors. The director's plan became
effective on January 1, 1991. For the years ended December 31, 1995, 1996 and
1997, the net periodic pension expense for the Supplemental Executive Retirement
Plan for Officers totaled $ 615,000, $ 964,000 and $ 951,000, respectively. The
projected benefit obligation as of December 31, 1995, 1996 and 1997, was
estimated at $ 5,791,000, $ 5,217,000 and $ 6,049,000, respectively. For 1995,
1996 and 1997, respectively, the discount rates used to measure the projected
benefit obligation were 6.50%, 7.75% and 7.25%. The rate of increase in future
compensation levels in all years was 5.00%. For the years ended December 31,
1995, 1996 and 1997, the net periodic pension expense for the Retirement Plan
for the Director's totaled $ 257,000, $ 273,000 and $ 227,000, respectively. The
projected benefit obligation for the Retirement Plan for Directors as of
December 31, 1995, 1996 and 1997 was estimated at $ 1,678,000, $ 1,514,000 and $
1,475,000, respectively. For 1995, 1996 and 1997, the discount rates used to
measure that projected benefit obligation were 6.50%, 7.75% and 7.25%,
respectively. The rate of increase in future compensation levels for the
Retirement Plan for Directors was 5.00% in all years. The provisions of SFAS No.
87 require recognition in the statement of financial position of the additional
minimum liability and related intangible asset for a retirement plan with
accumulated benefits in excess of plan assets. This resulted in the recognition
at December 31, 1995 and 1996, of an additional liability and an intangible
asset of $ 2,050,000 and $ 592,000, respectively. There was no material effect
on earnings or cash requirements to fund the retirement plans. At December 31,
1997, the Bank had no additional liability or intangible asset to recognize.
These additional liability and intangible asset amounts as of December 31, 1995
and 1996 are recorded in the account balances captioned other liabilities and
other assets, respectively, in the accompanying consolidated statements of
financial position.
INCENTIVE PROGRAM - The Bank also has a Senior Management Performance Incentive
Award Program to provide the opportunity for those executives to be rewarded in
future earnings growth. A designated percentage of income at December 31 of each
year is used to determine the award fund contribution. This percentage will be
determined annually by the Board of Directors after taking into consideration
such factors as profit performance and ability to meet capital requirements.
Awards amounting to $ 164,000, $ 120,000 and $ 229,000, were made during the
calendar years 1995, 1996 and 1997, respectively, for distribution in subsequent
years.
EMPLOYEE STOCK OWNERSHIP PLAN - On January 7, 1994, in connection with the
Bank's Plan of Reorganization into a Mutual Holding Company (See Note 18), the
Bank adopted a tax qualified Employee Stock Ownership Plan ("ESOP") for all
eligible employees. The ESOP purchased 193,200 shares of the Bank's stock at the
date of the Reorganization. The funds used to purchase the shares were borrowed
from a third party lender (See Note 10). The Bank will contribute to the ESOP
sufficient funds to pay the principal and interest on this loan over seven
years. Benefits generally become 100% vested after five years of credited
service. However, contributions to the ESOP and shares allocated among
participants proportional to repayment of the seven year ESOP loan will be
allocated among participants on the basis of compensation in the year of
allocation, subject to regulatory maximum limitations. The Bank recognized $
398,000, $ 462,000 and $ 765,000, by a charge against income in 1995, 1996 and
1997, respectively, under this plan.
BANK RECOGNITION AND RETENTION PLANS - On January 7, 1994, in connection with
the Bank's Plan of Reorganization into a Mutual Holding Company (See Note 18),
the Bank adopted two Recognition and Retention Plans to encourage key employees
and Directors to remain with the Bank. Both plans, consisting of a total of
121,440 shares of restricted stock after the 10% stock dividend, were awarded
and were allocated to the affected employees and Directors. These shares vested
ratably over the three years ended December 31, 1996. The Bank recognized $
328,000, $ 280,000 and $ 0 by a charge against income in 1995, 1996 and 1997,
respectively, under this plan.
46
<PAGE>
13. STOCK OPTION PLAN
The Bank has adopted stock option plans which granted options with an exercise
price equal to the market value of the stock at the date of grant, to Directors
and officers. The Directors may exercise their options at any time up to ten
years, while officer's options are exercisable at a rate of twenty percent per
year, not to exceed ten years. Under these plans, after retroactively adjusting
for the 10% stock dividend distributed in November 1995, the Bank reserved
303,600 shares of authorized but unissued common stock for future issuance. The
following table shows a summary of transactions.
<TABLE>
<CAPTION>
OPTIONS PRICE
--------------------------------------
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE PER AGGREGATE
OUTSTANDING SHARE PRICE
======================================
<S> <C> <C> <C>
OPTIONS OUTSTANDING
- -------------------
Balance - December 31, 1994..... 303,600 $9.09 $2,759,724
------- ----- ----------
Granted........................ -- -- --
Exercised...................... (37,950) 9.09 (344,966)
Canceled....................... -- -- --
------- ----- ----------
Balance - December 31, 1995..... 265,650 9.09 2,414,758
------- ----- ----------
Granted........................ -- -- --
Exercised...................... (43,117) 9.09 (391,934)
Canceled....................... -- -- --
------- ----- ----------
Balance - December 31, 1996..... 222,533 9.09 2,022,824
------- ----- ----------
Granted........................ -- -- --
Exercised...................... (47,101) 9.09 (428,148)
Canceled....................... (1,595) 9.09 (14,499)
------- ----- ----------
Balance - December 31, 1997..... 173,837 $9.09 $1,580,177
======= ===== ==========
</TABLE>
14. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory and possible discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk-weighting
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Tangible capital of
not less than 1.5% of adjusted total assets, Total capital to risk-weighted
assets of not less than 8%, Tier I capital of not less than 3.0% of adjusted
total assets, and Tier I capital to risk-weighted assets of 4.0% (as defined in
the regulations). As of December 31, 1997, the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the OTS categorized
the Bank as "Well Capitalized" under the framework for prompt corrective action.
To be considered well capitalized under Prompt Corrective Action Provisions, the
Bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the Bank's
categorization.
47
<PAGE>
The Bank's actual capital amounts and ratios are presented in the following
table:
<TABLE>
<CAPTION>
TO BE CONSIDERED
MINIMUM FOR WELL CAPITALIZED
CAPITAL ADEQUACY FOR PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------------------------------------------------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996 Stockholders'
Equity and ratio to total assets....... 9.4% $ 81,723
====
Unrealized increase in market value of
assets available for sale (net of
applicable income taxes)............... (782)
Goodwill................................ (755)
----------
Tangible capital and ratio to adjusted.. 9.2% $ 80,186 1.5% $13,072
total assets........................... ==== ========== ====== ========
Tier I (core) capital and ratio to
adjusted total assets.................. 9.2% $ 80,186 3.0% $26,144 5.0% $43,574
==== ========== ====== ======== ====== ==========
Tier I (core) capital and ratio to
risk-weighted total assets............. 17.9% $ 80,186 4.0% $17,943 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 December 31, 1997 Stockholders'
Equity and ratio to total assets....... 7.0% $ 85,559
====
Unrealized increase in market value of
assets available for sale (net of
applicable income taxes)............... (1,405)
Goodwill................................ (3,083)
Disallowed servicing assets............. (30)
----------
Tangible capital and ratio to adjusted.. 6.6% $ 81,041 1.5% $18,228
total assets........................... ==== ========== ====== ========
Tier I (core) capital and ratio to
adjusted total assets.................. 6.7% $ 81,041 3.0% $36,457 5.0% $60,761
==== ========== ====== ======== ====== ==========
Tier I (core) capital and ratio to
risk-weighted total assets............. 13.6% $ 81,041 4.0% $23,751 6.0% $35,626
==== ====== ======== ====== ==========
General loan valuation allowances....... 2,242
Equity investments...................... (1)
----------
Tier 2 capital.......................... $ 2,241
----------
Total risk-based capital and ratio to
risk-weighted total assets............. 14.0% $ 83,282 8.0% $47,501 10.0% $59,377
==== ========== ====== ======== ====== ==========
Total assets............................ $1,219,735
==========
Adjusted total assets................... $1,215,217
==========
Risk-weighted assets.................... $ 593,768
==========
</TABLE>
48
<PAGE>
At periodic intervals, both the OTS and the FDIC routinely examine the Company's
and the Bank's financial statements as part of their legally proscribed
oversight of the savings and loan industry. Based on these examinations, the
regulators can direct that the financial statements be adjusted in accordance
with their findings.
During the year ended December 31, 1997, an OTS examination resulted in no
significant adjustments to the consolidated financial statements.
15. ACQUISITION OF BANKBOYNTON
On December 5, 1997, the Bank acquired, for cash, all the outstanding stock of
BankBoynton, a thrift institution located in Boynton Beach, Florida. The
acquisition has been accounted for under the purchase method of accounting and
the results of operation of BankBoynton are included in the Consolidated
Statements of Operations from the date of acquisition. The excess of cost over
net assets acquired amounted to approximately $ 2.3 million and will be charged
against operations over a period of fifteen years, using the straight-line
method of amortization.
The following unaudited pro-forma information shows the condensed consolidated
results of operation as though the above acquisition, including the related
purchase accounting adjustments, had been made at the beginning of the year:
<TABLE>
<CAPTION>
1996 1997
===========================
(IN THOUSANDS)
<S> <C> <C>
Net interest income........... $29,883 $32,752
Net income.................... $ 3,337 $ 5,861
Basic earnings per share...... $ .51 $ .88
Diluted earnings per share.... $ .50 $ .87
</TABLE>
The unaudited pro-forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the acquisition
been made at the beginning of the respective periods, or of results which may
occur in the future.
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes commitments to extend credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. The interest
rates on both fixed and variable rate mortgage loans are generally based on the
market rates in effect on the date the loan application is taken. Commitments
generally have fixed expiration dates of no longer than 60 days and other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained by the Bank upon extension of credit is based on
management's credit evaluation of the customer. Collateral held varies but may
include single-family homes, marketable securities and income-producing
residential and commercial properties. Credit losses may occur when one of the
parties fails to perform in accordance with the terms of the contract. The
Bank's exposure to credit risk is represented by the contractual amount of the
commitments to extend credit. At December 31, 1997, the Bank had commitments to
extend credit for or purchase mortgage loans of $ 44,708,000 ($ 10,302,000 in
fixed rate commitments, see Note 4, and the balance of commitments in either
variable rate or for which rates had not yet been set). The Bank also has a pre-
approval program which commits dollar amounts to potential loan customers based
on their credit history. This program, however, does not commit to locked in
rates. No fees are received in connection with such commitments.
49
<PAGE>
The Bank leases various property for original periods ranging from one to
seventy-two years. Rent expense for the years ended December 31, 1995, 1996 and
1997, was approximately $ 623,000, $ 682,000 and $ 638,000, respectively. At
December 31, 1997, future minimum lease payments under these operating leases
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
--------------------------------------------
(IN THOUSANDS)
<S> <C>
1998 $ 744,462
1999 642,069
2000 640,617
2001 567,556
2002 518,379
Thereafter 3,043,684
----------
Total $6,156,767
==========
</TABLE>
The Bank has entered into a three year employment agreement with its Chief
Executive Officer. This agreement, among other matters, would provide for
severance payments of up to three years salary in the event of termination for
reasons other than cause. In addition, the Bank has entered into severance
agreements with four of its executive officers. The severance agreements would
provide for payments of up to three years salary for these executives, but only
in the event of change of control of the Bank.
YEAR 2000 ISSUE
The Bank formed a Year 2000 Committee in March 1997, which meets regularly to
review the Bank's plan to achieve compliance with the issues associated with the
year 2000 and progress to date and report such progress to the Board of
Directors. The Bank's Year 2000 Project Plan includes five phases; assessment,
evaluation, renovation, validation and implementation. While in some instances
the Bank is in the final stages of assessments, certain applications are in the
renovation and validation stages. Management of the Bank believes all "mission
critical" applications have been identified. To the extent application suppliers
assert their applications are year 2000 ready, the Bank is currently validating
their claims, while working toward solutions with others. Management has
concluded that the cost of modernizing the Bank's computer hardware and
software, on an accelerated basis, will cost approximately $ 2.3 million. These
costs are expected to be capitalized and expensed in conformity with generally
accepted accounting principles.
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
==============================================
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow
Information:
Cash paid for income taxes............. $ 3,223 $ 2,810 $ 5,016
======= ======= =======
Cash paid for interest on deposits and
other borrowings...................... $27,906 $31,879 $41,782
======= ======= =======
Supplemental Schedule of Noncash
Investing and Financing Activities:
Real estate acquired in settlement of
loans................................. $ 1,326 $ 593 $ 2,403
======= ======= =======
</TABLE>
18. CONVERSION TO HOLDING COMPANY
On April 25, 1996, Fidelity Federal Savings Bank of Florida (the "Bank") adopted
an Agreement and Plan of Reorganization, (the "Plan") whereby the Bank would
become a wholly-owned subsidiary of a stock holding company, Fidelity
Bankshares, Inc. (the "Company"), a Delaware corporation. Pursuant to the Plan,
the Bank's mutual holding company parent would continue to own a majority of the
Company's outstanding common stock. In addition, as part of the Plan, each share
of the Bank's outstanding one dollar par value common stock would be converted
into one share of Fidelity Bankshares, Inc. ten cent par value common stock.
Consequently, following
50
<PAGE>
the reorganization, each stockholder of the Bank would have the same ownership
interest in Fidelity Bankshares, Inc. as the stockholder had in the Bank.
In November, 1996, the Bank received regulatory approval to proceed with the
reorganization and on January 21, 1997, the Bank's stockholders approved the
Plan. On January 29, 1997, the transaction was consummated, resulting in the
Company owning all the outstanding common stock of the Bank. The reorganization
was completed as a tax-free transaction. In addition, since the reorganization
was accounted for in the same manner as a pooling of interests merger, no
significant accounting adjustments were necessary to the consolidated financial
statements. Common stock and additional paid in capital reflect the change in
par value described above.
19. SUBSEQUENT EVENTS
On January 21, 1998 the Company issued $ 28.375 million of preferred,
mandatorily redeemable, securities out of a grantor trust, Fidelity Capital
Trust I. As its only asset, the trust holds junior subordinated debentures due
January 31, 2028 of the Company, purchased with the proceeds of the preferred
securities issuance. Interest from the junior subordinated debentures bears
interest at 8.375%, and will be used to fund distributions on the preferred
securities. Costs of issuing securities of $ 1.3 million will be capitalized and
amortized over 30 years using the straight line method of amortization.
Distributions on the preferred securities are cumulative and are payable at the
same rate as the junior subordinated debentures described above. The junior
subordinated debentures are redeemable in whole, beginning January 31, 2000 at
107% of principal amount and at 100% of principal amount in whole or in part,
commencing January 31, 2003. The preferred securities are subject to mandatory
redemption, in whole or in part as applicable, upon the repayment of the junior
subordinated debentures. The proceeds from the preferred securities, to the
extent invested in common stock of the Bank, are considered to be Tier 1 capital
for regulatory purposes. The Company intends to invest $ 25 million of the
proceeds in common stock of the Bank.
20. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earnings per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the years ended December 31, 1995, 1996 and 1997, retroactively adjusted to
reflect the 10% stock dividend distributed on November 30, 1995, are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
1995 1996 1997
-------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(1) (2) AMOUNT (1) (2) AMOUNT (1) (2) AMOUNT
=======================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income................ $4,815,000 $3,550,000 $6,418,000
Basic EPS:
Mortgage loans
Income available to
common stockholders...... $4,815,000 6,538,873 $0.74 $3,550,000 6,583,118 $0.54 $6,418,000 6,661,401 $0.96
----- -----
Effect of diluted shares:
Common stock options..... 77,894 84,380 104,759
--------- --------- ---------
Diluted EPS
Income available to
common stockholders...... $4,815,000 6,616,767 $0.73 $3,550,000 6,667,498 $0.53 $6,418,000 6,766,161 $0.95
========== ========= ===== ========== ========= ===== ========== ========= =====
</TABLE>
(1) Numerator
(2) Denominator
Pursuant to Statement of Position 93-6, entitled "Employers' Accounting for
Employee Stock Ownership Plans," issued by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants, ESOP shares
that have not been committed to be released are not considered to be
outstanding.
51
<PAGE>
21. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards No. 107 ("SFAS No. 107"), "Disclosure About Fair Value of Financial
Instruments," as amended by SFAS 119, requires additional disclosures of fair
values of financial instruments in the notes to the consolidated financial
statements. Fair values of financial instruments that are not actively traded
are based on market prices of similar instruments and/or valuation techniques
using market assumptions. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts which the Bank
could realize in a current transaction.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
======================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and amounts due from depository institutions... $ 15,293 $ 15,293 $ 22,136 $ 22,136
Interest-bearing deposits........................... 27,127 27,127 33,688 33,688
Assets available for sale........................... 132,064 132,064 250,209 250,209
Loans receivable (net).............................. 661,700 664,667 861,257 870,162
Liabilities:
Deposits............................................ 694,718 697,163 872,340 873,741
Other borrowed funds................................ -- -- 3,780 3,780
Advances from the Federal Home Loan................. 82,517 84,859 239,091 239,963
ESOP loan............................................ 1,104 1,104 -- --
</TABLE>
The following methods and assumptions were used to estimate fair value of each
major class of financial instrument at December 31, 1996 and 1997.
CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS AND INTEREST-BEARING DEPOSITS
- - The carrying amount of these assets is a reasonable estimate of their fair
value.
ASSETS AVAILABLE FOR SALE - The fair value of these securities are based on
quoted market prices.
LOANS RECEIVABLE - The fair value of loans is estimated by discounting the
future cash flows of the loans using the current rates at which similar loans
would be made to borrowers with similar credit rating for the same remaining
maturities.
DEPOSITS - The fair value of demand deposits, savings accounts and money market
accounts are equal to the amount payable on demand at the reporting date. The
fair values of fixed maturity certificate accounts are estimated by discounting
the future cash flows of the certificates using the current rates for advances
from the Federal Home Loan Bank with similar maturities.
OTHER BORROWED FUNDS - Fair value is estimated using rates currently offered for
advances from the Federal Home Loan Bank with similar maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK - The fair value of these advances is
estimated by discounting the future cash flows of these advances using the
current rates at which similar term advances could be obtained.
ESOP LOAN - The carrying amount of this loan is a reasonable estimate of fair
market value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The fair value of
these commitments is insignificant.
52
<PAGE>
22. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial position as of December 31,
1996, and 1997 and the condensed statement of operations and statement of cash
flows for the three years then ended should be read in conjunction with the
Consolidated Financial Statements and related notes. Since the organization of
the parent company was accounted for in a manner similar to a pooling of
interests, these statements have been presented as if the parent company was in
existence for all periods covered by the Consolidated Financial Statements.
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
=====================
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION
ASSETS:
Cash and cash equivalents.................. $ __ $ 411
ESOP loan receivable....................... -- 828
Investment in and advances to Bank......... 82,339 86,710
Other assets............................... -- 217
------- -------
Total assets................................... $82,339 $88,166
======= =======
Liabilities.................................... $ 616 $ 779
Stockholders' Equity........................... 81,723 87,387
------- -------
Total liabilities and stockholders' equity..... $82,339 $88,166
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
==================================
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
INCOME:
Income................................................ $ -- $ -- $ 42
Expenses.............................................. -- -- 541
------- ------- -------
Income before income taxes and
equity in earnings of Bank........................... -- -- (499)
Income tax benefit.................................... -- -- 204
------- ------- -------
Income before equity in earnings
of Bank.............................................. -- (295)
Equity in earnings of Bank............................ 4,815 3,550 6,713
------- ------- -------
Net income............................................ $ 4,815 $ 3,550 $ 6,418
======= ======= =======
STATEMENT OF CASH FLOWS
CASH FLOW FROM (FOR) OPERATING
ACTIVITIES:
Net Income............................................ $ 4,815 $ 3,500 $ 6,418
Adjustments to reconcile net income
to net cash used for operating
activities
Equity in earnings of Bank............................ (4,815) (3,550) (6,713)
Other................................................. -- -- (148)
------- ------- -------
Net cash used for operating
activities........................................... -- -- (443)
------- ------- -------
CASH FLOW FROM (FOR) INVESTING
ACTIVITIES:
Dividends received from Bank.......................... 2,106 1,971 3,554
Purchase of ESOP loan................................. -- -- (966)
Principal payments on ESOP loan....................... -- -- 138
Other................................................. -- -- 386
------- ------- -------
Net cash from investing activities.................... 2,106 1,971 3,112
------- ------- -------
CASH FLOW FROM (FOR) FINANCING
ACTIVITIES:
Proceeds from the sale of stock....................... -- -- 308
Cash dividends paid................................... (2,106) (1,971) (2,566)
------- ------- -------
Net cash used for financing
activities........................................... (2,106) (1,971) (2,258)
------- ------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.......................................... -- -- 411
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR.............................................. -- -- --
CASH AND CASH EQUIVALENTS, END OF YEAR................ $ -- $ -- $ 411
======= ======== =======
</TABLE>
53
<PAGE>
Payment of dividends to Fidelity Bankshares, Inc. by the Bank is subject to
various limitations by bank regulatory agencies. Undistributed earnings of the
Bank available for distribution as dividends under these limitations were $ 24.6
million and $ 22.0 million as of December 31, 1996 and 1997, respectively.
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
==============================================
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Interest income................. $14,333 $14,709 $15,377 $15,821
Interest expense................ 7,579 7,591 8,247 8,714
------- ------- ------- -------
Net interest income........... 6,754 7,118 7,130 7,107
------- ------- ------- -------
Provision for loan losses....... 76 (16) 54 50
Non-interest income............. 1,420 864 968 1,624
Non-interest expenses........... 5,552 5,649 9,585 5,923
Income taxes.................... 1,050 974 (617) 1,155
------- ------- ------- -------
Net Income.................... $ 1,496 $ 1,375 $ (924) $ 1,603
======= ======= ======= =======
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
==============================================
(IN THOUSANDS)
Year ended December 31, 1997:
Interest income................. $16,297 $17,417 $18,684 $19,874
Interest expense................ 8,967 9,899 10,850 11,890
------- ------- ------- -------
Net interest income........... 7,330 7,518 7,834 7,984
------- ------- ------- -------
Provision for loan losses....... 51 21 57 41
Non-interest income............. 902 1,003 1,790 1,215
Non-interest expenses........... 6,041 5,967 6,073 6,154
Income taxes.................... 906 1,068 1,484 1,295
------- ------- ------- -------
Net Income.................... $ 1,234 $ 1,465 $ 2,010 $ 1,709
======= ======= ======= =======
</TABLE>
54
<PAGE>
[LOGO OF FIDELITY BANKSHARES, INC.]
55
<PAGE>
MANAGEMENT'S ASSERTIONS
as to the Effectiveness of its Internal Control Structure Over Financial
Reporting and Compliance with Designated Laws and Regulations
To the Stockholders:
FINANCIAL STATEMENTS
Management of Fidelity Bankshares, Inc. (the "Company") and its subsidiary,
Fidelity Federal Savings Bank of Florida (the "Bank"), is responsible for the
preparation, integrity and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on judgments and
estimates made by management.
The financial statements have been audited by the independent accounting firm,
Deloitte & Touche LLP, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders, the
Board of Directors and committees of the board. Management believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The independent auditors report accompanies the Company's
audited financial statements.
INTERNAL CONTROL
Management is responsible for and does maintain a structure of internal control
over financial reporting, which is designed to provide reasonable assurance to
the Company's management and Board of Directors regarding the preparation of
reliable published financial statements, including the Bank's reports to the
Office of Thrift Supervision which are based on both generally accepted
accounting principles and instructions for Thrift Financial Reports (TFR
instructions). The structure includes a documented organizational structure and
division of responsibility, established policies and procedures including a code
of conduct to foster a strong ethical climate, which are communicated throughout
the Bank, and the careful selection, training and development of our people.
Internal auditors monitor the operation of the internal control system and
report findings and recommendations to management and the Board of Directors,
and corrective actions are taken to address control deficiencies and other
opportunities for improving the system as they are identified. The Board,
operating through its audit committee, which is composed entirely of directors
who are not officers or employees of the Company nor the Bank, provides
oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any structure of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Furthermore, the effectiveness of an internal control
structure can change with circumstances.
Management assessed its internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
TFR instructions as of December 31, 1997 in relation to criteria for effective
internal control over financial reporting described in "Internal Control--
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management believes the Company and the Bank maintained an
effective internal control structure over financial reporting, presented in
conformity with generally accepted accounting principles and TFR instructions,
as of December 31, 1997.
COMPLIANCE WITH DESIGNATED LAWS AND REGULATIONS
Management is also responsible for compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with the designated safety and soundness laws
and regulations and has maintained records of its determinations and assessments
as required by the FDIC. Based on this assessment, management believes that the
Company and the Bank has complied, in all material respects, with the designated
safety and soundness laws and regulations for the year ended December 31, 1997.
by: by:
--------------------------------- -------------------------------
President and Chief Executive Officer Executive Vice President-
Chief Financial Officer
February 18, 1998
56
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Audit Committee
Fidelity Federal Savings Bank of Florida
West Palm Beach, Florida
We have examined management's assertion that, as of December 31, 1997, Fidelity
Bankshares, Inc. and its subsidiary, Fidelity Federal Savings Bank of Florida,
maintained an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
the Office of Thrift Supervision Instructions for Thrift Financial Reports for
Schedules SC, SO, and CA included in the accompanying Report on Management's
Assertions as to the Effectiveness of its Internal Control Structure over
Financial Reporting and Compliance with Designated Laws and Regulations, dated
February 18, 1998.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of the
internal control structure over financial reporting, and such other procedures
as we considered necessary in the circumstances. We believe that our examination
provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies may deteriorate.
In our opinion, management's assertion that, as of December 31, 1997, Fidelity
Bankshares, Inc. and its subsidiary, Fidelity Federal Savings Bank of Florida,
maintained an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
the Office of Thrift Supervision Instructions for Thrift Financial Reports for
Schedules SC, SO, and CA is fairly stated, in all material respects, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Certified Public Accountants
West Palm Beach, FL
February 20, 1998
57
<PAGE>
[LOGO OF FIDELITY BANKSHARES, INC.]
58
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Parent Company Subsidiary Company State of Incorporation
-------------- ------------------ ----------------------
<S> <C> <C>
Fidelity Bankshares, Inc. Fidelity Federal Savings Bank of Florida
Florida
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THREE MONTHS ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,136
<INT-BEARING-DEPOSITS> 33,688
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 250,209
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 861,257
<ALLOWANCE> 2,394
<TOTAL-ASSETS> 1,220,267
<DEPOSITS> 872,340
<SHORT-TERM> 3,780
<LIABILITIES-OTHER> 17,669
<LONG-TERM> 239,091
0
0
<COMMON> 678
<OTHER-SE> 86,709
<TOTAL-LIABILITIES-AND-EQUITY> 1,220,267
<INTEREST-LOAN> 15,934
<INTEREST-INVEST> 220
<INTEREST-OTHER> 3,720
<INTEREST-TOTAL> 19,874
<INTEREST-DEPOSIT> 9,149
<INTEREST-EXPENSE> 2,741
<INTEREST-INCOME-NET> 7,984
<LOAN-LOSSES> 41
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,154
<INCOME-PRETAX> 3,004
<INCOME-PRE-EXTRAORDINARY> 3,004
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,709
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> 3.11
<LOANS-NON> 3,250
<LOANS-PAST> 0
<LOANS-TROUBLED> 14
<LOANS-PROBLEM> 5,708
<ALLOWANCE-OPEN> 2,147
<CHARGE-OFFS> (61)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,294
<ALLOWANCE-DOMESTIC> 1,052
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,242
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,293
<INT-BEARING-DEPOSITS> 27,127
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 132,064
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 661,700
<ALLOWANCE> 2,263
<TOTAL-ASSETS> 873,562
<DEPOSITS> 694,718
<SHORT-TERM> 82,517
<LIABILITIES-OTHER> 7,209
<LONG-TERM> 0
0
0
<COMMON> 675
<OTHER-SE> 81,048
<TOTAL-LIABILITIES-AND-EQUITY> 873,562
<INTEREST-LOAN> 38,717
<INTEREST-INVEST> 2,144
<INTEREST-OTHER> 12,400
<INTEREST-TOTAL> 53,261
<INTEREST-DEPOSIT> 22,515
<INTEREST-EXPENSE> 28,095
<INTEREST-INCOME-NET> 25,166
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 20,449
<INCOME-PRETAX> 7,948
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,815
<EPS-PRIMARY> .74
<EPS-DILUTED> .73
<YIELD-ACTUAL> 3.62
<LOANS-NON> 3,035
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,371
<ALLOWANCE-OPEN> 2,265
<CHARGE-OFFS> 166
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,263
<ALLOWANCE-DOMESTIC> 2,263
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<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; THE CONSOLIDATED BALANCE
SHEET AS OF JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR SIX
MONTHS ENDED JUNE 30, 1997; THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,
1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR NINE MONTHS ENDED
SEPTEMBER 30, 1997; AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR TWELVE MONTHS ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 18,613 17,741 15,891 22,136
<INT-BEARING-DEPOSITS> 26,168 20,801 23,523 33,688
<FED-FUNDS-SOLD> 0 0 0 0
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 154,635 185,203 193,691 250,209
<INVESTMENTS-CARRYING> 0 0 0 0
<INVESTMENTS-MARKET> 0 0 0 0
<LOANS> 688,298 735,699 769,357 861,257
<ALLOWANCE> 2,130 2,109 2,147 3,294
<TOTAL-ASSETS> 926,891 999,289 1,045,692 1,220,267
<DEPOSITS> 743,850 779,558 791,179 872,340
<SHORT-TERM> 2,776 2,736 2,642 3,780
<LIABILITIES-OTHER> 17,406 21,070 25,511 17,669
<LONG-TERM> 81,104 112,246 140,586 239,091
0 0 0 0
0 0 0 0
<COMMON> 677 677 678 678
<OTHER-SE> 81,078 83,002 85,096 86,709
<TOTAL-LIABILITIES-AND-EQUITY> 926,891 999,289 1,045,692 1,220,267
<INTEREST-LOAN> 13,378 14,163 14,911 15,934
<INTEREST-INVEST> 159 192 187 220
<INTEREST-OTHER> 2,760 3,062 3,586 3,720
<INTEREST-TOTAL> 16,297 17,417 18,684 19,874
<INTEREST-DEPOSIT> 7,572 8,320 8,815 9,149
<INTEREST-EXPENSE> 1,395 1,579 2,035 2,741
<INTEREST-INCOME-NET> 7,330 7,518 7,834 7,984
<LOAN-LOSSES> 51 21 57 41
<SECURITIES-GAINS> 0 0 0 0
<EXPENSE-OTHER> 6,041 5,967 6,073 6,154
<INCOME-PRETAX> 2,140 2,533 3,494 3,004
<INCOME-PRE-EXTRAORDINARY> 2,140 2,533 3,494 3,004
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,234 1,465 2,010 1,709
<EPS-PRIMARY> 0.19 0.22 0.30 0.25
<EPS-DILUTED> 0.18 0.22 0.30 0.25
<YIELD-ACTUAL> 3.57 3.46 3.41 3.11
<LOANS-NON> 2,016 2,914 3,634 3,250
<LOANS-PAST> 0 0 0 0
<LOANS-TROUBLED> 20 18 16 14
<LOANS-PROBLEM> 3,568 3,568 4,640 5,708
<ALLOWANCE-OPEN> 2,263 2,263 2,263 2,147
<CHARGE-OFFS> (184) (42) (19) (61)
<RECOVERIES> 0 0 0 0
<ALLOWANCE-CLOSE> 2,130 2,109 2,147 3,294
<ALLOWANCE-DOMESTIC> 308 372 325 1,052
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 1,822 1,737 1,822 2,242
</TABLE>
