<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
- ---------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
-------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check |X| whether the Registrant has filed all reports required
to be filed by Sections 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 6,818,284 shares
of the Registrant's common stock outstanding as of July 30, 1999.
<PAGE>
FIDELITY BANKSHARES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements.....................................................................1
Consolidated Statements of Financial Condition as of
December 31, 1998 and June 30, 1999..................................................2
Consolidated Statements of Operations for the three and six months ended
June 30, 1998 and 1999...............................................................3
Consolidated Statements of Comprehensive Operations for the three and six
months ended June 30, 1998 and 1999..................................................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1999...............................................................5
Notes to Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................12
PART II. OTHER INFORMATION..................................................................................21
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------------
Unaudited
December 31, June 30,
1998 1999
========================================
(In Thousands)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions.............. $ 27,951 $ 32,483
Interest-bearing deposits...................................... 32,075 35,397
----------------- -----------------
Total cash and cash equivalents........................... 60,026 67,880
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities............................... 18,824 39,513
Mortgage-backed and other securities........................... 389,263 377,613
Corporate debt securities...................................... 44,488 39,794
----------------- -----------------
Total assets available for sale........................... 452,575 456,920
LOANS RECEIVABLE, Net (Notes 2, 3)................................... 977,166 1,068,310
OFFICE PROPERTIES AND EQUIPMENT, Net ................................ 37,708 41,805
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market..... 15,658 15,561
REAL ESTATE OWNED, Net............................................... 907 853
ACCRUED INTEREST RECEIVABLE.......................................... 7,549 8,180
DEFERRED INCOME TAX ASSET............................................ 1,443 2,565
OTHER ASSETS......................................................... 13,895 15,023
----------------- -----------------
TOTAL ASSETS......................................................... $ 1,566,927 $ 1,677,097
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS............................................................. $ 1,120,746 $ 1,217,232
OTHER BORROWED FUNDS................................................. 6,981 8,743
ADVANCES FROM FEDERAL HOME LOAN BANK................................. 303,140 309,281
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE........................ 3,081 12,011
DRAFTS PAYABLE....................................................... 9,605 8,394
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES................................. 28,750 28,750
OTHER LIABILITIES.................................................... 9,625 10,880
----------------- -----------------
TOTAL LIABILITIES.............................................. 1,481,928 1,595,291
----------------- -----------------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued............ - -
COMMON STOCK ($ .10 par value) 8,200,000 authorized shares,
6,803,042 shares outstanding at December 31, 1998, and
6,818,284 shares outstanding at June 30, 1999.................. 680 681
ADDITIONAL PAID IN CAPITAL........................................... 40,535 40,819
RETAINED EARNINGS - substantially restricted......................... 52,018 52,437
TREASURY STOCK, at cost, 394,029 shares at December 31, 1998 and
489,273 shares at June 30, 1999................................ (7,258) (9,230)
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN.............. (658) (493)
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 6)........................ (318) (2,408)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY (Note 4)............................ 84,999 81,806
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $ 1,566,927 $ 1,677,097
================= =================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Unaudited Unaudited
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1998 1999 1998 1999
==============================================================
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans...................................................... $ 18,098 $ 19,651 $ 35,433 $ 38,497
Investment securities...................................... 264 557 509 878
Other investments.......................................... 768 716 1,604 1,539
Mortgage-backed and other securities....................... 5,331 6,046 9,735 12,110
------------- ------------- ------------- ------------
Total interest income................................. 24,461 26,970 47,281 53,024
------------- ------------- ------------- ------------
Interest expense:
Deposits................................................... 10,983 12,301 20,998 24,568
Advances from Federal Home Loan Bank and other borrowings.. 5,127 5,296 9,392 10,455
------------- ------------- ------------- ------------
Total interest expense................................ 16,110 17,597 30,390 35,023
------------- ------------- ------------- ------------
Net interest income............................................. 8,351 9,373 16,891 18,001
Provision for (recovery from) loan losses....................... 20 73 (49) 107
------------- ------------- ------------- ------------
Net interest income after provision for loan losses............. 8,331 9,300 16,940 17,894
------------- ------------- ------------- ------------
Other income:
Servicing income and other fees............................ 1,123 1,335 2,212 2,573
Net gain on sale of loans, investments
and mortgage-backed securities........................ 753 72 1,424 278
Miscellaneous.............................................. 411 493 565 860
------------- ------------- ------------- ------------
Total other income.................................... 2,287 1,900 4,201 3,711
------------- ------------- ------------- ------------
Operating expense:
Employee compensation and benefits......................... 4,031 4,997 7,838 9,738
Occupancy and equipment.................................... 1,524 1,653 2,961 3,458
Loss (gain) on real estate owned........................... 17 (25) 34 (125)
Marketing.................................................. 181 227 439 484
Federal deposit insurance premium.......................... 135 165 267 324
Other...................................................... 1,445 1,689 2,807 3,245
------------- ------------- ------------- ------------
Total operating expense............................... 7,333 8,706 14,346 17,124
------------- ------------- ------------- ------------
Income before provision for income taxes........................ 3,285 2,494 6,795 4,481
------------- ------------- ------------- ------------
Provision for income taxes:
Current.................................................... 1,172 860 2,469 1,550
Deferred................................................... 120 97 240 177
------------- ------------- ------------- ------------
Total provision for income taxes...................... 1,292 957 2,709 1,727
------------- ------------- ------------- ------------
Net income...................................................... $ 1,993 $ 1,537 $ 4,086 $ 2,754
============= ============= ============= ============
Earnings per share (Note 5):
Basic...................................................... $ 0.30 $ 0.24 $ 0.61 $ 0.43
============= ============= ============= ============
Diluted.................................................... $ 0.29 $ 0.24 $ 0.60 $ 0.42
============= ============= ============= ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Unaudited Unaudited
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1998 1999 1998 1999
============================= =============================
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Net income........................................................ $ 1,993 $ 1,537 $ 4,086 $ 2,754
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period. 294 (2,295) 467 (2,087)
Less: reclassification adjustment for gains realized
in net income...................................... - (3) (320) (3)
------------- ------------- ------------- ------------
Comprehensive income (loss) (Note 6).............................. $ 2,287 $ (761) $ 4,233 $ 664
============= ============= ============= ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Unaudited
For the Six Months Ended
June 30,
1998 1999
===============================
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income................................................................................. $ 4,086 $ 2,754
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 786 1,121
ESOP and Recognition and Retention Plan compensation expense....................... 451 258
Accretion of discounts, amortization of premiums, and other deferred yield items... 37 1,067
Provision for loan losses and real estate losses................................... (49) 107
Provisions for (gains) losses and net (gains) losses on sales of real estate owned. 25 (121)
Net (gain) loss on sale of:
Loans........................................................................ (516) (273)
Corporate bonds.............................................................. - (5)
Mortgage-backed securities................................................... (906) -
Office property and equipment................................................ - 63
(Increase) in accrued interest receivable.................................................. (1,082) (631)
Decrease (increase) in other assets........................................................ (846) (1,128)
Increase (decrease) in drafts payable...................................................... (2,339) (1,211)
(Increase) decrease in deferred income tax asset........................................... 214 159
Increase in other liabilities.............................................................. 1,796 1,264
-------------------------------
Net cash from operating activities........................................... 1,657 3,424
-------------------------------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans.......................................... (70,210) (91,595)
Principal payments received on mortgage-backed securities.................................. 61,759 56,924
Purchases of:
Loans.............................................................................. (24,465) (14,946)
Mortgage-backed and other securities............................................... (237,410) (50,031)
Federal Home Loan Bank stock....................................................... (4,974) -
Investment securities.............................................................. (4,989) (23,006)
Office properties and equipment.................................................... (10,634) (5,414)
Proceeds from sales of:
Loans.............................................................................. 42,634 14,548
Federal Home Loan Bank stock....................................................... 579 98
Corporate debt securities.......................................................... - 4,958
Real estate acquired in settlement of loans........................................ 826 1,594
Mortgage-backed securities......................................................... 12,137 -
Proceeds from maturities of investment securities.......................................... 2,000 2,000
Other...................................................................................... 1,501 165
-------------------------------
Net cash used for investing activities....................................... (231,246) (104,705)
-------------------------------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock............................................... 74 127
Purchase of Treasury Stock................................................................. - (1,980)
Sale of subordinated debentures, Net...................................................... 27,389 -
Cash dividends............................................................................. (1,820) (2,331)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts................................ 14,181 39,416
Certificates of deposit............................................................ 126,400 57,070
Advances from Federal Home Loan Bank............................................... 67,907 6,141
Other borrowed funds............................................................... (49) 1,762
Advances by borrowers for taxes and insurance...................................... 8,286 8,930
-------------------------------
Net cash from financing activities........................................... 242,368 109,135
-------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... 12,779 7,854
CASH AND CASH EQUIVALENTS, Beginning of period............................................. 55,824 60,026
-------------------------------
CASH AND CASH EQUIVALENTS, End of period................................................... $ 68,603 $ 67,880
===============================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Savings Bank of Florida (the
"Bank") conform to generally accepted accounting principles and to predominant
practices within the thrift industry. The Company has not changed its accounting
and reporting policies from those disclosed in its 1998 Annual Report on Form
10-K.
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.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at June 30, 1999 and
the results of its consolidated operations and cash flows for the period then
ended, all of which are of a normal and recurring nature, have been included.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time of
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after July 1, 2000 and, accordingly, would apply to the
Company beginning on January 1, 2001. The Company plans to adopt the standard at
that time and does not presently intend to reclassify securities between
categories. The Company has not engaged in derivatives and hedging activities
covered by the new standard, and does not expect to do so in the foreseeable
future. Accordingly, SFAS No. 133 is not expected to have a material impact on
the Company's financial statements.
In October 1998 the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." Statement No. 65, as amended by Statement No. 115
and Statement No. 125, required that after securitization of a mortgage loan
held for sale, a mortgage banking enterprise classify the resulting security as
a trading security. Statement No. 134 amends this section to require that after
the securitization of mortgage loans held for sale, the entity classify the
resulting mortgage-backed security or other retained interests based on its
ability and intent to sell or hold those investments. SFAS 134 is effective for
the first quarter beginning after December 15, 1998. The Company has not engaged
in retaining securities after the securitization of its mortgage loans held for
sale and does not expect to do so in the foreseeable future. Accordingly, SFAS
No. 134 is not expected to have a material impact on the Company's financial
statements.
Certain amounts in the financial statements have been reclassified to conform
with the June 30, 1999 presentation.
On August 31, 1998, the Company announced its plan to commence a stock
repurchase program to acquire up to 340,000 shares of the Company's Common
Stock, which represents approximately 5% of the outstanding Common Stock. At
June 30, 1999, the Company had repurchased 340,000 shares of its Common Stock at
an average price of $22.53 per share.
6
<PAGE>
2. LOANS RECEIVABLE
Loans receivable at December 31, 1998 and June 30, 1999, consist of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
=================================================
(In Thousands)
<S> <C> <C>
One-to-four single family, residential real estate
mortgages....................................... $ 828,929 $ 864,612
Commercial real estate mortgages......................... 74,671 100,968
Real estate construction-primarily residential........... 53,515 58,958
Land loans-primarily residential......................... 8,583 10,281
--------------------- ----------------------
Total first mortgage loans...................... 965,698 1,034,819
Consumer loans........................................... 48,270 53,811
Commercial business loans................................ 46,958 68,033
--------------------- ----------------------
Total gross loans............................... 1,060,926 1,156,663
Less:
Undisbursed portion of loans in process......... 84,155 88,188
Unearned discounts, premiums and deferred loan
fees, net................................. (3,621) (3,087)
Allowance for loan losses....................... 3,226 3,252
---------------------- ----------------------
Loans receivable-net..................................... $ 977,166 $ 1,068,310
===================== ======================
</TABLE>
7
<PAGE>
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 1998 and the three and six months ended June 30, 1998 and 1999, is
as follows:
<TABLE>
<CAPTION>
For the Year For the Three Months For the Six Months
Ended Ended Ended
December 31, June 30, June 30,
1998 1998 1999 1998 1999
===============================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ................ $ 3,294 $ 3,225 $ 3,201 $ 3,294 $ 3,226
Current provision (recovery) - net ............ 77 20 73 (49) 107
Charge-offs ................................... (145) (103) (22) (103) (81)
--------- ------------------------ ------------------------
Ending balance ................................ $ 3,226 $ 3,142 $ 3,252 $ 3,142 $ 3,252
========= ======================== ========================
</TABLE>
An analysis of the recorded investment in impaired loans owned by the Company at
the end of each period and the related specific valuation allowance for those
loans is as follows:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
===================================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Impaired loan balances and related
specific valuation allowances:
Loans performing in conformity with
contractual terms ................................... $ 324 $162 $ 726 $354
Loans for which interest income is
not being recognized ................................ 3,685 - 2,085 -
------------------------- -------------------------
Total ......................................... $4,009 $162 $2,811 $354
========================= =========================
</TABLE>
The Bank's policy on interest income on impaired loans is to reverse all accrued
interest against interest income if a loan becomes more than 90 days delinquent
and cease accruing interest thereafter. Such interest ultimately collected is
credited to income in the period of recovery.
8
<PAGE>
4. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Savings Bank of Florida, is a
regulated financial institution. Its regulatory capital amounts and ratios are
presented in the following table:
<TABLE>
<CAPTION>
Minimum for
Capital Adequacy
Actual Purposes
------------------------------------------------------------
Ratio Amount Ratio Amount
------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
As of December 31, 1998 Stockholders' Equity
and ratio to total assets............................ 6.8% $ 106,244
=========
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes)........................................ 318
Goodwill.................................................. (2,394)
Disallowed servicing assets and deferred tax assets....... (53)
--------------
Tangible capital and ratio to adjusted total assets....... 6.6% $ 104,115 1.5% $ 23,472
========= ============== ========= ==============
Tier 1 (core) capital and ratio to adjusted
total assets......................................... 6.7% $ 104,115 3.0% $ 46,943
========= ============== ========= ==============
Tier 1 (core) capital and ratio to risk-weighted
total assets......................................... 12.0% $ 104,115 4.0% $ 34,814
========= ========= ==============
Allowable Tier 2 capital:
General loan valuation allowances.................... 2,352
Equity investments................................... -
--------------
Total risk-based capital and ratio to risk-weighted
total assets..................................... 12.2% $ 106,467 8.0% $ 69,628
========= ============== ========= ==============
Total assets.............................................. $1,566,900
==============
Adjusted total assets..................................... $1,564,771
==============
Risk-weighted assets...................................... $ 870,355
==============
As of June 30, 1999 Stockholders' Equity
and ratio to total assets............................ 6.4% $ 107,781
=========
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes)........................................ 2,408
Goodwill.................................................. (2,163)
Disallowed servicing assets and deferred tax assets....... (61)
--------------
Tangible capital and ratio to adjusted total assets....... 6.4% $ 107,965 1.5% $ 25,135
========= ============== ========= ==============
Tier 1 (core) capital and ratio to adjusted
total assets......................................... 6.4% $ 107,965 3.0% $ 50,270
========= ============== ========= ==============
Tier 1 (core) capital and ratio to risk-weighted
total assets......................................... 13.5% $ 107,965 4.0% $ 31,878
========= ========= ==============
Allowable Tier 2 capital:
General loan valuation allowances.................... 2,457
Equity investments................................... -
--------------
Total risk-based capital and ratio to risk-weighted
total assets..................................... 13.8% $ 110,422 8.0% $ 63,756
========= ============== ========= ==============
Total assets.............................................. $1,675,486
==============
Adjusted total assets..................................... $1,675,670
==============
Risk-weighted assets...................................... $ 796,955
==============
<PAGE>
<CAPTION>
To be Considered
Well Capitalized
for Prompt Corrective
Action Provisions
--------------------------
Ratio Amount
--------------------------
(Dollars in Thousands)
<S> <C> <C>
As of December 31, 1998 Stockholders' Equity
and ratio to total assets..........................
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes)......................................
Goodwill................................................
Disallowed servicing assets and deferred tax assets.....
Tangible capital and ratio to adjusted total assets.....
Tier 1 (core) capital and ratio to adjusted
total assets....................................... 5.0% $ 78,239
========= =============
Tier 1 (core) capital and ratio to risk-weighted
total assets....................................... 6.0% $ 52,221
========= =============
Allowable Tier 2 capital:
General loan valuation allowances..................
Equity investments.................................
Total risk-based capital and ratio to risk-weighted
total assets................................... 10.0% $ 87,036
========= =============
Total assets............................................
Adjusted total assets...................................
Risk-weighted assets....................................
As of June 30, 1999 Stockholders' Equity
and ratio to total assets..........................
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes)......................................
Goodwill................................................
Disallowed servicing assets and deferred tax assets.....
Tangible capital and ratio to adjusted total assets.....
Tier 1 (core) capital and ratio to adjusted
total assets....................................... 5.0% $ 83,784
========= =============
Tier 1 (core) capital and ratio to risk-weighted
total assets....................................... 6.0% $ 47,817
========= =============
Allowable Tier 2 capital:
General loan valuation allowances..................
Equity investments.................................
Total risk-based capital and ratio to risk-weighted
total assets.................................... 10.0% $ 79,696
========= =============
Total assets.............................................
Adjusted total assets....................................
Risk-weighted assets.....................................
</TABLE>
9
<PAGE>
5. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the three months ended June 30, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, 1998
-----------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=====================================================
(Dollars In Thousands)
Net income........................ $ 1,993,000
==================
Basic EPS:
Income available to
common stockholders.......... $ 1,993,000 6,718,883 $ 0.30
================== ============
Effect of diluted shares:
Common stock options......... 105,975
---------------
Diluted EPS:
Income available to
common stockholders.......... $ 1,993,000 6,824,858 $.0.29
================== =============== ============
<CAPTION>
For the Three Months Ended
June 30, 1999
-----------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=====================================================
(Dollars In Thousands)
<S> <C> <C> <C>
Net income................... $ 1,537,000
==================
Basic EPS:
Income available to
common stockholders..... $ 1,537,000 6,416,468 $ 0.24
================== =============
Effect of diluted shares:
Common stock options.... 62,227
----------------
Diluted EPS:
Income available to
common stockholders..... $ 1,537,000 6,478,695 $ 0.24
================== ================ =============
</TABLE>
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the six months ended June 30, 1998 and 1999, are as follows:
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 1998
-----------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=====================================================
(Dollars In Thousands)
<S> <C> <C> <C>
Net income........................ $ 4,086,000
==================
Basic EPS:
Income available to
common stockholders.......... $ 4,086,000 6,710,156 $.0.61
================== ============
Effect of diluted shares:
Common stock options......... 107,795
---------------
Diluted EPS:
Income available to
common stockholders.......... $ 4,086,000 6,817,951 $ 0.60
================== =============== ============
<CAPTION>
For the Six Months Ended
June 30, 1999
-----------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=====================================================
(Dollars In Thousands)
<S> <C> <C> <C>
Net income......................... $ 2,754,000
==================
Basic EPS:
Income available to
common stockholders........... $ 2,754,000 6,423,129 $ 0.43
================== =============
Effect of diluted shares:
Common stock options.......... 67,778
----------------
Diluted EPS:
Income available to
common stockholders........... $ 2,754,000 6,490,907 $ 0.42
================== ================ =============
</TABLE>
Persuant to Statement of Position (SOP), 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AICPA), ESOP shares that have not been committed to be released are not
considered to be outstanding.
10
<PAGE>
6. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Income (Loss) for
the periods ended June 30, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1998 1999 1998 1999
------------------------------ ------------------------------
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on Securities on Securities
=================================================================
(In Thousands)
<S> <C> <C> <C> <C>
Beginning balance................................... $ 1,258 $ (110) $ 1,405 $ (318)
Current-period change............................... 294 (2,298) 147 (2,090)
------------ ------------- ------------ -------------
Ending balance...................................... $ 1,552 $ (2,408) $ 1,552 $ (2,408)
============ ============= ============ =============
</TABLE>
An analysis of the related tax effects allocated to Other Comprehensive Income
(Loss) is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
June 30, 1998 June 30, 1999
------------------------------------- ------------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
=============================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period.................................... $ 474 $ (180) $ 294 $ (3,701) $ 1,406 $ (2,295)
Less: reclassification adjustment for gains
realized in net income........................... - - - (5) 2 (3)
------------------------------------- ------------------------------------
Other comprehensive income (loss)...................... $ 474 $ (180) $ 294 $ (3,706) $ 1,408 $ (2,298)
===================================== ===================================
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 1998 June 30, 1999
------------------------------------- -----------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
=============================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period.................................... $ 753 $ (286) $ 467 $ (3,366) $ 1,279 $ (2,087)
Less: reclassification adjustment for gains
realized in net income........................... (516) 196 (320) (5) 2 (3)
------------------------------------- -----------------------------------
Other comprehensive income (loss)...................... $ 237 $ (90) $ 147 $ (3,371) $ 1,281 $ (2,090)
===================================== ===================================
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Savings Bank of Florida (the "Bank"). The Company conducts no business
other than holding the common stock of the Bank. Consequently, its net income is
derived from the Bank. The Bank's net income is primarily dependent on its net
interest income, which is the difference between interest income earned on its
investments in mortgage loans and mortgage-backed securities, other investment
securities and loans, and its cost of funds consisting of interest paid on
deposits and borrowings. The Bank's net income also is affected by its provision
for loan losses, as well as by the amount of other income, including income from
fees and service charges, net gains and losses on sales of investments, and
operating expense such as employee compensation and benefits, deposit insurance
premiums, occupancy and equipment costs, and income taxes. Earnings of the Bank
also are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Bank. In
particular, the general level of market interest rates tends to be highly
cyclical.
Forward-Looking Statements.
When used in this report, the words or 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, uncertainties
related to year 2000 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.
Recent Developments.
On July 16, 1999, the Company announced that its Bank subsidiary had acquired
Dunn & Noel, Inc., a full-service insurance agency based in Juno Beach, Florida.
The agency will be merged with a subsidiary of the Bank, Florida Consolidated
Agency, Inc., and will do business as Fidelity Insurance. Fidelity Insurance
will operate as an independent agency and licensed agents will make insurance
products available through the Bank's branch offices.
Other Comprehensive Income.
Accumulated Other Comprehensive Loss for the six months ended June 30, 1999
increased by $2,090,000. This increase was due to a decrease in the market value
of Assets Available for Sale that resulted from an increase in market interest
rates for these instruments. Accumulated Other Comprehensive Income for the six
months ended June 30, 1998 increased by $147,000. This increase was due to an
increase in the market value of Assets Available for Sale that resulted from a
modest decrease in market interest rates for these instruments.
Accumulated Other Comprehensive Loss for the quarter ended June 30, 1999
increased by $2,298,000. This increase was due to a decrease in the market value
of Assets Available for Sale that resulted from an increase in market interest
rates for these instruments. Accumulated Other Comprehensive Income for the
quarter ended June 30, 1998 increased by $294,000. This increase was due to an
increase in the market value of Assets Available for Sale that resulted from a
modest decrease in market interest rates for these instruments.
13
<PAGE>
Results of Operations.
Net income for the six months ended June 30, 1999 was $2.8 million, representing
a decrease of $1.3 million compared to $4.1 million for the same period in 1998.
The primary reasons for this decrease, as more fully described later herein, was
a decrease in other income of $490,000 and an increase in operating expenses of
$2.8 million. These amounts were partially offset by an increase in net interest
income of $1.1 million and a decrease in the provision for income taxes of
$982,000.
Net income for the quarter ended June 30, 1999 was $1.5 million, a decrease of
$456,000 when compared to $2.0 million for the quarter ended June 30, 1998. The
primary reasons for this decrease, as more fully described later herein, was a
decrease in other income of $387,000 along with an increase in operating costs
of $1.4 million. Offsetting these factors was an increase in net interest income
of $1.0 million and a decrease in the provision for income taxes of $335,000.
Interest Income.
Interest income for the six months ended June 30 1999, totaled $53.0 million,
representing an increase of $5.7 million or 12.1% compared to the same 1998
period. The primary reason for this increase was an increase in the Bank's
interest income from loans of $3.1 million. This increase was primarily the
result of an increase in the average balance of these loans to $1.0 billion from
$894.0 million for the period ended June 30, 1999 and 1998, respectively.
Interest income from mortgage-backed securities increased to $12.1 million for
the six months ended June 30, 1999 from $9.7 million for the 1998 period. This
increase was due to an increase in the average balance of these securities of
$116.4 million, which was partially offset by a decline in the average rate of
such securities to 5.72% in 1999 from 6.34% in 1998. The Bank's interest income
from investment securities also increased by $369,000. This increase resulted
from the average balance of investment securities increasing to $31.3 million
from $18.2 million for the periods ended June 30, 1999 and 1998, respectively.
Partially offsetting these increases was a decrease in interest income from
other investments of $65,000.
Interest income for the quarter ended June 30, 1999, totaled $27.0 million, an
increase of $2.5 million or 10.3% from the same quarter in 1998. The principal
reasons for this increase was an increase in interest income on the Bank's loans
of $1.6 million and an increase in interest income on the Bank's mortgage-backed
securities of $715,000. The increase from loans resulted from an increase in the
average balance of these loans to $1.0 billion for the quarter ended June 30,
1999 compared to $911.9 million for the comparable 1998 quarter. The increase in
mortgage-backed securities resulted from an increase in the average balance of
these securities to $419.9 million for the quarter ended June 30, 1999 from
$346.8 million for the same quarter in 1998. Interest income also increased on
investment securities by $293,000. This increase resulted from an increase in
the average balance of such securities to $39.4 million from $19.0 million for
the quarters ended June 30, 1999 and 1998, respectively.
Interest Expense.
Interest expense for the six months ended June 30, 1999, totaled $35.0 million,
an increase of $4.6 million or 15.2% from the same period in 1998. The reasons
for this increase were an increase in interest expense on deposits of $3.6
million and an increase in interest expense on borrowed funds of $1.1 million.
The increase in interest expense on deposits resulted from an increase in the
average balance of these deposits to $1.2 billion in 1999 from $935.4 million in
1998. Slightly offsetting this increase was a decrease in the average cost of
these deposits to 4.21% for the six months ended June 30, 1999 from 4.49% for
the six months ended June 30, 1998. The increase in interest expense on borrowed
funds resulted from an increase in the average balance of these funds to $342.3
million for the six months ended June 30, 1999 compared to $296.5 million for
the comparable 1998 period. This was partially offset by a decrease in the
average cost of borrowed funds to 6.11% from 6.34% for the six months ended June
30, 1999 and 1998, respectively.
14
<PAGE>
Interest expense was $17.6 million for the quarter ended June 30, 1999,
representing a $1.5 million or 9.2% increase when compared to the same quarter
in 1998. The principal cause for this increase was an increase in interest
expense on deposits of $1.3 million. This resulted from an increase in the
average balance of deposits to $1.2 billion for the quarter ended June 30, 1999
compared to $968.7 million for the same quarter in 1998. Interest expense on
borrowed funds also increased by $169,000 caused primarily by an increase in the
average balance on such funds to $345.2 million for the quarter ended June 30,
1999 from $322.5 million for the comparable 1998 quarter. These increases were
partially offset by a decrease in the average yield on deposits to 4.15% from
4.54% and a decrease in the average yield on borrowed funds to 6.14% from 6.36%
for the quarters ended June 30, 1999 and 1998, respectively.
Net Interest Income.
While the Bank's interest income increased by $5.7 million for the six months
ended June 30, 1999, compared to the same period in 1998, interest expense also
increased by $4.6 million, resulting in net interest income of $18.0 million for
the six months ended June 30, 1999. This represents a $1.1 million or 6.6%
increase in net interest income when compared to the same period in 1998.
During the quarter ended June 30, 1999, the Bank's interest income increased by
$2.5 million compared to the same quarter in 1998, while interest expense
increased by $1.5 million, resulting in net interest income of $9.4 million for
the quarter ended June 30, 1999, $1.0 million or 12.2% more than realized in
1998.
Provision for Loan Losses.
The provision for loan losses was $107,000 for the six months ended June 30,
1999. The Bank experienced a credit provision for loan losses of $49,000 for the
six months ended June 30, 1998. The credit provision primarily resulted from the
payoff of several delinquent loans on which the Bank had previously provided
specific loan loss allowances. The Bank's total allowance for loan losses as a
percentage of net loans receivable was approximately .30% at June 30, 1999 which
management believes to be adequate considering the Bank's loan composition and
historical loss experience.
The provision for loan losses was $73,000 for the quarter ended June 30, 1999,
compared to $20,000 for the quarter ended June 30, 1998. The provision for the
quarter ended June 30, 1999 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. Since the Bank is beginning
to increase its production of commercial business loans and since such loans are
deemed to have more credit risk than mortgage loans, the Bank's provision for
loan losses is likely in increase in future periods.
Other Income.
Other income for the six months ended June 30, 1999 was $3.7 million or $490,000
less than the same period in 1998. This decrease is primarily attributable to a
decrease of $1.1 million in net gain on sale of loans, investments and
mortgage-backed securities. This decrease was due to the fact that during 1998
the Bank recorded a gain of $511,000 from the sale of mortgage-backed securities
and a gain of $634,000 from the sale of the Bank's wholesale mortgage loan
production. This decrease in other income was partially offset by increases in
servicing income and other fees of $361,000. Servicing income and other fees
increased primarily due to an
15
<PAGE>
increase in the number of transaction accounts at June 30, 1999 compared to June
30, 1998 that produced a corresponding increase in fee income. Also offsetting
this decrease was an increase in other miscellaneous income of $295,000 for the
six months ended June 30, 1999 compared to 1998. Included in this $295,000 were
increased fees of $143,000 generated from the sale of investment products to
customers, through the Bank's affiliation with a third party provider. Also, an
increase in rental income of $56,000 and the receipt of approximately $80,000
from an adjacent land owner for the Bank's consenting to allow property it owns
to be annexed into the city of Stuart, Florida.
Other income for the quarter ended June 30, 1999 was $1.9 million, a decrease of
$387,000 compared to the same quarter in 1998. The principal cause for this
decrease was the $634,000 gain on the previously mentioned sale of the Bank's
wholesale mortgage loan production in June 1998. Partially offsetting this
decrease in other income was an increase in servicing income and other fees of
$212,000. Servicing income and other fees increased primarily due to an increase
in the number of transaction accounts at June 30, 1999 compared to June 30, 1998
that produced a corresponding increase in fee income. Miscellaneous other income
at June 30, 1999 also increased $82,000 compared to June 30, 1998. Contributing
to this increase in miscellaneous income was the previously mentioned receipt of
approximately $80,000 from an adjacent land owner for the Bank's consenting to
allow property it owns to be annexed into the city of Stuart, Florida.
Operating Expense.
Operating expenses were $17.1 million, representing a $2.8 million increase for
the six months ended June 30, 1999 when compared to $14.3 million for the six
months ended June 30, 1998. Employee compensation and benefits increased by $1.9
million. This increase, which includes normal salary increases, is due mainly to
the hiring of additional personnel in connection with the Bank's planned branch
expansion in 1999 as well as expansion of the Bank's commercial loan production
capabilities. As a result, the Bank's full time equivalent personnel increased
by 109 at June 30, 1999 to 460 compared to 351 at June 30, 1998. Occupancy and
equipment costs increased by $497,000 due in part to increases in real estate
tax assessments on the Bank's properties along with additional depreciation
expenses relating to new computer equipment and new branch office facilities
opened during 1999. In addition, there were increases in marketing costs of
$45,000, federal deposit insurance premiums of $57,000 and other operating
expense $438,000 for the six months ended June 30, 1999 and 1998, respectively.
These increases were only slightly offset by a decrease in loss on real estate
owned of $159,000 for the six months ended June 30, 1999 compared to 1998.
Operating expenses increased by $1.4 million to $8.7 million for the quarter
ended June 30, 1999 as compared to the quarter ended June 30, 1998. Employee
compensation and benefits increased by $966,000. This increase as stated above,
is due largely to the hiring of additional personnel in connection with the
Bank's planned branch expansion and the expansion of the Bank's commercial loan
production capabilities. Occupancy and equipment costs increased by $129,000 due
in part, as explained above, to increases in real estate tax assessments on the
Bank's properties and additional depreciation expenses relating to new computer
equipment and new branch facilities. Also contributing to this increase was an
increase in data processing charges caused by increased usage by the Bank and a
5% rate increase. In addition, there were increases in marketing costs of
$46,000, federal deposit insurance premiums of $30,000 and other operating
expense of $244,000 for the quarter ended June 30, 1999 compared to 1998.
Partially offsetting these increases was a decrease in the loss on real estate
owned of $42,000.
Income Taxes.
Provision for incomes taxes was $1.7 million for the six months ended June 30,
1999 compared to $2.7 million for the six months ended June 30, 1998. This
decrease was attributable to a decrease in income before provision for income
taxes of $2.3 million to $4.5 million in 1999 from $6.8 million in 1998. These
expenses approximate the rates paid by the Company for Federal and State income
taxes applied to the Company's pre-tax income.
16
<PAGE>
The income tax provision was $957,000 for the quarter ended June 30, 1999
compared to $1.3 million for the quarter ended June 30, 1998. These expenses
approximate the rates paid for Federal and State income taxes applied to the
Company's pre-tax income.
Changes in Financial Condition.
The Company's assets increased by $110.2 million from December 31, 1998 to June
30, 1999. Net loans receivable increased by $91.1 million. In addition, the Bank
increased its investment in office properties and equipment, primarily for new
office sites, by $4.1 million, while all other assets increased by $2.7 million.
Funds for the increase in assets were provided primarily by an increase in the
Bank's deposits of $96.5 million. The Company's equity at June 30, 1999
decreased by $3.2 million from December 31, 1998. This decrease was due in part
to the Company's completion of the stock repurchase program and dividends
declared of $2.3 million. Partially offsetting the decrease in equity was net
income during the six months of $2.8 million.
Market Risk Analysis
As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets, other than those which possess a short term to
maturity. Since the majority of the Company's interest-bearing liabilities and
nearly all of the Company's interest-earning assets are held by the Bank,
virtually all of the Company's interest rate risk exposure lies at the Bank
level. As a result, all significant interest rate risk management procedures are
performed by management of the Bank. Based upon the nature of the Bank's
operations, the Bank is not subject to foreign currency exchange or commodity
price risk. The Bank's loan portfolio is concentrated primarily in Palm Beach,
Martin and Broward Counties in Florida and is therefore subject to risks
associated with the local economy. As of June 30, 1999, the Company does not own
any trading assets, other than $701,000 of assets held by the SMPIAP Trust which
can be actively traded by and are held for the benefit of senior management.
Income in these accounts accrues to and losses are solely absorbed by senior
management. At June 30, 1999, the Company does not have any hedging transactions
in place such as interest rate swaps and caps.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
The Bank also monitors interest rate risk by various methods including analyzing
changes in its Market Value of Portfolio Equity (MVPE). MVPE is generally
defined as the difference between the market value of the Bank's assets and the
market value of the Bank's liabilities. The Bank uses an internal model that
generates estimates of the Bank's MVPE over a range of interest rate scenarios.
The model calculates MVPE essentially by discounting the cash flows from the
Bank's assets and liabilities to present value using current market rates and
adjusting those discounts rates accordingly for various interest rate scenarios.
The following table sets forth the Bank's estimated internal calculations of
MVPE as of June 30, 1999.
Changes in Rates Net Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
---------------- ------------------------------------
+200bp 79,874 (40,246) (33.5%)
+100bp 93,749 (26,371) (22.0%)
-0- 120,120 - -
-100bp 123,182 3,062 2.5%
-200bp 130,159 10,039 8.4%
17
<PAGE>
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in MVPE requires the making of certain
assumptions that may or may not reflect how actual yields and costs respond to
changes in market rates. Accordingly, while the above table provides an estimate
of the Bank's interest rate risk exposure at a particular point in time, it is
not intended to provide a precise forecast of the effect of market changes on
the Bank's MVPE and net interest income as actual results may vary.
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. Effective December 1998 these liquidity ratios were
amended to include as liquidity, unpledged obligations issued or fully
guaranteed as to principal and interest by the Federal National Mortgage
Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) among
others. Accordingly, the Bank's FNMA and FHLMC securities are included in
following liquidity ratios. The required ratio currently is 4.0%. The Bank's
liquidity ratio averaged 27.30% during the month of June 1999. Liquidity ratios
averaged 28.13% for the quarter ended June 30, 1999. The Bank adjusts its
liquidity levels in order to meet funding needs of deposit outflows, payment of
real estate taxes on mortgage loans, and repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities and other short-term investments, as well
as earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Bank manages
the pricing of its deposits to maintain a desired deposit balance. In addition,
the Bank invests excess funds in short-term interest-earning and other assets,
which provide liquidity to meet lending requirements. Short-term
interest-bearing deposits with the FHLB of Atlanta amounted to $35.4 million at
June 30, 1999. Other assets qualifying for liquidity at June 30, 1999, including
unpledged mortgage-backed securities guaranteed by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, were $316.9 million.
For additional information about cash flows from the Company's operating,
financing and investing activities, see Consolidated Statements of Cash Flows
included in the Financial Statements. A major portion of the Bank's liquidity
consists of cash and cash equivalents, which are a product of its operating,
investing and financing activities. The primary sources of cash are net income,
principal repayments on loans and mortgage-backed securities, increases in
deposit accounts and advances from the FHLB.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 1999, the Bank had $309.3 million in advances from
the FHLB. At June 30, 1999, the Bank had commitments outstanding to originate or
purchase loans of $43.3 million. This amount does not include the unfunded
portion of loans in process. Certificates of deposit scheduled to mature in less
than one year at June 30, 1999, totaled $684.9 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
Year 2000 Preparations.
Like many financial institutions, the Bank relies upon computers for the daily
conduct of its business and for data processing generally. There is concern that
on January 1, 2000 computers will be unable to "read" the new year and as a
consequence, there may be widespread computer malfunctions. To address this
contingency the Bank formed a Year 2000 Committee in March 1997, comprised of
the Bank's Senior Management, which meets monthly 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. The Bank has substantially completed all of the
above phases for its internal applications and systems, except for final
installation of
18
<PAGE>
additional hardware and software, which is in progress. Management of the Bank
believes all "mission critical" applications have been identified. The Bank has
identified 270 potential information and non information technology applications
including, for example, electrical utilities, phone service, alarm systems and
elevators which might have problems associated with the year 2000. Most of these
applications are not mission critical. Of these applications, 226 providers
assert they are or will be year 2000 compliant. To the extent applications
suppliers assert their applications are year 2000 ready, whether they are
information technology or non information technology related, the Bank is
currently testing and validating their claims, while working toward solutions
with others. However, legal recourse against the Bank's third party vendors may
be limited to having the third party vendor correct any service deficiency that
fails in the event the service is not year 2000 compliant. Management does not
believe that it would be able to obtain any material compensatory or punitive
damages in the event a vendor is not year 2000 compliant. 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,
including data processing upgrades not necessarily associated with the year 2000
and other non-information technology costs, of which approximately $1.7 million
has already been incurred. These costs, which will be funded through operating
cash flow, are being capitalized and expensed in conformity with generally
accepted accounting principles. The Bank does not separately track internal
costs associated with the year 2000 plan, including salaries and benefits for
all employees working on the project and has not included such costs in the
above estimate.
The Bank contracts with a data processing service bureau, FiServ-Orlando to
provide all direct processing of the Bank's loan and deposit transactions,
together with calculations of interest income and expense thereon. Management of
the Bank is in regular contact with the service bureau and closely monitors the
service bureau's reports on it progress in becoming year 2000 ready. Based on
its most recent report, the service bureau asserts it has completed the
assessment and evaluation phases. With respect to the renovation phase, the
service bureau reports substantial progress on all mission critical
applications. The testing and implementation phases have begun in several
applications. The Bank is participating in the testing of these applications.
While the service bureau assures management of the Bank that it will achieve
year 2000 readiness, management is unable to predict whether the service bureau
will achieve year 2000 readiness on a timely basis or the magnitude of the
financial consequences to the Bank in the event of the service bureau's failure
to achieve such readiness.
Since the Bank's business relies on the ability of computers to track and credit
deposits and loan repayments, the failure of the Bank's computer systems would
materially and adversely affect the Bank's ability to conduct its business. The
Bank's loan portfolio primarily consists of loans secured by residential real
estate. Consequently, the Bank does not believe that its residential real estate
lending operations are dependent on borrowers' compliance with the year 2000
issue. With respect to outstanding loans made to commercial borrowers, the Bank
has reviewed all commercial loan files and assigned risk factors to each loan
relating to credit problems which might arise with respect to year 2000 issues.
In addition, the Bank's loan officers have asked their commercial borrowers to
advise the Bank of the exposure of the borrower's business to the year 2000
issue and how the borrower is addressing the year 2000 issue. In this regard,
the Bank has sent its commercial loan customers a letter asking them if they are
aware of the year 2000 issue, and of the potential exposure of the customer's
business to the year 2000 issue and asking the customer to advise the Bank of
the steps that have been taken to remediate any problems the customer's business
might have in becoming year 2000 compliant. Bank personnel follow-up the letter
by making a telephone call to its customers to discuss each customer's exposure
to the year 2000 and the customer's contingency plans to become year 2000
compliant. With respect to new commercial loans, all borrowers must describe how
dependent their business is on computer technology, the actions taken by the
borrower to ensure that their business or property will not be adversely
affected by the year 2000 issue, and the contingency planning the borrower is
undertaking to ensure their business is year 2000 compliant. As part of the loan
underwriting process, commercial borrowers must indicate in writing to the Bank
that they are aware of the year 2000 issue and are either year 2000 compliant,
or are taking steps to become year 2000 compliant. As a result of its actions,
the Bank believes that its commercial borrowers are aware of the year 2000 issue
and are taking actions to become year 2000 compliant.
19
<PAGE>
The Bank has adopted and is testing contingency plans which address operational
policies and procedures in the event of data processing, electrical power supply
and/or phone service failures associated with the year 2000. In addition to
extensive training of its personnel, the Bank has organized a local financial
institutions "user group," comprised of financial institutions in Palm Beach,
Broward, Martin, St. Lucie and Indian River counties of Florida. The purpose of
the group is to meet and share ideas and solutions for solving issues associated
with the year 2000.
FASB Statement on Derivatives and Hedging Activities - In June, 1998, the FASB
issued SFAS No. 133 which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Statement requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value hedge, a cash flow hedge, or a foreign
currency hedge. Entities may reclassify securities from the held-to-maturity
category to the available-for-sale category at the time adopting SFAS No. 133.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after July 1, 2000 and, accordingly, would apply to the Company beginning on
January 1, 2001. The Company plans to adopt the standard at that time and does
not presently intend to reclassify securities between categories. The Company
has not engaged in derivatives and hedging activities covered by the new
standard, and does not expect to do so in the foreseeable future. Accordingly,
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
FASB Statement on Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise - In October,
1998 the FASB issued SFAS No. 134 which amends SFAS No. 65 "Accounting for
Certain Mortgage Banking Activities". Statement No. 65, as amended by Statement
No. 115 and Statement No. 125, required that after securitization of a mortgage
loan held for sale, a mortgage banking enterprise classify the resulting
security as a trading security. Statement No. 134 amends this section to require
that after the securitization of mortgage loans held for sale, the entity
classify the resulting mortgage-backed security or other retained interests
based on its ability and intent to sell or hold those investments. SFAS 134 is
effective for the first quarter beginning after December 15, 1998. The Company
has not engaged in retaining securities after the securitization of its mortgage
loans held for sale and does not expect to do so in the foreseeable future.
Accordingly, SFAS No. 134 is not expected to have a material impact on the
Company's financial statements.
20
<PAGE>
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation,
nor is the Company aware of any pending litigation, other than
legal proceedings incident to the business of the Company, such as
foreclosure actions filed on behalf of the Company. Management,
therefore, believes the results of any current litigation would be
immaterial to the consolidated financial condition or results of
operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
On April 20, 1999, several matters were submitted to the security
holders, in connection with the Company's annual meeting of
stockholders, all of which were set forth in the Company's proxy
materials. The results of such votes are as follows:
Ballot No. 1
------------
The election of Joseph B. Shearouse, Jr. and Keith D. Beaty to
serve as director for a term of three years and Karl H. Watson to
serve as director for a term of two years, or until their
successors have been elected and qualified.
For Withheld
--- --------
Joseph B. Shearouse, Jr. 6,253,877 12,525
Keith D. Beaty 6,254,427 11,975
Karl H. Watson 6,254,427 11,975
Ballot No. 2
------------
The ratification of the appointment of Deloitte and Touche,
LLP, as auditors for the Company for the fiscal year ended
December 31, 1999.
For Against Abstain
--- ------- -------
Number of Votes 6,260,527 1,982 3,893
21
<PAGE>
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under
Consolidated Financial Statements (pages 2 through 5), Notes
to Unaudited Consolidated Financial Statements (pages 6
through 11) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 12
through 20), and are incorporated by reference, herein.
(b) Exhibit 27 - Financial Data Schedule.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIDELITY BANKSHARES, INC.
Date: August 9, 1999 By: /s/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: August 9, 1999 By: /s/ Richard D. Aldred
-------------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,483
<INT-BEARING-DEPOSITS> 35,397
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 456,920
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,068,310
<ALLOWANCE> 3,252
<TOTAL-ASSETS> 1,677,097
<DEPOSITS> 1,217,232
<SHORT-TERM> 8,743
<LIABILITIES-OTHER> 31,285
<LONG-TERM> 338,031
681
0
<COMMON> 0
<OTHER-SE> 81,125
<TOTAL-LIABILITIES-AND-EQUITY> 1,677,097
<INTEREST-LOAN> 19,651
<INTEREST-INVEST> 557
<INTEREST-OTHER> 6,762
<INTEREST-TOTAL> 26,970
<INTEREST-DEPOSIT> 12,301
<INTEREST-EXPENSE> 5,296
<INTEREST-INCOME-NET> 9,373
<LOAN-LOSSES> 73
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,706
<INCOME-PRETAX> 2,494
<INCOME-PRE-EXTRAORDINARY> 2,494
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,537
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 2.62
<LOANS-NON> 2,085
<LOANS-PAST> 0
<LOANS-TROUBLED> 106
<LOANS-PROBLEM> 7,378
<ALLOWANCE-OPEN> 3,201
<CHARGE-OFFS> (22)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,252
<ALLOWANCE-DOMESTIC> 795
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,457
</TABLE>
