<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1998
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)
Delaware 65-0717085
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
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(Address of Principal Executive Offices) (Zip Code)
(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 26, 1999, there were issued and outstanding 6,463,735 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 26, 1999 ($18.34) was
$44,189,130.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1998 (Parts II and IV).
2. Proxy Statement for the 1999 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 $.10
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 $28.75 million in Preferred
Securities. In connection with the offer and sale of the Preferred Securities,
the Company issued an equivalent principal amount of 8.375% Junior Subordinated
Deferrable Interest Debentures which were sold to Fidelity Capital for the
equivalent of the net proceeds of $27.3 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.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System. At
December 31, 1998, the Bank had total assets of $1.6 billion, total deposits of
$1.1 billion, and stockholders' equity of $106 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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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. At December 31, 1998, the Bank had 22
offices in its market area, 3 of which are located in Martin County, and 19 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 1998. 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, 1998, approximately $509.5 million, or 48.0%,
of the Bank's total gross loan portfolio, and $160.2 million, or 41.2%, 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.
<TABLE>
<CAPTION>
At December 31,
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1994 1995 1996
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Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family (1) ......................... $ 373,407 81.8% $ 432,387 81.2% $ 528,689 79.9%
Construction loans .............................. 24,086 5.3 40,522 7.6 58,493 8.8
Land loans ...................................... 10,865 2.4 10,769 2.0 11,875 1.8
Commercial ...................................... 32,773 7.2 31,359 5.9 29,030 4.4
Multi-family .................................... 13,081 2.8 13,748 2.6 13,781 2.1
--------- --------- --------- --------- --------- ---------
Total real estate loans ...................... 454,212 99.5 528,785 99.3 641,868 97.0
--------- --------- --------- --------- --------- ---------
Non-real estate loans:
Consumer (2) .................................... 18,343 4.0 26,855 5.0 39,478 6.0
Commercial business ............................. 2,776 0.6 5,834 1.1 18,585 2.8
--------- --------- --------- --------- --------- ---------
Total non-real estate loans .................. 21,119 4.6 32,689 6.1 58,063 8.8
--------- --------- --------- --------- --------- ---------
Total loans receivable ....................... 475,331 104.1 561,474 105.4 699,931 105.8
Less:
Undisbursed loan proceeds ....................... 15,463 3.4 27,261 5.1 37,575 5.7
Unearned discount and net deferred fees (costs).. 759 0.2 (385) (0.1) (1,607) (0.2)
Allowance for loan losses ....................... 2,566 0.5 2,265 0.4 2,263 0.3
--------- --------- --------- --------- --------- ---------
Total loans receivable--net .................. $ 456,543 100.0% $ 532,333 100.0% $ 661,700 100.0%
========= ========= ========= ========= ========= =========
Mortgage-backed securities ......................... $ 126,807 $ 159,761 $ 123,599
========= ========= =========
<CAPTION>
At December 31,
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1997 1998
--------------------- ---------------------
Amount Percent Amount Percent
--------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family (1) ......................... $ 720,782 83.7% $ 828,929 84.8%
Construction loans .............................. 38,577 4.5 53,515 5.5
Land loans ...................................... 12,116 1.4 8,583 0.9
Commercial ...................................... 26,947 3.1 62,399 6.4
Multi-family .................................... 12,999 1.5 12,272 1.2
--------- --------- ---------- ---------
Total real estate loans ...................... 811,421 94.2 965,698 98.8
--------- --------- ---------- ---------
Non-real estate loans:
Consumer (2) .................................... 47,758 5.5 48,270 4.9
Commercial business ............................. 57,289 6.7 46,958 4.8
--------- --------- ---------- ---------
Total non-real estate loans .................. 105,047 12.2 95,228 9.7
--------- --------- ---------- ---------
Total loans receivable ....................... 916,468 106.4 1,060,926 108.5
Less:
Undisbursed loan proceeds ....................... 54,471 6.3 84,155 8.6
Unearned discount and net deferred fees (costs).. (2,554) (0.3) (3,621) (0.4)
Allowance for loan losses ....................... 3,294 0.4 3,226 0.3
--------- --------- ---------- ---------
Total loans receivable--net .................. $ 861,257 100.0% $ 977,166 100.0%
========= ========= ========== =========
Mortgage-backed securities ......................... $ 234,132 $ 389,263
========= ==========
</TABLE>
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(1) Includes participations of $6.6 million, $5.6 million, $4.3 million, $3.2
million and $2.2 million at December 31, 1994, 1995, 1996, 1997 and 1998,
respectively.
(2) Includes primarily home equity lines of credit, automobile loans, boat
loans and passbook loans. At December 31, 1998, the disbursed portion of
equity lines of credit totaled $14.8 million.
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Loan and Mortgage-Backed Securities Maturity Schedule. The following table
sets forth certain information as of December 31, 1998, regarding the dollar
amount of loans and mortgage-backed securities maturing in the Bank's portfolio
based on their contractual terms to maturity. The amounts shown represent
outstanding principal balances less loans in process and are not adjusted for
premiums, discounts, reserves, and unearned fees. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due. Fixed rate mortgage-backed securities are assumed
to mature in the period in which the final contractual payment is due on the
underlying mortgage.
<TABLE>
<CAPTION>
Over 1 Over 3 Over 5 Over 10 Beyond
Within Year to Years to Years to Years to 20
1 Year 3 Years 5 Years 10 Years 2 Years Years Total
-------- -------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential (1) ................. $320,410 $196,455 $119,406 $123,876 $ 45,222 $ 3,197 $808,566
Commercial, multi-family and land ................... 54,519 9,592 7,843 1,885 748 15 74,602
Consumer and commercial business loans (2) ............ 69,369 17,598 5,655 2,807 182 -- 95,611
-------- -------- -------- -------- -------- -------- --------
Total loans receivable .............................. $444,298 $223,645 $132,904 $128,568 $ 46,152 $ 3,212 $978,779
-------- -------- -------- -------- -------- -------- --------
Mortgage-backed securities ............................ $261,387 $ 37,652 $ 26,949 $ 38,386 $ 16,126 $ 1,811 $382,311
-------- -------- -------- -------- -------- -------- --------
</TABLE>
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(1) Includes construction loans.
(2) Includes commercial business loans of $44.7 million.
The following table sets forth at December 31, 1998, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
1999.
<TABLE>
<CAPTION>
Fixed Adjustable Total
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(In Thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family residential .................................. $346,746 $141,410 $488,156
Commercial, multi-family and land ................................ 6,654 13,429 20,083
Consumer and commercial business loans (1) .......................... 12,531 13,711 26,242
-------- -------- --------
Total ......................................................... $365,931 $168,550 $534,481
-------- -------- --------
Mortgage-backed securities .......................................... $120,924 $ -- $120,924
-------- -------- --------
</TABLE>
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(1) Includes commercial business loans of $6.3 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, 1998, $842.4 million, or 83.2%, of the
Bank's total gross loan portfolio consisted of one- to four-family residential
mortgage loans, including residential construction loans of which $53.5 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 $127.7 million during the year ended December 31, 1998.
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, three, five and seven years, based on changes in a designated
market index. After the initial interest rate adjustment period, three, five and
seven year ARM loans have the option of converting to a fixed rate mortgage for
the remaining term of the loan at the prevailing interest rate for fixed rate
mortgages at the time of the conversion. The interest rate on one year ARM loans
and the three, five and seven year ARM loans that do not convert to a fixed rate
mortgage adjust annually with an annual interest rate adjustment limitation of
200 basis points and with a maximum lifetime interest rate of 600 basis points
above the initial rate. The interest rate on all non-owner-occupied one- to
four-family mortgage loans is 300 basis points above the appropriate U.S.
Treasury securities as the index for ARM originations. 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 $343.7 million, or 32.4%, of the
Bank's total gross loan portfolio at December 31, 1998.
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 1998 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
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
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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, 1998, the Bank's loan portfolio
included $2.2 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
$26.9 million at December 31, 1998. 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, 1998 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.
The Bank also makes 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, 1998, $53.5 million, or 5.0%, and
$8.6 million, or less than 1.0%, 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%. The Bank uses the
applicable U.S. Treasury securities rate 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 $15.7 million, or 1.5%, of the Bank's
total loan portfolio at December 31, 1998. At December 31, 1998, the Bank had a
total of 78 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, 1998, substantially all of the Bank's multi-family
loans were secured by properties located within the Bank's market area. At
December 31, 1998, the Bank's multi-family real estate loans had an average
principal balance of $201,000 and the largest multi-family real estate loan had
a principal balance of $1.4 million. Multi-family 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. The Bank generally makes multi-family mortgage
loans up to 80% of the appraised value of the property
6
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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 $59.0 million, or 5.6%, of the Bank's total loan
portfolio at December 31, 1998. 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, 1998, substantially all of the Bank's commercial real estate loans
were secured by properties located within the Bank's market area. At
December 31, 1998, the Bank's commercial real estate loans had an average
principal balance of $333,000. At that date, the largest commercial real estate
loan had a principal balance of $4.6 million, secured by residential land
located in Delray 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. The Bank uses the applicable U.S.
Treasuries rate as its index on newly originated loans. Commercial real estate
loans originated by the Bank generally amortize over 15 to 25 years.
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 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, 1998, consumer loans totaled $48.3
million, or 4.5%, 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
7
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property). Such loans are offered on an adjustable rate basis with terms of up
to ten years. At December 31, 1998, the disbursed portion of home equity lines
of credit totaled $14.8 million, or 30.6% of consumer 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 businesses in its market area. Historically, the Bank offered
commercial business loans as a customer service to business account holders.
However, the Bank has begun to significantly expand and aggressively market its
loans and services to commercial business enterprises. During the year, the Bank
originated a $6.0 million loan secured by accounts receivable and inventory,
which is the Bank's largest commercial business loan. At December 31, 1998, the
Bank had 350 commercial business loans outstanding with an aggregate balance of
$46.1 million. The average commercial business loan balance was approximately
$132,000. 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. In addition,
as part of the loan underwriting process, commercial borrowers must indicate in
writing to the Bank that they are aware of the year 2000 concerns and are either
year 2000 compliant, or are taking steps to become year 2000 compliant.
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.
8
<PAGE>
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 $300,000 may be approved
by any one of the Bank's senior lending officers; loans between $300,000 and
$400,000 must be approved by any one of the Bank's designated senior officers;
loans between $400,000 and $1,000,000 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 $1,000,000 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, 1998, the
Bank had commitments to originate $32.8 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance or an opinion of title, based on a title search of the property,
is required on all loans secured by real property.
Borrowers who refinance must satisfy the Bank's underwriting criteria at
the time they apply to refinance their loan and have been current in their loan
payments for a minimum of one year. Approximately 7% of the Bank's loan
originations during the year ended December 31, 1998 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 1998 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 1998 were $76.7 million and are included
as originations in the following table. 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
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
9
<PAGE>
from the mortgage company. Purchases are accomplished by assignment of the
mortgage from the mortgage company to the Bank. The Bank purchased $32 million
in loans from this provider in 1998.
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, 1998, $82.8 million, or 7.8%, of all loans in the Bank's portfolio, were
purchased from others. Of this amount, $3.4 million represented the Bank's
interest in purchased participations. The Bank's largest loan participation was
a $1.2 million 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 $12,000.
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,
------------------------------------------------------
1996 1997 1998
----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C>
Loan receivable-gross, beginning of period .......................... $ 561,474 $ 699,931 $ 916,468
Originations:
Real estate:
One- to four-family residential (1) ......................... 187,851 177,111 255,444
Land loans .................................................. 3,207 30,908 23,089
Commercial .................................................. 390 5,664 9,668
Multi-family ................................................ 1,869 7,227 5,975
Non-real estate loans:
Consumer .................................................... 23,761 29,276 34,382
Commercial Business ......................................... 33,276 61,383 67,465
----------- ----------- -----------
Total originations ............................................ 250,354 311,569 396,023
Acquired as part of acquisition ..................................... -- 52,957 --
Transfer of mortgage loans to foreclosed real estate
and in-substance foreclosure .................................. (593) (2,403) (1,542)
Loan purchases ...................................................... 21,153 35,647 45,157
Repayments .......................................................... (115,440) (169,599) (241,478)
Loan sales .......................................................... (17,017) (11,634) (53,702)
----------- ----------- -----------
Net loan activity ................................................... 138,457 216,537 144,458
----------- ----------- -----------
Total loans receivable-gross, end of period ......................... $ 699,931 $ 916,468 $1,060,926
=========== =========== ===========
</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, 1998, the Bank
had $1.6 million of deferred loan origination fees and $5.3 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 $3.2 million, $3.6 million and $4.6 million for the years
ended December 31, 1996, 1997, and 1998, 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, 1998, the Bank's
largest outstanding loan balance to one borrower totaled $12 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
$6.8 million and was secured by various residential properties. The Bank's third
largest lending relationship totaled $6.0 million and was secured by accounts
receivable and inventory. 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 $4.3 million and was secured by various
residential properties. The Bank's regulatory limit on loans-to-one borrower was
$15.9 million at December 31, 1998.
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 $389.3 million at
December 31, 1998 and had a market value of $389.3 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.
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,
--------------------------------------------
1996 1997 1998
--------- --------- ----------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of period ............................... $ 159,761 $ 123,599 $ 234,132
Purchases ....................................................................... 9,962 131,956 310,581
Acquired as part of Acquisition of BankBoynton .................................. -- 205 --
Sales ........................................................................... (19,641) -- (26,044)
Repayments ...................................................................... (23,608) (22,325) (125,105)
Discount (premium) amortization ................................................. 3 (304) (2,503)
Increase (decrease) in market value of securities held for sale in
accordance with SFAS 115 ....................................................... (2,878) 1,001 (1,798)
--------- --------- ---------
Mortgage-backed securities at end of period ..................................... $ 123,599 $ 234,132 $ 389,263
========= ========= =========
</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,
--------------------------------------------------------------------------
1996 1997 1998
---------------------- ---------------------- ----------------------
$ % $ % $ %
--------- --------- --------- --------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities, net:
Adjustable:
FHLMC ....................................... $ 15,900 12.78% $ 48,469 20.57% $102,756 26.27%
FNMA ........................................ 29,576 23.76 43,825 18.60 56,490 14.44
GNMA ........................................ 1,963 1.58 1,586 0.67 995 .25
-------- ------- -------- ------ -------- ------
Total adjustable .......................... 47,439 38.12 93,880 39.84 160,241 40.96
-------- ------- -------- ------ -------- ------
Fixed:
FHLMC ....................................... 56,245 45.20 83,326 35.36 122,463 31.30
FNMA ........................................ 11,771 9.46 26,497 11.24 86,166 22.02
GNMA ........................................ 8,144 6.54 30,429 12.91 20,393 5.22
-------- ------- -------- ------- -------- ------
Total fixed ............................... 76,160 61.20 140,252 59.51 229,022 58.54
-------- ------- -------- ------- -------- ------
Accrued interest .................................. 842 0.68 1,530 0.65 1,941 .50
-------- ------- -------- ------- -------- ------
Total mortgage-backed securities, net .......... $124,441 100.00% $235,662 100.00% $391,204 100.00%
======== ======= ======== ======= ======== ======
</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
12
<PAGE>
a repayment schedule has not been made or kept by the borrower, generally a
notice of intent to foreclose 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 and
considered non-performing 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, 1998, the
Bank had non-performing loans of $3.9 million, and a ratio of non-performing
loans to net loans receivable of .39%.
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, 1998, the Bank had approximately $907,000 of property
acquired as the result of foreclosure and classified as REO. At December 31,
1998, the Bank had non-performing assets of $4.8 million and a ratio of
non-performing assets to total assets of .30%.
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,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Delinquent Loans:
One- to four-family residential (1) ................... $1,299 $1,513 $2,637 $2,610 $3,677
Commercial and multi-family real estate ............... 335 201 461 140 51
Land .................................................. 159 10 84 187 --
Consumer and commercial business loans (3) ............ 135 140 108 312 131
------ ------ ------ ------ ------
Total Delinquent loans .................................. 1,928 1,864 3,290 3,249 3,859
Total REO and loans foreclosed in-substance ............. 608 643 93 967 907
------ ------ ------ ------ ------
Total nonperforming assets (2) .................... $2,536 $2,507 $3,383 $4,216 $4,766
====== ====== ====== ====== ======
Total loans delinquent 90 days or more to net
loans receivable (3) .................................. 0.42% 0.35% 0.50% 0.38% 0.39%
Total loans delinquent 90 days or more to
total assets (3) ...................................... 0.27% 0.24% 0.38% 0.27% 0.25%
Total nonperforming loans, loans foreclosed
in substance and REO to total assets ................. 0.36% 0.32% 0.39% 0.35% 0.30%
</TABLE>
- ------------------------------------
(1) At December 31, 1998, 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, 1998, gross interest income of
approximately $317,000 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 1998.
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,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
One- to four-family residential (1)........ $ 1,554 $ 1,272 $ 2,038 $ 3,014 $ 2,049
Commercial real estate and multi-family.... 100 106 55 54 --
Consumer and commercial business loans..... 7 106 19 83 8
Land loans................................. 48 1 -- -- 11
--------- --------- --------- --------- --------
Total past due 60-89 days................ $ 1,709 $ 1,485 $ 2,112 $ 3,151 $ 2,068
========= ========= ========= ========= ========
</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.
At December 31,
-----------------------------
1996 1997 1998
------ ------ ------
(In Thousands)
Substandard assets (1)(2) .................. $3,207 $3,961 $4,752
Doubtful assets (2) ........................ -- -- --
Loss assets (2) ............................ -- -- --
------ ------ ------
Total classified assets (2) .......... $3,207 $3,961 $4,752
====== ====== ======
- ------------------------------------
(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, 1998.
Balance Number
------- ------
(Dollars In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent .................... $2,049 26
Loans more than 89 days delinquent ................ 3,677 68
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent .................... -- --
Loans more than 89 days delinquent ................ 51 1
Land loans:
Loans 60 to 89 days delinquent .................... 11 1
Loans more than 89 days delinquent ................ -- --
Consumer and commercial business loans
60 days or more delinquent ....................... 131 10
REO .................................................. 907 10
------ ------
Total .......................................... $6,826 116
====== ======
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.
Further, as the Bank is expanding its portfolio of commercial
15
<PAGE>
business loans, which are deemed to have greater credit risk than single family
mortgage loans, management of the Bank expects to provide greater allowances for
loan losses than have been considered necessary in the past.
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,
----------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total net loans receivable outstanding ........... $ 456,543 $ 532,333 $ 661,700 $ 861,257 $ 977,166
========= ========= ========= ========= =========
Average net loans receivable outstanding ......... $ 441,573 $ 490,088 $ 605,507 $ 735,949 $ 917,647
========= ========= ========= ========= =========
Allowance balance (at beginning of period) ....... $ 2,865 $ 2,566 $ 2,265 $ 2,263 $ 3,294
Reclassification of valuation allowances
on in-substance foreclosure .................... -- -- -- -- --
Acquired as part of Acquisition of BankBoynton:
Real estate .................................... -- -- -- 208 --
Consumer ....................................... -- -- -- 959 --
Provision for losses:
Real estate .................................... 73 (199) 133 165 115
Consumer and commercial business loans ......... 39 (11) 31 5 (38)
Charge-offs:
Real estate .................................... (229) (89) (145) (98) (85)
Consumer and commercial business loans ......... (182) (2) (21) (208) (60)
Recoveries:
Real estate .................................... -- -- -- -- --
Consumer and commercial business loans ......... -- -- -- -- --
--------- --------- --------- --------- ---------
Allowance balance (at end of period) ....... $ 2,566 $ 2,265 $ 2,263 $ 3,294 $ 3,226
========= ========= ========= ========= =========
Allowance for loan losses as a percent of net
loans receivable at end of period ............. 0.56% 0.43% 0.34% 0.38% 0.33%
Net loans charged-off as a percent of average
loans outstanding .............................. 0.10% 0.02% 0.03% 0.04% 0.01%
Ratio of allowance for loan losses to total
non-performing loans at end of period (1) ...... 132.61% 121.51% 68.78% 101.39% 100.59%
Ratio of allowance for loan losses to total
non-performing loans, REO and in-substance
foreclosures at end of period (1) .............. 100.90% 90.35% 66.89% 78.13% 78.42%
</TABLE>
- ------------------------------------
(1) Net of specific reserves.
16
<PAGE>
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,
------------------------------------------------------------------
1996 1997 1998
--------------------- -------------------- ------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------- ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family residential mortgage .................... $1,095 83.89% $1,547 82.86% $2,128 83.18%
Commercial real estate and multi-family residential ......... 571 6.12 441 7.04 753 7.04
Land loans .................................................. 119 1.70 209 1.32 203 0.81
Other ....................................................... 478 8.29 1,097 8.78 142 8.97
------ ------ ------ ------ ------ ------
Total allowance for loan losses........................... $2,263 100.00% $3,294 100.00% $3,226 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Investment Activities
In prior years, the Bank 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 U.S. government and agency securities, corporate
debt securities, municipal bonds, FHLB Stock and interest earning deposits. The
carrying value of the Bank's investment securities totaled $111.0 million at
December 31, 1998, compared to $61.7 million at December 31, 1997. The Bank's
interest-bearing deposits due from other financial institutions with original
maturities of three months or less, totaled $32.1 million at December 31, 1998,
compared to $33.7 million at December 31, 1997.
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.
17
<PAGE>
Investment Portfolio. The following tables set forth the carrying value of
the Bank's investments at the dates indicated. At December 31, 1998, the market
value of the Bank's investments was approximately $111.0 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,
----------------------------------------------------
1996 1997 1998
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations ........................... $ 8,035 $ 13,861 $ 15,924
Corporate debt securities ........................................ -- -- 44,488
Municipal bonds .................................................. 430 2,216 2,900
Interest-earning deposits ........................................ 27,127 33,688 32,075
FHLB stock ....................................................... 6,148 11,955 15,658
-------- -------- --------
Total investments .......................................... $ 41,740 $ 61,720 $111,045
======== ======== ========
</TABLE>
During 1998, the Bank began to diversify its investments in mortgage-backed
securities by purchasing investment grade rated, floating rate trust preferred
securities of other financial institutions. In doing so, the Bank was relying on
regulations which permit an investment of up to 35% of its assets in "commercial
paper and corporate debt securities." In November of 1998, the Office of Thrift
Supervision ("OTS") issued TB-73, which among other matters stated concerns over
institutions' investment in trust preferred securities, citing increased
interest rate risks as a result of the predominant fixed rate nature of such
securities and that some of these securities could have their maturities
extended at the issuer's option. As a result, the OTS adopted limitations on the
investment of such securities to 15% of a regulated institution's equity, but
adopted a method by which an institution could appeal the limitation.
At December 31, 1998, the Bank's investment in trust preferred securities
was 2.8% of its assets and 42.7% of its regulatory capital. Most issues of trust
preferred securities appear to be fixed rate and unrated as to credit risk
including Fidelity Bankshares, Inc.'s issue of "Guaranteed Preferred Beneficial
Interests in Company's Debentures." However, the Bank's investment policy
specifically restricts its investment in such securities to $50 million,
investment grade and floating rate to improve its interest rate risk. The Bank
has appealed to the OTS to permit it to continue its investment at current
levels and noted in its appeal that its investments had floating interest rates
and the issuers did not have the option to extend the maturities. Management of
the Bank is unable to predict the outcome of its appeal.
18
<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, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------
One Year or Less One to Three Years Three to Five Years
-------------------- --------------------- ---------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government agency securities ............. $ 11,796 6.1% $ 3,999 5.8% $ -- --%
Corporate debt Securities ..................... 46,000 6.3 -- -- -- --
Municipal bonds ............................... 1,101 4.6 980 4.0 444 3.90
FHLB stock .................................... 15,658 7.5 -- -- -- --
Interest-earning deposits ..................... 32,075 4.9 -- -- -- --
--------- ---------- --------- ---------- --------- ----------
Total ................................... $106,630 6.0% $ 4,979 5.5% $ 444 3.90%
========= ========== ========= ========== ========= ==========
<CAPTION>
Over Five Years Total
----------------------- ------------------------
Annualized Annualized
Weighted Average Weighted
Amortized Average Amortize Market Life in Average
Cost Yield Cost Value Years(1) Yield
--------- ---------- -------- -------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government agency securities .............. $ -- --% $ 15,795 $ 15,924 .8 6.0%
Corporate debt Securities ...................... -- -- 46,000 44,488 29.1 6.3
Municipal bonds ................................ 358 3.8 2,883 2,900 2.4 4.2
FHLB stock ..................................... -- -- 15,658 15,658 -- 7.5
Interest-earning deposits ...................... -- -- 32,075 32,075 -- 4.9
-------- --- -------- -------- ----- ----
Total .................................... $ 358 3.8% $112,411 $111,045 21.0 6.0%
======== === ======== ======== ===== ====
</TABLE>
- ---------------------------
(1) Total weighted average life in years calculated only on United States
Government agency securities, corporate debt securities and municipal
bonds.
19
<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, 1998.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum 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 $ 57,002 5.1%
1.01 None NOW accounts 100 94,848 8.5
2.00 None Passbooks 100 127,494 11.4
2.50 None Money market accounts 2,500 44,481 4.0
Certificates of Deposit
-----------------------
4.19 0 - 3 months Fixed term, fixed rate 1,000 $ 11,239 1.0%
4.75 3 - 6 months Fixed term, fixed rate 1,000 40,323 3.6
5.26 6 - 12 months Fixed term, fixed rate 1,000 296,224 26.4
5.66 12 - 36 months Fixed term, fixed rate 1,000 358,856 32.0
6.10 36 - 60 months Fixed term, fixed rate 1,000 90,279 8.0
---------- ------
Total $1,120,746 100.0%
========== =======
</TABLE>
20
<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 Increase Balance Deposit Increase Balance Deposit
12/31/94 Decrease 12/31/95 % Decrease 12/31/96 %
----------- -------- -------- ------- -------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand accounts .............. $ 19,551 $ 1,879 $ 21,430 3.6% $ 4,976 $ 26,406 3.8%
NOW, Super NOW and funds
transfer accounts .............................. 65,025 2,861 67,886 11.4 2,672 70,558 10.2
Passbook and statement accounts .................. 99,198 (12,727) 86,471 14.5 1,063 87,534 12.6
Variable rate money market accounts .............. 55,516 (10,839) 44,677 7.5 (665) 44,012 6.3
Time Deposits:
Maturing within 12 months ...................... 243,557 38,676 294,202 47.4 64,710 358,912 51.7
Maturing within 12-36 months ................... 34,405 41,018 57,236 12.7 22,658 79,894 11.5
Maturing beyond 36 months ...................... 20,983 (3,923) 23,278 2.9 4,124 27,402 3.9
-------- -------- -------- ------ -------- -------- -----
Total ........................................ $538,235 $ 56,945 $595,180 100.0% $ 99,538 $694,718 100.0%
======== ======== ======== ====== ======== ======== =====
<CAPTION>
Increase Balance Deposit Increase Balance Deposit
Decrease 12/31/97 % Decrease 12/31/98 %
---------- ---------- ------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand accounts .................. $ 9,482 $ 35,888 4.1% $ 21,114 $ 57,002 5.1%
NOW, Super NOW and funds
transfer accounts .................................. 11,594 82,152 9.4 12,696 94,848 8.5
Passbook and statement accounts ...................... 17,548 105,082 12.1 22,412 127,494 11.4
Variable rate money market accounts .................. (1,877) 42,135 4.8 2,346 44,481 4.0
Time Deposits:
Maturing within 12 months .......................... 28,599 387,511 44.4 (133,230) 254,281 22.7
Maturing within 12-36 months ....................... 89,334 169,228 19.4 263,897 433,125 38.6
Maturing beyond 36 months .......................... 22,942 50,344 5.8 59,171 109,515 9.7
---------- ---------- ------ ---------- ---------- -----
Total ............................................ $ 177,622 $ 872,340 100.0% $ 248,406 $1,120,746 100.0%
========== ========== ====== ========== ========== =====
</TABLE>
21
<PAGE>
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated.
At December 31,
------------------------------------------
1996 1997 1998
-------- -------- --------
Rate (In Thousands)
- ----
1.01 - 2.00% ................ $ 949 $ 895 $ 1,018
2.01 - 3.00% ................ 2 301 --
3.01 - 4.00% ................ 20 6 6
4.01 - 5.00% ................ 34,308 11,225 125,019
5.01 - 6.00% ................ 333,998 441,810 564,002
6.01 - 7.00% ................ 93,788 152,453 106,719
7.01 - 8.00% ................ 3,079 353 157
8.01 - 9.00% ................ 64 40 --
-------- -------- --------
$466,208 $607,083 $796,921
======== ======== ========
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
--------- ----- ----- ----- ----- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate
1.01 - 2.00%..................... $ 1,018 $ -- $ -- $ -- $ -- $ -- $ 1,018
2.01 - 3.00%..................... -- -- -- -- -- -- --
3.01 - 4.00%..................... 6 -- -- -- -- -- 6
4.01 - 5.00%..................... 81,319 35,628 7,529 314 36 193 125,019
5.01 - 6.00%..................... 136,525 187,695 150,103 1,851 86,896 932 564,002
6.01 - 7.00%..................... 35,413 34,508 17,539 16,008 3,188 63 106,719
7.01 - 8.00%..................... -- 123 -- 34 -- -- 157
--------- --------- --------- --------- --------- --------- ---------
$ 254,281 $ 257,954 $ 175,171 $ 18,207 $ 90,120 $ 1,188 $ 796,921
========= ========= ========= ========= ========= ========= =========
</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, 1998.
Remaining Maturity Amounts
------------------ -------
(In Thousands)
Three months or less.......................... $ 43,908
Three through six months...................... 28,777
Six through twelve months..................... 35,703
Over twelve months............................ 128,886
---------
Total..................................... $ 237,274
=========
22
<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,
------------------------------------
1996 1997 1998
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Deposits ....................................... $2,557,621 $3,353,672 $4,359,705
Acquired as part of acquisition ................ -- 41,730 --
Withdrawals .................................... 2,480,059 3,250,906 4,145,444
---------- ---------- ----------
Net increase (decrease) before interest credited 77,562 144,496 214,261
Interest credited .............................. 21,976 33,126 34,145
---------- ---------- ----------
Net increase (decrease) in deposits ............ $ 99,538 $ 177,622 $ 248,406
========== ========== ==========
</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, 1998, the Bank had $303.1 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, except for $28.3 million in such advances,
bearing interest at 8.17%, which mature in the fourth quarter, 1999..
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1997 1998
------- -------- --------
(In Thousands)
<S> <C> <C> <C>
FHLB advances:
Maximum month-end balance ........... 91,135 $239,091 $318,527
Balance at end of period ............. 82,517 239,091 303,140
Average balance ...................... 84,351 119,759 286,094
Weighted average interest rate on:
Balance at end of period ............. 6.74% 6.41% 5.94%
Average balance for period ........... 6.79% 6.27% 6.06%
</TABLE>
23
<PAGE>
Competition
The Bank's market area in Southeast Florida has a large concentration of
financial institutions, many of which are significantly larger and have greater
financial resources than the Bank, and all of which are competitors of the Bank
to varying degrees. As a result, the Bank encounters strong competition both in
attracting deposits and in originating real estate and other loans. Its most
direct competition for deposits has come historically from commercial banks,
brokerage houses, other savings associations, and credit unions in its market
area, and the Bank expects continued strong competition from such financial
institutions in the foreseeable future. The Bank's market area includes branches
of several commercial banks that are substantially larger than the Bank in terms
of state-wide deposits. The Bank competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Bank's market area
as well as the increased efforts by commercial banks to expand mortgage loan
originations.
The Bank competes for loans primarily through the interest rates and loan
fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Based on total assets as of $1.6 billion, the Bank was the largest savings
institution headquartered in Palm Beach County, and the Bank held approximately
5.1% 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, 1998, FRAS had a cumulative deficit of $96,000. For the year
ended December 31, 1998, FRAS had net income of $70,000.
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.
24
<PAGE>
Personnel
As of December 31, 1998, the Bank had 370 full-time and 45 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.
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
25
<PAGE>
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.
Federal Regulations
Regulatory Capital. The capital requirements consist of a "tangible capital
requirement," a "leverage limit" and a "risk-based capital requirement."
Under the tangible capital requirement, a savings association must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights. Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS 115 is
excluded from the regulatory capital calculation.
The leverage limit adopted by the OTS requires that savings associations
maintain "core capital" in an amount equal to at least 3% of adjusted total
assets. The OTS, however, has proposed an amendment to this requirement that
would increase core capital requirements for nearly all savings associations, as
discussed below. Core capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock, and
minority interests in the equity accounts of consolidated subsidiaries, plus
purchased mortgage servicing rights valued at the lower of 90% of fair market
value, 90% of original cost or the current amortized book value as determined
under generally accepted accounting principles ("GAAP"), and "qualifying
supervisory goodwill," less non-qualifying intangible assets.
In addition, the OTS has proposed a rule that would limit the amount of
purchased mortgage servicing rights includable as core capital to 50% of such
capital. No assurance can be given as to the final form of such regulation, the
date of its effectiveness, or whether it will differ materially from the
proposal. The proposal, if adopted as proposed, is not anticipated to have any
immediate effect on the Bank.
Savings associations receiving a CAMEL rating of "1", the best possible
rating on a scale of 1 to 5, are required to maintain a ratio of core capital to
adjusted total assets of 3%. All other savings associations are 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. At December 31, 1998, the Bank's ratio of core capital to
total adjusted assets was 6.7%. The OTS prohibits savings associations from
disclosing their CAMEL ratings. (See notes to consolidated financial
statements.)
A savings association that does not meet the minimum regulatory capital
requirements because of the failure to satisfy the 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
26
<PAGE>
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.
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 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, 1998 the Bank had $15.7
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 7.02%, and was 7.44% for the year ended
December 31, 1998. 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
27
<PAGE>
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 or GNMA and other mortgage-related
securities. Investments in nonsubsidiary corporations or partnerships whose
activities include servicing mortgages or real estate development are also
considered qualified thrift investments in proportion to the amount of primary
revenue such entities derive from housing-related activities. Also included in
qualified thrift investments are mortgage servicing rights, whether such rights
are purchased by the insured institution or created when the institution sells
loans and retains the right to service such loans.
A savings institution that fails to become, or maintain its status as, a
qualified thrift lender must either become a bank (other than a savings bank) or
be subject to certain restrictions. A savings institution that fails to meet the
QTL test and does not convert to a bank will be: (i) prohibited from making an
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, 1998, the Bank was in compliance with the QTL
requirement. At December 31, 1998, 87.5% 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
28
<PAGE>
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 1998
was 7.12% 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.
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.
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
29
<PAGE>
period if it satisfies the risk based capital standard that was applicable to it
on January 1, 1991, computed based on its current portfolio; and up to 25% of
its net income over the most recent four quarter period if it satisfies its
current risk-based capital requirement. In computing the institution's
permissible percentage of capital distributions, previous distributions made
during the prior four quarter period must be included. A savings institution
that does not meet its current regulatory capital requirement before or after
payment of a proposed capital distribution ("Tier 3 Association") may not make
any capital distributions without the prior approval of the OTS. In addition,
the OTS would prohibit a proposed capital distribution by any 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, 1998, 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 Mutual Holding Company are
holding companies within the meaning of the Home Owners' Loan Act of 1933
("HOLA"). As such, the Company and the Mutual Holding Company 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
Mutual Holding Company are subject to the Regulations as well as other
regulations promulgated by the OTS from
30
<PAGE>
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 Mutual Holding Company and with other persons affiliated with the Company
and the Mutual Holding Company 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 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
31
<PAGE>
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, 1998, 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."
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.
32
<PAGE>
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.
Executive Officers of the Registrant
Listed below is information, as of December 31, 1998, 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 59 President since 1987 and Chief Executive Officer since
1992; Director of the Bank since 1984
Richard D. Aldred 54 Executive Vice President as of December 31, 1994;
Treasurer and Chief Financial Officer since 1985
Joseph C. Bova 54 Executive Vice President as of December 31, 1994; Lending
Operations Manager
Robert L. Fugate 50 Executive Vice President as of December 31, 1994; Banking
Operations Manager since 1982
Christopher H. Cook 55 Executive Vice President as of December 31, 1996;
Corporate Counsel since 1996
Patricia C. Clager 63 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,
1998. The aggregate net book value of the Bank's premises and equipment was
$37.7 million at December 31, 1998.
<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 $136,872
1501 Corporate Dr
Boynton Beach, Florida
West Lake Worth 12/03/79 Fee Simple --
6535 Lake Worth Rd
Lake Worth, Florida
Wellington 6/02/80 Fee Simple --
12000 W. Forest Hill Blvd
Wellington, Florida
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
LOCATION OPENING DATE OWNERSHIP ANNUAL RENT
- -------- ------------ --------- -----------
<S> <C> <C> <C>
Delray Beach 10/20/80 Ground Lease $ 69,121
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 $197,808
701 Village Blvd
West Palm Beach, Florida
Palm Beach Gardens 5/20/91 Lease $156,185
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 $ 51,988
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 $ 14,357
4641 University Drive
Coral Springs, Florida
Jupiter
1240 W. Indiantown Road 6/23/97 Fee Simple --
Jupiter, Florida
Jupiter Farms
10058 Indiantown Road 3/16/98 Fee Simple --
Jupiter, Florida
Vero Beach Loan Production Office
1701 Highway AIA 6/15/98 Lease $ 7,280
Vero Beach, Florida
</TABLE>
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,
1998, was approximately $2,527,000.
35
<PAGE>
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, 1998 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, 1998 (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 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 1998.
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 19, 1999
(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, 1997 and 1998
. Consolidated Statements of Operations,
Years Ended December 31, 1996, 1997 and 1998
. Consolidated Statements of Changes in Stockholders' equity,
Years Ended December 31, 1996, 1997 and 1998
. Consolidated Statements of Cash Flows,
Years Ended December 31, 1996, 1997 and 1998
. 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 Bankshares, Inc.**
3.2 Bylaws of Fidelity Bankshares, Inc.**
4.1 Form of Indenture with respect to Fidelity Bankshares,
Inc.'s 8.375% Junior Subordinated Deferrable Interest*
10.1 Employment Agreement with Vince A. Elhilow**
10.2 Severance Agreement with Richard D. Aldred**
10.3 Severance Agreement with Robert Fugate**
10.4 Severance Agreement with Joseph Bova**
10.5 1994 Stock Option Plan for Outside Directors**
10.6 1994 Incentive Stock Option Plan**
10.7 Recognition and Retention Plan for Employees**
10.8 Recognition Plan for Outside Directors**
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
---------------
* Filed as exhibits to the Company's Registration Statement
on Form S-2 under the Securities Act of 1933, filed with
the SEC on December 15, 1997 (Registration No. 333-42227).
** Filed as exhibits to the Company's Registration Statement
on Form S-4 under the Securities Act of 1933, filed with
the Securities and Exchange Commission on December 12, 1996
(Registration No. 333-17737).
*** Filed with the Securities and Exchange Commission on May
13, 1997.
38
<PAGE>
**** Filed with the Securities and Exchange Commission on August 14,
1997.
(b) Reports on Form 8-K:
--------------------
None
(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 23, 1999 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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/Vince A. Elhilow By: /s/Richard D. Aldred
------------------------------------------------- ----------------------------------------------------
Vince A. Elhilow, President and Chief Richard D. Aldred, Executive Vice President, Chief
Executive Officer Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 23, 1999 Date: March 23, 1999
By: /s/Joseph B. Shearouse, Jr. By: /s/Keith D. Beaty
------------------------------------------------- ----------------------------------------------------
Joseph B. Shearouse, Jr., Chairman of the Board Keith D. Beaty, Director
Date: March 23, 1999 Date: March 23, 1999
By: /s/F. Ted Brown, Jr. By: /s/Donald E. Warren
------------------------------------------------- ----------------------------------------------------
F. Ted Brown, Jr., Director Donald E. Warren, Director
Date: March 23, 1999 Date: March 23, 1999
</TABLE>
40
<PAGE>
EXHIBIT 13
1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Table of Contents
Message from the President & CEO ....................... 2
Our Commitment to Business ............................. 5
Board of Directors and Officers ........................ 8
Locations .............................................. 10
Corporate Information .................................. 12
Financial Highlights ................................... 13
Management's Discussion and Analysis
of Financial Condition and Results of Operations...... 15
Independent Auditors' Report ........................... 31
Consolidated Financial Statements ...................... 32
Management's Assertions
as to the Effectiveness of its Internal Control
Structure over Financial Reporting and
Compliance with Designated Laws and
Regulations .......................................... 62
Independent Accountants' Report ........................ 63
1
<PAGE>
Report to Shareholders
I am pleased to report another year of satisfying results for Fidelity
Bankshares, Inc. and its operating subsidiary, Fidelity Federal Savings Bank of
Florida. Building on the foundation we laid in 1998, Fidelity Federal is well
positioned to continue diversifying into a broad range of commercial banking
activities and related financial services. Although expenses increased in the
latter part of 1998, these expenditures were within our expectations and
designed to support our long-term strategy of continued growth and expansion.
[PHOTO OF VINCE A. ELHILOW APPEARS HERE]
Vince A. Elhilow President and Chief Executive Officer
Coupled with this diversification is a significant refinement of our
corporate culture. We have outlined ambitious goals for broadening our loan
portfolio as we expand our commercial lending activities and establish a full
banking relationship with our business customers. We made major progress in this
regard in 1998, and succeeded in recruiting some of this area's most respected
and accomplished commercial banking talent, who will spearhead our growth in
this important arena. To further explain our position, we are including an
article entitled, "Our Commitment to Business," which follows this report. At
the same time, we continued our targeted geographical expansion in the most
desirable locations within our primary market.
These long-term strategies were carried out in an environment of
continued careful management, which resulted in satisfactory earnings. Net
income for the year ending December 31, 1998, was $7,412,000, which equates to
basic earnings per share of common stock of $1.12. This represents an increase
of 15.48 percent over 1997's net income of $6,418,000 ($0.96 per share). Based
on this performance, the Company's Board of Directors declared quarterly
dividends totaling $0.95 per share during the course of the year. The Board
increased the dividend in September to $.25 per share, or $1.00 per annum,
continuing the company's uninterrupted record of quarterly dividends since our
conversion in 1994.
The company also carried out its first stock repurchase program during
1998, an initiative that was completed in January 1999. Altogether the company
repurchased 340,000 shares, or five percent of the common stock held by persons
other than Fidelity Bankshares, MHC. We viewed the cost of the stock
repurchases, which totaled $7 million, as an excellent investment and an
opportunity to demonstrate our commitment to building long-term value for our
shareholders.
In addition to strong operating and financial results, 1998 also saw
continued growth for the bank. Over the past 18 months, Fidelity Federal's
assets have grown by more than a half-billion dollars, making us the
third-largest Florida-based thrift, and the ninth-largest of all Florida-based
banks.
- --------------------------------------------------------------------------------
Fidelity Federal is now the third-largest Florida-based thrift, and the
ninth-largest of all Florida-based banks.
- --------------------------------------------------------------------------------
2
<PAGE>
As satisfying as these immediate results are, however, we believe the
long-term prospects ahead of us are even more promising. Fidelity Federal is
uniquely positioned among South Florida banks - large enough to offer our
customers the benefits of new technology and innovative new services, yet
distinctly focused on the local communities we serve. We are convinced that this
combination of attributes will serve us well in the years to come, as rapid
change continues to sweep through the financial services industry.
Furthermore, we believe the high-profile mergers among mega-banks in
recent years has produced a unique opportunity for Fidelity Federal, as we
remain committed to our role as a local community bank. In these times of
increasingly impersonal service, Fidelity Federal is able to provide responsive,
locally focused financial services - even as we continue to expand our market
presence and diversify our products to encompass a broad range of commercial
banking activities.
We have considered a variety of options for addressing expansion,
including acquisitions of other institutions. However, we were unable to
identify suitable candidates in our marketplace. Although we remain open to
additional acquisitions under the right circumstances, our study of the current
situation convinced us that an ambitious program of de novo branching would be
the most productive and cost-effective means of meeting our expansion goals.
[MAP APPEARS HERE]
Although de novo branching incurs immediate start-up expenses, we believe
this course to be more prudent in the long run. Simply put, we are using our
current earnings to fund future growth and increase our franchise value. For
example, approximately 20 percent of the employees who will staff these new
offices were employed by the Bank during the fourth quarter of 1998 in order to
begin training. This naturally had an impact on operating expenses in 1998.
During 1999 we will be opening 12 new branch offices in Palm Beach and
St. Lucie counties, beginning with our Palm Springs office which opened January
11, 1999. This ambitious expansion program reflects our concerted study and
understanding of our market, and our conviction that outstanding opportunities
exist for expanding our reach into key areas which are currently underserved.
Nevertheless, based on the demographics of our marketplace and its rapid
growth, we expect all the new branches we open in 1999 will be accretive to
income within 18 to 24 months of their opening. This rapid return on investment
is made possible in large part by the experience of our management team in
developing a well-disciplined and predictable procedure for establishing new
branch locations.
In addition to traditional branches, Fidelity Federal is launching
several innovative approaches to seek out business, and make our products and
services even more accessible to our customers. For example, our Devonshire
office is a new type of facility for Fidelity Federal, designed to meet the
specialized needs of residents in an exclusive adult living
3
<PAGE>
facility. We are also opening three supermarket branches in local Winn Dixie
stores in Jupiter, Loxahatchee and Port St. Lucie, enabling us to economically
expand into new markets which are experiencing rapid population growth.
In addition to physical expansion, we are equally committed to
diversifying Fidelity Federal's range of services. For example, in 1998 we
continued to expand our online banking capabilities. Our new "FidFed Online"
service provides customers with 24-hour-a-day access to their accounts. This
service provides for electronic bill payment, inquiries and fund transfers, as
well as downloading of account information for use with popular personal
financial management software.
On an even broader scale, Fidelity Federal's website - "www.fidfed.com" -
has extended our reach greatly, linking us with a variety of other valuable
local resources and community-oriented sites. During 1998 the website's
capabilities were expanded dramatically, to the point where we can now offer
applications and customer access through this new medium.
Another 1998 event with far-reaching potential was the successful
introduction of INVEST Financial Corporation. This affiliation gives our
customers access to a broad range of investment products and services by
appointment in their local branch. We continue to explore other opportunities to
broaden our services to include trust powers and the possibility of establishing
an insurance subsidiary. Such diversification will contribute significantly to
both immediate income and the long-term value of the organization.
- --------------------------------------------------------------------------------
Whether we are establishing new branches or adding new services, our goal has
always been to develop stronger relationships with our customers.
- --------------------------------------------------------------------------------
Today, the giants of the financial services industry are moving rapidly
toward a more "transaction-oriented" corporate culture. By contrast, our
philosophy at Fidelity Federal is decidedly "relationship-oriented." Whether we
are establishing new branches in fast-growing markets or adding new, more
comprehensive services, our goal has always been to develop stronger
relationships with our customers.
As more local banks disappear through mergers and acquisitions, our role
and responsibility in the community is enhanced even further. As the
second-oldest bank in Palm Beach County, Fidelity Federal is ideally positioned
to recognize the tremendous potential that exists in this market. In contrast to
the increasingly distant banking conglomerates, we are committed to making it
easier for customers to bank with us, and to expand the scope of both our
personal and business banking services. We believe that philosophy, coupled with
nearly 50 years of experience as a locally focused, community bank, positions us
well for the future.
/s/ Vince A. Elhilow
Vince A. Elhilow
President and Chief Executive Officer
4
<PAGE>
Our Commitment to Business
As one of Florida's leading banks, Fidelity Federal has long been
recognized as a preeminent source for both deposit and lending services to
individuals. Chartered in 1952, we have grown into a position of leadership in
Florida's financial services industry as well as in our community. Today, we are
continuing to move aggressively to broaden our portfolio to encompass the full
range of business lending and deposit accounts, including business cash
management, retirement planning, tax deposit and merchant services. In this
effort, we draw on nearly 50 years of involvement in the community, building on
long-standing business relationships, along with proactive networking activities
designed to further expand our customer base. We believe this increasingly
visible role as an active and supportive partner with local businesses is
consistent with our place in the community.
In pursuing a commitment to business, Fidelity Federal is taking
advantage of the opportunities presented by today's wave of acquisitions and
mergers, as increasingly distant banks offer less personal contact and
involvement with their business customers. In this environment, the Bank is in a
unique position in the community, offering an alternative approach to large,
impersonal organizations by continuing a tradition of local management and
service. This situation opens important competitive and marketing opportunities,
as customers participate in our highly successful "Make the Switch" campaign,
and turn to the Bank for the responsive service only a locally focused community
bank can offer. Increasingly, business banking customers are coming to Fidelity
Federal for experience and understanding of local markets, the opportunity to
speak personally with the bank's decision-makers, and our ability to respond
quickly and personally to their needs.
[ARTWORK APPEARS HERE]
In addition, the changing face of banking also presents us with
recruiting and team-building opportunities. In recent months the Bank has
succeeded in attracting some of the community's most respected business banking
executives. These key bankers will play a major role in our continued growth and
expansion in the business banking arena. They bring to the Bank proven expertise
in SBA lending, commercial real estate, asset-based loans, and a variety of
other business banking products and services.
This experienced talent pool, coupled with our business development
staff, is illustrative of our serious commitment to meeting the needs of
businesses in our community. We are willing to go the extra
mile - literally - by coming to their place of business to work side-by-side
with them to meet their business banking needs. In addition, these proven
business banking experts help "put a face" on our efforts, enabling us to build
and expand on already strong relationships. As a result, we are receiving the
highest complement our business banking customers can give us - they are
recommending us to other businesses and to their employees.
5
<PAGE>
[ARTWORK APPEARS HERE]
The benefits we can achieve from our business banking initiative are
clear. This diversification of our asset base enables us to improve our return
on investments through prudent business lending while lowering the cost of our
liabilities through increasing business-related deposits. The opportunity for
success lies in underwriting with reasonable business risk. With that in mind,
we have set out ambitious goals. For example, after making an impressive $52.7
million in commercial real estate and business loans in 1998, we have now set
out to increase this to over $100 million in 1999. This lending, coupled with
the opportunity for substantial deposit accounts from local businesses in our
community, will improve the bank's bottom line.
To accommodate the needs of our business customers, Fidelity Federal
offers a comprehensive array of services, reflecting our commitment to
developing a complete business banking culture. Our selection of products and
services is designed to meet the full range of needs of today's business banking
customers:
. Cash Management. Fidelity Federal offers a variety of innovative services
to help local businesses improve their cash flow, including comprehensive
lock box and payment processing services. These services streamline the
business customer's accounting and data management, and enhance their
auditing controls. Using these services, businesses arrange for their
customer payments to be sent directly to a local processing center, which
credits payments to their accounts on a daily basis. This enables
customers to collect receivables without handling day-to-day processing,
eliminating the need for daily deposits. It also improves funds
availability, and allows the business to offer credit card and ACH options
for payment.
. Business Checking and Business Reserve Accounts. Our business checking
products are tailored to the needs of the specific customer, and are
designed to help companies manage their cash most effectively, regardless
of the size or activity level of their account. In this regard, Fidelity
Federal today offers the same business banking services as the
high-profile mega-banks, including account access through "FidFed Online,"
the Bank's on-line banking program. Services include currency and merchant
deposit services, night depository services, Mastercard and VISA merchant
accounts, Easy Pay payroll servicing through ADP, ACH Origination service,
federal tax and FICA deposit services, federal tax and loan electronic
funds transfer, wire and telephone transfers, and direct payroll deposit
and direct debit of recurring payments. Our Business Reserve Account is
designed to help companies get the maximum benefit from their cash on
hand, offering premium interest on cash reserves, compounded daily at
special tiered rates. In addition, recognizing that a company's most
valuable asset is its employees, we offer free checking to employees of
our business checking customers.
. Investment and Retirement Planning Services. Fidelity Federal offers
extensive experience in helping businesses and their employees to earn
tax-sheltered interest while saving for retirement. We offer a full range
of investment and retirement plans, including IRAs, SEP and SIMPLE
programs that are specifically tailored to meet the needs of business
customers.
6
<PAGE>
. Business Loans and Lines of Credit. At Fidelity Federal, we believe in
working one-on-one with our customers to find the loan product and
specifications that fit their situation precisely, rather than arbitrarily
assigning them a pre-formatted loan. Our business lending products are
designed to help businesses move quickly to take advantage of
opportunities and meet working capital requirements.
. Commercial Real Estate Loans. Drawing on our unrivaled expertise and
understanding of the local business area, we are ideally positioned to
make commercial real estate loans with reasonable business risk, to help
support the continued growth and expansion of local companies.
. SBA Loans. Our business lending experts have proven experience in helping
local businesses take advantage of federally supported financing programs.
. "Business Manager." Our unique "Business Manager" program offers accounts
receivable purchase, which speeds cash flow and enables businesses to
concentrate their efforts in areas where they are most productive.
Our role as a community business bank is also reflected in our Internet
presence, with our web site -www.fidfed.com - offering information on discounts
at over 600 merchants who are participating business partners in our highly
popular "Count On Us" checking account program. These partners are also listed
in a directory distributed to all "Count on Us" customers, and updated on a
semi-annual basis.
Fidelity Federal's commitment to business banking is underscored by our
community involvement and willingness to participate actively in the communities
we serve. We have been a key player in the business community for nearly 50
years. By being a good public citizen, we have been able to develop positive
relationships with many facets of the business community. Our networking efforts
through local chambers of commerce, business development boards as well as civic
and service organizations gives us many opportunities to meet and work with
other community business leaders. Over the years we have become an integral part
of the communities we serve, and we are now capitalizing on this position to
create new opportunities while simultaneously improving our communities.
These efforts, combined with the expertise of our staff, will allow us to
increase our business banking market share in the coming years. For personal and
business banking, we continue to tell the community they can "Count on Us."
[ILLUSTRATION FROM 1917 U.S. CURRENCY SILVER CERTIFICATE APPEARS HERE]
7
<PAGE>
[LOGO OF FIDELITY BANKSHARES, INC. APPEARS HERE]
Board of Directors
<TABLE>
<CAPTION>
[PHOTOS OF JOSEPH B. SHEAROUSE, JR., VINCE A. ELHILOW AND KEITH D.BEATY APPEAR HERE]
<S> <C> <C>
Joseph B. Shearouse, Jr. Vince A. Elhilow Keith D. Beaty
Chairman of the Board President Chief Executive Officer
Chief Executive Officer Implant Innovations, Inc.
<CAPTION>
[PHOTOS OF F. TED BROWN, JR., DONALD E. WARREN, M.D. AND KARL H. WATSON APPEAR HERE]
<S> <C> <C>
F. Ted Brown, Jr. Donald E. Warren, M.D. Karl H. Watson
President Retired Physician President
Ted Brown Real Estate, Inc. Quarries, Cement
and Construction
CSR Rinker
</TABLE>
Officers
<TABLE>
<S> <C> <C> <C>
Richard D. Aldred Joseph C. Bova Robert L. Fugate Patricia C. Clager
Executive Executive Executive Corporate
Vice President Vice President Vice President Secretary
Chief Financial Officer
</TABLE>
8
<PAGE>
Fidelity Federal Savings Bank of Florida
<TABLE>
<CAPTION>
Directors
<S> <C> <C>
Joseph. B. Shearouse, Jr. Vince A. Elhilow Keith D. Beaty
Chairman of the Board President
Chief Executive Officer
F. Ted Brown Donald E. Warren, M.D. Karl H. Watson
<CAPTION>
Directors Emeriti
<S> <C> <C>
Louis B. Bills, Sr. George B. Preston Raymond C. Tylander
Louis B. Bills Enterprises Chairman Emeritus President
Tylander Realty Corporation
<CAPTION>
Officers
EXECUTIVE VICE PRESIDENTS SENIOR VICE PRESIDENTS
<S> <C>
Richard D. Aldred David R. Hochstetler
Chief Financial Officer Director of Marketing/CRA Officer
Joseph C. Bova Brian C. Mahoney
Lending Operations Manager Controller
Christopher H. Cook Janice R. Newlands
Corporate Counsel Director of Human Resources
Robert L. Fugate Debra K. Schiavone
Banking Operations Manager Mortgage Loan Administration
J. Robert McDonald Shellie R. Schmidt
President, Fidelity Realty & Appraisal Services, Inc. Banking Administration
<CAPTION>
VICE PRESIDENT/CORPORATE SECRETARY Joseph B. Shearouse, III
Commercial Loan Manager
Patricia C. Clager
Administrative Assistant to the Chairman
Kenneth B. Stone, Jr.
Mortgage Loan Production
VICE PRESIDENT/ASSISTANT SECRETARY
Arlene Metz Daniel F. Turk
Administrative Assistant to the President Property and Risk Management
<CAPTION>
Martin County Advisory Board
<S> <C>
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
</TABLE>
[GRAPHIC APPEARS HERE]
9
<PAGE>
Locations
[MAPS OF FLORIDA AND COUNTIES APPEARS HERE]
10
<PAGE>
<TABLE>
<S> <C> <C>
[GRAPHIC Palm Beach County
APPEARS Downtown Office Wellington
HERE] 218 Datura Street 12000 W. Forest Hill Blvd. [GRAPHIC Future Branches
West Palm Beach APPEARS Abacoa
West Boynton Beach HERE] Donald Ross Road
45th Street 9875 Jog Road
4520 Broadway Devonshire
West Palm Beach West Delray Beach Ryder Cup Blvd.
5017 West Atlantic Ave.
Bear Lakes Downtown Lake Worth
701 Village Blvd. West Forest Hill Lucerne Ave. &
West Palm Beach 3989 Forest Hill Blvd. M Street
West Palm Beach
Boynton Beach Frederick Small
At I-95 & Woolbright Road WestLake Worth Military Trail &
1501 Corporate Drive 6535 Lake Worth Road Frederick Small Rd.
Century Corners Port St. Lucie
4835 Okeechobee Blvd. [GRAPHIC Martin County Port St. Lucie Blvd. &
West Palm Beach APPEARS HERE] Floresta Dr.
Forest Hill Jensen Beach St. Lucie West
399 Forest Hill Blvd. 1021 N.E. Jensen Bch. Blvd. Bethany Dr. &
West Palm Beach St. Lucie W. Blvd.
Kanner/Monterey
2401 South Kanner Hwy.
Jupiter Stuart
1240 W. Indiantown Rd. West Hypoluxo
Hypoluxo Rd. & Jog Rd.
Martin Square
Jupiter Farms 2980 S. Federal Highway West Linton
10058 Indiantown Rd. Stuart Linton Blvd. & Jog Rd.
Northlake [GRAPHIC Loan Production West Okeechobee
950 Northlake Blvd. APPEARS Offices State Road 7 &
Lake Park HERE] Okeechobee Blvd.
Vero Beach
Palm Beach 1701 A1A, Suite 216
245 Royal Poinciana Way [GRAPHIC Future
APPEARS Winn-Dixie
Boca Raton HERE] Supermarket
Palm Beach Gardens 7400 N. Federal Hwy. Branches
Garden Square Shoppes Colony Shoppes at
10973 North Military Trail Boca Bay, Suite C6 Admirals Crossings
[GRAPHIC Remote ATM Military Trail &
APPEARS South Florida Fairgrounds Frederick Small Rd.
Palm Springs HERE] West Palm Beach
3320 S. Congress Ave. Loxahatchee
Seminole Pratt Whitney Rd.
Royal Palm Beach Victoria Shoppes
100 Royal Palm Bch. Blvd. St. Lucie West &
Florida Turnpike
Singer Island
1200 East Blue Heron Blvd.
Riviera Beach
Tequesta
171 Tequesta Drive
</TABLE>
11
<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 common stock has been trading since January 7, 1994.
The Company's special purpose trust, Fidelity Capital Trust I, has outstanding
Trust Preferred Securities which are traded on the Nasdaq National Market under
the symbol "FFFLP."
INVESTOR RELATIONS
Vince A. Elhilow, President & CEO
Richard D. Aldred, Executive VP & 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 20, 1999, 10:00 a.m. (EDT)
Omni Hotel
1601 Belvedere Road
West Palm Beach, Florida 33401
GENERAL COUNSEL
Sned, Pruitt, D'Angio & Tucker, P.A.
218 Datura Street
West Palm Beach, Florida 33401
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick, P.C.
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
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).
BANK WEBSITE
Located on the Internet at www.fidfed.com
STOCKHOLDER INFORMATION
- ---------------------------------------------------------------
Quarter Ended
-------------
3/31/98 6/30/98 9/30/98 12/31/98
Stock Price
-----------------------------------------------------------
High $35.38 $31.63 $30.25 $24.00
Low $29.75 $27.00 $21.75 $18.75
Dividends
declared $ .225 $ .225 $ .25 $ .25
- ---------------------------------------------------------------
12
<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. 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.
Fidelity Bankshares, Inc. common stock currently trades on the Nasdaq National
Market system under the symbol "FFFL."
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
FOR THE YEAR (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 43,420 $ 53,261 $ 60,240 $ 72,272 $ 98,320
Interest expense 17,776 28,095 32,131 41,606 64,992
Net interest income 25,644 25,166 28,109 30,666 33,328
Net income 5,262 4,815 3,550 6,418 7,412
PER COMMON SHARE (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income:
Basic $ 0.81 $ 0.74 $ 0.54 $ 0.96 $ 1.12
Diluted 0.80 0.73 0.53 0.95 1.10
Book value 11.35 12.31 12.12 12.86 12.49
Stock price:
High 13.64 17.00 18.50 33.00 35.38
Low 9.09 10.23 11.75 17.50 18.75
Close 10.00 16.25 17.75 32.50 22.75
AVERAGE FOR THE YEAR (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $ 669,506 $ 741,777 $ 824,025 $ 995,528 $1,424,178
Loans receivable, net 441,573 490,088 605,507 735,463 917,647
Mortgage-backed and corporate debt securities 83,550 145,405 135,973 163,250 357,448
Investments (2) 103,715 63,605 35,530 44,146 70,674
Deposits 553,184 567,493 636,297 768,892 993,343
Borrowed funds 30,231 79,905 85,608 122,490 315,907
Stockholders' equity 72,546 77,356 81,339 84,217 88,974
SELECTED PERFORMANCE RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets .79% .65% .43% .64% .52%
Return on average equity 7.25% 6.22% 4.36% 7.62% 8.33%
Interest rate spread on average assets 3.85% 3.28% 3.30% 3.00% 2.35%
YEAR END (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 712,643 $ 779,620 $ 873,562 $1,220,267 $1,566,927
Investments (2) 82,410 43,108 41,740 61,720 66,557
Cash and amounts due from depository institutions 19,275 14,989 15,293 22,136 27,951
Loans receivable, net 456,543 532,333 661,700 861,257 977,166
Mortgage-backed and corporate debt securities 126,807 159,761 123,599 234,132 433,751
Deposits 538,235 595,180 694,718 872,340 1,120,746
Borrowed funds 88,319 86,549 83,621 242,871 338,871
Equity 74,404 81,266 81,723 87,387 84,999
</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.
13
<PAGE>
[ILLUSRATION FROM SILVER CERTIFICATE APPEARS HERE]
Illustration taken from
1889 Silver Certificate,
U.S. Currency
14
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
When used in this Annual 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.
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 $ 28.75 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 owns $ 28.75 million of Guaranteed
Preferred Beneficial Interests in the Company's Debentures due January 31, 2028,
purchased with the proceeds of the preferred securities issuance. Interest from
the Company's debentures 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 Company's debentures described above. The Company's 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 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 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 $ 27.3
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
15
<PAGE>
deposits and borrowings. The Bank's net income also is affected by its provision
for loan losses, as well as by the amount of other income, including income from
fees and service charges, net gains and losses on sales of investments, and
operating expense such as employee compensation and benefits, deposit insurance
premiums, occupancy and equipment costs, and income taxes. Earnings of the Bank
also are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Bank. In
particular, the general level of market rates tends to be highly cyclical. In
periods of high interest rates, earnings of the Bank are likely to be depressed,
which in turn would be likely to have a detrimental effect on the market value
of any investment in the 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 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 January 30, 1998, the Bank acquired an office building in downtown West Palm
Beach for $6.6 million from NationsBank/Bank America. 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.
Asset Quality and Emphasis on Residential Mortgage Lending. Since its inception,
the Bank has emphasized residential real estate financing as a portfolio lender,
and anticipates a continued commitment to financing the purchase or improvement
of residential real estate in its market area. To supplement local mortgage loan
originations, the Bank also invests in mortgage-backed securities that are
issued or guaranteed by the United States Government or agencies thereof. At
December 31, 1998, 83.2% of the Bank's total loan portfolio consisted of one-
to- four family residential mortgage loans, including residential construction
loans, and 26.0% 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.
16
<PAGE>
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, 1998, the Bank had $ 95.2 million in
commercial business and consumer loans, compared to $ 80.5 million at December
31, 1997.
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, 1998, total
interest-bearing liabilities maturing or repricing within one year exceeded
total interest-earning assets maturing or repricing in the same period by $ 31.4
million, representing a cumulative one-year gap ratio of a negative 2.0%.
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
$1.5 billion in loans and mortgage-backed securities at December 31, 1998,
$669.7 million, or 46.2%, 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.
Corporate Debt Securities. During 1998, the Bank began to diversify its
investments in mortgage-backed securities by purchasing investment grade rated,
floating rate trust preferred securities of other financial institutions. In
doing so, the Bank was relying on regulations which permit an investment of a
portion of its assets in "commercial paper and corporate debt securities." In
November of 1998, the Office of Thrift Supervision ("OTS") issued TB-73, which
among other matters stated concerns over institutions' investment in trust
preferred securities, citing increased interest rate risks as a result of the
predominant fixed rate nature of such securities and that some of these
securities could have their maturities extended at the issuer's option. As a
result, the OTS adopted limitations on the investment of such securities to 15%
of a regulated institution's equity, but adopted a procedure by which an
institution could appeal the limitation.
At December 31, 1998, the Bank's investment in trust preferred securities was
2.8% of its assets and 42.7% of its (Tier 1 (CORE)) regulatory capital. Most
issues of trust preferred securities appear to be fixed rate and unrated as to
credit risk, including Fidelity Bankshares, Inc.'s issue of "Guaranteed
Preferred Beneficial Interests in Company's Debentures." However, the Bank's
investment policy specifically restricts its investment in such securities to
$50 million, investment grade and floating rate to improve its interest rate
risk. The Bank has
17
<PAGE>
appealed to the OTS to permit it to continue its investment at current levels
and noted in its appeal that its investments had floating interest rates and the
issuer's did not have the option to extend the maturities. Management of the
Bank is unable to predict the outcome of its appeal. The trust preferred
securities have been classified as available for sale, and are recorded at fair
value in the accompanying consolidated financial statements at December 31,
1998.
Strong Retail Deposit Base. The Bank has had a relatively strong retail deposit
base drawn from the 22 full-service offices in its market area. At December 31,
1998, 28.9% of its deposit base of $ 1.1 billion 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. The Bank is in the process of
expanding its branch network through the opening of eleven new branch locations,
expected to open in 1999.
Capital Strength. While the Company's equity and ratio of equity to assets at
December 31, 1998 were $ 85.0 million and 5.4%, respectively, its wholly-owned
subsidiary, the Bank, had total equity at December 31, 1998, of $ 106.2 million.
As a result, the Bank's ratio of total equity to total assets was 6.8%. The Bank
intends to continue to leverage its capital through growth while maintaining
adequate capital ratios.
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 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 $ 7.4 million, or basic earnings per
share of $ 1.12, for the year ended December 31, 1998. Net income totaled $ 6.4
million, or basic earnings per share of $ .96, and $ 3.6 million, or basic
earnings per share of $ .54, for fiscal 1997 and 1996, respectively.
Interest Income. Interest income increased by $ 26.0 million, or 36.0%, to $
98.3 million for the year ended December 31, 1998 from $ 72.3 million for the
year ended December 31, 1997. The increase in interest income was principally
attributable to an increase in the average balance of interest-earning assets of
$ 402.9 million, to $ 1.3 billion from $ 942.9 million. The increase in average
interest-earning assets was primarily the result of a $ 194.2 million increase
in the average balance of mortgage-backed securities and a $ 182.2 million
increase in the average balance of loans. Also contributing to this increase was
an increase in the average balance of other investments of $ 20.3 million. While
the average balance on mortgage-backed securities increased to $ 357.4 million
in 1998 from $ 163.3 million in 1997, income derived from these investments was
partially offset by a decrease in the average yield on these securities to 6.10%
at December 31, 1998 from 6.84% at December 31, 1997.
Interest income on mortgage loans increased by $ 11.6 million, or 22.0%, to $
64.1 million for the year ended December 31, 1998 from $ 52.6 million for the
year ended December 31, 1997, primarily because of an increase in the average
balance of mortgage loans to $ 834.1 million from $ 668.9 million in 1997. The
increase in average loan balances reflects, as of December 1997, the effect of
acquiring $ 50.9 million of loans in the BankBoynton acquisition. Interest
income from consumer and other loans increased by $ 2.1 million in 1998, as
18
<PAGE>
compared to 1997. The principal reason for this increase in interest income was
a 25.6% increase in the average balance of such loans in 1998, as compared to
1997. Interest income on mortgage-backed securities increased by $ 10.6 million
to $ 21.8 million. The increase in interest income on mortgage-backed securities
was caused by an increase in the average balance of such securities by $ 194.2
million to $ 357.4 million which was partially offset by a decrease in the
average yield to 6.10% for the year ended December 31, 1998 from 6.84% for the
year ended December 31, 1997. Interest income on investment securities increased
by $ 290,000 as a result of an increase in the average balance of these
securities to $ 18.5 million in 1998 compared to $ 12.3 million in 1997. Income
from other investments, consisting of interest-earning deposits in other
financial institutions and FHLB Stock increased by $ 1.5 million to $ 3.5
million for the year ended December 31, 1998 compared to $ 2.0 million in 1997.
The increase in income from other investments is due to the average balances of
these investments increasing by $ 20.3 million or 63.9% in 1998, compared to
1997.
Interest income increased by $ 12.1 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 $ 165.8 million,
to $ 942.9 million from $ 777.0 million. The increase in average
interest-earning assets was primarily the result of a $ 108.7 million increase
in average mortgage loans and a $ 21.2 million increase in average consumer and
other loans. Also contributing to this increase was a $ 27.3 million increase in
the average balance of mortgage-backed securities. While the average balance on
mortgage-backed securities increased to $ 163.3 million in 1997 from $ 136.0
million in 1996, this was partially 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 $ 8.7 million, or 19.7%, to $
52.6 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 $ 668.9 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 $ 1.7 million in 1997,
as compared to 1996. The principal reason for this increase in interest income
was a 46.9% 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 balance of these
investments increasing by $ 8.7 million in 1997, or 37.5%, compared to 1996
which was 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.
Interest Expense. Interest expense increased by $ 23.4 million or 56.2%, to $
65.0 million for the year ended December 31, 1998 from $ 41.6 million for the
year ended December 31, 1997. The increase was attributable to an increase in
the average cost of the Bank's deposits to 4.54% from 4.40% and an increase in
the average balance of interest-bearing deposits of $ 224.5 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 $ 193.4
million to $ 315.9 million in 1998 compared to $ 122.5 million in 1997. The Bank
increased its FHLB advances primarily to fund its increased investments in
mortgage-backed and corporate debt securities.
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
19
<PAGE>
average cost of the Bank's deposits to 4.40% from 4.12% and an increase in the
average balance of interest-bearing deposits of $ 132.6 million. The average
balance of FHLB advances and other borrowings increased by $ 36.9 million to $
122.5 million in 1997 compared to $ 85.6 million in 1996. The Bank increased its
FHLB advances primarily to fund its increased investments in mortgage-backed
securities.
Net Interest Income. Net interest income increased to $ 33.3 million for the
year ended December 31, 1998 from $ 30.7 million for the same period in 1997,
representing an increase of $ 2.7 million, or 8.7%. This increase in net
interest income resulted from an increase in loans receivable to $ 977.2 million
at December 31, 1998 from $ 861.3 million at December 31, 1997. This was
partially offset by a decrease in the Bank's average interest rate spread to
2.35% from 3.00% at December 31, 1998 and 1997, respectively.
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 3.00% from 3.30% at December 31, 1997
and 1996, respectively.
Provision for Loan Losses. The Bank's provision for loan losses decreased by $
93,000 to $ 77,000 for the year ended December 31, 1998 from $ 170,000 for the
year ended December 31, 1997, principally as the result of payoffs on loans for
which the Bank had previously provided specific loan loss allowances. The Bank's
total allowance for loan losses at December 31, 1998 of $ 3.2 million was deemed
adequate by management, in light of the risks inherent in the Bank's loan
portfolio. The Bank's ratio of non performing loans to total loans was .33% and
.38% at December 31, 1998 and 1997, respectively.
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 provision for loan losses in 1997 and 1996 reflect more normal
circumstances. The Bank's total allowance for loan losses at December 31, 1997
was $ 3.3 million.
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 to increase in future periods.
Other Income. Other income for the year ended December 31, 1998 was $ 8.7
million, a $ 3.8 million increase when compared to 1997. This increase was
partially due to a $ 2.3 million increase in the gain on sale of loans,
mortgage-backed securities and investments to $ 2.5 million in 1998 from $
190,000 in 1997. The Company experienced an increase in the gain on sale of
loans of $ 950,000 and an increase in the gain on sale of mortgage-backed
securities of $ 1.4 million in 1998 compared to 1997. This increase in other
income also resulted from an increase in the Bank's servicing income and other
fees of $ 1.0 million and an increase in other miscellaneous income of $
476,000. The reasons for the increase in miscellaneous income included $ 615,000
of rental income received from NationsBank for leasing back most of the downtown
property acquired from them in January of 1998 and recognition of income from
the maturing of a $ 355,000 option on the sale of the Bank's downtown property,
which amounts were offset by non-recurring income of $ 702,000 in 1997.
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 from an
increase in servicing income and other fees of $ 405,000 and
20
<PAGE>
an increase in other miscellaneous income of $ 654,000. The increase in
miscellaneous income was due to a gain of $ 702,000 on the sale of the Company's
interest in its data processing servicer. These increases were offset by
decreases in net gain on sale of loans, mortgage-backed securities and
investments of $ 1.0 million.
Operating Expense. Operating expense increased by $ 5.5 million or 22.5% to $
29.7 million for the year ended December 31, 1998 as compared to the year ended
December 31, 1997. Employee compensation and benefits represent $ 2.5 million of
this increase. The reasons for the increase in employee compensation and
benefits are additional personnel to staff two offices that were opened
subsequent to June, 1997, additional customer service personnel hired as a
result of the Bank's 28% increase in deposits during the year and the hiring of
additional commercial loan personnel, together with normal salary increases. In
addition, as discussed elsewhere, herein, the Bank hired and began to train 19%
of the personnel necessary to staff the eleven new branches it expects to open
in 1999. As a result, the Bank's full time equivalent personnel increased by 88
in 1998 from 305 to 393, a 29% increase. The Bank's occupancy and equipment
costs were $ 1.3 million more than in 1997. Contributing to this increase are
approximately $ 300,000 pertaining to operating and depreciation expenses of the
Bank's new office building acquired in January, 1998, $ 81,000 relating to rent
expenses on certain properties acquired in the BankBoynton acquisition and
approximately $ 122,000 in costs to operate new branch offices and new loan
production offices. In addition, the Bank incurred additional depreciation
expense of $ 247,000 principally as the result of the installation of new
computer equipment. Also contributing to the increase in operating expenses were
increases in marketing costs of $ 134,000, federal deposit insurance premium of
$ 92,000 and other operating expenses of $ 1.3 million, which includes $ 162,000
of amortization of goodwill related to the acquisition of BankBoynton.
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.
Income Taxes. Federal and state income tax expense increased by $ 89,000 to $
4.8 million for the year ended December 31, 1998 compared to 1997. This increase
was attributable to an increase of $ 1.1 million in income before provision for
income tax to $ 12.3 million in 1998 from $ 11.2 million in 1997 which was
partially offset by a decrease in the Company's effective income tax rate.
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 of $ 5.1 million in income before
provision for income tax to $ 11.2 million in 1997 from $ 6.1 million in 1996.
21
<PAGE>
<TABLE>
<CAPTION>
Average Balance Sheet
For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1997 1998
====================================================================================================================================
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 .............. $560,233 $ 43,923 7.84% $668,943 $ 52,589 7.87% $ 834,065 $ 64,146 7.69%
Consumer and other loans .... 45,274 4,074 9.00% 66,520 5,797 8.71% 83,582 7,850 9.39%
Mortgage-backed
securities (1) ............ 135,973 9,949 7.32% 163,250 11,159 6.84% 357,448 21,794 6.10%
Investment securities ....... 12,391 804 6.49% 12,337 758 6.14% 18,527 1,048 5.66%
Other investments (2) ....... 23,139 1,490 6.44% 31,809 1,969 6.19% 52,147 3,482 6.68%
-------- -------- -------- -------- ---------- --------
Total interest-earning
assets ................... 777,010 60,240 7.75% 942,859 72,272 7.67% 1,345,769 98,320 7.31%
Non-interest-earning assets.... 47,015 52,669 78,409
-------- -------- ----------
Total assets............. $824,025 $995,528 $1,424,178
======== ======== ==========
Interest-bearing liabilities:
Deposits.................. $636,297 $ 26,239 4.12% $768,892 $33,856 4.40% $ 993,343 $ 45,128 4.54%
Borrowed funds............ 85,608 5,892 6.88% 122,490 7,750 6.33% 315,907 19,864 6.29%
-------- -------- -------- ------- ---------- --------
Total interest-bearing
liabilities.......... 721,905 32,131 4.45% 891,382 41,606 4.67% 1,309,250 64,992 4.96%
-------- ------- --------
Non-interest-bearing
liabilities................... 20,781 19,929 25,954
-------- -------- ----------
Total liabilities........ 742,686 911,311 1,335,204
Net worth...................... 81,339 84,217 88,974
-------- -------- ----------
Total liabilities and net
worth................ $824,025 $995,528 $1,424,178
======== ======== ==========
Net interest income............ $ 28,109 $30,666 $33,328
======== ======= ========
Net interest rate spread (3)... 3.30% 3.00% 2.35%
===== ===== =====
Net yield on interest-earning
assets (4)..................... 3.62% 3.26% 2.48%
===== ===== =====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities.................. 107.6% 105.7% 102.8%
===== ===== =====
</TABLE>
(1) Includes corporate debt securities.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(3) Net interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
The following table shows the yields on interest earning assets and interest
bearing liabilities as of the dates indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
At December 31, 1997 At December 31, 1998
========================================================================
Actual Actual
Balance Yield/Cost Balance Yield/Cost
========================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans...................... $ 779,683 7.85% $ 888,228 7.71%
Consumer and other loans............ 81,574 8.95% 88,938 8.63%
Mortgage-backed securities (1)...... 234,132 7.11% 433,751 6.11%
Investment securities............... 16,077 6.16% 18,824 6.02%
Other investments (2)............... 45,643 6.34% 47,733 5.75%
---------- ----------
Total interest-earning assets..... 1,157,109 7.71% 1,477,474 7.21%
Non-interest-earning assets............. 63,158 89,453
---------- ----------
Total assets...................... $1,220,267 $1,566,927
========== ==========
Interest-bearing liabilities:
Deposits............................ $ 872,340 4.50% $1,120,746 4.42%
Borrowed funds...................... 242,871 6.42% 338,871 6.15%
---------- ----------
Total interest-bearing liabilities 1,115,211 4.93% 1,459,617 4.82%
Non-interest-bearing liabilities........ 17,669 22,311
---------- ----------
Total liabilities................. 1,132,880 1,481,928
Net worth............................... 87,387 84,999
---------- ----------
Total liabilities and net worth... $1,220,267 $1,566,927
========== ==========
Net interest rate spread................ 2.78% 2.39%
====== ======
</TABLE>
(1) Includes corporate debt securities.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
22
<PAGE>
Average Balance Sheet
The previous tables set 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.
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,
-------------------------------------------------------------------------------------
1997 vs. 1996 1998 vs. 1997
-------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
--------------------------------- Total ------------------------------- Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
-------------------------------------------------------------------------------------
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans............... $8,523 $ 120 $ 23 $8,666 $12,981 $(1,142) $ (282) $11,557
Consumer and other loans..... 1,912 (129) (60) 1,723 1,487 451 115 2,053
Mortgage-backed securities... 1,996 (655) (131) 1,210 13,274 (1,205) (1,434) 10,635
Investment securities........ (4) (42) - (46) 380 (60) (30) 290
Other investments............ 559 (58) (22) 479 1,259 155 99 1,513
------ ------- ------ ------ ------- ------- ------- -------
Total interest-earning assets 12,986 (764) (190) 12,032 29,381 (1,801) (1,532) 26,048
------ ------- ------ ------ ------- ------- ------- -------
Interest expense:
Deposits..................... 5,468 1,778 371 7,617 9,883 1,075 314 11,272
Borrowed funds............... 2,539 (476) (205) 1,858 12,238 (48) (76) 12,114
------ ------- ------ ------ ------- ------ ------- -------
Total interest-bearing 8,007 1,302 166 9,475 22,121 1,027 238 23,386
------ ------- ------ ------ ------- ------- ------- -------
liabilities.....................
Change in net interest income... $4,979 $(2,066) $ (356) $2,557 $ 7,260 $(2,828) $(1,770) $ 2,662
====== ======= ====== ====== ======= ======= ======= =======
</TABLE>
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 December 31, 1998, the Company does not
own any trading assets, other than $ 443,000 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 December 31, 1998, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.
23
<PAGE>
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, 1998, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $ 31.4 million, representing a cumulative one-year gap ratio
of a negative 2.0%. 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.
24
<PAGE>
Gap Table
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, 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, NOW, and money market accounts, which totaled $ 323.8 million
at December 31, 1998, 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 Over 5
Months 3-6 Months 1 Year 1-3 Years 3-5 Years 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.. $42,742 $36,361 $51,782 $80,132 $38,782 $19,822 $269,621
Lagging market index ARMs.. 26,190 20,146 25,104 1,556 1,118 - 74,114
Fixed rate................. 55,129 25,176 37,780 114,767 79,506 152,473 464,831
Commercial and multi-family:
ARMs....................... 22,602 5,763 15,928 7,116 6,296 17 57,722
Fixed rate................. 8,901 471 854 2,476 1,547 2,631 16,880
Consumer and commercial 56,403 4,823 8,143 17,598 5,655 2,989 95,611
business........................
Investment securities......... 32,075 2,000 10,890 4,980 445 358 50,748
FHLB stock.................... 15,658 - - - - - 15,658
Mortgage-backed and corporate
debt securities:
Adjustable.................. 274,608 8,250 - - - - 282,858
Fixed....................... 6,811 6,157 11,560 37,652 26,949 56,323 145,452
------- ------- ------- ------- ------- ------- -------
Total interest-earning
assets (1).................. 541,119 109,147 162,041 266,277 160,298 234,613 1,473,495
------- ------- ------- ------- ------- ------- ---------
Non interest-bearing
liabilities:
Non interest-bearing deposits 5,163 5,163 10,326 21,570 8,770 6,010 57,002
------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Passbook accounts............. 75,478 17,082 34,162 214 155 403 127,494
NOW accounts.................. 14,095 12,591 25,182 14,586 9,636 18,758 94,848
Money market accounts......... 19,172 4,815 9,628 6,630 2,585 1,651 44,481
Certificate accounts.......... 195,573 176,690 155,816 229,672 39,170 - 796,921
Borrowed funds................ 8,818 41,848 32,073 41,445 185,951 28,736 338,871
------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities..................... 313,136 253,026 256,861 292,547 237,497 49,548 1,402,615
------- ------- ------- ------- ------- ------- ---------
Interest sensitivity gap........ $222,820 $(149,042) $(105,146) $(47,840) $(85,969) $179,055 $13,878
======== ========= ========= ======== ======== ======== =======
Cumulative interest-sensitive
gap............................. $222,820 $73,778 $(31,368) $(79,208) $(165,177) $13,878 $13,878
======== ======= ======== ======== ========= ======= =======
Cumulative interest sensitivity
gap to total assets............. 14.22% 4.71% (2.00)% (5.05)% (10.54)% .89% .89%
======== ======== ======= ======= ======= ======== ========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities........... 170.00% 112.80% 96.27% 93.22% 88.26% 100.94% 100.94%
======== ======== ======== ======== ======== ======== ========
</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.
25
<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, 1998.
The OTS assumptions could vary substantially from the actual prepayment rates
experienced by the Bank. The assumptions are as follows:
Annual
Prepayment
Type Rate
- --------------------------------------------------------------------------
ARM loans--current market index 13%-24%
ARM loans--lagging market index 13%-24%
Fixed-rate one- to four-family loans with maturities
equal to or greater than five years:
Below 7% interest rate 9%-12%
7.00% to 7.99% 12%-18%
8.00% to 8.99% 17%-26%
9.00% to 9.99% 23%-35%
10.00% and over 26%-37%
Mortgage-backed and related securities with maturities
equal to or greater than five years:
Below 7% interest rate 9%-12%
7.00% to 7.99% 12%-18%
8.00% to 8.99% 17%-26%
9.00% to 9.99% 23%-35%
10.00% and over 26%-37%
Other residential and all non-residential loans 12%-25%
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, 1998.
<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 54% 54% 19% 19% 19% 19%
Passbook, club accounts 95% 95% 15% 15% 15% 15%
Money market deposit accounts 60% 60% 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.
26
<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, 1998,
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 7.12% during the month of December 1998 and 5.91%
during the month of December 1997. Liquidity ratios averaged 5.71% and 7.05% for
the years ended December 31, 1998 and 1997, 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 $ 32.1 million and $ 32.4 million at December 31, 1998 and 1997,
respectively. Other assets qualifying for liquidity outstanding at December 31,
1998, and 1997, amounted to $ 33.5 million and $ 24.8 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, 1998, the Bank had $ 303.1 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, 1998, the Bank had outstanding loan commitments of $ 38.6
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, 1998, totaled $ 254.2
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 1998, the Company's assets increased by $ 346.7 million. Investment in
mortgage-backed securities increased by $ 155.1 million, the Bank invested $
44.5 million in corporate debt securities and loans receivable increased in the
amount of $ 115.9 million. Cash and cash equivalents increased by $ 4.2 million.
In addition, the
27
<PAGE>
Bank increased its investment in Federal Home Loan Bank stock by $ 3.7 million,
increased its investment in office properties and equipment, primarily for new
office sites, by $ 16.3 million, while all other assets increased by $ 6.9
million. The Bank continued to experience deposit inflows during 1998 of $ 248.4
million, principally as a result of continued aggressive pricing of its
certificates of deposit. Together, with an increase in equity, net of the change
in accumulated other comprehensive income of $ 2.4 million, the issue of $ 28.8
million in trust preferred securities and additional borrowings from the Federal
Home Loan Bank of $ 64.0 million, provided the principal funds for the Company's
asset growth.
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 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 accumulated other
comprehensive income 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.
Fidelity's 1999 Expansion Plans
During 1999, Fidelity Federal Savings Bank plans to relocate one full service
branch and open eleven de novo branches, assuming no delays in obtaining
building permits or construction. The new branches, eight full service and three
"supermarket" branches, are expected by management, based upon demographic
studies, to be accretive to income within eighteen to twenty four months of
their opening. These branches are expected to be opened periodically throughout
1999. Typical branches, of the type being constructed, within the Bank's current
branch system cost approximately $ 600,000, annually, per branch to operate,
which includes depreciation, personnel costs and other costs incident to their
operation. Accordingly, Management believes that the Bank will incur additional
operating expenses of approximately $ 3.3 million, while income earned on the
deposits in these new branches will be limited in 1999. Delays in opening the
branches or additional unanticipated costs could result in higher operating
costs.
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 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
28
<PAGE>
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 $ 1.5 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 by the end of March 1999, 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. Consequently, the Bank has
contacted other providers of such data processing services, who assert they are
year 2000 ready, to determine the latest possible date the Bank could convert to
their systems.
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.
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.
29
<PAGE>
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, 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
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and, accordingly, would apply to the
Company beginning on April 1, 2000. 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 and accordingly would apply
to the Company for the quarter ended March 31, 1999. 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.
30
<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, 1997 and 1998, and
the related consolidated statements of operations, comprehensive operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1997 and 1998 and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
As discussed in Note 13 to the consolidated financial statements, the Company
changed its method of accounting for the Company's Senior Management Performance
Incentive Award Program to comply with the provisions of EITF 97-14.
Certified Public Accountants
West Palm Beach, FL
February 24, 1999
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AT DECEMBER 31, 1997 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1998
================================
ASSETS (In Thousands)
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 22,136 $ 27,951
Interest-bearing deposits................................................ 33,688 32,075
----------- -----------
Total cash and cash equivalents (Notes 1, 21)........................ 55,824 60,026
ASSETS AVAILABLE FOR SALE (At Fair Value):
(Notes 1, 2, 3, 4, 21)
Government and agency securities......................................... 16,077 18,824
Mortgage-backed securities............................................... 234,132 389,263
Corporate debt securities................................................ - 44,488
----------- -----------
Total assets available for sale...................................... 250,209 452,575
LOANS RECEIVABLE, Net of allowance for loan losses - 1997, $3,294;
1998, $3,226 (Notes 1, 5, 21)............................................ 861,257 977,166
OFFICE PROPERTIES AND EQUIPMENT, Net (Notes 1, 6)............................. 21,440 37,708
FEDERAL HOME LOAN BANK STOCK, At cost......................................... 11,955 15,658
REAL ESTATE OWNED, Net (Notes 1, 7)........................................... 967 907
ACCRUED INTEREST RECEIVABLE (Note 8).......................................... 6,404 7,549
DEFERRED INCOME TAX ASSET (Notes 1,12)........................................ - 1,443
OTHER ASSETS (Notes 1, 12, 13)................................................ 12,211 13,895
----------- -----------
TOTAL ASSETS $ 1,220,267 $ 1,566,927
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS (Notes 9, 21)........................................................ $ 872,340 $ 1,120,746
OTHER BORROWED FUNDS.......................................................... 3,780 6,981
ADVANCES FROM FEDERAL HOME LOAN BANK (Note 10)................................ 239,091 303,140
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 2,783 3,081
DRAFTS PAYABLE (Note 1)....................................................... 5,349 9,605
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
DEBENTURES (Note 11)..................................................... - 28,750
OTHER LIABILITIES (Notes 1, 12, 13)........................................... 9,038 9,625
DEFERRED INCOME TAXES (Notes 1, 12)........................................... 499 -
----------- -----------
TOTAL LIABILITIES........................................................ 1,132,880 1,481,928
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 17, 21)
STOCKHOLDERS' EQUITY (Notes 1, 12, 13, 14, 15):
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 8,200,000 authorized shares:
outstanding 6,784,958 and 6,803,042 at December 31, 1997 and 1998,
respectively............................................................. 678 680
ADDITIONAL PAID IN CAPITAL.................................................... 38,347 40,535
RETAINED EARNINGS - substantially restricted.................................. 47,943 52,018
TREASURY STOCK - at cost (487,029 shares at December 31, 1998)................ - (7,258)
COMMON STOCK PURCHASED BY:
Employee stock ownership plan............................................ (986) (658)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(Net of applicable income taxes) (Notes 1, 2, 3, 21)..................... 1,405 (318)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY............................................... 87,387 84,999
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 1,220,267 $ 1,566,927
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
===============================================
(In Thousands)
<S> <C> <C> <C>
Interest income:
Loans............................................................. $ 47,997 $ 58,386 $ 71,996
Investment securities............................................. 804 758 1,048
Other investments................................................. 1,490 1,969 3,482
Mortgage-backed and corporate debt securities..................... 9,949 11,159 21,794
---------- ---------- ----------
Total interest income......................................... 60,240 72,272 98,320
---------- ---------- ----------
Interest expense:
Deposits (Note 9) ................................................ 26,239 33,856 45,128
Advances from Federal Home Loan Bank and
other borrowings (Notes 10 and 11)............................ 5,892 7,750 19,864
---------- ---------- ----------
Total interest expense........................................ 32,131 41,606 64,992
---------- ---------- ----------
Net interest income.................................................... 28,109 30,666 33,328
Provision for loan losses (Note 5) .................................... 164 170 77
---------- ---------- ----------
Net interest income after provision for loan losses.................... 27,945 30,496 33,251
---------- ---------- ----------
Other income:
Servicing income and other fees................................... 3,201 3,606 4,598
Net gain on sale of loans, mortgage-backed securities and
investments................................................... 1,215 190 2,502
Miscellaneous..................................................... 460 1,114 1,590
---------- ---------- ----------
Total other income............................................ 4,876 4,910 8,690
---------- ---------- ----------
Operating expense:
Employee compensation and benefits................................ 12,776 13,900 16,422
Occupancy and equipment........................................... 4,648 4,908 6,231
Loss (gain) on real estate owned.................................. (69) (153) (72)
Marketing......................................................... 604 633 767
Federal deposit insurance premium................................. 4,958 464 556
Miscellaneous..................................................... 3,792 4,483 5,783
---------- ---------- ----------
Total operating expense....................................... 26,709 24,235 29,687
---------- ---------- ----------
Income before provision for income taxes............................... 6,112 11,171 12,254
---------- ---------- ----------
Provision (benefit) for income taxes: (Note 12)
Current........................................................... 3,417 5,573 5,579
Deferred.......................................................... (855) (820) (737)
---------- ---------- ----------
Total provision for income taxes.............................. 2,562 4,753 4,842
---------- ---------- ----------
Net income............................................... $ 3,550 $ 6,418 $ 7,412
========== ========== ==========
Earnings per share: (Note 19)
Basic............................................................. $ .54 $ .96 $ 1.12
========== ========== ==========
Diluted........................................................... $ .53 $ .95 $ 1.10
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
================================================
(In Thousands)
<S> <C> <C> <C>
Net Income................................................................ $ 3,550 $ 6,418 $ 7,412
Other comprehensive income, net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period.......... (1,277) 623 (910)
Less: reclassification adjustment for gains realized in net
income................................................... (525) - (813)
----------- ----------- -----------
Comprehensive income (Note 20)............................................ $ 1,748 $ 7,041 $ 5,689
=========== =========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Recogni- Other
Retained Employee tion Comprehen-
Additional Earnings- Stock and sive
Common Paid In Substantially Treasury Ownership Retention Income
Stock Capital Restricted Stock Plan Plan (Loss) Total
========= ========= =========== ======== ========= ======== ========== ========
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 14) ..... 5 387 - - - - - 392
Common Stock retired .................. (2) (285) - - - - - (287)
Recognition of unrealized decrease in
fair value of assets available for
sale, net of income taxes ........ - - - - - - (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 14) ..... 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 ........ - - - - - - 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
Net Income for the year ended
December 31, 1998 ................ - - 7,412 - - - - 7,412
Stock Options exercised (Note 14) ..... 2 323 - - - - - 325
Common Stock retired .................. - (115) - - - - - (115)
Purchase of treasury stock ............ - - - (5,752) - - - (5,752)
Reclassification of common stock held
by SMPIAP and related obligation
(Note 13) ........................ - 1,506 - (1,506) - - - -
Recognition of unrealized decrease in
fair value of assets available for
sale, net of income taxes ........ - - - - - - (1,723) (1,723)
Amortization of deferred compensation -
Employee Stock Ownership Plan .... - 474 - - 328 - - 802
Cash dividends declared ............... - - (3,337) - - - - (3,337)
--------------------------------------------------------------------------------------------
Balance - December 31, 1998 ........... $ 680 $ 40,535 $ 52,018 $ (7,258) $ (658) $ - $ (318) $ 84,999
============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
============================================
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 3,550 $ 6,418 $ 7,412
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation........................................................ 1,238 1,258 1,796
ESOP and Recognition and Retention Plan compensation expense........ 734 765 803
Accretion of discounts, amortization of premiums and goodwill, and
other deferred yield items......................................... (820) (414) 1,405
Provision for loan losses........................................... 164 170 77
Provisions for losses and net (gains) losses on sales of real estate
owned.............................................................. (110) (189) (48)
Net (gain) loss on sale of:
Loans......................................................... (340) (190) (1,147)
Corporate debt securities..................................... - - (109)
Mortgage-backed securities.................................... (875) - (1,246)
Office properties and equipment............................... - - 43
Other assets.................................................. - (702) -
(Increase) decrease in accrued interest receivable..................... 13 (1,507) (1,145)
(Increase) decrease in other assets.................................... 165 (3,409) (1,654)
Increase (decrease) in drafts payable.................................. (706) 2,392 4,256
Increase (decrease) in deferred income taxes........................... (1,974) (387) 673
Increase (decrease) in other liabilities............................... (321) 661 566
-------- -------- --------
Net cash from operating activities............................ 718 4,866 11,682
-------- -------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (124,601) (125,911) (125,997)
Principal payments received on mortgage-backed securities.............. 23,608 22,325 125,105
Purchases of:
Loans............................................................... (21,153) (35,647) (45,157)
Mortgage-backed securities.......................................... (9,962) (131,956) (310,581)
Corporate debt securities........................................... - - (55,343)
Government and agency securities.................................... (10,029) (13,566) (5,347)
Federal Home Loan Bank stock........................................ - (5,283) (4,974)
Office properties and equipment..................................... (3,985) (4,724) (18,277)
Proceeds from sales of:
Loans............................................................... 17,357 11,824 54,850
Federal Home Loan Bank stock........................................ - - 1,271
Corporate debt securities........................................... - - 9,843
Real estate acquired in settlement of loans and held for investment. 1,195 1,647 1,470
Mortgage-backed securities available for sale....................... 20,516 - 27,290
Other Assets........................................................ - 798 -
Proceeds from maturities of investment securities...................... 28,490 7,000 2,660
Cash used to purchase BankBoynton, a Federal Savings Bank
net of cash received relating to purchase..................... - (4,367) -
Other.................................................................. 845 2,004 1,465
-------- -------- --------
Net cash used for investing activities........................ (77,719) (275,856) (341,722)
-------- --------- --------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Common stock options exercised......................................... 105 308 79
Purchase of treasury stock............................................. - - (5,752)
Sale of subordinated debentures, net................................... - - 27,277
Cash dividends paid.................................................... (1,971) (2,566) (3,316)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 8,046 27,858 58,568
Certificates of deposit............................................. 91,492 108,033 189,838
Advances from Federal Home Loan Bank................................ (2,652) 147,874 64,049
Other borrowed funds................................................ - 3,780 3,201
ESOP Loan........................................................... (276) (1,104) -
Advances by borrowers for taxes and insurance....................... (286) 211 298
-------- -------- --------
Net cash from financing activities............................ 94,458 284,394 334,242
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 17,457 13,404 4,202
CASH AND CASH EQUIVALENTS, Beginning of year........................... 24,963 42,420 55,824
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of year................................. $ 42,420 $ 55,824 $ 60,026
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- --------------------------------------------------------------------------------
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. 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 5 for the composition of the mortgage loan portfolio at December 31, 1997
and 1998). 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
36
<PAGE>
condition of borrowers or guarantors, additional collateral provided, current
and anticipated economic conditions, appraisals, cost of disposal, and holding
costs. While management uses the best information available to make such
evaluations, future adjustments to the allowance may be necessary, which may be
material, if economic conditions differ substantially from the assumptions used
in the evaluation. If additions to the original estimate of the allowance for
loan losses are deemed necessary, they will be reported in earnings in the
period in which they become reasonably estimable.
The Bank complies with 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 considered
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
37
<PAGE>
of goodwill, included in other assets at December 31, 1997 and 1998 was
$ 2,796,000 and $ 2,394,000, respectively.
Drafts Payable - Drafts payable represent checks drawn by the Bank on a third
party payer, for savings account withdrawals and payment of the Bank's expenses.
Under the agreement between the Bank and its third party payer, the Bank funds
the checks written on the day following their issuance.
Loan Origination Fees and Costs - Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
of the related loan. Deferred loan fees and costs are amortized to income over
the estimated life of the loans using the interest method.
Unearned discounts on consumer loans are amortized to income using the interest
method.
Commitment Fees - Non-refundable fees received for commitments to make or
purchase loans in the future, net of direct costs of underwriting the
commitments, are deferred and, if the commitment is exercised, recognized over
the life of the loan as an adjustment of yield. If the commitment expires
unexercised, income is recognized upon expiration of the commitment. Direct loan
origination costs incurred to make a commitment to originate a loan are offset
against any related commitment fee and the net amount recognized.
Pension and Retirement Plans - Benefits are accounted for in accordance with
Statement of Financial Accounting Standards No. 87, entitled "Employers'
Accounting for Pensions" ("SFAS No. 87"). Net periodic pension costs (income)
are actuarially determined.
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 12).
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 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 has adopted SFAS No. 130, which has resulted
in a change in the financial statement presentation but did not have an impact
on the Company's consolidated financial position, results of operations or cash
flows. All prior years were reclassified to comply with SFAS No. 130. Management
has evaluated SFAS No. 131 and has determined the Company does not operate
reportable segments as defined by SFAS No. 131.
38
<PAGE>
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
adopting SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and, accordingly, would apply to the Company
beginning on April 1, 2000. 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 No. 134 is effective
for the first quarter beginning after December 15, 1998 and accordingly would
apply to the Company for the quarter ended March 31, 1999. 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.
Reclassifications - Certain amounts in the 1996 and 1997 consolidated financial
statements have been reclassified to conform to the 1998 presentation.
39
<PAGE>
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, 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%
========
December 31, 1998:
Municipal Bonds................................. $ 2,883 $ 25 $ 8 $ 2,900
United States Government and agency securities.. 15,795 129 - 15,924
-------- -------- --------- ---------
Total........................................... $ 18,678 $ 154 $ 8 $ 18,824
======== ======== ========= =========
Weighted average interest rate.................. 5.08%
========
</TABLE>
The following table sets forth the contractual maturity of the Bank's securities
available for sale at December 31, 1997 and 1998.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
-------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
=============================================================
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less............................. $ 660 $ 661 $ 12,897 $ 13,006
Due after one year, through two years............... 15,340 15,416 5,781 5,818
-------- ------- -------- --------
Total.......................................... $ 16,000 $16,077 $ 18,678 $ 18,824
======== ======= ======== ========
</TABLE>
The Bank had total Government and Agency securities available for sale pledged
at December 31, 1997 and 1998 of $ 12,175,000 and $ 15,394,000, respectively. Of
the $ 15,394,000 of securities pledged at December 31, 1998, $ 700,000 was
pledged for customer accounts that exceeded $ 100,000, $ 2,000,000 was pledged
as collateral for "Treasury Tax and Loan" (TT&L) accounts held for the benefit
of the federal government, and the remaining $ 12,694,000 was pledged as
collateral for customer repurchase agreements.
There were no sales of government and agency securities during the years ended
December 31, 1996, 1997 and 1998.
40
<PAGE>
3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale at December 31, 1997 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
================================================================================
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 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
========= ========= ======== =========
December 31, 1998:
FHLMC-fixed rate................. $ 64,255 $ 378 $ 412 $ 64,221
FNMA-fixed rate.................. 64,115 577 141 64,551
GNMA-fixed rate.................. 20,311 112 29 20,394
FHLMC CMO-fixed rate............. 58,243 29 29 58,243
FHLMC-adjustable rate............ 11,213 151 57 11,307
FNMA-adjustable rate............. 11,485 157 13 11,629
GNMA-adjustable rate............. 996 - 1 995
FNMA CMO-adjustable rate......... 44,867 246 253 44,860
FHLMC CMO-adjustable rate........ 91,630 387 569 91,448
FHLMC CMO-fixed rate............. 21,642 38 65 21,615
--------- --------- -------- ---------
Total......................... $ 388,757 $ 2,075 $ 1,569 $ 389,263
========= ========= ======== =========
</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
realized losses. There were no sales of mortgage-backed securities classified as
available for sale during 1997. There were $ 26.0 million in sales of
mortgage-backed securities classified as available for sale during the year
ended December 31, 1998 resulting in proceeds of $ 27.3 million, gross realized
gains of $ 1.2 million and no gross realized losses.
At December 31, 1998 the Bank had $ 106.7 million of mortgage-backed securities
pledged to the State of Florida as collateral for certificates of deposit.
4. CORPORATE DEBT SECURITIES AVAILABLE FOR SALE
Investment grade, adjustable rate and trust preferred securities of other
financial institutions 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, 1998
Total.......................................... $ 45,653 $ - $ 1,165 $ 44,488
======== ======== ========= =========
Weighted average interest rate................. 6.34%
========
</TABLE>
41
<PAGE>
All of the Corporate debt securities available for sale contractually mature in
the years 2027 or 2028.
During 1998 there were $ 9.7 million in sales of corporate debt securities
classified as available for sale resulting in gross proceeds of $ 9.8 million,
gross realized gains of $ 109,000 and no gross realized losses.
During 1998, the Bank began to diversify its investments in mortgage-backed
securities by purchasing investment grade rated, floating rate trust preferred
securities of other financial institutions. In doing so, the Bank was relying on
regulations which permit an investment of up to 35% of its assets in "commercial
paper and corporate debt securities." In November of 1998, the Office of Thrift
Supervision ("OTS") issued TB-73, which among other matters stated concerns over
institutions' investment in trust preferred securities, citing increased
interest rate risks as a result of the predominant fixed rate nature of such
securities and that some of these securities could have their maturities
extended at the issuer's option. As a result, the OTS adopted limitations on the
investment of such securities to 15% of a regulated institution's equity, but
adopted a method by which an institution could appeal the limitation.
At December 31, 1998, the Bank's investment in trust preferred securities was
2.8% of its assets and 42.7% of its regulatory capital. Most issues of trust
preferred securities appear to be fixed rate and unrated as to credit risk
including Fidelity Bankshares, Inc.'s issue of "Guaranteed Preferred Beneficial
Interests in Company's Debentures." However, the Bank's investment policy
specifically restricts its investment in such securities to $ 50 million,
investment grade and floating rate to improve its interest rate risk. The Bank
has appealed to the OTS to permit it to continue its investment at current
levels and noted in its appeal that its investments had floating interest rates
and the issuer's did not have the option to extend the maturities. Management of
the Bank is unable to predict the outcome of its appeal.
5. LOANS RECEIVABLE
Loans receivable at December 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
1997 1998
================================
(In Thousands)
<S> <C> <C>
One-to-four single family, residential real estate mortgages......... $ 717,610 $ 826,680
Commercial and multi-family real estate mortgages.................... 64,525 74,671
Real estate construction-primarily residential....................... 38,577 53,515
Participations-primarily residential................................. 3,172 2,249
Land loans-primarily residential..................................... 12,116 8,583
---------- ----------
Total first mortgage loans........................................... 836,000 965,698
Consumer Loans....................................................... 47,758 48,270
Commercial business loans............................................ 32,710 46,958
---------- ----------
Total gross loans.................................................... 916,468 1,060,926
Less:
Undisbursed portion of loans in process......................... 54,471 84,155
Unearned discounts, premiums and deferred loan fees (costs), net (2,554) (3,621)
Allowance for loan losses....................................... 3,294 3,226
---------- ----------
Loans receivable-net................................................. $ 861,257 $ 977,166
========== ==========
</TABLE>
The amount of loans on which the Bank has ceased accruing interest or does not
charge interest aggregated approximately $ 2,995,000 and $ 3,845.000, net of
specific valuation allowances of $ 235,000 and $ 162,000, at December 31, 1997
and 1998, respectively. The amount of interest not accrued relating to these
loans was approximately $ 168,000 and $ 203,000 at December 31, 1997 and 1998,
respectively. Management believes the allowance for possible loan losses is
adequate.
42
<PAGE>
An analysis of the changes in the allowance for loan losses for the years ended
December 31, 1996, 1997 and 1998 is as follows. There were no recoveries during
the years presented.
<TABLE>
<CAPTION>
1996 1997 1998
===================================================
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of period.............................. $ 2,265 $ 2,263 $ 3,294
Increase in allowance due to purchase of BankBoynton........ - 1,167 -
Current provision........................................... 164 170 77
Charge-offs................................................. (166) (306) (145)
----------- ----------- -----------
Ending balance.............................................. $ 2,263 $ 3,294 $ 3,226
=========== =========== ===========
</TABLE>
The Bank originates both adjustable and fixed rate mortgage loans. Included in
the loans receivable at December 31, 1998 are $5.5 million of loans held for
sale. These loans are recorded at the lower of cost or market. Loans held for
sale at December 31, 1997 amounted to $3.0 million.
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, 1996, 1997 and 1998 and the
related allowance for those loans is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
=======================================================================
(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...... $ 646 $ 256 $ 500 $ 235 $ 324 $ 162
Loans without related allowance for loan losses... 2,725 - 2,730 - 3,685 -
--------- --------- --------- --------- --------- ---------
$ 3,371 $ 256 $ 3,230 $ 235 $ 4,009 $ 162
========= ========= ========= ========= ========= =========
Average balance of impaired loans................. $ 3,777 $ 3,301 $ 3,620
========= ========= =========
</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, 1998, the composition and maturity or repricing of the loan
portfolio is presented below:
<TABLE>
<CAPTION>
..........................Fixed Rate.......................... ......................Adjustable Rate..................
Term of Maturity Book Value Term to Rate Adjustment Book Value
(In Thousands) (In Thousands)
<S> <C> <C> <C>
1 year or less $ 93,963 1 year or less $ 282,768
1 year-3 years 12,712 1 year-3 years 81,398
3 years-5 years 10,914 3 years-5 years 77,956
5 years-10 years 50,056 5 years-10 years 64,499
10 years-20 years 171,256 10 years-20 years 1,973
Over 20 years 212,523 Over 20 years 908
----------- ----------
Total $ 551,424 Total $ 509,502
=========== ==========
</TABLE>
43
<PAGE>
Adjustable rate mortgage loans originated prior to December 31, 1993 have
interest rate adjustment limitations and are generally indexed to the monthly
weighted-average cost of funds for Savings Association Insurance Fund ("SAIF")
insured institutions headquartered in the Fourth Federal Home Loan Bank ("FHLB")
District. Adjustable rate mortgage loans originated subsequent to December 31,
1993 are indexed to comparable term U.S. Treasury securities. Future market
factors may affect the correlation of the interest rate adjustment with the
rates the Bank pays on the short-term deposits which have been primarily
utilized to fund those loans.
The Bank makes fixed rate loan commitments for periods generally not exceeding
sixty days. At December 31, 1997 and 1998 the Bank had commitments outstanding
to originate fixed rate mortgage loans as follows:
1997 1998
=====================
(In Thousands)
15 Years to Maturity
6.00 - 6.25..................... $ - $ 234
6.26 - 6.50..................... - 1,788
6.51 - 6.75..................... 175 506
6.76 - 7.00..................... 349 416
7.01 - 7.25..................... 472 -
7.26 - 7.50..................... 667 137
7.51 - 7.75..................... 120 35
7.76 - 8.00..................... 135 -
8.01 - 8.25..................... 199 811
8.26 - 8.50..................... 480 -
8.51 - 8.75..................... - -
8.76 - 9.00..................... 30 -
9.01 - 9.25..................... - -
16 - 30 Years to Maturity
6.26 - 6.50..................... 80 81
6.51 - 6.75..................... - 294
6.76 - 7.00..................... 60 347
7.01 - 7.25..................... 285 1,348
7.26 - 7.50..................... 3,668 526
7.51 - 7.75..................... 1,282 731
7.76 - 8.00..................... 1,187 399
8.01 - 8.25..................... 312 -
8.26 - 8.50..................... 651 -
8.51 - 8.75..................... 150 -
8.76 - 9.00..................... - -
Over 9.00....................... - -
-------- -------
Total................................ $ 10,302 $ 7,653
======== =======
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.
44
<PAGE>
Commercial Real Estate Lending - The Bank originates and purchases commercial
real estate loans, which totaled $ 64,525,000 and $ 74,671,000 at December 31,
1997 and 1998, 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, 1997 and 1998 are approximately as follows:
<TABLE>
<CAPTION>
1997 1998
==========================
(In Thousands)
<S> <C> <C>
Office buildings............................... $ 9,247 $ 8,756
Retail buildings............................... 9,661 8,749
Warehouses..................................... 9,975 10,043
Multi family................................... 13,199 15,653
Hotels and motels.............................. 54 404
Land........................................... 12,910 16,261
Other property improvements.................... 9,479 14,805
---------- ----------
Total.......................................... $ 64,525 $ 74,671
========== ==========
</TABLE>
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a federally chartered savings and loan association's aggregate
commercial real estate loans may not exceed 400% of its capital as determined
under the capital standards provisions of FIRREA. The Bank is federally
chartered and subject to this limitation. FIRREA does not require divestiture of
any loan that was lawful when it was originated. At December 31, 1998, the Bank
estimates that, while complying with this limitation, it could originate an
additional $ 350.3 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 $ 15.9 million at December 31, 1998. At December 31,
1998, the Bank met the loans to one borrower limitation under currently 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, 1997 and 1998 were $ 60.0 million and $ 72.1 million,
respectively. Custodial escrow balances maintained in connection with the
foregoing loan servicing were $ 228,781 and $ 339,849 at December 31, 1997 and
1998, 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 $ 1,185,000 and $ 2,525,000 at December 31, 1997 and 1998,
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 1998 include a blanket floating
lien that requires the Bank to maintain qualifying first mortgage loans as
pledged collateral in an amount equal to the advances, when discounted at 75% of
the unpaid principal balances (See Note 10).
45
<PAGE>
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1997 and 1998 are summarized as
follows:
1997 1998
==========================
(In Thousands)
Land.......................................... $ 5,681 $ 8,534
Buildings and improvements.................... 17,194 29,386
Furniture and equipment....................... 8,868 10,963
--------- ---------
Total......................................... 31,743 48,883
Less accumulated depreciation................. 10,303 11,175
--------- ---------
Office properties and equipment - net......... $ 21,440 $ 37,708
========= =========
7. REAL ESTATE OWNED
Real estate owned at December 31, 1997 and 1998 consists of the following:
1997 1998
=========================
(In Thousands)
Real estate owned................................ $ 967 $ 907
Valuation allowance.............................. - -
---------- ---------
Real estate owned - net.......................... $ 967 $ 907
========== =========
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and 1998 consists of the
following:
1997 1998
==========================
(In Thousands)
Loans.......................................... $ 4,421 $ 4,649
Investments.................................... 453 584
Mortgage-backed securities..................... 1,530 2,316
----------- -----------
Accrued interest receivable.................... $ 6,404 $ 7,549
=========== ===========
46
<PAGE>
9. DEPOSITS
The weighted-average interest rates on deposits at December 31, 1997 and 1998
were 4.50% and 4.42%, respectively. Deposit accounts, by type and range of rates
at December 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
Account Type and Rate 1997 1998
======================
(In Thousands)
<S> <C> <C>
Non-interest-bearing NOW accounts.......................... $ 35,888 $ 57,002
NOW, Super NOW and funds transfer accounts
1997 and 1998, 1.05% and 1.07%, respectively.......... 82,152 94,848
Passbook and statement accounts
1997 and 1998, 2.58% and 2.75%, respectively.......... 105,082 127,494
Variable-rate money market accounts
1997 and 1998, 2.83% and 3.09%, respectively.......... 42,135 44,481
-------- --------
Total non-certificate accounts............................. 265,257 323,825
-------- --------
Certificates:
1.01% - 2.00%......................................... 895 1,018
2.01% - 3.00%......................................... 301 -
3.01% - 4.00%......................................... 6 6
4.01% - 5.00%......................................... 11,225 125,019
5.01% - 6.00%......................................... 441,810 564,002
6.01% - 7.00%......................................... 152,453 106,719
7.01% - 8.00%......................................... 353 157
8.01% - 9.00%......................................... 40 -
-------- --------
Total certificates......................................... 607,083 796,921
-------- --------
Total...................................................... $872,340 $1,120,746
======== ==========
</TABLE>
Individual deposits greater than $ 100,000 at December 31, 1997 and 1998
aggregated approximately $ 96,648,000 and $ 237,274,000, 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 $ 106,000, $ 128,000 and $ 160,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997 1998
------------------- -------------------
Amount Percent Amount Percent
==============================================================================
Maturity (Dollars in Thousands)
<S> <C> <C> <C> <C>
Less than 1 year ............. $387,511 63.83% $254,281 31.91%
1 year-2 years ............... 112,307 18.50 257,954 32.37
2 years-3 years .............. 56,921 9.38 175,171 21.98
3 years-4 years .............. 22,103 3.64 18,207 2.28
4 years-5 years .............. 26,060 4.29 90,120 11.31
Thereafter ................... 2,181 .36 1,188 .15
-------- ------ -------- ------
Total ........................ $607,083 100.00% $796,921 100.00%
======== ====== ======== ======
</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
47
<PAGE>
institutions in the Bank's normal market area. Even though the Bank meets all of
the applicable minimum capital requirements at December 31, 1998, the Bank had
no brokered deposits.
Interest expense on deposits consists of the following during the years ended
December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
=============================================
(In Thousands)
<S> <C> <C> <C>
Passbook accounts................ $ 1,723 $ 1,892 $ 2,184
NOW accounts..................... 937 730 3,194
Money market accounts............ 1,075 901 877
Certificate accounts............. 22,504 30,333 38,873
--------- --------- ---------
Total............................ $ 26,239 $ 33,856 $ 45,128
========= ========= =========
</TABLE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank had outstanding advances from the FHLB of $ 239,091,000 with interest
rates ranging from 5.21% to 8.21% and $ 303,140,000 with interest rates ranging
from 4.78% to 8.21% at December 31, 1997 and 1998, respectively. The advances at
December 31, 1998 are repayable as follows:
Years Ending
December 31, Amount
===========================================
(In Thousands)
1999 $ 28,349
2000 25,024
2001 4,354
2002 122,500
2003 6,586
Thereafter 116,327
-------------
Total $ 303,140
=============
During 1997, the Bank entered into a collateral agreement with the FHLB which
includes 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 5).
11. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY DEBENTURES
On January 21, 1998 the Company issued $ 28.75 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 owns $ 28.75 million of Guaranteed
Preferred Beneficial Interests in the Company's Debentures due January 31, 2028,
purchased with the proceeds of the preferred securities issuance. Interest from
the Company's debentures 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 Company's debentures described above. The Company's 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 debentures are redeemable at 100% of principal
amount in whole or in part, commencing
48
<PAGE>
January 31, 2003. The preferred securities are subject to mandatory redemption,
in whole or in part as applicable, upon the repayment of the 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 $ 27.3 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."
12. 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, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
==========================================
(In Thousands)
<S> <C> <C> <C>
Current - federal................................... $ 2,993 $ 4,872 $ 4,902
Current - state..................................... 424 701 677
-------- ------- -------
Total current....................................... 3,417 5,573 5,579
Deferred - federal and state........................ (855) (820) (737)
-------- ------- -------
Total............................................... $ 2,562 $ 4,753 $ 4,842
======== ======= =======
</TABLE>
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,
1996 1997 1998
---------------------- ---------------------- ---------------------
Amount % Amount % Amount %
============================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate................. $ 2,139 35.0% $ 3,910 35.0% $ 4,289 35.0%
State income taxes, net of federal
income tax benefits................ 220 3.6 375 3.3 350 2.9
Benefit of graduated rates.............. (61) (1.0) (101) (0.9) (92) (0.8)
Employee stock ownership plan........... - - 190 1.7 184 1.5
Other................................... 264 4.3 379 3.4 111 .9
--------- ------- --------- ------- --------- -------
Total provision and effective tax rate.. $ 2,562 41.9% $ 4,753 42.5% $ 4,842 39.5%
========= ======= ========= ======= ========= =======
</TABLE>
49
<PAGE>
The tax effect of temporary differences which give rise to deferred tax assets
and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
=========================
(In Thousands)
Deferred tax liabilities:
<S> <C> <C>
Depreciation........................................................ $ 847 $ 878
Loan fee income..................................................... 1,938 1,515
FHLB stock dividends................................................ 1,115 1,160
Unrealized appreciation in securities............................... 976 -
Excess of tax bad debt reserve over book reserve.................... 174 227
Deferred state taxes................................................ - 62
Deferred compensation............................................... 25 -
-------- --------
Gross deferred tax liabilities...................................... 5,075 3,842
-------- --------
Deferred tax assets:
Executive death benefit............................................. 409 461
Amortization........................................................ 287 368
Retirement plan..................................................... 2,849 3,131
Deferred compensation............................................... 853 939
Unrealized depreciation in securities............................... - 195
Other............................................................... 178 191
-------- --------
Gross deferred tax assets........................................... 4,576 5,285
Less valuation allowances for deferred tax assets................... - -
-------- --------
Gross deferred tax assets........................................... 4,576 5,285
-------- --------
Net deferred tax liabilities (assets)............................... $ 499 $ (1,443)
======== ========
</TABLE>
During 1996, a law was enacted that repealling 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 No. 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 met the origination requirement for
1996 and 1997 and, therefore, delayed the 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.
13. 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.
50
<PAGE>
PENSION AND EMPLOYEE BENEFIT PLANS (continued)
Components of the Bank's Pension Plan are as follows:
1997 1998
========================
(In Thousands)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation, beginning of period ...... $ 7,190 $ 7,967
Service cost ................................. 498 552
Interest cost ................................ 575 582
Actuarial (gain) loss ........................ (258) 1,132
Benefit paid ................................. (38) (93)
-------- --------
Benefit obligation, end of period ............ $ 7,967 $ 10,140
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets,
beginning of period......................... $ 6,284 $ 7,804
Actual return on plan assets ................. 1,154 978
Employer's contribution ...................... 404 983
Benefits paid ................................ (38) (93)
-------- --------
Fair value of plan assets, end of period ..... $ 7,804 $ 9,672
======== ========
FUNDED STATUS
Funded status ................................ $ (163) $ (468)
Unrecognized net actuarial (gain) loss ....... (50) 737
Unrecognized prior service cost .............. (214) (184)
-------- --------
Net amount recognized ........................ $ (427) $ 85
======== ========
Components of net periodic benefit cost are as follows:
For the Years Ended December 31,
------------------------------------
1996 1997 1998
====================================
(In Thousands)
Service cost ....................... $ 410 $ 498 $ 552
Interest cost ...................... 535 575 582
Return on assets ................... (816) (1,154) (978)
Amortization of prior service cost.. (30) (30) (30)
Recognition of net actuarial loss... 463 681 345
------- ------- -------
Net periodic benefit cost ........ $ 562 $ 570 $ 471
======= ======= =======
For the years ended December 31, 1996, 1997 and 1998, pension expense amounts
were based upon actuarial computations.
The assumptions used in computing the present value of the projected benefit
obligation and the net periodic pension expense are as follows:
1996 1997 1998
==========================
Discount rate in determining benefit obligation .. 7.75% 7.25% 6.75%
Rate of increase in future compensation levels for
determining benefit obligations .............. 5.00% 5.00% 4.50%
Expected return on plan assets ................... 8.00% 8.00% 8.00%
In accordance with the actuarially determined computation under SFAS No. 87, the
Bank funded $ 983,000 as required for the 1998 plan year.
51
<PAGE>
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
and ability to meet capital requirements. The Bank's contribution to the plan
totaled $ 170,000, $ 183,000 and $ 210,000 for the years ended December 31,
1996, 1997 and 1998, 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, 1996, 1997 and
1998, the net periodic pension expense for the Supplemental Executive Retirement
Plan for Officers totaled $ 964,000, $ 951,000 and $ 1,090,000, respectively.
The projected benefit obligation as of December 31, 1996, 1997 and 1998, was
estimated at $ 5,217,000, $ 6,049,000 and $ 6,560,000, respectively. For 1996,
1997 and 1998, respectively, the discount rates used to measure the projected
benefit obligation were 7.75%, 7.25% and 6.75%. The rate of increase in future
compensation levels in 1996 and 1997 was 5.00% and 1998 was 4.50%. For the years
ended December 31, 1996, 1997 and 1998, the net periodic pension expense for the
Retirement Plan for the Director's totaled $ 273,000, $ 227,000 and $ 171,000,
respectively. The projected benefit obligation for the Retirement Plan for
Directors as of December 31, 1996, 1997 and 1998 was estimated at $ 1,514,000,
$ 1,475,000 and $ 1,503,000, respectively. For 1996, 1997 and 1998, the discount
rates used to measure that projected benefit obligation were 7.75%, 7.25% and
6.75%, respectively. The rate of increase in future compensation levels for the
Retirement Plan for Directors was 5.00% in all years. The provisions of SFAS No.
87 require recognition in the statement of financial position of the additional
minimum liability and related intangible asset for a retirement plan with
accumulated benefits in excess of plan assets. This resulted in the recognition
at December 31, 1997 and 1998, of an additional liability and an intangible
asset of $ 291,000 and $ 25,000, respectively. There was no material effect on
earnings or cash requirements to fund the retirement plans. These additional
liability and intangible asset amounts as of December 31, 1997 and 1998 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, "SMPIAP," 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 $ 120,000, $ 229,000 and $ 252,000,
were made during the calendar years 1996, 1997 and 1998, respectively, for
distribution in subsequent years. The assets of the SMPIAP are held in a Rabbi
trust for the benefit of senior management. The SMPIAP participants may elect to
invest their awards in either Company stock or other third party investment
options. Pursuant to the provisions of Emerging Issues Task Force Issue No.
97-14 ("EITF 97-14") which became effective during 1998, the assets of the Rabbi
trust are included in the accompanying financial statements and are accounted as
follows: (1) Assets, other than Company stock, (primarily trading securities)
are included in other assets at fair value ($ 443,000 at December 31, 1998) with
the corresponding obligation to the employees of a like amount included in other
liabilities. Changes in the fair value of the assets and changes in the amount
of the liability are included in earnings; and (2) Company stock (147,029 shares
at December 31, 1998) is carried at cost ($ 1.5 million at December 31, 1998)
and included in treasury stock with the corresponding obligation to the
employees (which can only be settled through delivery of the shares) of a like
amount included in additional paid-in capital. Prior to the adoption of EITF
97-14, the assets of the Rabbi trust and the corresponding obligations were
carried at cost and included in other assets and other liabilities,
respectively. The changes in accounting as a result of the adoption of EITF
97-14 had no effect on net income or earnings per share.
52
<PAGE>
Employee Stock Ownership Plan - On January 7, 1994, in connection with the
Bank's Plan of Reorganization into a Mutual Holding Company, 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. Effective June 30, 1997, the loan was purchased and is now held by
Fidelity Bankshares, Inc. and therefore has been eliminated in consolidation at
December 31, 1997 and 1998. 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 $ 462,000, $ 765,000 and $ 802,000, by
a charge against income in 1996, 1997 and 1998, 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, 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 $ 280,000 by a
charge against income in 1996. There were no such charges against income in 1997
and 1998.
14. 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.
Options Price
-------------------------------------------------
Average
Number of Exercise
Options Price Per Aggregate
Outstanding Share Price
=================================================
Options Outstanding
- -------------------
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
----------- -------- -----------
Granted ................ -- -- --
Exercised .............. (21,414) 9.09 (194,653)
Canceled ............... (440) 9.09 (4,000)
----------- -------- -----------
Balance - December 31, 1998.. 151,983 $ 9.09 $ 1,381,524
=========== ======== ===========
53
<PAGE>
15. 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, 1998, the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998, 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.
In 1998, the Company invested $ 25 million of the proceeds from its issuance of
the Guaranteed Preferred Beneficial Interests in Company's Debentures in common
stock of the Bank. In the table which follows, Stockholders' Equity includes
such additional investment. Management believes this investment qualifies as
core capital and Tier 1 capital. In the event regulatory authorities adopt,
retroactively, a different standard for determining core capital and Tier 1
capital, amounts presented at December 31, 1998 as $ 104.115 million could be
reduced by $ 25 million and ratios presented could be adjusted accordingly.
54
<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, 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 total assets .......... 6.6% $ 81,041 1.5% $ 18,228
=========== =========== ========== ===========
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
=========== ========== =========== ========== ===========
Allowable Tier 2 capital:
General loan valuation allowances ... 2,242
Equity investments .................. (1)
-----------
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
===========
As of December 31, 1998 Stockholders'
Equity and ratio to total assets 6.8% $ 106,244
===========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 318
Goodwill ............................ (2,394)
Disallowed servicing assets ......... (53)
-----------
Tangible capital and ratio to
adjusted total assets .......... 6.6% $ 104,115 1.5% $ 23,472
=========== ========== ===========
Tier I (core) capital and ratio to
adjusted total assets .......... 6.7% $ 104,115 3.0% $ 46,943 5.0% $ 78,239
=========== =========== ========== =========== ========== ===========
Tier I (core) capital and ratio to
risk-weighted total assets ..... 12.0% $ 104,115 4.0% $ 34,814 6.0% $ 52,221
=========== =========== ========== =========== ========== ===========
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 10.0% $ 87,036
=========== =========== ========== =========== ========== ===========
Total assets ........................ $ 1,566,900
===========
Adjusted total assets ............... $ 1,564,771
===========
Risk-weighted assets ................ $ 870,355
===========
</TABLE>
55
<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, 1998, an OTS examination resulted in no
significant adjustments to the consolidated financial statements.
16. 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:
1996 1997
======================
(In Thousands,
except per share
data)
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
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.
17. 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, 1998, the Bank had commitments to
extend credit for or purchase mortgage loans of $ 38,611,000 ($ 7,653,000 in
fixed rate commitments, see Note 5, 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.
56
<PAGE>
The Bank leases various property for original periods ranging from one to
seventy-two years. Rent expense for the years ended December 31, 1996, 1997 and
1998, was approximately $ 682,000, $ 638,000 and $ 658,000, respectively. At
December 31, 1998, future minimum lease payments under these operating leases
are as follows:
Years Ending December 31, Amount
----------------------------------------------------------------
(In Thousands)
1999 $ 726,735
2000 741,901
2001 674,893
2002 631,833
2003 645,869
Thereafter 2,827,570
-----------
Total $ 6,248,801
===========
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.
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1996 1997 1998
=================================
(In Thousands)
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes ............................. $ 2,810 $ 5,016 $ 5,916
======= ======= =======
Cash paid for interest on deposits and other borrowings $31,879 $41,782 $63,196
======= ======= =======
Supplemental Schedule of Noncash Investing and Financing
Activities:
Real estate acquired in settlement of loans ............ $ 593 $ 2,403 $ 1,542
======= ======= =======
</TABLE>
19. 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, 1996, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
For the Year Ended December For the Year Ended December For the Year Ended December
31, 1996 31, 1997 31, 1998
--------------------------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share
(1) (2) Amount (1) (2) Amount (1) (2) Amount
========================================================================================================
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income .............. $3,550,000 $6,418,000 $7,412,000
Basic EPS:
Mortgage loans
Income available to
common stockholders .. $3,550,000 6,583,118 $ 0.54 $6,418,000 6,661,401 $ 0.96 $7,412,000 6,644,096 $ 1.12
======== ======== ========
Effect of diluted shares:
Common stock options .. 84,380 104,760 91,881
--------- --------- ---------
Diluted EPS:
Income available to
common stockholders ... $3,550,000 6,667,498 $ 0.53 $6,418,000 6,766,161 $ 0.95 $7,412,000 6,735,977 $ 1.10
========== ========= ======== ========== ========= ======== ========== ========= ========
</TABLE>
(1) Numerator
(2) Denominator
57
<PAGE>
Weighted average shares outstanding for the year ended December 31, 1998 were
reduced for treasury shares held by the Bank's SMPIAP and increased for the
corresponding liability for settlement to the Bank's employees. (See Note 13).
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.
20. OTHER COMPREHENSIVE INCOME
An analysis of the changes in Accumulated Other Comprehensive Income for the
years ended December 31, 1996, 1997 and 1998 is as follows:
December 31,
1996 1997 1998
-----------------------------------------
Unrealized
Gains (Losses)
on Securities
=========================================
(In Thousands)
Beginning Balance ........... $ 2,584 $ 782 $ 1,405
Current-period change ....... (1,802) 623 (1,723)
------- ------- -------
Ending balance .............. $ 782 $ 1,405 $ (318)
======= ======= =======
An analysis of the related tax effects allocated to Other Comprehensive Income
is as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997 December 31, 1998
------------------------------- -------------------------------- --------------------------------
Tax Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
=======================================================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss) on
assets available for sale:
Unrealized holding gains
(losses) arising ..... $(2,149) $ 872 $(1,277) $ 1,055 $ (432) $ 623 $(1,539) $ 629 $ (910)
during period
Less: reclassification
adjustment for gains . (875) 350 (525) -- -- -- (1,355) 542 (813)
------- ------- ------- ------- ------- ------- ------- ------- -------
realized in net income
Other comprehensive income $(3,024) $ 1,222 $(1,802) $ 1,055 $ (432) $ 623 $(2,894) $ 1,171 $(1,723)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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 No. 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.
58
<PAGE>
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, 1997 December 31, 1998
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
==============================================================
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and amounts due from depository institutions. $ 22,136 $ 22,136 $ 27,951 $ 27,951
Interest-bearing deposits......................... 33,688 33,688 32,075 32,075
Assets available for sale......................... 250,209 250,209 452,575 452,575
Loans receivable (net)............................ 861,257 870,162 977,166 1,152,248
Liabilities:
Deposits.......................................... 872,340 873,741 1,120,746 1,130,266
Other borrowed funds.............................. 3,780 3,780 6,981 6,977
Advances from the Federal Home Loan Bank.......... 239,091 239,963 303,140 306,989
Guaranteed Preferred Beneficial Interests
in Company's Debentures........................ -- -- 28,750 31,268
</TABLE>
The following methods and assumptions were used to estimate fair value of each
major class of financial instrument at December 31, 1997 and 1998.
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.
Guaranteed Preferred Beneficial Interests in Company's Debentures - The fair
value is estimated by discounting the future cash flows of these debentures
using the yield for 30 year Treasury Bond plus 250 basis points.
Commitments to Extend Credit and Standby Letters of Credit - The fair value of
these commitments is insignificant.
22. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial position as of December 31,
1997, and 1998 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
59
<PAGE>
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.
December 31,
----------------------
1997 1998
======================
(In Thousands)
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash and cash equivalents ............. $ 411 $ 6,122
ESOP loan receivable .................. 828 509
Investment in and advances to Bank .... 86,710 106,482
Other assets .......................... 217 1,437
-------- --------
Total assets ............................... $88,166 $114,550
======== ========
Liabilities ................................ $ 779 $ 29,551
Stockholders' Equity ....................... 87,387 84,999
-------- --------
Total liabilities and stockholders' equity.. $88,166 $114,550
======== ========
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1996 1997 1998
====================================================
(In Thousands)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
Income:
Income ........................................................ $ - $ 42 $ 173
Expenses ...................................................... - 541 2,753
-------- -------- --------
Income before income taxes and equity in earnings of Bank ..... - (499) (2,580)
Income tax benefit ............................................ - 204 983
-------- -------- --------
Income before equity in earnings of Bank ...................... - (295) (1,597)
Equity in earnings of Bank .................................... 3,550 6,713 9,009
-------- -------- --------
Net income .................................................... $ 3,550 $ 6,418 $ 7,412
======== ======== ========
STATEMENT OF CASH FLOWS
Cash flow from (for) operating activities:
Net income ....................................................... $ 3,500 $ 6,418 $ 7,412
Adjustments to reconcile net income to
net cash used for operating activities
Equity in earnings of Bank ................................. (3,550) (6,713) (9,009)
Other ............................................................ - (148) 1,024
-------- -------- --------
Net cash used for operating activities ........................... - (443) (573)
-------- -------- --------
Cash flow from (for) investing activities:
Dividends received from Bank ..................................... 1,971 3,554 11,600
Purchase of ESOP loan ............................................ - (966) -
Principal payments on ESOP loan .................................. - 138 319
Investment in subsidiary ......................................... - - (25,000)
Other ............................................................ - 386 1,077
-------- -------- --------
Net cash from investing activities ............................... 1,971 3,112 (12,004)
-------- -------- --------
Cash flow from (for) financing activities:
Proceeds from the sale of stock .................................. - 308 79
Purchase of treasury stock ....................................... - - (5,752)
Sale of Guaranteed Preferred Beneficial
Interests in Company's Debentures (net) ....................... - - 27,277
Cash dividends paid .............................................. (1,971) (2,566) (3,316)
-------- -------- --------
Net cash used for financing activities ........................... (1,971) (2,258) 18,288
-------- -------- --------
Net increase in cash and cash equivalents ........................ - 411 5,711
Cash and cash equivalents, Beginning of year ..................... - - 411
-------- -------- --------
Cash and cash equivalents, End of year ........................... $ - $ 411 $ 6,122
======== ======== ========
</TABLE>
60
<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 $ 22.0
million and $ 18.4 million as of December 31, 1997 and 1998, respectively.
22. 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, 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
======== ======== ======== ========
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
===========================================================================
(In Thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Interest income ............................... $ 22,820 $ 24,461 $ 25,502 $ 25,537
Interest expense .............................. 14,280 16,110 17,055 17,547
-------- -------- -------- --------
Net interest income ......................... 8,540 8,351 8,447 7,990
-------- -------- -------- --------
Provision for loan losses ..................... (69) 20 6 120
Non-interest income ........................... 1,914 2,287 2,426 2,063
Non-interest expenses ......................... 7,013 7,333 7,369 7,972
Income taxes .................................. 1,417 1,292 1,358 775
-------- -------- -------- --------
Net Income ............................. $ 2,093 $ 1,993 $ 2,140 $ 1,186
======== ======== ======== ========
</TABLE>
61
<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, 1998 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, 1998.
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, 1998.
by: /s/ Vince Elhilow by: /s/ Richard Aldred
----------------------------------- ------------------------------------
President and Chief Executive Officer Executive Vice President-Chief
Financial Officer
February 22, 1999
62
<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, 1998, 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 the Reconciliation of Equity Capital included on Schedule
SI 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 22, 1999.
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, misstatements
due to error or fraud 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, 1998, 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 the Reconciliation of Equity Capital included on Schedule
SI 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 24, 1999
63
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<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, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THREE MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,951
<INT-BEARING-DEPOSITS> 32,075
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 452,575
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 977,166
<ALLOWANCE> 3,226
<TOTAL-ASSETS> 1,566,927
<DEPOSITS> 1,120,746
<SHORT-TERM> 6,981
<LIABILITIES-OTHER> 22,311
<LONG-TERM> 331,890
0
0
<COMMON> 680
<OTHER-SE> 84,319
<TOTAL-LIABILITIES-AND-EQUITY> 1,566,927
<INTEREST-LOAN> 18,533
<INTEREST-INVEST> 269
<INTEREST-OTHER> 6,735
<INTEREST-TOTAL> 25,537
<INTEREST-DEPOSIT> 12,313
<INTEREST-EXPENSE> 5,234
<INTEREST-INCOME-NET> 7,990
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,972
<INCOME-PRETAX> 1,961
<INCOME-PRE-EXTRAORDINARY> 1,961
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,186
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<YIELD-ACTUAL> 2.31
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
