SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
----------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
----------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check |X| whether the Registrant has filed all reports required
to be filed by Sections 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 6,843,584 shares
of the Registrant's common stock outstanding as of November 1, 2000.
<PAGE>
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................1
Consolidated Statements of Financial Condition as of
December 31, 1999 and September 30, 2000...........................2
Consolidated Statements of Operations for the three and the nine months
ended September 30, 1999 and 2000..................................3
Consolidated Statements of Comprehensive Operations for the three and
nine months ended September 30, 1999 and 2000......................4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000........................................5
Notes to Unaudited Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................12
PART II. OTHER INFORMATION...................................................21
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------------------------------------------------------------------------------------
Unaudited
December 31, September 30,
1999 2000
===================================================
(In Thousands, except share data)
ASSETS
CASH AND CASH EQUIVALENTS:
<S> <C> <C>
Cash and amounts due from depository institutions.......... $ 41,736 $ 47,027
Interest-bearing deposits.................................. 19,065 3,917
--------------- -----------
Total cash and cash equivalents....................... 60,801 50,944
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities, including municipal bonds. 29,059 81,533
Mortgage-backed and other securities........................ 336,212 304,201
Corporate debt securities................................... 38,959 38,431
Equity securities........................................... - 1,344
--------------- -----------
Total assets available for sale........................ 404,230 425,509
LOANS RECEIVABLE.................................................. 1,164,421 1,328,192
OFFICE PROPERTIES AND EQUIPMENT, Net ............................. 44,982 50,181
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.. 13,354 16,492
REAL ESTATE OWNED, Net............................................ 775 -
ACCRUED INTEREST RECEIVABLE....................................... 8,330 9,853
DEFERRED INCOME TAX ASSET......................................... 4,924 4,542
OTHER ASSETS...................................................... 17,116 19,137
--------------- -----------
TOTAL ASSETS...................................................... $ 1,718,933 $1,904,850
=============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES DEPOSITS................. ............................ $1,321,510 $1,412,433
OTHER BORROWED FUNDS.............................................. 14,656 16,763
ADVANCES FROM FEDERAL HOME LOAN BANK.............................. 247,073 326,289
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE..................... 4,010 18,037
DRAFTS PAYABLE.................................................... 6,533 5,450
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES.............................. 28,750 28,750
OTHER LIABILITIES................................................. 13,097 10,257
--------------- -----------
TOTAL LIABILITIES........................................... 1,635,629 1,817,979
--------------- -----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued......... - -
COMMONSTOCK ($.10 par value) 8,200,000 shares authorized,
6,834,463 shares outstanding at December 31, 1999, and
6,843,584 shares outstanding at September 30, 2000.......... 683 684
ADDITIONAL PAID-IN CAPITAL........................................ 40,937 41,054
RETAINED EARNINGS - substantially restricted...................... 57,343 61,702
TREASURY STOCK, at cost, 488,806 shares at December 31, 1999 and
478,586 shares at September 30, 2000........................ (9,232) (9,146)
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN........... (329) (82)
ACCUMULATED OTHER COMPREHENSIVE LOSS.............................. (6,098) (7,341)
--------------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. 83,304 86,871
--------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $ 1,718,933 $1,904,850
=============== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------
Unaudited Unaudited
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
======================== =========================
(In Thousands, except share data)
Interest income:
<S> <C> <C> <C> <C>
Loans..................................................... $20,986 $25,877 $59,483 $73,503
Investment securities..................................... 613 1,349 1,491 2,854
Other investments......................................... 839 965 2,378 2,382
Mortgage-backed and other securities...................... 6,184 6,255 18,294 18,784
---------- ----------- ----------- -----------
Total interest income................................ 28,622 34,446 81,646 97,523
---------- ----------- ----------- -----------
Interest expense:
Deposits.................................................. 13,169 16,539 37,737 46,689
Advances from Federal Home Loan Bank and other borrowings. 5,346 6,100 15,801 15,807
---------- ----------- ----------- -----------
Total interest expense............................... 18,515 22,639 53,538 62,496
---------- ----------- ----------- -----------
Net interest income........................................... 10,107 11,807 28,108 35,027
Provision for loan losses..................................... 161 363 268 928
---------- ----------- ----------- -----------
Net interest income after provision for loan losses........... 9,946 11,444 27,840 34,099
---------- ----------- ----------- -----------
Other income:
Service charges on deposit accounts....................... 844 1,068 2,314 2,870
Fees for other banking services........................... 726 1,101 2,000 2,972
Net gain on sale of loans, investments
and mortgage-backed securities....................... 64 623 342 658
Miscellaneous............................................. 278 191 967 3,141
---------- ----------- ----------- -----------
Total other income................................... 1,912 2,983 5,623 9,641
---------- ----------- ----------- -----------
Operating expense:
Employee compensation and benefits........................ 5,443 6,906 15,181 19,734
Occupancy and equipment................................... 1,762 2,185 5,220 6,608
(Gain) loss on real estate owned)......................... (67) 3 (192) (126)
Marketing................................................. 229 265 713 817
Federal deposit insurance premium......................... 168 71 492 207
Other..................................................... 1,664 2,034 4,909 5,848
---------- ----------- ----------- -----------
Total operating expense.............................. 9,199 11,464 26,323 33,088
---------- ----------- ----------- -----------
Income before provision for income taxes...................... 2,659 2,963 7,140 10,652
---------- ----------- ----------- -----------
Provision for income taxes:
Current................................................... 916 1,012 2,466 2,782
Deferred.................................................. 103 104 280 1,315
---------- ----------- ----------- -----------
Total provision for income taxes..................... 1,019 1,116 2,746 4,097
---------- ----------- ----------- -----------
Net income.................................................... $ 1,640 $ 1,847 $4,394 $6,555
========== =========== =========== ===========
Earnings per share:
Basic..................................................... $0.25 $0.28 $0.68 $1.01
========== =========== =========== ===========
Diluted................................................... $0.25 $0.28 $0.68 $1.00
========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
------------------------------------------------------------------------------------------------------------------------
Unaudited Unaudited
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
======================== =========================
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Net income....................................................... $1,640 $1,847 $4,394 $6,555
Other comprehensive income (losses) gains, net of tax:
Unrealized losses on assets available for sale:
Unrealized holding (losses) gains arising during period.... (1,651) 1,102 (3,741) (1,243)
---------- ---------- ----------- -----------
Comprehensive income (loss)..................................... $(11) $2,949 $653 $5,312
========== ========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000
------------------------------------------------------------------------------------------------------------------
Unaudited
For the Nine Months
Ended
September 30,
1999 2000
=========================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Net Income...................................................................... $ 4,394 $ 6,555
Adjustments to reconcile net income to net cash used for
(provided by) operating activities:
Depreciation and amortization........................................... 1,689 2,181
ESOP and Recognition and Retention Plan compensation expense............ 380 377
Accretion of discounts, amortization of premiums, and other
deferred yield items.................................................... 1,352 (989)
Provision for loan losses and real estate losses........................ 268 928
Provisions for (gains) losses and net (gains) losses on sales
of real estate owned.................................................... (214) (151)
Gain on securities received from insurance carrier's demutualization.... - (2,503)
Net (gain) loss on sale of:
Loans............................................................... (273) -
Corporate Bonds..................................................... (5) -
Mortgage-backed securities.......................................... (65) -
Equity securities................................................... - (658)
Office properties and equipment..................................... 66 77
Increase in accrued interest receivable......................................... (810) (1,523)
Increase in other assets........................................................ (2,805) (36)
Decrease in drafts payable...................................................... (5,121) (1,083)
Increase in deferred income tax asset........................................... 653 2,745
Increase (decrease) in other liabilities........................................ 65 (2,821)
-------------------------
Net cash used for (provided by) operating activities................ (426) 3,099
-------------------------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans............................... (137,069) (142,316)
Principal payments received on mortgage-backed securities....................... 77,718 29,294
Purchases of:
Loans................................................................... (21,005) (21,101)
Mortgage-backed and other securities.................................... (57,286) -
Federal Home Loan Bank stock............................................ - (4,638)
Investment securities................................................... (40,839) (65,112)
Office properties and equipment......................................... (8,162) (8,034)
Proceeds from sales of:
Loans................................................................... 14,548 -
Federal Home Loan Bank stock............................................ 540 1,500
Corporate debt securities............................................... 4,958 -
Mortgage-backed securities.............................................. 696 -
Real estate acquired in settlement of loans............................. 1,833 894
Office properties and equipment......................................... - 500
Proceeds from maturities of municipal bonds and government and agency securities 8,455 12,240
Cash used to purchase Florida Consolidated Agency,
net of cash received relating to purchase............................... (175) -
Other........................................................................... 403 (346)
-------------------------
Net cash used for investing activities.............................. (155,385) (197,119)
-------------------------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock.................................... 274 84
Purchase of Treasury Stock...................................................... (1,906) -
Cash dividends.................................................................. (3,050) (2,194)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts..................... 68,826 95,019
Certificates of deposit................................................. 89,041 (4,096)
Advances from Federal Home Loan Bank.................................... (788) 79,216
Other borrowed funds.................................................... 4,744 2,107
Advances by borrowers for taxes and insurance........................... 13,389 14,027
-------------------------
Net cash provided by financing activities........................... 170,530 184,163
-------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 14,719 (9,857)
CASH AND CASH EQUIVALENTS, Beginning of period.................................. 60,026 60,801
-------------------------
CASH AND CASH EQUIVALENTS, End of period........................................ $ 74,745 $ 50,944
=========================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Bank & Trust (the "Bank") conform
to generally accepted accounting principles and to predominant practices within
the thrift industry. The Company has not changed its accounting and reporting
policies from those disclosed in its 1999 Annual Report on Form 10-K.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at September 30, 2000
and the results of its consolidated operations and cash flows for the period
then ended, all of which are of a normal and recurring nature, have been
included.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time of
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after July 1, 2000 and, accordingly, would apply to the
Company beginning on January 1, 2001. The Company plans to adopt the standard at
that time and does not presently intend to reclassify securities between
categories. The Company has not engaged in derivatives and hedging activities
covered by the new standard, and does not expect to do so in the foreseeable
future. Accordingly, SFAS No. 133 is not expected to have a material impact on
the Company's financial statements.
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. As stated in the previous paragraph, the Company has
not engaged in derivative and hedging activities covered by this standard and
does not expect to do so in the foreseeable future. Accordingly, SFAS No. 138 is
not expected to have a material impact on the Company's financial statements.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces the accounting and reporting standards of SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on a
financial-components approach that focuses on control. The statement also
requires reclassification of financial assets pledged as collateral in the
statement of financial position separately from other assets not so encumbered
or disclosure of such assets in footnotes to the financial statements based on
certain criteria. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does not
expect adoption of this standard to have a material effect on the Company's
consolidated financial statements.
Certain amounts in the financial statements have been reclassified to conform
with the September 30, 2000 presentation.
<PAGE>
2. LOANS RECEIVABLE
Loans receivable at December 31, 1999 and September 30, 2000, consist of the
following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
==============================
(In Thousands)
One-to-four single family, residential real estate
<S> <C> <C>
mortgages .......................................................... $ 925,384 $ 1,012,572
Commercial real estate mortgages ................................... 118,262 130,696
Real estate construction-primarily residential ..................... 63,589 78,844
Land loans-primarily residential ................................... 9,763 14,061
Total first mortgage loans ......................................... 1,116,998 1,236,173
Consumer loans ..................................................... 60,281 78,821
Commercial business loans .......................................... 94,157 132,047
Total gross loans .................................................. 1,271,436 1,447,041
Less:
Undisbursed portion of loans in process ............................ 106,232 117,431
Unearned discounts, premiums and deferred loan
fees, net.......................................................... (2,826) (3,048)
Allowance for loan losses .......................................... 3,609 4,466
Loans receivable-net ............................................... $1,164,421 $ 1,328,192
</TABLE>
<PAGE>
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 1999 and the three and nine months ended September 30, 1999 and
2000, is as follows:
<TABLE>
<CAPTION>
For the Year For the Three Months For the Nine Months
Ended Ended Ended
December 31, September 30, September 30,
1999 1999 2000 1999 2000
================== ====================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........... $ 3,226 $ 3,252 $ 4,117 $ 3,226 $ 3,609
Current provision........................ 463 161 363 268 928
Charge-offs (recoveries)-net............. (80) 5 (14) (76) (71)
------------------ ------------------------------------ -----------------------------
Ending balance........................... $ 3,609 $ 3,418 $ 4,466 $ 3,418 $ 4,466
================== ==================================== =============================
</TABLE>
An analysis of the recorded investment in impaired loans owned by the Company at
the end of each period and the related specific valuation allowance for those
loans is as follows:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
================================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
----------------------------------------------------------------
(In Thousands)
Impaired loan balances and related allowances:
<S> <C> <C> <C> <C>
Loans with related allowance for loans losses............. $ 569 $ 101 $ 369 $ 209
Loans without related allowance for loan losses........... 3,726 - 4,991 -
------------- ------------- ------------- -------------
Total................................................ $ 4,295 $ 101 $ 5,360 $ 209
============================== =============================
</TABLE>
The Bank's policy on interest income on impaired loans is to reverse all accrued
interest against interest income if a loan becomes more than 90 days delinquent
and cease accruing interest thereafter. Such interest ultimately collected is
credited to income in the period of recovery.
<PAGE>
4. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Bank & Trust, is a regulated
financial institution. Its regulatory capital amounts and ratios are presented
in the following table:
<TABLE>
<CAPTION>
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, 1999 Stockholders' Equity
and ratio to total assets.............................6.5% $ 110,972
========
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes)......................................... 6,098
Goodwill................................................... (2,758)
Disallowed servicing assets and deferred tax assets........ (52)
----------------
Tangible capital and ratio to adjusted total assets........6.6% $ 114,260 1.5% $25,867
======== ================ ========= =============
Tier 1 (core) capital and ratio to adjusted
total assets..........................................6.6% $ 114,260 3.0% $51,734 5.0% $86,224
======== ================ ========= ============= ========= ==========
Tier 1 (core) capital and ratio to risk-weighted
total assets.........................................11.9% $ 114,260 4.0% $38,397 6.0% $57,595
======== ========= ============= ========= ==========
Allowable Tier 2 capital:
General loan valuation allowances.................... 2,797
Equity investments................................... -
----------------
Total risk-based capital and ratio to risk-weighted
total assets....................................12.2% $ 117,057 8.0% $76,794 10.0% $95,992
======== ================ ========= ============= ========= ==========
Total assets............................................. $1,717,452
================
Adjusted total assets.................................... $1,724,478
================
Risk-weighted assets..................................... $ 959,923
================
As of September 30, 2000 Stockholders' Equity
and ratio to total assets.............................6.0% $ 114,605
========
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes)....................................... 7,341
Goodwill................................................. (2,567)
Disallowed servicing assets and deferred tax assets...... (41)
----------------
Tangible capital and ratio to adjusted total assets........6.2% $ 119,338 1.5% $28,695
======== ================ ========= =============
Tier 1 (core) capital and ratio to adjusted
total assets..........................................6.2% $ 119,338 3.0% $57,391 5.0% $95,651
======== ================ ========= ============= ========= ==========
Tier 1 (core) capital and ratio to risk-weighted
total assets.........................................10.9% $.119,338 4.0% $43,994 6.0% $65,991
======== ========= ============= ========= ==========
Allowable Tier 2 capital:
General loan valuation allowances.................... 3,961
Unrealized gains on available for sale equity
securities........................................... 222
Equity investments................................... (850)
----------------
Total risk-based capital and ratio to
risk-weighted total assets...........................11.2% $ 122,671 8.0% $ 87,988 10.0% $109,984
======== ================ ========= ============= ========= ==========
Total assets............................................. $1,903,599
================
Adjusted total assets..................................... $1,913,025
================
Risk-weighted assets...................................... $1,099,844
================
</TABLE>
<PAGE>
5. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP) and stock options for the three months ended
September 30, 1999 and 2000, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
September 30, 1999 September 30, 2000
------------------------------------------------ ------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
================================================ ================================================
<S> <C> <C> <C> <C> <C> <C>
Net income $ 1,640,000 $ 1,847,000
=========== ===========
Basic EPS:
Income available to
common stockholders $ 1,640,000 6,438,175 $ 0.25 $ 1,847,000 6,487,805 $ 0.28
=========== ====== =========== ======
Effect of diluted shares:
Common stock options 55,116 53,794
---------- ---------
Diluted EPS:
Income available to
common stockholders $ 1,640,000 6,493,291 $ 0.25 $ 1,847,000 6,541,599 $ 0.28
=========== ========= ====== =========== ========= ======
</TABLE>
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's ESOP and stock
options for the nine months ended September 30, 1999 and 2000, are as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
September 30, 1999 September 30, 2000
------------------------------------------------ ------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
================================================ ================================================
<S> <C> <C> <C> <C> <C> <C>
Net income $ 4,394,000 $ 6,555,000
=========== ===========
Basic EPS:
Income available to
common stockholders $ 4,394,000 6,428,200 $ 0.68 $ 6,555,000 6,476,715 $ 1.01
=========== ====== =========== ======
Effect of diluted shares:
Common stock options 58,208 46,921
---------- ---------
Diluted EPS:
Income available to
common stockholders $ 4,394,000 6,486,408 $ 0.68 $ 6,555,000 6,523,636 $ 1.00
=========== ========= ====== =========== ========= ======
</TABLE>
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.
<PAGE>
6. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended September 30, 1999 and 2000, is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
-------------------------- ---------------------------
Unrealized Unrealized
Losses Losses
on Securities on Securities
==============================================================
(In Thousands)
<S> <C> <C> <C> <C>
Beginning balance.......................... $ (2,408) $ (8,443) $ (318) $ (6,098)
Current-period change...................... (1,651) 1,102 (3,741) (1,243)
----------- ---------- ----------- -----------
Ending balance............................. $ (4,059) $ (7,341) $ (4,059) $ (7,341)
=========== ========== =========== ===========
</TABLE>
An analysis of the related tax effects allocated to Other Comprehensive Loss is
as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
September 30, 1999 September 30, 2000
----------------------------------- -----------------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
==========================================================================
(In Thousands)
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
<S> <C> <C> <C> <C> <C> <C>
during period................................. $ (2,598) $ 987 $ (1,611) $ 2,465 $ (962) $ 1,503
Less: reclassification adjustment for gains
realized in net income........................ (65) 25 (40) (658) 257 (401)
----------------------------------- -----------------------------------
Other comprehensive income (loss)................... $ (2,663) $ 1,012 $ (1,651) $ 1,807 $ (705) $ 1,102
=================================== ===================================
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
September 30, 1999 September 30, 2000
----------------------------------- -----------------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
==========================================================================
(In Thousands)
Unrealized gain (loss) on assets available for
sale:
Unrealized holding gains (losses) arising
<S> <C> <C> <C> <C> <C> <C>
during period................................. $ (5,964) $ 2,266 $ (3,698) $ (1,380) $ 538 $ (842)
Less: reclassification adjustment for gains
realized in net income........................ (70) 27 (43) (658) 257 (401)
----------------------------------- -----------------------------------
Other comprehensive loss............................ $ (6,034) $ 2,293 $ (3,741) $ (2,038) $ 795 $ (1,243)
=================================== ===================================
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Bank & Trust ("Fidelity Federal" or the "Bank"). The Company conducts no
business other than holding the common stock of the Bank. Consequently, its net
income is derived from the Bank. The Bank's net income is primarily dependent on
its net interest income, which is the difference between interest income earned
on its investments in mortgage loans and mortgage-backed securities, other
investment securities and loans, and its cost of funds consisting of interest
paid on deposits and borrowings. The Bank's net income also is affected by its
provision for loan losses, as well as by the amount of other income, including
income from fees and service charges, net gains and losses on sales of
investments, and operating expense such as employee compensation and benefits,
deposit insurance premiums, occupancy and equipment costs, and income taxes.
Earnings of the Bank also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of the Bank. In particular, the general level of market
interest rates tends to be highly cyclical.
Forward-Looking Statements.
When used in this report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, uncertainties
related to year 2000 that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
Recent Developments.
As previously reported, one of Palm Beach County's largest employers, Pratt &
Whitney, has announced that it will be substantially closing its operations in
Florida by September 2000. Of the estimated four thousand employees affected,
approximately two thirds reside in Palm Beach County, while the remainder live
in Martin County. Both counties are within the Bank's primary service area.
Management is unable to estimate the effects on the Bank's operation, if any, as
a result of Pratt & Whitney's plant closing.
Other Comprehensive Income/Loss.
Accumulated Other Comprehensive Loss for the nine months ended September 30,
2000 increased by $1.2 million to $7.3 million. This increase was due to a
decrease in the market value of Assets Available for Sale which resulted from an
increase in market interest rates for comparable instruments. Accumulated Other
Comprehensive Loss for the nine months ended September 30, 1999 increased by
$3.7 million to $4.1 million, due to an decrease in the market value of Assets
Available for Sale which resulted from an increase in market interest rates for
comparable instruments.
<PAGE>
Accumulated Other Comprehensive Loss for the quarter ended September 30, 2000
decreased by $1.1 million. This decrease in the loss resulted from an increase
in the market value of Assets Available for Sale which was caused by a decrease
in market interest rates for comparable instruments. Accumulated Other
Comprehensive Loss for the quarter ended September 30, 1999 increased by $1.7
million, due to a decrease in the market value of Assets Available for Sale
which was caused by an increase in market interest rates for comparable
instruments.
Results of Operations.
Net income for the nine months ended September 30, 2000 was $6.6 million,
representing an increase of $2.2 million compared to $4.4 million for the same
period in 1999. The primary reasons for this increase, as more fully described
later herein, was an increase in net interest income of $6.9 million and an
increase in other income of $4.0 million. Offsetting these factors was an
increase in the provision for loan losses of $660,000, an increase in operating
expenses of $6.8 million and an increase in the provision for income taxes of
$1.4 million.
Net income for the quarter ended September 30, 2000 was $1.8 million,
representing an increase of $207,000 compared to $1.6 million for the same
period in 1999. The primary reasons for this increase, as more fully described
later herein, was an increase in net interest income of $1.7 million and an
increase in other income of $1.2 million. These amounts were offset by an
increase in the provision for loan losses of $202,000, an increase in operating
expenses of $2.3 million and an increase in the provision for income taxes of
$97,000.
Interest Income.
Interest income for the nine months ended September 30, 2000, totaled $97.5
million, representing an increase of $15.9 million or 19.4% compared to the same
period in 1999. The primary reason for this increase was an increase in the
Bank's interest income from loans of $14.0 million. This increase was primarily
the result of an increase of 19.5% in the average balance of loans to $1.2
billion from $1.0 billion for the periods ended September 30, 2000 and 1999,
respectively. Interest income from investment securities increased to $2.9
million for the nine months ended September 30, 2000 from $1.5 million for the
1999 period. This increase was due to an increase in the average balance of
investment securities of $21.0 million and an increase in the average rate of
such securities to 6.88% in 2000 from 5.79% in 1999. The Bank's interest income
from mortgage-backed and other securities also increased by $490,000. This
increase, which resulted from an increase in the average yield of
mortgage-backed and other securities to 7.01% from 5.82% for the nine months
ended September 30, 2000 and 1999, respectively was driven by the Banks
investment in adjustable rate securities, which repriced upward in reaction to
the general increase in market interest rate.
Interest income for the quarter ended September 30, 2000, totaled $34.4 million,
representing an increase of $5.8 million or 20.3% compared to the same 1999
quarter. The primary reason for this increase was an increase in the Bank's
interest income from loans of $4.9 million. This increase was primarily the
result of an increase of 18.7% in the average balance of loans to $1.3 billion
from $1.1 billion for the quarter ended September 30, 2000 and 1999,
respectively. Interest income from investment securities increased to $1.3
million for the quarter ended September 30, 2000 from $613,000 for the 1999
quarter. This increase was due to an increase in the average balance of
investment securities of $34.2 million and an increase in the average yield of
such securities to 7.17% in 2000 from 5.97% in 1999. The Bank's interest income
from mortgage-backed and other securities also increased by $71,000. This
increase resulted from an increase in the average yield of mortgage-backed and
other securities to 7.21% from 6.03% for the quarters ended September 30, 2000
and 1999, respectively. This increase in yield was the result of the Banks
adjustable rate securities repricing upward with the general increase in market
interest rates. Interest income also increased on other investments by $126,000
to $965,000 for the quarter ended September 30, 2000 from $839,000 for the same
quarter in 1999.
<PAGE>
Interest Expense.
Interest expense for the nine months ended September 30, 2000, totaled $62.5
million, an increase of $9.0 million or 16.7% from the same quarter in 1999. The
principal cause for this increase was an increase in interest expense on
deposits of $9.0 million. This resulted from an increase in the average balance
of deposits to $1.4 billion for the nine months ended September 30, 2000
compared to $1.2 billion for the same quarter in 1999. The increase in the
average balance of deposits has occurred primarily as a result of opening
additional branches. Interest expense on borrowed funds also increased by
$6,000.
Interest expense for the quarter ended September 30, 2000, totaled $22.6
million, an increase of $4.1 million or 22.3% from the same quarter in 1999. The
principal cause for this increase was an increase in interest expense on
deposits of $3.4 million. This resulted from an increase in the average balance
of deposits to $1.4 billion for the quarter ended September 30, 2000 compared to
$1.2 billion for the same quarter in 1999 as a result of opening additional
branches. Interest expense on borrowed funds also increased by $754,000 caused
primarily by an increase in the average balance of such funds to $373.0 million
from $346.0 million and an increase in the average cost to 6.54% for the quarter
ended September 30, 2000 from 6.18% for the comparable 1999 quarter.
Net Interest Income.
While the Bank's interest income increased by $15.9 million for the nine months
ended September 30, 2000, compared to the same period in 1999, interest expense
also increased by $9.0 million, resulting in net interest income of $35.0
million for the nine months ended September 30, 2000. This represents a $6.9
million or 24.6% increase in net interest income when compared to the same
period in 1999.
During the quarter ended September 30, 2000, the Bank's interest income
increased by $5.8 million compared to the same quarter in 1999, while interest
expense increased by $4.1 million, resulting in net interest income of $11.8
million for the quarter ended September 30, 2000, $1.7 million or 16.8% more
than realized in 1999.
Provision for Loan Losses.
The Bank's provision for loan losses increased by $660,000 to $928,000 for the
nine months ended September 30, 2000 from $268,000 for the nine months ended
September 30, 1999, principally as the result of the increased credit risk
associated with increased originations of commercial real estate mortgages,
consumer loans and commercial business loans. The Bank's total allowance for
loan losses at September 30, 2000 of $4.5 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 .29% and .19% at
September 30, 2000 and 1999, respectively.
The provision for loan losses was $363,000 for the quarter ended September 30,
2000, compared to $161,000 for the quarter ended September 30, 1999 the
increase, again principally as a result of increased production of consumer and
commercial loans. The provision for the quarter ended September 30, 2000 is
deemed adequate by management in light of the risks inherent in the Bank's loan
portfolio.
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 increasing
its production of commercial business loans and commercial real estate mortgages
and since such loans are deemed to have more credit risk than residential
mortgage loans, the Bank's provision for loan losses is likely to increase in
future periods.
<PAGE>
Other Income.
Other income for the nine months ended September 30, 2000 was $9.6 million or
$4.0 million more than the same period in 1999. This increase is due in part to
an increase of $2.2 million in other miscellaneous income, which resulted
primarily from the receipt of 147,232 shares of John Hancock Financial common
stock, valued at $17.00 per share, received pursuant to John Hancock's
conversion from a mutual to a stock insurance company. The Bank received these
shares as a result of owning various life insurance policies issued by John
Hancock Financial. Also attributing to this increase in other income was an
increase in service charges on deposit accounts to $2.9 million from $2.3
million. The Bank also increased its fees for other banking services to $3.0
million from $2.0 million for the nine months ended September 30, 2000 and 1999,
respectively. The main reason for the increase in fees for other banking
services resulted from insurance and annuity sales which increased by $614,000
from the same period last year. Net gain on sale of loans, investments and
mortgage-backed securities also increased by $316,000 to $658,000 for the nine
months ended September 30, 2000 compared to the same 1999 period due to the sale
of 97,232 shares of John Hancock Financial Stock referred to above resulting in
a profit of $658,000.
Other income for the quarter ended September 30, 2000 was $3.0 million, an
increase of $1.1 million compared to the same quarter in 1999. This increase is
principally due to increases in net gain on sale of loans, investments and
mortgage-backed securities of $559,000 due to a profit of $623,000 on the sale
of 92,133 shares of John Hancock Financial stock referred to above and fees for
other banking services of $375,000. Also attributing to this increase was an
increase in service charges on deposit accounts of $224,000. These increases
were slightly offset by a decrease in other miscellaneous income of $87,000 for
the quarter ended September 30, 2000 compared to the same quarter in 1999. Of
the $375,000 increase in fees for other banking services, $227,000 came as a
result of increased sales of insurance and annuity products compared to the
prior year.
Operating Expense.
Operating expenses for the nine months ended September 30, 2000 include the
operation of seven additional full service offices which were not in existence
during the same period in 1999. Operating expenses were $33.1 million,
representing a $6.8 million increase for the nine months ended September 30,
2000 when compared to $26.3 million for the nine months ended September 30,
1999. Employee compensation and benefits increased by $4.6 million. This
increase, which includes normal salary increases, is due mainly to the hiring of
additional personnel in connection with the Bank's branch expansion in 1999 and
2000 but also includes expansion of the Bank's commercial loan production
capabilities. As a result, the Bank's full time equivalent personnel increased
by 58 at September 30, 2000 to 553 compared to 495 at September 30, 1999. Health
care cost also contributed to the increase in employee compensation being
$434,000 greater for the nine months ended September 30, 2000 compared to the
same period in 1999. Occupancy and equipment costs increased by $1.4 million due
in part to increases in real estate tax assessments on the Bank's properties
along with additional depreciation expenses relating to new computer equipment
and new branch office facilities opened during 1999 and 2000. In addition, there
were increases in marketing costs of $104,000 and other operating expense of
$939,000 for the nine months ended September 30, 2000 and 1999, respectively.
The increase in other operating cost consists in part of increases in postage
and stationary of $340,000 compared to prior year dealing with the Bank's name
change and stocking new branches with supplies. Armored car expense increased
for the nine months by $115,000 also due to additional branches. Also, telephone
costs increased by approximately $136,000 due to additional branches and
expansion of the Bank's downtown operations center. Also attributing to this
increase was a decrease in gain on real estate owned of $66,000. These increases
were only slightly offset by a decrease in federal deposit insurance premiums of
$285,000 for the nine months ended September 30, 2000 compared to 1999.
Operating expenses increased by $2.3 million to $11.5 million for the quarter
ended September 30, 2000 as compared to the quarter ended September 30, 1999.
Employee compensation and benefits increased by $1.5 million. This increase as
stated above, is due largely to the hiring of additional personnel in connection
with the Bank's branch expansion in 1999 and 2000 but also includes expansion of
the Bank's commercial loan production capabilities along with an increase in
health care cost of $276,000 compared to prior year.
<PAGE>
Occupancy and equipment costs increased by $423,000 due in part, as explained
above, to additional depreciation expenses relating to new computer equipment
and new branch facilities. Also contributing to this increase were an increase
in marketing costs of $36,000, a decrease of $70,000 in gain on real estate
owned and an increase in other operating expense of $370,000 for the quarter
ended September 30, 2000 compared to 1999. Partially offsetting these increases
was a decrease in federal deposit insurance premiums of $97,000.
Income Taxes.
Provision for income taxes was $4.1 million for the nine months ended September
30, 2000 compared to $2.7 million for the nine months ended September 30, 1999.
This increase was attributable to an increase in income before provision for
income taxes of $3.5 million to $10.7 million in 2000 from $7.1 million in 1999.
These expenses approximate the rates paid by the Company for Federal and State
income taxes applied to the Company's pre-tax income.
The income tax provision was $1.1 million for the quarter ended September 30,
2000 compared to $1.0 million for the quarter ended September 30, 1999. These
expenses approximate the rates paid for Federal and State income taxes applied
to the Company's pre-tax income.
Changes in Financial Condition.
The Company's assets increased by $185.9 million to $1.9 billion at September
30, 2000 compared to December 31, 1999. Net loans receivable increased by $163.8
million, while cash and assets available for sale increased by $11.4 million. In
addition, the Bank increased its investment in office properties and equipment,
primarily for new office sites, by $5.2 million, while all other assets
increased by $5.5 million. Funds for the increase in assets were provided
primarily by an increase in the Bank's deposits of $90.9 million and an increase
in advances from the FHLB of $79.2 million, together with increases in other
liabilities, principally advances by borrowers for taxes and insurance, of $12.2
million The Company's equity at September 30, 2000 increased by $3.6 million
from December 31, 1999. This increase primarily consisted of net income for the
nine months of $6.6 million which was offset by dividends declared of $2.3
million and also an increase in Accumulated Other Comprehensive Loss of $1.2
million.
Market Risk Analysis.
As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, 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 September 30, 2000,
the Company does not own any trading assets, other than $1.1 million 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 September 30, 2000, the Company does
not have any hedging transactions in place such as interest rate swaps and caps.
<PAGE>
Asset and Liability Management-Interest Rate Sensitivity Analysis.
The majority of the Company's assets and liabilities are monetary in nature
which subjects the Company to significant interest rate risk. As stated above,
the majority of the Company's interest-bearing liabilities and nearly all of the
Company's interest-earning assets are held by the Bank and therefore virtually
all of the Company's interest rate risk exposure lies at the Bank level.
The Bank monitors interest rate risk by various methods including analyzing
changes in its Market Value of Portfolio Equity ("MVPE"). MVPE is generally
defined as the difference between the market value of the Bank's assets and the
market value of the Bank's liabilities. The Bank uses an internal model that
generates estimates of the Bank's MVPE over a range of interest rate scenarios.
The model calculates MVPE essentially by discounting the cash flows from the
Bank's assets and liabilities to present value using current market rates and
adjusting those discount rates accordingly for various interest rate scenarios.
The following table sets forth the Bank's estimated internal calculations of
MVPE as of September 30, 2000.
Changes in Rates Net Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
-------------------------- ---------------------------------------
+200bp 166,532 (61,326) (26.9%)
+100bp 202,988 (24,870) (10.9%)
-0- 227,858 - -
-100bp
243,275 15,417 6.8%
-200bp
245,411 17,553 7.7%
In preparing the MVPE table above, the Bank has estimated prepayment rates for
its loans ranging from 8% to 22% depending on interest rate scenario. These
rates are management's best estimate based on prior repayment experience.
Decay rates for liabilities 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. During 1999, the Bank contracted
with a third party consultant to perform an analysis of its core deposit
accounts. The purpose of this analysis was to obtain an estimate of the actual
deposit balance trends over various interest rate scenarios in the Bank's
previous five years and to use that data to provide a forecast of future balance
trends over various interest rate scenarios. The following decay rates are based
on this analysis.
<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 .27% .27% 1.54% 1.51% 3.75% 100.00%
Passbook, club accounts .00% .00% .03% .92% 10.63% 100.00%
Money market deposit accounts 6.49% 6.49% 29.49% 36.16% 100.00% 100.00%
</TABLE>
The above assumptions are estimates of annual percentages based on remaining
balances and while management believes these rates to be a reasonable analysis
of future deposit trends based on past performance, they should not be regarded
as indicative of the actual prepayments and withdrawals that may be experienced
by the Bank in any given period. Certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in MVPE requires the making of certain assumptions that may or may not reflect
how actual yields and costs respond to changes in market rates. For example,
although certain assets and
<PAGE>
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 may possibly deviate
significantly from those assumed in calculating the above table. Management has
also made estimates of fair value discount rates that it believes to be
reasonable. However, due to the fact that there is no quoted market for many of
the assets and liabilities, management has no definitive basis to determine
whether the fair values presented would be indicative of the value negotiated in
an actual sale.
Accordingly, while the above table provides an estimate of the Bank's interest
rate risk exposure at a particular point in time, it is not intended to provide
a precise forecast of the effect of market changes on the Bank's MVPE and net
interest income, as actual results may vary.
Under OTS risk-based capital regulations, savings associations are required to
calculate the 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. There are significant differences between the
Bank's internal assumptions used to calculate the previously presented MVPE and
those used by the OTS. For example, the Bank's internal decay rates for NOW,
passbook and money market accounts produce an average expected life for these
instruments of 17.93 years, 12.44 years and 4.15 years, respectively. The OTS
standard assumptions for these same instruments at June 30, 2000 result in an
expected average life of 2.7 years, 3.5 years and 1.3 years, respectively.
Accordingly, the Bank's previously presented MVPE calculations are not
representative of those which would be produced by the OTS.
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 does not solicit
high-rate jumbo certificates or brokered funds.
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 25.55% during the month of September 2000. Liquidity
ratios averaged 28.06% for the quarter ended September 30, 2000. The Bank
adjusts its liquidity levels in order to meet funding needs of loan
originations, deposit outflows, payment of real estate taxes on mortgage loans,
and repayment of borrowings and loan commitments. The Bank also adjusts
liquidity as appropriate to meet its asset and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities and other short-term investments, as well
as earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Bank manages
the pricing of its deposits to maintain a desired deposit balance. In addition,
the Bank invests excess funds in short-term interest-earning and other assets,
which provide liquidity to meet lending requirements. Short-term
interest-bearing deposits with the FHLB of Atlanta amounted to $3.9 million at
September 30, 2000. Other assets qualifying for liquidity at September 30, 2000,
including unpledged mortgage-backed securities guaranteed by the Federal
National Mortgage Association and the Federal Home
<PAGE>
Loan Mortgage Corporation, were $352.0 million. For additional information about
cash flows from the Company's operating, financing and investing activities, see
Consolidated Statements of Cash Flows included in the Financial Statements. The
primary sources of cash are net income, principal repayments on loans and
mortgage-backed securities, increases in deposit accounts and advances from the
FHLB.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At September 30, 2000, the Bank had $326.3 million in advances
from the FHLB. At September 30, 2000, the Bank had commitments outstanding to
originate or purchase loans of $97.8 million. This amount does not include the
unfunded portion of loans in process. Certificates of deposit scheduled to
mature in less than one year at September 30, 2000, totaled $739.6 million.
Based on prior experience, management believes that a significant portion of
such deposits will remain with the Bank.
FASB Statement on Derivatives and Hedging Activities - In June, 1998, the FASB
issued SFAS No. 133 which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Statement requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value hedge, a cash flow hedge, or a foreign
currency hedge. Entities may reclassify securities from the held-to-maturity
category to the available-for-sale category at the time adopting SFAS No. 133.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after July 1, 2000 and, accordingly, would apply to the Company beginning on
January 1, 2001. The Company plans to adopt the standard at that time and does
not presently intend to reclassify securities between categories. The Company
has not engaged in derivatives and hedging activities covered by the new
standard, and does not expect to do so in the foreseeable future. Accordingly,
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. As stated in the previous paragraph, the Company has
not engaged in derivative and hedging activities covered by this standard and
does not expect to do so in the foreseeable future. Accordingly, SFAS No. 138 is
not expected to have a material impact on the Company's financial statements.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces the accounting and reporting standards of SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on a
financial-components approach that focuses on control. The statement also
requires reclassification of financial assets pledged as collateral in the
statement of financial position separately from other assets not so encumbered
or disclosure of such assets in footnotes to the financial statements based on
certain criteria. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does not
expect adoption of this standard to have a material effect on the Company's
consolidated financial statements.
<PAGE>
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation,
nor is the Company aware of any pending litigation, other than
legal proceedings incident to the business of the Company, such as
foreclosure actions filed on behalf of the Company. Management,
therefore, believes the results of any current litigation would be
immaterial to the consolidated financial condition or results of
operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under
Consolidated Financial Statements (pages 2 through 5), Notes
to Unaudited Consolidated Financial Statements (pages 6
through 11) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 12
through 20), and are incorporated by reference, herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIDELITY BANKSHARES, INC.
Date: November 8, 2000 By: /S/Vince A. Elhilow
--------------------------------
Vince A. Elhilow
President and Chief Executive
Officer
Date: November 8, 2000 By: /S/Richard D. Aldred
--------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
