As filed with the Securities and Exchange Commission on January 5, 2001
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIDELITY BANKSHARES, INC.
FIDELITY BANKSHARES II, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
Delaware 6712 65-0717085
-------- ---- ----------
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification) Identification Number)
205 Datura Avenue (I.R.S. Employer
West Palm Beach, Florida 33401 Identification Number to be
(561) 659-9900 applied for by Fidelity
(Address, including zip code, and telephone number, including Bankshares II, Inc.)
area code, of registrant's principal executive offices)
Vince A. Elhilow
President and Chief Executive Officer
Fidelity Bankshares, Inc.
Fidelity Bankshares II, Inc.
218 Datura Avenue
West Palm Beach, Florida 33401
(561) 596-9900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Eric Luse, Esq.
Alan Schick, Esq.
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================================
Proposed Proposed maximum
Title of each class of Amount to be maximum offering aggregate Amount of
securities to be registered registered price per share offering price (1) registration fee
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock, $.10 par value per share 17,192,500 shares $10.00 $171,925,000 $43,000
=========================================================================================================================
</TABLE>
-------
(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
PROSPECTUS
FIDELITY BANKSHARES, INC.
(Holding company for Fidelity Federal Bank and Trust)
Up to 8,250,151 Shares of Common Stock
Fidelity Bankshares, Inc. is offering common stock for sale in
connection with the conversion of Fidelity Bankshares, MHC. The shares we are
offering represent the 55.19% ownership interest in Fidelity Bankshares, Inc.
now owned by Fidelity Bankshares, MHC. The existing publicly held shares of
Fidelity Bankshares, Inc. which represent the remaining 44.81% interest in
Fidelity Bankshares, Inc. will be exchanged for new shares of common stock in
Fidelity Bankshares, Inc. All shares being offered for sale will be offered at a
price of $10.00 per share. You will not have to pay any sales commissions on
shares of common stock that you purchase in the offering.
o If you are a current or former depositor of Fidelity Federal Bank and Trust
you may have priority rights to purchase shares.
o If you are a current stockholder of Fidelity Bankshares, Inc. your shares
will be exchanged automatically for new shares of Fidelity Bankshares, Inc.
o You may purchase shares after priority orders are filled.
o You may purchase up to 82,500 shares. You may purchase no fewer than 25
shares.
================================================================================
OFFERING SUMMARY
Price: $10.00 per Share
MINIMUM MAXIMUM
------- -------
Number of Shares: 6,097,938 8,250,151
Gross offering proceeds: $60,979,380 $82,501,510
Estimated offering expenses: $ 1,780,000 $ 1,982,000
Estimated net proceeds: $59,199,380 $80,519,510
Estimated net proceeds per share: $9.71 $9.76
================================================================================
The maximum number of shares offered may be increased up to 9,487,674.
We will terminate the offering of new stock and the exchange of existing shares
if we do not sell the minimum number of shares. Ryan, Beck & Co., Inc. will
assist Fidelity Bankshares, Inc. in the sale of the common stock on a best
efforts basis, however, it is not required to purchase any of the common stock
that is being offered. Our common stock will trade on the Nasdaq National Market
under the symbol "FFFL". The offering will end at ________, eastern time, on
__________, 2001, unless extended in accordance with our Plan of Conversion and
Reorganization.
For a discussion of the risks that you should consider before
making an investment decision, see "Risk Factors" beginning on page __.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved of
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
RYAN BECK & CO.
The date of this prospectus is ____________, 2001
<PAGE>
[INSERT MAP SHOWING FIDELITY BANKSHARES' MARKET AREA]
<PAGE>
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS.....................................................1
SUMMARY .................................................................5
RISK FACTORS.............................................................12
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF FIDELITY BANKSHARES, INC. AND SUBSIDIARY.....................15
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE..............................17
USE OF PROCEEDS..........................................................18
DIVIDEND POLICY..........................................................19
MARKET FOR THE COMMON STOCK..............................................20
CAPITALIZATION...........................................................21
PRO FORMA DATA...........................................................22
FIDELITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS...........................27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................28
REGULATION...............................................................65
TAXATION ................................................................70
MANAGEMENT OF FIDELITY BANKSHARES, INC...................................71
BENEFICIAL OWNERSHIP OF COMMON STOCK.....................................83
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS........................84
THE CONVERSION...........................................................85
STOCKHOLDERS' RIGHTS....................................................106
RESTRICTIONS ON ACQUISITION OF FIDELITY BANKSHARES, INC.................110
DESCRIPTION OF CAPITAL STOCK OF FIDELITY BANKSHARES, INC................111
TRANSFER AGENT..........................................................112
EXPERTS ...............................................................113
LEGAL MATTERS...........................................................113
ADDITIONAL INFORMATION..................................................113
<PAGE>
QUESTIONS AND ANSWERS
Q: Who may purchase common stock in the subscription offering?
A: Rights to subscribe for common stock have been granted under the plan of
conversion and reorganization to the following persons in the following
descending order of priority:
(1) Fidelity Federal Bank and Trust depositors with $50.00 or more on
deposit as of October 31, 1999;
(2) Fidelity Federal Bank and Trust's employee stock ownership plan;
(3) Fidelity Federal Bank and Trust depositors with $50.00 or more on
deposit as of _______________, 2000; and
(4) Fidelity Federal Bank and Trust depositors and borrowers as of
________, 2001.
Q: Will any commission be charged for common stock I purchase in the stock
offering?
A: No.
Q: How many shares of common stock are being offered, and at what price per
share?
A: Fidelity Bankshares, Inc. is offering between 6,097,938 and 8,250,151
shares of common stock for a subscription price of $10.00 per share. We may
increase the number of shares offered to up to 9,487,674 under certain
circumstances. The amount of common stock being offered is based upon an
independent appraisal of the market value of Fidelity Bankshares, MHC and
Fidelity Bankshares, Inc., assuming completion of the conversion and
offering.
Any shares that are not purchased in the subscription offering, will be
available for purchase by the public in a community offering, with a
preference, first to stockholders of Fidelity Bankshares, Inc. as of
________, 2001, and second to residents of the Palm Beach, Martin, St.
Lucie and Indian River Counties.
Q: How do I purchase common stock?
A: First, you should read this document. Then, complete and return the
enclosed stock order form, together with your payment. You may submit stock
order forms in three ways: you may send the stock order form by regular
mail, using the reply envelope provided; you may send the stock order form
by overnight delivery to the address indicated on the back of the stock
order form; or you may hand-deliver the stock order form to our stock
information center, located at 205 Datura Street. Stock order forms should
not be delivered to branch offices.
Q: How can I pay for the common stock?
A: Full payment for shares must accompany your stock order form at the time it
is submitted. You may pay for your shares by check or money order payable
to Fidelity Bankshares, Inc., or by authorizing a withdrawal from the types
of Fidelity Federal Bank and Trust deposit accounts designated on the stock
order form (we will waive any penalty for early withdrawal of certificate
deposit accounts). Authorized withdrawals will not be made until the
completion of the stock offering, but the designated funds will not be
available to you in the interim. If you wish to use IRA funds, see the
discussion below. Funds authorized to be withdrawn from Fidelity Federal
Bank and Trust deposit account(s) must be available in your account at the
time you submit your stock order form. Checks and money orders will be
cashed upon receipt.
Please note, however, that federal law prohibits Fidelity Federal Bank and
Trust from loaning funds to purchase common stock in the stock offering.
However, other financial institutions may make such a loan.
<PAGE>
Q: May I obtain a loan or line of credit from Fidelity Federal Bank and Trust
to pay for my common stock?
A: No.
Q: May I subscribe for shares using funds in my Individual Retirement Account
at Fidelity Federal Bank and Trust or elsewhere?
A: Yes. However, common stock must be held in a self-directed retirement
account. By regulation, Fidelity Federal Bank and Trust's IRAs are not
self-directed, so they cannot be invested in stock. If you wish to use some
or all of the funds in your Fidelity Federal Bank and Trust IRA, the
applicable funds must be transferred to a self-directed account maintained
by an independent trustee, such as a brokerage firm. If you do not have
such an account, you will need to establish one before placing your stock
order. Because individual situations vary and processing takes time, we
recommend that you contact the stock information center by ___________,
2001 for assistance with purchases using your Fidelity Federal Bank and
Trust IRA, or another retirement account that you may have. Whether you may
use such funds for the purchase of shares in the stock offering may depend
on timing constraints and, possibly, the institution where the funds are
currently held.
Q: May I change my mind after I place an order to subscribe for common stock?
A: No. After your stock order form and payment are received, you may not
cancel or modify your order.
Q: Will I receive interest on my subscription payment?
A: Yes. Payments received with the stock order form will be cashed and placed
in an interest-bearing escrow account at Fidelity Federal Bank and Trust,
and will earn interest at the passbook savings rate, until the conclusion
of the stock offering. At that time, a check for the accrued interest will
be mailed to you. Subscribers who elect to pay by deposit account
withdrawal will continue to accrue interest in the account at its
contractual rate until the funds are withdrawn.
Q: How many shares may I buy?
A: The minimum order is 25 shares, or $250. There are maximum purchase
limitations, and there is a stock ownership limitation which applies to
current Fidelity Bankshares, Inc. stockholders. These limitations are
described on the stock order form and in the section of this document
entitled "The Conversion."
Q: What is the deadline for placing an order?
A: Orders in the subscription offering and community offering must be received
(not postmarked) by no later than 10:00 a.m. local time, on _________,
2001.
Q: When will I receive my stock certificate?
A: The new shares of Fidelity Bankshares, Inc. will begin trading, and stock
certificates will be mailed to investors, as promptly as practicable after
the stock offering is completed.
2
<PAGE>
Q: How can I buy or sell Fidelity Bankshares, Inc. common stock in the future?
A: Existing publicly held shares of Fidelity Bankshares, Inc. common stock
trade on the Nasdaq National Market under the symbol "FFFL." Upon
completion of the conversion and offering, the new shares of common stock
of Fidelity Bankshares, Inc. will continue to be traded on the Nasdaq
National Market under the symbol "FFFL". You will be able to buy or sell
shares through a stockbroker or discount broker. However, even though the
common stock may have begun trading, brokerage firms may require that you
have received your stock certificate prior to selling shares that you
purchased in the stock offering.
Q: Will dividends be paid initially on the common stock?
A: Fidelity Bankshares, Inc. intends initially to pay quarterly dividends
following the stock offering, reflecting an annual amount of between $0.59
and $0.44 per share, depending on how many shares are sold in the offering.
The amount of dividends that we intend to pay after the conversion is
intended to preserve the per share dividend amount adjusted to reflect the
exchange ratio, that Fidelity Bankshares, Inc. stockholders currently
receive. At the midpoint of the offering range, the annual dividend is
expected to be $0.50 per share. Fidelity Bankshares, Inc. intends to pay a
pro-rated dividend after the end of the quarter during which the stock
offering is completed. However, there can be no assurance that dividends
will be paid or that they will not be subsequently reduced or eliminated.
Q: As an eligible depositor of Fidelity Federal Bank and Trust placing an
order in the subscription offering, may I register the shares in someone
else's name?
A: No. To preserve your purchase priority, you must register the shares only
in the name or names of deposit account holders at the applicable date of
eligibility. You may not add the names of non-depositors or depositors who
were eligible only at a later date.
Q: I am eligible to purchase shares in the subscription offering, but I do not
want to become a stockholder. May I allow someone else to use my stock
order form to take advantage of my priority?
A: No. Transferring your subscription rights to someone who does not have
subscription rights is illegal under federal law. Fidelity Bankshares, Inc.
intends to take legal action against anyone who attempts to transfer
subscription rights. If anyone offers to give you money to buy common stock
in your name in exchange for later transferring the common stock, or
requests to share in cash proceeds upon your future sale of Fidelity
Bankshares, Inc. stock, please inform our stock information center at the
number below.
Q: Will the conversion and stock offering have any effect on my Fidelity
Federal Bank and Trust deposit or loan accounts?
A: No. The amount, interest rate and other terms of deposit accounts will not
change. Deposit accounts will continue to be insured by the FDIC. Likewise,
the loan accounts and rights of borrowers will not be affected.
Q: Will the common stock be insured by the FDIC?
A: No. Unlike deposit accounts at Fidelity Federal Bank and Trust, common
stock cannot be insured or guaranteed by the FDIC or any other government
agency. The trading price of common stock may fluctuate, so common stock is
subject to investment risk, including loss of principal invested. There can
be no assurance that you will be able to sell your Fidelity Bankshares,
Inc. shares at or above the $10.00 per share purchase price in the
offering.
3
<PAGE>
Q: By placing an order, am I guaranteed to receive all the shares I requested?
A: No. If there is an oversubscription, shares will be allocated as described
in the prospectus section entitled "The Conversion and Stock Offering." If
we do not fill an order (either wholly or in part), funds submitted but not
used will be refunded, with interest, and deposit account withdrawal
authorizations will be canceled to the extent not used.
Q: Can my Fidelity Federal Bank and Trust local branch assist me with
purchasing shares or completing the stock order form?
A: No. Our branch personnel may not, by law, assist with investment-related
questions about the stock offering. We have established a stock information
center staffed by registered representatives who can assist you. You may
call the stock information center at the number below.
ADDITIONAL QUESTIONS
Please call our Stock Information Center
(800) ____ - _______
from 9:00 a.m. to 4:00p.m., local time, Monday through Friday.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS
PRIOR TO THE EXPIRATION DATE OF ____________, 2001 IN ACCORDANCE WITH FEDERAL
LAW, NO PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO
____________, 2001 OR HAND-DELIVERED ANY LATER THAN TWO DAYS PRIOR TO
____________, 2001.
4
<PAGE>
SUMMARY
The following summary explains the significant aspects of the
conversion, the offering and the exchange of existing shares of Fidelity
Bankshares, Inc. common stock for new shares of Fidelity Bankshares, Inc. common
stock. It may not contain all the information that is important to you. For
additional information, you should read this entire document carefully,
including the consolidated financial statements and the notes to the
consolidated financial statements.
The Companies
Fidelity Bankshares, Inc.
205 Datura Street, West Palm Beach, Florida 33401
(561) 803-9900
Fidelity Bankshares, Inc. is currently the stock holding company that
owns all of the outstanding common stock of Fidelity Federal Bank and Trust.
Fidelity Bankshares, MHC owns 3,589,000 shares of Fidelity Bankshares, Inc.'s
outstanding common stock. The remaining 2,914,584 shares of common stock of
Fidelity Bankshares, Inc. are held by the public. At September 30, 2000,
Fidelity Bankshares, Inc. had consolidated assets of $1.9 billion, deposits of
$1.4 billion and consolidated stockholders' equity of $86.9 million. Following
the conversion this corporation will cease to exist, but will be succeeded by a
new Delaware corporation with the same name. The new corporation's certificate
of incorporation and bylaws will be identical to the current certificate of
incorporation and bylaws of Fidelity Bankshares, Inc., except that the new
certificate of incorporation provides for a greater number of authorized shares
of common and preferred stock and eliminates references to Fidelity Bankshares,
MHC.
Fidelity Bankshares, MHC
205 Datura Street, West Palm Beach, Florida 33401
(561) 803-9900
Fidelity Bankshares, MHC is currently the mutual holding company parent
of Fidelity Bankshares, Inc. As of September 30, 2000, Fidelity Bankshares,
MHC's principal business activity was the ownership of 3,589,000 shares, or
55.19% of the outstanding common stock of Fidelity Bankshares, Inc. common
stock. Fidelity Bankshares, MHC will cease to exist at the conclusion of the
conversion and offering.
Fidelity Federal Bank and Trust
205 Datura Street, West Palm Beach, Florida 33401
(561) 803-9900
Fidelity Federal Bank and Trust is a federally chartered savings bank
headquartered in West Palm Beach, Florida. In 2000, Fidelity Federal Bank and
Trust changed its name from Fidelity Federal Savings Bank of Florida. Fidelity
Federal Bank and Trust is a community-oriented financial institution that offers
a broad range of financial services through its main office in West Palm Beach,
Florida, and 34 branch offices and two loan production offices located
throughout Palm Beach, Martin, St. Lucie and Indian River Counties in Florida. A
full description of our products and services begins on page __ of the
prospectus.
5
<PAGE>
The following chart shows our current ownership structure which is
commonly referred to as the "two-tier" mutual holding company structure:
------------------------
Fidelity Bankshares, MHC
------------------------
55.19% of
Common Stock
------------------------- -------------------
Fidelity Bankshares, Inc. __________ 44.81% of ______ Public Stockholders
------------------------- Common -------------------
Stock
100% of Common
Stock
-------------------------------
Fidelity Federal Bank and Trust
-------------------------------
Following our conversion and offering, our ownership structure will be
as follows:
--------------------------------
Public Stockholders
--------------------------------
100% of
Common Stock
--------------------------------
Fidelity Bankshares, Inc.
--------------------------------
100% of
Common Stock
-------------------------------
Fidelity Federal Bank and Trust
-------------------------------
Business Strategies
We have several business strategies that are designed to improve our
profitability and enhance our franchise in our market area. These strategies
include:
o Geographic expansion of our market presence by opening new branches;
o Expanding our business banking operations by emphasizing transaction
accounts with a goal of increasing our small business customers;
o Increasing our emphasis on commercial real estate and non-mortgage-related
loans;
o Increasing our noninterest income, with an emphasis on providing trust and
asset management services, as well as insurance and investment products;
o Maintaining high asset quality; and
6
<PAGE>
o Continuing our traditional residential mortgage lending.
These strategies are discussed in detail beginning on page _____ of the
prospectus.
The Conversion
The Offering
We are selling in this offering common stock representing the 55.19%
ownership interest in Fidelity Bankshares, Inc. now owned by Fidelity
Bankshares, MHC. Under the plan of conversion, eligible current and former
depositors of Fidelity Federal Bank and Trust and Fidelity Bankshares, Inc.'s
employee stock ownership plan have priority rights to subscribe for shares in
Fidelity Bankshares, Inc. The priorities in this subscription offering are as
follows:
(1) First, depositors with $50 or more on deposit as of October 31,
1999.
(2) Second, Fidelity Bankshares, Inc.'s tax-qualified employee stock
benefit plans, including the employee stock ownership plan. The
employee stock ownership plan expects to purchase from 365,876 to
495,009 shares of common stock.
(3) Third, depositors with $50 or more on deposit as of ____________,
2000.
(4) Fourth, depositors and borrowers as of _____________, 2001.
We are selling between 6,097,938 and 8,250,151 shares of common stock,
all at a price of $10.00 per share. The number of shares to be sold may be
increased up to 9,487,674. The amount of shares offered is based on an
independent appraisal of Fidelity Bankshares, MHC and Fidelity Bankshares, Inc.
performed by RP Financial, LC, an independent appraisal firm. The factors
considered in the appraisal are discussed under The Conversion -Stock Pricing,
and Number of Shares to Be Issued."
The subscription offering expires at ________, eastern time, on
___________, 2001, unless extended by Fidelity Bankshares, Inc. You cannot
transfer your subscription rights. If you attempt to transfer your rights, you
may lose the right to purchase shares and may be subject to criminal prosecution
and/or other sanctions.
We will also offer shares of common stock to the general public in a
community offering. In this part of the offering, stockholders of Fidelity
Bankshares, Inc., as of ______________, 2001, will have first preference and
people who reside in our community will have second preference. The Community
Offering will end on ____________, 2001, unless extended with the approval of
the Office of Thrift Supervision, if necessary.
You will not pay a commission to buy any shares in the offering.
Ryan, Beck & Co., Inc. is managing the offering on a best efforts
basis. It is not obligated to purchase any shares of common stock in our
offering. Ryan, Beck & Co., Inc. is a registered broker dealer and member of the
National Association of Securities Dealers, Inc.
Shares not sold in the offering may be offered for sale in a syndicated
offering, which would be an offering to the general public on a best efforts
basis by a selling group of broker-dealers managed by Ryan, Beck & Co., Inc.
We have described the offering in greater detail beginning on page
_____ of the prospectus.
The Exchange of Fidelity Bankshares, Inc. Common Stock
If you are now a stockholder of Fidelity Bankshares, Inc., your
existing shares will be cancelled and exchanged for new shares in Fidelity
Bankshares, Inc. The number of shares you will get will be based on an
7
<PAGE>
exchange ratio determined as of the closing of the conversion. The actual number
of shares you receive will depend upon the number of shares we sell in our
offering, which in turn will depend upon the final appraised value of Fidelity
Bankshares, Inc. and Fidelity Bankshares, MHC. The following table shows how the
exchange ratio will adjust, based on the number of shares sold in our offering.
The table also shows how many shares a hypothetical owner of Fidelity
Bankshares, Inc. common stock would receive in the exchange, adjusted for the
number of shares sold in the offering.
<TABLE>
<CAPTION>
Shares to be
exchanged for Total shares
Shares to be sold Fidelity Bankshares, Inc. of Shares of Fidelity
in this offering common stock common stock Bankshares, Inc. that
------------------------- ------------------------ to be Exchange would be exchanged
Amount Percent Amount Percent outstanding ratio for 100 shares
----------- ----------- ----------- ----------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum............. 6,097,938 55.19% 4,952,062 44.81% 11,050,000 1.6991 169.91
Mid-point........... 7,174,044 55.19 5,825,956 44.81 13,000,000 1.9989 199.89
Maximum............. 8,250,151 55.19 6,699,849 44.81 14,950,000 2.2987 229.87
15% above Maximum... 9,487,674 55.19 7,704,826 44.81 17,192,500 2.6435 264.35
</TABLE>
Shares of Fidelity Bankshares, Inc. held in "street name," will be
exchanged automatically. Those who hold certificates will receive after the
conversion and offering is completed, a transmittal form with instructions to
surrender stock certificates. New certificates of Fidelity Bankshares, Inc.
common stock will be mailed within five business days after the exchange agent
receives properly executed transmittal forms and certificates.
No fractional shares of Fidelity Bankshares, Inc. common stock will be
issued to any public stockholder of Fidelity Bankshares, Inc. upon consummation
of the conversion. For each fractional share that would otherwise be issued,
Fidelity Bankshares, Inc. will pay an amount equal to the product obtained by
multiplying the fractional share interest to which the holder would otherwise be
entitled by the $10.00 per share subscription price.
Under federal regulations, current public stockholders of Fidelity
Bankshares, Inc. do not have dissenters' rights or appraisal rights.
Reasons for the Conversion
We are pursuing the conversion for the following reasons:
o The conversion will increase our capital which will enable us to
continue to be a well-capitalized institution.
o The additional funds resulting from the offering will support
increased lending, continued geographic expansion and
diversification of new financial products and services.
Conditions to Completion of the Conversion
We cannot complete our conversion and related offering unless:
o The plan of conversion is approved by at least a majority of
votes eligible to be cast by members of Fidelity Bankshares, MHC;
o The plan of conversion is approved by at least two-thirds of the
outstanding shares of Fidelity Bankshares, Inc. common stock;
o the plan of conversion is approved by at least a majority of the
votes cast by stockholders of Fidelity Bankshares, Inc. common
stock, not including those shares held by Fidelity Bankshares,
MHC.
o We sell at least the minimum number of shares offered; and
8
<PAGE>
o We receive the final approval of the Office of Thrift Supervision
to complete the conversion and offering.
Fidelity Bankshares, MHC intends to vote its 55.19% ownership interest
in favor of the conversion. In addition, as of September 30, 2000, directors and
executive officers of Fidelity Bankshares, Inc. and their associates
beneficially owned 458,932 shares of Fidelity Bankshares, Inc., or 7.06% of the
outstanding shares. They intend to vote those shares in favor of the plan of
conversion.
$10.00 per Share Stock Pricing and Number of Shares to be Issued in the
Conversion and Offering
We are offering each share of stock at a price of $10.00 per share. The
amount of common stock we are offering is based on an independent appraisal of
the estimated market value of Fidelity Bankshares, MHC and Fidelity Bankshares,
Inc., assuming the conversion and offering are completed. RP Financial, LC, the
independent appraiser, has estimated that, as of December 15, 2000, this market
value was between $110.5 million and $149.5 million, with a mid-point of $130.0
million. The appraisal was based in part on Fidelity Bankshares, Inc.'s
financial condition and results of operations, and the effect of the additional
capital raised by the sale of common stock in this offering. Based on this
valuation and the approximate 55.19% ownership interest of Fidelity Bankshares,
MHC being sold in this offering, the Boards of Directors of Fidelity Bankshares,
MHC and Fidelity Bankshares, Inc. established an offering range of between
6,097,938 and 8,250,151 shares. This offering range means the $10.00 per share
purchase price for our shares will range from 77.7% to 92.6% of our estimated
post-conversion stockholders' equity per share, using September 30, 2000,
financial data. See "The Conversion--Stock Pricing and Number of Shares to be
Issued" on page __.
The independent appraisal will be updated prior to the completion of
the conversion. If the market value changes to either below $110.5 million or
above $171.9 million, subscribers will be notified and provided with the
opportunity to modify or cancel their orders. See "The Conversion--Stock Pricing
and Number of Shares to be Issued" for additional details.
Purchase Limitations
The minimum number of shares that may be purchased is 25.
If you are not now a Fidelity Bankshares, Inc. stockholder-
You may not purchase more than 82,500 shares individually, and you,
together with associates or persons acting in concert with you, may not purchase
more than 165,000 shares.
If you are now a Fidelity Bankshares, Inc. stockholder-
In addition to the above limitations, shares that you purchase in the
offering plus shares you receive in the exchange for your existing Fidelity
Bankshares, Inc. common stock, may not exceed 5% of the shares outstanding
immediately following the offering, or _________ shares at the maximum of the
offering range. For example, if you are to receive _______ shares in the
exchange, you may only purchase up to an additional ________ shares in the
offering.
For further discussion of the purchase limits and definitions of
"associate" and "acting in concert," see "The Conversion--Limitations on Common
Stock Purchases" on page __.
How Investors Can Purchase Common Stock
You can subscribe for shares of common stock in the offering by
delivering a completed, signed original stock order form, together with full
payment provided that we receive the stock order form before the end of the
offering. Following the instructions on the stock order form, you may use the
mail or overnight courier or hand deliver your subscription to the stock
information center. Payment for shares may be made by check or money order
9
<PAGE>
which will be immediately cashed. Fidelity Federal Bank and Trust will pay
interest at the rate of ____%, which is our passbook rate, from the date funds
are received until completion or termination of the conversion. Subscribers may
authorize withdrawal from the types of deposit accounts with Fidelity Federal
Bank and Trust designated on the order form. Withdrawals from certificates of
deposit may be made without incurring an early withdrawal penalty. All funds
authorized for withdrawal from deposit accounts with Fidelity Federal Bank and
Trust will not be withdrawn from the accounts until the completion of the
offering and will earn interest at the applicable deposit account rate until the
completion of the offering. However, a hold will be placed on those funds making
them unavailable until the completion of the conversion. After we receive an
order, the order cannot be withdrawn or changed, except with our consent.
Except for those with priority rights to purchase shares, we have the
discretion to accept or reject orders received in the offering. If an order is
rejected in part, there is no right to cancel the remainder of the order.
For further information on how to purchase stock, see "The
Conversion--Procedure for Purchasing Shares" on page __.
Use of Proceeds
We will use the proceeds of this offering as follows:
o We estimate net proceeds will be between $59.2 million and $80.5
million. Approximately $25.9 million to $35.3 million of the net
proceeds will be invested in Fidelity Federal Bank and Trust.
Funds invested in Fidelity Federal Bank and Trust will be used to
expand our branch network and to offer new products and banking
services. The net proceeds will be used to support asset growth,
including the growth of our commercial real estate and
non-mortgage loan portfolios. Initially, the net proceeds
received by Fidelity Federal Bank and Trust will be invested in
short- term assets.
o Fidelity Bankshares, Inc. will retain approximately 50% of the
net proceeds (between $29.6 million and $40.3 million). A portion
(between $3.7 million and $5.0 million) will be used to provide a
loan to the employee stock ownership plan to fund the purchase of
common stock. The balance of the net proceeds (between $29.6
million and $40.3 million) retained by Fidelity Bankshares, Inc.
will be used for general corporate purposes. These purposes may
include paying dividends, repurchasing shares of common stock, or
funding a new recognition and retention plan. The net proceeds
may be used for future diversification or acquisition activities,
although we do not have plans to do so now.
For further discussion, see "Use of Proceeds."
Purchases by Officers and Directors
We expect our directors and executive officers, together with their
families, to subscribe for 34,000 shares, which equals approximately 0.45% of
the shares sold at the mid-point of the offering range. The purchase price paid
by them will be the same $10.00 per share price paid by all other persons who
purchase shares in the conversion. See "Subscriptions by Executive Officers and
Directors."
10
<PAGE>
Benefits of the Conversion to Management
Fidelity Federal Bank and Trust's employee stock ownership plan expects
to purchase up to 6% of the shares we sell in this offering, or 495,009 shares,
assuming we sell the maximum number of shares proposed to be sold. If we sell
more than 8,250,151 shares in the offering, the employee stock ownership plan
will have first priority to purchase shares over this maximum, up to a total of
6% of the shares sold. This plan is a tax-qualified retirement plan for all
eligible employees. Assuming the employee stock ownership plan purchases 495,009
shares in the offering, Fidelity Bankshares, Inc. will recognize additional
compensation expense of $4.95 million over a period of 10 years, or
approximately $495,000 per year, from the consummation of the conversion,
assuming the shares have a fair market value of $10.00 per share for the full
10-year period. If, in the future, the shares have a fair market value greater
or less than $10.00, the compensation expenses will increase or decrease
accordingly.
We also intend to implement two additional stock-based incentive plans.
Neither plan will be implemented earlier than six months after the conversion.
The stock recognition plan, would, if implemented within one year of the
conversion, reserve 4% of the shares sold in the offering, or 330,006 shares at
the maximum of the offering range, for awards to key employees and directors, at
no cost to the recipients. If the shares awarded under the stock recognition
plan come from authorized but unissued shares, stockholders would experience
dilution of approximately 2.2% in their ownership interest in Fidelity
Bankshares, Inc. The second plan, would be a stock option plan, and would
reserve 10% of the shares sold in this offering, up to 825,015 shares at the
maximum of the offering range, for key employees and directors upon their
exercise. If the shares issued upon the exercise of options come from authorized
but unissued shares, stockholders would experience dilution of approximately
5.2% in their ownership interest in Fidelity Bankshares, Inc. Awards made under
these plans would be subject to vesting over a period of years.
We will also convert options previously awarded under the Fidelity
Federal Bank and Trust stock option plan into options to purchase our common
stock, with the number and exercise price to be adjusted, based on the exchange
ratio, and the term and vesting period will remain unchanged.
The following table summarizes the benefits under the new stock
recognition plan, new stock option plan and the purchases by the employee stock
ownership plan as part of the conversion. A portion of the stock grants shown in
the table below would be made to non-management employees. The value of shares
shown in the table assumes a value of $10.00 per share, the price at which
shares in the offering will be sold. No value is given for options because their
exercise price will be equal to the fair market value of the common stock on the
day the options are granted. As a result, value can be received under an option
only if the market price of common stock increases after the option grant.
<TABLE>
<CAPTION>
Number of Shares
to be Granted Value of Grants Percentage of
------------------------------ -------------------------------- Common Stock
At Minimum At Maximum At Minimum At Maximum to be Sold
of of of of in the
Offering Range Offering Range Offering Range Offering Range Offering
-------------- -------------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
Employee stock ownership plan........ 365,876 495,009 $3,658,760 $4,950,090 6%
stock recognition plan............... 243,918 330,006 2,439,180 3,300,060 4%
stock option plan.................... 609,794 825,015 -- -- 10%
--------- --------- ---------- ----------
Total................................ 1,219,588 1,650,030 $6,097,940 $8,250,150 20%
========= ========= ========== ==========
</TABLE>
As of the date of this prospectus, management of Fidelity Bankshares,
Inc. had the right to acquire ______ shares of Fidelity Bankshares, Inc. After
the exchange and assuming the grant of the additional shares shown in the above
table, management and the employee stock ownership plan would own ______ and
_______ shares of Fidelity Bankshares, Inc. at the minimum and maximum,
respectively, of the offering range. That would amount to ____% and ____%,
respectively, of the shares of our common stock outstanding after the offering
at the minimum and maximum of the offering range.
11
<PAGE>
Market for Common Stock
Existing publicly held shares of our common stock trade on the Nasdaq
National Market under the symbol "FFFL." Although it is expected that Fidelity
Bankshares, Inc. common stock will be more easily tradeable after the offering
because there will be significantly more outstanding shares, there can be no
assurance of this.
Ryan Beck & Co., Inc. has advised us that it intends to be a market
maker in the common stock and will assist us in obtaining additional market
makers.
Dividend Policy
Fidelity Bankshares, Inc. now pays a cash dividend of $0.25 per share
per quarter, or $1.00 per share per year. After the conversion, we intend to pay
a dividend of $0.1475, $0.125 and $0.11 per share per quarter at the minimum,
midpoint and maximum of the offering range, respectively, which represents a
dividend rate of 5.9%, 5.0% and 4.4%, at the minimum, midpoint and maximum of
the offering range, respectively, based upon a price of $10.00 per share. The
amount of dividends that we intend to pay after the conversion is intended to
preserve the per share dividend amount, adjusted to reflect the exchange ratio
that Fidelity Bankshares, Inc. stockholders currently receive. The dividend rate
and the continued payment of dividends will depend on a number of factors,
including our capital requirements, our financial condition and results of
operations, tax considerations, statutory and regulatory limitations, and
general economic conditions. No assurance can be given that we will continue to
pay dividends or that they will not be reduced in the future. Assuming the
offering is completed in ________ 2001, the first dividend is expected to be
declared for the quarter ending ________ 2001.
RISK FACTORS
You should consider carefully the following risk factors before deciding whether
to invest in our common stock.
The rapid growth of our branch network has increased our expenses and will
reduce our profitability in the near term
Since 1998 we have been actively expanding our branch network by
building new branches in our market area. At December 31, 1998, we had 22
offices, compared with 34 offices at September 30, 2000. During the next two
years we expect to open approximately three new branches per year. To support
the growth, we have increased the number of our employees from 370 full-time and
45 part-time employees at December 31, 1998 to 527 full-time and 51 part-time
employees at September 30, 2000. New branch office employees are often hired
before a branch office is opened so that they can be trained adequately.
Consequently, the expense associated with building and staffing the new branches
has significantly increased our noninterest expense, particularly our
compensation and occupancy costs, during the past three years. This has caused
our operating expenses to increase relative to our interest income. Our
efficiency ratio was 70.78%, 71.10% and 75.65% for the years ended December 31,
1998 and 1999 and the nine months ended September 30, 2000, respectively. It
takes time and adequate management for new branches to gather significant
deposits and loans to generate enough income to become profitable. While we
expect that each new branch location will be accretive to earnings within 18 to
24 months of their opening, there can be no guarantee that our projections will
in fact be realized. Consequently, our ability to generate an adequate return
from our investment in our new branches is subject to uncertainty. The failure
of our branches, or those we anticipate opening in the future, to achieve
profitability as projected will adversely affect our profitability in the
near-term.
Our strategy of introducing new products and services may not be profitable in
the near term
In addition to the growth in the number of our branch locations, we are
offering a number of new loan and deposit products as well as trust services and
insurance and investment products. Our strategy of diversifying the financial
products and services we offer is relatively new, and the benefits of this
strategy may not materialize in the near term. As part of our efforts, we have
increased the number of commercial and consumer lenders that we employ, and we
have expanded our loan underwriting and collections department as part of our
desire to develop our commercial real estate and non-mortgage loan portfolios.
In July 1999, we began offering insurance products and in
12
<PAGE>
February 2000, we began offering trust services. As we have diversified our
banking products and services, we have elected to hire experienced personnel
rather than training inexperienced persons. The initial costs of hiring
personnel are therefore higher than would otherwise be the case. The success of
our diversification strategy will depend upon establishing new customer
relationships and the willingness of our existing customers to use our new
products and services. Consequently, until we build our customer relationships
sufficiently to cover the costs associated with expanding and diversifying our
products and services, our profitability will be affected adversely.
The increase in commercial real estate lending, consumer and commercial business
lending increases the risk that some of our loans will not be repaid.
We have significantly increased our commercial real estate lending,
consumer lending and commercial business lending. These types of loans generally
have a higher risk of non-payment by borrowers than traditional home mortgage
loans. Nevertheless, our goal is to continue to increase these types of loans
because of the portfolio diversification, increased customer base and higher
yields they provide. In this regard, we have hired a number of commercial real
estate, commercial business and consumer lenders. At September 30, 2000,
commercial real estate loans totaled $108.5 million or 8.2% of total loans,
compared to $62.4 million or 6.4% of total loans at December 31, 1998. At
September 30, 2000, commercial business and consumer loans totaled $212.3
million, or 16.0% of total loans, compared to $95.2 million, or 9.7% of total
loans at December 31, 1998. We intend to continue to emphasize the origination
of loans secured by commercial real estate and loans that are not secured by
real estate, in particular, the commercial business loans. As we increase our
portfolio of these loans, we may begin to experience higher levels of
nonperforming loans and credit losses.
Increases in interest rates may cause earnings to decline and decrease the value
of our mortgage-backed securities and investment securities classified as
available for sale.
To be profitable, we have to earn more money in interest and other
income than we pay as interest and other expenses. Our loan portfolio primarily
consists of loans which either mature or reprice after five years. At September
30, 2000, our deposit accounts consisted of $884.4 million in time deposit
accounts, of which $749.5 million, or 53.1% of total deposits have remaining
terms to maturity of less than one year, as well as demand deposits such as NOW
accounts. If interest rates rise, the amount of interest we pay on deposits is
likely to increase faster than the amount of interest we receive on our loans,
mortgage-backed securities and investment securities. This could cause our
profits to decrease. If interest rates fall, many borrowers may refinance their
loans, and interest rates on interest earning assets could fall, perhaps faster
than interest rates on our deposits. This could also cause our profits to
decrease. For additional information on our exposure to interest rates, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Management of Market Risk."
In addition, when interest rates rise, it causes a reduction in the
fair value of our mortgage-backed securities and investment securities. At
September 30, 2000, mortgage-backed securities and investment securities that
were classified as available for sale had a fair value of $425.5 million, which
is $12.0 million less than the $437.5 million amortized cost of such securities.
The $12.0 million unrealized loss on such securities ($7.3 million, net of
taxes) is shown in our consolidated statement of financial condition as a
reduction of stockholders' equity but does not affect our income statement
unless we sell these securities and realize the loss.
Strong competition within our market area makes it difficult to achieve the
desired level of profitability.
Competition in the banking and financial services industry in Florida
is intense. We have competed for customers by offering excellent service and
competitive rates on our loans and deposit products. In our market, we compete
with commercial banks, savings institutions, mortgage banking firms, credit
unions, finance companies, mutual funds, insurance companies, and brokerage and
investment banking firms. Many of these competitors, such as regional banks,
have greater resources than we do and offer services that we do not provide.
Moreover, many of our competitors offer services through the Internet, which are
different from those we offer, and many larger institutions that do not have a
physical presence in our market area compete with us through the use of the
Internet. Our profitability depends upon our continued ability to successfully
compete in our market area.
13
<PAGE>
In addition, in November 1999, the Gramm-Leach-Bliley Financial
Services Modernization Act of 1999 became law. This legislation is intended to
modernize the financial services industry by establishing a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers. To the extent the
legislation permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
This could result in a growing number of larger financial institutions that
offer a wider variety of financial services than we currently offer and that can
aggressively compete in the markets we currently serve. This could adversely
impact our profitability.
Future Economic Growth in our area is likely to be more moderate
Over the past decade, our market area has had one of the fastest
growing economies in the United States. Consequently, Palm Beach, Martin, St.
Lucie and Indian River Counties have experienced significant growth in
population, new business formation and public works spending. However, due to
significant growth controls established at the state and local levels,
management believes that economic growth in our market area will be more
moderate in the future. In the event that the growth of our local economy
significantly slows for this reason or due to a general slow-down in the
national and local economy, our profitability will be adversely affected.
Recently, Pratt & Whitney, one of Palm Beach County's largest employers closed a
significant portion of its Florida operations, displacing approximately 3,200
employees, two-thirds of whom reside in Palm Beach County and one- third of whom
reside in Martin County. Management is unable to estimate the effect on our
operations, if any, that may result from the partial closing of Pratt &
Whitney's facilities. In addition, there can be no assurances that in the months
ahead there may not be further business closings in our market area.
Furthermore, since a significant number of the properties securing our one-to
four-family loans consist of vacation homes, weakness in the national economy
generally may have an adverse impact on our loan portfolio as property owners
put their homes up for sale, or delinquencies increase. Additionally, some of
our commercial real estate loans secured by properties in the early stages of
development could be adversely effected by a downturn in our real estate market
or in general economic conditions.
Our low return on equity after the stock offering may cause our common stock
price to decline.
Our return on equity, or the amount we earn in relation to the amount
of equity we have, excluding the non- recurring gains on the sale of assets, has
been lower than that of comparable financial institutions. Our return on equity
for the fiscal years ended December 31, 1998 and 1999, and annualized for the
nine months ended September 30, 1999 and 2000, was 8.33%, 11.04%, 7.07% and
10.39%, respectively. The return on equity for the year ended December 31, 1999
and the nine months ended September 30, 2000, included non-recurring gain on
sale of assets totaling $5.1 million and $3.2 million, respectively. We will not
be able to deploy the increased capital from this offering immediately, which
will cause our return on equity to decrease further and our ability to
profitably leverage our new capital will be significantly affected by
competition for loans and deposits. Initially, we intend to invest the net
proceeds in short-term investments which have lower yields than mortgage and
non-mortgage loans. Until we can leverage our increased capital by growing
interest-earning assets and interest-bearing liabilities, we expect our return
on equity to continue to be below the industry average, which may negatively
impact the value of our common stock.
You may not be able to sell your shares when you desire, or for $10.00 or more
per share.
The common stock will trade on the Nasdaq National Market System. We
cannot predict whether a liquid trading market in shares of our common stock
will develop or how liquid that market might remain. Persons purchasing shares
may not be able to sell their shares when they desire if a liquid trading market
does not develop or may not be able to sell them at a price equal to or above
the initial offering price of $10.00 per share, even if a liquid trading market
develops. In several cases, common stock issued by recently converted financial
institutions has traded at a price that is below the price at which such shares
were sold in the initial offerings of those companies. The purchase price of our
common stock in the offering is based on the independent appraisal by RP
Financial, LC. After our shares begin trading, the trading price of our common
stock will be determined by the marketplace, and may be influenced by many
factors, including prevailing interest rates, investor perceptions and general
industry and economic conditions. An investor should understand that, the value
of an investment in common stock is subject to fluctuation, including loss, due
to volatility in stock markets generally or for other reasons.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF FIDELITY BANKSHARES, INC. AND SUBSIDIARY
The following tables set forth selected consolidated historical
financial and other data of Fidelity Bankshares, Inc. for the periods and at the
dates indicated. The information at December 31, 1998 and 1999 and for the years
ended December 31, 1997, 1998 and 1999, is derived in part from, and should be
read together with, the Consolidated Financial Statements and Notes thereto of
Fidelity Bankshares, Inc. contained elsewhere in this prospectus. The
information at December 31, 1995 and 1996 and for the years then ended was
derived in part from consolidated financial statements which are not included in
this prospectus. The selected financial information at September 30, 2000, and
for the nine months ended September 30, 1999 and 2000 have been derived from
unaudited financial statements. In our opinion, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the financial
condition and results of operations for the unaudited periods presented have
been included. The results of operations for the nine months ended September 30,
2000, are not necessarily indicative of the results which may be expected for
any other period.
<TABLE>
<CAPTION>
At December 31, At September 30,
---------------------------------------------------------------- (unaudited)
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
(In thousands, except per share amounts)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets....................... $ 779,620 $ 873,562 $1,220,267 $1,566,927 $1,718,933 $1,904,850
Loans receivable, net.............. 532,333 661,700 861,257 977,166 1,164,421 1,328,192
Mortgage-backed securities and
corporate debt securities........ 159,761 123,599 234,132 433,751 375,171 342,632
Investment securities(2)........... 43,108 41,740 61,720 66,557 61,478 101,941
Deposits........................... 595,180 694,718 872,340 1,120,746 1,321,510 1,412,433
Total borrowings................... 86,549 83,621 242,871 338,871(1) 290,479(1) 371,802(1)
Stockholders' equity............... 81,266 81,723 87,387 84,999 83,304 86,871
Book value per common share........ $ 12.10 $ 12.12 $ 12.88 $ 12.96 $ 12.83 $ 13.36
Tangible book value per common
share........................... $ 11.94 $ 11.98 $ 12.38 $ 12.52 $ 12.32 $ 12.90
</TABLE>
--------------
(1) Includes $28.8 million of junior subordinated debentures issued in
connection with the issuance of 8.375% Cumulative Trust Preferred
Securities by Fidelity Capital Trust I.
(2) Includes interest- bearing deposits, government and agency securities and
FHLB stock.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
For the Years Ended December 31, (unaudited)
---------------------------------------------------------------- ---------------------
1995 1996(1) 1997 1998 1999 1999 2000
---- ------- ---- ---- ---- ---- ----
(In thousands, except per share amounts)
Selected Operating Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................... $ 53,261 $ 60,240 $ 72,272 $ 98,320 $ 110,925 $ 81,646 $ 97,523
Interest expense................... 28,095 32,131 41,606 64,992 72,255 53,538 62,496
---------- ---------- ---------- --------- ---------- ---------- ----------
Net interest income................ 25,166 28,109 30,666 33,328 38,670 28,108 35,027
Provision (recovery) for loan losses (210) 164 170 77 463 268 928
---------- ---------- ---------- --------- ---------- ---------- ----------
Net interest income after
provision for loan losses........ 25,376 27,945 30,496 33,251 38,207 27,840 34,099
---------- ---------- ---------- --------- ---------- ---------- ----------
Other income....................... 3,021 4,876 4,910 8,690 12,927 5,623 9,641
---------- ---------- ---------- --------- ---------- ---------- ----------
Noninterest expenses............... 20,449 26,709(1) 24,235 29,687 36,354 26,323 33,088
---------- ---------- ---------- --------- ---------- ---------- ----------
Income before taxes................ 7,948 6,112 11,171 12,254 14,780 7,140 10,652
Income tax expense................. 3,133 2,562 4,753 4,842 5,666 2,746 4,097
---------- ---------- ---------- --------- ---------- ---------- ----------
Net income....................... $ 4,815 $ 3,550(1) $ 6,418 $ 7,412 $ 9,114 $ 4,394 $ 6,555
========== ========== ========== ========= ========== ========== ==========
Income per common share:
Basic.............................. $ 0.74 $ 0.54(1) $ 0.96 $ 1.12 $ 1.42 $ 0.68 $ 1.01
========== ========== ========== ========= ========== ========== ==========
Diluted............................ $ 0.73 $ 0.53(1) $ 0.95 $ 1.10 $ 1.40 $ 0.68 $ 1.00
========== ========== ========== ========= ========== ========== ==========
</TABLE>
--------------------
(1) Fiscal 1996 includes the effect of a one-time SAIF recapitalization
assessment of approximately $3.6 million, or $2.2 million net of taxes.
Excluding this non-recurring assessment for the year ended December 31,
1996, total non-interest expenses would have been $23.1 million, net income
would have been $5.7 million, basic earnings per share would have been $.86
and diluted earnings per share would have been $.86.
(2) Includes $5.1 million from the sale of property owned by Fidelity Federal
Bank and Trust.
(3) Includes $2.5 million from the receipt of 147,232 shares of John Hancock
Financial common stock valued at $17.00 per share, received pursuant to
John Hancock Financial's conversion from a mutual to a stock insurance
company.
15
<PAGE>
<TABLE>
<CAPTION>
At and for the Nine Months
At and for the Years ended December 31, Ended September 30,
---------------------------------------------------------------- --------------------------
1995 1996(1) 1997 1998 1999 1999(4) 2000(4)
---- ------- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Return on average assets (ratio of net
income to average total assets)..... 0.65% 0.43%(1) 0.64% 0.52% 0.55% 0.36% 0.48%
Return on average stockholders'
equity (ratio of net income to
average stockholders' equity)....... 6.22% 4.36%(1) 7.62% 8.33% 11.04% 7.07% 10.39%
Noninterest income to average assets.. 0.41% 0.59% 0.49% 0.61% 0.78% 0.46% 0.70%
Noninterest expense to average assets. 2.76% 3.24% 2.43% 2.08% 2.19% 2.13% 2.41%
Net interest rate spread during
the period.......................... 3.28% 3.30% 3.00% 2.35% 2.45% 2.38% 2.78%
Net interest margin (net interest income
to average interest earning assets). 3.60% 3.62% 3.25% 2.48% 2.47% 2.42% 2.74%
Ratio of average interest-earning assets
to average interest-bearing liabilities111.61% 111.54% 105.8% 102.8% 100.51% 100.81% 99.21%
Efficiency ratio(2)................... 72.55% 80.97% 68.12% 70.65% 70.46% 78.04% 74.08%
Asset Quality Ratios:
Non-accruing loans to total loans
at end of period.................... 0.35% 0.50% 0.38% 0.39% 0.36% 0.28% 0.38%
Allowance for loan losses to non-
accruing loans at end of period..... 121.51% 68.78% 101.39% 100.59% 131.57% 164.33% 117.59%
Allowance for loan losses to
total loans at end of period........ 0.43% 0.34% 0.38% 0.33% 0.31% 0.31% 0.34%
Non-performing assets to total
assets at end of period............. 0.32% 0.39% 0.35% 0.30% 0.29% 0.20% 0.27%
Ratio of net charge-offs during
the period to average loans
outstanding during the period....... 0.02% 0.03% 0.04% 0.01% 0.01% 0.01% 0.01%
Capital Ratios:
Stockholders' equity to total assets
at end of period.................... 10.42% 9.36% 7.16% 5.42% 4.85% 4.69% 4.56%
Average stockholders' equity to
average total assets................ 10.43% 9.87% 8.46% 6.25% 4.96% 5.03% 4.59%
Tangible capital to tangible assets
at end of period(3)................. 10.04% 9.20% 6.67% 6.65% 6.63% 6.28% 6.24%
Core capital to adjusted tangible
assets at end of period(3).......... 10.04% 9.20% 6.67% 6.65% 6.63% 6.28% 6.24%
Risk-based capital to risk-weighted
assets at end of period(3).......... 21.44% 18.26% 14.03% 12.23% 12.19% 13.54% 11.15%
Other Data:
Number of branch offices
at end of period.................... 20 20 21 22 32 30 34
Number of deposit accounts
at end of period.................... 64,262 69,833 82,983 92,561 109,342 105,228 123,889
</TABLE>
--------------------
(1) Fiscal 1996 includes the effect of a one-time SAIF recapitalization
assessment of approximately $3.6 million, or $2.2 million net of taxes.
Excluding this non-recurring assessment for the year ended December 31,
1996, return on average assets would have been 0.69% and return on average
stockholders' equity would have been 7.01%.
(2) Represents noninterest expense divided by the sum of net interest income
before provision for loan losses and noninterest income.
(3) Represents regulatory capital ratios for Fidelity Federal Bank and Trust
only.
(4) Ratios are annualized where appropriate.
16
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At September 30, 2000, Fidelity Federal Bank and Trust exceeded all of
the applicable regulatory capital requirements. The table on the following pages
sets forth the historical regulatory capital of Fidelity Federal Bank and Trust
at September 30, 2000, and the pro forma regulatory capital of Fidelity Federal
Bank and Trust after giving effect to the conversion, based upon the sale at
$10.00 per share of the number of shares shown in the table. The pro forma
regulatory capital amounts reflect the receipt by Fidelity Federal Bank and
Trust of 50% of the net conversion proceeds, and the retention of approximately
50% of the proceeds by Fidelity Bankshares, Inc. and funding of the employee
stock ownership plan and the stock recognition plan. The pro forma risk-based
capital amounts assume the investment of the net proceeds received by Fidelity
Federal Bank and Trust in assets which have a risk-weight of 20% under
applicable regulations, as if the net proceeds had been received and so applied
at September 30, 2000. See "Pro Forma Data" for the assumptions used to
determine the net proceeds of the offering. For purposes of the table below, the
entire amount expected to be borrowed by the employee stock ownership plan and
the entire cost of the shares expected to be acquired by the stock recognition
plan are deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
Fidelity Federal
Bank and Trust Pro Forma at September 30, 2000
Historical at -----------------------------------------------------------------------------------
September 30, 2000 Minimum Midpoint Maximum Maximum as Adjusted
---------------------- -------------------- ------------------- ------------------ ---------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital.......... $ 114,605 6.02% $ 142,135 7.36% $ 146,819 7.58% $ 151,504 7.81% $ 156,890 8.06%
Tangible Capital...... $ 119,338 6.24% $ 146,868 7.57% $ 151,552 7.79% $ 156,237 8.01% $ 161,623 8.27%
Tangible Requirement.. 28,695 1.50% 29,108 1.50% 29,179 1.50% 29,249 1.50% 29,330 1.50%
---------- ----- ---------- ----- ---------- ------ ---------- ------ ---------- ------
Excess........... $ 90,643 4.74% $ 117,760 6.07% $ 122,373 6.29% $ 126,988 6.51% $ 132,293 6.77%
========== ===== ========== ===== ========== ====== ========== ====== ========== ======
Core Capital.......... $ 119,338 6.24% $ 146,868 7.57% $ 151,552 7.79% $ 156,237 8.01% $ 161,623 8.27%
Core Requirement(3) 57,391 3.00% 58,217 3.00% 58,357 3.00% 58,498 3.00% 58,659 3.00%
---------- ----- ---------- ----- ---------- ------ ---------- ------ ---------- ------
Excess........... $ 61,947 3.24% $ 88,651 4.57% $ 93,195 4.79% $ 97,739 5.01% $ 102,964 5.27%
========== ===== ========== ===== ========== ====== ========== ====== ========== ======
Total Capital(4)..... $ 122,671 11.15% $ 150,201 13.59% $ 154,885 14.00% $ 159,570 14.41% $ 164,956 14.88%
Risk-based requirement 87,988 8.00% 88,428 8.00% 88,503 8.00% 88,578 8.00% 88,664 8.00%
---------- ----- ---------- ----- ---------- ------ ---------- ------ ---------- -------
Excess........... $ 34,683 3.15% $ 61,773 5.59% $ 66,382 6.00% $ 70,992 6.41% $ 76,292 6.88%
========== ===== ========== ===== ========== ====== ========== ====== ========== ======
Assets................ $1,903,599 $1,931,129 $1,935,813 $1,940,498 $1,945,884
Tangible Assets....... $1,913,025 $1,940,555 $1,945,239 $1,949,924 $1,955,310
Core Assets........ $1,913,025 $1,940,555 $1,945,239 $1,949,924 $1,955,310
Risk Weighted Assets.. $1,099,844 $1,105,350 $1,106,287 $1,107,224 $1,108,301
</TABLE>
-------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market or general financial conditions following the commencement of the
offering.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets. Pro forma total adjusted and risk- weighted assets
used for the capital calculations include the proceeds of the employee
stock ownership plan's purchase of 6% of the Fidelity Bankshares, Inc.
common stock in the offering.
(3) The current Office of Thrift Supervision core capital requirement for
savings banks is 3% of total adjusted assets for savings banks that receive
the highest supervisory rating for safety and soundness, and a 4% to 5%
core capital ratio requirement for all other savings banks.
(4) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weighting.
17
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the common stock in
the offering cannot be determined until the offering is completed, it is
presently anticipated that the net proceeds will be between $59.2 million and
$80.5 million, or $92.8 million if the offering range is increased by 15%. See
"Pro Forma Data" and "The Conversion--Share Exchange Ratio" and "--Stock Pricing
and Number of Shares to be Issued" as to the assumptions used to arrive at these
amounts. Fidelity Bankshares, Inc. will be unable to use any of the net proceeds
of the offering until the consummation of the conversion.
Fidelity Bankshares, Inc. estimates that it will invest between $25.9
million and $35.3 million, or $40.7 million if the offering range is increased
by 15%, to Fidelity Federal Bank and Trust. Fidelity Bankshares, Inc. will
retain approximately 50% of the net proceeds, a portion of which is expected to
be used to fund the loan to the employee stock ownership plan. The balance of
funds retained by Fidelity Bankshares, Inc. will be used for general corporate
purposes. These purposes may include investment in federal funds, short-term
investment grade marketable securities and mortgage-backed securities.
The loan to the employee stock ownership plan will enable it to
purchase up to 6.0% of the shares of Fidelity Bankshares, Inc. common stock
issued in the offering. Fidelity Bankshares, Inc. and Fidelity Federal Bank and
Trust also may elect to fund the employee stock ownership plan's stock purchases
by borrowing from a third- party financial institution. We also may determine to
fund the employee stock ownership plan through open market purchases of common
stock following completion of the offering. See "Management of Fidelity
Bankshares, Inc.--Benefits." Fidelity Bankshares, Inc. also may use the net
proceeds from the offering to support the expansion of new products and banking
services, branch acquisitions, the establishment of new branch offices, and the
acquisition of other financial institutions or diversification into other
banking related businesses. Neither Fidelity Bankshares, Inc. nor Fidelity
Federal Bank and Trust have any current specific plans, arrangements or
understandings regarding any additional expansions or acquisitions at this time,
nor have criteria been established to identify potential candidates for
acquisition.
Fidelity Bankshares, Inc. intends to use the net proceeds as follows:
Minimum Maximum
Shares Shares
------ ------
(In Thousands)
Net proceeds ................................... $59,199 $80,520
======= =======
Investment in Fidelity Federal
Bank and Trust ................................ 25,941 35,310
Funds loaned to ESOP ........................... 3,659 4,950
------- -------
Funds retained for general
corporate purposes ............................ $29,599 $40,260
======= =======
Upon completion of the conversion, the board of directors of Fidelity
Bankshares, Inc. will have the authority to repurchase stock, as permitted by
statutory and regulatory authority. The Office of Thrift Supervision may permit
Fidelity Bankshares, Inc. to repurchase up to 5% of its common stock during the
first year following completion of the conversion, and Fidelity Bankshares, Inc.
may repurchase its shares without restriction thereafter.
Based upon facts and circumstances following the conversion and subject
to applicable regulatory requirements, the board of directors may determine to
repurchase stock in the future. These facts and circumstances may include, but
are not limited to the following:
(1) market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the opportunity to improve our return on
equity;
(2) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund our employee
stock benefit plans; and
18
<PAGE>
(3) any other circumstances in which repurchases would be in the best
interests of Fidelity Bankshares, Inc. and our stockholders.
In the event we determine to repurchase our stock, repurchases may be
made at market prices which may be in excess of the $10.00 subscription price in
the offering. To the extent that we repurchase stock at market prices in excess
of the per-share book value, such repurchases may dilute the book value per
share of existing stockholders.
The portion of the net proceeds not retained by Fidelity Bankshares,
Inc., will be invested in Fidelity Federal Bank and Trust. These funds will be
used for general corporate purposes and to support asset growth, including
consumer and commercial loan originations. The funds also will be used to make
investments in one-to four-family residential mortgage loans, federal funds,
short-term investment grade marketable securities and mortgage-backed
securities. Fidelity Federal Bank and Trust also will use such funds for the
expansion of its facilities, and to expand operations by acquiring other
financial institutions, branch offices, or other financial services companies.
Fidelity Federal Bank and Trust intends to open approximately three new branch
offices in each of the next two years. Fidelity Federal Bank and Trust and
Fidelity Bankshares, Inc. have not determined the approximate amount of net
proceeds to be used for each of the purposes mentioned above.
DIVIDEND POLICY
Fidelity Bankshares, Inc. currently pays a cash dividend of $0.25 per
share per quarter, or $1.00 per share per year. After the conversion, we intend
to pay a dividend of $0.1475, $0.125 and $0.11 per share per quarter at the
minimum, midpoint and maximum of the offering range, respectively, which
represents a dividend rate of 5.9%, 5.0% and 4.4%, at the minimum, midpoint and
maximum of the range, respectively, based upon a price of $10.00 per share. The
amount of dividends that we intend to pay to our stockholders following the
conversion is intended to preserve the per share dividend amount, adjusted to
reflect the exchange ratio, that our current stockholders currently receive on
their Fidelity Bankshares, Inc. common stock. The dividend rate and the
continued payment of dividends will depend on a number of factors including our
capital requirements, our financial condition and results of operations, tax
considerations, statutory and regulatory limitations, and general economic
conditions. No assurance can be given that we will continue to pay dividends or
that they will not be reduced in the future. Assuming the offering is completed
in ____________ 2001, the first dividend is expected to be declared for the
quarter ending __________ 2001.
Under the rules of the Office of Thrift Supervision Fidelity Federal
Bank and Trust will not be permitted to pay dividends on its capital stock to
Fidelity Bankshares, Inc. if Fidelity Federal Bank and Trust's stockholders'
equity would be reduced below the amount of the liquidation account. See "The
Conversion--Liquidation Rights." For information concerning federal and state
law and regulations which apply to Fidelity Federal Bank and Trust in
determining the amount of proceeds which may be retained by Fidelity Bankshares,
Inc. and regarding a savings institution's ability to make capital
distributions, including payment of dividends to its holding company, see
"Taxation--Federal Taxation" and "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions."
Unlike Fidelity Federal Bank and Trust, Fidelity Bankshares, Inc. is
not restricted by Office of Thrift Supervision regulations on the payment of
dividends to its stockholders, although the source of dividends will depend on
the net proceeds retained by Fidelity Bankshares, Inc. and earnings thereon, and
may depend, in part, upon dividends from Fidelity Federal Bank and Trust.
Fidelity Bankshares, Inc. is subject, however, to the requirements of Delaware
law, which generally limit dividends to an amount equal to the excess of the net
assets of Fidelity Bankshares, Inc. over its statutory capital or, if there is
no excess, to its net profits for the current and/or immediately preceding
fiscal year. For these purposes, net assets means the amount by which total
assets exceed total liabilities, and statutory capital generally means the
aggregate par value of the outstanding shares of Fidelity Bankshares, Inc.'s
capital stock.
19
<PAGE>
Additionally, in connection with the conversion, Fidelity Bankshares,
Inc. and Fidelity Federal Bank and Trust have committed to the Office of Thrift
Supervision that during the one-year period following the consummation of the
conversion, Fidelity Bankshares, Inc. will not take any action to declare an
extraordinary dividend to stockholders that would be treated by recipient
stockholders as a tax-free return of capital for federal income tax purposes
without prior approval of the Office of Thrift Supervision.
MARKET FOR THE COMMON STOCK
There is an established market for Fidelity Bankshares, Inc. common
stock, which is currently listed on the Nasdaq National Market under the symbol
"FFFL." At September 30, 2000, Fidelity Bankshares, Inc. had ______ market
makers, including Ryan, Beck & Co., Inc. Ryan, Beck & Co., Inc. intends to
remain a market maker of Fidelity Bankshares, Inc. common stock following the
conversion. Ryan, Beck & Co., Inc. will also assist Fidelity Bankshares, Inc. in
obtaining other market makers after the conversion. There can be no assurance
that other market makers will be obtained or that an active and liquid trading
market for the common stock will develop or, if developed, will be maintained.
See "The Conversion--Share Exchange Ratio."
The development of a public market having the desirable characteristics
of depth, liquidity and orderliness depends on the existence of willing buyers
and sellers, the presence of which is not within the control of Fidelity
Bankshares, Inc. or any market maker. In the event that institutional investors
buy a relatively large proportion of the offering, the number of active buyers
and sellers of the common stock at any particular time may be limited. There can
be no assurance that persons purchasing the common stock will be able to sell
their shares at or above the subscription price of $10.00 per share. Therefore,
purchasers of the common stock should have a long-term investment intent and
should recognize that there may be a limited trading market in the common stock.
This may make it difficult to sell the common stock after the conversion and may
have an adverse effect on the price at which the common stock can be sold.
The following table sets forth the high and low bid quotations for
Fidelity Bankshares, Inc. common stock and cash dividends per share declared for
the periods indicated. These quotations represent prices between dealers and do
not include retail markups, markdowns, or commissions and do not reflect actual
transactions. This information has been obtained from monthly statistical
summaries provided by the Nasdaq Stock Market. As of September 30, 2000, there
were 2,914,584 publicly held shares of Fidelity Bankshares, Inc. common stock
issued and outstanding. In connection with the conversion, each share of common
stock of Fidelity Bankshares, Inc. will be converted into a number of shares of
common stock, based upon the exchange ratio that is described in other parts of
this prospectus.
<TABLE>
<CAPTION>
Cash Dividend
Fiscal 2000 High Bid Low Bid Declared
----------------- ----------------- -----------------
<S> <C> <C> <C>
Quarter Ended September 30, 2000............ $ 20.625 $ 15.250 $ 0.25
Quarter Ended June 30, 2000................. $ 16.000 $ 13.750 $ 0.25
Quarter Ended March 31, 2000................ $ 15.750 $ 13.375 $ 0.25
Fiscal 1999
Quarter Ended December 31, 1999............. $ 16.500 $ 14.125 $ 0.25
Quarter Ended September 30, 1999............ $ 18.750 $ 15.500 $ 0.25
Quarter Ended June 30, 1999................. $ 18.250 $ 15.125 $ 0.25
Quarter Ended March 31, 1999................ $ 22.625 $ 17.750 $ 0.25
Fiscal 1998
Quarter Ended December 31, 1998............. $ 23.750 $ 18.250 $ 0.25
Quarter Ended September 30, 1998............ $ 29.750 $ 22.000 $ 0.25
Quarter Ended June 30, 1998................. $ 30.750 $ 27.000 $ 0.225
Quarter Ended March 31, 1998................ $ 34.000 $ 29.750 $ 0.225
</TABLE>
At November 21, 2000, the business day immediately preceding the public
announcement of the conversion, and at ___________, 2001, the closing prices of
Fidelity Bankshares, Inc. common stock as reported on
20
<PAGE>
the Nasdaq National Market were $18.375 per share and $______ per share,
respectively. At September 30, 2000, Fidelity Bankshares, Inc. had approximately
734 stockholders of record. On the effective date of the conversion, all
publicly held shares of Fidelity Bankshares, Inc. common stock, including shares
held by Fidelity Bankshares, Inc.'s officers and directors, will be converted
automatically into and become the right to receive a number of shares of
Fidelity Bankshares, Inc. common stock determined pursuant to the exchange
ratio, and options to purchase shares of Fidelity Bankshares, Inc. common stock
will be converted into options to purchase a number of shares of Fidelity
Bankshares, Inc. common stock determined pursuant to the exchange ratio, for the
same aggregate exercise price.
See "Beneficial Ownership of Common Stock."
CAPITALIZATION
The following table presents the historical consolidated capitalization
of Fidelity Bankshares, Inc. at September 30, 2000, and the pro forma
consolidated capitalization of Fidelity Bankshares, Inc. after giving effect to
the conversion, based upon the assumptions set forth in the "Pro Forma Data"
section.
<TABLE>
<CAPTION>
Pro Forma at September 30, 2000
------------------------------------------------------------
Maximum
Minimum Mid-point Maximum as adjusted(1)
Fidelity 6,097,938 7,174,044 8,250,151 9,487,674
Bankshares, Inc. shares at shares at shares at shares at
Historical at $10.00 $10.00 $10.00 $10.00
September 30, 2000 per share per share per share per share
------------------ --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2) .......................... $ 1,412,433 $ 1,412,433 $ 1,412,433 $ 1,412,433 $ 1,412,433
Borrowed funds ....................... 343,052 343,052 343,052 343,052 343,052
Trust preferred securities(3) ........ 28,750 28,750 28,750 28,750 28,750
----------- ----------- ----------- ----------- -----------
Total deposits, borrowed funds and
trust preferred securities ........ $ 1,784,235 $ 1,784,235 $ 1,784,235 $ 1,784,235 $ 1,784,235
=========== =========== =========== =========== ===========
Stockholders' equity:
Preferred stock, $0.10 par value,
2,000,000 shares authorized; ...... -- -- -- -- --
Common stock, $0.10 par value
(post-conversion), 30,000,000 shares
authorized; shares to be issued
as reflected(4) .................... 684 1,105 1,300 1,495 1,719
Additional paid-in capital(4)(5) ..... 41,054 101,421 111,886 122,352 134,385
Retained earnings(6) ................. 61,702 61,702 61,702 61,702 61,702
Accumulated other comprehensive
income (loss) ...................... (7,341) (7,341) (7,341) (7,341) (7,341)
Less:
Treasury stock ..................... (9,146) (9,146) (9,146) (9,146) (9,146)
Common stock held by existing
Employee stock ownership plan(7)... (82) (82) (82) (82) (82)
Common stock to be acquired by
ESOP .............................. -- (3,659) (4,304) (4,950) (5,693)
Common stock to be acquired by
recognition plan(8) ............... -- (2,439) (2,870) (3,300) (3,795)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ........... $ 86,871 $ 141,561 $ 151,145 $ 160,730 $ 171,749
=========== =========== =========== =========== ===========
Total stockholders' equity as a
percentage of total assets .......... 4.56% 7.22% 7.68% 8.12% 8.63%
=========== =========== =========== =========== ===========
</TABLE>
----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market or general financial conditions following the commencement of the
subscription and community offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. These withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(3) Represents $28.8 of junior subordinated debentures issued in connection
with the issuance of 8.375% Cumulative Trust Preferred Securities by
Fidelity Capital Trust I.
(4) Fidelity Bankshares, Inc. has 2,000,000 authorized shares of preferred
stock. Fidelity Bankshares, Inc. has 30,000,000 authorized shares of common
stock, par value $0.10 per share. Fidelity Bankshares, Inc. common stock
and additional paid-in capital have been increased to reflect the number of
shares of Fidelity Bankshares, Inc. common stock to be outstanding. Pro
forma additional paid-in capital reflects consolidation of $1.6 million of
capital from Fidelity Bankshares, MHC. (Footnotes continued on next page)
21
<PAGE>
(5) No effect has been given to the issuance of additional shares of Fidelity
Bankshares, Inc. common stock pursuant to an additional stock option plan
and stock recognition plan that may be adopted by Fidelity Bankshares, Inc.
If these plans are approved by stockholders, an amount equal to 10% of the
shares of Fidelity Bankshares, Inc. common stock sold in the offering will
be reserved for issuance upon the exercise of options under the stock
option plan, and the stock recognition plan will acquire an amount of
common stock equal to 4% of the number of shares sold in the offering,
either through open market purchases or from authorized but unissued
shares. No effect has been given to the exercise of options currently
outstanding. See "Management of Fidelity Bankshares, Inc.--Benefits."
(6) The retained earnings of Fidelity Federal Bank and Trust will be
substantially restricted after the conversion, see "The
Conversion--Liquidation Rights" and "Regulation--Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(7) Assumes that 6 % of the shares sold in the offering will be acquired by the
employee stock ownership plan financed by a loan from Fidelity Bankshares,
Inc. The loan will be repaid principally from Fidelity Federal Bank and
Trust's contributions to the employee stock ownership plan. Since Fidelity
Bankshares, Inc. will finance the employee stock ownership plan debt, this
debt will be eliminated through consolidation and no liability will be
reflected on Fidelity Bankshares, Inc.'s consolidated financial statements.
Accordingly, the amount of stock acquired by the employee stock ownership
plan is shown in this table as a reduction of total stockholders' equity.
(8) Assumes a number of shares of common stock equal to 4% of the common stock
to be sold in the offering will be purchased by the stock recognition plan
in open market purchases. The dollar amount of common stock to be purchased
is based on the $10.00 per share subscription price in the offering and
represents unearned compensation and is reflected as a reduction of
capital. This amount does not reflect possible increases or decreases in
the value of stock relative to the subscription price in the offering. As
Fidelity Bankshares, Inc. accrues compensation expense to reflect the
vesting of shares pursuant to the stock recognition plan, the deferred
charge against capital will be reduced through a charge to operations.
Implementation of the stock recognition plan will require stockholder
approval. If the shares to fund the plan are assumed to come from
authorized but unissued shares purchased by the stock recognition plan from
Fidelity Bankshares, Inc. at the subscription price, at the minimum,
mid-point, maximum and the maximum, as adjusted, of the offering range, the
number of outstanding shares would be 11,293,918, 13,286,962, 15,280,006
and 17,572,007, respectively, and total stockholders' equity would be
$144.0 million, $154.0 million, $164.0 million, and $175.5 million,
respectively, at September 30, 2000. If the stock recognition plan acquires
authorized but unissued shares of Fidelity Bankshares, Inc., stockholders'
ownership in Fidelity Bankshares, Inc. would be diluted by approximately
2.2%.
PRO FORMA DATA
The following tables summarize historical data of Fidelity Bankshares,
Inc. and pro forma data of Fidelity Bankshares, Inc. at or for the nine months
ended September 30, 2000, and the year ended December 31, 1999, based on
assumptions set forth below and in the table, and should not be used as a basis
for projections of market value of the common stock following the conversion. No
effect has been given in the tables to the possible issuance of additional
shares reserved for future issuance pursuant to currently outstanding stock
options or the 2001 stock option plan, nor does book value give effect to the
liquidation account to be established in the conversion, or to the tax bad debt
reserve on liquidation. See "The Conversion--Liquidation Rights," and
"Management of Fidelity Federal Bank and Trust--Directors' Compensation," and
"--Executive Compensation."
Pro forma consolidated net income of Fidelity Bankshares, Inc. for the
nine months ended September 30, 2000, and the twelve months ended December 31,
1999, has been calculated as if the estimated net proceeds received by Fidelity
Bankshares, Inc. and Fidelity Federal Bank and Trust had been invested at an
assumed interest rate of 6.07% and 5.97%, for the nine months ended September
30, 2000, and the twelve months ended December 31, 1999, respectively. The
reinvestment rate was calculated based on the one-year U.S. Treasury bill rate
(which, in light of changes in interest rates in recent periods is deemed by
Fidelity Bankshares, Inc. and Fidelity Federal Bank and Trust to reflect more
accurately the pro forma reinvestment rate in recent periods than the arithmetic
average method). The effect of withdrawals from deposit accounts for the
purchase of common stock has not been reflected. The pro forma after-tax yield
on the estimated net proceeds is assumed to be 3.70% and 3.64% for the nine
months ended September 30, 2000, and the twelve months ended December 31, 1999,
respectively, based on the effective tax rate of 39.0%. Historical and pro forma
per share amounts have been calculated by dividing historical and pro forma
amounts by the indicated number of shares of common stock. No effect has been
given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. It is assumed that Fidelity Bankshares, Inc. will
retain 50% of the estimated adjusted net conversion proceeds. The actual net
proceeds from the sale of common stock will not be determined until the
conversion is completed; however, we currently estimate the net proceeds to be
between $59.2 million and $80.5 million.
22
<PAGE>
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amounts of assets and liabilities of Fidelity
Bankshares, Inc. The pro forma stockholders' equity is not intended to represent
the fair market value of the common stock and may be greater than amounts that
would be available for distribution to stockholders in the event of liquidation.
<TABLE>
<CAPTION>
At or for the Nine Months Ended September 30, 2000
Based upon the Sale for $10.00 of
-------------------------------------------------------------------
6,097,938 7,174,044 8,250,151 9,487,674
Shares Shares Shares Shares(1)
Minimum of Midpoint of Maximum of 15% Above Maximum
Estimated Estimated Estimated of Estimated
Price Range Price Range Price Range Price Range
----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Gross proceeds ................................. $ 60,979 $ 71,740 $ 82,502 $ 94,877
Expenses ....................................... (1,780) (1,881) (1,982) (2,099)
------------ ------------ ------------ ------------
Estimated net proceeds ......................... 59,199 69,859 80,520 92,778
Common stock purchased by employee
stock ownership plan(2) ..................... (3,659) (4,304) (4,950) (5,693)
Common stock purchased by recognition plan(3). (2,439) (2,870) (3,300) (3,795)
Assets reinvested from the MHC ............... 1,589 1,589 1,589 1,589
------------ ------------ ------------ ------------
Estimated net proceeds, as adjusted .......... $ 54,690 $ 64,274 $ 73,859 $ 84,879
============ ============ ============ ============
For the nine months ended September 30, 2000:
Consolidated net income:
Historical ................................... $ 6,555 $ 6,555 $ 6,555 $ 6,555
Pro forma adjustments:
Income on adjusted net proceeds ............. 1,519 1,785 2,051 2,357
Employee stock ownership plan(2) ............ (167) (197) (226) (260)
Recognition plan(3) ......................... (223) (263) (302) (347)
------------ ------------ ------------ ------------
Pro forma net income ...................... $ 7,684 $ 7,880 $ 8,078 $ 8,305
============ ============ ============ ============
Net income per share(4):
Historical ................................... $ 0.61 $ 0.52 $ 0.45 $ 0.39
Pro forma adjustments:
Income on net proceeds ....................... 0.14 0.14 0.14 0.14
Employee stock ownership plan(2) ............. (0.02) (0.02) (0.02) (0.02)
Recognition plan(3) .......................... (0.02) (0.02) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma net income per share(4)(5) ........ $ 0.71 $ 0.62 $ 0.55 $ 0.49
============ ============ ============ ============
Pro forma price to earnings(8) ................. 10.42x 11.90x 13.39x 15.00x
============ ============ ============ ============
Number of shares used in net income per
share calculations ............................ 10,697,844 12,585,699 14,473,554 16,644,587
At September 30, 2000:
Stockholders' equity:
Historical ................................... $ 86,871 $ 86,871 $ 86,871 $ 86,871
Estimated net proceeds ....................... 59,199 69,859 80,520 92,778
MHC capital consolidation .................... 1,589 1,589 1,589 1,589
Less: common stock acquired by employee
stock ownership plan(2) ...................... (3,659) (4,304) (4,950) (5,693)
Common stock acquired by recognition plan(3) . (2,439) (2,870) (3,300) (3,795)
------------ ------------ ------------ ------------
Pro forma stockholders' equity(6) .............. 141,561 151,145 160,730 171,750
Intangible assets ............................ 2,567 2,567 2,567 2,567
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity ...... $ 138,994 $ 148,578 $ 158,163 $ 169,183
============ ============ ============ ============
Stockholders' equity per share(7):
Historical ................................... $ 7.86 $ 6.68 $ 5.81 $ 5.05
Estimated net proceeds ....................... 5.36 5.38 5.38 5.40
MHC capital consolidation .................... 0.14 0.12 0.11 0.09
Less: common stock acquired by employee
stock ownership plan(2) .................... (0.33) (0.33) (0.33) (0.33)
Common stock acquired by recognition plan(3) (0.22) (0.22) (0.22) (0.22)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per share(6)(7) $ 12.81 $ 11.63 $ 10.75 $ 9.99
============ ============ ============ ============
Pro forma tangible stockholders'
equity per share ............................ $ 12.58 $ 11.43 $ 10.58 $ 9.84
============ ============ ============ ============
Offering price as a percentage of pro forma
stockholders' equity per share(8) ............. 78.06% 85.98% 93.02% 100.10%
============ ============ ============ ============
Offering price as a percentage of pro forma
tangible stockholders' equity per share ....... 79.49% 87.49% 94.52% 101.63%
============ ============ ============ ============
Number of shares used in book value per share
calculations .................................. 11,050,000 13,000,000 14,950,000 17,192,500
</TABLE>
(footnotes on next page)
23
<PAGE>
--------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market and financial conditions following the commencement of the
offering.
(2) Assumes that 6.0% of shares of common stock sold in the offering will be
purchased by the employee stock ownership plan. For purposes of this table,
the funds used to acquire these shares are assumed to have been borrowed by
the employee stock ownership plan from the net proceeds of the offering
retained by Fidelity Bankshares, Inc. Fidelity Federal Bank and Trust
intends to make annual contributions to the employee stock ownership plan
in an amount at least equal to the principal of the debt. Fidelity Federal
Bank and Trust' total annual payments on the employee stock ownership plan
debt are based upon 10 equal annual installments of principal and interest.
Statement of Position 93-6 requires that an employer record compensation
expense in an amount equal to the fair value of the shares committed to be
released to employees. The pro forma adjustments assume that the employee
stock ownership plan shares are allocated in equal annual installments
based on the number of loan repayment installments assumed to be paid by
Fidelity Federal Bank and Trust, the fair value of the common stock remains
at the subscription price and the employee stock ownership plan expense
reflects an effective combined federal and state tax rate of 39.0%. The
unallocated employee stock ownership plan shares are reflected as a
reduction of stockholders' equity. No reinvestment is assumed on proceeds
contributed to fund the employee stock ownership plan. The pro forma net
income further assumes (i) that 27,440, 32,284, 37,126 and 42,694 shares
were committed to be released during the nine months ended September 30,
2000, at the minimum, mid-point, maximum, and adjusted maximum of the
offering range, respectively, and (ii) in accordance with Statement of
Position 93-6, only the employee stock ownership plan shares committed to
be released during the period were considered outstanding for purposes of
net income per share calculations.
(3) If approved by Fidelity Bankshares, Inc.'s stockholders, the stock
recognition plan intends to purchase an aggregate number of shares of
common stock equal to 4% of the shares to be sold in the offering.
Stockholder approval of the stock recognition plan and purchases by the
plan may not occur earlier than six months after the completion of the
conversion. The shares may be acquired directly from Fidelity Bankshares,
Inc., or through open market purchases. The funds to be used by the stock
recognition plan to purchase the shares will be provided by Fidelity
Bankshares, Inc. or Fidelity Federal Bank and Trust. The table assumes that
the stock recognition plan acquires the shares through open market
purchases at the subscription price with funds contributed by Fidelity
Bankshares, Inc., and that they vest over a five-year period and are
amortized as an expense during the nine months ended September 30, 2000,
and the stock recognition plan expense reflects an effective combined
federal and state tax rate of 39.0%. Assuming stockholder approval of the
plan and that the plan shares are awarded through the use of authorized but
unissued shares of common stock, stockholders would have their voting
interests diluted by approximately 2.2%.
(4) Per share figures include shares of Fidelity Bankshares, Inc. common stock
that will be exchanged for the publicly held shares of Fidelity Bankshares,
Inc. common stock in the share exchange. Net income per share computations
are determined by taking the number of subscription shares assumed to be
sold in the offering and the number of exchange shares assumed to be issued
in the share exchange and, in accordance with Statement of Position 93-6,
subtracting the employee stock ownership plan shares which have not been
committed for release during the respective period. See Note 2 above. The
number of shares of common stock actually sold and the corresponding number
of exchange shares may be more or less than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which may be adopted by Fidelity
Bankshares, Inc. following the offering and presented to stockholders for
approval not earlier than six months after the completion of the
conversion. If the stock option plan is approved by stockholders, an amount
equal to 10% of the common stock sold in the offering will be reserved for
future issuance upon the exercise of options to be granted under the stock
option plan. The issuance of authorized but previously unissued shares of
common stock pursuant to the exercise of options under such plan would
dilute existing stockholders' interests by approximately 5.2%.
(6) The retained earnings of Fidelity Federal Bank and Trust will be
substantially restricted after the conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(7) Per share figures include shares of Fidelity Bankshares, Inc. common stock
that will be exchanged for publicly held shares of Fidelity Bankshares,
Inc. common stock in the share exchange. Stockholders' equity per share
calculations are based upon the sum of (i) the number of subscription
shares assumed to be sold in the offering, and (ii) exchange shares equal
to the minimum, mid-point, maximum and adjusted maximum of the offering
range, respectively. The exchange shares reflect an exchange ratio of
1.6991, 1.9989, 2.2987 and 2.6435, respectively, at the minimum, mid-point,
maximum, and adjusted maximum of the offering range, respectively. The
number of subscription shares actually sold and the corresponding number of
exchange shares may be more or less than the assumed amounts.
(8) Annualized.
24
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1999
Based upon the Sale for $10.00 of
---------------------------------------------------------------
6,097,938 7,174,044 8,250,151 9,487,674
Shares Shares Shares Shares(1)
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Price Price Price Estimated
Range Range Range Price Range
----- ----- ----- -----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Gross proceeds ................................. $ 60,979 $ 71,740 $ 82,502 $ 94,877
Expenses ....................................... (1,780) (1,881) (1,982) (2,099)
------------ ------------ ------------ ------------
Estimated net proceeds ....................... 59,199 69,859 80,520 92,778
Common stock purchased by employee
stock ownership plan(2) ..................... (3,659) (4,304) (4,950) (5,693)
Common stock purchased by recognition plan(3). (2,439) (2,870) (3,300) (3,795)
Assets reinvested from the MHC ............... 1,589 1,589 1,589 1,589
------------ ------------ ------------ ------------
Estimated net proceeds, as adjusted .......... $ 54,690 $ 64,274 $ 73,859 $ 84,879
============ ============ ============ ============
For the fiscal year ended December 31, 1999:
Consolidated net income:
Historical ................................... $ 9,114 $ 9,114 $ 9,114 $ 9,114
Pro forma adjustments:
Income on adjusted net proceeds ............. 1,992 2,341 2,690 3,091
Employee stock ownership plan(2) ............ (223) (263) (302) (347)
Recognition plan(3) ......................... (298) (350) (403) (463)
------------ ------------ ------------ ------------
Pro forma net income ...................... $ 10,585 $ 10,842 $ 11,099 $ 11,395
============ ============ ============ ============
Net income per share(4):
Historical ................................... $ 0.85 $ 0.72 $ 0.63 $ 0.55
Pro forma adjustments:
Income on net proceeds ....................... 0.19 0.19 0.19 0.19
Employee stock ownership plan(2) ............. (0.02) (0.02) (0.02) (0.02)
Recognition plan(3) .......................... (0.03) (0.03) (0.03) (0.03)
------------ ------------ ------------ ------------
Pro forma net income per share(4)(5) ........ $ 0.99 $ 0.86 $ 0.77 $ 0.69
============ ============ ============ ============
Pro forma price to earnings .................... 10.10x 11.63x 12.99x 14.71x
============ ============ ============ ============
Number of shares used in price-to-earnings
ratio calculations ............................ 10,702,418 12,591,079 14,479,741 16,651,703
At December 31, 1999:
Stockholders' equity:
Historical ................................... $ 83,304 $ 83,304 $ 83,304 $ 83,304
Estimated net proceeds ....................... 59,199 69,859 80,520 92,778
MHC capital consolidation .................... 1,589 1,589 1,589 1,589
Less: Common stock acquired by employee
stock ownership plan(2) .................... (3,659) (4,304) (4,950) (5,693)
Common stock acquired by recognition plan(3) (2,439) (2,870) (3,300) (3,795)
------------ ------------ ------------ ------------
Pro forma stockholders' equity(6) .............. 137,994 147,578 157,163 168,183
Intangible assets ............................ 2,758 2,758 2,758 2,758
------------ ------------ ------------ ------------
Pro forma tangible stockholders' equity ...... $ 135,236 $ 144,820 $ 154,405 $ 165,425
============ ============ ============ ============
Stockholders' equity per share(7):
Historical ................................... $ 7.54 $ 6.41 $ 5.57 $ 4.85
Estimated net proceeds ....................... 5.36 5.37 5.38 5.40
MHC capital consolidation .................... 0.14 0.12 0.11 0.09
Less: common stock acquired by employee
stock ownership plan(2) .................... (0.33) (0.33) (0.33) (0.33)
Common stock acquired by recognition plan(3) (0.22) (0.22) (0.22) (0.22)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per share(6)(7) $ 12.49 $ 11.35 $ 10.51 $ 9.79
============ ============ ============ ============
Pro forma tangible stockholders' equity per
share ....................................... $ 12.24 $ 11.14 $ 10.33 $ 9.62
============ ============ ============ ============
Offering price as a percentage of pro forma
stockholders' equity per share ................ 80.06% 88.11% 95.15% 102.25%
============ ============ ============ ============
Offering price as a percentage of pro forma
tangible stockholders' equity per share ....... 81.70% 89.77% 96.81% 103.95%
============ ============ ============ ============
Number of shares used in book value per share
calculations .................................. 11,050,000 13,000,000 14,950,000 17,192,500
</TABLE>
(footnotes on next page)
25
<PAGE>
-------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect changes
in market and financial conditions following the commencement of the
offering.
(2) Assumes that 6.0 % of shares of common stock sold in the offering will be
purchased by the employee stock ownership plan. For purposes of this table,
the funds used to acquire these shares are assumed to have been borrowed by
the employee stock ownership plan from the net proceeds of the offering
retained by Fidelity Bankshares, Inc. Fidelity Federal Bank and Trust
intends to make annual contributions to the employee stock ownership plan
in an amount at least equal to the principal and interest of the debt.
Fidelity Federal Bank and Trust's total annual payments on the employee
stock ownership plan debt are based upon 10 equal annual installments of
principal. Statement of Position 93-6 requires that an employer record
compensation expense in an amount equal to the fair value of the shares
committed to be released to employees. The pro forma adjustments assume
that the employee stock ownership plan shares are allocated in equal annual
installments based on the number of loan repayment installments assumed to
be paid by Fidelity Federal Bank and Trust, the fair value of the common
stock remains at the subscription price and the employee stock ownership
plan expense reflects an effective combined federal and state tax rate of
39.0%. The unallocated employee stock ownership plan shares are reflected
as a reduction of stockholders' equity. No reinvestment is assumed on
proceeds contributed to fund the employee stock ownership plan. The pro
forma net income further assumes (i) that 36,588, 43,044, 49,500 and 56,926
shares were committed to be released during the year ended December 31,
1999, at the minimum, mid-point, maximum, and adjusted maximum of the
offering range, respectively, and (ii) in accordance with Statement of
Position 93-6, only the employee stock ownership plan shares committed to
be released during the period were considered outstanding for purposes of
net income per share calculations.
(3) If approved by Fidelity Bankshares, Inc.'s stockholders, the stock
recognition plan intends to purchase an aggregate number of shares of
common stock equal to 4% of the shares to be sold in the offering.
Stockholder approval of the stock recognition plan and purchases by the
plan may not occur earlier than six months after the completion of the
conversion. The shares may be acquired directly from Fidelity Bankshares,
Inc., or through open market purchases. The funds to be used by the stock
recognition plan to purchase the shares will be provided by Fidelity
Bankshares, Inc. or Fidelity Federal Bank and Trust. The table assumes that
the stock recognition plan acquires the shares through open market
purchases at the subscription price with funds contributed by Fidelity
Bankshares, Inc., and that 20% of the amount contributed to the stock
recognition plan is amortized as an expense during the fiscal year ended
December 31, 1999, and the stock recognition plan expense reflects an
effective combined federal and state tax rate of 39.0%. Assuming
stockholder approval of the plan and that the plan shares are awarded
through the use of authorized but unissued shares of common stock,
stockholders would have their voting interests diluted by approximately
2.2%.
(4) Per share figures include shares of Fidelity Bankshares, Inc. common stock
that will be exchanged for the publicly held shares of Fidelity Bankshares,
Inc. common stock in the share exchange. Net income per share computations
are determined by taking the number of subscription shares assumed to be
sold in the offering and the number of exchange shares assumed to be issued
in the share exchange and, in accordance with Statement of Position 93-6,
subtracting the employee stock ownership plan shares which have not been
committed for release during the respective period. See Note 2 above. The
number of shares of common stock actually sold and the corresponding number
of exchange shares may be more or less than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which is expected to be adopted by
Fidelity Bankshares, Inc. following the offering and presented to
stockholders for approval not earlier than six months after the completion
of the conversion. If the stock option plan is approved by stockholders, an
amount equal to 10% of the common stock sold in the offering will be
reserved for future issuance upon the exercise of options to be granted
under the stock option plan. The issuance of authorized but previously
unissued shares of common stock pursuant to the exercise of options under
such plan would dilute existing stockholders' interests by approximately
5.2%.
(6) The retained earnings of Fidelity Federal Bank and Trust will be
substantially restricted after the conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(7) Per share figures include shares of Fidelity Bankshares, Inc. common stock
that will be exchanged for publicly held shares of Fidelity Bankshares,
Inc. common stock in the share exchange. Stockholders' equity per share
calculations are based upon the sum of (i) the number of subscription
shares assumed to be sold in the offering, and (ii) exchange shares equal
to the minimum, mid-point, maximum and adjusted maximum of the offering
range, respectively. The exchange shares reflect an exchange ratio of
1.6991, 1.9989, 2.2987 and 2.6435, respectively, at the minimum, mid-point,
maximum, and adjusted maximum of the offering range, respectively. The
number of subscription shares actually sold and the corresponding number of
exchange shares may be more or less than the assumed amounts.
26
<PAGE>
FIDELITY BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of Fidelity
Bankshares, Inc. for the years ended December 31, 1997, 1998, and 1999, have
been audited by Deloitte & Touche LLP, independent certified public accountants,
whose report thereon appears elsewhere herein. The Consolidated Statements of
Operations for the nine months ended September 30, 1999 and 2000, are unaudited
and have been prepared in accordance with the requirements for a presentation of
interim financial statements and are in accordance with generally accepted
accounting principles. In our opinion, all adjustments consisting of normal
recurring adjustments, that are necessary for a fair presentation of the interim
periods, have been reflected. The results of operations for the nine months
ended September 30, 2000, are not necessarily indicative of the results of
operations that may be expected for the year ending December 31, 2000. These
statements should be read in conjunction with the consolidated financial
statements of Fidelity Bankshares, Inc. and related notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
December 31, (Unaudited)
----------------------------------- ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(In thousands, except share data)
Interest income:
<S> <C> <C> <C> <C> <C>
Loans ....................... $ 58,386 $ 71,996 $ 81,290 $ 59,483 $ 73,503
Investment securities ....... 758 1,048 2,215 1,491 2,854
Other investments ........... 1,969 3,482 3,109 2,378 2,382
Mortgage-backed and corporate
debt securities ............ 11,159 21,794 24,311 18,294 18,784
--------- --------- --------- --------- ---------
Total interest income ......... 72,272 98,320 110,925 81,646 97,523
--------- --------- --------- --------- ---------
Interest expense:
Deposits .................... 33,856 45,128 51,578 37,737 46,689
Advances from Federal Home
Loan Bank and other
borrowings ............... 7,750 19,864 20,677 15,801 15,807
--------- --------- --------- --------- ---------
Total interest expense ........ 41,606 64,992 72,255 53,538 62,496
--------- --------- --------- --------- ---------
Net interest income ........... 30,666 33,328 38,670 28,108 35,027
Provision for loan losses ..... 170 77 463 268 928
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses .... 30,496 33,251 38,207 27,840 34,099
--------- --------- --------- --------- ---------
Other income:
Service charges on deposit
accounts ................... 2,061 2,519 3,222 2,314 2,870
Fees for other banking
services ................... 1,545 2,220 2,722 2,000 2,972
Net gain on sale of loans,
mortgage-backed securities
and investments .......... 190 2,502 420 342 658
Gain on sale of property .... -- -- 5,100 -- --
Miscellaneous ............... 1,114 1,449 1,463 967 3,141
--------- --------- --------- --------- ---------
Total other income ............ 4,910 8,690 12,927 5,623 9,641
--------- --------- --------- --------- ---------
Operating expense:
Employee compensation and
benefits ................... 13,900 16,422 21,214 15,181 19,734
Occupancy and equipment ..... 4,908 6,231 7,256 5,220 6,608
Gain on real estate owned ... (153) (72) (234) (192) (126)
Marketing ................... 633 767 916 713 817
Federal deposit insurance
premium .................... 464 556 672 492 207
Miscellaneous ............... 4,483 5,783 6,530 4,909 5,848
--------- --------- --------- --------- ---------
Total operating expense ....... 24,235 29,687 36,354 26,323 33,088
--------- --------- --------- --------- ---------
Income before provision for
income taxes ................. 11,171 12,254 14,780 7,140 10,652
--------- --------- --------- --------- ---------
Provision (benefit) for
income taxes:
Current ..................... 5,573 5,579 5,604 3,169 2,760
Deferred .................... (820) (737) 62 (423) 1,337
--------- --------- --------- --------- ---------
Total provision for income
taxes ........................ 4,753 4,842 5,666 2,746 4,097
--------- --------- --------- --------- ---------
Net income .................... $ 6,418 $ 7,412 $ 9,114 $ 4,394 $ 6,555
========= ========= ========= ========= =========
Earnings per share:
Basic ....................... $ 0.96 $ 1.12 $ 1.42 $ 0.68 $ 1.01
========= ========= ========= ========= =========
Diluted ..................... $ 0.95 $ 1.10 $ 1.40 $ 0.68 $ 1.00
========= ========= ========= ========= =========
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis reflects Fidelity Bankshares, Inc.'s
consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our financial condition and results of
operations. You should read the information in this section in conjunction with
Fidelity Bankshares, Inc.'s consolidated financial statements and their notes
beginning on page F-1 of this prospectus, and the other statistical data
provided in this prospectus. This prospectus contains certain "forward-looking
statements" which may be identified by the use of such words as "believe,"
"expect," "anticipate," "should," "planned," "estimated" and "potential."
Examples of forward-looking statements include, but are not limited to,
estimates with respect to our financial condition, results of operations and
business that are subject to various factors which could cause actual results to
differ materially from these estimates and most other statements that are not
historical in nature. These factors include, but are not limited to, general and
local economic conditions, changes in interest rates, deposit flows, demand for
mortgage and other loans, real estate values, and competition; changes in
accounting principles, policies, or guidelines; changes in legislation or
regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and services.
General
We conduct no business other than holding the common stock of Fidelity
Federal Bank and Trust. Consequently, our net income is derived from the
operations of Fidelity Federal Bank and Trust, which is primarily dependent on
its net interest income, which is the difference between interest income earned
on investments in mortgage loans and mortgage-backed securities, other
investment securities and loans, and the cost of funds consisting of interest
paid on deposits and borrowings. Our net income is also affected by our
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. In
addition, our earnings 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 our control. In particular, the general level of market rates tends to be
highly cyclical.
Business Strategy
Our current business strategy is to operate as a well-capitalized,
profitable and independent community- oriented financial institution dedicated
to providing quality customer service. Historically, we have sought to implement
this strategy by emphasizing retail deposits as our primary source of funds. We
also maintain a substantial part of our assets in locally originated residential
first mortgage loans, mortgage-backed securities and in other liquid investment
securities. In recent years, we have sought to complement our traditional
lending activities by substantially increasing our level of commercial real
estate and consumer and commercial business loans. Since January 1, 1999, we
have increased our presence in our market area by opening 12 new branch
locations. During this period, we have also introduced a number of new loan and
deposit products, in addition to introducing trust, insurance and securities
investment services. Specifically, our business strategy incorporates the
following elements: (1) geographic expansion of our market presence by opening
new branches; (2)expanding our business banking services, with particular
emphasis on transaction accounts, with a goal of increasing our small business
customers; (3) increasing the origination of commercial real estate, consumer
and commercial business loans; (4) increasing our noninterest income, with an
emphasis on trust and asset management services as well as insurance and
investment products; (5) maintaining high asset quality; and (6) continuing our
traditional mortgage lending.
28
<PAGE>
Highlights of Fidelity Federal Bank and Trust's business strategy are
as follows:
Expanding our market presence. Management determined that the strong
Florida economy presented Fidelity Federal Bank and Trust with an opportunity to
grow internally and in 1998, we began to significantly increase the number of
our branch offices in Palm Beach, Martin and St. Lucie Counties. A principal
component of this expansion program was to identify strategic locations for
opening new branches. The new branches consist of both full service and
complementary "supermarket" branches. As a result of our efforts, we have
increased the number of branches from 22 at December 31, 1998 to 34 at September
30, 2000. Of these branches, 30 are full- service offices and four are
supermarket branches. None of the new branches opened during this period were
acquired from other financial institutions. Upon completion of the conversion, a
portion of the net proceeds will be used to continue our branch expansion
program. During the next two years we expect to open approximately three new
branches per year. Generally, management expects new branches will become
profitable 18-24 months after they have opened. With the recent merger activity
in our market area, we believe that our community-oriented approach to banking
may enable us to increase our market share.
Expanding our business banking. We have increased our emphasis on
business banking and we intend to use our branch offices to provide convenient
and expanded commercial deposit products and services to business customers. Our
goal is to use our service-oriented banking philosophy to attract business
customers that have been affected adversely by recent bank mergers. We have been
hiring senior commercial banking officers who have extensive experience in
originating and administering business loans. These senior officers have
enhanced our commercial lending infrastructure and our commercial loan
origination capabilities, so we can expand relationships with current business
customers and attract new relationships. We have also hired additional personnel
to serve our business customers by providing cash management services and
variable money market, NOW, sweep, and other transaction accounts.
Increasing emphasis on commercial real estate and consumer and
commercial business loans. We have sought to increase our commercial real estate
lending as well as our consumer and commercial business lending consistent with
safety and soundness. At September 30, 2000, loans secured by commercial real
estate totaled $108.5 million, or 8.2% of total loans. At September 30,2000,
consumer loans (primarily home equity lines of credit, automobile loans, boat
loans and passbook loans) and commercial business loans totaled $212.3 million,
or 15.9% of total loans. We have been emphasizing our commercial real estate and
consumer and commercial business lending activities, and in this regard we have
expanded our underwriting and collection department to add qualified persons who
are experienced in originating and servicing our commercial real estate and
commercial business loans. Although these loans offer higher yields than one-to
four-family loans, they also involve greater risk.
Diversifying our products and services with a goal of increasing our
noninterest income. We have sought to reduce our dependence on net interest
income by increasing our noninterest income. In 1999, we began offering
insurance and investments products through an operating subsidiary, Florida
Consolidated Agency, Inc., doing business as Fidelity Insurance. In July 1999,
Fidelity Insurance acquired an established full-service insurance agency based
in Juno, Florida. Fidelity Insurance acts as agent for a number of insurance
companies. In addition, beginning in February 2000, we began to offer trust and
investment management services that we believe will be sought by persons with
net worth of $500,000 or more, and by small and medium-sized businesses. At
September 30, 2000, we had $23.2 million in assets under trust management.
Maintaining our high asset quality. We have consistently maintained a
high level of asset quality. We believe that our high asset quality is the
result of a stable economy, conservative underwriting standards and experienced
loan officers, as well as diligent monitoring of our loan portfolio by our
collections department. During the year ended December 31, 1999 and the nine
months ended September 30, 2000, loans charged-off totaled $80,000 and $71,000,
respectively. At December 31, 1999 and September 30, 2000, our percentage of
non-accruing loans to total loans was 0.36% and 0.29%, respectively. In
addition, the percentage of non-performing assets to total assets at December
31, 1999 and September 30, 2000 was 0.29% and 0.27%, respectively.
29
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Continuing our traditional residential mortgage lending. Our principal
business activity has been originating residential real estate loans and
maintaining these loans in our loan portfolio. We anticipate a continued
commitment to financing the purchase or improvement of residential real estate
in our market area. At September 30, 2000, $1.0 billion, or 76.2% of our loan
portfolio consisted of one-to four-family residential mortgage loans.
Changes in Financial Condition
Comparison of Financial Condition at December 31, 1999 and September
30, 2000
Our assets increased by $185.9 million from $1.7 billion at December
31, 1999 to $1.9 billion at September 30, 2000. The increase in our assets is
primarily attributable to a $163.8 million increase in net loans receivable and
a $11.4 million increase in cash and assets available for sale. In addition, we
increased our 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
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 increases in loans and
deposits reflects our branch expansion in our market area. In addition, the
increase in our deposits primarily reflect the popularity of our variable rate
money market accounts and noninterest bearing NOW accounts which increased by
$57.1 million and $28.6 million, respectively. Stockholders' equity at September
30, 2000 was $86.9 million, an increase of $3.6 million from December 31, 1999.
This increase primarily consisted of net income for the nine months of $6.6
million, which was partially offset by dividends declared of $2.2 million and
also an increase in accumulated other comprehensive loss (net of taxes) of $1.2
million.
Comparison of Financial Condition at December 31, 1998 and 1999
During 1999, our assets increased by $152.0 million. Loans receivable
increased by $187.3 million, while cash and cash equivalents increased by
$775,000. In addition, we increased our investment in office properties and
equipment, primarily for new office sites, by $7.3 million, and other assets
increased by $3.2 million, from $13.9 million to $17.1 million. Partially
offsetting the increase in total assets was a $48.3 million decrease in assets
classified as available for sale. The funds used to provide for the increase in
loan growth and investments in properties and equipment include a $58.6 million
decrease in mortgage-backed and corporate securities. Deposits increased by
$200.8 million from $1.1 billion at December 31, 1998, to $1.3 billion at
December 31, 1999. The increase in deposits includes $86.1 million from the new
branch offices opened during the year. Approximately $56.1 million of the
increased deposits were used to reduce our FHLB advances which decreased from
$303.1 million to $247.1 million, while the remaining funds were used to fund
asset growth.
Stockholders' equity decreased by $1.7 million from $85.0 million at
December 31, 1998, to $83.3 million at December 31, 1999. The decrease in
stockholders' equity is attributable to an increase in accumulated other
comprehensive loss (net of taxes) from $318,000 to $6.1 million, reflecting the
decline in the fair value of our securities classified as available for sale.
Partially offsetting this loss was an increase in our retained earnings of $5.3
million from $52.0 million at December 31, 1998 to $57.3 million at December 31,
1999.
Results of Operations
Our earnings depend primarily on our level of net interest income,
which is the difference between interest earned on our interest-earning assets,
consisting primarily of mortgage loans, mortgage-backed securities and other
investment securities, and the interest paid on interest-bearing liabilities,
consisting primarily of deposits. Net interest income is a function of our
interest rate spread, which is the difference between the average yield earned
on interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets compared to interest-bearing liabilities. Our earnings are also affected
by our level of operating expenses and service charges as well as other
expenses, including employee compensation and benefits, occupancy and equipment
costs, and deposit insurance premiums.
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<PAGE>
Results of Operations for the nine months ended September 30, 1999 and
2000
General. Our net income for the nine months ended September 30, 1999
was $4.4 million, compared to $6.6 million for the nine months ended September
30, 2000, representing an increase of $2.2 million, or 50.0%. The primary
reasons for the increase in our net income was an increase in net interest
income of $6.9 million, or 24.6%, from $28.1 million for the nine months ended
September 30, 1999, to $35.0 million for the nine months ended September 30,
2000 and an increase in other income of $4.0 million, or 71.4%, from $5.6
million for the nine months ended September 30, 1999 to $9.6 million for the
nine months ended September 30, 2000. Offsetting these increases was an increase
in our provision for loan losses of $660,000, from $268,000 to $928,000, an
increase in operating expenses of $6.8 million and an increase in our provision
for income taxes of $1.4 million, or 49.2%, from $2.7 million to $4.1 million.
Interest Income. Interest income for the nine months ended September
30, 1999, totaled $81.6 million compared to $97.5 million at September 30, 2000,
an increase of $15.9 million, or 19.4%. The primary reason for this increase was
an increase in our interest income from loans of $14.0 million, or 23.6%. This
increase was primarily the result of an increase of 19.5% in the average balance
of loans from $1.0 billion to $1.2 billion, for the periods ended September 30,
1999 and 2000, respectively. The average balance of our mortgage loans increased
from $936.4 million, to $1.1 billion, and the average balance of our consumer
and commercial business loans increased from $107.6 million to $163.2 million.
The average yield of our mortgage loans increased from 7.45% to 7.58%. The
average yield of our consumer and commercial business loans increased from 8.88%
to 9.74%. Interest income from investment securities increased from $1.5 million
for the nine months ended September 30, 1999 to $2.9 million for the nine months
ended September 30, 2000. This increase was due to an increase in the average
balance of investment securities of $21.0 million and an increase in the average
yield of such securities to 6.88% in 2000, from 5.79% in 1999. Our interest
income from mortgage-backed and other securities also increased by $490,000,
from $18.3 million to $18.8 million. This increase resulted from an increase in
the average yield of mortgage-backed securities from 5.82% to 7.01% for the nine
months ended September 30, 1999 and 2000, respectively, notwithstanding the
$61.4 million, or 14.7% decrease in the average balance of mortgage-backed
securities from $418.8 million to $357.4 million for the comparative nine month
periods. The increase in the average yield of our mortgage-backed securities
portfolio resulted from our investment in adjustable rate securities, which
repriced upward in reaction to the general increase in market interest rates.
Interest Expense. Interest expense for the nine months ended September
30, 1999 totaled $53.5 million, compared to $62.5 million at September 30, 2000,
an increase of $9.0 million, or 16.7%. The increase in interest expense
primarily resulted from an increase in the average balance of deposits from $1.2
billion for the nine months ended September 30, 1999 to $1.4 billion for the
nine months ended September 30, 2000. The average cost of deposits was 4.21% and
4.49% for the nine month period ended September 30, 1999 and 2000, respectively.
The increase in the average balance of deposits reflects the introduction of our
variable rate money market accounts and non-interest bearing NOW accounts. The
cost of borrowed funds remained unchanged at $15.8 million for the respective
nine month periods.
Net Interest Income. Net interest income totaled $28.1 million for the
nine months ended September 30, 1999, compared with $35.0 million for the nine
months ended September 30, 2000. The $6.9 million, or 24.6% increase in net
interest income, was a result of an increase in our interest rate spread from
2.38% to 2.78%. The increase in our interest rate spread primarily reflects
increased originations of higher yielding consumer and commercial business
loans.
Provision for Loan Losses. Our provision for loan losses increased by
$660,000, from $268,000 for the nine months ended September 30, 1999, to
$928,000 for the nine months ended September 30, 2000, principally to reflect
the higher credit risk associated with increased originations of commercial real
estate mortgages, consumer loans and commercial business loans. Our allowance
for loan losses at September 30, 2000 of $4.5 million was deemed adequate by
management, in light of the risks inherent in our loan portfolio. Charge-offs
during the nine months ended September 30, 1999 and 2000 were $76,000 and
$71,000, respectively. Our ratio of non-performing loans to total loans was
0.28% and 0.38% at September 30, 1999 and 2000, respectively.
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<PAGE>
Our financial statements are prepared in accordance with generally
accepted accounting principles and, accordingly, allowances for loan losses are
based on management's estimate of the losses inherent in the loan portfolio. We
provide both general valuation allowances (for unspecified, probable losses) and
specific valuation allowances (for known losses) in our loan portfolio. General
valuation allowances are added to our capital for purposes of computing our
regulatory risk-based capital. We regularly review our loan portfolio, including
impaired loans, to determine whether any loans require classification or the
establishment of appropriate valuation allowances. Since we are increasing our
origination of commercial business loans and commercial real estate mortgages
and since such loans are deemed to have more credit risk than mortgage loans,
our provision for loan losses is likely to increase in future periods.
Other Income. Other income increased by $4.0 million, from $5.6 million
for the nine months ended September 30, 1999, to $9.6 million for the nine
months ended September 30, 2000. The increase in other income was 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, which we received in connection with John
Hancock Financial's conversion from a mutual to a stock insurance company. We
received these shares as a result of our ownership of various life insurance
policies issued by John Hancock Financial. Also contributing to the increase in
other income was an increase in service charges on deposit accounts from $2.3
million to $2.9 million. We also increased our fees for other banking services
from $2.0 million, to $3.0 million for the nine months ended September 30, 1999
and 2000, 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, resulting in a profit
of $658,000.
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 $26.3 million for the nine months ended September 30, 1999,
compared to $33.1 million for the nine months ended September 30, 2000,
representing an increase of $6.8 million. Employee compensation and benefits
increased by $4.6 million. This increase, which includes normal salary
increases, is primarily a consequence of the hiring of additional personnel in
connection with our branch expansion in 1999 and 2000, as well as expansion of
our commercial loan production capabilities. As a result, our full-time
equivalent personnel increased by 58 persons, from 495 at September 30, 1999 to
553 at September 30, 2000. Health care costs also contributed to the increase in
employee compensation. Our health care costs increased by $434,000 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 our 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 comparative
nine month periods. The increase in other operating cost consists in part of
increases in postage and stationery of $340,000, relating to Fidelity Federal
Bank and Trust's name change from Fidelity Federal Savings Bank of Florida and
stocking our new branches with supplies. Armored-car expense increased for the
nine months by $115,000, also as a result of servicing our expanded branch
network. Telephone costs increased by approximately $136,000, reflecting the
growth of our branch network and expansion of our downtown West Palm Beach
operations center. Also contributing 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.
Income Taxes. Provision for income taxes was $2.7 million for the nine
months ended September 30, 1999, compared to $4.1 million for the nine months
ended September 30, 2000. The increase in income tax expense for the nine months
ended September 30, 2000 was attributable to an increase in income before
provision for income taxes of $3.5 million, from $7.1 million for the nine
months ended September 30, 1999 to $10.7 million for the nine months ended
September 30, 2000. These expenses approximate the rates paid by us for Federal
and state income taxes applied to our pre-tax income.
32
<PAGE>
Results of Operations for the years ended December 31, 1997, 1998 and
1999
General. We had net income of $9.1 million, or basic earnings per share
of $1.42, for the year ended December 31, 1999. Net income totaled $7.4 million,
or basic earnings per share of $1.12, and $6.4 million, or basic earnings per
share of $0.96, for fiscal 1998 and 1997, respectively.
Interest Income. Interest income increased by $12.6 million, or 12.8%,
from $98.3 million for the year ended December 31, 1998, to $110.9 million for
the year ended December 31, 1999. The increase in interest income was
principally attributable to an increase of $217.2 million in the average balance
of interest-earning assets from $1.3 billion to $1.6 billion. The increase in
average interest-earning assets was primarily the result of a $149.5 million
increase in the average balance of loans and a $52.2 million increase in the
average balance of mortgage- backed securities. Also contributing to this
increase was an increase in the average balance of investment securities of
$17.7 million. While the average balance on mortgage-backed securities increased
from $357.4 million in 1998 to $409.7 million in 1999, income derived from these
investments was partially offset by a decrease in the average yield on these
securities from 6.10% at December 31, 1998 to 5.93% at December 31, 1999.
Interest income on mortgage loans increased by $6.8 million, or 10.6%,
from $64.1 million for the year ended December 31, 1998, to $71.0 million for
the year ended December 31, 1999, primarily because of an increase in the
average balance of mortgage loans from $834.1 million in 1998, to $952.7 million
in 1999. Interest income from consumer and other loans increased by $2.5 million
in 1999, as compared to 1998. The principal reason for this increase was a 36.9%
increase in the average balance of such loans in 1999, as compared to 1998.
Interest income on mortgage-backed securities increased by $2.5 million to $24.3
million. The increase in interest income on mortgage- backed securities was
caused by an increase in the average balance of such securities by $52.2 million
to $409.7 million, which was partially offset by a decrease in the average yield
from 6.10% for the year ended December 31, 1998 to 5.93% for the year ended
December 31, 1999. The decrease in the average yield reflect management's
decision to purchase short-and medium-term mortgage-backed securities. Interest
income on investment securities increased by $1.2 million as a result of an
increase in the average balance of these securities from $18.5 million in 1998
to $36.2 million in 1999. Income from other investments, consisting of
interest-earning deposits in other financial institutions and FHLB stock,
decreased by $373,000, from $3.5 million in 1998 to $3.1 million for the year
ended December 31, 1999. The decrease in income from other investments was due
to the average balances of these investments decreasing by $2.2 million or 4.1%
in 1999, compared to 1998.
Interest income increased by $26.0 million, or 36.0%, from $72.3
million for the year ended December 31, 1997 to $98.3 million for the year ended
December 31, 1998. The increase in interest income was principally attributable
to an increase of $402.9 million in the average balance of interest-earning
assets, from $942.9 million to $1.3 billion. The increase in average
interest-earning assets was primarily the result of a $194.2 million increase in
the average balance of mortgage-backed securities and a $182.2 million increase
in the average balance of loans. Also contributing to this increase was an
increase in the average balance of other investments of $20.3 million. While the
average balance on mortgage-backed securities increased from $163.3 million in
1997 to $357.4 million in 1998, income derived from these investments was
partially offset by a decrease in the average yield on these securities from
6.84% for the year ended December 31, 1997 to 6.10% for the year ended December
31, 1998.
Interest income on mortgage loans increased by $11.6 million, or 22.0%,
from $52.6 million for the year ended December 31, 1997 to $64.1 million for the
year ended December 31, 1998, primarily because of an increase in the average
balance of mortgage loans from $668.9 million in 1997 to $834.1 million in 1998.
The increase in average loan balances reflects, as of December 1997, the effect
of acquiring $50.9 million of loans at the time we acquired BankBoynton, a
Federal Savings Bank. Interest income from consumer and other loans increased by
$2.1 million in 1998 as compared to 1997. The principal reason for this increase
in interest income was a 25.6% increase in the average balance of such loans in
1998, as compared to 1997. Interest income on mortgage-backed securities
increased by $10.6 million to $21.8 million. The increase in interest income on
mortgage-backed securities was caused by an increase in the average balance of
such securities by $194.2 million to $357.4 million, which was partially offset
by a decrease in the average yield from 6.84% for the year ended December 31,
1997, to 6.10% for the year ended December 31, 1998. Interest income on
investment securities increased by $290,000 as a result of an increase in the
average balance of these securities from $12.3 million in 1997 to $18.5 million
in 1998. Income from other investments, consisting of interest-earning deposits
in other financial institutions and FHLB stock, increased
33
<PAGE>
by $1.5 million, from $2.0 million in 1997 to $3.5 million for the year ended
December 31, 1998. The increase in income from other investments was due to the
average balances of these investments increasing by $20.3 million or 63.9% in
1998, compared to 1997.
Interest Expense. Interest expense increased by $7.3 million or 11.2%,
from $65.0 million for the year ended December 31, 1998 to $72.3 million for the
year ended December 31, 1999. The increase was attributable to an increase in
the average balance of interest-bearing deposits of $228.2 million.
Approximately 54% of the increase in deposits for 1999 was in core deposits,
consisting of money market accounts, passbooks, noninterest bearing demand
accounts and NOW accounts. As a result, this increase was partially offset by a
decrease in the average cost of deposits from 4.54% to 4.22%. The average
balance of FHLB advances and other borrowings increased by $17.5 million, from
$315.9 million in 1998, to $333.4 million in 1999. We increased our FHLB
advances primarily to fund our increased investments in mortgage-backed and
corporate debt securities.
Interest expense increased by $23.4 million, or 56.2%, from $41.6
million for the year ended December 31, 1997, to $65.0 million for the year
ended December 31, 1998. The increase was attributable to an increase in the
average cost of our deposits from 4.40% to 4.54%, and an increase in the average
balance of interest-bearing deposits of $224.5 million. This increase in average
deposit balances includes the effect of the acquisition of $41.7 million of
BankBoynton, a Federal Savings Bank deposits in the month of December 1997. The
average balance of FHLB advances and other borrowings increased by $193.4
million, from $122.5 million in 1997, to $315.9 million in 1998. We increased
our FHLB advances primarily to fund our increased investments in mortgage-backed
and corporate debt securities.
Net Interest Income. Net interest income increased from $33.3 million
for 1998 to $38.7 million for the year ended December 31, 1999, representing an
increase of $5.4 million, or 16.2%. The increase in net interest income resulted
from an increase in loans receivable, from $977.2 million at December 31, 1998
to $1.2 billion at December 31, 1999 and an increase in our average interest
rate spread from 2.35% to 2.45%.
Net interest income increased from $30.7 million for 1997 to $33.3
million for the year ended December 31, 1998, representing an increase of $2.7
million, or 8.7%. This increase in net interest income resulted from an increase
in loans receivable from $861.3 million at December 31, 1997 to $977.2 million
at December 31, 1998. This was partially offset by a decrease in our average
interest rate spread from 3.00% to 2.35% at December 31, 1997 and 1998,
respectively.
Provision for Loan Losses. Our provision for loan losses increased by
$386,000, from $77,000 for the year ended December 31, 1998 to $463,000 for the
year ended December 31, 1999, principally as the result of increased volume in
commercial real estate mortgages, consumer loans and commercial business loans.
Our total allowance for loan losses at December 31, 1999 totaled $3.6 million
and was deemed adequate by management, in light of the risks inherent in our
loan portfolio. Our ratio of non-performing loans to total loans was 0.39% and
0.36% at December 31, 1998 and 1999, respectively.
Our provision for loan losses decreased by $93,000, from $170,000 for
the year ended December 31, 1997, to $77,000 for the year ended December 31,
1998, principally as the result of payoffs on loans for which we had previously
provided specific loan loss allowances. Our total allowance for loan losses at
December 31, 1998 of $3.2 million was deemed adequate by management, in light of
the risks inherent in our loan portfolio. Our ratio of non- performing loans to
total loans was 0.38% and 0.39% at December 31, 1997 and 1998, respectively.
Our financial statements are prepared in accordance with generally accepted
accounting principles and, accordingly, allowances for loan losses are based on
management's estimate of the losses inherent in the loan portfolio. We provide
both general valuation allowances (for unspecified, probable losses) and
specific valuation allowances (for known losses) in our loan portfolio. General
valuation allowances are added to our capital for purposes of computing our
regulatory risk-based capital. We regularly review our loan portfolio, including
impaired loans, to determine whether any loans require classification or the
establishment of appropriate valuation allowances. Since we are increasing our
origination of commercial business loans and commercial real estate mortgages
and since such loans are deemed to have more credit risk than mortgage loans,
our provision for loan losses is likely to increase in future periods.
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<PAGE>
Other Income. Other income for the year ended December 31, 1999
increased by $4.2 million from $8.7 million for the year ended December 31, 1998
to $12.9 million. This increase was primarily due to an increase in other
miscellaneous income of $5.4 million, which resulted from the sale of downtown
West Palm Beach property in December 1999. Also contributing to this increase
was an increase in servicing income and other fees of $908,000. Partially
offsetting these increases was a decrease in net gain on sale of loans,
mortgage-backed securities and investments of $2.1 million for the year ended
December 31, 1999, compared to 1998.
Other income for the year ended December 31, 1998 increased by $3.8
million, from $4.9 million for the year ended December 31, 1997 to $8.7 million.
This increase was partially due to a $2.3 million increase in the gain on sale
of loans, mortgage-backed securities and investments to $2.5 million in 1998,
from $190,000 in 1997. We experienced an increase in the gain on sale of loans
of $950,000 and an increase in the gain on sale of mortgage- backed securities
of $1.4 million in 1998, compared to 1997. This increase in other income also
resulted from an increase in our servicing income and other fees of $1.0 million
and an increase in other miscellaneous income of $476,000. The reasons for the
increase in miscellaneous income included $615,000 of rental income received
from NationsBank for leasing back most of the downtown property acquired from
them in January of 1998 and recognition of income from the maturing of a
$355,000 option on the sale of the downtown property, which amounts were offset
by non-recurring income of $702,000 in 1997.
Operating Expense. Operating expense increased by $6.7 million, or
22.5% to $36.4 million for the year ended December 31, 1999, as compared to the
year ended December 31, 1998. Employee compensation and benefits, which
increased by 29.0%, represent $4.8 million of this increase. The increase in
compensation and benefits, which includes normal salary increases, was due
mainly to the hiring of additional personnel in connection with our 1999 branch
expansion as well as the expansion of the commercial loan production
capabilities. As a result, our full-time equivalent personnel increased by 113
in 1999, from 393 to 506, also a 29.0% increase. Our occupancy and equipment
costs were $1.0 million more than in 1998, due in part to increases in real
estate tax assessments on our properties, along with additional depreciation
expenses relating to new computer equipment and new branch office facilities
opened during 1999. Also contributing to the increase in operating expenses were
increases in marketing costs of $149,000, federal deposit insurance premium of
$116,000 and other operating expenses of $747,000. The increases in other
operating expenses, such as $220,000 in stationery and supplies, $118,000 in
telephone expense and $93,000 in postage resulted primarily from the operation
of branches opened in 1999. These increases were partially offset by an increase
in gains on the sale of real estate owned of $162,000 for the year ended
December 31, 1999, compared to 1998.
Operating expense increased by $5.5 million, or 22.5%, to $29.7 million
for the year ended December 31, 1998, as compared to the year ended December 31,
1997. Employee compensation and benefits represent $2.5 million of this
increase. The reasons for the increase in employee compensation and benefits are
additional personnel to staff two offices that were opened subsequent to June
1997, additional customer service personnel hired as a result of our 28.5%
increase in deposits during the year and the hiring of additional commercial
loan personnel, together with normal salary increases. In addition, we hired and
began training of the personnel necessary to staff the ten new branches we
opened in 1999. As a result, our full-time equivalent personnel increased by 88
in 1998, from 305 to 393, a 29.0% increase. Our occupancy and equipment costs
were $1.3 million more than in 1997. Contributing to this increase are
approximately $300,000 pertaining to operating and depreciation expenses of our
new office building acquired in January 1998, $81,000 relating to rent expenses
on certain properties acquired as part of the BankBoynton acquisition and
approximately $122,000 in costs to operate new branch offices and new loan
production offices. In addition, we incurred additional depreciation expense of
$247,000, principally as the result of the installation of new computer
equipment. Also contributing to the increase in operating expenses were
increases in marketing costs of $134,000, federal deposit insurance premium of
$92,000 and other operating expenses of $1.3 million, which includes $162,000 of
amortization of goodwill related to the acquisition of BankBoynton, a Federal
Savings Bank.
Income Taxes. Our Federal and state income tax expense increased by
$824,000 to $5.7 million for the year ended December 31, 1999, compared to 1998.
This increase was attributable to an increase of $2.5 million in income before
provision for income tax to $14.8 million in 1999, from $12.3 million in 1998,
which was partially offset by a decrease in our effective income tax rate.
35
<PAGE>
Federal and state income tax expense increased by $89,000 to $4.8
million for the year ended December 31, 1998, compared to 1997. This increase
was attributable to an increase of $1.1 million in income before provision for
income tax to $12.3 million in 1998, from $11.2 million in 1997, which was
partially offset by a decrease in our effective income tax rate.
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar
amount of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollar and rates, and the net interest margin. No
tax-equivalent adjustments have been made and all average balances are daily
average balances. Non-accruing loans have been included in the yield
calculations in this table and dividends received are included as interest
income.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------------------------
1997 1998 1999
------------------------------- -------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans .................. $ 668,943 $ 52,589 7.86% $834,065 $64,146 7.69% $ 952,715 $ 70,975 7.45%
Consumer and commercial
business loans ............... 66,520 5,797 8.71 83,582 7,850 9.39 114,392 10,315 9.02
Mortgage-backed securities(1) ... 163,250 11,159 6.84 357,448 21,794 6.10 409,653 24,311 5.93
Investment securities ........... 12,337 758 6.14 18,527 1,048 5.66 36,197 2,215 6.12
Other investments(2) ............ 31,809 1,969 6.19 52,147 3,482 6.68 49,984 3,109 6.22
------ ----- ------ ----- ------ -----
Total interest-earning assets . 942,859 72,272 7.67 1,345,769 98,320 7.31 1,562,941 110,925 7.10
Non-interest-earning assets ........ 52,669 78,409 100,299
------ ------ -------
Total assets ................. $ 995,528 $1,424,178 $1,663,240
========== ========== ==========
Interest-bearing liabilities:
Deposits ........................ $ 768,892 $ 33,856 4.40% $ 993,343 $45,128 4.54% $1,221,590 $ 51,578 4.22%
Borrowed funds .................. 121,928 7,750 6.36 315,907 19,864 6.29 333,439 20,677 6.20
------- ----- ------- ------ ------- ------
Total interest-bearing
liabilities ............... 890,820 41,606 4.67 1,309,250 64,992 4.96 1,555,029 72,255 4.65
Non-interest bearing liabilities ... 20,491 25,954 25,644
------ ------ ------
Total liabilities ............ 911,311 1,335,204 1,580,673
Stockholders' equity ............... 84,217 88,974 82,567
------ ------ ------
Total liabilities and
stockholders' equity ..... $ 995,528 $1,424,178 $1,663,240
========== ========== ==========
Net interest income ................ $ 30,666 $33,328 $ 38,670
========== ======= =========
Net interest rate spread(3) ........ 3.00% 2.35% 2.45%
==== ==== ====
Net interest margin(4) ............. 3.25% 2.48% 2.47%
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities ...................... 105.8% 102.8% 100.51%
===== ===== ======
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Nine Months Nine months
Ended September 30, 1999 Ended September 30, 2000 At September 30, 2000
---------------------------- ----------------------------- ------------------------
Average Average
Average Yield/ Average Yield/ Actual Yield/
Balance Interest Rate Balance Interest Rate Balance Cost
------- -------- ---- ------- -------- ---- ------- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans......... $ 936,356 $52,323 7.45% $1,083,793 $61,578 7.58% $1,132,890 8.06%
Consumer and commercial
business loans...... 107,554 7,160 8.88 163,240 11,925 9.74 195,727 8.99
Mortgage-backed
securities(1)......... 418,817 18,294 5.82 357,409 18,784 7.01 343,016 7.07
Investment securities.. 34,356 1,491 5.79 55,328 2,854 6.88 81,533 6.83
Other investments(2)... 54,041 2,378 5.87 42,632 2,382 7.45 20,409 7.54
---------- ------- ---------- ------- ----------
Total interest-earning
assets 1,551,124 81,646 7.02 1,702,402 97,523 7.64 1,773,575 7.91
Non-interest-earning assets 96,272 126,290 131,275
---------- ---------- ----------
Total assets........ 1,647,396 1,828,692 $1,904,850
========== ========== ==========
Interest-bearing
liabilities:
Deposits............... $1,195,376 $37,737 4.21 $1,385,141 $46,689 4.49 $1,412,433 4.75%
Borrowed funds......... 343,342 15,801 6.14 330,853 15,807 6.37 371,802 6.48
---------- ------- ---------- ------- ----------
Total interest-
bearing liabilities. 1,538,718 53,538 4.64 1,715,994 62,496 4.86 1,784,235 5.11
Non-interest bearing
liabilities.............. 25,868 28,602 33,744
---------- ---------- ----------
Total liabilities... 1,564,586 1,744,596 1,817,979
Stockholders' equity...... 82,810 84,096 86,871
---------- ---------- ----------
Total liabilities
and stockholders'
equity............. $1,647,396 $1,828,692 $1,904,850
=========== ========== ==========
Net interest income....... $28,108 $35,027
======= =======
Net interest rate
spread(3)................ 2.38% 2.78% 2.80%
====== ===== =====
Net interest margin(4).... 2.42% 2.74% 2.77%
====== ====== =====
Ratio of average interest-
earning assets to average
interest-bearing
liabilities.............. 100.81% 99.21% 99.40%
====== ===== =====
</TABLE>
--------------
(1) Includes corporate debt securities.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(3) Net interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
Rate Volume Analysis
The table below sets forth certain information regarding changes in our
interest income and interest expense for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rate (change
in rate multiplied by old average volume); (iii) the allocation of changes in
rate and volume; and (iv) the net change.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1998 vs. 1997 1999 vs. 1998
------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
------------------------------ Total ------------------------------ Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------ ---- ------ ---------- ------ ---- ------ ----------
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans ..................... $ 12,981 $ (1,142) $ (282) $ 11,557 $ 9,125 $ (2,010) $ (286) $ 6,829
Consumer and commercial
business loans ................... 1,487 451 115 2,053 2,894 (314) (115) 2,465
Mortgage-backed securities ......... 13,274 (1,205) (1,434) 10,635 3,183 (581) (85) 2,517
Investment securities .............. 380 (60) (30) 290 1,000 85 82 1,167
Other investments .................. 1,259 155 99 1,513 (144) (239) 10 (373)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets ............................ 29,381 (1,801) (1,532) 26,048 16,058 (3,059) (394) 12,605
-------- -------- -------- -------- -------- -------- -------- --------
Interest expense:
Deposits ........................... 9,883 1,075 314 11,272 10,369 (3,187) (732) 6,450
Borrowed funds ..................... 12,238 (48) (76) 12,114 1,102 (274) (15) 813
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ....................... 22,121 1,027 238 23,386 11,471 (3,461) (747) 7,263
-------- -------- -------- -------- -------- -------- -------- --------
Change in net interest
income .............................. $ 7,260 $ (2,828) $ (1,770) $ 2,662 $ 4,587 $ 402 $ 353 $ 5,342
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
37
<PAGE>
Nine Months Ended September 30,
-----------------------------------------
1999 vs. 2000
-----------------------------------------
Increase/(Decrease)
Due to
-----------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
------ ---- ------ ----------
(In Thousands)
Interest income:
Mortgage loans ................. $ 8,239 $ 878 $ 138 $ 9,255
Consumer and commercial
business loans .............. 3,707 697 361 4,765
Mortgage-backed securities ..... (2,682) 3,717 (545) 490
Investment securities .......... 910 281 172 1,363
Other investments .............. (502) 641 (135) 4
------- ------- ------- -------
Total interest-earning
assets .......................... 9,672 6,214 (9) 15,877
------- ------- ------- -------
Interest expense:
Deposits ....................... 5,991 2,555 406 8,952
Borrowed funds ................. (575) 603 (22) 6
------- ------- ------- -------
Total interest-bearing
liabilities ................... 5,416 3,158 384 8,958
------- ------- ------- -------
Change in net interest
income .......................... $ 4,256 $ 3,056 $ (393) $ 6,919
======= ======= ======= =======
Asset and Liability Management - Interest Rate Sensitivity Analysis
The majority of our assets and liabilities are monetary in nature,
which subjects us to significant interest rate risk. As stated above, the
majority of our interest-bearing liabilities and nearly all of our
interest-earning assets are held by Fidelity Federal Bank and Trust and
therefore virtually all of our interest rate risk exposure lies at the Fidelity
Federal Bank and Trust level.
We monitor interest rate risk by various methods, including analyzing
changes in Market Value of Portfolio Equity ("MVPE"). MVPE is generally defined
as the difference between the market value of our assets and the market value of
our liabilities. We use an internal model that generates estimates of our MVPE
over a range of interest rate scenarios. The model calculates MVPE essentially
by discounting the cash flows from our 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 our estimated internal calculations of
MVPE as of September 30, 2000.
Changes in Rates Market Value of Portfolio Equity
---------------------- ------------------------------------------------
(Rate Shock) $ Amount $ Change % Change
---------------------- ------------- ------------- -----------------
(Dollars in Thousands)
+200 bp 166,532 (61,326) (26.9%)
+100 bp 202,988 (24,870) (10.9%)
-0- 227,858 -- --
-100 bp 243,275 15,417 6.8%
-200 bp 245,411 17,553 7.7%
In preparing the MVPE table above, we have estimated prepayment rates
for our 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 NOW accounts,
passbook and money market deposits. During 1999, we contracted with a
third-party consultant to perform an analysis of our core deposit accounts and
updated this analysis in 2000. The purpose of this analysis was to obtain an
estimate of the actual deposit balance trends over various interest rate
scenarios during the 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.
38
<PAGE>
<TABLE>
<CAPTION>
6 Months 1 Year 3 Years 5 Years
Within 6 Through Through Through Through Over 10
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 6.49% 6.49% 29.49% 36.16% 100.00% 100.00%
accounts
</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 us 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.
While the above table provides an estimate of our 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 our MVPE, as actual results may
vary. At September 30, 2000, we were not required to hold additional risk-based
capital for interest rate risk- purposes.
Our policy in recent years has been to reduce our exposure to interest
rate risk generally by better matching the maturities of 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. We seek to lengthen the maturities of our
deposits by promoting longer-term certificates. We do not solicit high-rate
jumbo certificates or brokered funds.
Liquidity and Capital Resources
Fidelity Federal Bank and Trust 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%. Fidelity Federal Bank and Trust's liquidity ratio averaged
22.35% during the month of December 1999 and 25.55% during the month of
September 2000. Liquidity ratios averaged 30.12% and 21.62% and 25.45% for the
years ended December 31, 1998 and 1999 and the nine months ended September 30,
2000, respectively. Fidelity Federal Bank and Trust adjusts its liquidity levels
in order to meet funding needs of deposit outflows, payment of real estate taxes
on mortgage loans, repayment of borrowings and loan commitments. Fidelity
Federal Bank and Trust also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
Our primary sources of funds are deposits, amortization and prepayment
of loans and mortgage-backed securities, maturities of investment securities and
other short-term investments, and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions, and
competition. We manage the pricing of our deposits to maintain a desired deposit
balance. In addition, we invest excess funds in short-term interest-earning and
other assets, which provide liquidity to meet lending requirements. Short-term
interest-bearing deposits with the FHLB of Atlanta amounted to $32.1 million and
39
<PAGE>
$19.1 million and $3.9 million at December 31, 1998 and 1999, and September 30,
2000, respectively. Other assets qualifying for liquidity outstanding at
December 31, 1998 and 1999, and September 30, 2000, amounted to $313.8 million
and $286.5 million, and $352.0 million, respectively. For additional information
about cash flows from our operating, financing, and investing activities, see
Consolidated Statements of Cash Flows included in the Financial Statements.
A major portion of our liquidity consists of cash and cash equivalents,
which are a product of our operating, investing and financing activities. The
primary sources of cash were net income, principal repayments on loans and
mortgage-backed securities, and increases in deposit accounts, along with
advances from the FHLB.
Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the FHLB which provide an additional source of
funds. At September 30, 2000, we had $326.3 million in advances from the FHLB.
We engage in borrowing from the FHLB in order to reduce interest rate risk, and
for liquidity purposes.
At September 30, 2000, we had outstanding loan commitments of $97.8
million to originate and/or purchase mortgage loans. This amount does not
include the unfunded portion of loans in process. Certificates of deposit
scheduled to mature in less than one year at September 30, 2000, totaled $749.5
million. Based on prior experience, management believes that a significant
portion of such deposits will remain with Fidelity Federal Bank and Trust,
although there can be no assurance that the deposits will remain with Fidelity
Federal Bank and Trust or that their cost could be significantly higher.
Impact of Inflation and Changing Prices
The consolidated financial statements of Fidelity Bankshares, Inc. and
notes thereto, presented elsewhere herein, have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
Fidelity Federal Bank and Trust's operations. Unlike most industrial companies,
nearly all the assets and liabilities of Fidelity Federal Bank and Trust are
monetary. As a result, interest rates have a greater impact on Fidelity Federal
Bank and Trust's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Impact of New Accounting Issues
In June 1998, the FASB issued SFAS No. 133 (as amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"),
which establishes accounting and reporting standards for derivative instruments
and for hedging activities. The statement requires that an entity recognize all
derivatives (including certain derivative instruments embedded in other
contracts) 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. In June of 1999,
FASB issued SFAS No. 137 "Deferral of the Effective Date of FASB Statement No.
133," which makes SFAS 133 effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and, accordingly, would apply to Fidelity
Bankshares, Inc. beginning on January 1, 2001. We plan to adopt the standard at
that time and do not presently intend to reclassify securities between
categories. Management does not believe that the Company is a party to any
transactions involving derivatives as defined by SFAS No. 133.
In September 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
which replaces the accounting and reporting standards of SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 140 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment 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
40
<PAGE>
criteria. This statement is effective for transfers and servicing of financial
assets and extinguishment 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. Fidelity Bankshares, Inc. does not
expect adoption of this standard to have a material effect on Fidelity
Bankshares, Inc.'s consolidated financial statements.
BUSINESS OF FIDELITY BANKSHARES, INC. AND FIDELITY FEDERAL BANK AND TRUST
Fidelity Bankshares, Inc. is a Delaware corporation which, in January
1997, became the mid-tier stock holding company parent of Fidelity Federal Bank
and Trust. At September 30, 2000, the only significant assets of Fidelity
Bankshares, Inc. is its ownership of all of the outstanding stock of Fidelity
Federal Bank and Trust and $495,000 in cash. In 1997, we acquired BankBoynton, a
Federal Savings Bank. At the time the acquisition was completed, we acquired
approximately $55.0 million in assets and assumed $41.7 million in deposits from
BankBoynton. We did not retain any of BankBoynton's branches. In 1998, we sold
$28.8 million in cumulative trust preferred securities through Fidelity Capital
Trust I, a special purpose subsidiary of Fidelity Bankshares, Inc. The
cumulative trust preferred securities have a yield of 8.375% and are scheduled
to mature on January 31, 2028. In the event they are redeemed prior to January
31, 2003, holders of the cumulative trust preferred securities will receive the
accrued and paid interest to the date fixed for redemption plus 107% of the
principal amount. In the event the cumulative trust preferred securities are
redeemed after January 31, 2003, holders will receive accrued and unpaid
interest to the date fixed for redemption plus 100% of the principal amount. We
have no intention to redeem the cumulative trust preferred securities
immediately following the conversion and offering. The additional capital raised
through the cumulative trust preferred stock issuance provided additional
capital to support our asset growth.
Fidelity Federal Bank and Trust was chartered as a federal mutual
savings and loan association in 1952. In 1983, it amended its charter to become
a federally chartered mutual savings bank. On January 7, 1994, Fidelity Federal
Bank and Trust completed a reorganization into a federally chartered mutual
holding company. In 1999, Fidelity Federal Bank and Trust, through its
wholly-owned subsidiary, Florida Consolidated Agency, Inc., began offering
insurance and investment products. In 2000, Fidelity Federal Bank and Trust
began offering trust services. At September 30, 2000, we managed $23.2 million
in trust assets.
We are primarily engaged in the business of attracting deposits from
the general public in our market area, and investing such deposits, together
with other sources of funds, in loans secured by one- to four-family residential
real estate. We have sought to increase our commercial real estate lending as
well as our consumer and commercial business lending activities. Our goal over
the next several years is to continue to increase the origination of these loans
consistent with safety and soundness considerations. To a lesser extent, we also
originate construction loans and land loans for single-family properties and
invest in mortgage-backed securities issued or guaranteed by the United States
Government or agencies thereof. In addition, we invest a portion of our assets
in securities issued by the United States Government, cash and cash equivalents,
including deposits in other financial institutions, and FHLB stock. Our
principal source of funds are deposits and principal and interest payments on
loans. Principal sources of income are interest received from loans and
investment securities. Our principal expense is interest paid on deposits and
employee compensation and benefits.
Beginning in 1998, we actively expanded our branch network throughout
our market area. Since December 1998, we have opened 12 new branches.
Market Area
We are headquartered in West Palm Beach, Florida, and conduct our
business primarily in Palm Beach, Martin, and St. Lucie Counties in Florida. At
September 30, 2000, we had 34 offices in our market area, 29 of which are
located in Palm Beach County, three of which are located in Martin County and
two of which are located in St. Lucie County. Palm Beach, Martin and St. Lucie
Counties are located in southeastern Florida, an area that has experienced
considerable growth and development since the 1960s. This three-county area had
a total population of 1.4 million as of December 31, 1999. Due to growth
controls established at the state and local levels during the 1990's (which will
increase the costs of new developments), as well as a moderation of economic
growth and migration in our market area, management believes growth in our local
market area may be more moderate in the future.
41
<PAGE>
The southeast Florida economy is significantly dependent upon
government, foreign trade, tourism, and its attraction as a retirement area.
Unemployment in Palm Beach County is higher than the national and State of
Florida averages. Major employers in our market area include Intra-Coastal
Health Services, Florida Power and Light, BellSouth and the Palm Beach County
School Board.
One of Palm Beach County's largest employers, Pratt & Whitney, recently
closed a significant portion of its operations in Florida. Of the estimated
3,200 employees affected, approximately two-thirds reside in Palm Beach County,
while the remainder live in Martin County. Both counties are within our primary
service area. Management does not believe that the closing of Pratt & Whitney's
facilities has had an adverse effect on our operations.
Competition
Our market area in southeast Florida has a large concentration of
financial institutions, many of which are significantly larger and have greater
financial resources than we have, and all of which are competitors of ours to
varying degrees. As a result, we encounter strong competition both in attracting
deposits and in originating real estate and other loans. Our most direct
competition for deposits has come historically from commercial banks, brokerage
houses, other savings associations, and credit unions in our market area, and we
expect continued strong competition from such financial institutions in the
foreseeable future. Our market area includes branches of several commercial
banks that are substantially larger than Fidelity Federal Bank and Trust in
terms of state-wide deposits. We compete for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, credit unions and other savings
associations. This competition for loans has increased substantially in recent
years as a result of the number of institutions competing in our market area as
well as the increased efforts by commercial banks to expand mortgage loan
originations.
We compete for loans primarily through the interest rates and loan fees
we charge and the efficiency and quality of services we provide to borrowers,
real estate brokers, and builders. Factors that affect competition include
general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Based on total assets of $1.9 billion, Fidelity Federal Bank and Trust
was the largest savings institution headquartered in Palm Beach County, and
Fidelity Federal Bank and Trust held approximately 5.6% of all financial
institution deposits in Palm Beach County.
Lending Activities
General. Historically, our principal lending activity has been the
origination of fixed and adjustable rate mortgage loans collateralized by one-
to four-family residential properties located in our market area. We currently
originate adjustable rate mortgage ("ARM") loans for retention in our portfolio,
and fixed-rate loans, the majority of which are eligible for sale in the
secondary mortgage market. We also originate loans secured by commercial real
estate and multi-family residential real estate, construction loans, commercial
business loans and consumer loans. In recent years, we have sought to increase
our commercial real estate and non-real estate lending, primarily consumer and
commercial business lending.
In an effort to manage interest rate risk, we make our interest-earning
assets more interest- rate sensitive by originating adjustable rate loans, such
as ARM loans and short- and medium-term consumer loans, including home equity
loans. We also purchase both fixed and adjustable rate mortgage-backed
securities. At September 30, 2000, approximately $739.1 million, or 55.6%, of
our total loan portfolio, and $148.3 million, or 48.8%, of our mortgage- backed
securities portfolio, consisted of loans or securities with adjustable interest
rates. We originate fixed-rate mortgage loans generally with 15- to 30-year
terms to maturity, collateralized by one- to four-family residential properties.
One- to four-family fixed-rate residential mortgage loans generally are
originated and underwritten according to standards that allow us to resell such
loans in the secondary mortgage market for the purpose of managing interest rate
risk and liquidity. We periodically sell a portion of our residential loans
which have terms to maturity exceeding fifteen years. Generally, we retain in
our portfolio all consumer, commercial real estate and multi-family residential
real estate loans.
42
<PAGE>
Analysis of Loan Portfolio. Set forth below are selected data relating
to the composition of Fidelity Federal Bank and Trust's loan portfolio by type
of loan as of the dates indicated. Also set forth below is the aggregate amount
of Fidelity Federal Bank and Trust's investment in mortgage-backed securities at
the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------
1995 1996 1997 1998
----------------- ------------------ ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family (1) ...... $432,387 81.2% $528,689 79.9% $720,782 83.7% $ 828,929 84.8%
Construction loans ........... 40,522 7.6 58,493 8.8 38,577 4.5 53,515 5.5
Land loans ................... 10,769 2.0 11,875 1.8 12,116 1.4 8,583 0.9
Commercial ................... 31,359 5.9 29,030 4.4 26,947 3.1 62,399 6.4
Multi-family ................. 13,748 2.6 13,781 2.1 12,999 1.5 12,272 1.2
-------- ----- -------- ----- -------- ----- ---------- -----
Total real estate loans ... 528,785 99.3 641,868 97.0 811,421 94.2 965,698 98.8
-------- ----- -------- ----- -------- ----- ---------- -----
Non-real estate loans:
Consumer (2) ................. 26,855 5.0 39,478 6.0 47,758 5.5 48,270 4.9
Commercial business .......... 5,834 1.1 18,585 2.8 57,289 6.7 46,958 4.8
-------- ----- -------- ----- -------- ----- ---------- -----
Total non-real estate loans 32,689 6.1 58,063 8.8 105,047 12.2 95,228 9.7
-------- ----- -------- ----- -------- ----- ---------- -----
Total loans receivable .... 561,474 105.4 699,931 105.8 916,468 106.4 1,060,926 108.5
Less:
Undisbursed loan proceeds .... 27,261 5.1 37,575 5.7 54,471 6.3 84,155 8.6
Unearned discount and net
deferred fees (costs) ...... (385) (0.1) (1,607) (0.2) (2,554) (0.3) (3,621) (0.4)
Allowance for loan losses .... 2,265 0.4 2,263 0.3 3,294 0.4 3,226 0.3
-------- ----- -------- ----- -------- ----- --------- -----
Total loans receivable--net $532,333 100.0% $661,700 100.0% $861,257 100.0% $ 977,166 100.0%
======== ===== ======== ===== ======== ===== ========== =====
Mortgage-backed securities ...... $159,761 $123,599 $234,132 $ 389,263
======== ======== ======== ==========
</TABLE>
At December 31, At September 30,
1999 2000
---------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands
Real estate loans:
One- to four-family (1) ...... $ 925,384 79.5% $ 1,012,364 76.2%
Construction loans ........... 63,589 5.5 78,844 5.9
Land loans ................... 9,763 0.8 14,061 1.1
Commercial ................... 94,490 8.1 108,453 8.2
Multi-family ................. 23,772 2.0 20,976 1.5
----------- ----- ----------- -----
Total real estate loans ... 1,116,998 95.9 1,234,698 92.9
----------- ----- ----------- -----
Non-real estate loans:
Consumer (2) ................. 60,281 5.2 78,821 5.9
Commercial business .......... 94,157 8.1 133,522 10.1
----------- ----- ----------- -----
Total non-real estate loans 154,438 13.3 212,343 16.0
----------- ----- ----------- -----
Total loans receivable .... 1,271,436 109.2 1,447,041 108.9
Less:
Undisbursed loan proceeds .... 106,232 9.1 117,431 8.8
Unearned discount and net
deferred fees (costs) ...... (2,826) (0.2) (3,048) (0.2)
Allowance for loan losses .... 3,609 0.3 4,466 0.3
----------- ----- ----------- -----
Total loans receivable--net $ 1,164,421 100.0% $ 1,328,192 100.0%
=========== ===== =========== =====
Mortgage-backed securities ...... $ 336,212 $ 304,201
=========== ===========
--------------
(1) Includes participations of $5.6 million, $4.3 million, $3.2 million, $2.2
million, $1.5 million and $1.2 million at December 31, 1995, 1996, 1997,
1998, 1999 and September 30, 2000, respectively.
(2) Includes primarily home equity lines of credit, automobile loans, boat
loans and passbook loans. At December 31, 1999 and September 30, 2000, the
disbursed portion of equity lines of credit totaled $18.9 million and $21.4
million, respectively.
43
<PAGE>
Loan and Mortgage-Backed Securities Contractual Repayments. The
following table sets forth certain information as of December 31, 1999,
regarding the dollar amount of loans and mortgage-backed securities maturing in
our portfolio based on their contractual terms to maturity. The amounts shown
represent outstanding principal balances less loans in process and are not
adjusted for premiums, discounts, reserves, and unearned fees. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than in which they contractually mature, and fixed-rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due. Fixed-rate mortgage-backed securities are assumed
to mature in the period in which the final contractual payment is due on the
underlying mortgage.
<TABLE>
<CAPTION>
Over 1 Over 3 Over 5 Over 10 Beyond
Within Year to 3 Years to 5 Years to 10 Years to 2 20
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(In Thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family residential(1) ..... $ 211,522 $ 99,500 $ 68,245 $ 109,317 $ 179,258 $ 238,992 $ 906,834
Commercial, multi-family and
land ................................... 112,885 1,842 1,388 6,264 18,023 -- 140,402
Consumer and commercial
business loans(2) ...................... 69,504 11,968 21,373 12,530 2,315 278 117,968
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans receivable ................ $ 393,911 $ 113,310 $ 91,006 $ 128,111 $ 199,596 $ 239,270 $1,165,204
========== ========== ========== ========== ========== ========== ==========
Mortgage-backed securities .............. $ 125,621 $ -- $ -- $ -- $ 64,923 $ 149,586 $ 340,130
========== ========== ========== ========== ========== ========== ==========
</TABLE>
---------
(1) Includes construction loans.
(2) Includes commercial business loans of $58.2 million.
The following table sets forth at December 31, 1999, the dollar amount
of all fixed-rate and adjustable rate loans and mortgage-backed securities due
or repricing after December 31, 2000.
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Real estate loans:
One- to four-family residential ........ $476,003 $219,309 $695,312
Commercial, multi-family and
land ................................... 27,517 -- 27,517
Consumer and commercial business
loans(1) ............................... 48,464 -- 48,464
-------- -------- --------
Total ............................. $551,984 $219,309 $771,293
======== ======== ========
Mortgage-backed securities .............. $214,509 $ -- $214,509
======== ======== ========
-------------
(1) Includes commercial business loans of $9.3 million.
One- to Four-Family Residential Real Estate Loans. Our primary lending
activity consists of the origination of one- to four-family, owner-occupied,
residential mortgage loans secured by properties located in our market area.
During 1995, we began to originate one- to four-family residential loans on
properties outside of our market area. These loans, which were originated
through a network of brokers throughout Florida, are subject to our customary
underwriting standards. At September 30, 2000, $1.0 billion, or 76.2%, of our
total loan portfolio consisted of one- to four-family residential mortgage
loans. Of this amount, $388.4 million were originated outside of our market
area.
We currently offer one- to four-family residential mortgage loans with
terms typically ranging from 15 to 30 years, and with adjustable or fixed
interest rates. Originations of fixed-rate mortgage loans versus ARM loans are
monitored on an ongoing basis and are affected significantly by the level of
market interest rates, customer preference, and loan products offered by our
competitors. Therefore, even if management's strategy is to emphasize ARM loans,
market conditions may be such that there is greater demand for fixed-rate
mortgage loans. ARM loan originated and purchased totaled $219.3 million and
$162.3 million during the year ended December 31, 1999, and nine months ended
September 30, 2000, respectively.
44
<PAGE>
Our fixed-rate loans are generally originated and underwritten
according to standards that permit sale in the secondary mortgage market.
Whether we can or will sell fixed-rate loans into the secondary market, however,
depends on a number of factors, including the yield and the term of the loan,
market conditions, and our current interest rate sensitivity. Our fixed-rate
mortgage loans amortize on a monthly basis with principal and interest due each
month. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option.
We currently offer ARM loans with initial interest rate adjustment
periods of one, three, five and seven years, based on changes in a designated
market index. After the initial interest rate adjustment period, three, five,
seven and ten year ARM loans have the option of converting to a fixed-rate
mortgage for the remaining term of the loan at the prevailing interest rate for
fixed-rate mortgages at the time of the conversion. The interest rate on one
year ARM loans and the three, five and seven year ARM loans that do not convert
to a fixed-rate mortgage adjust annually with an annual interest rate adjustment
limitation of 200 basis points and with a maximum lifetime interest rate of 600
basis points above the initial interest rate. The interest rate on all
non-owner-occupied one- to four- family mortgage loans is 300 to 325 basis
points above the appropriate U.S. Treasury securities as the index for - ARM
originations. We originate ARM loans with initially discounted rates, which vary
depending upon whether the - initial interest rate adjustment period is one,
three, five or seven years. We determine whether a borrower qualifies for an ARM
loan based on the fully indexed rate of the ARM loan at the time the loan is
originated. One- to four-family residential ARM loans totaled $518.4 million, or
39.0%, of our total loan portfolio at September 30, 2000.
The primary purpose of offering ARM loans is to make our loan portfolio
more interest rate sensitive. However, as the interest income earned on ARM
loans varies with prevailing interest rates, such loans may not offer us as
predictable cash flows as long-term, fixed-rate loans. ARM loans carry increased
credit risk associated with potentially higher monthly payments by borrowers as
general market interest rates increase. It is possible, therefore, that during
periods of rising interest rates, the risk of default on ARM loans may increase
due to the upward adjustment of interest costs to the borrower.
Our one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving us the right to declare
a loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the underlying real property serving as
security for the loan. Due-on-sale clauses are an important means of adjusting
the rates on our fixed-rate mortgage loan portfolio, and we have generally
exercised our rights under these clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Appraisals are
generally performed by our service corporation subsidiary. Such regulations
permit a maximum loan-to-value ratio of 97% for residential property and 85% for
all other real estate loans. Our lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and ARM loans without private mortgage
insurance to 80% of the lesser of the appraised value or the purchase price of
the property to serve as collateral for the loan.
We make one- to four-family real estate loans with loan-to-value ratios
in excess of 80%. For one- to four-family real estate loans with loan-to-value
ratios of between 80% and 90%, we generally require the borrower to obtain
private mortgage insurance. For loans in excess of 90% we require that the
borrower obtain private mortgage insurance. We require fire and casualty
insurance, including windstorm insurance, as well as a title guaranty regarding
good title, on all properties securing real estate loans.
Construction and Land Loans. At September 30, 2000, we held $78.8
million, or 5.9%, of our loan portfolio in construction loans. We currently
offer fixed-rate and adjustable-rate residential construction loans primarily
for the construction of owner-occupied single-family residences to builders who
have a contract for sale of the property or owners who have a contract for
construction. In addition, we make construction loans to builders for homes held
for sale which totaled $71.1 million at September 30, 2000. Construction loans
are generally structured r to become permanent loans, and are originated with
terms of up to 30 years with an allowance of up to one year for construction.
Construction loans require the payment of interest only during the construction
period. Funds are disbursed as construction is completed. During the
construction phase, the loans made prior to December 31, 1999
45
<PAGE>
predominately had an adjustable interest rate that adjusted annually and
converted into either a fixed-rate or remained an adjustable rate mortgage loan
at the end of the construction period. We also make construction loans with
fixed-rates of interest. Such loans become permanent one- to four-family loans
upon completion of construction. Advances are made as construction is completed.
In addition, we originate loans which are secured by individual
unimproved or improved lots. At September 30, 2000, $14.1 million, or 1.1%, of
our total loan portfolio consisted of land loans. Land loans are currently
offered with one-year adjustable rates for terms of up to 15 years. The maximum
loan-to-value ratio for our land loans is 75%. We use the applicable U.S.
Treasury securities rate as our index on newly originated loans. Initial
interest rates may be below the fully indexed rate.
Construction and land lending generally involves a greater degree of
credit risk than one- to four-family residential mortgage lending. The repayment
of the construction loan is often dependent upon the successful completion of
the construction project. Construction delays or the inability of the borrower
to sell the property once construction is completed may impair the borrower's
ability to repay the loan.
Multi-Family Residential Real Estate Loans. Loans securing multi-family
real estate constituted approximately $21.0 million, or 1.5%, of our total loan
portfolio at September 30, 2000. At September 30, 2000, we had a total of 88
loans secured by multi-family properties. Our multi-family real estate loans are
secured by multi-family residences. At September 30, 2000, substantially all of
our multi-family loans were secured by properties located within our market
area. At September 30, 2000, our multi-family real estate loans had an average
principal balance of $236,000 and the largest multi-family real estate loan had
a principal balance of $1.6 million. Multi-family real estate loans currently
are offered with adjustable interest rates, although in the past we originated
fixed-rate multi-family real estate loans. The terms of each multi-family loan
are negotiated on a case-by-case basis. Such loans typically have adjustable
interest rates tied to a market index with a 600 basis point lifetime interest
rate cap and an interest rate floor equal the initial rate, and amortize over 15
to 25 years. We generally make multi- family mortgage loans at up to 80% of the
appraised value of the property securing the loan. We may choose to offer
initial discount rates depending on market conditions, but generally the initial
interest rate on multi-family real estate loans has been priced at the
applicable U.S. Treasury securities as our index on newly originated loans. Our
originations of multi-family loans have been limited in recent years.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family and
commercial real estate is typically dependent upon the successful operation of
the related real estate property. If the cash flow from the project is reduced,
the borrower's ability to repay the loan may be impaired.
Commercial Real Estate Loans. Loans secured by commercial real estate
constituted approximately $108.5 million, or 8.2%, of our total loan portfolio
at September 30, 2000. Our commercial real estate loans are secured by improved
property such as offices, small business facilities, strip shopping centers,
warehouses and other non-residential buildings. Commercial real estate loans are
originated in amounts up to 80% of the appraised value of the property securing
the loan. In addition, the borrower must demonstrate that the income from the
property will support the loan. We generally require a debt coverage ratio of
1.25x. At September 30, 2000, substantially all of our commercial real estate
loans were secured by properties located within our market area. At September
30, 2000,f our commercial real estate loans had an average principal balance of
$553,000. At that date, the largest commercial real estate loan had a principal
balance of $5.5 million and was secured by commercial property located in Palm
Beach County, Florida. At September 30, 2000, this loan was performing in
accordance with its terms. This was the largest commercial real estate lending
relationship at Fidelity Federal Bank and Trust and was within the current
loans-to-one borrower limits. Commercial real estate loans are currently offered
with adjustable rates, although in the past we have originated fixed-rate
commercial real estate loans. The terms of each commercial real estate loan are
negotiated on a case-by-case basis, although such loans typically have
adjustable interest rates tied to a market index, with a 600 basis point
lifetime interest rate cap, and a 200 basis point interest rate floor below the
initial interest rate. We may choose to offer initial discount rates depending
on market conditions. We use the applicable
46
<PAGE>
U.S. Treasury rate as our index on newly originated loans. Commercial real
estate loans that we originate generally amortize over 15 to 25 years.
Loans secured by commercial real estate generally involve a greater
degree of risk than one- to four-familyy residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired. However, loans secured by commercial
real estate generally provide higher levels of interest income than loans
secured by one-to four-family residential real estate.
Consumer Loans. As of September 30, 2000, consumer loans totaled $78.8
million, or 5.9%, of our total loan portfolio. The principal types of consumer
loans that we offer are home equity lines of credit, adjustable and fixed-rate
second mortgage loans, automobile loans, unsecured personal loans, and loans
secured by deposit accounts. Consumer loans are offered on a fixed-rate and
adjustable rate basis with maturities generally of less than ten years. Our home
equity lines of credit are secured by the borrower's principal residence with a
maximum loan-to-value ratio, including the principal balances of both the first
and second mortgage loans, of 90%. Such loans are offered on an adjustable-rate
or fixed-rate basis with terms of up to ten years. At September 30, 2000, the
disbursed portion of home equity lines of credit totaled $21.4 million, or 27.2%
of consumer loans.
The underwriting standards which we employ for consumer loans include a
determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount, and in the case of home equity lines of credit, we obtain a title
guarantee or an opinion as to the validity of title.
While offering the benefits of shorter terms and generally higher
interest rates than those obtained when making loans secured by one-to
four-family residences, consumer loans entail greater credit risk than do
residential mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by assets that depreciate rapidly, such as automobiles,
mobile homes, boats, and recreational vehicles. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
of demand for used automobiles. We add a general provision on a regular basis to
our consumer loan loss allowance, based on general economic conditions and prior
loss experience. See "--Delinquencies and Classified Assets--Non-Performing
Assets," and "Delinquent Loans and Non-Performing Assets--Classification of
Assets" for information regarding our loan loss experience and reserve policy.
Commercial Business Loans. We also offer commercial business loans to
businesses in our market area. Historically, we offered commercial business
loans as a customer service to business account holders. However, we have begun
to significantly expand and aggressively market our loans and services to
commercial business enterprises. In this regard, we have hired additional
lenders with commercial business lending expertise. Our largest commercial
business loan at September 30, 2000 totaled $7.6 million and was secured by
residential property under development located in Indian River County, Florida.
At September 30, 2000, we had 618 commercial business loans outstanding with an
aggregate balance of $133.5 million, or 10.1% of our total loans. The average
commercial business loan balance was approximately $216,000. Commercial business
loans are generally offered with t adjustable interest rates only, which are
tied to The Wall Street Journal prime rate, plus up to 300 basis points. The
loans are offered with prevailing terms of five years but which may range up to
15 years. In addition, we offer Small Business Administration loans.
Underwriting standards which we employ for commercial business loans
include a determination of the applicant's ability to meet existing obligations
and payments on the proposed loan for normal cash flows generated
47
<PAGE>
by the applicant's business. The financial strength of each applicant also is
assessed through a review of financial statements provided by the applicant.
Commercial business loans generally bear higher interest rates and
shorter terms than one-to four-family residential loans, but they also may
involve a higher risk of default since their repayment is generally dependent on
the successful operation of the borrower's business. We generally obtain
personal guarantees from the borrower or a third party as a condition of
originating commercial business loans. Furthermore, in order to reduce the risks
associated with the origination of commercial business loans, where possible our
commercial business loans are also secured by real estate owned by the borrower.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, we will obtain a credit report and
employment verification to verify specific information relating to the
applicant's employment, income, and credit standing. In the case of a real
estate loan, we obtain an appraisal of the real estate intended to secure the
proposed loan. We check the loan application file for accuracy and completeness,
and verify the information provided. All loans of up to $300,000 may be approved
by any one of our senior lending officers; loans between $300,000 and $400,000
must be approved by any one of our designated senior officers; loans between
$400,000 and $1,000,000 must be approved by at least two of our designated
senior officers which includes the Chief Executive Officer; and loans in excess
of $1,000,000 must be approved by at least three members of the Board of
Directors acting as a loan committee. The loan committee meets as needed to
review and verify that management's approvals of loans are made within the scope
of management's authority. Fire and casualty insurance is required at the time
the loan is made and throughout the term of the loan, and upon our request flood
insurance may be required. After the loan is approved, a loan commitment letter
is promptly issued to the borrower. At September 30, 2000, we had commitments to
originate $85.3 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan, including the amount of the loan, interest
rate, amortization term, a brief description of the required collateral, and
required insurance coverage. We also require the borrower to provide proof of
fire and casualty insurance on the property (and, as required, flood insurance)
serving as collateral, which insurance must be maintained during the full term
of the loan. Title insurance or an opinion of title, based on a title search of
the property, is required on all loans secured by real property.
Borrowers who refinance an existing loan must satisfy our underwriting
criteria at the time they apply to refinance their loan and have been current in
their loan payments for a minimum of one year. Approximately 15% of our loan
originations during the year ended December 31, 1999 and 8.0% of the loan
originations during the nine months ended September 30, 2000 represented the
refinancing of loans that we hold. Refinancings have resulted in a decrease in
our interest rate spread.
In connection with local mortgage brokers, we have established a
mortgage loan broker solicitation program to supplement our internal
originations of one- to four-family residential loans. Under this program, which
is limited to the origination of one- to four-family residential loans,
prospective borrowers complete loan applications which are provided by mortgage
brokers. All loans obtained in this manner are reviewed by our underwriting
department in accordance with our customary underwriting standards. Total
originations from all sources under the mortgage loan broker solicitation
program during 1999 and the nine months ended September 30, 2000 were $60.6
million and $59.9 million, respectively.
We have entered into an agreement with the wholly owned mortgage
subsidiary of a major South Florida builder-developer, who has substantial
operations in our local service area, whereby the mortgage company originates,
processes and closes home mortgages resulting from the sale of the developer's
inventory of homes. The mortgage files are sent to us by the mortgage company
for review and, if we approve the loans we will issue a commitment to purchase
the loan from the mortgage company. Purchases are accomplished by assignment of
the mortgage from the mortgage company to Fidelity Federal Bank and Trust. We
purchased $23.7 million and $21.1 million, respectively, in loans from this
provider in 1999 and during the nine months ended September 30, 2000.
48
<PAGE>
Loans which we purchase are collateralized by residential properties
located primarily in Florida, although we have in the past purchased loans
collateralized by properties located outside the State of Florida. Generally, we
only purchase residential loans. At September 30, 2000, $109.7 million, or 8.3%,
of all loans in our portfolio, were purchased. Of this amount, $8.8 million
represented our interest in purchased loan participations. Our largest loan
participation was a $3.9 million interest in a loan secured by one- to
four-family residences. n Origination, Purchase and Sale of Loans. The table
below shows our loan origination, purchase and sales n activity for the periods
indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- --------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loan receivable-gross, beginning of period ... $ 699,931 $ 916,468 $ 1,060,926 $ 1,060,926 $ 1,271,436
----------- ----------- ----------- ----------- -----------
Originations:
Real estate:
One- to four-family residential(1) ........ 177,111 255,444 241,965 185,848 177,829
Land loans ................................ 30,908 23,089 19,123 15,269 11,373
Commercial ................................ 5,664 9,668 31,951 23,792 25,568
Multi-family .............................. 7,227 5,975 9,404 8,255 4,463
Non-real estate loans:
Consumer .................................. 29,276 34,382 46,358 31,278 48,681
Commercial Business ....................... 61,383 67,465 109,523 79,606 107,095
----------- ----------- ----------- ----------- -----------
Total originations ......................... 311,569 396,023 458,324 344,048 375,009
Acquired as part of acquisition of BankBoynton 52,957 -- -- -- --
Transfer of mortgage loans to foreclosed real
estate and in-substance foreclosure ........ (2,403) (1,542) (1,733) (1,283) (253)
Loan purchases ............................... 35,647 45,157 28,401 21,005 21,101
Repayments ................................... (169,599) (241,478) (258,749) (194,113) (220,252)
Loan sales ................................... (11,634) (53,702) (15,733) (14,275) --
----------- ----------- ----------- ----------- -----------
Net loan activity ............................ 216,537 144,458 210,510 155,382 175,605
----------- ----------- ----------- ----------- -----------
Total loans receivable-gross, end of period .. $ 916,468 $ 1,060,926 $ 1,271,436 $ 1,216,308 $ 1,447,041
=========== =========== =========== =========== ===========
</TABLE>
--------
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
(2) This table is presented on a gross loan receivable basis.
Loan Origination Fees and Other Income. In addition to interest earned
on loans, we occasionally receive loan origination fees. To the extent that
loans are originated or acquired for our portfolio, Statement of Financial
Accounting Standards ("SFAS") 91 "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring loans and Initial Direct Costs of
Leases" requires that we defer loan origination fees and costs and amortize such
amounts as an adjustment of yield over the life of the loan by use of the level
yield method. Fees and costs deferred under SFAS 91 are recognized into income
immediately upon prepayment or the sale of the related loan. At September 30,
2000, we had $2.8 million of deferred loan origination fees and $5.8 million of
deferred loan origination costs. Such fees vary with the volume and type of
loans and commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand and
availability of money.
We also receive other fees, service charges, and other income that
consist primarily of deposit transaction account service charges, late charges,
credit card fees, and income from real estate owned operations. We recognized
fees and service charges of $3.6 million, $4.7 million and $5.9 million and $5.8
million for the years ended December 31, 1997, 1998, and 1999, and nine months
ended September 30, 2000, respectively.
Loans-to-One Borrower. Savings associations are subject to the same
loans-to-one borrower limits as those applicable to national banks, which under
current regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10%
49
<PAGE>
of unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). At September 30, 2000, our largest outstanding loan balance to one
borrower totaled $12.1 million which is secured by a residential and commercial
complex under development in northern Palm Beach and Indian River Counties,
Florida. At that date, our second largest lending relationship totaled $11.6
million and is secured by residential property under development in Palm Beach
County, Florida. Our third largest lending relationship totaled $8.3 million and
is secured by residential property under development in Palm Beach County,
Florida. Our fourth largest lending relationship totaled $8.1 million and is
secured by residential property under development in Palm Beach County, Florida.
Our fifth largest lending relationship totaled $7.6 million and is secured by
residential property under development in Indian River County, Florida. All of
the loans comprising these lending relationships are performing in accordance
with their terms. Our regulatory limit on loans-to-one borrower was $17.2
million at September 30, 2000.
Mortgage-Backed Securities
We also invest in mortgage-backed securities issued or guaranteed by
the United States Government or agencies thereof. These securities consist
primarily of fixed-rate mortgage-backed securities issued or guaranteed by
Fannie Mae or Freddie Mac. At September 30, 2000 our mortgage-backed securities
had a market value of $304.2 million. Effective December 31, 1993, we
implemented SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities." As a result of the adoption of this accounting principle, we
declared its investment in adjustable rate, mortgage-backed securities as
available for sale. In November 1995, FASB issued "A Guide to Implementation of
SFAS 115 on Accounting for Certain Investments in Debt and Equity Securities -
Questions and Answers" ("SFAS 115 Q & A Guide"). SFAS 115 Q & A Guide permits an
entity to conduct a one-time reassessment of the classifications of all
securities held at that time. On November 28, 1995, in conformity with the SFAS
115 Q & A Guide, we classified all securities as "Available for Sale". As a
result, all such securities are now presented at fair value, as determined by
market quotations.
Our objective in investing in mortgage-backed securities varies from
time to time depending upon market interest rates, local mortgage loan demand,
and our level of liquidity. Mortgage-backed securities are more liquid than
whole loans and can be readily sold in response to market conditions and
interest rates. Mortgage-backed securities purchased by us also have lower
credit risk than mortgage loans because principal and interest are either
insured or guaranteed by the United States Government or agencies thereof.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ---------------------------
1997 1998 1999 1999 2000
(In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities at
beginning of period................ $ 123,599 $ 234,132 $ 389,263 $ 389,263 $ 336,212
Purchases........................... 131,956 310,581 57,285 57,285 --
Acquired as part of Acquisition of
BankBoynton....................... 205 -- -- -- --
Sales............................... -- (26,044) (9,914) (631) --
Repayments.......................... (22,325) (125,105) (89,810) (77,716) (29,294)
Discount (premium) amortization..... (304) (2,503) (2,611) (2,054) (568)
Increase (decrease) in market
value of securities held for sale
in accordance with SFAS 115....... 1,001 (1,798) (8,001) (5,061) (2,149)
---------- ----------- ------------ ---------- ----------
Mortgage-backed securities at
end of period..................... $ 234,132 $ 389,263 $ 336,212 $ 361,086 $ 304,201
========== ========== =========== ========== ==========
</TABLE>
50
<PAGE>
The following table sets forth the allocation of fixed and adjustable
rate mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
At December 31, At September 30
-------------------------------------------------------------------------- ----------------------
1997 1998 1999 2000
---------------------- ------------------------- -------------------- ------------------------
$ % $ % $ % $ %
--- --- --- --- --- --- --- ---
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities,
net:
Adjustable:
FreddieMac.............. $ 48,469 20.57% $ 102,756 26.27% $ 73,717 21.81% $ 85,087 27.82%
FannieMae............... 43,825 18.60 56,490 14.44 42,183 12.48 38,452 12.58
GinnieMae............... 1,586 0.67 995 0.25 11,083 3.28 -- --
---------- ------- ----------- ------- ---------- ------ ----------- ---------
Total adjustable....... 93,880 39.84 160,241 40.96 126,983 37.57 123,539 40.40
---------- ------- ----------- ------- ---------- ------ ----------- ---------
Fixed:
FreddieMac.............. 83,326 35.36 122,463 31.30 110,744 32.77 97,432 31.87
FannieMae............... 26,497 11.24 86,166 22.02 84,600 25.04 71,060 23.24
GinnieMae............... 30,429 12.91 20,393 5.22 13,885 4.11 12,170 3.98
---------- ------- ----------- ------- ---------- ------ ----------- ---------
Total fixed............ 140,252 59.51 229,022 58.54 209,229 61.92 180,662 59.09
---------- ------- ----------- ------- ---------- ------ ----------- ---------
Accrued interest........... 1,530 0.65 1,941 0.50 1,726 0.51 1,563 0.51
---------- ------- ----------- ------- ---------- ------ ----------- ---------
Total mortgage-backed
securities, net......... $ 235,662 100.00% $ 391,204 100.00% $ 337,938 100.00% $ 305,764 100.00%
========== ======= =========== ======= ========== ====== =========== =========
</TABLE>
Delinquencies and Classified Assets
Delinquencies. Our collection procedures provide that when a loan is 15
days past due, a computer-generated late charge notice is sent to the borrower
requesting payment, plus a late charge. If delinquency continues, at 30 days a
delinquent notice is sent and personal contact efforts are attempted, either in
person or by telephone, to strengthen the collection process and obtain reasons
for the delinquency. Also, plans to arrange a repayment plan are made. If a loan
becomes 60 days past due, a collection letter is sent, personal contact is
attempted, and the loan becomes subject to possible legal action if suitable
arrangements to repay have not been made. In addition, the borrower is given
information which provides access to consumer counseling services, to the extent
required by regulations of the Department of Housing and Urban Development
("HUD"). When a loan continues in a delinquent status for 90 days or more, and a
repayment schedule has not been made or kept by the borrower, generally a notice
of intent to foreclose is sent to the borrower, giving 30 days to cure the
delinquency. If not cured, foreclosure proceedings are initiated.
Impaired Loans. A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Loans are placed on non-accrual
status and considered non performing when either principal or interest is 90
days or more past due. Interest accrued and unpaid at the time a loan is placed
on a non-accrual status is charged against interest income.
Real estate that we acquired as a result of foreclosure or by the deed
in lieu of foreclosure is classified as real estate owned ("REO") until such
time as it is sold. When real estate is acquired through foreclosure or by deed
in lieu of foreclosure, it is recorded at its fair value, less estimated costs
of disposal. If the value of the property is less than the loan, less any
related specific loan loss provisions, the difference is charged against our
earnings. Any subsequent write-down of REO is also charged against earnings. At
September 30, 2000, we had no property that was acquired as the result of
foreclosure and classified as REO. At September 30, 2000, we had nonperforming
assets of $5.1 million and a ratio of nonperforming assets to total assets of
0.27%.
51
<PAGE>
Delinquent Loans and Nonperforming Assets
The following table sets forth information regarding our non-accrual
mortgage loans delinquent 90 days or more, non-accrual consumer and commercial
business loans delinquent 60 days or more, and real estate acquired or deemed
acquired by foreclosure at the dates indicated. When a loan is delinquent 90
days or more, we fully reserve all accrued interest thereon and cease to accrue
interest thereafter. For all the dates indicated, we did not have any material
restructured loans within the meaning of SFAS 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings."
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------- At September 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Delinquent Loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family residential(1) $1,513 $2,637 $2,610 $3,677 $4,022 $3,462
Commercial and multi-family real
estate ........................... 201 461 140 51 -- --
Land ............................. 10 84 187 -- -- --
Consumer and commercial business
loans(3) ......................... 140 108 312 131 221 1,618
------ ------ ------ ------ ------ ------
Total delinquent loans ............. 1,864 3,290 3,249 3,859 4,243 5,080
Total REO and loans foreclosed
in-substance ..................... 643 93 967 907 775 --
------ ------ ------ ------ ------ ------
Total nonperforming assets(2) .. $2,507 $3,383 $4,216 $4,766 $5,018 $5,080
====== ====== ====== ====== ====== ======
Total loans delinquent 90 days or
more to net loans receivable (3) . 0.35% 0.50% 0.38% 0.39% 0.36% 0.38%
Total loans delinquent 90 days or
more to total assets (3) ......... 0.24% 0.38% 0.27% 0.25% 0.25% 0.27%
Total nonperforming loans, loans
foreclosed in-substance and
REO to total assets ............... 0.32% 0.39% 0.35% 0.30% 0.29% 0.27%
</TABLE>
----------------
(1) At December 31, 1999 and September 30, 2000, we had no delinquent or
nonperforming construction loans.
(2) Net of specific valuation allowances.
(3) Includes consumer and commercial business loans delinquent 60 days or more.
During the year ended December 31, 1999 and the nine months ended
September 30, 2000, gross interest income of approximately $123,000 and
$141,000, respectively, would have been recorded on loans accounted for on a
non-accrual basis if the loans had been current throughout the periods. No
interest income on non-accrual loans was included in income during 1999 or the
nine months ended September 30, 2000.
The following table sets forth information with respect to loans past
due 60-89 days in our portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------- At September 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
One- to four-family residential(1) $1,272 $2,038 $3,014 $2,049 $2,538 $1,866
Commercial real estate and
multi-family ...................... 106 55 54 -- -- --
Consumer and commercial
business loans .................... 106 19 83 8 123 148
Land loans ...................... 1 -- -- 11 -- --
------ ------ ------ ------ ------ ------
Total past due 60-89 days ..... $1,485 $2,112 $3,151 $2,068 $2,661 $2,014
====== ====== ====== ====== ====== ======
</TABLE>
----------
(1) Includes construction loans
52
<PAGE>
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that these weaknesses make "collection or liquidation in full,"
on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are designated "special mention" by management.
When we classify problem assets as either substandard or doubtful, we
are required to establish general allowances for loan losses in an amount deemed
prudent by management. General allowances represent loss allowances that have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When we classify problem assets as "loss," we are
required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge off such amount. Our
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS, which can order the
establishment of additional general or specific loss allowances. We regularly
review the problem loans in our portfolio to determine whether any loans require
classification in accordance with applicable regulations.
The following table sets forth the aggregate amount of our classified
assets at the dates indicated.
At December 31,
--------------------------- At September 30,
1997 1998 1999 2000
---- ---- ---- ----
(In Thousands)
Substandard assets(1)(2) ..... $3,961 $4,752 $4,794 $5,151
Doubtful assets(2) ........... -- -- -- --
Loss assets(2) ............... -- -- -- --
------ ------ ------ ------
Total classified assets(2) . $3,961 $4,752 $4,794 $5,151
====== ====== ====== ======
-------------
(1) Includes REO and in-substance foreclosures.
(2) Net of specific valuation allowances.
53
<PAGE>
The following table sets forth information regarding our delinquent
loans, REO and loans foreclosed in- substance, net of specific valuation
allowance at September 30, 2000.
Balance Number
------- ------
(Dollars In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent ............... $1,866 29
Loans more than 89 days delinquent ........... 3,462 46
Commercial and multi-family real
estate:
Loans 60 to 89 days delinquent ............... -- --
Loans more than 89 days delinquent ........... -- --
Land loans:
Loans 60 to 89 days delinquent ............... -- --
Loans more than 89 days delinquent ........... -- --
Consumer and commercial business loans
60 days or more delinquent ................... 1,618 17
REO .......................................... -- --
------ ------
Total .................................. $6,946 92
====== ======
Allowance for Loan Losses. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the probable estimated losses inherent in the loan
portfolio, and to a lesser extent, unused commitments to provide financing. Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include a formula allowance and specific allowances
for identified problem loans and portfolio segments.
The formula allowance is calculated by applying loss factors to
outstanding loans based on an internal risk grade of such loans or pools of
loans. Changes in risk grades of both performing and nonperforming loans affect
the amount of the formula allowance. Loss factors are based primarily on our
historical loss experience and may be adjusted for other significant conditions
that, in management's judgement, affect the collectibility of the portfolio as
of the evaluation date. There were no changes to our estimation methodology for
the calculation of the allowance for loan losses.
The conditions evaluated in connection with the allowance include the
following conditions that existed as of the balance sheet date:
o general economic and business conditions affecting our key
lending areas; o credit quality trends (including trends in
nonperforming loans expected to result from existing conditions);
o collateral values;
o loan volumes and concentrations;
o seasoning of the loan portfolio;
o specific industry conditions within portfolio segments;
o recent loss experience in particular segments of the portfolio;
o duration of the current business cycle; and
o bank regulatory examination results.
Where any of these conditions is not evidenced by a specifically
identifiable problem loan or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the allowance.
The allowance for loan losses is based upon estimates of probable
losses inherent in the loan portfolio. The amount actually observed in respect
to of the losses can vary significantly from the estimated amounts. Our
methodology includes several features that are intended to reduce the
differences between estimated and actual losses. The historical loss experience
model that is used to establish the loan loss factors for problem graded loans
is designed to be self-correcting by taking account our recent loss experience.
Similarly, by basing the pass graded
54
<PAGE>
loss factors on historical loss experience, the methodology is designed to take
our recent loss experience into account. Pooled loan loss factors are adjusted,
if necessary, quarterly based upon the level of net charge-offs expected by
management. Furthermore, our methodology permits adjustments to any loss factor
used in the computation of the formula allowance in the event that, management's
judgment, significant conditions which affect the collectibility of the
portfolio as of the evaluation date are not reflected in the loss factors. By
assessing the probable estimated losses inherent in the loan portfolio on a
monthly basis, we are able to adjust specific and inherent loss estimates based
upon any more recent information that becomes available.
The allowance also incorporates the results of measuring impaired loans
as provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures." These
accounting standards prescribe the measurement methods, income recognition and
disclosure related to impaired loans. A loan is considered impaired when we
determine that it is probable that we will be unable to collect all amount due
according to the original contractual terms of the loan agreement. Impairment is
measured by the difference between the recorded investment in the loan
(including accrued interest, net deferred loan fees or costs and unamortized
premium or discount) and the estimated present value of the collateral, if the
loan is collateral dependent. Impairment is recognized by adjusting an
allocation of the existing allowance for loan losses.
Additional specific allowances are established in cases where
management has identified significant conditions or circumstances related to a
specific loan that management believes indicate the probability that a loss has
been incurred in excess of the amount determined by the formula allowance.
Pooled loan loss factors (not individually graded loans) are derived
from a model that tracks five years of historical loss experience. Pooled loans
are loans that are homogeneous in nature, such as consumer installment and
residential mortgage loans.
The allowance for loan losses is based upon estimates of probable
losses inherent in the loan portfolio. Our methodology permits adjustments to
any loss factor used in the computation of the formula allowance in the event
that, in management's judgment, significant factors which affect the
collectibility of the portfolio as of the evaluation date are not reflected in
the loss factors. By assessing the probable estimated losses inherent in the
loan portfolio on a monthly basis, we are able to adjust specific and inherent
loss estimates based upon the most recent information that has become available.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary. Management believes that our current allowance for loan
losses is adequate; however, there can be no assurance that the allowance for
loan losses will be adequate to cover losses that may in fact be realized in the
future or that additional provisions for loan losses will not be required.
Further, as we expand our portfolio of commercial real estate and loans that are
not secured by real estate, which are deemed to have greater credit risk than
single family mortgage loans, we expect to provide greater allowances for loan
losses than have been considered necessary in the past.
55
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------ At September 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total net loans receivable
outstanding ...................... $ 532,333 $ 661,700 $ 861,257 $ 977,166 $ 1,164,421 $ 1,328,192
=========== =========== =========== =========== =========== ===========
Average net loans receivable
outstanding ...................... $ 490,088 $ 605,507 $ 735,949 $ 917,647 $ 1,067,107 $ 1,247,033
=========== =========== =========== =========== =========== ===========
Allowance balance (at beginning
of period) ...................... $ 2,566 $ 2,265 $ 2,263 $ 3,294 $ 3,226 $ 3,609
Acquired as part of acquisition
of BankBoynton:
Residential real estate ....... -- -- 208 -- -- --
Land loans .................... -- -- 158 -- -- --
Consumer and commercial
business .................... -- -- 801 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total loans acquired ...... -- -- 1,167 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Provision for losses(2):
Residential real estate ........ (28) 78 132 119 117 244
Commercial & multi-family
real estate ...................... (287) 47 -- (43) 81 104
Land loans ..................... 13 -- 33 (4) (53) (146)
Consumer and commercial
business ..................... 92 39 5 5 318 726
----------- ----------- ----------- ----------- ----------- -----------
Total provisions for
losses ................... (210) 164 170 77 463 928
----------- ----------- ----------- ----------- ----------- -----------
Charge-offs:
Residential real estate ........ (76) (137) (93) (56) (32) (37)
Commercial and multi-family
real estate ...................... -- (7) (167) (22) (21) --
Land loans ..................... (13) -- (5) (28) (16) --
Consumer and commercial
business(2) .................. (22) (41) (39) (11) (34)
----------- ----------- ----------- ----------- ----------- -----------
Total charge-offs ......... (91) (166) (306) (145) (80) (71)
----------- ----------- ----------- ----------- ----------- -----------
Allowance balance (at end
of period) ...................... $ 2,265 $ 2,263 $ 3,294 $ 3,226 $ 3,609 $ 4,466
=========== =========== =========== =========== =========== ===========
Allowance for loan losses
as a percent of net loans
receivable at end of
period ............................ 0.43% 0.34% 0.38% 0.33% 0.31% 0.34%
Net loans charged-off as
a percent of average loans
outstanding ....................... 0.02% 0.03% 0.04% 0.01% 0.01% 0.01%
Ratio of allowance for loan
losses to total non-performing
loans at end of period(1) ......... 121.51% 68.78% 101.39% 100.59% 131.57% 117.59%
Ratio of allowance for loan
losses to total non-performing
loans, REO and in-substance
foreclosures at end of period(1) .. 90.35% 66.89% 78.13% 78.42% 102.59% 117.59%
</TABLE>
---------------
(1) Net of specific reserves.
(2) Net of immaterial recoveries.
56
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31, At September 30,
----------------------------------------------------------------------------------------- ------------------
1995 1996 1997 1998 1999 2000
----------------- --------------- ----------------- ---------------- ----------------- ------------------
% of Loans % of Loans % of Loans % of Loans % of Loans % of Loans
in Each In Each In Each In Each In Each In Each
Category to Category to Category to Category to Category to Category to
Total Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end
of period
applicable to:
One- to four-
family
residential
mortgage.......... $1,351 84.23% $ 1,095 83.89% $1,547 82.86% $2,128 83.18% $ 1,362 77.78% $1,568 75.42%
Commercial real
estate and
multi-family
residential........ 574 8.03 571 6.12 441 7.04 753 7.04 716 9.30 821 9.03
Land loans.......... 91 1.92 119 1.70 209 1.32 203 0.81 146 0.77 -- 0.97
Other............... 249 5.82 478 8.29 1,097 8.78 142 8.97 1,385 12.15 2,077 14.58
------ ------ ------- ----- ------ ------ ------ ------ -------- ------ ------ -------
Total allowance
for loan losses.... $2,265 100.00% $ 2,263 100.00% $3,294 100.00% $3,226 100.00% $ 3,609 100.00% $4,466% 100.00%
======= ====== ======= ====== ====== ====== ====== ====== ======== ====== ====== =======
</TABLE>
Investment Activities
In prior years, we increased the percentage of our assets held in our
investment portfolio as part of our strategy of maintaining higher levels of
liquidity which improve Fidelity Federal Bank and Trust's interest rate risk
position. Our investment portfolio consists of U.S. Government and agency
securities, corporate debt securities, municipal bonds, FHLB Stock and interest
earning deposits. The carrying value of our investment securities totaled $100.4
million at December 31, 1999, and $140.3 million at September 30, 2000.
Our interest-earning deposits due from other financial institutions
with original maturities of three months or less, totaled $19.1 million at
December 31, 1999, and $3.9 million at September 30, 2000.
Under federal regulations, we must maintain a minimum amount of liquid
assets that may be invested in specified short term securities and certain other
investments. See "Regulation--Federal Regulations--Liquidity Requirements" below
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". We generally maintain a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short term demand for funds to be used in our loan origination and other
activities.
Investment Portfolio. The following tables set forth the carrying value
of our investments at the dates indicated. At September 30, 2000, the market
value of our investments was approximately $140.3 million. As allowed by SFAS
115, "Accounting for Certain Investments in Debt and Equity Securities," we
classified our investment in U.S. Government and agency obligations as available
for sale. As a result, such securities are now presented at fair value, as
determined by market quotations. The market value of investments includes
interest- earning deposits and FHLB stock at book value, which approximates
market value.
57
<PAGE>
At December 31,
-------------------------------- At September 30,
1997 1998 1999 2000
---- ---- ---- ----
(In Thousands)
U.S. Government and agency
obligations ................ $ 13,861 $ 15,924 $ 26,317 $ 79,018
Investment in trust
preferred securities ....... -- 44,488 38,959 38,431
Municipal bonds ............. 2,216 2,900 2,742 2,515
Interest-earning deposits ... 33,688 32,075 19,065 3,917
FHLB stock .................. 11,955 15,658 13,354 16,492
-------- -------- -------- --------
Total investments ..... $ 61,720 $111,045 $100,437 $140,373
======== ======== ======== ========
During 1998, we began to diversify our investments in mortgage-backed
securities by purchasing investment grade rated, floating rate trust preferred
securities of other financial institutions. In doing so, we relied on
regulations which permit an investment of up to 35% of our assets in "commercial
paper and corporate debt securities." In November of 1998, the Office of Thrift
Supervision ("OTS") issued Thrift Bulletin TB-73, which among other matters
stated concerns over institutions' investment in trust preferred securities,
citing increased interest rate risks as a result of the predominant fixed-rate
nature of such securities and that some of these securities could have their
maturities extended at the issuer's option. As a result, the OTS adopted
limitations on the investment of such securities to 15% of a regulated
institution's equity, but adopted a method by which an institution could appeal
the limitation.
At September 30, 2000, Fidelity Federal Bank and Trust's investment in
trust preferred securities totaled 2.0% of assets and 33.5% of Fidelity Federal
Bank and Trust's regulatory capital. Our investment policy specifically
restricts our investment in trust preferred securities to $50 million,
investment grade and floating rate to improve our interest rate risk. We have
asked the OTS to permit us to continue our investment at current levels and
noted in our appeal that our investments had floating interest rates and the
issuers did not have the option to extend the maturities. The OTS has approved
our request to maintain our current market investment in these securities but
has not approved the increase of our investment.
58
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, amortized cost, market values and average yields of our
investment securities at September 30, 2000.
<TABLE>
<CAPTION>
At September 30, 2000
----------------------------------------------------------------------------------------------
One Year or Less One to Three Years Three to Five Years Over Five Years
-------------------- --------------------- ---------------------- ---------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government agency
securities ................ $ 26,616 6.17% $ 25,000 6.24% $ 7,832 6.62% $ 20,115 8.10%
Investment in trust preferred
securities ................ -- -- -- -- -- -- 40,742 7.36
Municipal bonds ............. 965 3.93 937 3.94 285 3.85 357 3.80
FHLB stock(2) ............... 16,492 7.75 -- -- -- -- -- --
Interest-earning deposits ... 3,917 6.58 -- -- -- -- -- --
-------- ---- -------- ---- -------- ---- -------- ----
Total ................. $ 47,990 6.70% $ 25,937 6.16% $ 8,117 6.52% $ 61,214 7.58%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
At September 30, 2000
-----------------------------------------
Total
-----------------------------------------
Annualized
Average Weighted
Amortized Market Life in Average
Cost Value Years(1) Yield
---- ----- -------- -----
(Dollars in Thousands)
Debt securities:
U.S. Government agency
securities ................ $ 79,563 $ 79,018 3.4 6.72%
Investment in trust preferred
securities ................ 40,742 38,431 27.0 7.36
Municipal bonds ............. 2,544 2,515 2.0 3.91
FHLB stock(2) ............... 16,492 16,492 -- 7.75
Interest-earning deposits ... 3,917 3,917 -- 6.58
-------- -------- ---- ----
Total ................. $143,258 $140,373 11.2 6.97%
======== ======== ==== ====
-------------
(1) Total weighted average life in years calculated only on United States
Government agency securities, corporate debt securities and municipal
bonds.
(2) FHLB stock has no stated maturity, and the interest rate is adjustable.
59
<PAGE>
Sources of Funds
General. Deposits are the major source of our funds for lending and
other investment purposes. In addition to deposits, we derive funds from the
amortization and prepayment of loans and mortgage-backed securities, the
maturity of investment securities, operations and, if needed, advances from the
FHLB. Scheduled loan principal repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer-term basis for general business
purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within our market area through the offering of a broad selection of deposit
instruments, including noninterest bearing demand accounts, NOW accounts,
passbook savings, money market deposits, term certificate accounts and
individual retirement accounts. Deposit account terms vary according to the
minimum balance required, the period of time during which the funds must remain
on deposit, and the interest rate, among other factors. We regularly evaluate
our internal cost of funds, survey rates offered by competing institutions,
review our cash flow requirements for lending and liquidity, and execute rate
changes when deemed appropriate. We do not obtain funds through brokers. As a
result of our strategy of seeking to attract business customers, we have
expanded our commercial deposit products and services, particularly variable
money market accounts, sweep accounts, and other transaction accounts.
Deposit Portfolio. The following table sets forth information regarding
interest rates, terms, minimum amounts and balances of our deposit portfolio as
of September 30, 2000.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum Checking and Minimum of Total
Interest Rate Term Savings Deposits Amount Balances Deposits
------------- ---- ---------------- ------ -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00% None Noninterest bearing demand $ 0 $ 122,331 8.66%
0.97 None NOW accounts 100 108,900 7.71
3.01 None Passbooks and statement savings 100 145,773 10.32
5.35 None Money market accounts 2,500 150,983 10.69
Certificates of Deposit
-----------------------
4.08% 0 - 3 months Fixed term, fixed-rate $1,000 $ 21,890 1.55%
5.83 3 - 6 months Fixed term, fixed-rate 1,000 47,007 3.33
6.28 6 - 12 months Fixed term, fixed-rate 1,000 495,549 35.08
5.83 12 - 36 months Fixed term, fixed-rate 1,000 260,682 18.46
5.95 36 - 60 months Fixed term, fixed-rate 1,000 59,318 4.20
----------- ------
Total $ 1,412,433 100.00%
=========== ======
</TABLE>
60
<PAGE>
The following table sets forth our certificates of deposit classified
by rates as of the dates indicated.
At December 31,
---------------------------- At September 30,
1997 1998 1999 2000
---- ---- ---- ----
Rate (In Thousands)
----
1.01 - 2.00%.......... $ 895 $ 1,018 $ 663 $ 484
2.01 - 3.00%.......... 301 -- -- --
3.01 - 4.00%.......... 6 6 -- --
4.01 - 5.00%.......... 11,225 125,019 199,817 63,353
5.01 - 6.00%.......... 441,810 564,002 573,903 251,530
6.01 - 7.00%.......... 152,453 106,719 114,007 568,874
7.01 - 8.00%.......... 353 157 152 205
8.01 - 9.00%.......... 40 -- -- --
-------- -------- -------- --------
$607,083 $796,921 $888,542 $884,446
======== ======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at September 30, 2000.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
-------- ----- ----- ----- ----- ----- -----
(In Thousands)
Rate
----
<S> <C> <C> <C> <C> <C> <C> <C>
1.01 - 2.00%................ $ 484 $ -- $ -- $ -- $ -- $ -- $ 484
2.01 - 3.00%................ -- -- -- -- -- -- --
3.01 - 4.00%................ -- -- -- -- -- -- --
4.01 - 5.00%................ 60,820 1,170 37 1,326 -- -- 63,353
5.01 - 6.00%................ 209,299 26,669 8,824 4,462 2,276 -- 251,530
6.01 - 7.00%................ 478,799 74,117 14,309 147 1,502 -- 568,874
7.01 - 8.00%................ 90 103 12 -- -- -- 205
-------- --------- --------- --------- -------- -------- --------
$749,492 $ 102,059 $ 23,182 $ 5,935 $ 3,778 $ -- $884,446
======== ========= ========= ========= ======== ======== ========
</TABLE>
The following table indicates the amount of our negotiable certificates
of deposit of $100,000 or more by time remaining until maturity as of September
30, 2000.
Remaining Maturity Amounts
------------------ -------
(In Thousands)
Three months or less............... $ 74,678
Three through six months........... 42,932
Six through twelve months.......... 59,528
Over twelve months................. 27,484
------------
Total.......................... $ 204,622
============
61
<PAGE>
The following table sets forth the net changes in our deposit
activities for the periods indicated.
Deposit Flow
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------ ------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits.............................. $ 3,353,672 $ 4,359,705 $ 6,273,994 $ 4,397,590 $ 6,531,747
Acquired as part of BankBoynton
acquisition......................... 41,730 -- -- -- --
Withdrawals........................... 3,250,906 4,145,444 6,116,775 4,271,584 6,478,021
----------- ----------- ----------- ----------- -----------
Net increase before interest credited. 144,496 214,261 157,219 126,006 53,726
Interest credited..................... 33,126 34,145 37,803 27,501 37,486
----------- ----------- ----------- ----------- -----------
Net increase in deposits.............. $ 177,622 $ 248,406 $ 195,022 $ 153,507 $ 91,212
=========== =========== =========== =========== ===========
</TABLE>
Borrowings
Savings deposits are the primary source of funds for our lending and
investment activities and for general business purposes. If the need arises, we
may rely upon advances from the FHLB and the Federal Reserve Bank discount
window to supplement our supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically collateralized by our FHLB
stock and a portion of our first mortgage loans. At September 30, 2000, we had
$326.3 million in FHLB advances outstanding. Our borrowings include $28.8
million of junior subordinated debentures issued in connection with the issuance
of 8.375% Cumulative Trust Preferred Securities by Fidelity Capital Trust I.
The FHLB functions as a central reserve bank providing credit to us as
well as other member savings institutions and financial institutions. As a
member, we are required to own capital stock in the FHLB and are authorized to
apply for advances on the security of such stock and certain of our home
mortgages and other assets (principally, securities that are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several different
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based either
on a fixed percentage of a member institution's net worth or on the FHLB's
assessment of the institution's creditworthiness. All FHLB advances have fixed
interest rates and mature between 3 months and 10 years, except for $25.0
million in such advances, bearing interest at 6.94%, which matures in the third
quarter, 2000.
<TABLE>
<CAPTION>
For the Nine Months
Year Ended December 31, Ended September 30, 2000
----------------------------------- ----------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Dollars in thousands)
FHLB advances:
<S> <C> <C> <C> <C> <C>
Maximum month-end balance........... $ 239,091 $ 318,527 $ 310,976 $ 310,976 $ 329,743
Balance at end of period............ 239,091 303,140 247,073 302,352 326,289
Average balance..................... 119,759 286,094 294,675 306,134 286,568
Weighted average interest rate on:
Balance at end of period............ 6.41% 5.94% 5.81% 5.90% 6.31%
Average balance for period.......... 6.27% 6.06% 6.01% 5.95% 6.16%
</TABLE>
62
<PAGE>
Subsidiary Activities
We have two active wholly owned subsidiaries. Fidelity Realty and
Appraisal Service, Inc., a Florida corporation ("FRAS") primarily engaged in
providing appraisal services for Fidelity Federal Bank and Trust and selling our
real estate owned. At December 31, 1999, FRAS had a cumulative deficit of
$104,000. For the year ended December 31, 1999, FRAS had a net loss of $8,000
and a net loss of $48,000 for the nine months ended September 30, 2000.
Our other subsidiary, Florida Consolidated Agency, Inc., a Florida
corporation doing business as Fidelity Insurance, was established in 1999. On
July 16, 1999, Fidelity Insurance acquired Dunn and Noel, Inc., a full- service
insurance agency based in Juno Beach, Florida. Dunn & Noel was founded in 1947,
originally as Burns & Company. Fidelity Insurance operates as an independent
insurance agency and licensed agents make insurance products available through
Fidelity Federal Bank and Trust's branch offices. Licensed representatives also
sell a variety of investment products. Fidelity Insurance incurred a net loss
for the period from July 16 through December 31, 1999 of $62,000 and net income
of $75,000 for the nine months ended September 30, 2000.
In addition to our two active subsidiaries, in December 1997, we
incorporated Fidelity Capital Trust I, a Delaware chartered statutory business
trust. Fidelity Capital Trust I was formed for the purpose of issuing 8.375%
Cumulative Trust Preferred Securities (the "Preferred Securities") which
represent beneficial interests in Fidelity Capital Trust I. On January 21, 1998,
Fidelity Capital Trust I completed the offer and sale of $28.75 million in
Preferred Securities. In connection with the offer and sale of the Preferred
Securities, Fidelity Bankshares, Inc., issued an equivalent principal amount of
8.375% Junior Subordinated Deferrable Interest Debentures which were sold to
Fidelity Capital Trust I for the equivalent of the net proceeds of $27.3 million
from the sale of the Preferred Securities. The Junior Subordinated Deferrable
Interest Debentures are scheduled to mature on January 31, 2028, at which time
the Preferred Securities will be redeemed. The annual interest expense paid on
the Junior Subordinated Deferrable Interest Debentures is approximately $2.4
million.
Under FIRREA, SAIF-insured institutions are required to provide 30 days
advance notice to the OTS and FDIC before establishing or acquiring a subsidiary
or conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC and the OTS such information as may be required by applicable
regulations and must conduct the activity in accordance with the rules and
orders of the OTS. In addition to other enforcement and supervision powers, the
OTS may determine after notice and opportunity for a hearing that the
continuation of a savings association's ownership of or relation to a subsidiary
(i) constitutes a serious risk to the safety, soundness or stability of the
savings association, or (ii) is inconsistent with the purposes of FIRREA. Upon
the making of such a determination, the OTS may order the savings association to
divest the subsidiary or take other actions.
Personnel
As of September 30, 2000, we had 527 full-time and 51 part-time
employees. None of our employees is represented by a collective bargaining
group. We believe our relationship with our employees is good.
Property
We conduct our business through our main office located in West Palm
Beach, Florida, and 34 full service branch offices located in Palm Beach, Martin
and St. Lucie Counties and two loan production offices located in Palm Beach and
Indian River Counties. The aggregate net book value of our premises and
equipment was $50.2 million at September 30, 2000. In January 2001, we opened
our main administrative office at 205 Datura Street, West Palm Beach, Florida.
63
<PAGE>
Legal Proceedings
There are various claims and lawsuits in which we are periodically
involved incident to our business. We believe that these routine legal
proceedings, in the aggregate, are not material to our financial condition and
results of operations.
REGULATION
Fidelity Federal Bank and Trust is examined and supervised extensively
by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. Fidelity Federal Bank and Trust is a member of, and owns stock in,
the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks
in the Federal Home Loan Bank System. This regulation and supervision limits the
activities in which Fidelity Federal Bank and Trust may engage. Fidelity Federal
Bank and Trust is also regulated to a lesser extent by the Board of Governors of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision examines Fidelity Federal
Bank and Trust and prepares reports for the consideration of its board of
directors on any operating deficiencies. Fidelity Federal Bank and Trust's
relationship with its depositors and borrowers is also regulated to a great
extent by both federal and state laws, especially in matters concerning the
ownership of savings accounts and the form and content of Fidelity Federal Bank
and Trust's mortgage documents. Any change in this regulation, whether by the
Federal Deposit Insurance Corporation, Office of Thrift Supervision, or
Congress, could have a material adverse impact on Fidelity Bankshares, Inc. and
Fidelity Federal Bank and Trust and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of federal savings banks are
subject to extensive regulation, including restrictions or requirements with
respect to loans to one borrower, the percentage of non-mortgage loans or
investments to total assets, capital distributions, permissible investments and
lending activities, liquidity, transactions with affiliates and community
reinvestment. In particular, many types of loans, such as commercial real
estate, commercial business and consumer loans, are limited to a specific
percentage of our capital or assets. The description of statutory provisions and
regulations applicable to savings associations set forth herein does not purport
to be a complete description of these statutes and regulations and their effect
on Fidelity Federal Bank and Trust.
Capital Requirements. The Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS rating system) and an 8%
risk-based capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system),and together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries
engaged in activities as principal that are not permissible for a national bank.
The risk-based capital standards for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weighted
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries less
tangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets and up to 45% of unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital exceed 100% of core
capital.
64
<PAGE>
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk- based capital requirements. For the present time, the Office of Thrift
Supervision has deferred implementation of the interest rate risk capital
charge. At September 30, 2000, Fidelity Federal Bank and Trust met each of it
capital requirements.
Loans to One Borrower. Federal savings associations generally may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which is defined to include
certain securities and bullion, but generally does not include real estate. As
of September 30, 2000, Fidelity Federal Bank and Trust was in compliance with
its loans-to-one- borrower limitations.
Qualified Thrift Lender Test. As a federal savings association,
Fidelity Federal Bank and Trust is required to satisfy a qualified thrift lender
test whereby it must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments," which consist primarily of residential mortgages
and related investments, including mortgage- backed and related securities.
"Portfolio assets" generally means total assets less specified liquid assets up
to 20% of total assets, goodwill and other intangible assets, and the value of
property used to conduct business. A savings association that fails the
qualified thrift lender test must either convert to a bank charter or operate
under specified restrictions. As of September 30, 2000, Fidelity Federal Bank
and Trust maintained 78.91% of its portfolio assets in qualified thrift
investments and, therefore, met the qualified thrift lender test.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution. A savings
institution must file an application for OTS approval of a capital distribution
if either (1) the total capital distributions for the applicable calendar year
exceed the sum of the institution's net income for that year to date plus the
institution's retained net income for the preceding two years, (2) the
institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company, as well as certain other institutions, must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
Any additional capital distributions would require prior OTS approval.
If Fidelity Federal Bank and Trust's capital falls below its required levels or
the Office of Thrift Supervision notifies it that it is in need of more than
normal supervision, Fidelity Federal Bank and Trust's ability to make capital
distributions could be restricted. In addition, the Office of Thrift Supervision
may prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by regulation, if the Office of Thrift Supervision
determines that the distribution would constitute an unsafe or unsound practice.
Liquidity. Fidelity Federal Bank and Trust is required to maintain an
average daily balance of specified liquid assets equal to a quarterly average of
not less than a specified percentage of its net withdrawable deposit accounts
plus borrowings payable in one year or less. The current requirement is 4%.
Fidelity Federal Bank and Trust's average liquidity ratio for the quarter ended
September 30, 2000 was 28.06%, which exceeded the applicable requirements.
65
<PAGE>
Community Reinvestment Act and Fair Lending Laws. Federal savings banks
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities, and failure to comply with
the Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the Office of Thrift Supervision, as well as other
federal regulatory agencies and the Department of Justice. Fidelity Federal Bank
and Trust received a satisfactory Community Reinvestment Act rating under the
current Community Reinvestment Act regulations in its most recent federal
examination by the Office of Thrift Supervision.
Transactions with Related Parties. Fidelity Federal Bank and Trust's
authority to engage in transactions with related parties or "affiliates" or to
make loans to specified insiders, is limited by Sections 23A and 23B of the
Federal Reserve Act. The term "affiliates" for these purposes generally means
any company that controls or is under common control with an institution,
including Fidelity Bankshares, Inc. and its non-savings institution
subsidiaries. Section 23A limits the aggregate amount of certain "covered"
transactions with any individual affiliate to 10% of the capital and surplus of
the savings institution and also limits the aggregate amount of covered
transactions with all affiliates to 20% of the savings institution's capital and
surplus. Covered transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
provides that covered transactions with affiliates, including loans and asset
purchases, must be on terms and under circumstances, including credit standards,
that are substantially the same or at least as favorable to the institution as
those prevailing at the time for comparable transactions with non- affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Fidelity Federal Bank and Trust's authority to extend credit to
executive officers, directors and 10% stockholders, as well as entities
controlled by these persons, is currently governed by Sections 22(g) and 22(h)
of the Federal Reserve Act, and also by Regulation O. Among other things, these
regulations generally require these loans to be made on terms substantially the
same as those offered to unaffiliated individuals and do not involve more than
the normal risk of repayment. However, recent regulations now permit executive
officers and directors to receive the same terms through benefit or compensation
plans that are widely available to other employees, as long as the director or
executive officer is not given preferential treatment compared to other
participating employees. Regulation O also places individual and aggregate
limits on the amount of loans Fidelity Federal Bank and Trust may make to these
persons based, in part, on Fidelity Federal Bank and Trust's capital position,
and requires approval procedures to be followed. At September 30, 2000, Fidelity
Federal Bank and Trust was in compliance with these regulations.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take such
action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and
66
<PAGE>
soundness standards required under the Federal law. The guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The guidelines address internal controls and information systems;
internal audit systems; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; and compensation, fees and benefits. If the
appropriate federal banking agency determines that an institution fails to meet
any standard prescribed by the guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan.
Prompt Corrective Regulatory Action
Under the Office of Thrift Supervision Prompt Corrective Action
regulations, the Office of Thrift Supervision is required to take supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's level of capital. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has the total risk-based capital less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that
is less than 3.0% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." Generally, the
applicable Banking regulator is required to appoint a receiver or conservator
for an institution that is "critically undercapitalized." The regulation also
provides that a capital restoration plan must be filed with the Office of Thrift
Supervision within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The Office of Thrift Supervision could also take any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
Insurance of Deposit Accounts
The Federal Deposit Insurance Corporation has adopted a risk-based
deposit insurance assessment system. The Federal Deposit Insurance Corporation
assigns an institution to one of three capital categories, based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, and one of three supervisory subcategories
within each capital group. The three capital categories are well capitalized,
adequately capitalized and undercapitalized. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, it
could have an adverse effect on the earnings of Fidelity Federal Bank and Trust.
Federal Home Loan Bank System
The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. Fidelity Federal Bank and Trust, as a member
of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares
of capital stock in that Federal Home Loan Bank in an amount at least equal to
1% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its borrowings
from the Federal Home Loan Bank, whichever is greater. As of September 30, 2000,
Fidelity Federal Bank and Trust was in compliance with this requirement. The
Federal Home Loan Banks are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan
Banks pay to their members and could also result in the Federal Home Loan Banks
imposing a higher rate of interest on advances to their members.
67
<PAGE>
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At September
30, 2000, Fidelity Federal Bank and Trust was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements
imposed by the Office of Thrift Supervision.
Holding Company Regulation
Upon completion of the conversion, Fidelity Bankshares, Inc. will be a
non-diversified unitary savings and loan holding company, as those terms are
defined under federal law, subject to regulation and supervision by that agency.
In addition, the Office of Thrift Supervision has enforcement authority over
Fidelity Bankshares, Inc. and its non-savings institution subsidiaries. Among
other things, this authority permits the Office of Thrift Supervision to
restrict or prohibit activities that are determined to be a risk to the
subsidiary savings institution.
Under prior law, a unitary savings and loan holding company was not
generally restricted as to the types of business activities in which it may
engage, provided that its subsidiary savings bank continued to be a qualified
thrift lender. See "--Federal Regulatory Savings Institutions--QTL Test." The
Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings and loan
holding companies not existing or applied for before May 4, 1999 to activities
permissible for financial holding companies under the law or for multiple
savings and loan holding companies. Fidelity Bankshares, Inc. will not qualify
to be grandfathered and will be limited to the activities permissible for
financial holding companies or for multiple savings and loan holding companies.
A financial holding company may engage in activities that are financial in
nature, incidental to financial activities or complementary to a financial
activity. A multiple savings and loan holding company is generally limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the Office of Thrift
Supervision, and certain additional activities authorized by Office of Thrift
Supervision regulation.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with specified exceptions, more than 5% of a non-subsidiary savings institution,
a non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by Federal law; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the Office of
Thrift Supervision must consider the financial and managerial resources, future
prospects of Fidelity Federal Bank and Trust and institution involved, the
effect of the acquisition on the risk to the insurance fund, the convenience and
needs of the community and competitive factors.
Prospective Regulation and Legislation
Regulations that affect Fidelity Federal Bank and Trust and Fidelity
Bankshares, Inc. on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations may also change because of
new interpretations by the authorities who administer those laws and
regulations. Any change in the regulatory structure or the applicable statues or
regulations, whether by the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation or the U.S. Congress, could have a material impact of the
business and operations of Fidelity Federal Bank and Trust and Fidelity
Bankshares, Inc.
Legislation enacted several years ago provided that the Bank Insurance
Fund and the Savings Association Insurance Fund would have merged on January 1,
1999 if there were no savings associations as of that date. Congress did not
enact legislation eliminating the savings association charter by that date and
accordingly, the Bank Insurance Fund and the Savings Association Insurance Fund
have not been merged, and we are unable to predict whether such funds will
eventually be merged and what effect, if any, that may have on our business.
68
<PAGE>
Federal Securities Laws
Fidelity Bankshares, Inc. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, for the registration of the common stock to be issued pursuant to the
conversion. Upon completion of the conversion, Fidelity Bankshares, Inc. common
stock will be registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. Fidelity Bankshares, Inc. will then be subject
to the information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of the
common stock to be issued in the conversion does not cover the resale of the
shares. Shares of the common stock purchased by persons who are not affiliates
of Fidelity Bankshares, Inc. may be resold without registration. Shares
purchased by an affiliate of Fidelity Bankshares, Inc. will be subject to the
resale restrictions of Rule 144 under the Securities Act of 1933. If Fidelity
Bankshares, Inc. meets the current public information requirements of Rule 144
under the Securities Act of 1933, each affiliate of Fidelity Bankshares, Inc.
who complies with the other conditions of Rule 144, including those that require
the affiliate's sale to be aggregated with those of other persons, would be able
to sell in the public market, without registration, a number of shares not to
exceed, in any three-month period, the greater of 1% of the outstanding shares
of Fidelity Bankshares, Inc., or the average weekly volume of trading in the
shares during the preceding four calendar weeks. Provision may be made in the
future by Fidelity Bankshares, Inc. to permit affiliates to have their shares
registered for sale under the Securities Act of 1933.
TAXATION
Federal Taxation
For federal income tax purposes, Fidelity Bankshares, Inc. and its
subsidiary file a consolidated federal income tax return on a calendar year
basis, using the accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act
of 1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or be merged into a commercial bank
without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. However, transactions that would require recapture of the
pre-1988 tax bad debt reserve include redemption of Fidelity Federal Bank and
Trust's stock, payment of dividends or distributions in excess of earnings and
profits, or failure by the institution to qualify as a bank for federal income
tax purposes. At September 30, 2000, Fidelity Federal Bank and Trust had a
balance of approximately $7.4 million of pre-1988 bad debt reserves. A deferred
tax liability has not been provided on this amount as management does not intend
to make distributions, redeem stock or fail certain bank tests that would result
in recapture of the reserve.
Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Fidelity Bankshares, Inc.
accounts for deferred income taxes by the asset and liability method, applying
the enacted statutory rates in effect at the balance sheet date to differences
between the book basis and the tax basis of assets and liabilities. The
resulting deferred-tax liabilities and assets are adjusted to reflect changes in
the tax laws.
Fidelity Bankshares, Inc. is subject to the corporate alternative
minimum tax to the extent it exceeds Fidelity Bankshares, Inc.'s regular income
tax for the year. The alternative minimum tax will be imposed at the rate of 20%
of a specially computed tax base. Included in this base are a number of
preference items, including interest on certain tax-exempt bonds issued after
August 7, 1986, and an "adjusted current earnings" computation which is similar
to a tax earnings and profits computation. In addition, for purposes of the
alternative minimum tax, the amount of alternative minimum taxable income that
may be offset by net operating losses is limited to 90% of alternative minimum
taxable income.
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<PAGE>
State Taxation
Florida Taxation. Foreign corporations, like Fidelity Bankshares, Inc.,
pay a 5 1/2% tax on the portion of their net taxable income which is allocable
to the State of Florida.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, Fidelity Bankshares, Inc. is exempt from Delaware corporate income tax
but is required to file an annual report with and pay an annual franchise tax to
the State of Delaware.
Fidelity Bankshares, Inc. has not been audited by the Internal Revenue
Service, the State of Delaware or the State of Florida within the past five
years. See Notes 1 and 12 to the Financial Statements.
MANAGEMENT OF FIDELITY BANKSHARES, INC.
Directors
The Board of Directors of Fidelity Bankshares, Inc. is divided into
three classes and is elected by stockholders of Fidelity Bankshares, Inc. for
staggered three-year terms, or until their successors are elected and qualified.
One class of directors, consisting of directors Paul C. Bremer, F. Ted Brown,
Jr. and Karl H. Watson, have terms of office expiring in 2001; a second class,
consisting of directors Keith D. Beaty and Joseph B. Shearouse, Jr., have terms
of office expiring in 2002; and a third class, consisting of directors Vince A.
Elhilow and Donald E. Warren, M.D., have a term of office expiring in 2003. The
following table sets forth certain information regarding the composition of the
Board of Directors as of September 30, 2000, including their terms of office:
<TABLE>
<CAPTION>
Position Held at Director Current Term
Name Age Fidelity Bankshares, Inc. Since(1) to Expire
---- --- ------------------------- -------- ---------
<S> <C> <C> <C> <C>
Vince A. Elhilow 60 President and
Chief Executive Officer 1984 2003
Joseph B. Shearouse, Jr. 76 Chairman of the Board 1961 2002
Keith D. Beaty 50 Director 1992 2002
Paul C. Bremer 57 Director 2000 2001
F. Ted Brown, Jr. 71 Director 1990 2001
Donald E. Warren, M.D. 72 Director 1979 2003
Karl H. Watson 58 Director 1999 2001
</TABLE>
----------
(1) Reflects initial appointment to Fidelity Bankshares, Inc.'s predecessor,
Fidelity Federal Savings Bank of Florida.
The principal occupations of each director and executive officer of
Fidelity Bankshares, Inc. during at least the past five years is set forth
below.
Vince A. Elhilow has been President of Fidelity Federal Bank and Trust
since 1987 and Chief Executive Officer of Fidelity Federal Bank and Trust since
1992. Prior to his appointment as President of Fidelity Federal Bank and Trust,
Mr. Elhilow was manager of the Mortgage Loan Department from 1973 to 1992 and
Executive Vice President and Chief Operating Officer from 1981 to 1987. Mr.
Elhilow joined Fidelity Federal Bank and Trust in January 1963 and has been a
Director since 1984.
Joseph B. Shearouse, Jr. is Chairman of the Board of Directors. Mr.
Shearouse joined Fidelity Federal Bank and Trust in 1954 and has held various
positions in Fidelity Federal Bank and Trust. Mr. Shearouse became Chairman of
the Board of Fidelity Federal Bank and Trust in 1987 and was President of
Fidelity Federal Bank and Trust from 1974 to 1987. Mr. Shearouse has been a
director of Fidelity Federal Bank and Trust since 1961. Mr. Shearouse retired as
an active officer of Fidelity Federal Bank and Trust on January 31, 1995, but
has continued as Chairman of the Board.
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<PAGE>
Keith D. Beaty is the President and Chief Executive Officer of Implant
Innovations, Inc. a distributor of dental implants, located in West Palm Beach.
Mr. Beaty has been a director of Fidelity Federal Bank and Trust since 1992.
Paul C. Bremer is a retired certified public accountant. From 1979
until his retirement in 2000, Mr. Bremer was a partner with the accounting firm
of Ernst & Young. Mr. Bremer was appointed to the Board of Directors in August
2000.
F. Ted Brown, Jr. is the President of Ted Brown Real Estate, Inc.,
located in North Palm Beach. Mr. Brown has been a director of Fidelity Federal
Bank and Trust since 1990.
Donald E. Warren, M.D. is a retired physician who practiced in West
Palm Beach for over 36 years. He was associated with Intracoastal Health Systems
until his retirement in November 1996. Dr. Warren has been a director of
Fidelity Federal Bank and Trust since 1979.
Karl H. Watson is President of the Quarries, Cement and Construction
Division, CSR Rinker, a concrete and building materials company based in West
Palm Beach. Mr. Watson has been with CSR Rinker for over 35 years. Mr. Watson
was appointed to the Board of Directors on January 19, 1999.
Richard D. Aldred is Executive Vice President, Chief Financial Officer
and Treasurer.
Joseph C. Bova is Executive Vice President and Lending Operations
Manager.
Robert L. Fugate is Executive Vice President and Banking Operations
Manager.
Christopher H. Cook became Executive Vice President and corporate
counsel in 1996. Prior to that time, Mr. Cook was a partner with the law firm of
Brackett, Cook, Sned, Welch, D'Angio, Tucker & Farach, P.A.
The business of Fidelity Bankshares, Inc.'s Board of Directors is
conducted through meetings and activities of the Board and its committees.
During the year ended December 31, 1999, the Board of Directors of Fidelity
Bankshares, Inc. held 12 regular and special meetings. During the year ended
December 31, 1999, no director attended fewer than 75 percent of the total
meetings of the Board of Directors of Fidelity Bankshares, Inc. and committees
on which such director served.
Fidelity Bankshares, Inc. does not have a compensation committee. The
Executive Compensation Committee of Fidelity Federal Bank and Trust meets
periodically to review the performance of officers and employees and determine
compensation programs and adjustments. It is comprised of Directors Beaty,
Bremer, Brown, Shearouse, Warren and Watson. The Executive Compensation
Committee met one time during the year ended December 31, 1999.
The Audit and Examination Committee of Fidelity Federal Bank and Trust
consists of Directors Beaty, Bremer, Brown, Shearouse, Warren and Watson. This
committee meets on a quarterly basis with the internal auditor and Fidelity
Federal Bank and Trust's compliance officer to review audit programs and the
results of audits of specific areas as well as other regulatory compliance
issues. The Audit Committee also meets twice a year with Fidelity Bankshares,
Inc.'s independent auditors. The Audit Committee met four times during the year
ended December 31, 1999.
The Board of Directors serves as the Nominating Committee. During the
year ended December 31, 1999, one meeting was held.
The following table sets forth the cash compensation paid for services
during the years ended December 31, 1999, 1998 and 1997 to Fidelity Bankshares,
Inc.'s Chief Executive Officer and Fidelity Bankshares, Inc.'s five most highly
compensated executive officers other than the Chief Executive Officer.
71
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
====================================================================================================================================
Long-Term
Annual Compensation Compensation Awards
------------------------------------------------------------------------------ ----------------------------------
Year Other Restricted
Ended Annual Stock Options All Other
Name and December Salary Bonus Compensation Award(s) /SARs mpensation
Principal Position 31, ($)(1) ($)(2) ($)(3)(4) ($) (#) Payouts ($)(5)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vince A. Elhilow 1999 $292,000 $26,922 $39,362 -- -- -- $134,994
President and Chief 1998 270,000 22,441 39,699 -- -- -- 103,639
Executive Officer 1997 250,000 21,179 38,882 -- -- -- 80,976
------------------------------------------------------------------------------------------------------------------------------------
J. Robert McDonald 1999 $143,500 $13,230 $14,717 -- -- -- $ 44,229
Executive Vice 1998 133,500 11,096 14,148 -- -- -- 60,970
President--Appraisal; 1997 126,000 10,674 9,918 -- -- -- 50,227
President of FRAS
------------------------------------------------------------------------------------------------------------------------------------
Richard D. Aldred 1999 $157,000 $14,475 $ 2,770 -- -- -- $ 41,374
Executive Vice 1998 145,000 12,052 2,676 -- -- -- 48,441
President--Finance 1997 137,000 11,606 1,908 -- -- -- 35,480
------------------------------------------------------------------------------------------------------------------------------------
Joseph C. Bova 1999 $150,000 $13,830 $11,878 -- -- -- $ 46,390
Executive Vice 1998 133,000 11,054 10,732 -- -- -- 50,953
President--Lending 1997 125,000 10,590 9,137 -- -- -- 37,441
Operations
------------------------------------------------------------------------------------------------------------------------------------
Robert L. Fugate 1999 $147,000 $13,553 $ 6,039 -- -- -- $ 36,406
Executive Vice 1998 129,500 10,763 6,838 -- -- -- 45,978
President--Banking 1997 121,500 10,293 6,660 -- -- -- 34,251
Operations Manager
------------------------------------------------------------------------------------------------------------------------------------
Christopher C. Cook 1999 $157,000 $14,475 $ 7,625 -- -- -- $ 21,515
Executive Vice 1998 145,000 12,052 15,481 -- -- -- 15,075
President 1997 137,000 11,606 33,385 -- -- -- 5,196
Corporate Counsel
====================================================================================================================================
</TABLE>
------------
(1) Includes compensation deferred at the election of the named individual
under Fidelity Federal Bank and Trust's savings plan for employees,
Fidelity Federal Bank and Trust's flexible benefit plan and Fidelity
Federal Bank and Trust's long-term deferred compensation plan.
(2) Includes amounts deferred at the election of the executive under Fidelity
Federal Bank and Trust's management performance plan.
(3) Includes $26,400, $2,400 and $2,400 in Directors' fees for Fidelity Federal
Bank and Trust and its subsidiaries, payable to Messrs. Elhilow, McDonald
and Bova, respectively, in 1999.
(4) Consists of automobile lease payments or automobile reimbursement stipends
and club dues for the named individual. The aggregate amount of such
benefits did not exceed the lesser of $50,000 or 10% of cash compensation
for the named individual.
(5) Includes amount allocated to executive officers under Fidelity Federal Bank
and Trust employee stock ownership plan, long-term deferred compensation
plan and matching contributions allocated under Fidelity Federal Bank and
Trust's savings plan for employees.
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<PAGE>
Employment and Severance Arrangements
Employment Agreement. Fidelity Federal Bank and Trust has entered into
an employment agreement with Vince A. Elhilow, President and Chief Executive
Officer of Fidelity Federal Bank and Trust. The employment agreement is intended
to ensure that Fidelity Federal Bank and Trust and Fidelity Bankshares, Inc.
will be able to maintain a stable and competent management. The continued
success of Fidelity Federal Bank and Trust and Fidelity Bankshares, Inc. depends
to a significant degree on the skill and competence of the President and Chief
Executive Officer.
The employment agreement provides for a three-year term for Mr.
Elhilow. Commencing on the first anniversary date and continuing each
anniversary date thereafter, the Board of Directors may extend the employment
agreement for an additional year such that the remaining term shall be three
years unless written notice of nonrenewal is given by the Board of Directors
after conducting a performance evaluation of the executive. The agreement
provides that the base salary of Mr. Elhilow will be reviewed annually.
Effective January 1, 2000, the current base salary of Mr. Elhilow is $316,800.
In addition to the base salary, the employment agreement provides that Mr.
Elhilow is to receive all benefits provided to permanent full-time employees of
Fidelity Federal Bank and Trust, including among other things, participation in
stock benefit plans and other fringe benefits applicable to executive personnel.
The employment agreement provides for termination by Fidelity Federal Bank and
Trust for cause at any time. In the event Fidelity Federal Bank and Trust
chooses to terminate his employment for reasons other than for cause, or upon
the termination of his employment for reasons other than a change in control, as
defined in the employment agreement, or in the event of his resignation from
Fidelity Federal Bank and Trust upon: (i) failure to re-elect him to his current
office; (ii) a material change in his functions, duties or responsibilities
which change would cause his position to become one of lesser responsibility,
importance or scope; (iii) relocation of his principal place of employment by
more than 30 miles; (iv) the liquidation or dissolution of Fidelity Federal Bank
and Trust; or (v) a breach of the agreement by Fidelity Federal Bank and Trust,
the executive, or in the event of death, his beneficiary, would be entitled to
receive an amount equal to the greater of the remaining payments, including base
salary, bonuses and other payments due under the remaining term of the
employment agreement or three times the average of the executive's base salary,
including bonuses and other cash compensation paid, and the amount of any
benefits received pursuant to any employee benefit plans maintained by Fidelity
Federal Bank and Trust.
If termination, whether voluntary or involuntary, follows a change in
control of Fidelity Federal Bank and Trust or Fidelity Bankshares, Inc., as
defined in the employment agreement, the executive or, in the event of death,
his beneficiary, would be entitled to a payment equal to the greater of (i) the
payments due under the remaining term of the employment agreement or (ii) 2.99
times his average annual compensation over the five years preceding termination.
Fidelity Federal Bank and Trust would also continue the executive's life,
health, and disability coverage for the remaining unexpired term of the
employment agreement to the extent allowed by the plan or policies maintained by
Fidelity Federal Bank and Trust from time to time.
The employment agreement provides that for a period of one year
following termination (other than in connection with a change in control), the
executive agrees not to compete with Fidelity Federal Bank and Trust in any
city, town or county in which Fidelity Federal Bank and Trust maintains an
office or has filed an application to establish an office.
Severance Plan. Fidelity Federal Bank and Trust has entered into
severance agreements (the "Severance Agreements") with Richard D. Aldred,
Executive Vice President, Joseph C. Bova, Executive Vice President, Robert L.
Fugate, Executive Vice President, and Christopher H. Cook, Esquire, Executive
Vice President/Corporate Counsel, providing for certain benefits in the event of
a change of control of Fidelity Federal Bank and Trust or Fidelity Bankshares,
Inc. Following a change of control of Fidelity Bankshares, Inc. or Fidelity
Federal Bank and Trust, as defined in the Severance Agreements, the officer
shall be entitled to a payment under a severance agreement if the officer
terminates employment following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 30 miles.
73
<PAGE>
In the event that an officer is entitled to receive payments pursuant
to a severance agreement, he shall receive a cash payment up to a maximum of
three times such officer's annual compensation prior to termination of
employment, plus life and medical coverage for a period of up to 36 months from
the date of termination.
Directors' Compensation
The Chairman of the Board receives a monthly fee of $3,000 and each
director receives a monthly meeting fee of $2,000. Committee chairmen receive
fees of $425 for each meeting attended and committee members receive $300 for
each meeting attended. Fidelity Federal Bank and Trust paid a total of $193,300
in director and committee fees during the fiscal year ending December 31, 1999.
In addition, Fidelity Federal Bank and Trust has one e chairman emeritus who
receives $1,200 monthly. One director emeritus does not receive any fee;
however, he e receives $1,341 monthly under Fidelity Federal Bank and Trust's
Retirement Plan for directors. The directors e emeriti meet informally with
members of Fidelity Federal Bank and Trust to discuss general matters affecting
e Fidelity Federal Bank and Trust. Directors emeriti do not attend board
meetings and they have no authority to affect Board or management decisions.
There are currently three directors emeriti.
Retirement Plan for Directors. Fidelity Federal Bank and Trust
maintains a non-tax qualified Retirement Plan for Directors that provides
directors who serve on the Board for at least five years with an annual
retirement benefit equal to 80% of such directors' director fees for his or her
last full year of service on the Board. Eligible directors must have served on
the Board on or after January 1, 1990. Retirement benefits are payable monthly
over a period equal to the number of months (including partial months) that a
director has served on the Board. The directors' retirement plan provides for
survivor benefits payable to a designated beneficiary in an amount equal to the
director's regular benefit for a period of up to 180 months or the number of
months the director served on the Board, whichever is less. Survivor benefits
begin the day a deceased director would have reached age 65. Survivors are
entitled to receive the remaining payments due a director who dies after
retirement from the Board but before payment of all benefits under the
directors' retirement plan. During the year ended December 31, 1999, the cost to
Fidelity Federal Bank and Trust of the Director's Plan was $110,852.
Benefits
Defined Benefit Plan. Fidelity Federal Bank and Trust maintains a
noncontributory defined benefit plan. All employees age 21 or older who have
worked at Fidelity Federal Bank and Trust for a period of one year and been
credited with 1,000 or more hours of employment with Fidelity Federal Bank and
Trust during the year are eligible to accrue benefits under the retirement plan.
Fidelity Federal Bank and Trust annually contributes an amount to the retirement
plan necessary to satisfy the actuarially determined minimum funding
requirements in accordance with the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
At the normal retirement age of 65 (or the fifth anniversary of plan
participation, if later), the plan is designed to provide a life annuity
guaranteed for ten years. The retirement benefit provided is an amount equal to
the sum of (1) and (2), where (1) is 1.46% of a participant's average monthly
compensation multiplied by the o participant's credited service; and (2) is .44%
of average monthly compensation in excess of $1,417 multiplied by o the
participant's credited service (not to exceed 35 years). Retirement benefits are
also payable upon retirement due to early and late retirement, disability or
death. A reduced benefit is payable upon early retirement at or after age 55 and
the completion of 15 years of service with Fidelity Federal Bank and Trust. Upon
termination of employment other than as specified above, a participant who was
employed by Fidelity Federal Bank and Trust for a minimum of five years is
eligible to receive his or her accrued benefit reduced for early retirement or a
deferred retirement benefit commencing on such participant's normal retirement
date. Benefits are payable in various annuity forms as well as inthe form of a
single lump sum payment. At December 31, 1999, the market value of the
retirement plan trust fund equaled approximately $12.5 million. For the plan
year ended December 31, 1999, Fidelity Federal Bank and Trust made a
contribution to the retirement plan of $1,440,853.
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<PAGE>
The following table indicates the annual retirement benefit that would
be payable under the retirement plan upon retirement at age 65 in calendar year
1999, expressed in the form of a single life annuity for the final average
salary and benefit service classification specified below.
<TABLE>
<CAPTION>
Years of Service and Benefits Payable at Retirement
--------------------------------------------------------------------------------------
Final Average
Compensation 15 20 25 30 35 40
------------ -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
$ 25,000 $ 6,003 $ 8,004 $ 10,005 $ 12,006 $ 14,007 $ 15,832
$ 50,000 13,128 17,504 21,880 26,256 30,632 34,282
$ 75,000 20,253 27,004 33,755 40,506 47,257 52,732
$100,000 27,378 36,504 45,630 54,756 63,882 71,182
$150,000 41,628 55,504 69,380 83,256 97,132 104,596
</TABLE>
The following table sets forth the years of credited service (i.e.,
benefit service) as of December 31, 1999, for each of the individuals named in
the cash compensation table.
Years of
Name Credited Service
---- ----------------
Vince A. Elhilow............................ 36.9
J. Robert McDonald.......................... 43.3
Richard D. Aldred........................... 15.0
Joseph C. Bova.............................. 28.2
Robert L. Fugate............................ 26.6
Christopher C. Cook......................... 4.0
Savings Plan for Employees. Fidelity Federal Bank and Trust maintains a
savings plan for employees which is a qualified, tax-exempt profit sharing plan
with a cash-or-deferred feature under Section 401(k) of the Internal Revenue
Code. All employees who have attained age 21 and have completed one year of
employment during which they worked at least 1,000 hours are eligible to
participate. Funds included in the 401(k) plan are managed by an independent
trustee who is appointed by Fidelity Federal Bank and Trust's Board of
Directors.
Under the 401(k) plan, participants are permitted to make salary
reduction contributions to the 401(k) plan equal to a percentage of up to 15% of
compensation. For these purposes, "compensation" includes total compensation
(including salary reduction contributions made under the 401(k) plan or the
flexible benefits plan sponsored by Fidelity Federal Bank and Trust), but does
not include compensation in excess of the Code section 401(a)(17) limits. The
participants' salary reduction contribution may be matched by Fidelity Federal
Bank and Trust, in its discretion, in the amount of $.50 per $1.00, up to a
maximum of 6% of the participants' salary. All employee contributions and
earnings thereon are fully and immediately vested. All employer matching
contributions vest at the rate of 20% per year until a participant is 100%
vested after five years of service. Participants will also vest in employer
matching contributions upon the attainment of the normal retirement age of 65 or
later, death or disability, regardless of their years of service. A participant
may also withdraw salary reduction contributions in the event the participant
suffers a financial hardship.
The 401(k) plan permits employees to direct the investment of their own
accounts into various investment options, including our common stock. In
connection with the stock offering participants will be permitted to direct the
investment of all or a portion of their account in the stock offering.
Participants will direct the trustee how to vote their allocable shares of
common stock.
Plan benefits will be paid to each participant in either a lump sum or
installments over a period of up to 20 years, at the participant's election.
Upon distribution of a participant's account, the participant will have the
choice
75
<PAGE>
of having his account paid to him in common stock (to the extent invested
therein) or in cash. At December 31, 1999, the market value of the 401(k) plan
trust fund equaled approximately $7.8 million. The contribution to the 401(k)
plan for the plan year ended December 31, 1999, was $291,254. During the year
ended December 31, 1999, Fidelity Federal Bank and Trust contributed $4,800,
$4,080, $4,800, $4,294, $3,056 and $4,800 to the accounts of Messrs. Elhilow,
McDonald, Aldred, Bova, Fugate and Cook, respectively.
Supplemental Executive Retirement Plan. Fidelity Federal Bank and Trust
maintains a non-qualified supplemental executive retirement plan for certain
executives of Fidelity Federal Bank and Trust to compensate those executive
participants in Fidelity Federal Bank and Trust's retirement plan whose benefits
are limited by Section 415 or Section 401(a)(17) of the Internal Revenue Code.
As of December 31, 1999, there were 15 executive employees participating in the
supplemental executive retirement plan. The supplemental executive retirement
plan provides the designated executive employees with retirement benefits
generally equal to 80% of compensation (the "target percentage") reduced by the
employee's accrued benefit under Fidelity Federal Bank and Trust's retirement
plan and 50% of the social security benefits. Benefits under the supplemental
executive retirement plan vest over a period ending on normal retirement age
which is age 65 or age 60 with 30 years of service. Participants may increase
their target percentage by 2% of compensation for each year of service beyond
normal retirement age; however, a participant's target percentage may not exceed
100%. Participants may elect to have benefits paid as a single life annuity with
guaranteed 10-year term or as a joint and 100% or joint and 50% survivor
annuity. Benefits for participants who retire before normal retirement age are
reduced 5% per year for each year under normal retirement age.
Pre-retirement survivor benefits are provided for designated
beneficiaries of participants who do not survive until retirement in an amount
equal to the lump sum actuarial equivalent of the participant's accrued benefit
under the Plan. Pre-retirement benefits are payable in 120 equal monthly
installments.
The supplemental executive retirement plan is considered an unfunded
plan for tax and ERISA purposes. All obligations arising under the supplemental
executive retirement plan are payable from the general assets of Fidelity
Federal Bank and Trust; however, Fidelity Federal Bank and Trust has set up a
trust to ensure that sufficient assets will be available to pay the benefits
under the supplemental executive retirement plan.
The benefits paid under the supplemental executive retirement plan
supplement the benefits paid by the retirement plan. Fidelity Federal Bank and
Trust is unable to project the actual amounts to be paid to each participant
under the supplemental executive retirement plan. The following table indicates
the expected aggregate annual retirement benefit payable from the retirement
plan, supplemental executive retirement plan and 50% of estimated social
security benefits to supplemental executive retirement plan participants,
expressed in the form of a single life annuity for the final average salary and
benefit service classification specified below.
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<PAGE>
Years of Service and Benefit Payable at Retirement
--------------------------------------------------------
Final Average
Compensation 25 30 35 40
------------ -- -- -- --
$100,000 $ 80,000 $ 80,000 $ 80,000 $ 80,000
$125,000 100,000 100,000 100,000 100,000
$150,000 120,000 120,000 120,000 120,000
$175,000 140,000 140,000 140,000 140,000
$200,000 160,000 160,000 160,000 160,000
$225,000 180,000 180,000 180,000 180,000
$250,000 200,000 200,000 200,000 200,000
$275,000 220,000 220,000 220,000 220,000
$300,000 240,000 240,000 240,000 240,000
Messrs. Elhilow, McDonald, Aldred, Bova, Fugate and Cook have 36.9,
43.3, 15.0, 28.2, 26.6 and 4.0 years, respectively, of credited service under
the supplemental executive retirement plan as of December 31, 2000. Mr. Aldred's
normal retirement age under the supplemental executive retirement plan is 60.
Mr. Cook's normal retirement age under the supplemental executive retirement
plan is 62. Fidelity Federal Bank and Trust's cost attributable to the
supplemental executive retirement plan was $807,259 for the year ended December
31, 1999.
Long-Term Deferred Compensation Plan. Fidelity Federal Bank and Trust
maintains a long-term deferred compensation plan for selected officers
designated by the Board of Directors. As of December 31, 2000, the Board has
designated 15 executives to participate in the long-term deferred compensation
plan, including Messrs. Elhilow, McDonald, Aldred, Bova, Fugate and Cook. The
long-term deferred compensation plan provides the designated executives with the
option of deferring any percentage of compensation until retirement. In addition
to participant deferrals, Fidelity Federal Bank and Trust may contribute
annually an amount equal to 10% of each participant's compensation. For these
purposes, "compensation" includes salary payable during the calendar year,
before reduction for amounts deferred under this Plan or any other salary
reduction plan, but does not include bonuses, expense reimbursements, or
non-cash compensation. Participant and bank contributions are credited to a
separate account which earns "interest" at an annual rate equal to Moody's
corporate bond index plus 3%. Participants are at all times 100% vested in
participant deferrals but vest in Fidelity Federal Bank and Trust's
contributions over a period of years ending on each participant's normal
retirement age of 65 (or age 60 with 30 years of service). Benefits are paid,
beginning no later than 60 days following termination of employment with
Fidelity Federal Bank and Trust, either as a lump sum or, at the participant's
election made at the time of deferral, over a period of 60, 120 or 180 months.
Participants may alternatively elect to withdraw participant deferrals prior to
their normal retirement date, but no less than seven years following the end of
the deferral period in which the participant initially elected the early
withdrawal option. Early withdrawals are available from participant deferrals
only and may not be made from bank contributions or "interest" credited to a
participant's account. Although segregated "accounts" are set up for
participants, all amounts credited to a participant's account remain subject to
the claims of Fidelity Federal Bank and Trust's general creditors. For the year
ended December 31, 1999, Fidelity Federal Bank and Trust vested and funded
$120,116, $32,275, $26,627, $32,207, $23,736 and $8,406 to the account balances
of Messrs. Elhilow, McDonald, Aldred, Bova, Fugate and Cook, respectively.
Senior Management Performance Incentive Award Program. Fidelity Federal
Bank and Trust maintains a senior management performance incentive award program
to reward selected members of senior management (i.e., senior officers, vice
presidents and above) for their services which contributed to Fidelity Federal
Bank and Trust's success during the year. Under the senior management
performance incentive award program,
77
<PAGE>
Fidelity Federal Bank and Trust annually sets aside a varying percentage of net
profits and allocates such sums to key management employees in accordance with
criteria annually determined by the plan committee. Participants elect either
immediate receipt of annual awards or deferral of such awards in a non-qualified
deferred compensation plan for a designated period of years, or until
retirement. Amounts allocated to participants under the non-qualified deferred
compensation plan will be invested among ten investment funds, including an
Employer Stock Fund. Accordingly, Fidelity Federal Bank and Trust no longer
provides funds to increase compensation deferred under the plan. A participant's
benefit under the plan will equal the value of the benefit booked to the
participant's account. At the time of distribution, deferred amounts will be
received in a lump sum or in installments.
Supplemental Survivor Benefit Plan. Fidelity Federal Bank and Trust
maintains a Supplemental Survivor t Benefit Plan that provides selected bank
officers with life insurance in an amount initially equal to three times such t
officer's annual compensation. For these purposes, "officer" means any
individual who has achieved the rank of t corporate secretary, vice president or
higher. Fidelity Federal Bank and Trust is the owner and beneficiary of the life
t insurance policies; however, each participant is permitted to designate a
beneficiary or beneficiaries to whom benefits under the plan would be paid by
Fidelity Federal Bank and Trust in the event of such officer's death. If a
participant does not designate a beneficiary, Fidelity Federal Bank and Trust
will pay the participant's benefits to his or her spouse, children, or estate.
The plan is intended to qualify as a "top-hat" plan exempt from the
participation, vesting, funding and fiduciary requirements of Title I of ERISA.
Supplemental Disability Income. Fidelity Federal Bank and Trust also
has purchased long-term disability income insurance policies for the benefit of
Messrs. Elhilow, McDonald, Aldred, Bova, Fugate and Cook to provide disability
income in an amount equal to the lesser of $10,000 per month or 60% of such
participant's basic monthly salary less disability income payable from other
sources. Benefits are payable for periods of up to 60 months for participants
who become disabled prior to age 60 and for progressively shorter periods for
participants who become disabled after attaining age 60.
Employee Stock Ownership Plan and Trust. Fidelity Federal Bank and
Trust maintains an employee stock ownership plan and related trust for eligible
employees. The employee stock ownership plan is a tax-qualified plan subject to
the requirements of ERISA and the Code. Employees with a 12-month period of
employment with Fidelity Federal Bank and Trust during which they worked at
least 1,000 hours and who have attained age 21 are eligible to participate
(employees who satisfy these requirements after 6 months of employment will be
entitled to participate earlier). The employee stock ownership plan was
originally funded from borrowings from an unrelated third-party lender to
purchase 193,200 shares of common stock, which shares serve as collateral for
the loan. On June 30, 1997, the loan was purchased and is now held by Fidelity
Bankshares, Inc. The loan is being repaid principally from Fidelity Federal Bank
and Trust's contributions to the employee stock ownership plan. Shares purchased
by the employee stock ownership plan are held in a suspense account for
allocation among participants as the loan is repaid.
Contributions to the employee stock ownership plan and shares released
from the suspense account in an amount proportional to the repayment of the
employee stock ownership plan loan are allocated among participants on the basis
of compensation in the year of allocation, up to an annual adjusted maximum
level of compensation. Benefits generally become 100% vested after five years of
credited service. Forfeitures are reallocated among remaining participating
employees in the same proportion as contributions. Benefits may be payable upon
death, retirement, early retirement, disability or separation from service.
Fidelity Federal Bank and Trust's contributions to the employee stock ownership
plan are not fixed, so benefits payable under the employee stock ownership plan
cannot be estimated.
The Board of Directors established a committee consisting of all of the
non-employee directors of Fidelity Federal Bank and Trust to administer the
employee stock ownership plan, and has appointed an unrelated corporate trustee
for the employee stock ownership plan. The Benefits Committee may instruct the
trustee regarding investment of funds contributed to the employee stock
ownership plan. The employee stock ownership plan trustee will generally vote
all shares of common stock held under the employee stock ownership plan in
accordance with the written instructions of the employee stock ownership plan
committee. In certain circumstances, however, the trustee must vote all
allocated shares held in the employee stock ownership plan in accordance with
the instructions of the participating employees, and unallocated shares and
shares held in the suspense account in a manner calculated to
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<PAGE>
most accurately reflect the instructions the employee stock ownership plan
trustee has received from participants regarding the allocated stock, subject to
and in accordance with the fiduciary duties under ERISA owed by the trustee for
the plan to the employee stock ownership plan participants. Under ERISA, the
Secretary of Labor is authorized to bring an action against the plan trustee for
the failure of the trustee to comply with its fiduciary responsibilities. Such a
suit could seek to enjoin the trustee from violating its fiduciary
responsibilities and could result in the imposition of civil penalties or
criminal penalties if the breach is found to be willful.
In connection with the stock offering, the employee stock ownership
plan intends to obtain a loan from Fidelity Bankshares, Inc. in order to
purchase up to 6% of the shares issued in the stock offering. It is anticipated
that the loan will be repaid over a period of up to 10 years.
Stock Option Plan. Options to purchase 227,700 shares of common stock
were granted on January 7, d 1994, pursuant to the Fidelity Federal Savings Bank
of Florida 1994 Incentive Stock Option Plan. The options (with d limited rights)
provide for an exercise price of $9.09 per share (adjusted for a 10% stock
dividend distributed d November 30, 1995). Set forth below is information
relative to options granted under the 1994 Incentive Stock d Option Plan to
named executive officers.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
==================================================================================================================
Number of Securities
Shares Acquired Value Underlying Unexercised Value of Unexercised In-
Name Upon Exercise Realized (1) Options at The-Money Options at
Fiscal Year-End Fiscal Year-End (2)
-----------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vince A. Elhilow 10,000 $76,600 20,000/0 $100,800/0
------------------------------------------------------------------------------------------------------------------
J. Robert McDonald 6,140 $46,870 0/0 0/0
------------------------------------------------------------------------------------------------------------------
Richard D. Aldred 1,500 $12,248 6,724/0 $ 33,889/0
------------------------------------------------------------------------------------------------------------------
Joseph C. Bova 0 0 9,655/0 $ 48,661/0
------------------------------------------------------------------------------------------------------------------
Robert L. Fugate 0 0 4,862/0 $ 24,504/0
------------------------------------------------------------------------------------------------------------------
Christopher C. Cook 0 0 2,996/0 $ 15,100/0
==================================================================================================================
</TABLE>
(1) Equals the difference between the aggregate exercise price of the options
exercised and the aggregate fair market value of the shares of common stock
received upon exercise computed using the price of the common stock as
quoted on the Nasdaq National Market at the time of exercise.
(2) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of common stock that
would be received upon exercise, assuming such exercise occurred on
December 31, 1999, at which date the closing price of the common stock as
quoted on the Nasdaq National Market was at $14.13.
Stock Option Plan For Outside Directors. Options to purchase 75,900
shares of common stock were granted to outside directors on January 7, 1994
under the Fidelity Federal Savings Bank of Florida 1994 Stock Option Plan for
Outside Directors.
The options provide for an exercise $9.09 per share which was equal to
the fair market value of the common stock on the date of grant. All options
granted under the directors' stock option plan expire upon the earlier of ten
years from the date of grant or one year following the date the optionee ceases
to be a director. Options for 15,180 shares of common stock have been awarded to
each of Directors Warren, Brown, and Beaty. The directors' stock option plan
further provides that each new director shall be granted options to purchase 100
shares of common
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<PAGE>
stock to the extent options remain available in, or are returned to, the
directors' stock option plan. Presently, there are no options reserved for
future grant.
Benefits to Be Considered Following Completion of the Conversion
Stock Option Plan. We intend to submit for stockholder approval, no
earlier than six months after the completion of the conversion, a new stock
option plan for directors and officers of Fidelity Federal Bank and Trust and of
Fidelity Bankshares, Inc. If approved by the stockholders, the new stock option
plan would reserve 10% of the shares sold in the offering for issuance when
options granted to officers and directors are exercised. Ten percent of the
shares issued in the offering would amount to _________ shares, _________
shares, _________ shares or _________ shares at the minimum, mid-point, maximum
and adjusted maximum of the offering range, respectively. No options would be
granted under the new stock option plan until stockholder approval of the plan
is received. In the event that shares underlying options come from authorized
but unissued shares, stockholders would experience dilution of approximately
______% in their ownership interest in Fidelity Bankshares, Inc. at the
mid-point of the offering range
The exercise price of the options granted under the new stock option
plan will be equal to the fair market value of Fidelity Bankshares, Inc. common
stock on the date of grant of the stock options. If the stock option plan is
adopted within one year following the conversion, options will vest at a rate of
20% at the end of each 12 months of service with Fidelity Federal Bank and Trust
after the date of grant. Options granted under the stock option plan would be
adjusted for capital changes such as stock splits and stock dividends. Awards
will be 100% vested upon termination of employment due to death or disability,
and if the stock option plan is adopted more than one year after the conversion,
awards would be 100% vested upon normal retirement or a change in control of
Fidelity Federal Bank and Trust or Fidelity Bankshares, Inc. Under Office of
Thrift Supervision rules, if the stock option plan is adopted within one year of
the conversion, no individual officer may receive more than 25% of the awards
under the plan,no non-employee director may receive more than 5% of the awards
under the plan, and all non-employee directors as a group can receive no more
than 30% of the awards under the plan in the aggregate.
The stock option plan would be administered by a committee of
non-employee members of the Fidelity Bankshares, Inc.'s board of directors.
Options granted under the stock option plan to employees may be "incentive"
stock options, designed to result in a beneficial tax treatment to the employee
but no tax deduction to Fidelity Bankshares, Inc. Non-qualified stock options
may also be granted to employees under the stock option plan, and will be
granted to the non-employee directors who receive stock options. In the event an
option recipient terminated his employment or service as an employee or
director, the options would terminate during certain specified periods.
Stock Recognition Plan. We also intend to request stockholder approval
of a new stock recognition plan, no earlier than six months after the completion
of the conversion. If approved by stockholders, the new stock recognition plan
would, if implemented within one year of conversion, reserve 4% of the shares
sold in the offering or ______ shares, ______ shares, ______ or ______ shares at
the minimum, mid-point, maximum and adjusted maximum of the offering range,
respectively. The officers and directors will be awarded common stock under the
stock recognition plan without having to pay cash for the shares. No awards
would be made under the stock recognition plan until the plan is approved by
stockholders. If the shares awarded under the stock recognition plan come from
authorized but unissued shares totaling 4% of the shares sold in the offering,
stockholders would experience dilution of approximately ____% in their ownership
interest in Fidelity Bankshares, Inc. at the mid-point of the offering range.
Awards under the stock recognition plan would be nontransferable and
nonassignable. Under OTS rules, if the stock recognition plan is adopted within
one year following the conversion, the shares which are subject to an award
would vest at a rate of 20% at the end of each full 12 months of service with
Fidelity Federal Bank and Trust after the date of grant of the award. Awards
would be adjusted for capital changes such as stock dividends and stock splits.
Awards would be 100% vested upon termination of employment or service due to
death or disability, and if the stock recognition plan is adopted more than one
year after the conversion, awards would be 100% vested upon normal retirement or
a change in control of Fidelity Federal Bank and Trust or Fidelity Bankshares,
Inc. If employment or service were to terminate for other reasons, the award
recipient would forfeit any nonvested award. If employment or service is
terminated for cause (as defined), shares not already delivered would be
forfeited. Under
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<PAGE>
OTS rules, if the stock recognition plan is adopted within one year of the
conversion, no individual officer may receive more than 25% of the awards under
the plan, no non-employee director may receive more than 5% of the awards under
the plan, and all non-employee directors as a group may receive no more than 30%
of the awards under the plan in the aggregate.
The recipient of an award will recognize income equal to the fair
market value of the stock earned, determined as of the date of vesting, unless
the recipient makes an election under ss. 83(b) of the Code to be taxed earlier.
The amount of income recognized by the recipient would be a deductible expense
for tax purposes for Fidelity Bankshares, Inc. If the stock recognition plan is
adopted within one year following the conversion, dividends and other earnings
will accrue and be payable to the award recipient when the shares vest. If the
stock recognition plan is adopted within one year following the conversion,
shares not yet vested will be voted by the trustee of the stock recognition
plan, taking into account the best interests of the award recipients. If the
stock recognition plan is adopted more than one year following the conversion,
dividends declared on unvested shares will be distributed to the recipient when
paid, and the recipient will be entitled to vote the unvested shares.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table provides the beneficial ownership of our common
stock held by our directors and executive officers, individually and as a group
as of September 30, 2000.
Number of Shares Percent of All Percent of
Name of of Common Stock Common Stock Publicly Held
Beneficial Owner Beneficially Owned(1) Outstanding(1) Common Stock(2)
---------------- --------------------- -------------- ---------------
Vince A. Elhilow(3) 132,460 2.04% 4.50%
Joseph B. Shearouse, Jr. 62,320 0.96 2.73
Keith D. Beaty(4) 32,393 0.50 1.11
Paul C. Bremer 2,000 0.03 0.06
F. Ted Brown, Jr.(5) 32,395 0.50 1.11
Donald E. Warren, M.D.(6) 28,259 0.43 0.97
Karl H. Watson 1,000 0.01 0.03
Richard D. Aldred(7) 38,624 0.59 1.33
J. Robert McDonald(8) 50,880 0.78 1.75
Joseph C. Bova(9) 28,624 0.43 0.98
Robert L. Fugate(10) 42,808 0.66 1.47
Christopher C. Cook(11) 7,169 0.11 0.25
All directors and
executive Officers as
a group.(12) 458,932 7.06% 15.75%
-----------------
(1) Based upon 6,503,584 shares outstanding.
(2) Based upon 2,914,584 shares held by persons other than Fidelity Bankshares,
Inc.
(3) Includes 20,000 shares of common stock subject to options pursuant to the
stock option plan that may be exercised within 60 days of the record date
and 28,810 shares held by the management performance plan. Includes 3,993
shares allocated under the Fidelity Federal Bank and Trust's employee stock
ownership plan. Includes 11,852 shares held under the savings plan for
employees for the benefit of Mr. Elhilow.
(4) Includes 15,180 shares subject to options that may be exercised within 60
days pursuant to the directors' stock option plan.
(5) Includes 8,000 shares subject to options that may be exercised within 60
days pursuant to the directors' stock option plan.
(6) Includes 15,180 shares subject to options that may be exercised within 60
days pursuant to the directors' stock option plan.
(7) Includes 6,724 shares of common stock subject to options pursuant to the
stock option plan and 8,654 shares held by the management performance plan.
Includes 3,780 shares allocated under the Fidelity Federal Bank and Trust's
employee stock ownership plan. Includes 3,843 shares held under the savings
plan for employees for the benefit of Mr. Aldred.
(footnotes continued on next page)
81
<PAGE>
(8) Includes 18,243 shares held by the management performance plan. Includes
3,283 shares allocated under the Fidelity Federal Bank and Trust's employee
stock ownership plan. Includes 8,123 shares held under the savings plan for
employees for the benefit of Mr. McDonald.
(9) Includes 9,655 shares of common stock subject to options pursuant to the
stock option plan and 5,329 shares held by the management performance plan.
Includes 3,665 shares allocated under the Fidelity Federal Bank and Trust's
employee stock ownership plan. Includes 6,996 shares held under the savings
plan for employees for the benefit of Mr. Bova.
(10) Includes 4,862 shares of common stock subject to options pursuant to the
stock option plan and 7,819 shares held by the management performance plan.
Includes 3,249 shares allocated under the Fidelity Federal Bank and Trust's
employee stock ownership plan. Includes 12,478 shares held under the
savings plan for employees for the benefit of Mr. Fugate.
(11) Includes 1,996 shares subject to options that may be exercised pursuant to
the directors' plan. Includes 573 shares allocated under the Fidelity
Federal Bank and Trust's employee stock ownership plan.
(12) Unless otherwise indicated, includes shares held directly by the
individuals as well as by spouses, in trust, and other indirect forms of
ownership over which shares the individuals effectively exercise sole or
shared voting and investment power. Includes 38,360 shares of common stock
which outside directors of Fidelity Bankshares, Inc. have the right to
acquire within 60 days of the record date pursuant to the exercise of stock
options granted under the Fidelity Federal Bank and Trust stock option plan
for outside directors.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth, for each of Fidelity Bankshares, Inc.'s
directors and executive officers and for all of the directors and executive
officers as a group, the following information:
(1) the number of exchange shares to be held upon consummation of the
conversion, based upon their beneficial ownership of Fidelity Bankshares, Inc.
common stock as of September 30, 2000;
(2) the proposed purchases of subscription shares, assuming sufficient
shares are available to satisfy their subscriptions; and
(3) the total amount of Fidelity Bankshares, Inc. common stock to be
held upon consummation of the conversion.
In each case, it is assumed that subscription shares are sold at the
mid-point of the offering range. Because of limitations on the purchase of
subscription shares, directors and executive officers may be precluded from
purchasing subscription shares if the offering is sold at the maximum or the
maximum, as adjusted, of the offering range. See "The Conversion--Limitations on
Common Stock Purchases."
<TABLE>
<CAPTION>
Proposed Purchases of Total Common Stock
Conversion of Stock (1) to be Held
Number of ----------------------- ------------------------
Exchange Shares Number Number Percentage
Name of Beneficial Owner to be Held(2)(3) of Shares Amount of Shares of Total
------------------------ ---------------- --------- ------ --------- --------
<S> <C> <C> <C> <C> <C>
Vince A. Elhilow
Joseph B. Shearouse, Jr.
Keith D. Beaty
Paul C. Bremer
F. Ted Brown, Jr.
Donald E. Warren, M.D.
Karl H. Watson
Richard D. Aldred
J. Robert McDonald
Joseph C. Bova
Robert L. Fugate
Christopher C. Cook
</TABLE>
82
<PAGE>
THE CONVERSION
The Boards of Directors of Fidelity Bankshares, Inc. and Fidelity
Bankshares, MHC have approved the plan of conversion. The plan of conversion
must also be approved by the members of Fidelity Bankshares, MHC, and the
stockholders of Fidelity Bankshares, Inc. A special meeting of members and a
special meeting of stockholders has been called for this purpose. The Office of
Thrift Supervision has also approved the plan, however, such approval does not
constitute a recommendation or endorsement of the plan of conversion by that
agency.
General
The Board of Directors of Fidelity Bankshares, MHC adopted the plan of
conversion on November 21, 2000. Pursuant to the plan of conversion, Fidelity
Bankshares, MHC will be merged into Fidelity Federal Bank and Trust, and
Fidelity Bankshares, MHC will no longer exist. Pursuant to the plan, Fidelity
Bankshares, Inc. also will be succeeded by a new Delaware corporation with the
same name. The new Delaware corporation has been established solely to
facilitate the conversion. As part of the conversion, shares of common stock of
Fidelity Bankshares, Inc. representing the current ownership interest of
Fidelity Bankshares, MHC, will be offered for sale in the subscription offering.
Following the completion of the conversion, all of the capital stock of Fidelity
Federal Bank and Trust will be held by Fidelity Bankshares, Inc.
Under the plan of conversion, each share of Fidelity Bankshares, Inc.
common stock held by persons other than Fidelity Bankshares, MHC will be
converted automatically into and become a right to receive new shares of
Fidelity Bankshares, Inc. common stock determined pursuant to the exchange
ratio. The exchange ratio will ensure that immediately after the conversion and
the share exchange, the public stockholders of Fidelity Bankshares, Inc. common
stock will own the same aggregate percentage of Fidelity Bankshares, Inc. common
stock that they owned immediately prior to the conversion.
Fidelity Bankshares, Inc. intends to retain $29.6 million of the net
proceeds (at the minimum) of the offering and to contribute the balance of the
net proceeds of the offering to Fidelity Federal Bank and Trust. The conversion
will be effected only upon completion of the sale of all of the shares of common
stock of Fidelity Bankshares, Inc. to be issued pursuant to the plan of
conversion.
The plan of conversion provides generally that Fidelity Bankshares,
Inc. will offer shares of common stock for sale in the subscription offering to
Eligible Account Holders, Fidelity Federal Bank and Trust's tax-qualified plans,
including the employee stock ownership plan, supplemental eligible account
holders and other members. Subject to the prior rights of these holders of
subscription rights, Fidelity Bankshares, Inc. will offer common stock for sale
in a community offering to members of the general public, with a preference
given to the public stockholders of Fidelity Bankshares, Inc. common stock as of
___________, 2001, and then to persons residing in Palm Beach, Martin, Indian
River and St. Lucie Counties. Fidelity Bankshares, Inc. has the right to accept
or reject, in whole or in part, any orders to purchase shares of the common
stock received in the community offering. The community offering must be
completed within 45 days after the completion of the subscription offering
unless otherwise extended by the Office of Thrift Supervision. See "--Community
Offering."
The number of shares of common stock to be issued in the offering will
be determined based upon an independent appraisal of the estimated pro forma
market value of the common stock of Fidelity Bankshares, Inc. All shares of
common stock to be issued and sold in the offering will be sold at the same
price. The independent valuation will be updated and the final number of the
shares to be issued in the offering will be determined at the completion of the
offering. See "--Stock Pricing and Number of Shares to be Issued" for more
information as to the determination of the estimated pro forma market value of
the common stock.
The appraisal was prepared pursuant to written guidelines promulgated
by the Office of Thrift Supervision. RP Financial made its appraisal in reliance
upon the information contained in this document, including the financial
statements. RP Financial also considered the following factors, among others:
o the present and projected operating results and financial
condition of Fidelity Bankshares, Inc. and the economic and
demographic conditions in Fidelity Bankshares, Inc.'s existing
market areas;
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<PAGE>
o certain historical, financial and other information relating to
Fidelity Bankshares, Inc.;
o a comparative evaluation of the operating and financial
characteristics of Fidelity Bankshares, Inc. with those of other
similarly situated publicly traded savings institutions located
in Florida and other regions of the United States;
o the aggregate size of the offering of the common stock;
o the impact of the conversion on Fidelity Bankshares, Inc.'s net
worth and earnings potential;
o the proposed dividend policy of Fidelity Bankshares, Inc.; and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
The appraisal considered the pro forma impact of the offering.
Consistent with the Office of Thrift Supervision appraisal guidelines, the
appraisal applied three primary methodologies: the pro forma price-to-book value
approach applied to both reported book value and tangible book value; the pro
forma price-to-earnings approach applied to reported and core earnings; and the
pro forma price-to-asset approach. The market value ratios applied in the three
methodologies were based upon the current market valuations of the peer group
companies, subject to valuation adjustments applied by RP Financial, LC to
account for differences between Fidelity Bankshares, Inc. and the peer group. RP
Financial, LC placed the greatest emphasis on the price-to-earnings and
price-to-book approaches in estimating pro forma market value. RP Financial's
analysis provides an approximation of the pro forma market value of Fidelity
Bankshares, Inc. and Fidelity Federal Bank and Trust as converted based on the
valuation approaches applied and the assumptions outlined in its report.
Included in its report were certain assumptions as to the pro forma earnings of
Fidelity Bankshares, Inc. after the conversion that were utilized in determining
the appraised value. These assumptions included estimated expenses and an
assumed after-tax rate of return on the net conversion proceeds as described
under "Pro Forma Tables," purchases by the employee stock ownership plan of an
amount equal to 6% of the common stock issued in the offering and purchases in
the open market by the recognition plan of a number of shares equal to 4% of the
common stock issued in the offering at the $10.00 purchase price. See "Pro Forma
Tables" for additional information concerning theses assumptions. The use of
different assumptions may yield different results.
The following is a brief summary of the conversion and is qualified in
its entirety by reference to the provisions of the plan of conversion. A copy of
the plan of conversion is available for inspection at each branch of Fidelity
Federal Bank and Trust and at the Southeast Regional and Washington, D.C.
offices of the Office of Thrift Supervision. The plan of conversion is also
filed as an exhibit to the application to convert from mutual to stock form of
which this prospectus is a part, copies of which may be obtained from the Office
of Thrift Supervision. See "Additional Information."
Purposes of Conversion
Fidelity Federal Bank and Trust reorganized into a mutual holding
company in 1994 and sold only a minority interest in the bank based on its
capital needs at that time. If Fidelity Federal Bank and Trust had undertaken a
full conversion to public ownership in 1994, it would have offered 100% of its
commons stock for sale, and it would have raised more capital than management
believes could have been effectively reinvested in its market area. Fidelity
Bankshares, Inc. now has the need for additional capital, and it will sell the
portion of its shares now owned by Fidelity Bankshares, MHC to the public. This
will complete the transition to full public ownership.
The potential impact of the conversion upon Fidelity Federal Bank and
Trust's capital base is significant. Fidelity Federal Bank and Trust had equity
in accordance with generally accepted accounting principles of $114.6 million,
or 6.0% of assets at September 30, 2000. Assuming that $71.7 million, the
mid-point of the $61.0 million to $82.5 million offering range established by
the board of directors based on the estimated pro forma market value of the
common stock, of gross proceeds are realized from the sale of common stock, and
assuming that $30.6 million of the net proceeds are contributed to Fidelity
Federal Bank and Trust as additional capital, Fidelity Federal Bank and Trust's
ratio of capital to pro forma assets, calculated under generally accepted
accounting principles, will increase to 7.6%. The investment of the net proceeds
from the sale of the common stock will provide Fidelity Federal Bank
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and Trust with additional income to further increase its capital position. The
additional capital may also assist Fidelity Federal Bank and Trust in offering
new programs and expanded services to its customers.
After completion of the conversion and depending on market conditions,
the unissued common and preferred stock authorized by the certificate of
incorporation of Fidelity Bankshares, Inc. will permit it to raise additional
equity capital through further sales of securities, and to issue securities in
connection with possible acquisitions. At the present time, we have no plans
with respect to additional offerings of securities, other than the issuance of
additional shares upon exercise of stock options or the possible issuance of
authorized but unissued shares to our stock benefit programs.
Approvals Required
The affirmative vote of a majority of the total eligible votes of the
members of Fidelity Bankshares, MHC at the special meeting of members is
required to approve the plan of conversion. By their approval of the plan of
conversion, the members of Fidelity Bankshares, MHC will also be deemed to
approve the merger of Fidelity Bankshares, MHC into Fidelity Federal Bank and
Trust. The affirmative vote of the holders of at least two-thirds of the
outstanding common stock of Fidelity Bankshares, Inc. and a majority of the
publicly held shares of Fidelity Bankshares, Inc. common stock is required to
approve the plan of conversion.
Share Exchange Ratio
Office of Thrift Supervision regulations provide that in a conversion
of a mutual holding company to stock form, the minority stockholders will be
entitled to exchange their shares of subsidiary savings bank common stock for
common stock of the converted holding company, provided that the mutual holding
company demonstrates to the satisfaction of the Office of Thrift Supervision
that the basis for the exchange is fair and reasonable. The board of directors
of Fidelity Bankshares, Inc. has determined that each publicly held share of
Fidelity Bankshares, Inc. common stock will, on the effective date of the
conversion, be converted automatically into and become the right to receive a
number of new shares of Fidelity Bankshares, Inc. common stock determined
pursuant to the exchange ratio. Consequently, the public stockholders of
Fidelity Bankshares, Inc. common stock will own the same percentage of common
stock in Fidelity Bankshares, Inc. after the conversion as they held in Fidelity
Bankshares, Inc. immediately prior to the conversion, subject to additional
purchases, or the receipt of cash in lieu of fractional shares. At September 30,
2000, there were 6,503,584 shares of Fidelity Bankshares, Inc. common stock
outstanding, and 2,914,584 shares, or 44.81% of the total were publicly held.
Based on the percentage of Fidelity Bankshares, Inc. common stock held by the
public and the offering range, the exchange ratio is expected to range from
approximately 1.6991 exchange shares for each publicly held share of Fidelity
Bankshares, Inc. at the minimum of the offering range to 2.2987 exchange shares
for each publicly held share of Fidelity Bankshares, Inc. at the adjusted
maximum of the offering range.
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If you are now a stockholder of Fidelity Bankshares, Inc., your
existing shares will be cancelled and exchanged for new shares in Fidelity
Bankshares, Inc. The number of shares you will get will be based on an exchange
ratio determined as of the closing of the conversion. The actual number of
shares you receive will depend upon the number of shares we sell in our
offering, which in turn will depend upon the final appraised value of Fidelity
Bankshares, Inc. and Fidelity Bankshares, MHC. The following table shows how the
exchange ratio will adjust, based on the number of shares sold in our offering.
The table also shows how many shares a hypothetical owner of Fidelity
Bankshares, Inc. common stock would receive in the exchange, adjusted for the
number of shares sold in the offering.
<TABLE>
<CAPTION>
Shares to be exchanged for Total shares Shares of Fidelity
Shares to be sold Fidelity Bankshares, Inc. of Bankshares, Inc.
in this offering common stock common stock that would be
---------------------------- ------------------------ to be Exchange exchanged for
Amount Percent Amount Percent outstanding ratio 100 shares
--------- --------- --------- ----------- -------------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum............ 6,097,938 55.19% 4,952,062 44.81% 11,050,000 1.6991 169.91
Mid-point.......... 7,174,044 55.19 5,825,956 44.81 13,000,000 1.9989 199.89
Maximum............ 8,250,151 55.19 6,699,849 44.81 14,950,000 2.2987 229.87
15% above Maximum.. 9,487,674 55.19 7,704,826 44.81 17,192,500 2.6435 264.35
</TABLE>
Options to purchase shares of Fidelity Bankshares, Inc. common stock
will also be converted into and become options to purchase Fidelity Bankshares,
Inc. common stock. At September 30, 2000, there were outstanding options to
purchase __________ shares of Fidelity Bankshares, Inc. common stock. The number
of shares of common stock to be received upon exercise of these options will be
determined pursuant to the exchange ratio. The aggregate exercise price,
duration, and vesting schedule of these options will not be affected. At
September 30, 2000, options to purchase __________ shares were vested. If all of
these options to purchase shares of Fidelity Bankshares, Inc. common stock are
exercised prior to the effective date, then there will be:
(1) an increase in the percentage of Fidelity Bankshares, Inc. common
stock held by the public stockholders of Fidelity Bankshares, Inc.
common stock to _____%;
(2) an increase in the number of shares of common stock issued to the
public stockholders of Fidelity Bankshares, Inc. common stock in the
share exchange; and
(3) a decrease in the exchange ratio to ___________, __________,
__________, and __________ at the minimum, mid-point, maximum and
adjusted maximum, respectively, of the offering range.
Executive officers and directors of Fidelity Bankshares, Inc. do not intend
to exercise options prior to the effective date.
Effect of the Conversion on Minority Stockholders
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
conversion will increase the stockholders' equity of the public stockholders of
Fidelity Bankshares, Inc. common stock. At September 30, 2000, the stockholders'
equity per share of Fidelity Bankshares, Inc. common stock including shares held
by Fidelity Bankshares, MHC was $13.36. As adjusted at that date for the
exchange ratio, stockholders' equity per share would be $10.17, $9.23, $8.44 and
$7.69 at the minimum, mid-point, maximum, and adjusted maximum, of the offering
range. Based on the pro forma information set forth for September 30, 2000, in
"Pro Forma Data," pro forma stockholders' equity per share following the
conversion will be $12.81, $11.63, $10.75, and $9.99 at the minimum, mid-point,
maximum and adjusted maximum, respectively, of the offering range.
Effect on Earnings per Share of the Shares Exchanged. The conversion
will also affect the public stockholders of Fidelity Bankshares, Inc. common
stock pro forma earnings per share. For the nine months ended September 30,
2000, basic earnings per share of Fidelity Bankshares, Inc. common stock was
$1.01, including shares held by Fidelity Bankshares, MHC. As adjusted for the
exchange ratio, earnings per share would range from $0.61 to $0.39,
respectively, for the minimum to the adjusted maximum of the offering range.
Based on the pro forma information set forth for the nine months ended September
30, 2000, in "Pro Forma Data," earnings per share of common stock following the
conversion will range from $0.71 to $0.49, respectively, for the minimum to the
adjusted maximum of the offering range.
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Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate subscription price of the shares of common stock received in exchange
for the publicly held shares of Fidelity Bankshares, Inc. common stock is $49.5
million, $58.3 million, $67.0 million, and $77.0 million at the minimum,
mid-point, maximum and adjusted maximum, respectively, of the offering range.
The last trade of Fidelity Bankshares, Inc. common stock on November 21, 2000,
the last trading day preceding the announcement of the conversion, was $_____
per share, and the price at which Fidelity Bankshares, Inc. common stock last
traded on __________, 2001 was $_____ per share.
Dissenters' and Appraisal Rights. Under Office of Thrift Supervision
regulations, the public stockholders of Fidelity Bankshares, Inc. common stock
will not have dissenters' rights or appraisal rights in connection with the
exchange of publicly held shares of Fidelity Bankshares, Inc. common stock as
part of the conversion.
Effects of Conversion on Depositors, Borrowers and Members
General. Each depositor in Fidelity Federal Bank and Trust has both a
deposit account in Fidelity Federal Bank and Trust and a pro rata ownership
interest in the net worth of Fidelity Bankshares, MHC based upon the balance in
his or her account. This interest may only be realized in the event of a
complete liquidation of Fidelity Bankshares, MHC and Fidelity Federal Bank and
Trust. However, this ownership interest is tied to the depositor's account and
has no tangible market value separate from the deposit account. Any depositor
who opens a deposit account obtains a pro rata ownership interest in Fidelity
Bankshares, MHC without any additional payment beyond the amount of the deposit.
A depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of Fidelity Bankshares, MHC, which is lost to the extent that the balance in the
account is reduced or closed.
Consequently, depositors in a stock subsidiary of a mutual holding
company normally have no way of realizing the value of their ownership interest,
which has realizable value only in the unlikely event that Fidelity Bankshares,
MHC and Fidelity Federal Bank and Trust are liquidated. If this occurs, the
depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves of Fidelity Bankshares, MHC after other claims,
including claims of depositors to the amounts of their deposits, are paid.
Continuity. While the conversion is being accomplished, the normal
business of Fidelity Federal Bank and Trust of accepting deposits and making
loans will continue without interruption. Fidelity Federal Bank and Trust will
continue to be regulated by the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation. After the conversion, Fidelity Federal Bank and
Trust will continue to provide services for depositors and borrowers under
current policies by its present management and staff. The directors serving
Fidelity Bankshares, Inc. at the time of the conversion will serve as directors
of Fidelity Bankshares, Inc. after the conversion.
Effect on Deposit Accounts. Under the plan of conversion, each
depositor in Fidelity Federal Bank and Trust at the time of the conversion will
automatically continue as a depositor after the conversion, and each of the
deposit accounts will remain the same with respect to deposit balance, interest
rate and other terms. Each such account will be insured by the Federal Deposit
Insurance Corporation to the same extent as before the conversion. Depositors
will continue to hold their existing certificates, passbooks and other evidences
of their accounts.
Effect on Loans. No loan outstanding from Fidelity Federal Bank and
Trust will be affected by the conversion, and the amount, interest rate,
maturity and security for each loan will remain as they were contractually fixed
prior to the conversion.
Effect on Voting Rights of Members. At present, all depositors of
Fidelity Federal Bank and Trust are members of, and have voting rights in,
Fidelity Bankshares, MHC as to all matters requiring membership action. Upon
completion of the conversion, depositors and borrowers will cease to be members
of Fidelity Bankshares, MHC and will no longer be entitled to vote at meetings
of Fidelity Bankshares, MHC. Upon completion of the conversion, all voting
rights in Fidelity Federal Bank and Trust will be vested in Fidelity Bankshares,
Inc. as the sole stockholder of Fidelity Federal Bank and Trust. Exclusive
voting rights with respect to Fidelity Bankshares, Inc. will be vested in the
holders of common stock. Depositors of Fidelity Federal Bank and Trust will not
have voting rights after the conversion, except to the extent that they become
stockholders of Fidelity Bankshares, Inc. through the purchase of common stock.
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Tax Effects. Fidelity Bankshares, Inc. will receive an opinion of
counsel or tax advisor with regard to federal and state income taxation to the
effect that the adoption and implementation of the plan of conversion will not
be taxable for federal or state income tax purposes to Fidelity Bankshares, MHC,
Fidelity Bankshares, Inc., the minority stockholders of Fidelity Bankshares,
Inc., members of Fidelity Bankshares, MHC, eligible account holders or Fidelity
Federal Bank and Trust. See "--Tax Aspects."
Effect on Liquidation Rights. If Fidelity Federal Bank and Trust were
to liquidate prior to the conversion, all claims of creditors of Fidelity
Federal Bank and Trust, including those of depositors to the extent of their
deposit balances, would be paid first. Thereafter, if there were any assets of
Fidelity Federal Bank and Trust remaining, these assets would be distributed to
Fidelity Bankshares, MHC, to the extent of its stock ownership interest in
Fidelity Bankshares, Inc. Were Fidelity Bankshares, MHC to liquidate, all claims
of creditors would be paid first. Thereafter, if there were any assets of
Fidelity Bankshares, MHC remaining, members of Fidelity Bankshares, MHC would
receive the remaining assets, pro rata, based upon the balances in their deposit
accounts in Fidelity Federal Bank and Trust immediately prior to liquidation. In
the unlikely event that Fidelity Federal Bank and Trust were to liquidate after
the conversion, all claims of creditors, including those of depositors, would
also be paid first, followed by distribution of the "liquidation account" to
depositors as of October 31, 1999, and _____________, with any assets remaining
thereafter distributed to Fidelity Bankshares, Inc. as the holder of Fidelity
Federal Bank and Trust's capital stock. Pursuant to the rules and regulations of
the Office of Thrift Supervision, a post-conversion merger, consolidation, sale
of bulk assets or similar combination or transaction with another insured
savings institution would not be considered a liquidation and, in such a
transaction, the liquidation account would be assumed by the surviving
institution.
Stock Pricing and Number of Shares to be Issued
The plan of conversion and federal regulations require that the
aggregate purchase price of the common stock in the offering must be based on
the appraised pro forma market value of the common stock, as determined by the
independent valuation. Fidelity Federal Bank and Trust and Fidelity Bankshares,
Inc. have retained RP Financial, LC to make the valuation. For its services in
preparing the initial valuation, RP Financial, LC will receive a fee of $72,500.
In addition RP Financial, LC will receive a fee of $5,000 for each time the
appraisal is updated. This amount does not include a fee of $12,500 to be paid
to RP Financial, LC for assistance in preparation of a business plan. Fidelity
Federal Bank and Trust and Fidelity Bankshares, Inc. have agreed to indemnify RP
Financial, LC and its employees and affiliates against specified losses,
including any losses in connection with claims under the federal securities
laws, arising out of its services as appraiser, except where RP Financial, LC's
liability results from its negligence or bad faith.
The independent valuation was prepared by RP Financial, LC in reliance
upon the information contained in this prospectus, including the consolidated
financial statements. RP Financial, LC also considered the following factors,
among others: the present and projected operating results and financial
condition of Fidelity Bankshares, Inc. and Fidelity Federal Bank and Trust; the
economic and demographic conditions in Fidelity Federal Bank and Trust's
existing marketing area; certain historical, financial and other information
relating to Fidelity Federal Bank and Trust; a comparative evaluation of the
operating and financial statistics of Fidelity Federal Bank and Trust with those
of other publicly traded savings institutions located in Fidelity Federal Bank
and Trust's region and on a national basis; the aggregate size of the offering
of the common stock; the impact of the conversion on Fidelity Federal Bank and
Trust's stockholders' equity and earnings potential; the proposed dividend
policy of Fidelity Bankshares, Inc. and Fidelity Federal Bank and Trust; and the
trading market for securities of comparable institutions and general conditions
in the market for the securities.
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The following table presents a summary of selected pricing ratios for
comparable public thrift institutions used by RP Financial, LC to help establish
the market value of Fidelity Bankshares, Inc. and the resulting pricing ratios
for Fidelity Bankshares, Inc.
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma Pro Forma
price to core price to book price to tangible price to assets
earnings multiple value ratio book value ratio
----------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Fidelity Bankshares, Inc.:
15% above maximum.................... 20.18x 100.10% 101.62% 8.64%
Maximum.............................. 18.20 93.01 94.52 7.56
Mid-point............................ 16.34 86.01 87.50 6.60
Minimum.............................. 14.37 78.06 79.50 5.64
All fully converted thrifts publicly
traded on the NYSE, NASDAQ
and AMEX Exchanges as of 12/22/00:
Averages............................. 13.25x 99.47% 106.43% 10.32%
Medians.............................. 12.20 89.59 94.16 9.44
Valuation of peer group institutions
as of 12/22/00
Averages............................. 11.27x 107.39% 124.87% 9.96%
Medians.............................. 9.80 98.69 104.76 9.54
</TABLE>
The independent valuation was prepared based on the assumption that the
aggregate amount of common stock sold in the offering would be equal to the
estimated pro forma market value of Fidelity Bankshares, Inc. multiplied by the
percentage of Fidelity Bankshares, Inc. common stock owned by Fidelity
Bankshares, MHC. The independent valuation states that as of December 22, 2000,
the estimated pro forma market value, or valuation range, of Fidelity
Bankshares, Inc. ranged from a minimum of $110.5 million to a maximum of $149.5
million, with a mid- point of $130.0 million. The Board of Directors determined
to offer the subscription shares for a price of $10.00 per share. The aggregate
offering price of the subscription shares will be equal to the valuation range
multiplied by the percentage of Fidelity Bankshares, Inc. common stock owned by
Fidelity Bankshares, MHC. The number of subscription shares offered will be
equal to the aggregate offering price of the subscription shares divided by the
subscription price per share. Based on the valuation range, the percentage of
Fidelity Bankshares, Inc. common stock owned by Fidelity Bankshares, MHC, and
the subscription price per share, the minimum of the offering range will be
6,097,938 subscription shares, the mid-point of the offering range will be
7,174,044 subscription shares, and the maximum of the offering range will be
8,250,151 subscription shares.
The Board of Directors reviewed the independent valuation and, in
particular, considered the following:
(1) Fidelity Bankshares, Inc.'s financial condition and results of
operations;
(2) financial comparisons of Fidelity Bankshares, Inc. in relation to
institutions of similar size and asset quality;
(3) stock market conditions generally and in particular for financial
institutions; and
(4) the historical trading price of the publicly held shares of Fidelity
Bankshares, Inc. common stock.
All of these factors are set forth in the independent valuation. The
Board also reviewed the methodology and the assumptions used by RP Financial, LC
in preparing the independent valuation and the Board believes that such
assumptions were reasonable. The offering range may be amended with the approval
of the Office of Thrift Supervision, if required, by subsequent developments in
the financial condition of Fidelity Bankshares, Inc. or Fidelity Federal Bank
and Trust or market conditions generally. In the event the independent valuation
is updated to amend the pro forma market value of Fidelity Bankshares, Inc. to
less than $110,500,000 or more than
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$171,925,000, the appraisal will be filed with the Securities and Exchange
Commission by post-effective amendment.
The independent valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
shares. RP Financial, LC did not independently verify the consolidated financial
statements and other information provided by Fidelity Bankshares, Inc., nor did
RP Financial, LC value independently the assets or liabilities of Fidelity
Federal Bank and Trust. The independent valuation considers Fidelity Federal
Bank and Trust as a going concern and should not be considered as an indication
of the liquidation value of Fidelity Federal Bank and Trust. Moreover, because
the valuation is necessarily based upon estimates and projections of a number of
matters, all of which may change from time to time, no assurance can be given
that persons purchasing shares in the offering will thereafter be able to sell
their shares at prices at or above the subscription price.
Following commencement of the subscription offering, the maximum of the
valuation range may be increased by up to 15% to up to $171,925,000, which will
result in a corresponding increase of up to 15% in the maximum of the offering
range to up to 9,487,674 shares, to reflect changes in the market and financial
conditions, without a resolicitation of subscribers. The minimum of the
valuation range and of the offering range may not be decreased without a
resolicitation of subscribers. The subscription price of $10.00 per share will
remain fixed. See "--Limitations on Common Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the event
of an increase in the offering range to fill unfilled orders in the subscription
and community offerings.
If the update to the independent valuation at the conclusion of the
offering results in an increase in the maximum of the valuation range to more
than $171,925,000 and a corresponding increase in the offering range to more
than 9,487,674 shares, or a decrease in the minimum of the valuation range to
less than $110,500,000 and a corresponding decrease in the offering range to
fewer than 6,097,938 shares, then Fidelity Bankshares, Inc., after consulting
with the Office of Thrift Supervision, may terminate the plan of conversion and
return by check all funds promptly with interest at Fidelity Federal Bank and
Trust's passbook rate of interest on payments made by check, certified or
teller's check, bank draft or money order. Alternatively, Fidelity Bankshares,
Inc. may extend or hold a new subscription offering, community offering, or
both, establish a new offering range, commence a resolicitation of subscribers
or take other actions as permitted by the Office of Thrift Supervision in order
to complete the conversion. In the event that a resolicitation is commenced,
unless an affirmative response is received within a reasonable period of time,
all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the subscription and
community offerings would not exceed 45 days unless further extended by the
Office of Thrift Supervision for periods of up to 90 days, not to extend beyond
____________, 2003, which is two years after the special meeting of members of
Fidelity Bankshares, MHC to approve the conversion.
An increase in the number of shares to be issued in the offering would
decrease both a subscriber's ownership interest and Fidelity Bankshares, Inc.'s
pro forma earnings and stockholders' equity on a per share basis while
increasing pro forma earnings and stockholders' equity on an aggregate basis. A
decrease in the number of shares to be issued in the offering would increase
both a subscriber's ownership interest and Fidelity Bankshares, Inc.'s pro forma
earnings and stockholders' equity on a per share basis while decreasing pro
forma earnings and stockholders' equity on an aggregate basis. For a
presentation of the effects of these changes, see "Pro Forma Data."
Copies of the appraisal report of RP Financial, LC and the detailed
memorandum of the appraiser setting forth the method and assumptions for the
appraisal are available for inspection at the main office of Fidelity Federal
Bank and Trust and the other locations specified under "Additional Information."
Exchange of Stock Certificates
Publicly held shares of Fidelity Bankshares, Inc. common stock will
continue to be available for trading on the Nasdaq National Market. The
conversion of existing outstanding shares of Fidelity Bankshares, Inc. common
stock into new shares of Fidelity Bankshares, Inc. common stock will occur
automatically on the effective date of the conversion.
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As soon as practicable after the effective date of the conversion,
Fidelity Bankshares or a bank or trust company designated by Fidelity
Bankshares, Inc. in the capacity of exchange agent, will send a transmittal form
to each public stockholder of Fidelity Bankshares, Inc. The transmittal forms
are expected to be mailed within five business days after the effective date of
the conversion and will contain instructions with respect to the surrender of
certificates representing Fidelity Bankshares, Inc. common stock to be exchanged
into Fidelity Bankshares, Inc. common stock. It is expected that certificates
for shares of Fidelity Bankshares, Inc. common stock will be distributed within
five business days after the receipt of properly executed transmittal forms and
other required documents.
Fidelity Bankshares, Inc. stockholders should not forward their stock
certificates to Fidelity Bankshares, Inc., the stock information center, or the
exchange agent until they have received transmittal forms.
Until existing certificates representing Fidelity Bankshares, Inc.
common stock are surrendered for exchange after the conversion in compliance
with the terms of the transmittal form, holders of such certificates will not
receive new shares of Fidelity Bankshares, Inc. common stock and will not be
paid dividends on the Fidelity Bankshares, Inc. common stock into which their
shares have been converted. When certificates are surrendered, any unpaid
dividends will be paid without interest. For all other purposes, however, each
certificate which represents shares of Fidelity Bankshares, Inc. common stock
outstanding at the effective date of the conversion will be deemed to evidence
ownership of new shares of Fidelity Bankshares, Inc. common stock into which
those shares have been converted by virtue of the conversion.
All new shares of Fidelity Bankshares, Inc. common stock issued upon
exchange of shares of Fidelity Bankshares, Inc. common stock shall be deemed to
have been issued in full satisfaction of all rights pertaining to such shares of
Fidelity Bankshares, Inc. common stock, subject, however, to Fidelity
Bankshares, Inc.'s obligation to pay any dividends or make any other
distributions with a record date prior to the effective date which may have been
declared or made by Fidelity Bankshares, Inc. on its common stock on or prior to
the effective date and which remain unpaid at the effective date. Fidelity
Bankshares, Inc. intends to continue to pay a quarterly cash dividend of $0.25
per share through the fiscal quarter ending _________ 2001.
No fractional shares of Fidelity Bankshares, Inc. common stock will be
issued to any public stockholder of Fidelity Bankshares, Inc. upon consummation
of the conversion. For each fractional share that would otherwise be issued,
Fidelity Bankshares, Inc. will pay by check an amount equal to the product
obtained by multiplying the fractional share interest to which the holder would
otherwise be entitled by the subscription price. Payment for fractional shares
will be made as soon as practicable after the receipt by the exchange agent of
surrendered Fidelity Bankshares, Inc. stock certificates.
If a certificate for Fidelity Bankshares, Inc. common stock has been
lost, stolen or destroyed, the exchange agent will issue the consideration
properly payable upon receipt of appropriate evidence as to the loss, theft or
destruction, appropriate evidence as to the ownership of the certificate by the
claimant, and appropriate and customary indemnification.
Subscription Offering and Subscription Rights
In accordance with the plan of conversion, rights to subscribe for the
purchase of common stock in the subscription offering have been granted under
the plan of conversion in the following order of descending priority. All
subscriptions received will depend on the availability of common stock after
satisfaction of all subscriptions of all persons having prior rights in the
subscription offering and to the maximum, minimum, and overall purchase
limitations set forth in the plan of conversion and as described below under
"--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each depositor with aggregate
deposit account balances, including demand deposit accounts, of $50 or more (a
"Qualifying Deposit") at October 31, 1999, ("Eligible Account Holders") will
receive, without payment therefor, nontransferable subscription rights to
purchase up to 82,500 shares of common stock, subject to the overall purchase
limitations and exclusive of shares purchased by the employee
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stock ownership plan from any increase in the shares offered pursuant to an
increase in the maximum of the offering range. See "--Limitations on Common
Stock Purchases." If there are not sufficient shares available to satisfy all
subscriptions, shares will first be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make his
total allocation equal to the lesser of 100 shares or the number of shares for
which he subscribed. Thereafter, unallocated shares, except for additional
shares issued to the Employee Stock Ownership Plan upon an increase in the
maximum of the offering range, will be allocated to each subscribing Eligible
Account Holder whose subscription remains unfilled in the proportion that the
amount of his aggregate Qualifying Deposit bears to the total amount of
Qualifying Deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled. If an amount so allocated exceeds the amount
subscribed for by any one or more Eligible Account Holders, the excess shall be
reallocated among those Eligible Account Holders whose subscriptions are not
fully satisfied until all available shares have been allocated.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form and certification form all deposit accounts
in which he has an ownership interest on October 31, 1999. Failure to list an
account could result in fewer shares being allocated than if all accounts had
been disclosed. The subscription rights of Eligible Account Holders who are also
directors or officers of Fidelity Bankshares, Inc. or their associates will be
subordinated to the subscription rights of other Eligible Account Holders to the
extent attributable to increased deposits in the twelve months preceding October
31, 1999.
Priority 2: Tax-qualified Plans. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the tax-qualified employee stock benefit plans of Fidelity
Bankshares, Inc. and Fidelity Federal Bank and Trust, including the employee
stock ownership plan, will receive, without payment therefor, nontransferable
subscription rights to purchase in the aggregate up to 6% of the common stock
offered in the subscription offering, including any shares to be issued in the
subscription offering as a result of an increase in the valuation range after
commencement of the subscription offering and prior to completion of the
conversion.
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and the tax-qualified employee stock benefit plans,
each depositor with a Qualifying Deposit on _____________, who is not an
Eligible Account Holder ("Supplemental Eligible Account Holder") will receive,
without payment therefor, nontransferable subscription rights to purchase up to
82,500 shares of common stock, subject to the overall purchase limitations. See
"--Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of 100 shares
or the number of shares for which he subscribed. Thereafter, unallocated shares
will be allocated to each subscribing Supplemental Eligible Account Holder whose
subscription remains unfilled in the proportion that the amount of his
Qualifying Deposit bears to the total amount of Qualifying Deposits of all
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his subscription order form and certification form
all deposit accounts in which he has an ownership interest at ____________.
Failure to list an account could result in less shares being allocated than if
all accounts had been disclosed.
Priority 4: Other Members. To the extent that there are shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
tax-qualified employee stock benefit plans, and Supplemental Eligible Account
Holders, each member of Fidelity Bankshares, MHC on the voting record date who
is not an Eligible Account Holder or Supplemental Eligible Account Holder
("Other Members") will receive, without payment therefor, nontransferable
subscription rights to purchase up to 82,500 shares of common stock, subject to
the overall purchase limitations. See "--Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
available shares will be allocated on a pro rata basis based on the size of the
order of each Other Member.
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Expiration Date for the Subscription Offering. The Subscription
Offering will expire on __________, 2001, unless extended for up to 45 days or
such additional periods by Fidelity Federal Bank and Trust with the approval of
the Office of Thrift Supervision, if necessary. Fidelity Federal Bank and Trust
and Fidelity Bankshares, Inc. may determine to extend the subscription offering
and/or the community offering for any reason, whether or not subscriptions have
been received for shares at the minimum, mid-point, or maximum of the offering
range, and are not required to give subscribers notice of any such extension.
Subscription rights which have not been exercised prior to the expiration date
will become void.
Fidelity Bankshares, Inc. will not execute orders until all shares of
common stock have been subscribed for or otherwise sold. If 6,097,938 shares
have not been subscribed for or sold within 45-days after the expiration date,
unless the period is extended with the consent of the Office of Thrift
Supervision, all funds delivered to Fidelity Federal Bank and Trust pursuant to
the subscription offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be cancelled. If an extension
beyond the 45 day period following the expiration date is granted, Fidelity
Bankshares, Inc. will notify subscribers of the extension of time and of any
rights of subscribers to modify or rescind their subscriptions. Extensions may
not go beyond _____________, 2003, which is two years after the special meeting
of members of Fidelity Bankshares, MHC to approve the conversion.
Persons in Nonqualified States or Foreign Countries. Fidelity
Bankshares, Inc. will make reasonable efforts to comply with the securities laws
of all states in the United States in which persons entitled to subscribe for
stock pursuant to the plan of conversion reside. However, Fidelity Bankshares,
Inc. is not required to offer stock in the offering to any person who resides in
a foreign country or resides in a state of the United States with respect to
which:
(1) a small number of persons otherwise eligible to subscribe for
shares of common stock reside; or
(2) Fidelity Bankshares, Inc. determines that compliance with the
securities laws of a state would be impracticable for reasons of cost or
otherwise, including but not limited to a request that Fidelity Bankshares, Inc.
or its officers or directors, under the securities laws of a state, register as
a broker, dealer, salesman or selling agent or register or otherwise qualify the
subscription rights or common stock for sale in a state. Where the number of
persons eligible to subscribe for shares in one state is small, Fidelity
Bankshares, Inc. will base its decision as to whether or not to offer the common
stock in a state on a number of factors, including the size of accounts being
held by account holders in the state, the cost of registering or qualifying the
shares or the need to register Fidelity Bankshares, Inc., its officers,
directors or employees as brokers, dealers or salesmen.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the
tax-qualified employee stock benefit plans, Supplemental Eligible Account
Holders, and Other Members, Fidelity Bankshares, Inc. has determined to offer
shares pursuant to the plan of conversion to certain members of the general
public in a direct community offering, with preference given first to the public
stockholders of Fidelity Bankshares, Inc. common stock as of _____________,
2001, and then to natural persons residing in Fidelity Federal Bank and Trust's
community. Fidelity Federal Bank and Trust's community means the Florida
counties of Palm Beach, Martin, St. Lucie and Indian River. These persons may
purchase for up to 82,500 shares of common stock, subject to the overall
purchase limitations. See "--Limitations on Common Stock Purchases." The minimum
purchase is 25 shares. The opportunity to purchase for shares of common stock in
the community offering category is subject to the right of Fidelity Bankshares,
Inc., in its sole discretion, to accept or reject any such orders in whole or in
part either at the time of receipt of an order or as soon as practicable
following the expiration date. If Fidelity Bankshares, Inc., with the approval
of the Office of Thrift Supervision, increases the maximum purchase limitation,
Fidelity Bankshares, Inc. is only required to resolicit persons who subscribed
for the maximum purchase amount and may, in the sole discretion of Fidelity
Bankshares, Inc., resolicit certain other large subscribers. The limitation may
be increased to 9.99%, provided that orders for common stock exceeding 5% of the
subscription shares issued in the offering shall not exceed in the aggregate 10%
of the total subscription shares issued in the offering. Requests to purchase
additional shares of the common stock in the event that the purchase limitation
is so increased will be determined by the Board of Directors of Fidelity
Bankshares, Inc. in its sole discretion.
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If the amount of common stock remaining is insufficient to fill the
orders of common stockholders of Fidelity Bankshares, Inc. as of ______________,
2001, the remaining stock will be allocated among those persons in the manner
that permits each of these persons, to the extent possible, to purchase the
number of shares necessary to make his total allocation of common stock equal to
the lesser of 100 shares or the number of shares subscribed for by each such
person. However, if there are insufficient shares available for this allocation,
then shares will be allocated among such persons whose orders remain unsatisfied
in the proportion that the unfilled subscription of each bears to the total
unfilled subscriptions of all those persons whose subscriptions remain
unsatisfied. Similar allocation procedures will be used for orders of natural
persons residing in Fidelity Federal Bank and Trust's community. If all orders
of natural persons residing in Fidelity Federal Bank and Trust's community are
filled, any shares remaining will be allocated to other persons who purchase in
the community offering applying the same allocation described above for natural
persons residing in the community.
The term "resided" or "residing" as used herein shall mean any person
who occupies a dwelling within Fidelity Federal Bank and Trust's community, has
a present intent to remain within the community for a period of time, and
manifests the genuineness of that intent by establishing an ongoing physical
presence within the community, together with an indication that this presence
within Fidelity Federal Bank and Trust's community is something other than
merely transitory in nature. To the extent the person is a corporation or other
business entity, the principal place of business or headquarters shall be in
Fidelity Federal Bank and Trust's community. To the extent a person is a
personal benefit plan, the circumstances of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
Fidelity Federal Bank and Trust may utilize deposit or loan records or other
evidence provided to it to make a determination as to whether a person is a
resident. In all cases, however, the determination shall be in the sole
discretion of Fidelity Federal Bank and Trust.
The community offering will terminate no more than 45 days following
the expiration date, unless extended by Fidelity Bankshares, Inc. with the
approval of the Office of Thrift Supervision, if necessary. Fidelity Bankshares,
Inc. may determine to extend the community offering for any reason, and is not
required to give purchasers notice of any such extension. Fidelity Bankshares,
Inc. will not execute orders until all shares of common stock have been
subscribed for or otherwise sold. If 6,097,938 shares have not been subscribed
for or sold within 45 days after the expiration date, unless this period is
extended with the consent of the Office of Thrift Supervision, all funds
delivered to Fidelity Bankshares, Inc. will be returned promptly to the
purchasers with interest and all withdrawal authorizations will be cancelled. If
an extension beyond the 45 day period following the expiration date is granted,
Fidelity Bankshares, Inc. will notify purchasers of the extension of time and of
any rights of purchasers to modify or rescind their orders. These extensions may
not go beyond ____________, 2003, which is two years after the special meeting
of members of Fidelity Bankshares, MHC to approve the conversion.
The Board of Directors has the right to reject any order submitted in
the offering by a person whose representations the Board of Directors believes
to be false or who it otherwise believes, either alone or acting in concert with
others, is violating, evading, circumventing, or intends to violate, evade or
circumvent the terms and conditions of the plan of conversion.
Syndicated Community Offering
If feasible, the Board of Directors may determine to offer for sale all
shares of common stock not subscribed for or purchased in the subscription and
community offerings in a syndicated community offering, subject to such terms,
conditions and procedures as may be determined by Fidelity Bankshares, Inc., in
a manner that will achieve the widest distribution of the common stock. However,
Fidelity Bankshares, Inc. retains the right to accept or reject in whole or in
part any subscriptions in the syndicated community offering. In the syndicated
community offering, any person, may purchase up to 82,500 shares of common
stock, subject to the overall maximum purchase limitations. The shares purchased
by any person, together with an associate or group of persons acting in concert,
in the community offering shall be counted toward meeting the overall purchase
limitations. Provided that the subscription offering has commenced, Fidelity
Bankshares, Inc. may commence the syndicated community offering at any time
after the mailing to the members of the proxy statement to be used in connection
with the special meeting of members of Fidelity Bankshares, MHC. The completion
of the offer and sale of the subscription shares shall be conditioned upon the
approval of the plan of conversion by the members. If the
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syndicated community offering is not sooner commenced pursuant to the provisions
of the preceding sentence, the syndicated community offering will be commenced
as soon as practicable following the date upon which the subscription and
community offerings terminate.
If for any reason a syndicated community offering of shares of
subscription shares not sold in the subscription and community offerings cannot
be effected, or in the event that any insignificant residue of shares of
subscription shares is not sold in the subscription and community offerings or
in the syndicated community offering, other arrangements will be made for the
disposition of unsubscribed shares by Fidelity Bankshares, Inc., if possible.
The Office of Thrift Supervision must approve these other purchase arrangements.
Plan of Distribution; Selling Agent Compensation
Offering materials have been distributed initially by mail, with
additional copies made available at Fidelity Federal Bank and Trust's offices
and by Ryan Beck and Co., Inc. All prospective purchasers are to send payment
along with a completed order form and certification form directly to Fidelity
Federal Bank and Trust, where funds will be held in a segregated special escrow
account and not released until the offering is completed or terminated.
To assist in the marketing of the common stock, Fidelity Bankshares,
Inc. has retained Ryan Beck and Co., Inc., which is a broker/dealer registered
with the National Association of Securities Dealers, Inc. Ryan Beck & Co., Inc.
will assist Fidelity Federal Bank and Trust in the offering by:
(1) acting as the financial advisor to Fidelity Bankshares, Inc.;
(2) providing administrative services and stock sales center management;
and
(3) providing securities marketing services.
For these services, Ryan Beck & Co., Inc., will receive an advisory and
management fee of $100,000 and a marketing fee equal to 1% of the dollar amount
of common stock sold in the subscription and community offering other than
shares purchased by officers, directors and employees or their immediate
families and common stock purchased by tax-qualified and non-qualified employee
benefit plans for which no fee need be paid. In the event that Ryan Beck & Co.,
Inc. sells common stock through a group of broker-dealers in a syndicated
community offering, it will be paid a fee of 1% of the dollar amount of shares
sold in the syndicated community offering for managing such offering, and the
fees payable directly to the selected broker-dealers will not exceed 7% of the
value of the common stock sold in the syndicated community offering. Ryan Beck &
Co., Inc. may participate as one of the selected broker-dealers in which case
the total fees it receives for the shares it sells in the syndicated community
offering will not exceed 7% of the dollar amount of such shares sold. Ryan Beck
& Co., Inc. will also be reimbursed for allocable expenses in an amount not to
exceed $65,000 and for attorney's fees in an amount not to exceed $60,000
Fidelity Federal Bank and Trust has made an advance payment to Ryan
Beck & Co., Inc. in the amount of $50,000. Fidelity Federal Bank and Trust will
indemnify Ryan Beck & Co., Inc. against liabilities and expenses, including
legal fees, incurred in connection with certain claims or litigation arising out
of or based upon untrue statements or omissions contained in the offering
material for the common stock, including liabilities under the Securities Act of
1933.
Some directors and executive officers of Fidelity Bankshares, Inc. and
Fidelity Federal Bank and Trust may participate in the solicitation of offers to
purchase common stock. These persons will be reimbursed for their reasonable
out-of-pocket expenses, including, but not limited to, de minimis telephone and
postage expenses, incurred in connection with the solicitation. Other regular,
full-time employees of Fidelity Federal Bank and Trust may participate in the
offering but only in ministerial capacities, providing clerical work in
effecting a sales transaction or answering questions of a potential purchaser,
provided that the content of the employee's responses is limited to information
contained in the prospectus or other offering documents, and no offers or sales
may be made by tellers or at the teller counter. All sales activity will be
conducted in a segregated or separately identifiable area of Fidelity Federal
Bank and Trust's offices, apart from the area accessible to the general public
for the purpose of
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making deposits or withdrawals. Other questions of prospective purchasers will
be directed to executive officers or registered representatives. These other
employees have been instructed not to solicit offers to purchase common stock or
provide advice regarding the purchase of common stock. Fidelity Bankshares, Inc.
will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, and sales of
common stock will be conducted within the requirements of Rule 3a4-1, so as to
permit officers, directors and employees to participate in the sale of common
stock. No officer, director or employee of Fidelity Bankshares, Inc. or Fidelity
Federal Bank and Trust will be compensated in connection with his participation
by the payment of commissions or other remuneration, based either directly or
indirectly on the transactions in the common stock.
Procedure for Purchasing Shares
Expiration Date. The offering will terminate at __________, eastern
time, on _________, 2001, unless extended by Fidelity Federal Bank and Trust and
Fidelity Bankshares, Inc., with the approval of the Office of Thrift
Supervision, if required. This extension may be approved by Fidelity Federal
Bank and Trust and Fidelity Bankshares, Inc., in their sole discretion, without
further approval or additional notice to purchasers in the offering. Any
extension of the offering beyond 45 days after the expiration date of the
offering would require the Office of Thrift Supervision's approval and potential
purchasers would be given the right to increase, decrease, or rescind their
orders for common stock. If the minimum number of shares offered in the offering
is not sold by the expiration date, Fidelity Bankshares, Inc. may terminate the
offering and promptly refund all orders for common stock. A reduction in the
number of shares below the minimum of the offering range will not require the
approval of Fidelity Bankshares, MHC's members or Fidelity Bankshares, Inc.'s
stockholders, or an amendment to the independent valuation. If the number of
shares is reduced below the minimum of the offering range, purchasers will be
given an opportunity to increase, decrease, or rescind their orders.
To ensure that each purchaser receives a prospectus at least 48 hours
before the expiration date of the offering in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to this date or hand delivered any later than two days prior to
this date. Execution of an order form will confirm receipt of delivery in
accordance with Rule 15c2-8. Order forms will be distributed only with a
prospectus. Subscription funds will be maintained in a special escrow account at
Fidelity Federal Bank and Trust.
Fidelity Bankshares, Inc. reserves the right in its sole discretion to
terminate the offering at any time and for any reason, in which case Fidelity
Bankshares, Inc. will cancel any withdrawal orders, and return all purchase
orders, plus interest at ____%, which is Fidelity Federal Bank and Trust's
current passbook rate from the date of receipt.
Use of Order and Certification Forms. In order to purchase shares of
the common stock, each purchaser must complete an order form and a certification
form. Incomplete order forms, or order forms that are not accompanied by a
signed certification form, will not be accepted. Fidelity Bankshares, Inc. will
not be required to accept orders submitted on photocopied or facsimilied stock
order forms. Any person receiving an order form who desires to purchase shares
of common stock must do so by delivering, by mail or in person, to Fidelity
Bankshares, Inc. a properly executed and completed order form and a
certification form, together with full payment for the shares purchased. All
order forms with properly executed certification forms must be received at the
stock information center or a branch of Fidelity Federal Bank and Trust prior to
_________, eastern time on __________, 2001. Once tendered, an order form cannot
be modified or revoked without the consent of Fidelity Bankshares, Inc. Fidelity
Bankshares, Inc. reserves the absolute right, in its sole discretion, to reject
orders received in the community offering, in whole or in part, at the time of
receipt or at any time prior to completion of the offering. Each person ordering
shares is required to represent that he is purchasing shares for his own account
and that he has no agreement or understanding with any person for the sale or
transfer of the shares. The interpretation by Fidelity Bankshares, Inc. of the
terms and conditions of the plan of conversion and of the acceptability of the
order forms and certification forms will be final.
The order form includes a certification in which subscribers
acknowledge that the common stock is not a deposit or savings account that is
federally insured or otherwise guaranteed by Fidelity Federal Bank and Trust or
the Federal Government and that the subscribers received a copy of this
prospectus describing the nature of the
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common stock and the risks involved in an investment in the common stock,
including the "Risk Factors" described in this prospectus. The certification is
required by federal regulation and is intended to ensure that subscribers are
aware of the Risk Factors before making an investment decision. However, signing
the order form and certification will not result in investors waiving their
rights under the Securities Act of 1933.
Payment for Shares. Payment for all shares will be required to
accompany all completed order forms for the purchase to be valid. Payment for
shares may be made by:
(1) cash, if delivered in person to a branch of Fidelity Federal Bank and
Trust;
(2) check, money order, certified or teller's check or bank draft made
payable to Fidelity Federal Bank and Trust; or
(3) authorization of withdrawal from savings accounts, including
certificates of deposit, maintained with Fidelity Federal Bank and
Trust.
Appropriate means by which withdrawals may be authorized are provided
in the order forms. Once a withdrawal amount has been authorized, a hold will be
placed on these funds, making them unavailable to the depositor until the
offering has been completed or terminated. In the case of payments authorized to
be made through withdrawal from deposit accounts, all funds authorized for
withdrawal will continue to earn interest at the contract rate until the
offering is completed or terminated. Interest penalties for early withdrawal
applicable to certificate accounts will not apply to withdrawals authorized for
the purchase of shares of common stock; however, if a withdrawal results in a
certificate account with a balance less than the applicable minimum balance
requirement, the certificate shall be cancelled at the time of withdrawal
without penalty, and the remaining balance will earn interest at the passbook
rate subsequent to the withdrawal. In the case of payments made by cash, check
or money order, these funds will be placed in a segregated savings account and
interest will be paid by Fidelity Federal Bank and Trust at the current passbook
rate per annum from the date payment is received until the offering is completed
or terminated. An executed order form, once received by Fidelity Federal Bank
and Trust, may not be modified, amended or rescinded without the consent of
Fidelity Federal Bank and Trust, unless the offering is not completed by the
expiration date, in which event purchasers may be given the opportunity to
increase, decrease, or rescind their orders for a specified period of time.
A depositor interested in using his or her individual retirement
account funds to purchase common stock must do so through a self-directed
individual retirement account. There will be no early withdrawal or Internal
Revenue Service interest penalties for these transfers. Depositors interested in
using funds in a Fidelity Federal Bank and Trust individual retirement account
to purchase common stock should contact the stock information center at Fidelity
Federal Bank and Trust as soon as possible but no later than one week prior to
the subscription deadline so that the necessary forms may be forwarded for
execution and returned prior to the expiration date.
The employee stock ownership plan will not be required to pay for
shares purchased until consummation of the offering, provided that there is in
force from the time the order is received a loan commitment from an unrelated
financial institution or Fidelity Bankshares, Inc. to lend to the employee stock
ownership plan the necessary amount to fund the purchase.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering and Fidelity Federal Bank and Trust checks representing
interest paid on subscriptions made by cash, check, or money order will be
mailed by Fidelity Federal Bank and Trust to the persons entitled thereto at the
address noted on the order form, as soon as practicable following consummation
of the offering and receipt of all necessary regulatory approvals. Any
certificates returned as undeliverable will be held by Fidelity Federal Bank and
Trust until claimed by persons legally entitled thereto or otherwise disposed of
in accordance with applicable law. Until certificates for the common stock are
available and delivered to purchasers, purchasers may not be able to sell the
shares of stock which they ordered. Regulations prohibit Fidelity Federal Bank
and Trust from lending funds or extending credit to any persons to purchase
common stock in the offering.
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Other Restrictions. Notwithstanding any other provision of the plan of
conversion, no person is entitled to purchase any common stock to the extent the
purchase would be illegal under any federal or state law or regulation,
including state "blue sky" registrations, or would violate regulations or
policies of the National Association of Securities Dealers, Inc., particularly
those regarding free riding and withholding. Fidelity Federal Bank and Trust
and/or its agents may ask for an acceptable legal opinion from any purchaser as
to the legality of their purchase and may refuse to honor any purchase order if
an opinion is not timely furnished.
Restrictions on Transfer of Subscription Rights and Shares
Office of Thrift Supervision conversion regulations prohibit any person
with subscription rights, including the Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members of Fidelity Federal Bank and Trust,
from transferring or entering into any agreement or understanding to transfer
the legal or beneficial ownership of the subscription rights issued under the
plan of conversion or the shares of common stock to be issued upon their
exercise. These rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising subscription rights
will be required to certify that he is purchasing shares solely for his own
account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
subscription rights or shares of common stock prior to the completion of the
conversion.
Fidelity Federal Bank and Trust and Fidelity Bankshares, Inc. will
pursue any and all legal and equitable remedies in the event they become aware
of the transfer of subscription rights and will not honor orders known by them
to involve the transfer of subscription rights.
Limitations on Common Stock Purchases
The plan of conversion includes the following limitations on the number
of shares of common stock which may be purchased during the conversion:
(1) No person may purchase less than 25 shares of common stock;
(2) The tax-qualified employee stock benefit plans, including the
employee stock ownership plan, may purchase in the aggregate up to 6% of the
subscription shares issued in the offering, including shares issued in the event
of an increase in the offering range of up to 15%. The employee stock ownership
plan expects to subscribe for 6% of the shares sold, or 365,876 shares at the
minimum of the offering range and 495,009 shares at the maximum of the offering
range;
(3) Except for the employee stock ownership plan, as described above,
no person or entity, together with associates or persons acting in concert with
such person or entity, may purchase more than 165,000 shares in the offering.
(4) Current stockholders of Fidelity Bankshares, Inc. are subject to an
additional limitation upon the number of shares that may be purchased in the
offering. As previously described, current stockholders of Fidelity Bankshares,
Inc. will receive new shares of Fidelity Bankshares, Inc. common stock in
exchange for their existing shares of Fidelity Bankshares, Inc common stock. The
number of shares that may be purchased in the offering, when combined with the
shares that a stockholder receives in exchange for existing Fidelity Bankshares,
Inc. common stock, may not exceed 5% of the shares outstanding at the completion
of the offering; and
(5) The maximum number of shares of common stock which may be purchased
in all categories of the offering by officers and directors of Fidelity Federal
Bank and Trust and their associates, in the aggregate, may not exceed 25% of the
shares offered in the offering.
Depending upon market or financial conditions, the Board of Directors
of Fidelity Bankshares, Inc., with the approval of the Office of Thrift
Supervision and without further approval of members of Fidelity Bankshares, MHC,
may decrease or further increase the purchase limitations. Fidelity Federal Bank
and Trust may need regulatory approval to increase the purchase limitations. If
this amount is increased, subscribers for the maximum
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amount will be, and some other large subscribers who through their subscriptions
evidence a desire to purchase the maximum allowable number of shares in the sole
discretion of Fidelity Federal Bank and Trust may be, given the opportunity to
increase their subscriptions up to the then applicable limit. The effect of this
type of resolicitation will be an increase in the number of shares owned by
subscribers who choose to increase their subscriptions. In addition, the Board
of Directors of Fidelity Bankshares, Inc. may, in its sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offered shall not exceed, in
the aggregate, 10% of the total offering. Requests to purchase additional shares
under this provision will be determined by the respective Boards of Directors in
their sole discretion.
In the event of an increase in the total number of shares offered in
the offering due to an increase in the offering range of up to 15%, the maximum
number of shares that may be purchased as restricted by the purchase limitations
shall not be increased proportionately, except for the employee stock ownership
plan, and the additional shares sold will be allocated in the following order of
priority in accordance with the plan of conversion:
(1) to fill the employee stock ownership plan's subscription for 6% of the
total number of shares sold;
(2) in the event that there is an oversubscription at the Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member levels,
to fill unfulfilled subscriptions of these subscribers according to
their respective priorities; and
(3) to fill unfulfilled subscriptions in the community offering, with
preference given first to Fidelity Bankshares, Inc. stockholders as of
_____________, 2001,and then to natural persons residing in Fidelity
Federal Bank and Trust's community.
The term "associate" of a person is defined to mean:
(1) any corporation or organization, other than Fidelity Bankshares, Inc.,
Fidelity Federal Bank and Trust, or a majority-owned subsidiary of
Fidelity Federal Bank and Trust, of which the person is an officer,
partner or 10% stockholder;
(2) any trust or other estate in which the person has a substantial
beneficial interest or serves as a director or in a similar fiduciary
capacity; provided, however, that this term shall not include any
employee stock benefit plan in which the person has a substantial
beneficial interest or serves as director or in a similar fiduciary
capacity; and
(3) any relative or spouse of the persons, or any relative of the spouse,
who either has the same home as the person or who is a director or
officer of Fidelity Bankshares, Inc., or Fidelity Federal Bank and
Trust.
Directors are not treated as associates of each other solely because of
their Board membership. For a further discussion of limitations on purchases of
a converting institution's stock at the time of conversion and subsequent to
conversion, see "Certain Restrictions on Purchase or Transfer of Shares after
Conversion" and "Restrictions on Acquisition of Fidelity Bankshares, Inc."
Liquidation Rights
In the unlikely event of a complete liquidation of Fidelity Bankshares,
Inc. prior to the conversion, all claims of creditors of Fidelity Bankshares,
Inc., including those of depositors to the extent of their deposit balances,
would be paid first. Thereafter, if there were any assets of Fidelity
Bankshares, Inc. remaining, these assets would be distributed to stockholders,
including Fidelity Bankshares, MHC. Were Fidelity Bankshares, MHC and Fidelity
Bankshares, Inc. to liquidate prior to the conversion, all claims of creditors
would be paid first. Then, if there were any assets of Fidelity Bankshares, MHC
remaining, members of Fidelity Bankshares, MHC would receive these remaining
assets, pro rata, based upon the deposit balances in their deposit account in
Fidelity Federal Bank and Trust immediately prior to liquidation. In the
unlikely event that Fidelity Federal Bank and Trust were to liquidate after
conversion, all claims of creditors, including those of depositors, also would
be paid first, followed by distribution of the "liquidation account" to certain
depositors, with any assets remaining thereafter distributed to
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Fidelity Bankshares, Inc. as the holder of Fidelity Federal Bank and Trust
capital stock. Pursuant to the rules and regulations of the Office of Thrift
Supervision, a postconversion merger, consolidation, sale of bulk assets or
similar combination or transaction with another insured savings institution
would not be considered a liquidation and, in these types of transactions, the
liquidation account would be assumed by the surviving institution.
The plan of conversion provides for the establishment, upon the
completion of the conversion, of a special "liquidation account" for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders in an
amount equal to the greater of:
(1) Fidelity Bankshares, MHC's ownership interest in the surplus and
reserves of Fidelity Bankshares, Inc. as of the date of its latest
balance sheet contained in this prospectus; or
(2) the retained earnings of Fidelity Federal Bank and Trust at the time
that Fidelity Federal Bank and Trust reorganized into Fidelity
Bankshares, MHC in 1994.
The purpose of the liquidation account is to provide Eligible Account
Holders and Supplemental Eligible Account Holders who maintain their deposit
accounts with Fidelity Federal Bank and Trust after the conversion with a
distribution upon complete liquidation of Fidelity Federal Bank and Trust after
the conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at Fidelity
Federal Bank and Trust, would be entitled, on a complete liquidation of Fidelity
Federal Bank and Trust after the conversion, to an interest in the liquidation
account prior to any payment to the stockholders of Fidelity Bankshares, Inc.
Each Eligible Account Holder and each Supplemental Eligible Account Holder would
have an initial interest in the liquidation account for each deposit account,
including regular accounts, transaction accounts such as negotiable order of
withdrawal accounts, money market deposit accounts, and certificates of deposit,
with a balance of $50 or more held in Fidelity Federal Bank and Trust on October
31, 1999, or ____________, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the total
liquidation account for each such deposit account, based on the proportion that
the balance of each such deposit account on October 31, 1999, or ____________,
respectively, bore to the balance of all deposit accounts in Fidelity
Bankshares, Inc. on such dates.
If, however, on any December 31 annual closing date commencing after
December 31, 2001, the amount in any such deposit account is less than the
amount in the deposit account on October 31, 1999, or ____________,
respectively, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced from time
to time by the proportion of any such reduction, and such interest will cease to
exist if such deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Payment pursuant to liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders would be separate and
apart from any insured deposit accounts to such depositor. Any assets remaining
after the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to Fidelity
Bankshares, Inc. as the sole stockholder of Fidelity Federal Bank and Trust.
Tax Aspects
Consummation of the conversion is expressly conditioned upon the prior
receipt of an opinion of counsel or tax advisor with respect to federal and
state income taxation that indicates that the conversion will not be a taxable
transaction to Fidelity Bankshares, MHC, Fidelity Bankshares, Inc., Fidelity
Federal Bank and Trust, Eligible Account Holders, Supplemental Eligible Account
Holders, and/or other members of Fidelity Bankshares, MHC. Unlike private letter
rulings, opinions of counsel or tax advisors are not binding on the IRS or any
state taxing authority, and such authorities could disagree with such opinions.
In the event of such disagreement, there can be no assurance that Fidelity
Bankshares, Inc. or Fidelity Federal Bank and Trust would prevail in a judicial
proceeding.
Fidelity Bankshares, MHC and Fidelity Bankshares, Inc. have received an
opinion of counsel, Luse Lehman Gorman Pomerenk & Schick, A Professional
Corporation, regarding the federal income tax consequences of the conversion
which includes, but is not limited to, the following opinions:
1. The merger of Fidelity Bankshares, Inc. with and into Fidelity Federal
Bank and Trust qualifies as
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a tax-free reorganization within the meaning of Section 368(a)(1)(A)
of the Code.
2. No gain or loss will be recognized by Fidelity Federal Bank and Trust
upon the receipt of the assets of Fidelity Bankshares, Inc. in the
Mid-Tier Merger.
3. The merger of Fidelity Bankshares, MHC with and into Fidelity Federal
Bank and Trust qualifies as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Code.
4. The exchange of the members' equity interests in Fidelity Bankshares,
MHC for interests in a liquidation account established in Fidelity
Federal Bank and Trust will satisfy the continuity of interest
requirement of Section 1.368-1(b) of the Income Tax Regulations.
5. Fidelity Bankshares, MHC will not recognize any gain or loss on the
transfer of its assets to Fidelity Federal Bank and Trust in exchange
for an interest in a liquidation account established in Fidelity
Federal Bank and Trust for the benefit of Fidelity Bankshares, MHC
members who remain depositors of Fidelity Federal Bank and Trust.
6. No gain or loss will be recognized by Fidelity Federal Bank and Trust
upon the receipt of the assets of Fidelity Bankshares, MHC in exchange
for the transfer to the members of Fidelity Bankshares, MHC of an
interest in the liquidation account in Fidelity Federal Bank and
Trust.
7. Members of Fidelity Bankshares, MHC will recognize no gain or loss
upon the receipt of an interest in the liquidation account in Fidelity
Federal Bank and Trust in exchange for their interests in Fidelity
Bankshares, MHC.
8. Current stockholders of Fidelity Bankshares, Inc. will not recognize
any gain or loss upon their exchange of Fidelity Bankshares, Inc.
common stock solely for new shares of Fidelity Bankshares, Inc. common
stock.
9. Cash received by any current stockholder of Fidelity Bankshares, Inc.
in lieu of a fractional share interest in new shares of Fidelity
Bankshares, Inc. common stock will be treated as having been received
as a distribution in full payment in exchange for a fractional share
interest of new Fidelity Bankshares, Inc. common stock, which such
stockholder would otherwise be entitled to receive, and will qualify
as capital gain or loss, assuming common stock of Fidelity Bankshares,
Inc. surrendered in exchange therefor was held as a capital asset by
such stockholder at the Effective Time.
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10. Each stockholder's aggregate basis in new shares of Fidelity
Bankshares, Inc. common stock received in the exchange will be the
same as the aggregate basis of Fidelity Bankshares, Inc. common stock
surrendered in exchange therefor.
11. Each stockholder's holding period in his or her Fidelity Bankshares,
Inc. common stock received in the exchange will include the period
during which Fidelity Bankshares, Inc. common stock surrendered was
held, provided that the Fidelity Bankshares, Inc. common stock
surrendered is a capital asset in the hands of the stockholder on the
date of the exchange.
12. No gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or other members upon
distribution to them of subscription rights to purchase shares of
Fidelity Bankshares, Inc. common stock, provided that the amount to be
paid for Fidelity Bankshares, Inc. common stock is equal to the fair
market value of Fidelity Bankshares, Inc. common stock.
13. No gain or loss will be recognized by Fidelity Bankshares, Inc. on the
receipt of money in exchange for Fidelity Bankshares, Inc. common
stock sold in the offering.
In the view of RP Financial, LC, which view is not binding on the
Internal Revenue Service, the subscription rights do not have any value, based
on the fact that these rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the common stock at a price equal to its estimated fair market
value, which will be the same price as the subscription price for the
unsubscribed shares of common stock. If the subscription rights granted to
Eligible Account Holders and Supplemental Eligible Account Holders are deemed to
have an ascertainable value, receipt of these rights could result in taxable
gain to those Eligible Account Holders and Supplemental Eligible Account Holders
who exercise the subscription rights in an amount equal to the value and
Fidelity Bankshares, Inc. could recognize gain on a distribution. Eligible
Account Holders and Supplemental Eligible Account Holders are encouraged to
consult with their own tax advisors as to the tax consequences in the event that
subscription rights are deemed to have an ascertainable value. Unlike private
rulings, an opinion of RP Financial, LC is not binding on the Internal Revenue
Service and the Internal Revenue Service could disagree with the conclusions
reached therein.
The form of federal tax opinion has been filed with the Securities and
Exchange Commission as an exhibit to Fidelity Bankshares, Inc.'s registration
statement. An opinion on the Florida state income tax consequences which will be
consistent with the federal tax opinion will be issued by Deloitte & Touche,
LLP, tax advisors to Fidelity Bankshares, MHC and Fidelity Bankshares, Inc.
Certain Restrictions on Purchase or Transfer of Shares after Conversion
All shares purchased in the offering by a director or an executive
officer of Fidelity Federal Bank and Trust generally may not be sold for a
period of one year following the conversion, except in the event of the death of
the director or executive officer. Each certificate for restricted shares will
bear a legend giving notice of this restriction on transfer, and instructions
will be issued to the effect that any transfer within this time period of any
certificate or record ownership of the shares other than as provided above is a
violation of the restriction. Any shares of common stock issued at a later date
as a stock dividend, stock split, or otherwise, with respect to the restricted
stock will be similarly restricted. The directors and executive officers of
Fidelity Federal Bank and Trust also will be restricted by the insider trading
rules promulgated pursuant to the Securities Exchange Act of 1934.
Purchases of shares of common stock of Fidelity Bankshares, Inc. by
directors, executive officers, or any person who was an executive officer after
adoption of the plan of conversion, and their associates, during the three- year
period following the conversion may be made only through a broker or dealer
registered with the Securities and Exchange Commission, except with the prior
written approval of the Office of Thrift Supervision. This restriction does not
apply, however, to negotiated transactions involving more than 1% of Fidelity
Bankshares, Inc.'s outstanding common stock or to the purchase of stock pursuant
to a stock option plan or any tax-qualified employee stock benefit plan or
nontax-qualified employee stock benefit plan of Fidelity Federal Bank and Trust
or Fidelity Bankshares, Inc., including any employee plans, recognition plans or
restricted stock plans.
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Office of Thrift Supervision regulations applicable to Fidelity
Bankshares, Inc. as a result of the conversion prohibit Fidelity Bankshares,
Inc. from repurchasing more than 5% of its outstanding shares of its common
stock during the first year following conversion. After one year the OTS does
not impose any repurchase restriction.
STOCKHOLDERS' RIGHTS
General. Both before and after the conversion, stockholders rights will
be governed by Delaware General Corporation Law, since Fidelity Bankshares,
Inc.,is and will remain a Delaware chartered corporation.
The following discussion summarizes the material rights of Fidelity
Bankshares, Inc. stockholders both before and after the conversion. The
discussion is qualified in its entirety by reference to the certificate of
incorporation and bylaws of Fidelity Bankshares, Inc. and the Delaware General
Corporation Law. See "Additional Information" for procedures for obtaining a
copy of Fidelity Bankshares, Inc.'s certificate of incorporation and bylaws.
Authorized Capital Stock. The authorized capital stock of Fidelity
Bankshares, Inc. currently consists of 8.2 million shares of common stock, par
value $0.10 per share, and $2 million shares of preferred stock, par value $0.10
per share. Following the completion of the conversion, the authorized capital
stock of Fidelity Bankshares, Inc. will consist of 30 million shares of common
stock par value of $0.10 per share and 2 million shares of preferred stock, par
value $0.10 per share. The authorized shares of common stock and preferred stock
exceed that to be issued in the conversion to provide Fidelity Bankshares,
Inc.'s with flexibility to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and employee stock options. However,
the additional authorized shares may also be used by the Board of Directors,
consistent with its fiduciary duty, to deter future attempts to gain control of
Fidelity Bankshares, Inc. The Board of Directors of Fidelity Bankshares, Inc.
also has sole authority to determine the terms of any one or more series of
preferred stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
preferred stock, the Board has the power, to the extent consistent with its
fiduciary duty, to issue a series of preferred stock to persons friendly to
management in order to attempt to block a post tender offer merger or other
transaction by which a third party seeks control. The Board of Directors of
Fidelity Bankshares, Inc. currently has no plans to issue additional shares,
other than to issue additional shares to fund stock benefit plans.
Issuance of Capital Stock. While in the mutual holding company
structure, Fidelity Bankshares, MHC was required to own at least a majority of
the outstanding Fidelity Bankshares, Inc. common stock. This requirement will no
longer apply following completion of the conversion.
The certificate of incorporation of Fidelity Bankshares, Inc. does not
contain restrictions on the issuance of shares of capital stock to directors,
officers or controlling persons of Fidelity Bankshares, Inc. Thus, stock-based
compensation plans, such as stock option plans, could be adopted by Fidelity
Bankshares, Inc. without stockholder approval and shares of Fidelity Bankshares,
Inc. capital stock could be issued directly to directors or officers without
stockholder approval. However, corporations such as of Fidelity Bankshares,
Inc., that have their securities quoted on the Nasdaq National Market System
generally must obtain stockholder approval of most stock compensation plans for
directors, officers and key employees. Moreover, although generally not
required, stockholder approval of stock-related compensation plans may be sought
in certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations.
Voting Rights. The certificate of incorporation and bylaws of Fidelity
Bankshares, Inc. do not provide for cumulative voting in the elections of
directors. For additional information regarding voting rights, see
"--Limitations on Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends. The ability of Fidelity Bankshares, Inc. to pay
dividends on its capital stock is restricted indirectly by Office of Thrift
Supervision regulations and by federal income tax considerations related to
savings institutions because dividends from Fidelity Federal Bank and Trust will
be a primary source of funds of Fidelity Bankshares, Inc. for the payment of
dividends to stockholders of Fidelity Bankshares, Inc..
Certain restrictions generally imposed on Delaware corporations may
also have an impact on Fidelity Bankshares, Inc.'s ability to pay dividends.
Delaware law generally provides that a Delaware chartered corporation
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is limited to paying dividends in an amount equal to the excess of its net
assets (total assets minus total liabilities) over its statutory capital or, if
no such excess exists, equal to its net profits for the current year and/or the
immediately preceding fiscal year.
Board of Directors. Fidelity Bankshares, Inc.'s certificate of
incorporation and bylaws each require the Board of Directors of Fidelity
Bankshares, Inc., to be divided into three classes as nearly equal in number as
possible and that the members of each class shall be elected for a term of three
years and until their successors are elected and qualified, with one class being
elected annually.
Under each of Fidelity Bankshares, Inc.'s certificate of incorporation,
any vacancy occurring in the Board of Directors of Fidelity Bankshares, Inc.
including any vacancy created by reason of an increase in the number of
directors, may be filled by the remaining directors, and any director so chosen
shall hold office for the remainder of the term to which the director has been
elected and until his or her successor is elected and qualified.
Fidelity Bankshares, Inc.'s and Fidelity Bankshares, Inc.'s certificate
of incorporation both provide that any director may be removed for cause by the
holders of at least 80% of the outstanding voting shares of the respective
corporation.
Limitations on Liability. Fidelity Bankshares, Inc's certificate of
incorporation each provides that their directors shall not be personally liable
for monetary damages to Fidelity Bankshares, Inc. for certain actions as
directors, except for liabilities that involve intentional misconduct or a
knowing violation of law by the director, the authorization or illegal
distributions or receipt of an improper personal benefit from their positions as
directors. This provision might, in certain instances, discourage or deter
stockholders or management from bringing a lawsuit against directors for a
breach of their duties even though such an action, if successful, might have
benefited Fidelity Bankshares, Inc.
Indemnification of Directors, Officers, Employees and Agents. The
officers, directors, agents and employees of Fidelity Bankshares, Inc. are
indemnified with respect to certain actions pursuant to their respective
certificates of incorporation, which complies with Delaware law regarding
indemnification. Delaware law allows Fidelity Bankshares, Inc. to indemnify the
aforementioned persons for expenses, settlements, judgments and fines in suits
in which such person has been made a party by reason of the fact that he or she
is or was an agent of Fidelity Bankshares, Inc. No such indemnification may be
given if the acts or omissions of the person are adjudged to be in violation of
law, if such person is liable to the corporation for an unlawful distribution,
or if such person personally received a benefit to which he or she was not
entitled.
Special Meetings of Stockholders. Each of Fidelity Bankshares, Inc.'s
certificate of incorporation provides that special meetings of the stockholders
of Fidelity Bankshares, Inc. may be called only by the board of directors.
Stockholder Nominations and Proposals. Fidelity Bankshares, Inc.'s
bylaws generally provide that any stockholder desiring to make a nomination for
the election of directors or a proposal for new business at a meeting of
stockholders must submit written notice at least 90 days in advance of the
meeting, together with certain information relating to the nomination or new
business. However, if less than 100 days notice or prior disclosure of the date
of the meeting is given, stockholders must submit such written notice no later
than the tenth day following the date on which notice of the meeting is mailed
to stockholders or such public disclosure was made. Failure to comply with these
advance notice requirements will preclude such nominations or new business from
being considered at the meeting. The advance notice requirement gives management
time to disclose to stockholders information about a dissident slate of
nominations for directors and to solicit its own proxies in an attempt to defeat
any dissident slate of nominations, should management determine that doing so is
in the best interest of stockholders generally. Similarly, adequate advance
notice of stockholder proposals will give management time to study such
proposals and to determine whether to recommend to the stockholders that such
proposals be adopted. In certain instances, such provisions could make it more
difficult to oppose management's nominees or proposals, even if stockholders
believe such nominees or proposals are in their best interests.
Stockholder Action Without a Meeting. Fidelity Bankshares, Inc.'s
certificate of incorporation each specifically denies the authority of
stockholders to act without a meeting.
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Stockholder's Right to Examine Books and Records. Delaware law provides
that a stockholder may inspect books and records upon written demand stating the
purpose of the inspection, if such purpose is reasonably related to such
person's interest as a stockholder.
Limitations on Acquisitions of Voting Stock and Voting Rights. Fidelity
Bankshares, Inc.'s certificate of incorporation each provides that in no event
shall any record owner of any outstanding common stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the then outstanding shares of common stock be entitled or permitted to
any vote in respect of the shares held in excess of such limit.
Mergers, Consolidations and Sales of Assets. Fidelity Bankshares,
Inc.'s certificate of incorporation each requires the approval of the holders of
at least 80% of the outstanding shares of voting stock to approve certain
"Business Combinations" involving an "Interested Stockholder" except in cases
where the proposed transaction has been approved in advance by two-thirds of
those members of the Board of Directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder. The term "Interested Stockholder" is defined
to include any individual, corporation, partnership or other entity, other than
Fidelity Bankshares, Inc., or their subsidiary, which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of Fidelity Bankshares, Inc., or an affiliate of such person or
entity. This provision of the certificate of incorporation applies to any
"Business Combination," which is defined to include, among other things:
(1) any merger or consolidation of Fidelity Bankshares, Inc. with or into
any Interested Stockholder;
(2) any sale, lease, exchange, mortgage, transfer, or other disposition of
25% or more of the assets of Fidelity Bankshares, Inc., and its
subsidiaries to an Interested Stockholder;
(3) the issuance or transfer of any securities of Fidelity Bankshares,
Inc., or a subsidiary of Fidelity Bankshares, Inc. to an Interested
Stockholder having a value exceeding 25% of the combined fair market
value of the outstanding sections of Fidelity Bankshares, Inc.; or
(4) any reclassification of common stock of Fidelity Bankshares, Inc., or
any recapitalization involving the common stock of Fidelity
Bankshares, Inc.
Under Delaware law, absent this provision, business combinations,
including mergers, consolidations and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of Fidelity
Bankshares, Inc., and any other affected class of stock. One exception under
Delaware law to the majority approval requirement applies to stockholders owning
15% or more of the common stock of a corporation for a period of less than three
years. Such 15% stockholder, in order to obtain approval of a business
combination, must obtain the approval of two-thirds of the outstanding stock,
excluding the stock owned by such 15% stockholder, or satisfy other requirements
under Delaware law relating to board of director approval of his or her
acquisition of the shares of Fidelity Bankshares, Inc. The increased stockholder
vote required to approve a business combination may have the effect of
foreclosing mergers and other business combinations which a majority of
stockholders deem desirable and placing the power to prevent such a merger or
combination in the hands of a minority of stockholders.
Fidelity Bankshares, Inc.'s certificate of incorporation each requires
the Board of Directors to consider certain factors in addition to the amount of
consideration to be paid when evaluating certain business combinations or a
tender or exchange offer. These additional factors include the social and
economic effects of the transaction on its customers and employees and the
communities served by Fidelity Bank and Trust.
Dissenters' Rights of Appraisal. Under Delaware law, stockholders of
Fidelity Bankshares, Inc. generally do not have dissenters' appraisal rights in
connection with a plan of merger or consolidation to which either Fidelity
Bankshares, Inc. is a party because the common stock is expected to be listed on
the Nasdaq National System.
Amendment of Governing Instruments. Fidelity Bankshares, Inc.'s
certificate of incorporation may be amended by the vote of the holders of a
majority of the outstanding shares of common stock, except that the
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provisions of the certificate of incorporation governing the calling of meeting
of stockholders, stockholders' nominations and proposals, authorized capital
stock, denial of preemptive rights, the number and staggered terms of directors,
removal of directors, approval of certain business combinations, the evaluation
of certain business combinations, elimination of directors' liability,
indemnification of officers and directors, and the manner of amending the
certificate of incorporation and bylaws, each may not be repealed, altered,
amended or rescinded except by the vote of the holders of at least 80% of the
outstanding shares of Fidelity Bankshares, Inc. This provision is intended to
prevent the holders of a lesser percentage of the outstanding common stock from
circumventing any of the foregoing provisions by amending the certificate of
incorporation to delete or modify one of such provisions.
The bylaws of Fidelity Bankshares, Inc. may only be amended by a
two-thirds vote of the Board of Directors or by the holders of at least 80% of
the outstanding stock of Fidelity Bankshares, Inc.
Purpose and Takeover Defensive Effects of Fidelity Bankshares, Inc.'s
Certificate of Incorporation and Bylaws. The Board of Directors of Fidelity
Bankshares, Inc. believes that the provisions described above are prudent and
will reduce Fidelity Bankshares, Inc. vulnerability to takeover attempts and
certain other transactions that have not been negotiated with and approved by
its Board of Directors. These provisions will also assist Fidelity Bankshares,
Inc. in the orderly deployment of the conversion proceeds into productive assets
during the initial period after the conversion. The Board of Directors believes
these provisions are in the best interest of Fidelity Bankshares, Inc. and its
stockholders. In the judgment of the Board of Directors, Fidelity Bankshares,
Inc.'s Board will be in the best position to determine the true value of
Fidelity Bankshares, Inc. and to negotiate more effectively for what may be in
the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interest of Fidelity Bankshares, Inc. and its
stockholders to encourage potential acquirer to negotiate directly with the
Board of Directors of Fidelity Bankshares, Inc. and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is also
the view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price reflective of
the true value of Fidelity Bankshares, Inc. and that is in the best interests of
all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of Fidelity
Bankshares, Inc. for its stockholders, with due consideration given to matters
such as the management and business of the acquiring corporation and maximum
strategic development of Fidelity Bankshares, Inc.'s assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market price, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive
Fidelity Bankshares, Inc.'s remaining stockholders of benefits of certain
protective provisions of the Securities Exchange Act of 1934, if the number of
beneficial owners became less than 300, thereby allowing for deregistration
under the Securities Exchange Act of 1934.
Despite the belief of Fidelity Bankshares, Inc. as to the benefits to
stockholders of these provisions of Fidelity Bankshares, Inc.'s certificate of
incorporation and bylaws, these provisions may also have the effect of
discouraging a future takeover attempt that would not be approved by Fidelity
Bankshares, Inc.'s Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of Fidelity Bankshares, Inc.'s Board of Directors and of management more
difficult. The Board of Directors of Fidelity Bankshares, Inc., however, has
concluded that the potential benefits outweigh the possible disadvantages.
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Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, Fidelity Bankshares, Inc. may adopt
additional anti-takeover charter provisions or other devices regarding the
acquisition of its equity securities that would be permitted for a Delaware
business corporation.
The cumulative effect of the restriction on acquisition of Fidelity
Bankshares, Inc. contained in the certificate of incorporation and bylaws of
Fidelity Bankshares, Inc. and in federal and Delaware law may be to discourage
potential takeover attempts and perpetuate incumbent management, even though
certain stockholders of Fidelity Bankshares, Inc. may deem a potential
acquisition to be in their best interests, or deem existing management not to be
acting in their best interests.
RESTRICTIONS ON ACQUISITION OF FIDELITY BANKSHARES, INC.
The following discussion is a summary of certain provisions of federal
law and regulations and Delaware corporate law relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations.
Conversion Regulations
Office of Thrift Supervision regulations prohibit any person from
making an offer, announcing an intent to make an offer or participating in any
other arrangement to purchase stock or acquiring stock or subscription rights in
a converting institution or its holding company from another person prior to
completion of its conversion. Further, without the prior written approval of the
Office of Thrift Supervision, no person may make such an offer or announcement
of an offer to purchase shares or actually acquire shares in the converting
institution or its holding company, for a period of three years from the date of
the completion of the conversion if, upon the completion of such offer,
announcement or acquisition, that person would become the beneficial owner of
more than 10% of the outstanding stock of the institution or its holding
company. The Office of Thrift Supervision has defined "person" to include any
individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association or its holding company, or an underwriter or
member of a selling group acting on the converting institution's or its holding
company's behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution or its holding company or who controls more than 9.9% of
the outstanding shares or voting rights of a converting or converted institution
or its holding company.
Change of Control Regulations
Under the Change in Bank Control Act, no person may acquire control of
an insured federal savings association or its parent holding company unless the
Office of Thrift Supervision has been given 60 days' prior written notice and
has not issued a notice disapproving the proposed acquisition. In addition,
Office of Thrift Supervision regulations provide that no company may acquire
control of a savings association without the prior approval of the Office of
Thrift Supervision. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the Office of Thrift Supervision.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 9.9% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the Office of Thrift Supervision
that the acquiror has the power to direct, or directly or indirectly to exercise
a controlling influence over, the management or policies of the institution.
Acquisition of more than 9.9% of any class of a savings association's voting
stock, if the acquiror is also subject to any one of eight "control factors,"
constitutes a rebuttable determination of control under the regulations. Such
control factors include the acquiror being one of the two largest stockholders.
The determination of control may be rebutted by submission to the Office of
Thrift Supervision, prior to the acquisition of stock or the occurrence of any
other circumstances giving rise to such determination, of a statement setting
forth facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The
107
<PAGE>
regulations provide that persons or companies which acquire beneficial ownership
exceeding 9.9% or more of any class of a savings association's stock must file
with the Office of Thrift Supervision a certification form that the holder is
not in control of such institution, is not subject to a rebuttable determination
of control and will take no action which would result in a determination or
rebuttable determination of control without prior notice to or approval of the
Office of Thrift Supervision, as applicable. There are also rebuttable
presumptions in the regulations concerning whether a group"acting in concert"
exists, including presumed action in concert among members of an "immediate
family."
The Office of Thrift Supervision may prohibit an acquisition of control
if it finds, among other things, that:
(1) the acquisition would result in a monopoly or substantially lessen
competition;
(2) the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK OF FIDELITY BANKSHARES, INC.
FOLLOWING THE CONVERSION
General
At the effective date, Fidelity Bankshares, Inc. will be authorized to
issue 30 million shares of common stock having a par value of $0.10 per share
and 2 million shares of preferred stock. Fidelity Bankshares, Inc. currently
expects to issue in the conversion up to 8,250,151, subject to adjustment,
shares of common stock in the offering, and up to 6,699,849 shares, subject to
adjustment, in exchange for the publicly held shares of Fidelity Bankshares,
Inc. does not intend to issue shares of preferred stock in the conversion. Each
share of Fidelity Bankshares, Inc. common stock will have the same relative
rights as, and will be identical in all respects with, each other share of
common stock. Upon payment of the subscription price for the common stock, in
accordance with the plan of conversion, all of the common stock will be duly
authorized, fully paid and nonassessable.
The common stock of Fidelity Bankshares, Inc. will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
Common Stock
Dividends. Fidelity Bankshares, Inc. can pay dividends out of statutory
surplus or from net profits if, as and when declared by its Board of Directors.
The payment of dividends by Fidelity Bankshares, Inc. is subject to limitations
that are imposed by law and applicable regulation. The holders of common stock
of Fidelity Bankshares, Inc. will be entitled to receive and share equally in
dividends as may be declared by the Board of Directors of Fidelity Bankshares,
Inc. out of funds legally available therefor. If Fidelity Bankshares, Inc.
issues preferred stock, the holders thereof may have a priority over the holders
of the common stock with respect to dividends.
Voting Rights. Upon the conversion, the holders of common stock of
Fidelity Bankshares, Inc. will possess exclusive voting rights in Fidelity
Bankshares, Inc. They will elect Fidelity Bankshares, Inc.'s Board of Directors
and act on other matters as are required to be presented to them under Delaware
law or as are otherwise presented to them by the Board of Directors. Generally,
each holder of common stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. If Fidelity
Bankshares, Inc. issues preferred stock, holders of the preferred stock may also
possess voting rights. Certain matters require an 80% stockholder vote.
As a federal stock savings association, corporate powers and control of
Fidelity Federal Bank and Trust are vested in its Board of Directors, who elect
the officers of Fidelity Federal Bank and Trust and who fill any vacancies
108
<PAGE>
on the Board of Directors as it exists upon the conversion. Voting rights of
Fidelity Federal Bank and Trust are vested exclusively in the owners of the
shares of capital stock of Fidelity Federal Bank and Trust, which will be
Fidelity Bankshares, Inc., and voted at the direction of Fidelity Bankshares,
Inc.'s Board of Directors. Consequently, the holders of the common stock will
not have direct control of Fidelity Federal Bank and Trust.
Liquidation. In the event of any liquidation, dissolution or winding up
of Fidelity Bankshares, Inc., as holder of Fidelity Federal Bank and Trust's
capital stock, would be entitled to receive, after payment or provision for
payment of all debts and liabilities of Fidelity Federal Bank and Trust,
including all deposit accounts and accrued interest thereon, and after
distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders, all assets of
Fidelity Federal Bank and Trust available for distribution. In the event of
liquidation, dissolution or winding up of Fidelity Bankshares, Inc., the holders
of its common stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of Fidelity
Bankshares, Inc. available for distribution. If preferred stock is issued, the
holders thereof may have a priority over the holders of the common stock in the
event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of Fidelity Bankshares,
Inc. will not be entitled to preemptive rights with respect to any shares which
may be issued. The common stock is not subject to redemption.
Preferred Stock
None of the shares of Fidelity Bankshares, Inc.'s authorized preferred
stock will be issued in the conversion. Preferred stock may be issued with
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
TRANSFER AGENT
The transfer agent and registrar for Fidelity Bankshares, Inc. common
stock is __________________________.
109
<PAGE>
EXPERTS
The consolidated financial statements as of December 31, 1998, and
1999, and for each of the three years in the period ended December 31, 1999,
included in this prospectus and elsewhere in the registration statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the registration statement, and has
been so included in reliance upon the report of such firm given their authority
as experts in accounting and auditing.
RP Financial, LC has consented to the publication herein of the summary
of its report to Fidelity Bankshares, Inc. setting forth its opinion as to the
estimated pro forma market value of the common stock upon stock offering and its
letter with respect to subscription rights.
LEGAL MATTERS
The legality of the common stock will be passed upon for Fidelity
Bankshares, Inc. by Luse Lehman Gorman Pomerenk & Schick, P.C., Washington,
D.C., special counsel to Fidelity Bankshares, Inc. Certain legal matters will be
passed upon for Ryan Beck & Co., Inc. by Nixon Peabody, LLP, Washington, D.C.
ADDITIONAL INFORMATION
Fidelity Bankshares, Inc. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 with
respect to the common stock offered hereby. As permitted by the rules and
regulations of the Securities and Exchange Commission, this prospectus does not
contain all the information set forth in the registration statement. Such
information, including the appraisal report which is an exhibit to the
registration statement, can be examined without charge at the public reference
facilities of the Securities and Exchange Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. In addition, the SEC maintains a web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including Fidelity Bankshares, Inc. The statements contained in
this prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement are, of necessity, brief descriptions of
the material terms of, and should be read in conjunction with, such contract or
document.
Fidelity Bankshares, MHC has filed an Application on Form AC with
respect to the conversion. This prospectus omits certain information contained
in the Application. The Application may be examined at the principal office of
the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552,
and at the Southeast Regional Office of the Office of Thrift Supervision, 1475
Peachtree Street, N.E., Atlanta, Georgia 30309.
In connection with the stock offering, Fidelity Bankshares, Inc. will
register its common stock with the SEC under Section 12 of the Securities
Exchange Act of 1934, and, upon such registration, Fidelity Bankshares, Inc. and
the holders of its stock will become subject to the proxy solicitation rules,
reporting requirements and restrictions on stock purchases and sales by
directors, officers and greater than 10% stockholders, the annual and periodic
reporting and certain other requirements of the Securities Exchange Act of 1934.
Under the stock issuance plan, Fidelity Bankshares, Inc. has undertaken that it
will not terminate such registration for a period of at least three years
following the stock offering.
110
<PAGE>
Fidelity Bankshares, Inc.
and Subsidiary
Consolidated Financial Statements
Contents
Independent Auditors' Report F-2
Consolidated Statements of Financial Position F-3
as of December 31, 1998 and 1999 (audited ) and September 30, 2000
(unaudited)
Consolidated Statements of Operations 27
for the years ended December 31, 1997, 1998 and 1999 (audited) and
for the nine months ended September 30, 1999 and 2000 (unaudited)
Consolidated Statements of Comprehensive Operations F-4
for the years ended December 31, 1997, 1998 and 1999 (audited)
and for the nine months ended September 30, 1999 and 2000 (unaudited)
Consolidated Statements of Changes in Stockholders' Equity F-5
for the years ended December 31, 1997, 1998 and 1999 (audited)
and for the nine months ended September 30, 2000 (unaudited)
Consolidated Statements of Cash Flows F-6
for the years ended December 31, 1997, 1998 and 1999 (audited)
and for the nine months ended September 30, 1999 and 2000 (unaudited)
Notes to Consolidated Financial Statements F-7
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and Related
Notes.
F-1
<PAGE>
Independent Auditors' Report
Board of Directors of
Fidelity Bankshares, Inc.:
We have audited the accompanying consolidated statements of financial position
of Fidelity Bankshares, Inc. and its wholly-owned subsidiary, Fidelity Federal
Bank & Trust (collectively the "Company"), as of December 31, 1998 and 1999, and
the related consolidated statements of operations (included elsewhere herein),
comprehensive operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Fidelity Bankshares, Inc. and
subsidiary as of December 31, 1998 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
West Palm Beach, FL
February 14, 2000
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------ ----------------
1998 1999 2000
---- ---- ----
(Unaudited)
ASSETS (In Thousands, except share data) CASH AND CASH EQUIVALENTS:
<S> <C> <C> <C>
Cash and amounts due from depository institutions ....................... $ 27,951 $ 41,736 $ 47,027
Interest-bearing deposits ............................................... 32,075 19,065 3,917
----------- ----------- -----------
Total cash and cash equivalents ..................................... 60,026 60,801 50,944
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities .................... 18,824 29,059 81,533
Mortgage-backed securities .............................................. 389,263 336,212 304,201
Corporate debt securities ............................................... 44,488 38,959 38,431
Equity securities ....................................................... -- -- 1,344
----------- ----------- -----------
Total assets available for sale ..................................... 452,575 404,230 425,509
LOANS RECEIVABLE, Net of allowance for loan losses - December 31, 1998
$3,226, December 31, 1999 $3,609 and September 30,
2000 $4,466 (unaudited) .................................................... 977,166 1,164,421 1,328,192
OFFICE PROPERTIES AND EQUIPMENT .............................................. 37,708 44,982 50,181
FEDERAL HOME LOAN BANK STOCK, At cost ........................................ 15,658 13,354 16,492
REAL ESTATE OWNED, Net ....................................................... 907 775 --
ACCRUED INTEREST RECEIVABLE .................................................. 7,549 8,330 9,853
DEFERRED INCOME TAX ASSET .................................................... 1,443 4,924 4,542
OTHER ASSETS ................................................................. 13,895 17,116 19,137
----------- ----------- -----------
TOTAL ASSETS ................................................................. $ 1,566,927 $ 1,718,933 $ 1,904,850
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 1,120,746 $ 1,321,510 $ 1,412,433
OTHER BORROWED FUNDS ......................................................... 6,981 14,656 16,763
ADVANCES FROM FEDERAL HOME LOAN BANK ......................................... 303,140 247,073 326,289
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE ................................ 3,081 4,010 18,037
DRAFTS PAYABLE ............................................................... 9,605 6,533 5,450
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
DEBENTURES .............................................................. 28,750 28,750 28,750
OTHER LIABILITIES ............................................................ 9,625 13,097 10,257
----------- ----------- -----------
TOTAL LIABILITIES ....................................................... 1,481,928 1,635,629 1,817,979
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued .................... -- -- --
COMMON STOCK ($.10 par value) 8,200,000 authorized shares:
outstanding 6,803,042, 6,834,463 and 6,843,584 (unaudited) at
December 31, 1998 and 1999 and September 30, 2000, respectively ......... 680 683 684
ADDITIONAL PAID IN CAPITAL ................................................... 40,535 40,937 41,054
RETAINED EARNINGS - substantially restricted ................................. 52,018 57,343 61,702
TREASURY STOCK - at cost
394,029, 488,806 and 478,586 shares at December 31, 1998
and 1999 and September 30, 2000, respectively ........................... (7,258) (9,232) (9,146)
COMMON STOCK PURCHASED BY:
Employee stock ownership plan ........................................... (658) (329) (82)
ACCUMULATED OTHER COMPREHENSIVE LOSS
(Net of applicable income taxes) ........................................ (318) (6,098) (7,341)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY .............................................. 84,999 83,304 86,871
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................... $ 1,566,927 $ 1,718,933 $ 1,904,850
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
----------------------------- --------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net income .............................................................. $ 6,418 $ 7,412 $ 9,114 $ 4,394 $ 6,555
Other comprehensive income, net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period ........ 623 (910) (5,689) (3,698) (842)
Less: reclassification adjustment for gains realized
in net income ............................................ -- (813) (91) (43) (401)
------- ------- ------- ------- -------
Comprehensive income .................................................... $ 7,041 $ 5,689 $ 3,334 $ 653 $ 5,312
======= ======= ------- ======= -------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, 1999 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Retained Employee Other
Paid Earnings- Stock Comprehen-
Common In Substantially Treasury Ownership sive Income
Stock Capital Restricted Stock Plan (Loss) Total
----- ------- ---------- ----- ---- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 .................... $ 675 $ 37,397 $ 44,184 $ -- $ (1,315) $ 782 $ 81,723
Net income for the year ended
December 31, 1997 ......................... -- -- 6,418 -- -- -- 6,418
Stock Options exercised ........................ 4 525 -- -- -- -- 529
Common Stock retired ........................... (1) (142) -- -- -- -- (143)
Recognition of unrealized increase in fair
value of assets available for sale, net
of income taxes ........................... -- -- -- -- -- 623 623
Amortization of deferred compensation-
Employee Stock Ownership Plan and
Recognition and Retention Plan ............ -- 567 -- -- 329 -- 896
Cash dividends declared ($ 0.85 per share) ..... -- -- (2,659) -- -- -- (2,659)
-------- -------- -------- -------- -------- -------- --------
Balance - December 31, 1997 .................... 678 38,347 47,943 -- (986) 1,405 87,387
Net income for the year ended
December 31, 1998 ......................... -- -- 7,412 -- -- -- 7,412
Stock Options exercised ........................ 2 323 -- -- -- -- 325
Common Stock retired ........................... -- (115) -- -- -- -- (115)
Purchase of treasury stock ..................... -- -- -- (5,752) -- -- (5,752)
Reclassification of common stock held
by SMPIAP and related obligation .......... -- 1,506 -- (1,506) -- -- --
Recognition of unrealized decrease in fair
value of assets available for sale, net
of income taxes ........................... -- -- -- -- -- (1,723) (1,723)
Amortization of deferred compensation-
Employee Stock Ownership Plan ............. -- 474 -- -- 328 -- 802
Cash dividends declared ($ 0.95 per share) ..... -- -- (3,337) -- -- -- (3,337)
-------- -------- -------- -------- -------- -------- --------
Balance - December 31, 1998 .................... 680 40,535 52,018 (7,258) (658) (318) 84,999
Net Income for the year ended
December 31, 1999 ......................... -- -- 9,114 -- -- -- 9,114
Stock Options exercised ........................ 3 190 -- -- -- -- 193
Common Stock retired ........................... -- (22) -- -- -- -- (22)
Purchase of treasury stock ..................... -- -- -- (1,906) -- -- (1,906)
Reclassification of common stock held
by SMPIAP and related obligation .......... -- 68 -- (68) -- -- --
Recognition of unrealized decrease in fair
value of assets available for sale, net
of income taxes ................................ -- -- -- -- -- (5,780) (5,780)
Amortization of deferred compensation-
Employee Stock Ownership Plan ............. -- 166 -- -- 329 -- 495
Cash dividends declared ($ 1.00 per share) ..... -- -- (3,789) -- -- -- (3,789)
-------- -------- -------- -------- -------- -------- --------
Balance - December 31, 1999 .................... $ 683 $ 40,937 $ 57,343 $ (9,232) $ (329) $ (6,098) $ 83,304
Net income for the nine months ended
September 30, 2000 ........................ -- -- 6,555 -- -- -- 6,555
Stock Options exercised ........................ 1 82 -- -- -- -- 83
Reclassification of common stock held
by SMPIAP and related obligation .......... -- (86) -- 86 -- -- --
Recognition of unrealized decrease in fair
value of assets available for sale, net
of income taxes ................................ -- -- -- -- -- (1,243) (1,243)
Amortization of deferred compensation-
Employee Stock Ownership Plan ............. -- 121 -- -- 247 -- 368
Cash dividends declared ($ 0.75 per share) ..... -- -- (2,196) -- -- -- (2,196)
-------- -------- -------- -------- -------- -------- --------
Balance - September 30, 2000 ................... $ 684 $ 41,054 $ 61,702 $ (9,146) $ (82) $ (7,341) $ 86,871
======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(In Thousands) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income ........................................................ $ 6,418 $ 7,412 $ 9,114 $ 4,394 $ 6,555
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation ................................................... 1,258 1,796 2,301 1,689 2,181
ESOP compensation expense ...................................... 765 803 487 380 377
Accretion of discounts, amortization of premiums and
goodwill, and other deferred yield items ...................... (414) 1,405 1,558 1,352 (989)
Provision for loan losses ...................................... 170 77 463 268 928
Provisions for losses and net (gains) losses on sales of real
estate owned .................................................. (189) (48) (230) (214) (151)
Gain on securities received from insurance carriers
demutualization ............................................... -- -- -- -- (2,503)
Net (gain) loss on sale of:
Loans .................................................... (190) (1,147) (273) (273) --
Corporate debt securities ................................ -- (109) (5) (5) --
Mortgage-backed securities ............................... -- (1,246) (140) (65) --
Equity securities ........................................ -- -- -- -- (658)
Office properties and equipment .......................... -- 43 (5,053) 66 77
Other assets ............................................. (702) -- -- -- --
Increase in accrued interest receivable ........................... (1,507) (1,145) (780) (810) (1,523)
Increase in other assets .......................................... (3,409) (1,654) (2,942) (2,805) (36)
Increase (decrease) in drafts payable ............................. 2,392 4,256 (3,072) (5,121) (1,083)
Increase (decrease) in deferred income taxes ...................... (387) 673 (41) 653 2,745
Increase (decrease) in other liabilities .......................... 661 566 2,918 65 (2,821)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities ...... 4,866 11,682 4,305 (426) 3,099
--------- --------- --------- --------- ---------
CASH FLOW PROVIDED FROM INVESTING ACTIVITIES:
Loan originations and principal payments on loans ................. (125,911) (125,997) (175,275) (137,069) (142,316)
Principal payments received on mortgage-backed
securities ....................................................... 22,325 125,105 89,810 77,718 29,294
Purchases of:
Loans .......................................................... (35,647) (45,157) (28,401) (21,005) (21,101)
Mortgage-backed securities ..................................... (131,956) (310,581) (57,286) (57,286) --
Corporate debt securities ...................................... -- (55,343) -- -- --
Federal Home Loan Bank stock ................................... (13,566) (5,347) (687) -- (4,638)
Investment securities .......................................... (5,283) (4,974) (40,839) (40,839) (65,112)
Office properties and equipment ................................ (4,724) (18,277) (11,335) (8,162) (8,034)
Proceeds from sales of:
Loans .......................................................... 11,824 54,850 16,006 14,548 --
Federal Home Loan Bank stock ................................... -- 1,271 2,991 540 1,500
Corporate debt securities ...................................... -- 9,843 4,958 4,958 --
Real estate acquired in settlement of loans and held
for investment ................................................ 1,647 1,470 2,127 1,833 894
Mortgage-backed securities available for sale .................. -- 27,290 10,054 696 --
Office properties and equipment ................................ -- -- 6,675 -- 500
Other assets ................................................... 798 -- -- -- --
Proceeds from maturities of investment securities ................. 7,000 2,660 29,890 8,455 12,240
Cash used to purchase BankBoynton, a Federal Savings Bank
Net of cash received relating to purchase ................ (4,367) -- -- -- --
Other ............................................................. 2,004 1,465 (114) 228 (346)
--------- --------- --------- --------- ---------
Net cash used in investing activities .................... (275,856) 341,722) (151,426) (155,385) (197,119)
--------- --------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock ...................... 308 79 274 274 84
Purchase of treasury stock ........................................ -- (5,752) (1,906) (1,906) --
Sale of subordinated debentures, net .............................. -- 27,277 -- -- --
Cash dividends paid ............................................... (2,566) (3,316) (3,773) (3,050) (2,194)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts ............. 27,858 58,568 109,143 68,826 95,019
Certificates of deposit ........................................ 108,033 189,838 91,621 89,041 (4,096)
Advances from Federal Home Loan Bank ........................... 147,874 64,049 (56,067) (788) 79,216
Other borrowed funds ........................................... 3,780 3,201 7,675 4,744 2,107
ESOP Loan ...................................................... (1,104) -- -- -- --
Advances by borrowers for taxes and insurance .................. 211 298 929 13,389 14,027
--------- --------- --------- --------- ---------
Net cash provided by financing activities ................ 284,394 334,242 147,896 170,530 184,163
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............. 13,404 4,202 775 14,719 (9,857)
CASH AND CASH EQUIVALENTS, Beginning of year ...................... 42,420 55,824 60,026 60,026 60,801
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, End of year ............................ $ 55,824 $ 60,026 $ 60,801 $ 74,745 $ 50,944
========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(INFORMATION RELATED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fidelity Bankshares, Inc. (the "Company") became the parent of Fidelity Federal
Bank & Trust (the "Bank") on January 29, 1997, as a result of a tax-free
reorganization, accounted for in the same manner as a pooling of interests
merger. Consequently, the Bank is now a wholly-owned subsidiary of the Company.
The Bank's lending markets are primarily concentrated in Palm Beach, Martin and
St. Lucie counties in Southeast Florida.
The accounting and reporting policies of the Company and its subsidiary conform,
in all material respects, to generally accepted accounting principles. The
following summarizes the more significant of these policies:
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, the Bank and the Bank's wholly-owned subsidiaries,
Fidelity Realty and Appraisal Services, Inc. ("FRAS") and Florida Consolidated
Agency, Inc. ("Fidelity Insurance"). All significant intercompany balances and
transactions have been eliminated. Neither the Bank nor its subsidiaries are or
have been involved in any joint ventures during any periods presented.
FRAS, principally, performs appraisals for and sells real estate owned by the
Bank. Fidelity Insurance, an insurance agency, sells a full line of insurance
products.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents - For presentation purposes in both the consolidated statements
of financial position and the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
Assets Available for Sale - Securities available for sale are carried at fair
value, based upon market quotations. Deferred income taxes are provided on any
unrealized appreciation or decline in value. Such appreciation or decline in
value, net of deferred taxes is reflected as an adjustment of equity. Gain or
loss on sale of such securities is based on the specific identification method.
Debt and equity securities are classified as either available for sale or held
to maturity based on management's intent. There are no investments held to
maturity at December 31, 1998, 1999 and September 30, 2000.
Interest Rate Risk - The Bank is engaged principally in providing first mortgage
loans (both adjustable rate and fixed rate mortgage loans) to individuals (See
Note 5 for the composition of the mortgage loan portfolio). Mortgage loans and
investment securities are funded primarily with short-term liabilities which
have interest rates that vary with market rates over time. Net interest income
and the market value of net interest-earning assets will fluctuate based on
changes in interest rates and changes in the levels of interest-sensitive assets
and liabilities. The actual duration of interest-earning assets and
interest-bearing liabilities may differ significantly from the stated duration
as a result of prepayment, early withdrawals, and similar factors.
F-7
<PAGE>
Allowance for Loan Losses - The Company maintains an allowance for loan losses
to absorb losses inherent in the loan portfolio. The allowance is based on
ongoing, quarterly assessments of the probable estimated losses inherent in the
loan portfolio, and to a lesser extent, unused commitments to provide financing.
The allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of
charge-offs, net of recoveries. The Company's methodology for assessing the
appropriateness of the allowance consists of several key elements, which include
a formula allowance and specific allowances.
The formula allowance is calculated by applying loss factors to outstanding
loans based on an internal risk grade of such loans or pools of loans. Changes
in risk grades of both performing and nonperforming loans affect the amount of
the formula allowance. Loss factors are based primarily on our historical loss
experience and may be adjusted for other significant factors that, in
management's judgement, affect the collectibility of the portfolio as of the
evaluation date.
Pooled loan loss factors (not individually graded loans) are derived from a
model that tracks five years of historical loss experience. Pooled loans are
loans that are homogeneous in nature, such as consumer installment and
residential mortgage loans.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a loan that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The allowance also incorporates the results of measuring impaired loans as
provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition
and disclosures related to impaired loans. A loan is considered impaired when
management determines that it is probable that the Company will be unable to
collect all amounts due according to the original contractual terms of the loan
agreement. Impairment is measured by the difference between the recorded
investment in the loan (including accrued interest, net deferred loan fees or
costs and unamortized premium or discount) and the estimated present value of
total expected future cash flows, discounted at the loan's effective rate, or
the fair value of the collateral, if the loan is collateral dependent.
Impairment is recognized by adjusting an allocation of the existing allowance
for loan losses.
Uncollected Interest - The Bank reverses all accrued interest against interest
income when a loan is more than 90 days delinquent and ceases accruing interest
thereafter. Such interest ultimately collected is credited to income in the
period of recovery.
Real Estate Owned - Properties acquired through foreclosure, or a deed in lieu
of foreclosure are carried at the lower of fair value less estimated costs to
sell, or cost. If the fair value less the estimated cost to sell an individual
property declines below the cost of such property, a provision for losses is
charged to operations.
Subsequent costs relating to the improvement of property are capitalized in
amounts not to exceed the property's fair value. Costs relating to holding the
property are charged to expense when incurred.
The amounts the Bank could ultimately recover from property acquired by
foreclosure or deed in lieu of foreclosure, could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the Bank's control or changes in the Bank's
strategy for recovering its investment.
Office Properties and Equipment - Office properties and equipment are carried at
cost less accumulated depreciation. Land is carried at cost. Depreciation is
computed on the straight-line method over the estimated useful lives of the
assets, which range from three to fifty years for buildings and improvements and
three to ten years for furniture and equipment.
F-8
<PAGE>
Goodwill and Core Deposit Intangibles - Core deposit intangibles resulting from
the acquisition of deposits from the Resolution Trust Corporation ("RTC") is
being amortized on a straight-line basis over five years. Goodwill resulting
from the acquisition of BankBoynton in 1997 is being amortized on a
straight-line basis over fifteen years, while goodwill arising for the
acquisition of Dunn & Noel in 1999, which became Fidelity Insurance, is being
amortized on a straight-line basis over ten years. The balance of goodwill and
core deposit intangibles, included in other assets at December 31, 1998, 1999
and September 30, 2000 was $ 2,394,000, $ 2,758,000 and $ 2,567,000,
respectively.
Long-Lived Assets - Long-lived assets to be held and used by the Company are
reviewed to determine whether any events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. For long-lived
assets to be held and used, the Company bases its evaluation on such impairment
indicators as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements, as well as other
external market conditions or factors that may be present. If such impairment
indicators are present or other factors exist that indicate that the carrying
amount of the asset may not be recoverable, the Company determines whether an
impairment has occurred through the use of an undiscounted cash flows analysis
of assets at the lowest level for which identifiable cash flows exist. If an
impairment has occurred, the Company recognizes a loss for the difference
between the carrying amount and the estimated value of the asset. The fair value
of the asset is measured using quoted market prices or, in the absence of quoted
market prices, fair value is based on an estimate of discounted cash flow
analysis.
Drafts Payable - Drafts payable represent checks drawn by the Bank on a third
party payer, for savings account withdrawals and payment of the Bank's expenses.
Under the agreement between the Bank and its third party payer, the Bank funds
the checks written on the day following their issuance.
Loan Origination Fees and Costs - Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
of the related loan. Deferred loan fees and costs are amortized to income over
the estimated life of the loans using the interest method.
Unearned discounts on consumer loans are amortized to income using the interest
method.
Commitment Fees -Non-refundable fees received for commitments to make or
purchase loans in the future, net of direct costs of underwriting the
commitments, are deferred and, if the commitment is exercised, recognized over
the life of the loan as an adjustment of yield. If the commitment expires
unexercised, income is recognized upon expiration of the commitment. Direct loan
origination costs incurred to make a commitment to originate a loan are offset
against any related commitment fee and the net amount recognized.
Pension and Retirement Plans - Benefits are accounted for in accordance with
SFAS No. 87, entitled "Employers' Accounting for Pensions." Net periodic pension
costs (income) are actuarially determined.
Income Taxes - The Company and its subsidiary file consolidated federal and
state income tax returns (See Note 12).
Deferred income taxes are provided on items recognized for financial reporting
purposes in periods different than such items are recognized for income tax
purposes.
Earnings Per Common Share - Basic earnings per common share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period less the weighted average
unallocated ESOP shares of common stock.
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued.
F-9
<PAGE>
Impact of New Accounting Issues - In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities, (as, subsequently
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities)," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives (including certain derivative
instruments embedded in other contracts) 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.
In June of 1999, FASB issued SFAS No. 137 "Deferral of the Effective Date of
FASB Statement No. 133," which makes SFAS 133 effective for all fiscal quarters
of fiscal years beginning after June 15, 2000 and, accordingly, would apply to
the Company beginning on April 1, 2001. The Company plans to adopt the standard
at that time and does not presently intend to reclassify securities between
categories. Management does not believe that the Company is a party to any
transactions involving derivatives as defined by SFAS No. 133.
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.
Reclassifications - Certain amounts in the consolidated financial statements
have been reclassified to be consistent with the current year's presentation.
F-10
<PAGE>
2. MUNICIPAL BONDS AND GOVERNMENT AND AGENCY SECURITIES AVAILABLE FOR SALE
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in Thousands)
December 31, 1998:
<S> <C> <C> <C> <C>
Municipal Bonds .................. $ 2,883 $ 25 $ 8 $ 2,900
United States Government
and agency securities ........... 15,795 129 -- 15,924
------- ------- ------- -------
Total ............................ $18,678 $ 154 $ 8 $18,824
======= ======= ======= =======
Weighted average interest rate ... 6.02%
=======
December 31, 1999:
Municipal Bonds .................. $ 2,786 $ -- $ 44 $ 2,742
United States Government
and agency securities ........... 26,832 -- 515 26,317
------- ------- ------- -------
Total ............................ $29,618 $ -- $ 559 $29,059
======= ======= ======= =======
Weighted average interest rate ... 5.94%
=======
September 30, 2000:
Municipal Bonds .................. $ 2,544 $ -- $ 29 $ 2,515
United States Government
and agency securities ........... 79,563 -- 545 79,018
------- ------- ------- -------
Total ............................ $82,107 $ -- $ 574 $81,533
======= ======= ======= =======
Weighted average interest rate ... 4.75%
=======
</TABLE>
The following table sets forth the contractual maturity of the Bank's securities
availabe for sale at December 31, 1998 and 1999 and September 30, 2000.
<TABLE>
<CAPTION>
September 30, 2000
December 31, 1998 December 31, 1999 (Unaudited)
------------------------- ----------------------- -------------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
---- ---------- ---- ---------- ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less................ $ 12,897 $ 13,006 $ 2,666 $ 2,665 $ 40,413 $ 40,316
Due in one year to five years.......... 5,781 5,818 26,952 26,394 41,694 41,217
---------- ---------- --------- ---------- ---------- ----------
Total............................. $ 18,678 $ 18,824 $ 29,618 $ 29,059 $ 82,107 $ 81,533
========== ========== ========= ========== ========== ==========
</TABLE>
The Bank had total Government and Agency securities available for sale pledged
at December 31, 1998 and 1999, and September 30, 2000 of $ 15.4 million, $ 19.0
million and $ 48.1 million, respectively. Of the $ 19.0 million of securities
pledged at December 31, 1999, $ 2.0 million was pledged for customer accounts
that exceeded $ 100,000, $ 2.0 million was pledged as collateral for Treasury
Tax and Loan ("TT&L") accounts held for the benefit of the federal government,
and the remaining $ 15.0 million was pledged as collateral to secure borrowings
from the Federal Reserve Bank for year 2000 contingency purposes, although no
borrowings were drawn by the Bank for such purposes. Of the $ 48.1 million of
securities pledged at September 30, 2000, $ 11.3 million was pledged for
customer accounts that exceeded $ 100,000, $ 2.8 million was pledged as
collateral for Treasury Tax and Loan ("TT&L") accounts held for the benefit of
the federal government, $ 1.0 million was pledged as collateral for trust
accounts and $ 33.0 million was pledged as collateral for other borrowed funds.
There were no sales of government and agency securities during the years ended
December 31, 1998 and 1999, and the nine months ended September 30, 2000.
F-11
<PAGE>
3. MORTGAGE-BACKED SECURITIES AVAILABE FOR SALE
Mortgage-backed securities available for sale at December 31, 1998 and 1999 and
September 30, 2000 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
December 31, 1998:
FHLMC-fixed rate ............ $ 64,255 $ 378 $ 412 $ 64,221
FNMA-fixed rate ............. 64,115 577 141 64,551
GNMA-fixed rate ............. 20,311 112 29 20,394
FHLMC CMO-fixed rate ........ 58,243 29 29 58,243
FHLMC-adjustable rate ....... 11,213 151 57 11,307
FNMA-adjustable rate ........ 11,485 157 13 11,629
GNMA-adjustable rate ........ 996 -- 1 995
FNMA CMO-adjustable
rate ....................... 44,867 246 253 44,860
FHLMC CMO-adjustable
rate ....................... 91,630 387 569 91,448
FHLMC CMO-fixed rate ........ 21,642 38 65 21,615
-------- -------- -------- --------
Total .................... $388,757 $ 2,075 $ 1,569 $389,263
======== ======== ======== ========
December 31, 1999:
FHLMC-fixed rate ............ $ 44,540 $ 15 $ 1,252 $ 43,303
FNMA-fixed rate ............. 52,312 8 1,542 50,778
GNMA-fixed rate ............. 14,371 -- 486 13,885
FHLMC CMO-fixed rate ........ 70,522 -- 3,081 67,441
FHLMC-adjustable rate ....... 4,147 2 35 4,114
FNMA-adjustable rate ........ 4,565 -- 105 4,460
GNMA-adjustable rate ........ 11,187 -- 104 11,083
FNMA CMO-fixed rate ......... 35,083 -- 1,261 33,822
FHLMC CMO-adjustable
rate ....................... 69,167 776 340 69,603
FNMA CMO-adjustable
rate ....................... 37,636 319 232 37,723
-------- -------- -------- --------
Total .................... $343,530 $ 1,120 $ 8,438 $336,212
======== ======== ======== ========
September 30, 2000
(Unaudited):
FHLMC-fixed rate ............ $ 39,092 $ 9 $ 1,007 $ 38,094
FNMA-fixed rate ............. 47,417 9 1,147 46,279
GNMA-fixed rate ............. 12,503 -- 333 12,170
FHLMC CMO-fixed rate ........ 63,750 -- 4,412 59,338
FHLMC-adjustable rate ....... 3,611 9 21 3,599
FNMA-adjustable rate ........ 4,197 -- 55 4,142
FNMA CMO-fixed rate ......... 26,356 -- 1,575 24,781
FHLMC CMO-adjustable
rate ....................... 82,320 265 1,097 81,488
FNMA CMO-adjustable
rate ....................... 34,599 73 362 34,310
-------- -------- -------- --------
Total .................... $313,845 $ 365 $ 10,009 $304,201
======== ======== ======== ========
There were no sales of mortgage-backed securities classified as available for
sale during 1997. There were $26.0 million in sales of mortgage-backed
securities classified as available for sale during the year ended December 31,
1998 resulting in proceeds of $27.3 million, gross realized gains of $1.2
million and no gross realized losses. There were $ 9.9 million in sales of
mortgage-backed securities classified as available for sale during the year
ended December 31, 1999 resulting in proceeds of $10.0 million, gross realized
gains of $142,000 and gross realized losses of $2,000. There were no sales of
mortgage-backed securities during the nine months ended September 30, 2000.
At December 31, 1999 and September 30, 2000 the Bank had $108.3 million and
$40.5 million, respectively, of mortgage-backed securities pledged to the State
of Florida as collateral for certificates of deposit.
F-12
<PAGE>
4. CORPORATE DEBT SECURITIES AVAILABLE FOR SALE
Investment grade, adjustable rate and trust preferred securities of other
financial institutions at December 31, 1998 and 1999 and September 30, 2000 are
summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in Thousands)
December 31, 1998:
Total ......................... $ 45,653 $ -- $ 1,165 $44,488
========== ========== ======= =======
Weighted average interest
rate ......................... 6.34%
=======
December 31, 1999:
Total ......................... $ 40,741 $ -- $ 1,782 $38,959
========== ========== ======= =======
Weighted average interest
rate ......................... 6.83%
=======
September 30, 2000
(Unaudited):
Total ......................... $ 40,741 $ -- $ 2,310 $38,431
========== ========== ======= =======
Weighted average interest
rate ......................... 7.36%
=======
All of the corporate debt securities available for sale contractually mature in
the years 2027 or 2028.
During 1997 there were no sales of corporate debt securities.
During 1998 there were $9.7 million in sales of corporate debt securities
classified as available for sale resulting in gross proceeds of $9.8 million,
gross realized gains of $109,000 and no gross realized losses.
During 1999 there were $5.0 million in sales of corporate debt securities
classified as available for sale resulting in gross proceeds of $5.0 million,
gross realized gains of $5,000 and no gross realized losses.
During the nine months ended September 30, 2000, there were no sales of
corporate debt securities.
During 1998, the Bank began to diversify its investments in mortgage-backed
securities by purchasing investment grade rated, floating rate trust preferred
securities of other financial institutions. In doing so, the Bank was relying on
regulations which permit an investment of up to 35% of its assets in "commercial
paper and corporate debt securities." In November of 1998, the Office of Thrift
Supervision ("OTS") issued TB-73, which among other matters stated concerns over
institutions' investment in trust preferred securities, citing increased
interest rate risks as a result of the predominant fixed rate nature of such
securities and that some of these securities could have their maturities
extended at the issuer's option. As a result, the OTS adopted limitations on the
investment of such securities to 15% of a regulated institution's equity, but
adopted a method by which an institution could appeal the limitation. At
December 31, 1999, the Bank's investment in trust preferred securities was 2.3%
of its assets and 35.1% of its regulatory capital. At September 30, 2000, the
Banks investment in trust preferred securities was 2.0% of its assets and 33.5%
of its regulatory capital. The Bank appealed to the OTS to permit it to continue
its investment at current levels. The OTS has approved the Bank maintaining its
current investment in these securities but not to increase its investment.
F-13
<PAGE>
5. LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1999 and September 30, 2000 consist of
the following:
At December 31, At September 30,
------------------------ -----------------
1998 1999 2000
---- ---- ----
(Unaudited)
(In Thousands)
One-to-four single family,
residential real estate mortgages $ 828,929 $ 925,384 $ 1,012,364
Commercial and multi-family real
estate mortgages ................. 74,671 118,262 129,429
Real estate construction-primarily
residential ...................... 53,515 63,589 78,844
Land loans-primarily residential .. 8,583 9,763 14,061
----------- ----------- -----------
Total first mortgage loans ........ 965,698 1,116,998 1,234,698
Consumer Loans .................... 48,270 60,281 78,821
Commercial business loans ......... 46,958 94,157 133,522
----------- ----------- -----------
Total gross loans ................. 1,060,926 1,271,436 1,447,041
Less:
Undisbursed portion of loans
in process .................. 84,155 106,232 117,431
Unearned discounts, premiums
and deferred loan fees
(costs), net ................ (3,621) (2,826) (3,048)
Allowance for loan losses .... 3,226 3,609 4,466
----------- ----------- -----------
Loans receivable-net .............. $ 977,166 $ 1,164,421 $ 1,328,192
=========== =========== ===========
The amount of loans on which the Bank has ceased accruing interest or does not
charge interest aggregated approximately $3,859,000, $4,243,000 and $5,080,000,
net of specific valuation allowances of $ 49,000, $ 101,000 and $112,000 at
December 31, 1998 and 1999 and September 30, 2000, respectively. The amount of
interest not accrued relating to non accrual loans was approximately $168,000,
$203,000, $123,000, $145,000 and $141,000 at December 31, 1997, 1998 and 1999
and September 30, 1999 and 2000, respectively. Management believes the allowance
for possible loan losses is adequate.
An analysis of the changes in the allowance for loan losses is as follows. There
were no recoveries during the years presented.
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
----------------------------- --------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,263 $ 3,294 $ 3,226 $ 3,226 $ 3,609
Increase in allowance due to
purchase of Bank Boynton .... 1,167 -- -- -- --
Current provision ............ 170 77 463 268 928
Charge-offs .................. (306) (145) (80) (76) (71)
------- ------- ------- ------- -------
Ending balance ............... $ 3,294 $ 3,226 $ 3,609 $ 3,418 $ 4,466
======= ======= ======= ======= =======
</TABLE>
The Bank originates both adjustable and fixed rate mortgage loans. Loans held
for sale at December 31, 1998 amounted to $ 5.5 million. The Bank had no loans
held for sale at December 31, 1999 or September 30, 2000. These loans held for
sale are recorded at the lower of cost or market.
F-14
<PAGE>
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. An analysis of the recorded
investment in impaired loans owned by the Bank at December 31, 1998, 1999 and
September 30, 2000 and the related allowance for those loans is as follows:
<TABLE>
<CAPTION>
At December 31, At December 31, At September 30,
1998 1999 2000
--------------------- ---------------------- ---------------------
(In Thousands) (Unaudited)
Loan Related Loan Related Loan Related
Balance Allowance Balance Allowance Balance Allowance
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Impaired loan balances and related allowances:
Loans with related allowance for loan losses.. $ 324 $ 162 $ 569 $ 101 $ 369 $ 209
Loans without related allowance for loan losses 3,685 -- 3,726 -- 4,991 --
--------- --------- -------- -------- -------- --------
$ 4,009 $ 162 $ 4,295 $ 101 $ 5,360 $ 209
========= ========= ======== ======== ======== ========
Average balance of impaired loans............. $ 3,620 $ 4,152 $ 4,271
========= ======== ========
</TABLE>
No interest income was recorded on impaired loans during the impairment periods
shown.
The Bank's policy on interest income on impaired loans is to reverse all accrued
interest against interest income if a loan becomes more than 90 days delinquent
and cease accruing interest thereafter. Any interest ultimately collected is
credited to income in the period of recovery.
At December 31, 1999, the composition and maturity or repricing of the loan
portfolio, net of the undisbursed portion of loans in process is presented
below:
<TABLE>
<CAPTION>
..........................Fixed Rate........................ ........................Adjustable Rate..................
Term of Maturity Book Value Term to Rate Adjustment Book Value
(In Thousands) (In Thousands)
<S> <C> <C> <C>
1 year or less $ 6,669 1 year or less $ 387,242
1 year-3 years 21,275 1 year-3 years 92,035
3 years-5 years 26,844 3 years-5 years 64,162
5 years-10 years 64,999 5 years-10 years 63,112
10 years-20 years 199,596 10 years-20 years -
Over 20 years 239,270 Over 20 years -
----------- ----------
Total $ 558,653 Total $ 606,551
=========== ==========
</TABLE>
At September 30, 2000, the composition and maturity or repricing of the loan
portfolio, net of the undisbursed portion of loans in process is presented
below:
<TABLE>
<CAPTION>
..........................Fixed Rate........................ ........................Adjustable Rate..................
Term of Maturity Book Value Term to Rate Adjustment Book Value
(In Thousands) (In Thousands)
(Unaudited) (Unaudited)
<S> <C> <C> <C>
1 year or less $ 9,510 1 year or less $ 408,329
1 year-3 years 24,808 1 year-3 years 63,148
3 years-5 years 43,372 3 years-5 years 88,385
5 years-10 years 63,857 5 years-10 years 179,234
10 years-20 years 194,903 10 years-20 years -
Over 20 years 254,063 Over 20 years -
----------- ----------
Total $ 590,513 Total $ 739,096
=========== ==========
</TABLE>
F-15
<PAGE>
Commercial Real Estate Lending - The Bank originates and purchases commercial
real estate loans, which are considered by management to be of somewhat greater
risk of uncollectibility due to the dependency on income production or future
development of the real estate. Accordingly, Bank management establishes greater
provisions for probable but not yet identified losses on these loans than on
less risky residential mortgage loans. The composition of commercial real estate
loans and its primary collateral are approximately as follows:
At December 31,
---------------------- At September 30,
1998 1999 2000
---- ---- ----
(In Thousands) (Unaudited)
Office buildings ............... $ 8,756 $ 15,477 $ 23,436
Retail buildings ............... 8,749 7,898 8,322
Warehouses ..................... 10,043 7,338 10,848
Multi family ................... 15,653 23,772 20,976
Hotels and motels .............. 404 2,077 1,273
Land ........................... 16,261 17,713 12,199
Other property improvements .... 14,805 43,987 52,375
-------- -------- --------
Total .......................... $ 74,671 $118,262 $129,429
======== ======== ========
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a federally chartered savings and loan association's aggregate
commercial real estate loans may not exceed 400% of its capital as determined
under the capital standards provisions of FIRREA. The Bank is federally
chartered and subject to this limitation. FIRREA does not require divestiture of
any loan that was lawful when it was originated. At December 31, 1999 and
September 30, 2000, the Bank estimates that, while complying with this
limitation, it could originate an additional $ 326 million and $ 330 million,
respectively, of commercial real estate loans, though the Bank's current
business plan indicates no intentions to do so.
Loans to One Borrower Limitation - The Bank may not make real estate loans to
one borrower in excess of 15% of its unimpaired capital and surplus. This 15%
limitation results in a dollar limitation of approximately $ 16.6 million and $
17.2 million at December 31, 1999 and September 30, 2000, respectively. At
December 31, 1999 and September 30, 2000, the Bank was in compliance with the
loans to one borrower limitation under currently existing regulations.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial position. The unpaid balances of these
loans at December 31, 1998 and 1999 and September 30, 2000 were $ 72.1 million,
$ 74.1 million and $ 66.8 million, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing were $ 339,800, $
395,600 and $ 1,316,000 at December 31, 1998 and 1999 and September 30, 2000,
respectively.
The Bank offers loans to its employees, including Directors and Senior
Management at prevailing market interest rates. These loans are made in the
ordinary course of business and on substantially the same terms and collateral
requirements as those of comparable transactions prevailing at the time.
The loans to Directors, Executive Officers, and associates of such persons
amounted to $ 2,525,000, $ 3,064,000 and $ 2,490,000 at December 31, 1998, 1999
and September 30, 2000, respectively, which did not exceed 5% of stockholders'
equity.
Collateral for Advances from the Federal Home Loan Bank - The terms of a
security agreement with the FHLB include a blanket floating lien that requires
the Bank to maintain qualifying first mortgage loans as pledged collateral in an
amount equal to the advances, when discounted at 75% of the unpaid principal
balances (See Note 10).
F-16
<PAGE>
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
At December 31,
------------------- At September 30,
1998 1999 2000
---- ---- ----
(Unaudited)
(In Thousands)
Land ................................ $ 8,534 $ 9,624 $12,317
Buildings and improvements .......... 29,386 34,043 36,696
Furniture and equipment ............. 10,963 13,371 15,051
------- ------- -------
Total ............................... 48,883 57,038 64,064
Less accumulated depreciation ....... 11,175 12,056 13,883
------- ------- -------
Office properties and equipment-net . $37,708 $44,982 $50,181
======= ======= =======
During the year ended December 31, 1999 the Bank sold its downtown West Palm
Beach property with a carrying value of $ 1.6 million, for a sale price, net of
selling cost, of $ 6.7 million resulting in a gain of $ 5.1 million.
7. REAL ESTATE OWNED
Real estate owned consists of the following:
At December 31,
----------------- At September 30,
1998 1999 2000
---- ---- ----
(Unaudited)
(In Thousands)
Real estate owned .................. $907 $775 $ --
Valuation allowance ................ -- -- --
---- ---- -------
Real estate owned - net ............ $907 $775 $ --
==== ==== =======
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
At December 31,
------------------- At September 30,
1998 1999 2000
---- ---- ----
(Unaudited)
(In Thousands)
Loans ............................... $4,649 $5,444 $7,130
Investments ......................... 584 804 776
Mortgage-backed securities .......... 2,316 2,082 1,947
------ ------ ------
Accrued interest receivable ......... $7,549 $8,330 $9,853
====== ====== ======
F-17
<PAGE>
9. DEPOSITS
The weighted-average interest rates on deposits at December 31, 1998, 1999 and
September 30, 2000 were 4.42%, 4.30% and 4.75%, respectively. Deposit accounts,
by type and range of rates consist of the following:
At December 31,
------------------- At September 30,
1998 1999 2000
---- ---- ----
(Unaudited)
(In Thousands)
Non-interest-bearing NOW
accounts ............................. $ 57,002 $ 65,203 $ 93,790
NOW, Super NOW and funds
transfer accounts December 31,
1998 and 1999 and September 30,
2000, 1.07 %, 0.87% and 0.95%,
respectively ......................... 94,848 129,468 137,425
Passbook and statement accounts
December 31, 1998 and 1999 and
September 30, 2000, 2.75 %, 3.27%
and 3.01%, respectively .............. 127,494 144,430 145,773
Variable-rate money market accounts
December 31, 1998 and 1999 and
September 30, 2000, 3.09 %, 2.87%
and 3.75%, respectively .............. 44,481 93,867 150,999
---------- ---------- ----------
Total non-certificate accounts ........ 323,825 432,968 527,987
---------- ---------- ----------
Certificates:
1.01%-2.00% ...................... 1,018 663 484
2.01%-3.00% ...................... -- -- --
3.01%-4.00% ...................... 6 -- --
4.01%-5.00% ...................... 125,019 199,817 63,353
5.01%-6.00% ...................... 564,002 573,903 251,530
6.01%-7.00% ...................... 106,719 114,007 568,874
7.01%-8.00% ...................... 157 152 205
---------- ---------- ----------
Total certificates .................... 796,921 888,542 884,446
---------- ---------- ----------
Total ................................. $1,120,746 $1,321,510 $1,412,433
========== ========== ==========
Individual deposits greater than $100,000 at December 31, 1998, 1999 and
September 30, 2000 aggregated approximately $237.3 million, $255.5 million and
$349.7 million, respectively.
Interest on deposit accounts, presented in the consolidated statements of
operations, is net of interest forfeited by depositors on early withdrawal of
certificate accounts of approximately $128,000, $160,000, $133,000, $102,000 and
$116,000 for the years ended December 31, 1997, 1998, 1999 and the nine months
ended September 30, 1999 and 2000, respectively.
Scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------- At September 30,
1998 1999 2000
----------------- ----------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Unaudited)
Maturity (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Less than 1 year.. $254,281 31.91% $698,415 78.60% $749,492 84.74%
1 year-2 years.... 257,954 32.37 115,848 13.04 102,059 11.54
2 years-3 years... 175,171 21.98 52,333 5.89 23,182 2.62
3 years-4 years... 18,207 2.28 15,500 1.74 5,935 .67
4 years-5 years... 90,120 11.31 5,321 .60 3,778 .43
Thereafter........ 1,188 .15 1,125 .13 -- --
-------- ------ -------- ------ -------- ------
Total............. $796,921 100.00% $888,542 100.00% $884,446 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
F-18
<PAGE>
Under FIRREA, any insured depository institution that does not meet its
applicable minimum capital requirements may not accept brokered deposits after
December 7, 1992. This prohibition includes renewals and rollovers of existing
brokered deposits and deposit solicitations at higher than prevailing interest
rates paid by institutions in the Bank's normal market area. Even though the
Bank meets all of the applicable minimum capital requirements at December 31,
1998 and 1999 and September 30, 2000, the Bank had no brokered deposits.
Interest expense on deposits consists of the following:
At December 31, At September 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
Passbook accounts ............ $ 1,892 $ 2,184 $ 1,149 $ 780 $ 766
NOW accounts ................. 730 3,194 4,929 3,521 7,142
Money market accounts ........ 901 877 734 561 582
Certificate accounts ......... 30,333 38,873 44,766 32,875 38,199
------- ------- ------- ------- -------
Total ........................ $33,856 $45,128 $51,578 $37,737 $46,689
======= ======= ======= ======= =======
10. ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank had outstanding advances from the FHLB of $ 303,140,000 with interest
rates ranging from 4.78% to 8.21%, $ 247,073,000 with interest rates ranging
from 4.55% to 7.37% and $ 326,289,000 with rates ranging from 4.55% to 6.94% at
December 31, 1998 and 1999 and September 30, 2000 respectively. The advances at
the dates specified are repayable as follows:
Years Ending At December 31, At December 31, At September 30,
December 31, 1998 1999 2000
------------ ---- ---- ----
(Unaudited)
(In Thousands)
1999 $ 28,349 $ -- $ --
2000 25,024 65,008 25,000
2001 4,354 3,368 2,629
2002 122,500 112,500 108,750
2003 6,586 5,111 4,004
2004 1,327 11,086 10,906
Thereafter 115,400 50,000 175,000
------------- ------------- -------------
Total $ 303,140 $ 247,073 $ 326,289
============= ============= =============
11. GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY DEBENTURES
On January 21, 1998 the Company issued $28.75 million of mandatorily redeemable,
Preferred Securities out of a grantor trust, Fidelity Federal Bank & Trust
Capital Trust I, a Delaware statutory trust, which was created by the Company
for this sole purpose. As its only asset, the trust owns $28.75 million of
Guaranteed Preferred Beneficial Interests in the Company's Debentures due
January 31, 2028, purchased with the proceeds of the preferred securities
issuance. Interest from the Company's debentures is payable quarterly at a rate
of 8.375%, annually. Interest expense is recorded as advances from Federal Home
Loan Bank and other borrowings on the
F-19
<PAGE>
Consolidated Statements of Operations. The interest will be used to fund
distributions on the preferred securities. As a result of the above, the
Preferred Securities of the trust are considered fully and unconditionally
guaranteed by the Company.
Distributions on the preferred securities are cumulative and are payable at the
same rate as the Company's debentures described above. The Company's debentures
are redeemable in whole at the Company's discretion, in the event the Company's
mutual holding company parent converts to stock form beginning January 31, 2000
at 107% of principal amount and in any event the debentures are redeemable at
100% of principal amount in whole or in part, commencing January 31, 2003. The
preferred securities are subject to mandatory redemption, in whole or in part as
applicable, upon the repayment of the debentures. The proceeds from the
securities, to the extent invested in common stock of the Bank, are considered
to be Tier 1 capital for regulatory purposes. Of the net proceeds of $ 27.3
million from the sale of the preferred securities, the Company invested $ 25
million in common stock of the Bank. The preferred securities are traded on the
Nasdaq National Market system under the symbol "FFFLP."
12. INCOME TAXES
Deferred income tax assets and liabilities are computed annually for differences
between financial statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period adjusted for the change during the
period in deferred tax assets and liabilities.
The components of the provisions for income taxes are as follows:
Years Ended Nine Months Ended
December 31, September 30,
---------------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
Current - federal ......... $ 4,872 $ 4,902 $ 5,103 $ 2,988 $ 2,368
Current - state ........... 701 677 501 181 392
------- ------- ------- ------- -------
Total current ............. 5,573 5,579 5,604 3,169 2,760
Deferred - federal
and state ................ (820) (737) 62 (423) 1,337
------- ------- ------- ------- -------
Total ..................... $ 4,753 $ 4,842 $ 5,666 $ 2,746 $ 4,097
======= ======= ======= ======= =======
The Company's provision for income taxes differs from the amounts determined by
applying the statutory federal income tax rate to income before income taxes for
the following reasons:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1997 1998 1999
-------------------- --------------------- -------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate.......... $ 3,910 35.0% $ 4,289 35.0% $ 5,173 35.0%
State income taxes, net of federal
income tax benefits......... 375 3.3 350 2.9 331 2.2
Benefit of graduated rates....... (101) (0.9) (92) (0.8) (87) (0.6)
Employee stock ownership plan.... 190 1.7 184 1.5 74 0.5
Other............................ 379 3.4 111 0.9 175 1.2
--------- ------- --------- ------- --------- -------
Total provision and effective tax
rate............................ $ 4,753 42.5% $ 4,842 39.5% $ 5,666 38.3%
========= ======= ========= ======= ========= =======
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------
1999 2000
-------------------- ---------------------
Amount % Amount %
------ --- ------ ---
(Unaudited)
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Tax at federal tax rate.......... $ 2,499 35.0% $ 3,728 35.0%
State income taxes, net of federal
income tax benefits............. 118 1.6 378 3.6
Benefit of graduated rates....... (4) (.1) (100) (1.0)
Employee stock ownership plan.... 60 .9 59 .6
Other............................ 73 1.1 32 .3
--------- ------- --------- -------
Total provision and effective
tax rate........................ $ 2,746 38.5% $ 4,097 38.5%
========= ======= ========= =======
</TABLE>
The tax effect of temporary differences which give rise to deferred tax assets
and deferred tax liabilities are presented below:
At December 31,
------------------- At September 30,
1998 1999 2000
---- ---- ----
(Unaudited)
(In Thousands)
Deferred tax liabilities:
Depreciation ....................... $ 878 $ 1,007 $ 1,068
Loan fee income .................... 1,515 1,565 1,755
FHLB stock dividends ............... 1,160 952 874
Excess of tax bad debt reserve
over book reserve ................. 227 -- --
Other .............................. -- -- 426
Deferred state taxes ............... 62 84 --
------- ------- -------
Gross deferred tax liabilities ..... 3,842 3,608 4,123
------- ------- -------
Deferred tax assets:
Excess of tax bad debt reserve
over book reserve ................. -- 184 744
Executive death benefit ............ 461 430 137
Amortization ....................... 368 388 358
Retirement plan .................... 3,131 2,368 1,450
Deferred compensation .............. 939 1,178 1,275
Unrealized depreciation in
securities ........................ 195 3,738 4,693
Deferred state taxes ............... -- -- 8
Other .............................. 191 246 --
------- ------- -------
Gross deferred tax assets .......... 5,285 8,532 8,665
Less valuation allowances for
deferred tax assets ............... -- -- --
------- ------- -------
Gross deferred tax assets .......... 5,285 8,532 8,665
------- ------- -------
Net deferred tax liabilities
(assets) .......................... $(1,443) $(4,924) $(4,542)
======= ======= =======
During 1996, a law was enacted that repealed Section 593 of the Internal Revenue
Code for taxable years beginning after December 31, 1995. Section 593 allowed
thrift institutions, including the Bank, to use the percentage-of-taxable income
bad debt accounting method, if more favorable than the specific charge-off
method, for Federal income tax purposes. The excess reserves (deduction based on
the percentage-of-taxable income less the deduction based on the specific
charge-off method) accumulated post-1987 are required to be recaptured ratably
over a six year period beginning in 1996. The recapture has no effect on the
Company's statement of operations as taxes were provided for in prior years in
accordance with SFAS No. 109, "Accounting for Income Taxes." The timing of this
recapture may be delayed for a one or two year period to the extent that the
Bank originates more residential loans than the average originations in the past
six years. The Bank met the origination requirement for 1996 and 1997 and,
therefore, delayed the recapture until the six year period beginning in 1998.
The recapture amount of $3.7 million will result in payments to the IRS totaling
$1.4 million which has been previously accrued. As of September 30, 2000, the
Company had a remaining recapture amount of $2.0 million, which will result in
payments to the IRS totaling $791,000. The same legislation forgave the tax
liability on pre-1987 accumulated bad debt reserves which would have penalized
any thrift choosing to adopt a bank charter
F-21
<PAGE>
because the tax would have become due and payable. The unrecorded potential
liability that was forgiven approximated $2.9 million.
13. PENSION AND EMPLOYEE BENEFIT PLANS
Pension Plan - The Bank's employees participate in the Bank's qualified defined
benefit pension plan covering substantially all employees. The plan calls for
benefits to be paid to eligible employees at retirement based primarily upon
years of service with the Bank and compensation rates during those years. The
Bank's policy is to fund the qualified retirement plan in an amount that falls
between the minimum contribution required by the Employee Retirement Income
Security Act and the maximum tax deductible contribution. Plan assets consist
primarily of common stock, U.S. Government obligations and certificates of
deposit.
Components of the Bank's Pension Plan are as follows:
Years Ended December 31,
------------------------
1998 1999
---- ----
(In Thousands)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation, beginning of period ......... $ 7,967 $ 10,140
Service cost .................................... 552 795
Interest cost ................................... 582 720
Actuarial loss .................................. 1,132 564
Benefit paid .................................... (93) (559)
-------- --------
Benefit obligation, end of period ............... $ 10,140 $ 11,660
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of period .. $ 7,804 $ 9,672
Actual return on plan assets .................... 978 590
Employer's contribution ......................... 983 1,441
Benefits paid ................................... (93) (559)
-------- --------
Fair value of plan assets, end of period ........ $ 9,672 $ 11,144
======== ========
FUNDED STATUS
Funded status ................................... $ (468) $ (516)
Unrecognized net actuarial loss ................. 737 1,568
Unrecognized prior service cost ................. (184) (154)
-------- --------
Net amount recognized ........................... $ 85 $ 898
======== ========
Components of net periodic benefit cost are as follows:
Years Ended December 31,
------------------------------------
1997 1998 1999
---- ---- ----
(In Thousands)
Service cost ......................... $ 498 $ 552 $ 795
Interest cost ........................ 575 582 720
Return on assets ..................... (1,154) (978) (590)
Amortization of prior
service cost ........................ (30) (30) (30)
Recognition of net actuarial
loss/(gain) ......................... 681 345 (267)
------- ------- -------
Net periodic benefit cost ............ $ 570 $ 471 $ 628
======= ======= =======
F-22
<PAGE>
For the years ended December 31, 1997, 1998 and 1999, pension expense amounts
were based upon actuarial computations.
The assumptions used in computing the present value of the projected benefit
obligation and the net periodic pension expense are as follows:
1997 1998 1999
---- ---- ----
Discount rate in determining benefit
obligation ..................................... 7.25% 6.75% 7.75%
Rate of increase in future compensation
levels for determining benefit obligations ..... 5.00% 4.50% 5.50%
Expected return on plan assets .................. 8.00% 8.00% 9.00%
The Bank funded $ 405,000, $ 983,000 and $ 1,441,000 as required for the 1997,
1998 and 1999 plan years. For the nine months ended September 30, 2000, the Bank
accrued $ 628,000 for pension expense.
Savings Plan - Effective January 1, 1988, the Board of Directors approved a
401(k) deferred savings plan for all Bank employees who are 21 years of age with
one or more years of service. The 401(k) deferred savings plan allows qualified
employees to save from 1% to 15% of their income. Presently, one-half of an
employee's contribution is matched by the Bank, up to 3% of the employee's
salary. The Bank's matching percentage will be determined annually by the Board
of Directors after taking into consideration such factors as profit performance
and ability to meet capital requirements. The Bank's contribution to the plan
totaled $ 183,000, $ 210,000, $ 291,000 and $ 220,000 and $ 282,000 for the
years ended December 31, 1997, 1998 and 1999 and the nine months ended September
30, 1999 and 2000, respectively.
Retirement Plans - During 1989, the Bank established non-qualified defined
benefit plans for certain officers and directors. The director's plan became
effective on January 1, 1991. For the years ended December 31, 1997, 1998 and
1999, the net periodic pension expense for the Supplemental Executive Retirement
Plan for Officers totaled $ 951,000, $ 1,090,000 and $ 1,104,000, respectively.
The projected benefit obligation as of December 31, 1998 and 1999, was estimated
at $ 6,560,000 and $ 7,113,000, respectively. For 1997, 1998 and 1999,
respectively, the discount rates used to measure the projected benefit
obligation were 7.25%, 6.75% and 7.75%. The rate of increase in future
compensation levels in 1997 was 5.00%, in 1998 was 4.50% and 1999 was 5.50%.
For the years ended December 31, 1997, 1998 and 1999, the net periodic pension
expense for the Retirement Plan for the Directors totaled $ 227,000, $ 171,000
and $ 106,000, respectively. The projected benefit obligation for the Retirement
Plan for Directors as of December 31, 1998 and 1999 was estimated at $ 1,503,000
and $ 1,525,000, respectively. For 1997, 1998 and 1999, the discount rates used
to measure that projected benefit obligation were 7.25%, 6.75% and 7.75%,
respectively. For the years ended December 31, 1997, 1998 and 1999, the rate of
increase in future compensation levels for the Retirement Plan for Directors was
5.00%, 4.50% and 5.50%, respectively. The provisions of SFAS No. 87 require
recognition in the statement of financial position of the additional minimum
liability and related intangible asset for a retirement plan with accumulated
benefits in excess of plan assets. This resulted in the recognition at December
31, 1998 and 1999, of an additional liability and an intangible asset of $
25,000 and $ 0, respectively. There was no material effect on earnings or cash
requirements to fund the retirement plans. These additional liability and
intangible asset amounts as of December 31, 1998 and 1999 are recorded in the
account balances captioned other liabilities and other assets, respectively, in
the accompanying consolidated statements of financial position.
Incentive Program - The Bank also has a Senior Management Performance Incentive
Award Program ("SMPIAP") to provide the opportunity for those executives to be
rewarded in future earnings growth. A designated percentage of income at
December 31 of each year is used to determine the award fund contribution.
F-23
<PAGE>
This percentage will be determined annually by the Board of Directors after
taking into consideration such factors as profit performance and ability to meet
capital requirements. Awards amounting to $ 229,000, $ 252,000 and $ 310,000
were made during the years 1997, 1998 and 1999 respectively, for distribution in
subsequent years. The assets of the SMPIAP are held in a Rabbi trust for the
benefit of senior management. The SMPIAP participants may elect to invest their
awards in either Company stock or other third party investment options. Pursuant
to the provisions of Emerging Issues Task Force Issue No. 97-14 ("EITF 97-14")
which became effective during 1998, the assets of the Rabbi trust are included
in the accompanying financial statements and are accounted as follows: (1)
Assets, other than Company stock, (primarily trading securities) are included in
other assets at fair value ($ 885,000 at December 31, 1999) with the
corresponding obligation to the employees of a like amount included in other
liabilities. Changes in the fair value of the assets and changes in the amount
of the liability are included in earnings; and (2) Company stock (148,806 shares
at December 31, 1999) is carried at cost ($ 1.6 million at December 31, 1999)
and included in treasury stock with the corresponding obligation to the
employees (which can only be settled through delivery of the shares) of a like
amount included in additional paid-in capital. Prior to the adoption of EITF
97-14, the assets of the Rabbi trust and the corresponding obligations were
carried at cost and included in other assets and other liabilities,
respectively. The changes in accounting as a result of the adoption of EITF
97-14 had no effect on net income or earnings per share.
Employee Stock Ownership Plan - On January 7, 1994, in connection with the
Bank's Plan of Reorganization into a Mutual Holding Company, the Bank adopted a
tax qualified Employee Stock Ownership Plan ("ESOP") for all eligible employees.
The ESOP purchased 193,200 shares of the Bank's stock at the date of the
Reorganization. The funds used to purchase the shares were borrowed from a third
party lender. Effective June 30, 1997, the loan was purchased and is now held by
Fidelity Federal Bank & Trust Bankshares, Inc. and therefore has been eliminated
in consolidation at December 31, 1998 and 1999. The Bank will contribute to the
ESOP sufficient funds to pay the principal and interest on this loan over seven
years. Benefits generally become 100% vested after five years of credited
service. However, contributions to the ESOP and shares allocated among
participants proportional to repayment of the seven year ESOP loan will be
allocated among participants on the basis of compensation in the year of
allocation, subject to regulatory maximum limitations. The Bank recognized $
765,000, $ 802,000, $ 487,000 and $ 380,000 and $ 376,000, by a charge against
income in 1997, 1998, 1999 and during the nine months ended September 30, 1999
and 2000, respectively, under this plan.
F-24
<PAGE>
14. Stock Option Plan
The Bank has adopted stock option plans which granted options with an exercise
price equal to the market value of the stock at the date of grant, to Directors
and officers. The Directors may exercise their options at any time up to ten
years, while officer's options are exercisable at a rate of twenty percent per
year, not to exceed ten years. Under these plans the Bank reserved 303,600
shares of authorized but unissued common stock for future issuance. All options
were exercisable at December 31, 1999 and September 30, 2000. The weighted
average remaining contractual life of the outstanding options was 4.0 years at
December 31, 1999 and 3.25 years at September 30, 2000. The following table
shows a summary of transactions.
Options Price
------------------------------------------
Average
Number of Exercise
Options Price Per Aggregate
Outstanding Share Price
----------- ----- -----
Options Outstanding
-------------------
Balance - December 31, 1996 ...... 222,533 $9.09 $ 2,022,824
----------- ----- -----------
Granted ..................... -- -- --
Exercised ................... (47,101) 9.09 (428,148)
Canceled .................... (1,595) 9.09 (14,499)
----------- ----- -----------
Balance - December 31, 1997 ...... 173,837 9.09 1,580,177
----------- ----- -----------
Granted ..................... -- -- --
Exercised ................... (21,414) 9.09 (194,653)
Canceled .................... (440) 9.09 (4,000)
----------- ----- -----------
Balance - December 31, 1998 ...... 151,983 9.09 1,381,524
----------- ----- -----------
Granted ..................... -- -- --
Exercised ................... (32,576) 9.09 (296,116)
Canceled .................... -- -- --
----------- ----- -----------
Balance - December 31, 1999 ...... 119,407 9.09 1,085,408
----------- ----- -----------
Granted (unaudited) ......... -- -- --
Exercised (unaudited) ....... (9,121) 9.09 (82,910)
Canceled (unaudited) ........ -- -- --
----------- ----- -----------
Balance - September 30, 2000
(unaudited) ..................... 110,286 $9.09 $ 1,002,498
=========== ===== ===========
15. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory and possible discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk-weighting
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Tangible capital of
not less than 1.5% of adjusted total assets, Total capital to risk-weighted
assets of not less than 8%, Tier I capital of not less than 3.0% of adjusted
total assets, and Tier I capital to risk-weighted assets of 4.0% (as defined in
the regulations). At December 31, 1998, 1999 and September 30, 2000, the Bank
met all capital adequacy requirements to which it was subject.
F-25
<PAGE>
As of September 11, 2000, the most recent notification from the OTS categorized
the Bank as "Well Capitalized" under the framework for prompt corrective action.
To be considered well capitalized under Prompt Corrective Action Provisions, the
Bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the Bank's
categorization.
As reported in the Company's 1998 Annual Report, in November of 1988 the OTS
issued TB-73, which among other matters, stated concerns over institution's
investment in trust preferred securities, citing increased interest rate risks
due to the fixed rate nature of such securities and that some of these
securities could have their maturities extended at the option of the issuer. The
OTS adopted limitations on the investment of such securities to 15% of a
regulated institution's equity, but adopted a method by which an institution
could appeal the limitation. The Bank appealed to the OTS to permit it to
continue its investment at current levels and noted in its appeal that its
investments had floating rates and the issuer did not have the option to extend
the maturities. The OTS has approved the Bank maintaining its current investment
in these securities but not to increase its investment. These securities are
shown on the Company's Consolidated Statements of Financial Position as
Corporate Debt Securities.
The Bank's actual capital amounts and ratios are presented in the following
table:
<TABLE>
<CAPTION>
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provisions
------------------ --------------------- -----------------
Ratio Amount Ratio Amount Ratio Amount
----- ------ ----- ------ ----- ------
(Dollars in Thousands)
As of December 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
Tangible capital to tangible assets ......... 6.7% $ 104,115 1.5% $ 23,472
==== ========== ==== ==========
Tier I capital to adjusted tangible assets .. 6.7% $ 104,115 3.0% $ 46,943 5.0% $ 78,239
==== ========== ==== ========== ==== ==========
Total capital to risk-weighted total assets . 12.0% $ 104,115 4.0% $ 34,814 6.0% $ 52,221
==== ========== ==== ========== ====
Total risk-based capital to
risk-weighted total assets ................. 12.2% $ 106,467 8.0% $ 69,628 10.0% $ 87,036
==== ========== ==== ========== ==== ==========
Total assets ................................ $1,566,900
==========
Adjusted total assets ....................... $1,564,771
==========
Risk-weighted assets ........................ $ 870,355
==========
As of December 31, 1999:
Tangible capital to tangible assets ......... 6.6% $ 114,260 1.5% $ 25,867
==== ========== ==== ==========
Tier I capital to adjusted tangible assets .. 6.6% $ 114,260 3.0% $ 51,734 5.0% $ 86,224
==== ========== ==== ========== ==== ==========
Total capital to risk-weighted total assets . 11.9% $ 114,260 4.0% $ 38,397 6.0% $ 57,595
==== =========== ==== ========== ==== ==========
Total risk-based capital 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 (unaudited):
Tangible capital to tangible assets ......... 6.2% $ 119,338 1.5% $ 28,695
==== ========== ==== ==========
Tier I capital to adjusted tangible assets .. 6.2% $ 119,338 3.0% $ 57,391 5.0% $ 95,651
==== ========== ==== ========== ==== ==========
Total capital to risk-weighted total asets .. 10.9% $ 119,338 4.0% $ 43,994 6.0% $ 65,991
==== ========== ==== ========== ==== ==========
Total risk-based capital 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>
F-26
<PAGE>
At periodic intervals, both the OTS and the FDIC routinely examine the Company's
and the Bank's financial statements as part of their legally proscribed
oversight of the savings and loan industry. Based on these examinations, the
regulators can direct that the financial statements be adjusted in accordance
with their findings.
During the nine months ended September 30, 2000, an OTS examination resulted in
no significant adjustments to the consolidated financial statements.
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes commitments to extend credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. The interest
rates on both fixed and variable rate mortgage loans are generally based on the
market rates in effect on the date the loan application is taken. Commitments
generally have fixed expiration dates of no longer than 60 days and other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained by the Bank upon extension of credit is based on
management's credit evaluation of the customer. Collateral held varies but may
include single-family homes, marketable securities and income-producing
residential and commercial properties. Credit losses may occur when one of the
parties fails to perform in accordance with the terms of the contract. The
Bank's exposure to credit risk is represented by the contractual amount of the
commitments to extend credit. At December 31, 1999, the Bank had commitments to
extend credit for or purchase loans of $ 73.0 million ($ 8.0 million in fixed
rate commitments and the balance of commitments in either variable rate or for
which rates had not yet been set). At September 30, 2000, the Bank had
commitments to extend credit for or purchase loans of $ 97.8 million ($ 13.2
million in fixed rate commitments and the balance of commitments in either
variable rate or for which rates had not yet been set). At September 30, 2000,
the Bank also has a pre-approval program which commits dollar amounts to
potential loan customers based on their credit history. This program, however,
does not commit to locked in rates. No fees are received in connection with such
commitments.
At December 31, 1999, future minimum lease payments under these operating leases
are as follows:
Years Ending December 31, Amount
------------------------- ------
(In Thousands)
2000 $ 1,126
2001 939
2002 911
2003 939
2004 555
Thereafter 2,284
-----------
Total $ 6,754
===========
F-27
<PAGE>
The Bank leases various property for original periods ranging from one to
fifty-one years. Rent expense for the years ended December 31, 1997, 1998 and
1999, and for the nine months ended September 30, 1999 and 2000 was
approximately $ 638,000, $ 658,000, $ 830,000, $ 589,000 and $ 839,000,
respectively. At September 30, 2000, future minimum lease payments under these
operating leases are as follows:
Years Ending December 31, Amount
------------------------- ------
(In Thousands)
(Unaudited)
2001 $ 911
2002 816
2003 838
2004 595
2005 523
Thereafter 1,727
------------
Total $ 5,410
============
The Bank has entered into a three year employment agreement with its Chief
Executive Officer. This agreement, among other matters, would provide for
severance payments of up to three years salary in the event of termination for
reasons other than cause. In addition, the Bank has entered into severance
agreements with four of its executive officers. The severance agreements would
provide for payments of up to three years salary for these executives, but only
in the event of change of control of the Bank.
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
For the Years Ended For the Nine Months
December 31, Ended September 30,
------------------------- -------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
Supplemental Disclosure of
Cash Flow Information:
Cash paid for income
taxes ....................... $ 5,016 $ 5,916 $ 3,508 $ 2,508 $ 5,316
======= ======= ======= ======= =======
Cash paid for interest on
deposits and other
borrowings .................. $41,782 $63,196 $72,686 $53,380 $61,476
======= ======= ======= ======= =======
Supplemental Schedule of
Noncash Investing and
Financing Activities:
Real estate acquired in
settlement of loans ......... $ 2,403 $ 1,542 $ 1,678 $ 1,283 $ 253
======= ======= ======= ======= =======
F-28
<PAGE>
18. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earnings per share, including the adjustments for the Bank's ESOP and stock
options for the years ended December 31, 1997, 1998 and 1999 and the nine months
ended September 30, 1999 and 2000, are as follows:
<TABLE>
<CAPTION>
For the Year Ended December For the Year Ended December For the Year Ended December
31, 1997 31, 1998 31, 1999
------------------------------- ------------------------------- --------------------------------
Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share
(1) (2) Amount (1) (2) Amount (1) (2) Amount
------------------------------- ------------------------------- --------------------------------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income................. $6,418,000 $7,412,000 $9,114,000
Basic EPS:
Income available to
common stockholders....... $6,418,000 6,661,401 $0.96 $7,412,000 6,644,096 $1.12 $9,114,000 6,435,357 $1.42
===== ===== =====
Effect of diluted shares:
Common stock options...... 104,760 91,881 56,451
--------- --------- ---------
Diluted EPS:
Income available to
common stockholders....... $6,418,000 6,766,161 $0.95 $7,412,000 6,735,977 $1.10 $9,114,000 6,491,808 $1.40
========== ========= ===== ========== ========= ===== ========== ========= =====
</TABLE>
---------------
(1) Numerator
(2) Denominator
<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
(1) (2) Amount (1) (2) Amount
----------------------------------- -------------------------------
(Unaudited)
(In Thousands, except per share data)
<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>
-------------
(1) Numerator
(2) Denominator
F-29
<PAGE>
Weighted average shares outstanding for the year ended December 31, 1999 were
reduced for treasury shares held by the Bank's SMPIAP and increased for the
corresponding liability for settlement to the Bank's employees. (See Note 13).
19. other comprehensive income
An analysis of the changes in Accumulated Other Comprehensive Income for the
years ended December 31, 1997, 1998 and 1999 and the nine months ended September
30, 1999 and 2000 is as follows:
December 31, September 30,
---------------------------- ------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
Beginning Balance ........ $ 782 $ 1,405 $ (318) $ (318) $(6,098)
Current-period change .... 623 (1,723) (5,780) (3,741) (1,243)
------- ------- ------- ------- -------
Ending balance ........... $ 1,405 $ (318) $(6,098) $(4,059) $(7,341)
======= ======= ======= ======= =======
An analysis of the related tax effects allocated to Other Comprehensive Income
is as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended For the Year
December 31, 1997 December 31, 1998 December 31, 1999
----------------------------- ------------------------------ -----------------------------
Before- Tax Before- Tax Before- Tax
tax (Expense) Net-of-Tax tax (Expense) Net-of-Tax tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
------ ------- ------ ------ ------- ------ ------ ------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized gain
(loss) on assets
available for sale:
Unrealized holding gains
(losses) arising during
period ........................ $ 1,055 $ (432) $ 623 $(1,539) $ 629 $ (910) $(9,176) $ 3,487 $(5,689)
Less: reclassification
adjustment for gains
realized in net income ........ -- -- -- (1,355) 542 (813) (147) 56 (91)
------- ------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive income ...... $ 1,055 $ (432) $ 623 $(2,894) $ 1,171 $(1,723) $(9,323) $ 3,543 $(5,780)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
September 30, 1999 September 30, 2000
------------------------------------------ --------------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
------ ------- ------ ------ ------- ------
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Unrealized gain (loss)
on assets available for sale:
Unrealized holding gains
(losses) arising ......................... $(5,964) $ 2,266 $(3,698) $(1,541) $ 699 $ (842)
during period
Less: reclassification
adjustment for gains
realized in net income ................... (70) 27 (43) (658) 257 (401)
------- ------- ------- ------- ------- -------
Other comprehensive income ................ $(6,034) $ 2,293 $(3,741) $(2,199) $ 956 $(1,243)
======= ======= ======= ======= ======= =======
</TABLE>
F-30
<PAGE>
20. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments - The fair value of the Company's financial
instruments at December 31, 1998 and 1999 and September 30, 2000 is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999 September 30, 2000
----------------------- ------------------------ -----------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
------ ----- ------ ----- ------ -----
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and amounts due from
depository institutions ............... $ 27,951 $ 27,951 $ 41,736 $ 41,736 $ 47,027 $ 47,027
Interest-bearing deposits .............. 32,075 32,075 19,065 19,065 3,917 3,917
Assets available for sale .............. 452,575 452,575 404,230 404,230 425,509 425,509
Loans receivable (net) ................. 977,166 1,152,248 1,164,421 1,128,620 1,328,192 1,285,145
Liabilities:
Deposits ............................... 1,120,746 1,130,266 1,321,510 1,315,118 1,412,433 1,408,944
Other borrowed funds ................... 6,981 6,977 14,656 14,647 16,763 16,760
Advances from the Federal
Home Loan Bank ........................ 303,140 306,989 247,073 243,315 326,289 324,014
Guaranteed Preferred
Beneficial Interests
in Company's Debentures ............... 28,750 31,268 28,750 26,995 28,750 28,735
</TABLE>
The following methods and assumptions were used to estimate fair value of each
major class of financial instrument at December 31, 1998 and 1999 and September
30, 2000.
Cash and Amounts due from Depository Institutions and Interest-Bearing Deposits
- The carrying amount of these assets is a reasonable estimate of their fair
value.
Assets Available for Sale - The fair value of these securities are based on
quoted market prices.
Loans Receivable - The fair value of loans is estimated by discounting the
future cash flows of the loans using the current rates at which similar loans
would be made to borrowers with similar credit rating for the same remaining
maturities.
Deposits - The fair value of demand deposits, savings accounts and money market
accounts are equal to the amount payable on demand at the reporting date. The
fair values of fixed maturity certificate accounts are estimated by discounting
the future cash flows of the certificates using the current rates for advances
from the Federal Home Loan Bank with similar maturities.
Other Borrowed Funds - Fair value is estimated using rates currently offered for
advances from the Federal Home Loan Bank with similar maturities.
Advances from the Federal Home Loan Bank - The fair value of these advances is
estimated by discounting the future cash flows of these advances using the
current rates at which similar term advances could be obtained.
Guaranteed Preferred Beneficial Interests in Company's Debentures - The fair
value is estimated by discounting the future cash flows of these debentures
using the yield for 30 year Treasury Bond plus 250 basis points.
Commitments to Extend Credit and Standby Letters of Credit - The fair value of
these commitments is insignificant.
Although management uses its best judgment in estimating the fair value of these
financial instruments, there are inherent limitations in any estimation
technique. Therefore, the fair value estimates presented herein are not
necessarily indicative of the amounts which the Bank could realize in a current
transaction.
F-31
<PAGE>
21. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial position as of December 31,
1998, and 1999 and September 30, 2000 and the condensed statement of operations
and statement of cash flows for the periods then ended should be read in
conjunction with the consolidated financial statements and related notes. Since
the organization of the parent company was accounted for in a manner similar to
a pooling of interests, these statements have been presented as if the parent
company was in existence for all periods covered by the consolidated financial
statements.
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999 2000
-------- -------- ----------
(Unaudited)
STATEMENT OF FINANCIAL CONDITION (In Thousands)
Assets:
<S> <C> <C> <C>
Cash and cash equivalents........................ $ 6,122 $ 141 $ 495
ESOP loan receivable............................. 509 276 69
Investment in and advances to Bank............... 106,482 110,972 114,605
Other assets..................................... 1,437 1,884 1,708
----------- ---------- ----------
Total assets $ 114,550 $ 113,273 $ 116,877
=========== ========== ==========
Liabilities......................................... $ 29,551 $ 29,969 $ 30,006
Stockholders' equity................................ 84,999 83,304 86,871
----------- ---------- ----------
Total liabilities and stockholders' equity.......... $ 114,550 $ 113,273 $ 116,877
=========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(Unaudited)
STATEMENT OF OPERATIONS (In Thousands)
Income:
<S> <C> <C> <C> <C> <C>
Income........................................... $ 42 $ 173 $ 85 $ 72 $ 35
Expenses......................................... 541 2,753 2,896 2,181 2,181
-------- -------- -------- -------- --------
Loss before income taxes and equity in earnings
of Bank........................................ (499) (2,580) (2,811) (2,109) (2,146)
Income tax benefit............................... 204 983 1,068 802 825
-------- -------- -------- -------- --------
Loss before equity in earnings of Bank........... (295) (1,597) (1,743) (1,307) (1,321)
Equity in earnings of Bank....................... 6,713 9,009 10,857 5,701 7,876
-------- -------- -------- -------- --------
Net income....................................... $ 6,418 $ 7,412 $ 9,114 $ 4,394 $ 6,555
======== ======== ======== ======== ========
STATEMENT OF CASH FLOWS
Cash flow from (for) operating activities:
Net income.......................................... $ 6,418 $ 7,412 $ 9,114 $ 4,394 $ 6,555
Adjustments to reconcile net income to net cash used for
operating activities Equity in earnings of Bank.. (6,713) (9,009) (10,857) (5,701) (7,876)
Other............................................... (148) 1,024 301 46 177
-------- -------- -------- -------- --------
Net cash used for operating activities.............. (443) (573) (1,442) (1,261) (1,144)
-------- -------- -------- -------- --------
Cash flow from (for) investing activities:
Dividends received from Bank........................ 3,554 11,600 350 350 3,000
Purchase of ESOP loan............................... (966) -- -- -- --
Principal payments on ESOP loan..................... 138 319 233 207 207
Investment in subsidiary............................ -- (25,000) -- -- --
Other............................................... 386 1,077 283 809 401
-------- -------- -------- -------- --------
Net cash from (used for) investing activities....... 3,112 (12,004) 866 1,366 3,608
-------- -------- -------- -------- --------
Cash flow from (for) financing activities:
Proceeds from the sale of stock..................... 308 79 274 274 84
Purchase of treasury stock.......................... -- (5,752) (1,906) (1,906) --
Sale of Guaranteed Preferred Beneficial
Interests in Company's Debentures (net).......... -- 27,277 -- -- --
Cash dividends paid................................. (2,566) (3,316) (3,773) (3,050) (2,194)
------- -------- -------- -------- --------
Net cash (used for) from financing activities....... (2,258) 18,288 (5,405) (4,682) (2,110)
------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 411 5,711 (5,981) (4,577) 354
Cash and cash equivalents, Beginning of year........ -- 411 6,122 6,122 141
------- -------- -------- -------- --------
Cash and cash equivalents, End of year.............. $ 411 $ 6,122 $ 141 $ 1,545 $ 495
======= ======== ======== ======== ========
</TABLE>
F-32
<PAGE>
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
========= ========= ========= =========
(In Thousands)
Year ended December 31, 1998:
<S> <C> <C> <C> <C>
Interest income............................... $ 22,820 $ 24,461 $ 25,502 $ 25,537
Interest expense.............................. 14,280 16,110 17,055 17,547
--------- --------- --------- ---------
Net interest income....................... 8,540 8,351 8,447 7,990
--------- --------- --------- ---------
Provision for loan losses..................... (69) 20 6 120
Non-interest income........................... 1,914 2,287 2,426 2,063
Non-interest expense.......................... 7,013 7,333 7,369 7,972
Income taxes.................................. 1,417 1,292 1,358 775
--------- --------- --------- ---------
Net income................................ $ 2,093 $ 1,993 $ 2,140 $ 1,186
========= ========= ========= =========
Earnings per share
Basic..................................... $ 0.31 $ 0.30 $ 0.32 $ 0.18
========= ========= ========= =========
Diluted................................... $ 0.31 $ 0.29 $ 0.31 $ 0.18
========= ========= ========= =========
Year ended December 31, 1999:
Interest income............................... $ 26,054 $ 26,970 $ 28,622 $ 29,279
Interest expense.............................. 17,426 17,597 18,515 18,717
--------- --------- --------- ---------
Net interest income....................... 8,628 9,373 10,107 10,562
--------- --------- --------- ---------
Provision for loan losses..................... 34 73 161 195
Non-interest income........................... 1,811 1,900 1,912 7,304
Non-interest expense.......................... 8,418 8,706 9,199 10,031
Income taxes.................................. 770 957 1,019 2,920
--------- --------- --------- ---------
Net income................................ $ 1,217 $ 1,537 $ 1,640 $ 4,720
========= ========= ========= =========
Earnings per share
Basic..................................... $ 0.19 $ 0.24 $ 0.25 $ 0.73
========= ========= ========= =========
Diluted................................... $ 0.19 $ 0.24 $ 0.25 $ 0.73
========= ========= ========= =========
Nine months ended September 30, 1999 (Unaudited):
Interest income............................... $ 26,054 $ 26,970 $ 28,622
Interest expense.............................. 17,426 17,597 18,515
--------- --------- ---------
Net interest income....................... 8,628 9,373 10,107
--------- --------- ---------
Provision for loan losses..................... 34 73 161
Non-interest income........................... 1,811 1,900 1,912
Non-interest expense.......................... 8,418 8,706 9,199
Income taxes.................................. 770 957 1,019
--------- --------- ---------
Net income................................ $ 1,217 $ 1,537 $ 1,640
========= ========= =========
Earnings per share
Basic..................................... $ 0.19 $ 0.24 $ 0.25
========= ========= =========
Diluted................................... $ 0.19 $ 0.24 $ 0.25
========= ========= =========
Nine months ended September 30, 2000 (Unaudited):
Interest income............................... $ 30,476 $ 32,601 $ 34,446
Interest expense.............................. 19,089 20,768 22,639
--------- --------- ---------
Net interest income....................... 11,387 11,833 11,807
--------- --------- ---------
Provision for loan losses..................... 201 364 363
Non-interest income........................... 4,312 2,346 2,983
Non-interest expense.......................... 10,681 10,943 11,464
Income taxes.................................. 1,842 1,139 1,116
--------- --------- ---------
Net income................................ $ 2,975 $ 1,733 $ 1,847
========= ========= =========
Earnings per share
Basic..................................... $ 0.46 $ 0.27 $ 0.28
========= ========= =========
Diluted................................... $ 0.46 $ 0.27 $ 0.28
========= ========= =========
</TABLE>
F-33
<PAGE>
--------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus, and, if given or
made, such other information or representation must not be relied upon as having
been authorized by Fidelity Bankshares, Inc., or Fidelity Federal Bank and
Trust. This prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so, or to
any person whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this prospectus nor any sale hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of Fidelity Bankshares, Inc. or Fidelity Federal Bank and
Trust since any of the dates as of which information is furnished herein or
since the date hereof.
Up to _________ Shares
(Anticipated Maximum)
Fidelity Bankshares, Inc.
(Holding Company for
Fidelity Federal Bank and Trust)
COMMON STOCK
Par Value $0.10 per share
------------------
PROSPECTUS
------------------
Ryan Beck & Co.
____________, 2001
----------------
These securities are not deposits or accounts and are not federally
insured or guaranteed.
----------------
Until , 2001 or 25 days after commencement of the Syndicated Community Offering,
if any, whichever is later, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments of subscriptions.
--------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Amount
------
<S> <C> <C>
* Legal Fees and Expenses............................................ $ 250,000
* Printing, Postage and Mailing...................................... 400,000
* Appraisal and Business Plan Fees and Expenses...................... 87,500
* Accounting Fees and Expenses....................................... 200,000
* Conversion Data Processing......................................... 15,000
** Marketing Fees and Expenses........................................ 925,000
* Filing Fees (NASD, OTS and SEC).................................... 75,000
* Other Expenses..................................................... 30,000
--------------
* Total ............................................................. $ 1,982,500
==============
</TABLE>
-------------
* Estimated
** Fidelity Federal Bank & Trust and Fidelity Bankshares, Inc. have retained
Ryan Beck & Co.("Ryan Beck") to assist in the sale of common stock on a
best efforts basis in the Subscription and Community Offerings. For
purposes of computing estimated expenses, it has been assumed that Ryan
Beck will receive fees of approximately $800,000, exclusive of attorneys'
fees of $60,000. Ryan Beck estimates that its other expenses shall not
exceed $65,000.
Item 14. Indemnification of Directors and Officers
Indemnification of Directors and Officers of Fidelity Bankshares, Inc., and
Fidelity Bankshares II, Inc.
Article TENTH of the Certificate of Incorporation of Fidelity
Bankshares, Inc. and Fidelity Bankshares II, Inc. (collectively the
"Corporation") sets forth circumstances under which directors, officers,
employees and agents of the Corporation may be insured or indemnified against
liability which they incur in their capacities as such:
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation
<PAGE>
Law requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a Director or Officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Section or otherwise. The rights
to indemnification and to the advancement of expenses conferred in Sections A
and B of this Article TENTH shall be contract rights and such rights shall
continue as to an indemnitee who has ceased to be a Director, Officer, employee
or agent and shall inure to the benefit of the indemnitee's heirs, executors and
administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows:
(a) List of Exhibits
1.1 Engagement Letter between Fidelity Bankshares, Inc. and Ryan, Beck & Co.,
Inc.
1.2 Form of Agency Agreement among Fidelity Bankshares, Inc., Fidelity
Federal Bank & Trust and Ryan, Beck & Co., Inc
2 Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of Fidelity Bankshares, Inc.***
3.2 Bylaws of Fidelity Bankshares, Inc.***
3.3 Certificate of Incorporation of Fidelity Bankshares II, Inc.
3.4 Bylaws of Fidelity Bankshares II, Inc.
4 Form of Common Stock Certificate of Fidelity Bankshares, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 Letter from RP Financial, LC with respect to Subscription Rights
10.1 Employment Agreement with Vince A. Elhilow***
10.2 Severance Agreement with Richard D. Alfred***
10.3 Severance Agreement with Robert Fugate ***
10.4 Severance Agreement with Joseph Bova***
10.5 1994 Stock Option Plan for Outside Directors***
10.6 1994 Incentive Stock Option Plan***
10.7 Recognition and Retention Plan for Employees***
10.8 Recognition Plan for Outside Directors***
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of Deloitte & Touche, LLP
23.3 Consent of RP Financial, LC
24 Power of Attorney (set forth on Signature Page)
<PAGE>
27 EDGAR Financial Data Schedule****
99.1 Appraisal Agreement between Fidelity Bankshares, Inc. and RP Financial,
LC
99.2 Appraisal Report of RP Financial, LC**
99.3 Marketing Materials*
99.4 Order and Acknowledgment Form*
99.5 Proxy Statement
---------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T
*** Filed as exhibits to the Company's Registration Statement on Form S-4
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on December 12, 1996 (Registration No. 333-17737). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
**** Filed as an exhibit to Fidelity Bankshares, Inc.'s Form 10-Q filed under
the Securities and Exchange Act of 1934, as filed with the Securities and
Exchange Commission on November 11, 2000. Such previously incorporated
document is incorporated herein by reference with Rule 12(b)-32 of the
Securities and Exchange Act of 1934 and Item 601 of Regulation S-K.
(b) Financial Statement Schedules
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post- effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
<PAGE>
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of West Palm
Beach, State of Florida on January 3, 2001.
FIDELITY BANKSHARES, INC.
By: /s/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Fidelity Bankshares, Inc.
(the "Company") hereby severally constitute and appoint Vince A. Elhilow as our
true and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said Vince A. Elhilow may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-1 relating
to the offering of the Company's Common Stock, including specifically, but not
limited to, power and authority to sign for us in our names in the capacities
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm
all that said Vince A. Elhilow shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Vince A. Elhilow President, Chief Executive Officer January 3, 2001
---------------------------------
Vince A. Elhilow and Director (Principal Executive
Officer)
/s/ Richard D. Aldred Executive Vice President and January 3, 2001
---------------------------------
Richard D. Aldred Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Joseph B. Shearhouse, Jr. Chairman of the Board January 3, 2001
---------------------------------
Joseph B. Shearhouse, Jr.
/s/ Keith D. Beaty Director January 3, 2001
---------------------------------
Keith D. Beaty
/s/ Paul C. Bremer Director January 3, 2001
---------------------------------
Paul C. Bremer
/s/ F. Ted Brown, Jr. Director January 3, 2001
---------------------------------
F. Ted Brown, Jr.
/s/ Donald E. Warren, M.D. Director January 3, 2001
---------------------------------
Donald E. Warren, M.D.
/s/ Karl H. Watson Director January 3, 2001
---------------------------------
Karl H. Watson
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of West Palm
Beach, State of Florida on January 3 2001.
FIDELITY BANKSHARES II, INC.
By: /s/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Fidelity Bankshares II,
Inc. (the "Company") hereby severally constitute and appoint Vince A. Elhilow as
our true and lawful attorney and agent, to do any and all things in our names in
the capacities indicated below which said Vince A. Elhilow may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-1 relating
to the offering of the Company's Common Stock, including specifically, but not
limited to, power and authority to sign for us in our names in the capacities
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm
all that said Vince A. Elhilow shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Vince A. Elhilow President, Chief Executive Officer January 3, 2001
-----------------------------------
Vince A. Elhilow and Director (Principal Executive
Officer)
/s/ Richard D. Aldred Executive Vice President and January 3, 2001
-----------------------------------
Richard D. Aldred Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Joseph B. Shearhouse, Jr. Chairman of the Board January 3, 2001
-----------------------------------
Joseph B. Shearhouse, Jr.
/s/ Keith D. Beaty Director January 3, 2001
-----------------------------------
Keith D. Beaty
/s/ Paul C. Bremer Director January 3, 2001
-----------------------------------
Paul C. Bremer
/s/ F. Ted Brown, Jr. Director January 3, 2001
-----------------------------------
F. Ted Brown, Jr.
/s/ Donald E. Warren, M.D. Director January 3, 2001
-----------------------------------
Donald E. Warren, M.D.
/s/ Karl H. Watson Director January 3, 2001
-----------------------------------
Karl H. Watson
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on January 5, 2001
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
----------
FIDELITY BANKSHARES, INC.
FIDELITY BANKSHARES II, INC.
================================================================================
<PAGE>
EXHIBIT INDEX
1.1 Engagement Letter between Fidelity Bankshares, Inc. and Ryan, Beck & Co.,
Inc.
1.2 Form of Agency Agreement among Fidelity Bankshares, Inc., Fidelity
Federal Bank & Trust and Ryan, Beck & Co., Inc.
2 Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of Fidelity Bankshares, Inc.***
3.2 Bylaws of Fidelity Bankshares, Inc.***
3.3 Certificate of Incorporation of Fidelity Bankshares II, Inc.
3.4 Bylaws of Fidelity Bankshares II, Inc.
4 Form of Common Stock Certificate of Fidelity Bankshares, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 Letter from RP Financial, LC with respect to Subscription Rights
10.1 Employment Agreement with Vince A. Elhilow***
10.2 Severance Agreement with Richard D. Alfred***
10.3 Severance Agreement with Robert Fugate ***
10.4 Severance Agreement with Joseph Bova***
10.5 1994 Stock Option Plan for Outside Directors***
10.6 1994 Incentive Stock Option Plan***
10.7 Recognition and Retention Plan for Employees***
10.8 Recognition Plan for Outside Directors***
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of Deloitte & Touche, LLP
23.3 Consent of RP Financial, LC
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule****
99.1 Appraisal Agreement between Fidelity Bankshares, Inc. and RP Financial,
LC
99.2 Appraisal Report of RP Financial, LC**
99.3 Marketing Materials*
<PAGE>
99.4 Order and Acknowledgment Form*
99.5 Proxy Statement
-----------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T
*** Filed as exhibits to the Company's Registration Statement on Form S-4
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on December 12, 1996 (Registration No. 333-17737). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
**** Filed as an exhibit to Fidelity Bankshares, Inc.'s Form 10-Q filed under
the Securities and Exchange Act of 1934, as filed with the Securities and
Exchange Commission on November 11, 2000. Such previously incorporated
document is incorporated herein by reference with Rule 12(b)-32 of the
Securities and Exchange Act of 1934 and Item 601 of Regulation S-K.
