<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the period ended March 31, 2000
--------------
Commission File Number: 001-15089
Fidelity BancShares (N.C.), Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 56-1586543
-------- ----------
(state or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
100 South Main Street, Fuquay-Varina, North Carolina 27526
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(919) 552-2242
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past thirty days.
Yes [ X ] No [ _ ]
Common Stock - $25 Par Value, - 28,170 shares
- --------------------------------------------------------------------------------
(Number of shares outstanding, by class, as of May 12, 2000)
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2000, December 31,
1999, and March 31, 1999
Consolidated Statements of Income for the three-months ended
March 31, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity for
the three-months ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the three-months ended
March 31, 2000 and 1999 Notes to Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
--------------- --------------- ---------------
2000 1999 1999
--------------- --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks................................................. $ 29,302,876 $ 31,510,348 $ 24,128,331
Interest bearing deposits in other banks................................. 1,082,833 40,747,611 --
Federal funds sold....................................................... 46,700,000 22,600,000 62,400,000
------------- ------------- -------------
Total cash and cash equivalents............................... 77,085,709 94,857,959 86,528,331
------------- ------------- -------------
Investment securities:
Held to maturity (estimated fair value of $141,993,991,
$132,844,174, and $110,296,172, respectively)................. 144,715,780 135,006,444 110,079,538
Available for sale (cost of $2,644,602 for all periods)............. 6,329,002 7,749,252 8,689,002
------------- ------------- -------------
Total investment securities................................... 151,044,782 142,755,696 118,768,540
------------- ------------- -------------
Loans.................................................................... 571,487,321 551,148,143 458,962,206
Allowance for loan losses................................................ (5,057,676) (5,141,647) (4,881,809)
------------- ------------- -------------
Loans, net.................................................... 566,429,645 546,006,496 454,080,397
------------- ------------- -------------
Federal Home Loan Bank of Atlanta stock, at cost......................... 2,169,700 2,059,300 2,059,300
Premises and equipment, net.............................................. 34,288,661 32,834,942 26,451,978
Accrued interest receivable.............................................. 4,848,319 4,824,267 2,949,172
Intangible assets........................................................ 13,617,850 13,898,119 10,224,023
------------- ------------- -------------
Other assets............................................................. 1,364,460 1,850,852 472,048
------------- ------------- -------------
Total assets.................................................. $ 850,849,126 $ 839,087,631 $ 701,533,789
============= ============= =============
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand deposits................................. $ 112,246,016 $ 103,774,405 $ 89,296,413
Savings and interest-bearing demand deposits........................ 260,662,386 266,549,100 220,470,416
Time deposits....................................................... 353,989,510 345,690,121 302,477,149
------------- ------------- -------------
Total deposits................................................ 726,897,912 716,013,626 612,243,978
Short-term borrowings.................................................... 22,003,520 22,972,551 15,981,336
Long-term borrowings..................................................... 23,000,000 23,000,000 --
Accrued interest payable................................................. 4,785,368 4,729,785 4,323,821
Other liabilities........................................................ 3,403,041 2,476,970 3,337,520
------------- ------------- -------------
Total liabilities............................................. 780,089,841 769,192,932 635,886,655
------------- ------------- -------------
Shareholders' equity:
Commonstock ($25 par value; 29,200 shares authorized; 28,170,
28,170, and 28,410 shares issued and outstanding,
respectively)................................................. 704,250 704,250 710,250
Surplus............................................................. 6,198,366 6,198,366 6,251,174
Accumulated other comprehensive income.............................. 2,120,112 3,021,971 3,634,190
Retained earnings................................................... 61,736,557 59,970,112 55,051,520
------------- ------------- -------------
Total shareholders' equity.................................... 70,759,285 69,894,699 65,647,134
------------- ------------- -------------
Total liabilities and shareholders' equity.................... $ 850,849,126 $ 839,087,631 $ 701,533,789
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Interest income:
Interest and fees on loans......................................... $13,024,697 $10,266,963
Interest and dividends on investment securities:
Non taxable interest income..................................... 19,050 --
Taxable interest income......................................... 2,485,072 1,302,111
Dividend income................................................. 41,082 75,223
Interest on federal funds sold..................................... 153,843 741,385
------------- -------------
Total interest income........................................ 15,723,744 12,385,682
------------- -------------
Interest expense:
Deposits........................................................... 6,243,657 5,028,435
Short-term borrowings.............................................. 225,725 109,448
Long-term borrowings............................................... 488,750 --
------------- -------------
Total interest expense....................................... 6,958,132 5,137,883
------------- -------------
Net interest income.......................................... 8,765,612 7,247,799
Provision for loan losses............................................... 375,000 300,000
------------- -------------
Net interest income after provision for
loan losses............................................... 8,390,612 6,947,799
------------- -------------
Noninterest income:
Service charges on deposit accounts................................ 861,900 700,822
Other service charges and fees..................................... 533,587 545,633
Other income....................................................... 7,679 14,761
------------- -------------
Total noninterest income..................................... 1,403,166 1,261,216
------------- -------------
Noninterest expenses:
Salaries and employee benefits..................................... 3,653,760 2,917,239
Occupancy and equipment............................................ 1,137,851 913,408
Data processing.................................................... 582,201 379,950
Amortization of intangibles........................................ 280,269 206,482
Other expense...................................................... 1,018,529 1,112,070
------------- -------------
Total noninterest expense.................................... 6,672,610 5,529,149
------------- -------------
Net income before income taxes............................... 3,121,168 2,679,866
Income tax expense...................................................... 1,129,363 1,061,000
------------- -------------
Net income................................................... $ 1,991,805 $ 1,618,866
============= =============
Per share information:
Net income......................................................... $ 70.71 $ 56.98
Cash dividends declared............................................ $ 8.00 $ 8.00
Weighted average shares outstanding................................ 28,170 28,410
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other Total
Common Stock comprehensive Retained Comprehensive shareholders'
-----------------
Shares Amount Surplus income earnings income equity
------ --------- ---------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998....... 28,410 $ 710,250 6,251,174 $4,186,818 $53,659,934 $64,808,176
------ --------- ---------- ---------- ----------- -----------
Net income.................... -- -- -- -- 1,618,866 $1,618,866 1,618,866
Cash dividends
($8.00 per share)........... -- -- -- -- (227,280) -- (227,280)
Unrealized loss on
securities available
for sale, net of
deferred tax benefit
of $366,370................. -- -- -- (552,628) -- (552,628) (552,628)
------ --------- ---------- ---------- ----------- ---------- -----------
Comprehensive income.......... $1,066,238
==========
Balance March 31, 1999.......... 28,410 $ 710,250 $6,251,174 $3,634,190 $55,051,520 $65,647,134
====== ========= ========== ========== =========== ===========
Balance December 31, 1999....... 28,170 $ 704,250 $6,198,366 $3,021,971 $59,970,112 $69,894,699
------ --------- ---------- ---------- ----------- -----------
Net income.................... -- -- -- -- 1,991,805 $1,991,805 1,991,805
Cash dividends
($8.00 per share)........... -- -- -- -- (225,360) -- (225,360)
Unrealized loss on
securities available
for sale, net of
deferred tax benefit
of $518,391................. -- -- -- (901,859) -- (901,859) (901,859)
------ --------- ---------- ---------- ----------- ---------- -----------
Comprehensive income........ $1,089,946
==========
Balance March 31, 2000.......... 28,170 $ 704,250 $6,198,366 $2,120,112 $61,736,557 $70,759,285
====== ========= ========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 1,991,805 $ 1,618,866
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.................................................. 876,854 686,501
Amortization (accretion) on investment securities.............................. (56,398) 63,838
Loss on disposition of premises and equipment.................................. 1,040 --
Provision for loan losses...................................................... 375,000 300,000
Origination of loans held for sale............................................. (1,005,650) (4,997,150)
Proceeds from sales of loans held for sale..................................... 878,709 5,015,045
Gain on sales of loans held for sale........................................... (4,309) (17,895)
Loss on other real estate...................................................... -- 32,096
Decrease (increase) in accrued interest receivable............................. (24,052) 702,483
Decrease in other assets, net.................................................. 368,231 241,347
Increase (decrease) in other liabilities, net.................................. 1,444,462 (235,054)
Increase in accrued interest payable........................................... 55,583 200,357
------------ ------------
Net cash provided by operating activities................................... 4,901,275 3,610,434
------------ ------------
Cash flows from investing activities:
Purchase of securities held to maturity........................................... (39,653,069) (64,996,900)
Proceeds from maturities and issuer calls of securities held to maturity.......... 30,000,131 45,000,000
Purchase of FHLB of Atlanta stock................................................. (110,400) (196,898)
Proceeds from sale of assets acquired in settlement of loans...................... 118,161 53,207
Net increase in loans............................................................. (20,666,899) (19,773,811)
Purchases of premises and equipment............................................... (2,051,344) (2,089,438)
------------ ------------
Net cash used by investing activities....................................... (32,363,420) (42,003,840)
------------ ------------
Cash flows from financing activities:
Net increase in deposits.......................................................... 10,884,286 2,597,643
Net increase (decrease) in short-term borrowings.................................. (969,031) 4,363,992
Cash dividends paid............................................................... (225,360) (227,280)
------------ -------------
Net cash provided by financing activities................................... 9,689,895 6,734,355
------------ -------------
Net decrease in cash and cash equivalents................................... (17,772,250) (31,659,051)
Cash and cash equivalents at beginning of year......................................... 94,857,959 118,187,382
------------ -------------
Cash and cash equivalents at end of year............................................... $ 77,085,709 $ 86,528,331
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.......................................... $ 6,902,549 $ 4,937,526
------------ -------------
Cash paid during the period for income taxes...................................... $ 1,438,124 $ 950,159
============ =============
Supplemental disclosure of noncash financing and investing activities:
Unrealized losses on available-for-sale securities, net of deferred tax
benefits of $518,391 and $366,370, respectively................................ $ (901,859) $ (552,628)
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Fidelity BancShares (N.C.), Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
Fidelity BancShares (N.C.), Inc. ("BancShares") is the holding company for The
Fidelity Bank (the "Bank"), which operates 59 branches primarily in central
North Carolina, and FIDBANK Capital Trust I (the "Trust"), a statutory business
trust created under the laws of the State of Delaware that issued $23.0 million
of 8.50% Capital Securities (the "Capital Securities") in June 1999 maturing in
2029. The Bank also has two wholly-owned subsidiaries, Fidelity Properties, Inc.
and TFB Financial Services.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements.
In the opinion of management, the consolidated financial statements contain all
material adjustments necessary to present fairly the consolidated financial
position of BancShares as of and for each of the periods presented, and all such
adjustments are of a normal recurring nature. 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 disclosures of contingent 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.
These financial statements should be read in conjunction with financial
statements and notes included in Fidelity BancShares (N.C.), Inc.'s Form 10K
filed with the Securities and Exchange Commission. Certain amounts for prior
periods have been reclassified to conform with statement presentations for 2000.
However, the reclassifications have no effect on shareholders' equity or net
income as previously reported.
Note 2. Net Income Per Share
Net income per share has been computed by dividing net income by the weighted
average number of shares outstanding during the period. For all periods
presented, BancShares had no potential common stock.
Note 3. Allowance for Loan Losses
A summary of the allowance for loan losses follows:
<TABLE>
<CAPTION>
(Unaudited)
Three months ended March 31,
---------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Balance at beginning of year....................................... $ 5,141,647 $ 4,601,000
Provision for loan losses..................................... 375,000 300,000
Loans charged off............................................. (730,744) (82,756)
Loan recoveries............................................... 271,773 63,565
-------------- ---------------
Balance at end of the period....................................... $ 5,057,676 $ 4,881,809
============== ===============
</TABLE>
Note 4. Long Term Borrowings
The $23.0 million long-term obligations at March 31, 2000 are Capital Trust
Securities of the Trust. These long-term obligations, which qualify as Tier 1
Capital for BancShares, bear interest at 8.50% and mature in 2029. BancShares
may redeem the long-term obligations in whole or in part on or after June 30,
2004. The sole asset of the Trust is $23.0 million of 8.50% Junior Subordinated
Debentures of BancShares due 2029. Considered together, the undertakings
constitute a full and unconditional guarantee by BancShares of the Trust's
obligations under the Capital Trust Securities.
<PAGE>
TABLE 1.
Financial Summary
<TABLE>
<CAPTION>
2000 1999
-------------- ------------------------------------------------------------
-------------- ------------ ------------ ------------ ------------
First Fourth Third Second First
-------------- ------------ ------------ ------------ ------------
(thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income....................................... $ 15,740 $ 15,586 $ 14,348 $ 13,059 $ 12,386
Interest expense...................................... 6,958 6,729 6,126 5,220 5,138
------------- ----------- ----------- ----------- -----------
Net interest income................................... 8,782 8,857 8,222 7,839 7,248
Provision for loan losses............................. 375 300 300 300 300
------------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses... 8,407 8,557 7,922 7,539 6,948
Noninterest income.................................... 1,474 1,420 1,251 1,251 1,261
Noninterest expense................................... 6,760 6,694 6,258 5,563 5,529
------------- ----------- ----------- ----------- -----------
Net income before income taxes........................ 3,121 3,283 2,915 3,227 2,680
Income taxes.......................................... 1,129 1,087 962 1,358 1,061
------------- ----------- ----------- ----------- -----------
Net income............................................ $ 1,992 $ 2,196 $ 1,953 $ 1,869 $ 1,619
============= =========== =========== =========== ===========
Selected Period-End Balances
Total assets.......................................... $ 850,849 $ 839,088 $ 832,712 $ 728,432 $ 701,534
Investment securities and federal funds sold.......... 197,745 165,356 187,811 159,615 181,169
Loans, gross.......................................... 571,487 551,148 535,869 479,322 458,962
Interest earning assets............................... 772,485 759,311 725,740 640,996 642,190
Deposits.............................................. 726,898 716,014 707,128 613,031 612,244
Interest bearing liabilities.......................... 659,656 658,212 650,268 558,005 538,929
Shareholders' equity.................................. 70,759 69,895 68,386 66,857 65,647
Common shares outstanding............................. 28,170 28,170 28,170 28,170 28,410
------------- ----------- ----------- ----------- -----------
Selected Average Balances
Total assets.......................................... $ 834,136 $ 842,477 $ 777,957 $ 702,869 $ 687,872
Investment securities and federal funds sold.......... 189,141 189,573 165,334 170,373 173,950
Loans, gross.......................................... 560,914 541,311 505,844 471,186 452,637
Interest earning assets............................... 757,646 768,370 703,421 643,618 628,463
Deposits.............................................. 710,665 718,199 658,450 610,187 602,032
Interest bearing liabilities.......................... 656,086 660,418 604,424 539,497 532,737
Shareholders' equity.................................. 70,107 68,883 67,276 66,058 64,951
Common shares outstanding............................. 28,170 28,170 28,170 28,370 28,410
------------- ----------- ----------- ----------- -----------
Profitability Ratios
Rate of return (annualized) on:
Total assets......................................... 0.96% 1.03% 1.00% 1.07% 0.95%
Shareholders' equity................................. 11.43 12.65 11.52 11.35 10.11
Dividend payout ratio................................. 11.31 10.26 11.54 12.16 14.04
------------- ----------- ----------- ----------- -----------
Liquidity and Capital Ratios (averages)
Loans to deposits..................................... 78.93% 75.37% 76.82% 77.22% 75.18%
Shareholders' equity to total assets.................. 8.40 8.18 8.65 9.40 9.44
------------- ----------- ----------- ----------- -----------
Per Share of Common Stock
Net income............................................ $ 70.71 $ 77.89 $ 69.28 $ 65.90 $ 56.98
Cash dividends........................................ 8.00 8.00 8.00 8.00 8.00
Book value............................................ 2,511.87 2,481.17 2,427.61 2,373.36 2,310.71
------------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
TABLE 2.
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - First Quarter
<TABLE>
<CAPTION>
2000 1999
-------------------------------- -------------------------------
Interest Interest Increase (decrease) due to:
---------------------------------
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
Balance Expense Rate Balance Expense Rate Volume Rate Change
---------- --------- ------- ---------- --------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(thousands)
ASSETS
Interest earning assets:
Loans...................... $560,914 $13,050 9.36 % $452,637 $10,303 9.15% $ 2,492 $ 255 $ 2,747
Taxable investment
securities................ 169,244 2,404 5.71 95,688 1,302 5.47 1,023 79 1,102
Non taxable investment
securities................ 2,000 30 6.03 -- -- -- 15 15 30
Federal funds sold......... 11,149 154 5.56 69,768 741 4.27 (716) 129 (587)
Other investments.......... 8,813 41 1.87 10,370 76 2.95 (35) (35)
Cash and due from banks.... 5,526 81 5.90 -- -- -- 40 41 81
--------- ------- ------ -------- ------- ----- --------- ------- ------
Total interest earning assets 757,646 15,760 8.37 628,463 $ 12,422 7.95 % 2,854 484 3,338
--------- ------- ------ -------- ------- ----- --------- ------- ------
Noninterest earning assets:
Cash and due from banks.... 26,661 23,384
Premises and equipment..... 33,768 25,676
Other assets............... 21,356 15,063
Reserve for loan losses.... (5,295) (4,714)
--------- --------
Total assets................. $834,136 $687,872
========= ========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits............ $108,358 $ 438 1.63% $ 90,808 $ 357 1.58% $ 91 $ (10) $ 81
Savings deposits........... 145,583 1,294 3.57 125,881 860 275 155 279 434
Time deposits.............. 356,891 4,512 5.08 302,806 3,812 5.06 682 18 700
Short-term borrowings...... 22,254 226 4.08 13,242 109 3.31 81 36 117
Long-term borrowings....... 23,000 488 8.53 -- -- -- 244 244 488
--------- ------- ------ -------- ------- ----- --------- ------- ------
Total interest bearing
liabilities................. 656,086 $ 6,958 4.27% 532,737 $ 5,138 3.88% $ 1,253 $ 567 $1,820
--------- ------- ------ -------- ------- ----- --------- ------- ------
Noninterest bearing
liabilities:
Demand deposits........... 99,833 82,536
Other liabilities......... 8,110 7,648
Shareholders' equity...... 70,107 64,951
--------- --------
Total liabilities and equity. $834,136 $687,872
========= ========
Interest rate spread......... 4.10% 4.07%
====== =====
Net interest income and net
interest margin........... $ 8,802 4.67% $ 7,284 4.66 % 1,601 (83) 1,518
======= ====== ======= ===== ======== ======= ======
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
Management's discussion and analysis of earnings and related financial
data are presented to assist in understanding the financial condition and
results of operations of Fidelity BancShares (N.C.), Inc. and Subsidiaries
("BancShares") for the period ended March 31, 2000 and 1999. This discussion and
analysis should be read in conjunction with the unaudited consolidated financial
statements and related notes presented within this report. The focus of this
discussion concerns BancShares' banking subsidiary, The Fidelity Bank (the
"Bank"), which operates 59 branches in North Carolina.
Financial Condition and Results of Operations.
Net Income. In the first quarter of 2000, BancShares' net income
increased $373,000 to $2.0 million from $1.6 million in first quarter 1999, an
increase of 23.04%. The increase in net income resulted primarily from an
increase in interest income driven by loan growth that was offset by increases
in interest expense from deposit growth and long-term obligations as well as an
increase in salaries and employee benefits. Net income for the first quarter of
2000 includes operations, not present in the first quarter of 1999, from seven
branches which were acquired from First-Citizens Bank & Trust Company ("FCB")
during the third quarter of 1999, as well as six de novo branches opened during
the second and third quarters of 1999. Loans and deposits acquired from FCB were
approximately $28.0 million and $99.6 million, respectively.
Net income per share for the first quarter of 2000 was $70.71, an
increase of $13.73 per share, or 24.10%, from $56.98 per share in 1999. Return
on average assets for the first quarter of 2000 and 1999 was 0.96% and 0.95%,
respectively. Return on average equity for first quarter 2000 and 1999 was
11.43% and 10.11%, respectively. Various profitability, liquidity and capital
ratios are presented in Table 1. To understand the changes and trends in
interest-earning assets and interest-bearing liabilities, refer to the average
balance sheets presented in Table 2.
Net Interest Income. The greatest portion of BancShares' earnings is
from net interest income, which is the difference between interest income on
interest-earning assets and interest paid on deposits and other interest-bearing
liabilities. The primary factors affecting net interest income are changes in
the volume and yields/rates on interest-earning assets and interest-bearing
liabilities, and the ability to respond to changes in interest rates through
asset/liability management. For the first quarter of 2000, net interest income
was $8.8 million as compared to $7.2 million for the same period in 1999, an
increase of $1.5 million, or 20.94%. The net interest margin for first quarter
2000 and 1999 was 4.67% and 4.66%, respectively.
Interest income for the first quarter of 2000 was $15.7 million as
compared to $12.4 million in 1999, an increase of $3.3 million or 26.95%. The
increase in interest income in the first quarter of 2000 over the first quarter
of 1999 is primarily attributable to an increase in average loan balances
outstanding from $452.6 million to $560.9 million, an increase of $108.3 million
or 23.92%. Interest income from loans amounted to $13.0 million in the first
quarter of 2000 as compared to $10.3 million in the first quarter 1999, an
increase of $2.8 million or 26.86%. BancShares' loan growth is due to the
acquisition of seven branches in the third quarter of 1999, the opening of six
de novo branches during the second and third quarters of 1999, as well as growth
within the existing branch network. Earnings from investments and federal funds
sold provided the balance of interest income, contributing $2.7 million and $2.1
million for the first quarter of 2000 and 1999, respectively. Average
interest-earning assets for the first quarter of 2000 increased to $757.6
million, a 20.56% increase, from $628.5 million in the first quarter of 1999.
The yield on interest-earnings assets for the first quarter of 2000 and 1999 was
8.37% and 7.95%, respectively. Trends in interest earning assets are shown in
Table 2.
Interest expense for the first quarter of 2000 was $7.0 million
compared to $5.1 million in 1999, an increase of $1.8 million or 35.43%. The
increase in interest expense in the first quarter of 2000, compared to the first
quarter of 1999, is primarily attributable to increased average interest-bearing
deposit balances, primarily time deposits. Average interest-bearing deposits
increased $91.3 million or 17.58%, from $519.5 million in the first quarter of
1999 to $610.8 million in the first quarter of 2000. The average rate paid on
interest-bearing deposits was 4.11% and 3.89% for the first quarter of 2000 and
1999, respectively. Borrowings contributed $714,000 in
<PAGE>
interest expense during the first quarter of 2000 compared to $109,000 during
the first quarter of 1999, an increase of $605,000 or 552.80%. Interest expense
on borrowings increased due to the FIDBANK Capital Trust I's issuance of $23.0
million in 8.50% Capital Securities during the second quarter of 1999 (see the
notes to the consolidated financial statements). There were no long-term
borrowings during the first quarter of 1999. Average interest-bearing
liabilities for the first quarter of 2000 increased $123.3 million or 23.15%,
from $532.7 million in 1999 to $656.1 million in 2000. The yield on interest-
bearing liabilities for the first quarter of 2000 and 1999 was 4.27% and 3.88%,
respectively. Trends in interest bearing liabilities are shown in Table 2 to the
consolidated financial statements.
Asset Quality and Provision for Possible Loan Losses. For the first
quarter of 2000 and 1999, management added $375,000 and $300,000, respectively,
to the allowance for loan losses as volume related provisions for loan losses.
The increased provision in the first quarter of 2000 was prompted by strong loan
portfolio growth from acquired branches, de novo branch openings and from within
the existing branch network. During the first quarter of 2000, management
charged-off loans totaling $731,000 and had recoveries of $272,000, resulting in
net charge-offs of $459,000. During the same period in 1999, management
charged-off $83,000 in loans and had recoveries of $64,000, resulting in net
charge-offs of $19,000. Charge-offs for the first quarter of 2000 increased
$648,000 due to two significant borrowing relationships in which loans were
charged off. No such charge-offs were experienced during the first quarter of
1999. BancShares' ratio of annualized net loans charged off to average loans
increased slightly due to the charge-offs noted above. The ratio of allowance
for loan losses to loans decreased to 0.89% at March 31, 2000 from 0.93% at
December 31, 1999 due to recent loan growth and an increase in charge-offs which
reduced the allowance for loan losses. These charge-offs were considered normal
and not necessarily indicative of future trends. The following table presents
BancShares' comparative asset quality ratios:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Ratio of annualized net loans charged off to average loans........................................ 0.32% 0.19%
Allowance for loan losses to loans................................................................ 0.89 0.93
Non-performing assets to total gross loans and other real estate owned............................ 0.01 0.02
Non-performing assets to total assets............................................................. 0.01 --
</TABLE>
Management considers the allowance for loan losses, at March 31, 2000,
to be adequate to cover the losses and risks inherent in the loan portfolio at
that date and will continue to monitor its portfolio and to adjust the relative
level of the allowance as needed. BancShares had no impaired loans at March 31,
2000. Management actively maintains a current loan watch list and knows of no
other loans which are material and (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity or capital resources, or (ii) represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible loan
losses. Such agencies may require the Bank to increase the allowance based on
the examiners' judgements about information available to them at the time of
their examinations.
Noninterest Income. Noninterest income increased $142,000 or 11.26% for
the first quarter of 2000 over the first quarter of 1999. Noninterest income,
consisting primarily of service charges on deposit accounts and other service
charges and fees, increased during the first quarter of 2000 primarily due to
increased deposit base from acquired branches, de novo branch openings and
growth in the existing branch network. BancShares' average deposits increased
$108.6 million or 18.04% to $710.7 million in the first quarter of 2000 from
$602.0 million in the first quarter of 1999. Noninterest income does not include
any securities gains for either quarterly period.
Noninterest Expense. Noninterest expense increased $1.1 million or
20.68%, from $5.5 million in the first quarter of 1999 to $6.7 million in the
first quarter of 2000, including increases of $737,000 in salaries and employee
benefits, $224,000 in occupancy and equipment expense, $202,000 in data
processing costs and $74,000 in intangibles amortization. The increases
represented increases of 25.25% in salaries and employee benefits, 24.57% in
occupancy and equipment expenses, 53.23% in data processing costs and 35.74% in
intangibles amortization over the first quarter of 1999. Noninterest expense
increased due to expansion of BancShares' branch network. BancShares acquired
seven branches during the third quarter of 1999, opened six de novo branches
during the second and third quarters of 1999, and has seen increased activity
within the existing branch network.
<PAGE>
Income Taxes. In the first of quarter 2000, BancShares had income tax
expense of $1.1 million, an increase of $68,000 or 6.44%, from $1.1 million in
the prior year period. The resulting effective income tax rates, based on the
accruals for the three months ended March 31, 2000 and 1999, were 36.18% and
39.59%, respectively.
Capital Resources.
Shareholders' Equity and Capital Adequacy. Sufficient levels of capital
are necessary to sustain growth and absorb losses. To this end, the Federal
Reserve, which regulates BancShares, and the FDIC, which regulates the Bank, has
established minimum capital guidelines for the institutions they supervise.
Regulatory guidelines define minimum requirements for BancShares'
leverage capital ratio. Leverage capital equals total equity and certain
long-term borrowings less goodwill and certain other intangibles and is measured
relative to total adjusted assets as defined by regulatory guidelines. According
to these guidelines, BancShares' leverage ratio at March 31, 2000 was 9.49% as
compared to 9.12% at December 31, 1999.
BancShares is also required to meet minimum requirements for risk based
capital ("RBC"). BancShares' assets, including loan commitments and other
off-balance sheet items, are weighted according to federal guidelines for the
risk considered inherent in each asset. At March 31, 2000, the Total Capital
Ratio was 13.13% as compared to 13.20% at December 31, 1999.
The following table presents capital adequacy calculations and ratios
of BancShares:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ -------------
(dollars in thousands)
<S> <C> <C>
Tier 1 capital....................................... $ 85,070 $ 75,601
Total capital........................................ 77,901 83,665
Leverage capital ratio............................... 9.49% (1) 9.12% (1)
Tier 1 capital ratio................................. 12.07 (1) 11.93 (1)
Total capital ratio.................................. 13.13 (1) 13.20 (1)
</TABLE>
_________________
(1) These ratios exceed the minimum required regulatory capital ratios.
At March 31, 2000, and December 31, 1999, the Bank was in compliance
with its regulatory capital requirements, and all of its regulatory capital
ratios exceed the minimum ratios required for it to be classified as "well
capitalized." Growth in the Bank's assets resulting from acquisitions of branch
offices and the opening of de novo branches has reduced, and is expected to
continue to reduce, the Bank's capital ratios. Between October 1998 and August
of 1999, the Bank purchased assets and assumed the deposit liabilities of twelve
branch offices of FCB and established six de novo branches.
Liquidity, Market Risk and Interest Sensitivity.
Liquidity. Liquidity refers to the ability of BancShares to generate
sufficient funds to meet its financial obligations and commitments at a
reasonable cost. Maintaining liquidity ensures that funds will be available for
reserve requirements, customer demand for loans, withdrawal of deposit balances
and maturities of other deposits and liabilities. Past experiences help
management anticipate cyclical demands and amounts of cash required. These
obligations can be met by existing cash reserves or funds from maturing loans
and investments, but in the normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentration, competition and BancShares' overall financial condition.
BancShares' liquid assets include cash and due from banks, federal funds sold
and investment securities available-for-sale. The liquidity ratio, which is
defined as cash plus short-term and marketable securities divided by deposits
and short-term liabilities, was 30.27% at March 31, 2000, and 31.95% at December
31, 1999.
The consolidated statements of cash flows disclose the principal
sources and uses of cash from operating, investing and financing activities for
the three months ended March 31, 2000 and 1999. BancShares has no brokered
deposits. Jumbo time deposits are considered to include all time deposits of
$100,000 or more. BancShares has never aggressively bid on these deposits. Most
jumbo deposit customers have other relationships
<PAGE>
with the Bank, including savings, demand and other time deposits, and in some
cases, loans. At March 31, 2000, and December 31, 1999, jumbo time deposits
represented 10.23% and 9.26%, respectively, of total deposits.
Management believes that BancShares has the ability to generate
sufficient amounts of cash to cover normal requirements and any additional needs
which arise, within realistic limitations, and management is not aware of any
known demands, commitments or uncertainties that will affect liquidity in a
material way.
Market Risk. Market risk reflects the risk of economic loss resulting
from adverse changes in market price and interest rates. The risk of loss can be
reflected in either diminished current market values or reduced potential net
interest income in future periods.
BancShares' market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. Management seeks to
manage this risk through the use of short-term maturities. The composition and
size of the investment portfolio is managed so as to reduce the interest rate
risk in the deposit and loan portfolios while at the same time maximizing the
yield generated by the portfolio.
Management is of the opinion that as of March 31, 2000, there have been
no material changes in BancShares' market risk since December 31, 1999.
Interest Sensitivity. Deregulation of interest rates and short-term,
interest earning deposits which are more volatile, has created a need for
shorter maturities of interest earning assets. As a result, an increasing
percentage of commercial, installment, and mortgage loans are being made with
variable rates or shorter maturities to increase liquidity and interest rate
sensitivity.
The difference between interest sensitive asset and interest sensitive
liability repricing within time periods is referred to as the interest rate
sensitivity gap. Gaps are identified as either positive (interest sensitive
assets in excess of interest sensitive liabilities) or negative (interest
sensitive liabilities in excess of interest sensitive assets). The
interest-sensitivity position has meaning only as of the date for which it was
prepared.
As of March 31, 2000, BancShares had a positive one-year cumulative gap
position of 4.67% and a positive total cumulative gap position of 14.61%. At
December 31, 1999, BancShares had a negative one-year cumulative gap position of
1.47% and a positive total cumulative gap position of 13.31%. The increase in
the one-year cumulative gap position at March 31, 2000 is due to the
repositioning of securities, which at December 31, 1999, would mature in greater
than one year and at March 31, 2000, will mature in less than one year. A
positive gap position implies that interest earning assets (loans and
investments) will reprice at a faster rate than interest bearing liabilities
(deposits). In a falling rate environment, this position will generally have a
negative effect on earnings, while in a rising rate environment this position
will generally have a positive effect on earnings.
Accounting and Other Matters.
In June 1998, the Financial Accounting Standard Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This statement, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Earlier application of all provisions of this
statement is encouraged. BancShares' plans to adopt this Statement on January 1,
2001, and does not anticipate any material effect on its consolidated financial
statements.
Management is not aware of any other trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources or other operations.
<PAGE>
Forward-Looking Statements
This discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of the
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate," or other statements concerning
opinions or judgments of BancShares and its management about future events.
Factors that could influence the accuracy of such forward-looking statements
include, but are not limited to, the financial success or changing strategies of
BancShares' customers, actions of government regulators, the level of market
interest rates, and general economic conditions.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of BancShares' shareholders was held on January 31,
2000. At the meeting, the shareholders elected a complete board of directors
consisting of the seven individuals named below, and ratified the reappointment
of KPMG LLP as BancShares' independent public accountants for 2000.
The results of voting at the annual meeting were as follows:
1. Election of Directors:
Nominee Votes "For" Votes Withheld
-------------------------- ----------- --------------
F. Ray Allen 28,168 -
Wiley H. Cozart, M.D. 28,168 -
Haywood A. Lane, Jr. 28,168 -
D. Gary McRae 28,168 -
Wallace H. Mitchell 28,168 -
Sam C. Riddle, Jr. 28,168 -
Billy T. Woodard 28,168 -
2. Ratification of Appointment of Independent Accountants:
Votes "For" Votes "Against" Abstain
----------- --------------- -------
28,167 0 1
ITEM 6. EXHIBITS AND REPORTS ON FORM 10K
(a) BancShares' financial data schedule is filed herewith as Exhibit 27.
(b) No reports on Form 8-K were filed during the quarter ended March 31,
2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY BANCSHARES (N.C.), INC.
Dated: May 12, 2000 By:/s/ Mary A. Woodard
---------------------------------------
Mary A. Woodard
Chief Financial Officer and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000825953
<NAME> FIDELITY BANCSHARES (N.C.), INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 29,302,876
<INT-BEARING-DEPOSITS> 1,082,833
<FED-FUNDS-SOLD> 46,700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,329,002
<INVESTMENTS-CARRYING> 144,715,780
<INVESTMENTS-MARKET> 141,993,991
<LOANS> 571,487,321
<ALLOWANCE> 5,057,676
<TOTAL-ASSETS> 850,849,126
<DEPOSITS> 726,897,912
<SHORT-TERM> 22,003,520
<LIABILITIES-OTHER> 8,188,409
<LONG-TERM> 23,000,000
0
0
<COMMON> 6,902,616
<OTHER-SE> 63,856,669
<TOTAL-LIABILITIES-AND-EQUITY> 850,849,126
<INTEREST-LOAN> 13,024,697
<INTEREST-INVEST> 2,545,204
<INTEREST-OTHER> 153,843
<INTEREST-TOTAL> 15,723,744
<INTEREST-DEPOSIT> 6,243,657
<INTEREST-EXPENSE> 6,958,132
<INTEREST-INCOME-NET> 8,765,612
<LOAN-LOSSES> 375,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,760,260
<INCOME-PRETAX> 3,121,168
<INCOME-PRE-EXTRAORDINARY> 3,121,168
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,991,805
<EPS-BASIC> 70.71
<EPS-DILUTED> 70.71
<YIELD-ACTUAL> 4.67
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,141,647
<CHARGE-OFFS> 730,744
<RECOVERIES> 271,773
<ALLOWANCE-CLOSE> 5,057,676
<ALLOWANCE-DOMESTIC> 5,057,676
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 508,519
</TABLE>
