<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
_____________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 6,503,484 shares
of the Registrant's common stock outstanding as of August 1, 2000.
<PAGE>
FIDELITY BANKSHARES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements..................................... 1
Consolidated Statements of Financial Condition as
of December 31, 1999 and June 30, 2000................. 2
Consolidated Statements of Operations for the three and
the six months ended June 30, 1999 and 2000............ 3
Consolidated Statements of Comprehensive Operations for
the three and six months ended June 30, 1999 and 2000.. 4
Consolidated Statements of Cash Flows for the six
months ended June 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
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
<PAGE>
FIDELITY BANKSHARES, INC
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
December 31 June 30,
1999 2000
====================================
(In Thousands, except share data)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions..................... $ 41,736 $ 48,321
Interest-bearing deposits............................................. 19,065 52,329
----------- ----------
Total cash and cash equivalents.................................. 60,801 100,650
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities, including municipal bonds........... 29,059 56,901
Mortgage-backed and other securities.................................. 336,212 312,520
Corporate debt securities............................................. 38,959 38,740
Equity securities..................................................... - 3,367
----------- -------------
Total assets available for sale.................................. 404,230 411,528
LOANS RECEIVABLE......................................................... 1,164,421 1,275,808
OFFICE PROPERTIES AND EQUIPMENT, Net..................................... 44,982 48,869
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market......... 13,354 16,492
REAL ESTATE OWNED, Net................................................... 775 63
ACCRUED INTEREST RECEIVABLE.............................................. 8,330 9,899
DEFERRED INCOME TAX ASSET................................................ 4,924 5,350
OTHER ASSETS............................................................. 17,116 17,958
----------- -------------
TOTAL ASSETS............................................................. $ 1,718,933 $ 1,886,617
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS................................................................. $ 1,321,510 $ 1,396,914
OTHER BORROWED FUNDS..................................................... 14,656 16,452
ADVANCES FROM FEDERAL HOME LOAN BANK..................................... 247,073 328,216
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE............................ 4,010 13,127
DRAFTS PAYABLE........................................................... 6,533 7,271
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................ 28,750 28,750
OTHER LIABILITIES........................................................ 13,097 11,400
----------- ------------
TOTAL LIABILITIES..................................................... 1,635,629 1,802,130
=========== ============
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued................ - -
COMMON STOCK ($ .10 par value) 8,200,000 shares authorized,
6,834,463 shares outstanding at December 31, 1999, and
6,841,053 shares outstanding at June 30, 2000......................... 683 684
ADDITIONAL PAID-IN CAPITAL............................................... 40,937 41,113
RETAINED EARNINGS - substantially restricted............................. 57,343 60,598
TREASURY STOCK, at cost, 488,806 shares at December 31, 1999 and
494,345 shares at June 30, 2000....................................... (9,232) (9,301)
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN.................. (329) (164)
ACCUMULATED OTHER COMPREHENSIVE LOSS..................................... (6,098) (8,443)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY............................................ 83,304 84,487
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $ 1,718,933 $ 1,886,617
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited Unaudited
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
==================== ===================
(In Thousands, except share data)
<S> <C> <C> <C> <C>
Interest income:
Loans...................................................... $ 19,651 $ 24,524 $ 38,497 $ 47,626
Investment securities...................................... 557 886 878 1,505
Other investments.......................................... 716 864 1,539 1,417
Mortgage-backed and other securities....................... 6,046 6,327 12,110 12,529
--------- ---------- --------- ----------
Total interest income.................................. 26,970 32,601 53,024 63,077
Interest expense:.............................................. --------- ---------- --------- ----------
Deposits................................................... 12,301 15,426 24,568 30,150
Advances from Federal Home Loan Bank and other borrowings.. 5,296 5,342 10,455 9,707
--------- ---------- --------- ----------
Total interest expense................................. 17,597 20,768 35,023 39,857
--------- ---------- --------- ----------
Net interest income............................................ 9,373 11,833 18,001 23,220
Provision for loan losses...................................... 73 364 107 565
--------- ---------- --------- ----------
Net interest income after provision for loan losses............ 9,300 11,469 17,894 22,655
--------- ---------- --------- ----------
Other income:
Service charges on deposit accounts......................... 755 957 1,470 1,802
Fees for other banking services............................. 695 1,038 1,274 1,871
Net gain on sale of loans, investments
and mortgage-backed securities......................... 72 35 278 35
Miscellaneous.................................................. 378 316 689 2,950
--------- ---------- --------- ----------
Total other income..................................... 1,900 2,346 3,711 6,658
Operating expense:............................................. --------- ---------- --------- ----------
Employee compensation and benefits.......................... 4,997 6,507 9,738 12,827
Occupancy and equipment..................................... 1,653 2,210 3,458 4,424
Gain on real estate owned................................... (25) (79) (125) (129)
Marketing................................................... 227 303 484 552
Federal deposit insurance premium........................... 165 68 324 136
Other....................................................... 1,689 1,934 3,245 3,814
--------- ---------- --------- ----------
Total operating expense................................ 8,706 10,943 17,124 21,624
--------- ---------- --------- ----------
Income before provision for income taxes....................... 2,494 2,872 4,481 7,689
--------- ---------- --------- ----------
Provision for income taxes:
Current..................................................... 860 1,033 1,550 1,770
Deferred.................................................... 97 106 177 1,211
--------- ---------- --------- ----------
Total provision for income taxes....................... 957 1,139 1,727 2,981
--------- ---------- --------- ----------
Net income..................................................... $ 1,537 $ 1,733 $ 2,754 $ 4,708
========= ========== ========= ==========
Earnings per share:
Basic....................................................... $ 0.24 $ 0.27 $ 0.43 $ 0.73
========= ========== ========= ==========
Diluted..................................................... $ 0.24 $ 0.27 $ 0.42 $ 0.72
========= ========== ========= ==========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited Unaudited
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
======================== ===========================
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Net income................................................. $ 1,537 $ 1,733 $ 2,754 $ 4,708
Other comprehensive income (loss), net of tax:
Unrealized losses on assets available for sale:
Unrealized holding losses arising during period........ (2,298) (709) (2,090) (2,345)
------- ------- -------- ---------
Comprehensive income (loss)................................ $ (761) $ 1,024 $ 664 $ 2,363
======= ======= ======== =========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
For the Six Months Ended
June 30,
1999 2000
=============================
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income..................................................................................... $ 2,754 $ 4,708
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization.............................................................. 1,121 1,434
ESOP and Recognition and Retention Plan compensation expense............................... 258 221
Accretion of discounts, amortization of premiums, and other deferred yield items........... 1,067 (464)
Provision for loan losses and real estate losses........................................... 107 565
Provisions for (gains) losses and net (gains) losses on sales of real estate owned......... (121) (252)
Gain on securities received from insurance carrier's demutualization....................... - (2,503)
Net (gain) loss on sale of:
Loans................................................................................ (273) -
Corporate Bonds...................................................................... (5) -
Equity securities.................................................................... - (35)
Office property and equipment........................................................ 63 10
Increase in accrued interest receivable........................................................ (631) (1,569)
Increase in other assets....................................................................... (1,128) (821)
Increase (decrease) in drafts payable.......................................................... (1,211) 738
Increase in deferred income tax asset.......................................................... 159 1,233
Increase (decrease) in other liabilities....................................................... 1,264 (1,689)
-----------------------------
Net cash from operating activities................................................... 3,424 1,576
-----------------------------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans.............................................. (91,595) (95,929)
Principal payments received on mortgage-backed securities...................................... 56,924 18,832
Purchases of:
Loans...................................................................................... (14,946) (15,310)
Mortgage-backed and other securities....................................................... (50,031) -
Federal Home Loan Bank stock............................................................... - (4,638)
Investment securities...................................................................... (23,006) (30,112)
Office properties and equipment............................................................ (5,414) (5,863)
Proceeds from sales of:
Loans...................................................................................... 14,548 -
Federal Home Loan Bank stock............................................................... 98 1,500
Corporate debt securities.................................................................. 4,958 -
Real estate acquired in settlement of loans................................................ 1,594 910
Equity securities.......................................................................... - 121
Office properties and equipment............................................................ - 500
Proceeds from maturities of municipal bonds and government and agency securities............... 2,000 2,000
Other.......................................................................................... 165 203
-----------------------------
Net cash used for investing activities............................................... (104,705) (127,786)
-----------------------------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock................................................... 127 61
Purchase of Treasury Stock..................................................................... (1,980) -
Cash dividends................................................................................. (2,331) (1,462)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts........................................ 39,416 86,056
Certificates of deposit.................................................................... 57,070 (10,652)
Advances from Federal Home Loan Bank....................................................... 6,141 81,143
Other borrowed funds....................................................................... 1,762 1,796
Advances by borrowers for taxes and insurance.............................................. 8,930 9,117
-----------------------------
Net cash from financing activities................................................... 109,135 166,059
-----------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................................................... 7,854 39,849
CASH AND CASH EQUIVALENTS, Beginning of period................................................. 60,026 60,801
-----------------------------
CASH AND CASH EQUIVALENTS, End of period....................................................... $ 67,880 $ 100,650
=============================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal 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 June 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.
Certain amounts in the financial statements have been reclassified to conform
with the June 30, 2000 presentation.
<PAGE>
2. LOANS RECEIVABLE
Loans receivable at December 31, 1999 and June 30, 2000, consist of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
==========================================
(In Thousands)
<S> <C> <C>
One-to-four single family, residential real
estate mortgages........................................................... $ 925,384 $ 986,283
Commercial real estate mortgages............................................ 118,262 128,812
Real estate construction-primarily residential.............................. 63,589 74,691
Land loans-primarily residential............................................ 9,763 13,620
------------------ ------------------
Total first mortgage loans.......................................... 1,116,998 1,203,406
Consumer loans.............................................................. 60,281 74,015
Commercial business loans................................................... 94,157 115,251
------------------ ------------------
Total gross loans................................................... 1,271,436 1,392,672
Less:
Undisbursed portion of loans in process............................. 106,232 115,729
Unearned discounts, premiums and deferred loan fees, net............ (2,826) (2,982)
Allowance for loan losses........................................... 3,609 4,117
------------------ ------------------
Loans receivable-net........................................................ $ 1,164,421 $ 1,275,808
================== ==================
</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 six months ended June 30, 1999 and 2000, is
as follows:
<TABLE>
<CAPTION>
For the Year For the Three Months For the Six Months
Ended Ended Ended
December 31, June 30, June 30,
1999 1999 2000 1999 2000
============ ==============================================================
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............... $ 3,226 $ 3,201 $ 3,765 $ 3,226 $ 3,609
Current provision............................ 463 73 364 107 565
Charge-offs (recoveries)-net................. (80) (22) (12) (81) (57)
------------ ---------------------------- ----------------------------
Ending balance................................ $ 3,609 $ 3,252 $ 4,117 $ 3,252 $ 4,117
============ ============================ =============================
</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 June 30, 2000
===========================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
-----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Impaired loan balances and related allowances:
Loans with related allowance for loans losses......... $ 569 $ 101 $ 361 $ 241
Loans without related allowance for loan losses....... 3,726 - 2,945 -
--------- ---------- ---------- ---------
Total............................................. $ 4,295 $ 101 $ 3,306 $ 241
========= ========== ========== =========
</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>
To be Considered
Minimum For Well Capitalized
Capital Adequacy For Prompt Corrective
Actual Purposes Action Provisions
----------------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
----------------------------------------------------------------------------
<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 June 30, 2000 Stockholders' Equity
and ratio to total assets........................... 5.9% $ 111,722
====
Net unrealized decrease in market value of assets
available for sale (net of applicable income taxes)....... 8,442
Goodwill.................................................. (2,629)
Disallowed servicing assets and deferred tax assets....... (45)
-----------
Tangible capital and ratio to adjusted total assets....... 6.2% $ 117,490 1.5% $ 28,464
==== =========== === ========
Tier 1 (core) capital and ratio to adjusted
total assets........................................ 6.2% $ 117,490 3.0% $ 56,928 5.0% $ 94,880
==== =========== === ======== === ========
Tier 1 (core) capital and ratio to risk-weighted
total assets........................................ 11.0% $ 117,490 4.0% $ 42,779 6.0% $ 64,168
==== === ======== === ========
Allowable Tier 2 capital:
General loan valuation allowances......................... 3,551
Unrealized gains on available for sale equity securities.. 951
Equity investments........................................ (3,553)
============
Total risk-based capital and ratio to risk-weighted
total assets........................................ 11.1% $ 118,439 8.0% $ 85,558 10.0% $106,947
==== =========== === ======== ==== ========
Total assets.............................................. $ 1,886,426
============
Adjusted total assets..................................... $ 1,897,592
============
Risk-weighted assets...................................... $ 1,069,471
============
</TABLE>
9
<PAGE>
5. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP) and stock options for the three months ended June
30, 1999 and 2000, are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
June 30, 1999 June 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....................... $1,537,000 $1,733,000
========== ==========
Basic EPS:
Income available to
common stockholders............ $1,537,000 6,416,468 $ 0.24 $1,733,000 6,476,589 $ 0.27
========== ========= ========== =========
Effect of diluted shares:
Common stock options........... 62,227 46,104
--------- ---------
Diluted EPS:
Income available to
common stockholders............ $1,537,000 6,478,695 $ 0.24 $1,733,000 6,522,693 $ 0.27
========== ========= ========= ========== ========= =========
</TABLE>
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP) and stock options for the six months ended June 30,
1999 and 2000, are as follows:
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
June 30, 1999 June 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. $ 2,754,000 $ 4,708,000
=========== ============
Basic EPS:
Income available to
common stockholders $ 2,754,000 6,423,129 $ 0.43 $ 4,708,000 6,471,024 $ 0.73
============ ========= ============ =========
Effect of diluted shares:
Common stock options 67,778 43,954
--------- ----------
Diluted EPS:
Income available to
common stockholders $ 2,754,000 6,490,907 $ 0.42 $ 4,708,000 6,514,978 $ 0.72
============ ========= ======== ============ ========= =========
</TABLE>
Pursuant to Statement of Position (SOP), 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AICPA), ESOP shares that have not been committed to be released are not
considered to be outstanding.
10
<PAGE>
6. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended June 30, 1999 and 2000, is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 2000 1999 2000
-------------------------- --------------------------
Unrealized Unrealized
Losses Losses
on Securities on Securities
==============================================================
(In Thousands)
<S> <C> <C> <C> <C>
Beginning balance......................... $ (110) $ (7,734) $ (318) $ (6,098)
Current-period change..................... (2,298) (709) (2,090) (2,345)
----------- ---------- ---------- ---------
Ending balance............................ $ (2,408) $ (8,443) $ (2,408) $ (8,443)
=========== ========== ========== =========
</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
June 30, 1999 June 30, 2000
-------------------------------- --------------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
=====================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period......................................... $ (3,701) $ 1,406 $ (2,295) $ (1,366) $ 657 $ (709)
Less: reclassification adjustments for gains
realized in net income................................ (5) 2 (3) - - -
-------------------------------- ------------------------------
Other comprehensive income (loss)......................... $ (3,706) $ 1,408 $ (2,298) $ (1,366) $ 657 $ (709)
================================ ==============================
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 1999 June 30, 2000
-------------------------------- --------------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
======================================================================
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period........................................ $ (3,366) $ 1,279 $ (2,087) $ (4,005) $ 1,660 $ (2,345)
Less: reclassification adjustments for gains
realized in net income............................... (5) 2 (3) - -
-------------------------------- ------------------------------
Other comprehensive income (loss)........................ $ (3,371) $ 1,281 $ (2,090) $ (4,005) $ 1,660 $ (2,345)
================================ ==============================
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal 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 six months ended June 30, 2000
increased by $2.3 million to $8.4 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 six months ended June 30, 1999 increased by $2.1
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.
Accumulated Other Comprehensive Loss for the quarter ended June 30, 2000
increased by $709,000. This increase resulted from a decrease in the market
value of Assets Available for Sale which was caused by an increase in market
interest rates for comparable instruments. Accumulated Other Comprehensive Loss
for the quarter ended June 30, 1999 increased by $2.3, 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.
13
<PAGE>
Results of Operations.
Net income for the six months ended June 30, 2000 was $4.7 million, representing
an increase of $1.9 million compared to $2.8 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 $5.2 million and an increase
in other income of $2.9 million. Offsetting these factors was an increase in
the provision for loan losses of $458,000, an increase in operating expenses of
$4.5 million and an increase in the provision for income taxes of $1.3 million.
Net income for the quarter ended June 30, 2000 was $1.7 million, representing an
increase of $196,000 compared to $1.5 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 $2.5 million and an increase in other income
of $446,000. These amounts were offset by an increase in the provision for loan
losses of $291,000, an increase in operating expenses of $2.2 million and an
increase in the provision for income taxes of $182,000.
Interest Income.
Interest income for the six months ended June 30, 2000, totaled $63.1 million,
representing an increase of $10.1 million or 19.0% 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 $9.1 million. This increase was primarily the
result of an increase of 19.9% in the average balance of loans to $1.2 billion
from $1.0 billion for the periods ended June 30, 2000 and 1999, respectively.
Interest income from investment securities increased to $1.5 million for the six
months ended June 30, 2000 from $878,000 for the 1999 period. This increase was
due to an increase in the average balance of investment securities of $12.9
million and an increase in the average rate of such securities to 6.81% in 2000
from 5.62% in 1999. The Bank's interest income from mortgage-backed and other
securities also increased by $419,000. This increase, which resulted from an
increase in the average rate of mortgage-backed and other securities to 6.91%
from 5.72% for the six months ended June 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. Partially
offsetting these increases was a decrease in interest income from other
investments of $122,000, which resulted from a decrease in the average balance
of these investments to $43.7 million from $51.8 million for the six months
ended June 30, 2000 and 1999, respectively.
Interest income for the quarter ended June 30, 2000, totaled $32.6 million,
representing an increase of $5.6 million or 20.9% 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 20.2% in the average balance of loans to $1.2 billion
from $1.0 billion for the quarter ended June 30, 2000 and 1999, respectively.
Interest income from investment securities increased to $886,000 for the quarter
ended June 30, 2000 from $557,000 for the 1999 quarter. This increase was due
to an increase in the average balance of investment securities of $12.4 million
and an increase in the average rate of such securities to 6.85% in 2000 from
5.66% in 1999. The Bank's interest income from mortgage-backed and other
securities also increased by $281,000. This increase resulted from an increase
in the average rate of mortgage-backed and other securities to 7.09% from 5.76%
for the quarters ended June 30, 2000 and 1999, respectively. This increase in
rate 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 $148,000 to $864,000 for the quarter ended
June 30, 2000 from $716,000 for the same quarter in 1999.
Interest Expense.
Interest expense for the six months ended June 30, 2000, totaled $40.0 million,
an increase of $4.8 million or 13.8% from the same quarter in 1999. The
principal cause for this increase was an increase in interest expense on
deposits of $5.6 million. This resulted from an increase in the average balance
of deposits to $1.4 billion for the six months ended June 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 the additional
branches mentioned previously. The increase in interest expense on deposits was
partially offset by a decrease in interest expense on
14
<PAGE>
borrowed funds of $748,000 caused primarily by a decrease in the average balance
of such funds to $312.9 million from $342.3 million for the six months ended
June 30, 2000 and 1999, respectively.
Interest expense for the quarter ended June 30, 2000, totaled $20.8 million, an
increase of $3.2 million or 18.0% from the same quarter in 1999. The principal
cause for this increase was an increase in interest expense on deposits of $3.1
million. This resulted from an increase in the average balance of deposits to
$1.4 billion for the quarter ended June 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 $46,000 caused primarily by an
increase in the average cost of such funds to 6.38% for the quarter ended June
30, 2000 from 6.14% for the comparable 1999 quarter.
Net Interest Income.
While the Bank's interest income increased by $10.1 million for the six months
ended June 30, 2000, compared to the same period in 1999, interest expense also
increased by $4.8 million, resulting in net interest income of $23.2 million for
the six months ended June 30, 2000. This represents a $5.2 million or 29.0%
increase in net interest income when compared to the same period in 1999.
During the quarter ended June 30, 2000, the Bank's interest income increased by
$5.6 million compared to the same quarter in 1999, while interest expense
increased by $3.2 million, resulting in net interest income of $11.8 million for
the quarter ended June 30, 2000, $2.5 million or 26.2% more than realized in
1999.
Provision for Loan Losses.
The Bank's provision for loan losses increased by $458,000 to $565,000 for the
six months ended June 30, 2000 from $107,000 for the six months ended June 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 June
30, 2000 of $4.1 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 .17% and .19% at June 30, 2000 and 1999, respectively.
The provision for loan losses was $364,000 for the quarter ended June 30, 2000,
compared to $73,000 for the quarter ended June 30, 1999 the increase, again
principally as a result of increased production of consumer and commercial
loans. The provision for the quarter ended June 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.
Other Income.
Other income for the six months ended June 30, 2000 was $6.7 million or $2.9
million more than the same period in 1999. This increase is due primarily to an
increase of $2.6 million in other miscellaneous income, which resulted primarily
from the receipt of 147,232 shares of John Hancock Financial common stock,
received pursuant to John Hancock's conversion from a mutual to a stock
insurance company. The Bank received these
15
<PAGE>
shares as a result of owning various life insurance policies issued by John
Hancock Financial. The shares will be classified as "Available for Sale" until
sold. Also attributing to this increase in other income was an increase in
service charges on deposit accounts to $1.8 million from $1.5 million. The Bank
also increased its fees for other banking services to $1.9 million from $1.3
million for the six months ended June 30, 2000 and 1999, respectively. The main
increase in fees for other banking services resulted from insurance and annuity
sales which increased by $460,000 from the same period last year. These
increases were slightly offset by a decrease in net gain on sale of loans,
investments and mortgage-backed securities of $243,000 for the six months ended
June 30, 2000 compared to the same 1999 period.
Other income for the quarter ended June 30, 2000 was $2.3 million, an increase
of $446,000 compared to the same quarter in 1999. This increase is principally
due to increases in service charges on deposit accounts of $202,000 and fees for
other banking services of $343,000. These increases were slightly offset by a
decrease in net gain on sale of loans, investments and mortgage-backed
securities of $37,000 for the quarter ended June 30, 2000 compared to the same
quarter in 1999. Of the $343,000 increase in fees for other banking services,
$224,000 came as a result of increased sales of insurance and annuity products
compared to the prior year.
Operating Expense.
Operating expenses for the six months ended June 30, 2000 include the operation
of nine additional full service offices which were not in existence during the
same period in 1999. Operating expenses were $21.6 million, representing a $4.5
million increase for the six months ended June 30, 2000 when compared to $17.1
million for the six months ended June 30, 1999. Employee compensation and
benefits increased by $3.1 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 93 at June 30, 2000 to 553 compared
to 460 at June 30, 1999. Occupancy and equipment costs increased by $966,000
due in part to increases in real estate tax assessments on the Bank's properties
along with additional depreciation expenses relating to new computer equipment
and new branch office facilities opened during 1999 and 2000. In addition,
there were increases in marketing costs of $68,000 and other operating expense
of $569,000 for the six months ended June 30, 2000 and 1999, respectively. The
increase in other operating cost consists in part of increases in postage and
stationary of $185,000 compared to prior year dealing with the Bank's name
change and stocking new branches with supplies. Armored car expense increased
for the six months by $79,000 also due to additional branches. Also, telephone
costs increased by approximately $96,000 due to additional branches and
expansion of the Bank's downtown operations center. These increases were only
slightly offset by an increase in gain on real estate owned of $4,000 and a
decrease in federal deposit insurance premiums of $188,000 for the six months
ended June 30, 2000 compared to 1999.
During the quarter ended June 30, 2000, operating expenses include those of nine
new full service offices which were not in existence during the same period in
1999. Operating expenses increased by $2.2 million to $10.9 million for the
quarter ended June 30, 2000 as compared to the quarter ended June 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. Occupancy and equipment
costs increased by $557,000 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 increases in marketing
costs of $76,000 and other operating expense of $245,000 for the quarter ended
June 30, 2000 compared to 1999. Partially offsetting these increases was an
increase in gain on real estate owed of $54,000 and a decrease in federal
deposit insurance premiums of $97,000.
16
<PAGE>
Income Taxes.
Provision for incomes taxes was $3.0 million for the six months ended June 30,
2000 compared to $1.7 million for the six months ended June 30, 1999. This
increase was attributable to a increase in income before provision for income
taxes of $3.2 million to $7.7 million in 2000 from $4.5 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 June 30, 2000 compared to $957,000 for the quarter
ended June 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 $167.7 million to almost $1.9 billion at June
30, 2000 compared to December 31, 1999. Net loans receivable increased by
$111.4 million, while cash and assets available for sale increased by $43.8
million. In addition, the Bank increased its investment in office properties
and equipment, primarily for new office sites, by $3.9 million, while all other
assets increased by $8.6 million. Funds for the increase in assets were
provided primarily by an increase in the Bank's deposits of $75.4 million and an
increase in advances from the FHLB of $81.1 million, together with increases in
other liabilities, principally advances by borrowers for taxes and insurance, of
$10.0 million The Company's equity at June 30, 2000 increased by $1.2 million
from December 31, 1999. This increase consisted of net income for the six months
of $4.7 million which was offset by dividends declared of $1.5 million and also
an increase in Accumulated Other Comprehensive Loss of $2.3 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 June 30, 2000, the
Company does not own any trading assets, other than $1.0 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 June 30, 2000, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
The 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.
17
<PAGE>
The following table sets forth the Bank's estimated internal calculations of
MVPE as of June 30, 2000.
<TABLE>
<CAPTION>
Changes in Rates Net Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
---------------- --------------------------------------
<S> <C> <C> <C>
+ 200bp 173,140 (44,028) (20.3%)
+ 100bp 200,855 (16,313) (7.5%)
-0- 217,168 - -
-100bp 226,255 9,087 4.2%
-200bp 227,365 10,197 4.7%
</TABLE>
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 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.
18
<PAGE>
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 March 31, 2000 result in an expected
average life of 2.7 years, 3.4 years and 1.4 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 29.36% during the month of June 2000. Liquidity
ratios averaged 25.23% for the quarter ended June 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 $52.3 million at June 30,
2000. Other assets qualifying for liquidity at June 30, 2000, including
unpledged mortgage-backed securities guaranteed by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, were $384.2 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.
19
<PAGE>
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 2000, the Bank had $328.2 million in advances from
the FHLB. At June 30, 2000, the Bank had commitments outstanding to originate
or purchase loans of $95.8 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 June 30, 2000, totaled $698.6 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.
20
<PAGE>
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor
is the Company aware of any pending litigation, other than legal
proceedings incident to the business of the Company, such as
foreclosure actions filed on behalf of the Company. Management,
therefore, believes the results of any current litigation would be
immaterial to the consolidated financial condition or results of
operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
On April 18, 2000, several matters were submitted to the security
holders, in connection with the Company's annual meeting of
stockholders, all of which were set forth in the Company's proxy
materials. The result of such votes are as follows:
Ballot No. 1
------------
The election of Vince A. Elhilow and Dr. Donald E. Warren to
serve as director for a term of three years or until their successors
have been elected and qualified.
For Withheld
--- --------
Vince A. Elhilow 6,359,894 19,825
Donald E. Warren 6,359,564 20,155
Ballot No. 2
------------
The ratification of the appointment of Deloitte & Touche LLP, as
auditors for the Company for the fiscal year ended December 31, 2000.
For Against Abstain
--- ------- -------
Number of Votes 6,364,421 9,466 5,832
21
<PAGE>
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under Consolidated
Financial Statements (pages 2 through 5), Notes to Unaudited
Consolidated Financial Statements (pages 6 through 11) and
Management's Discussion and Analysis of Financial Condition and
Results of Operations (pages 12 through 20), and are incorporated
by reference, herein.
Exhibit 27
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIDELITY BANKSHARES, INC.
Date: August 11, 2000 By: /s/Vince A. Elhilow
-------------------
Vince A. Elhilow
President and Chief Executive
Officer
Date: August 11, 2000 By: /s/Richard D. Aldred
--------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
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