SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
--------------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
-------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check x whether the Registrant has filed all reports required
to be filed by Sections 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 6,771,054 shares
of the Registrant's common stock outstanding as of August 1, 1997.
FIDELITY BANKSHARES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................1
Consolidated Statements of Financial Condition as of
December 31, 1996 and June 30, 1997..........................................2
Consolidated Statements of Operations for the three and six months ended
June 30, 1996 and 1997.......................................................3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1997.......................................................4
Notes to Consolidated Financial Statements......................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................12
PART II. OTHER INFORMATION.......................................................................18
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Unaudited
December 31, June 30,
1996 1997
====================================
(In Thousands)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions .................................... $ 15,293 $ 17,741
Interest-bearing deposits ............................................................ 27,127 20,801
--------------- ---------------
Total cash and cash equivalents ................................................ 42,420 38,542
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities ..................................................... 8,465 13,050
Mortgage-backed securities ........................................................... 123,599 172,153
--------------- ---------------
Total assets available for sale ................................................ 132,064 185,203
LOANS RECEIVABLE, Net (Notes 2, 3) ....................................................... 661,700 735,699
OFFICE PROPERTIES AND EQUIPMENT, Net ..................................................... 18,092 19,016
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market ......................... 6,148 6,659
REAL ESTATE OWNED, Net ................................................................... 93 546
ACCRUED INTEREST RECEIVABLE .............................................................. 4,614 5,491
OTHER ASSETS ............................................................................. 8,431 8,133
--------------- ---------------
TOTAL ASSETS ............................................................................. $ 873,562 $ 999,289
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ................................................................................. $ 694,718 $ 779,558
REPURCHASE AGREEMENTS .................................................................... -- 2,736
ADVANCES FROM FEDERAL HOME LOAN BANK ..................................................... 82,517 111,304
ESOP LOAN ................................................................................ 1,104 942
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE ............................................ 2,448 9,139
DRAFTS PAYABLE ........................................................................... 2,957 3,315
OTHER LIABILITIES ........................................................................ 7,209 7,567
DEFERRED INCOME TAXES .................................................................... 886 1,049
--------------- ---------------
TOTAL LIABILITIES .................................................................... 791,839 915,610
--------------- ---------------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued ................................ -- --
COMMON STOCK ($ .10 par value) 8,200,000 authorized shares,
6,744,689 shares outstanding at December 31, 1996, and
6,770,654 shares outstanding at June 30, 1997 ....................................... 675 677
ADDITIONAL PAID IN CAPITAL ............................................................... 37,397 37,717
RETAINED EARNINGS - substantially restricted ............................................. 44,184 45,641
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN .................................. (1,315) (1,151)
NET UNREALIZED INCREASE IN FAIR VALUE OF
ASSETS AVAILABLE FOR SALE ( Net of applicable income taxes) ......................... 782 795
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY (Note 4) .................................................. 81,723 83,679
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................... $ 873,562 $ 999,289
=============== ===============
See Notes to Unaudited Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Unaudited Unaudited
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1996 1997 1996 1997
======================= ======================
(In Thousands, except per share amounts)
Interest income:
Loans ............................................................. $ 11,824 $14,163 $ 22,704 $27,541
Investment securities ............................................. 146 192 479 351
Other investments ................................................. 313 424 601 954
Mortgage-backed securities ........................................ 2,426 2,638 5,258 4,868
-------- ------- -------- -------
Total interest income .................................... 14,709 17,417 29,042 33,714
-------- ------- -------- -------
Interest expense:
Deposits .......................................................... 6,117 8,320 12,237 15,892
Advances from Federal Home Loan Bank and other borrowings ......... 1,474 1,579 2,933 2,974
-------- ------- -------- -------
Total interest expense ................................... 7,591 9,899 15,170 18,866
-------- ------- -------- -------
Net interest income ........................................................ 7,118 7,518 13,872 14,848
Provision for loan losses .................................................. (16) 21 60 72
-------- ------- -------- -------
Net interest income after provision for loan losses ........................ 7,134 7,497 13,812 14,776
-------- ------- -------- -------
Other income:
Servicing income and other fees ................................... 803 867 1,595 1,663
Net gain (loss) on sale of loans, investments
and mortgage-backed securities ........................... (22) 8 515 12
Miscellaneous ..................................................... 83 128 174 230
-------- ------- -------- -------
Total other income ....................................... 864 1,003 2,284 1,905
-------- ------- -------- -------
Operating expense:
Employee compensation and benefits ................................ 3,040 3,402 6,092 6,816
Occupancy and equipment ........................................... 1,171 1,220 2,356 2,385
Loss (gain) on real estate owned .................................. 1 30 (57) 51
Marketing ......................................................... 131 169 311 348
Federal deposit insurance premium ................................. 342 112 678 221
Other ............................................................. 964 1,034 1,821 2,187
-------- ------- -------- -------
Total operating expense .................................. 5,649 5,967 11,201 12,008
-------- ------- -------- -------
Income before provision for income taxes ................................... 2,349 2,533 4,895 4,673
-------- ------- -------- -------
Provision for income taxes:
Current ........................................................... 903 987 1,877 1,820
Deferred .......................................................... 71 81 147 154
-------- ------- -------- -------
Total provision for income taxes ......................... 974 1,068 2,024 1,974
-------- ------- -------- -------
Net income ................................................................. $ 1,375 $ 1,465 $ 2,871 $ 2,699
======== ======= ======== =======
Earnings per share (Note 5):
Primary ........................................................... $ 0.21 $ 0.22 $ 0.43 $ 0.40
======== ======= ======== =======
Fully Diluted ..................................................... $ 0.21 $ 0.22 $ 0.43 $ 0.40
======== ======= ======== =======
Dividends declared per share of common stock ............................... $ 0.15 $ 0.20 $ 0.30 $ 0.40
======== ======= ======== =======
See Notes to Unaudited Consolidated Financial Statements.
3
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997
- --------------------------------------------------------------------------------
Unaudited
For the Six Months Ended
June 30,
1996 1997
=============================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income....................................................................................... $ 2,871 $ 2,699
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization....................................................... 596 626
ESOP and Recognition and Retention Plan compensation expense........................ 349 302
Accretion of discounts, amortization of premiums, and other deferred yield items.... (689) (404)
Provision for loan losses........................................................... 60 72
Provisions for gains and net gains on sales of real estate owned.................... (69) (5)
Net gain on sale of:
Mortgage-backed securities................................................ (511) -
Loans..................................................................... (4) (12)
Decrease (increase) in accrued interest receivable............................................... 165 (877)
Decrease (increase) in other assets.............................................................. (1,674) 298
Increase in drafts payable....................................................................... 1,083 358
Increase (decrease) in deferred income taxes..................................................... (1,863) 163
Increase in other liabilities.................................................................... 1,656 353
-----------------------------
Net cash from operating activities........................................ 1,970 3,573
-----------------------------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans................................................ (73,091) (62,680)
Principal payments received on mortgage-backed securities........................................ 15,347 9,424
Purchases of:
Loans............................................................................... (16,471) (12,688)
Mortgage-backed securities.......................................................... - (58,085)
Federal Home Loan Bank stock........................................................ - (511)
Investment securities............................................................... - (6,567)
Office properties and equipment..................................................... (2,478) (1,566)
Proceeds from sales of:
Loans............................................................................... 5,356 722
Real estate acquired in settlement of loans......................................... 670 557
Mortgage-backed securities.......................................................... 14,516 -
Proceeds from maturities of investment securities available for sale............................. 20,490 2,000
Other............................................................................................ 1,912 104
-----------------------------
Net cash used for investing activities.................................... (33,749) (129,290)
-----------------------------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock..................................................... 22 184
Cash dividends................................................................................... (908) (1,237)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts................................. (378) 10,043
Certificates of deposit............................................................. 25,401 74,797
Advances from Federal Home Loan Bank................................................ 5,966 28,787
ESOP loan........................................................................... (138) (162)
Repurchase agreements............................................................... - 2,736
Advances by borrowers for taxes and insurance....................................... 6,212 6,691
-----------------------------
Net cash from financing activities........................................ 36,177 121,839
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................. 4,398 (3,878)
CASH AND CASH EQUIVALENTS, Beginning of period................................................... 24,963 42,420
-----------------------------
CASH AND CASH EQUIVALENTS, End of period......................................................... $ 29,361 $ 38,542
=============================
See Notes to Unaudited Consolidated Financial Statements.
4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Savings Bank of Florida (the
"Bank") conform to generally accepted accounting principles and to predominant
practices within the thrift industry. The Company has not changed its accounting
and reporting policies from those disclosed in its 1996 Annual Report on Form
10-K.
On April 25, 1996, Fidelity Federal Savings Bank of Florida adopted an Agreement
and Plan of Reorganization, (the "Plan") whereby the Bank would become a
wholly-owned subsidiary of a stock holding company, Fidelity Bankshares, Inc., a
Delaware corporation. Pursuant to the Plan, the Bank's mutual holding company
parent would continue to own a majority of the Company's outstanding common
stock. In addition, as part of the Plan, each share of the Bank's outstanding
stock would be converted into one share of Fidelity Bankshares, Inc. common
stock. Consequently, following the reorganization, each stockholder of the Bank
would have the same ownership interest in Fidelity Bankshares, Inc. as the
stockholder had in the Bank. In November 1996, the Bank received regulatory
approval to proceed with the reorganization and on January 21, 1997, the Bank's
stockholders approved the Plan. On January 29, 1997, the transaction was
consummated, resulting in the Company owning all the outstanding common stock of
the Bank.
The reorganization, which has been accounted for in the same manner as a pooling
of interest merger, did not result in any significant accounting adjustments.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the Bank. In the opinion of
the Company's management, all adjustments necessary to fairly present the
consolidated financial position of the Company at June 30, 1997 and the results
of its consolidated operations and cash flows for the period then ended, all of
which are of a normal and recurring nature, have been included.
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income", which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and No. 131 "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Adoption of these
statements will not impact the Bank's consolidated financial position, results
of operations or cash flows, and any effect will be limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Certain amounts in the financial statements have been reclassified to conform
with the June 30, 1997 presentation.
2. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and June 30, 1997, consist of the
following:
December 31, June 30,
1996 1997
===================================
(In Thousands)
One-to-four single family, residential real estate
mortgages.................................................... $ 524,434 $ 617,067
Commercial real estate mortgages.......................................... 42,811 42,719
Real estate construction-primarily residential............................ 58,493 26,461
Participations-primarily residential...................................... 4,255 3,597
Land loans-primarily residential.......................................... 11,875 12,385
--------------- --------------
Total first mortgage loans................................... 641,868 702,229
Consumer and commercial business loans.................................... 58,063 78,723
--------------- --------------
Total gross loans............................................ 699,931 780,952
Less:
Undisbursed portion of loans in process...................... 37,575 45,136
Unearned discounts, premiums and deferred loan
fees, net......................................... (1,607) (1,992)
Allowance for loan losses.................................... 2,263 2,109
--------------- --------------
Loans receivable-net...................................................... $ 661,700 $ 735,699
=============== ==============
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 1996 and the three and six months ended June 30, 1996 and 1997, is
as follows:
For the Year For the Three Months For the Six Months
Ended Ended Ended
December 31, June 30, June 30,
1996 1996 1997 1996 1997
===============================================================================
(In Thousands)
Balance at beginning of period.... $ 2,265 $ 2,331 $ 2,130 $ 2,265 $ 2,263
Current provision................. 164 (16) 21 60 72
Charge-offs....................... (166) (90) (42) (100) (226)
------------ -------------------------- --------------------------------
Ending balance.................... $ 2,263 $ 2,225 $ 2,109 $ 2,225 $ 2,109
============ ========================== ================================
6
An analysis of the recorded investment in impaired loans owned by the Company at
the end of each period and the related specific valuation allowance for those
loans is as follows:
December 31, 1996 June 30, 1997
============================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------------------------------------------------------
(In Thousands)
Impaired loan balances and related
specific valuation allowances:
Loans performing in conformity with
contractual terms......................... $ 984 $ 164 $ 973 $ 164
Loans for which interest income is
not being recognized...................... 667 277 238 123
======================== ========================
Total.............................. $ 1,651 $ 441 $ 1,211 $ 287
The Bank's policy on interest income on impaired loans is to reverse all accrued
interest against interest income if a loan becomes more than 90 days delinquent
and cease accruing interest thereafter. Such interest ultimately collected is
credited to income in the period of recovery.
7
4. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Savings Bank of Florida, is a
regulated financial institution. Its regulatory capital amounts and ratios are
presented in the following table:
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, 1996 Stockholders' Equity
and ratio to total assets............................ 9.4% $ 81,723
=========
Net unrealized increase in market value of assets
available for sale (net of applicable
income taxes)........................................ (782)
Goodwill................................................ (755)
-----------
Tangible capital and ratio to adjusted total
assets............................................... 9.2% $ 80,186 1.5% $ 13,072
========= =========== ======= ===========
Tier 1 (core) capital and ratio to adjusted
total assets......................................... 9.2% $ 80,186 3.0% $ 26,144 5.0% $ 43,574
========= =========== ======= =========== ======= ===========
Tier 1 (core) capital and ratio to risk-weighted
total assets......................................... 17.9% $ 80,186 6.0% $ 26,915
========= ======= ===========
General loan valuation allowances....................... 1,822
Equity investments...................................... (97)
-----------
Tier 2 capital.......................................... $ 1,725
===========
Total risk-based capital and ratio to risk-weighted
total assets......................................... 18.3% $ 81,911 8.0% $ 35,886 10.0% $ 44,858
========= =========== ======= =========== ======= ===========
Total assets............................................ $873,562
===========
Adjusted total assets................................... $871,472
===========
Risk-weighted assets.................................... $448,579
===========
As of June 30, 1997 Stockholders' Equity
and ratio to total assets............................ 8.3% $ 82,442
=========
Net unrealized increase in market value of assets
available for sale (net of applicable income
taxes)............................................... (795)
Goodwill................................................ (604)
Disallowed servicing assets and deferred tax assets..... (186)
-----------
Tangible capital and ratio to adjusted total assets..... 8.1% $ 80,857 1.5% $ 14,954
========= =========== ======= ===========
Tier 1 (core) capital and ratio to adjusted
total assets......................................... 8.1% $ 80,857 3.0% $ 29,907 5.0% $ 49,845
========= =========== ======= =========== ======= ===========
Tier 1 (core) capital and ratio to risk-weighted
total assets......................................... 15.9% $ 80,857 6.0% $ 30,421
========= ======= ===========
General loan valuation allowances....................... 1,737
Equity investments...................................... (97)
-----------
Tier 2 capital.......................................... $ 1,640
===========
Total risk-based capital and ratio to risk-weighted
total assets......................................... 16.3% $ 82,497 8.0% $ 40,562 10.0% $ 50,702
========= =========== ======= =========== ======= ===========
Total assets............................................ $998,305
===========
Adjusted total assets................................... $996,906
===========
Risk-weighted assets.................................... $507,019
===========
8
5. EARNINGS PER SHARE
The weighted-average number of shares, including the adjustments for the Bank's
leveraged Employee Stock Ownership Plan (ESOP), Management Recognition Plan
(MRP) and stock options for the three months ended June 30, 1996 and 1997, are
as follows:
For the Three Months Ended
---------------------------------------------
June 30, 1996 June 30, 1997
------------------- -------------------
Net income........................................... $ 1,375,000 $ 1,465,000
=========== ===========
Primary Shares:
Shares Outstanding................................ 6,720,252 6,768,544
Adjustments to reflect:
Uncommitted ESOP shares...................... (144,127) (113,767)
Unearned MRP shares (treasury stock method).. (5,078) -
Common stock options (treasury stock method). 86,790 100,455
----------- -----------
Total............................... 6,657,837 6,755,232
=========== ===========
Earnings per share.................................. $ 0.21 $ 0.22
=========== ===========
The computations of fully diluted shares outstanding is the same as for primary
shares, above.
The weighted-average number of shares, including the adjustments for the Bank's
leveraged Employee Stock Ownership Plan (ESOP), Management Recognition Plan
(MRP) and stock options for the six months ended June 30, 1996 and 1997, are as
follows:
For the Six Months Ended
---------------------------------------
June 30, 1996 June 30, 1997
--------------- ---------------
Net income.......................................... $ 2,871,000 $ 2,699,000
=========== ===========
Primary Shares:
Shares Outstanding............................... 6,719,183 6,762,483
Adjustments to reflect:
Uncommitted ESOP shares....................... (147,922) (117,540)
Unearned MRP shares (treasury stock method)... (5,517) -
Common stock options (treasury stock method).. 94,304 99,690
----------- -----------
Total............................... 6,660,048 6,744,633
=========== ===========
Earnings per share.................................. $ 0.43 $ 0.40
=========== ===========
The computations of fully diluted shares outstanding is the same as for primary
shares, above.
Pursuant to Statement of Position (SOP), 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AICPA), ESOP shares that have not been committed to be released are not
considered to be outstanding.
9
PRO FORMA EARNINGS PER SHARE
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share". This statement,
which changes the method of calculating earnings per share, is effective for
financial statements beginning after December 15, 1997. While earlier
application is not allowed, the Company is permitted to disclose pro forma
earnings per share in the notes to financial statements in periods prior to the
required adoption. The following table shows pro forma earnings per share as
though this statement had been adopted.
For the Three Months Ended For the Three Months Ended
June 30, 1996 June 30, 1997
--------------------------------------------- ---------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- ------------ ------------ ------------- ------------
Net income.................. $ 1,375,000 $ 1,465,000
============ ============
Basic EPS
Income available to
common stockholders..... $ 1,375,000 6,576,125 0.21 $ 1,465,000 6,654,777 0.22
============ ============
Effect of Dilutive Shares
Common stock options.... 86,790 100,455
------------- ------------
Diluted EPS
Income available to
common stockholders.... $ 1,375,000 6,662,915 $ 0.21 $ 1,465,000 6,755,232 $ 0.22
============ ============= ============ ============ ============ ============
For the Six Months Ended For the Six Months Ended
June 30, 1996 June 30, 1997
--------------------------------------------- ---------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- ------------ ------------ ------------- ------------
Net income.................. $ 2,871,000 $ 2,699,000
============ ============
Basic EPS
Income available to
common stockholders...... $ 2,871,000 6,571,261 0.44 $ 2,699,000 6,644,943 0.41
============ ============
Effect of Dilutive Shares
Common stock options..... 94,304 99,690
------------ -------------
Diluted EPS
Income available to
common stockholders...... $ 2,871,000 6,665,565 $ 0.43 $ 2,699,000 6,744,633 $ 0.40
============ ============ ============ ============ ============= ============
The guidance in AICPA, SOP 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" continues to apply to earnings per share calculations under
Statement No. 128. Therefore, the weighted average shares outstanding in the
table above do not include uncommitted ESOP shares.
10
6. SUBSEQUENT EVENT
On August 1, 1997, the Bank entered into a contract to sell the property it owns
in downtown West Palm Beach, Florida for $7.2 million. The prospective buyer has
thirty days to perform due diligence, which period may be extended by an
additional thirty days at the buyer's option. The buyer has the right to cancel
the contract at any time and for any reason, during the due diligence period. If
there is no cancellation, the closing on the contract is scheduled eighteen
months following the conclusion of due diligence.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
On April 25, 1996, Fidelity Federal Savings Bank of Florida (the "Bank") adopted
an Agreement and Plan of Reorganization, (the "Plan") whereby the Bank would
become a wholly-owned subsidiary of a stock holding company, Fidelity
Bankshares, Inc. (the "Company"), a Delaware corporation. Pursuant to the Plan,
the Bank's mutual holding company parent would continue to own a majority of the
Company's outstanding common stock. In addition, as part of the Plan, each share
of the Bank's outstanding stock would be converted into one share of Fidelity
Bankshares, Inc. common stock. Consequently, following the reorganization, each
stockholder of the Bank would have the same ownership interest in Fidelity
Bankshares, Inc. as the stockholder had in the Bank. In November, 1996, the Bank
received regulatory approval to proceed with the reorganization and on January
21, 1997, the Bank's stockholders approved the Plan. On January 29, 1997, the
transaction was consummated, resulting in the Company owning all the outstanding
common stock of the Bank.
The reorganization, which has been accounted for in the same manner as a pooling
of interests merger, did not result in any significant accounting adjustments.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the Bank, which is primarily
dependent on its net interest income, which is the difference between interest
income earned on its investments in mortgage loans and mortgage-backed
securities, other investment securities and loans, and its cost of funds
consisting of interest paid on deposits and borrowings. The Bank's net income
also is affected by its provision for loan losses, as well as by the amount of
other income, including income from fees and service charges, net gains and
losses on sales of investments, and operating expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, and income taxes. Earnings of the Bank also are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Bank. In particular, the general level of
market rates tends to be highly cyclical. In periods of high interest rates,
earnings of the Bank are likely to be depressed, which in turn would be likely
to have a detrimental effect on the market value of any investment in the Bank's
common stock. In addition, legislative and regulatory actions may result in
diminishing the value of any investment in the Bank.
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income", which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and No. 131 "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Adoption of these
statements will not impact the Bank's consolidated financial position, results
of operations or cash flows, and any effect will be limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Recent Development.
On August 1, 1997, the Bank entered into a contract to sell the property it owns
in downtown West Palm Beach, Florida for $7.2 million. The prospective buyer has
thirty days to perform due diligence, which period may be extended by an
additional thirty days at the buyer's option. The buyer has the right to cancel
the contract at any time and for any reason, during the due diligence period. If
there is no cancellation, the closing on the contract is scheduled eighteen
months following the conclusion of due diligence.
13
Results of Operations.
Net income for the six months ended June 30, 1997 was $2.7 million, representing
a decrease of $172,000 from the comparable period ended June 30, 1996. The
reasons for this decrease, as more fully described herein, was an increase in
interest expense of $3.7 million, a decrease in other income of $379,000 and an
increase in operating expenses of $807,000. Offsetting these factors was an
increase in interest income of $4.7 million and a decrease in the provision for
income taxes of $50,000.
Net income for the quarter ended June 30, 1997 was $1.5 million, representing an
increase of $90,000 from the comparable quarter in 1996. The principal reasons
for this increase, as more fully described later herein, were an increase in net
interest income of $400,000 and an increase in other income of $139,000 which
was partially offset by an increase in operating expenses of $318,000 and an
increase in the provision for income taxes of $94,000.
Interest Income.
Interest income for the six months ended June 30, 1997, totaled $33.7 million,
an increase of $4.7 million or 16.1% from the same period in 1996. The principal
cause of this increase was an increase in interest income on the Bank's loans of
$4.8 million. This increase resulted from an increase in the average balance of
these loans to $695.3 million for the six months ended June 30, 1997 compared to
$572.5 million from the comparable 1996 period. Interest income from other
investments for the six months ended June 30, 1997 increased by $353,000
compared to the same period in 1996. The principal reason for this increase was
an increase in the average balance of these investments to $29.6 million for the
six months ended June 30, 1997 from $18.5 million for the six months ended June
30, 1996. Partially offsetting these increases was a decrease in interest income
from mortgage-backed securities of $390,000. This decline was the result of a
decrease in the average yield on these securities to 6.90% from 7.43% and a
decrease in the average balance to $141.0 million from $141.6 million for the
six months ended June 30, 1997 and 1996, respectively.
Interest income for the quarter ended June 30, 1997, totaled $17.4 million, an
increase of $2.7 million or 18.4% from the same quarter in 1996. The principal
cause of this increase was an increase in interest income on loans of $2.3
million. This increase resulted from an increase in the average balance of the
Bank's loan portfolio to $714.1 million for the quarter ended June 30, 1997
compared to $595.6 million from the comparable 1996 quarter. Interest income
from mortgage-backed securities for the quarter ended June 30, 1997 was $2.6
million, an increase of $212,000 or 8.7% compared to $2.4 million for the same
quarter in 1996. The primary reason for this increase was an increase in the
average balance of these securities to $153.7 million for the quarter ended June
30, 1997 from $129.9 million for the same quarter in 1996, which was offset by a
decline in the average rate of such investments of 7.47% in 1996 to 6.86% in
1997. Interest income also increased on investment securities and other
investments by $46,000 and $111,000, respectively. These increases resulted from
an increase in the average balance of investment securities to $12.5 million
from $8.5 million and an increase in the average balance of other investments to
$28.5 million from $20.5 million for the quarters ended June 30, 1997 and 1996,
respectively.
Interest Expense.
Interest expense was $18.9 million for the six months ended June 30, 1997,
representing a $3.7 million or 24.4% increase when compared to the same period
in 1996. The principal cause of this increase was an increase in the cost of
deposits of $3.7 million. This resulted from an increase in the average balance
of interest-bearing deposits to $708.3 million for the six months ended June 30,
1997 compared to $582.9 million for the same period in 1996 and an increase in
the average yield on deposits to 4.49% from 4.20% for the periods ended June 30,
1997 and 1996, respectively. Interest expense on borrowed funds increased
slightly by $41,000, caused primarily by an increase in the average balance on
such funds to $90.2 million for the six
14
months ended June 30, 1997 compared to $85.6 million for the same period in
1996. The average yield on borrowed funds decreased to 6.59% from 6.85% for the
six months ended June 30, 1997 and 1996, respectively.
Interest expense was $9.9 million for the quarter ended June 30, 1997,
representing a $2.3 million or 30.4% increase when compared to the same quarter
in 1996. The principal cause for this increase was an increase in the cost of
deposits of $2.2 million. This resulted from an increase in the average balance
of deposits to $731.3 million for the quarter ended June 30, 1997 compared to
$589.4 million for the same quarter in 1996 and an increase in the average yield
on deposits to 4.55% from 4.15% for the quarters ended June 30, 1997 and 1996,
respectively. Interest expense on borrowed funds also increased by $105,000,
caused primarily by a increase in the average balance on such funds to $96.2
million for the quarter ended June 30, 1997 compared to $86.9 million for the
same quarter in 1996. The average yield on borrowed funds decreased slightly to
6.56% for the quarter ended June 30, 1997 from 6.78% for the comparable 1996
quarter.
Net Interest Income.
While the Bank's interest income increased by $4.7 million for the six months
ended June 30, 1997, compared to the same period in 1996, interest expense also
increased by $3.7 million, resulting in net interest income of $14.8 million for
the six months ended June 30, 1997. This represents a $976,000 or 7.0% increase
when compared to the same period in 1996.
During the quarter ended June 30, 1997, the Bank's interest income increased by
$2.7 million compared to the same quarter in 1996, while interest expense
increased by $2.3 million, resulting in net interest income of $7.5 million for
the quarter ended June 30, 1997, $400,000 or 5.6% more than realized in 1996.
Provision for Loan Losses.
The Bank's provision for loan losses was $72,000 for the six months ended June
30, 1997, representing a $12,000 increase when compared to $60,000 for the six
months ended June 30, 1996. The provision for loan losses for the six months
ended June 30, 1997 was determined adequate by management in light of the Bank's
historical loan loss experience. The Bank's total allowance for loan losses at
June 30, 1997 of $2.1 million was deemed adequate by management, in light of the
risks inherent in the Bank's loan portfolio.
The provision for loan losses was $21,000 for the quarter ended June 30, 1997,
representing a $37,000 increase when compared to a $16,000 credit for the
quarter ended June 30, 1996. The provision for the quarter ended June 30, 1997
is deemed adequate by management in light of the Bank's historical loan loss
experience.
Other Income.
Other income for the six months ended June 30, 1997 was $1.9 million or $379,000
less than the same period in 1996. This decrease is primarily attributable to a
decrease in gain on sale of loans, investment and mortgage-backed securities of
$503,000, as a result of increased sales of such instruments in 1996. This
decline was only partially offset by an increase in the Bank's servicing income
and other fees of $68,000 and an increase in miscellaneous income of $56,000 for
the six months ended June 30, 1997 and 1996, respectively.
Other income for the quarter ended June 30, 1997 was $1.0 million, an increase
of $139,000 from the comparable quarter in 1996. This increase is due primarily
to an increase of $64,000 in servicing income and other fees. This increase was
also attributable to an increase in gain on sale of loans, investments and
mortgage-backed securities of $30,000 and an increase in miscellaneous income of
$45,000 for the quarter ended June 30, 1997 compared to the same quarter in
1996.
15
Operating Expense.
Operating expenses increased by $807,000 to $12.0 million for the six months
ended June 30, 1997 as compared to the six months ended June 30, 1996. Employee
compensation and benefits increased by $724,000 for the six months ended June
30, 1997 when compared to the same 1996 quarter. Of this increase, approximately
$167,000 is attributable to expanded operations at two of the Bank's offices,
together with its LPO office. In addition, lower loan production in 1997
compared to 1996 resulted in $152,000 less being allocated to deferred loan
costs. The Bank's personnel benefits expense, despite a decrease of $140,000 in
the cost of the Bank's Management Recognition Program expense, increased by
$242,000, principally due to increases in the Bank's ESOP and hospitalization
costs. The increase in other operating expenses of $366,000 for the six months
ended June 30, 1997 compared to the same quarter in 1996, was due largely to
expensing most of the organizing costs of creating the mid-tier holding company.
Loss on real estate owned increased by $108,000. Occupancy and equipment and
marketing expenses also increased by $29,000 and $37,000, respectively. These
increases were partially offset by a decrease in Federal deposit insurance
premium of $457,000, due primarily to the resolution of the Savings Association
Insurance Fund (SAIF) issue through a one-time special assessment charged in the
third quarter of 1996.
Operating expenses increased by $318,000 to $6.0 million for the quarter ended
June 30, 1997 as compared to the quarter ended June 30, 1996. Employee
compensation and benefits increased by $362,000 which, as explained above, is
partially attributable to expanded operations at two of the Bank's offices and
its LPO office. Occupancy and equipment costs increased by $49,000. Marketing
costs and other operating expenses increased by $38,000 and $70,000,
respectively. Partially offsetting these increases was an increase in the loss
on real estate owned of $29,000 and a decrease in Federal deposit insurance
premium of $230,000, due primarily to the resolution of the SAIF issue discussed
above.
Income Taxes.
The income tax provision was $2.0 million for the six months ended and $1.1
million for the quarter ended June 30, 1997, respectively. These expenses
approximate the rates paid by the Company for Federal and State income taxes
applied to the Company's pre-tax income.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
At June 30, 1997, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $116.0 million, representing a cumulative one-year gap ratio
of a negative 11.62%. This compares to a negative gap ratio of 11.41% at
December 31, 1996, at which date the Bank had total interest bearing liabilities
maturing or repricing within one year that exceeded total interest-earning
assets maturing or repricing during the same period by $99.7 million. The Bank
has an Asset-Liability Management Committee which is responsible for reviewing
the Bank's assets and liability policies. The Committee meets weekly and reports
monthly to the Board of Directors on interest rate risks and trends, as well as
liquidity and capital ratios and requirements.
Liquidity and Capital Resources.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio currently is 5.0%. The Bank's
liquidity ratio averaged 6.36% during the month of June, 1997. Liquidity ratios
averaged 6.86% for the quarter ended June 30, 1997. The Bank adjusts its
liquidity levels in order to meet funding needs of deposit outflows, payment of
real estate taxes on mortgage loans, and repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
16
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities and other short-term investments, as well
as earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Bank manages
the pricing of its deposits to maintain a desired deposit balance. In addition,
the Bank invests excess funds in short-term interest-earning and other assets,
which provide liquidity to meet lending requirements. Short-term interest-
bearing deposits with the FHLB of Atlanta amounted to $20.7 million and $27.0
million at June 30, 1997 and December 31, 1996, respectively. Other assets
qualifying for liquidity at June 30, 1997 and December 31, 1996, amounted to
$25.3 million and $19.8 million, respectively. For additional information about
cash flows from the Company's operating, financing and investing activities, see
Consolidated Statements of Cash Flows included in the Financial Statements. A
major portion of the Bank's liquidity consists of cash and cash equivalents,
which are a product of its operating, investing and financing activities. The
primary sources of cash were net income, principal repayments on loans and
mortgage-backed securities, increases in deposit accounts and additional
advances from the Federal Home Loan Bank.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 1997, the Bank had $111.3 million in advances from
the FHLB. At June 30, 1997, the Bank had commitments outstanding to originate or
purchase loans of $41.8 million. This amount does not include the unfunded
portion of loans in process. Certificates of deposit scheduled to mature in less
than one year at June 30, 1997, totaled $398.7 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
Changes in Financial Condition.
The Company's assets increased by $125.7 million from December 31, 1996 to June
30, 1997. Loans receivable-net increased by $74.0 million and assets available
for sale, principally mortgage-backed securities, increased by $53.1 million.
Funds for the increase in assets were provided by an increase in the Bank's
deposits and repurchase agreements of $87.6 million, advances from the FHLB of
$28.8 million and increases in all other liabilities of $7.4 million. The
Company's equity at June 30, 1997 increased by $2.0 million from December 31,
1996 as a result of net income for the six months of $2.7 million plus a change
in the fair value of assets available for sale, net of applicable income taxes.
This amount was offset by dividends declared for the six months of $1.2 million.
17
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor
is the Company aware of any pending litigation, other than legal
proceedings incident to the business of the Company, such as
foreclosure actions filed on behalf of the Company. Management,
therefore, believes the results of any current litigation would be
immaterial to the consolidated financial condition or results of
operation of the Company.
Item 2 Changes in Securities
Not applicable.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
On April 16, 1997, several matters were submitted to the security
holders, in connection with the Bank's annual meeting of stockholders,
all of which were set forth in the Bank's proxy materials. The results
of such votes are as follows:
Ballot No. 1
------------
The election of Donald E. Warren and Vince A. Elhilow, each to
serve as directors for a term of three years or until their successors
have been elected and qualified.
For Withheld
--- --------
Donald E. Warren 6,205,408 4,695
Vince A. Elhilow 6,205,133 4,970
Ballot No. 2
------------
The ratification of the appointment of Deloitte and Touche, LLP,
as auditors for the Company for the fiscal year ended December 31,
1997.
For Against Abstain
--- ------- -------
Number of Votes 6,205,989 859 3,256
18
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under
Consolidated Financial Statements (pages 2 through 4), Notes
to Consolidated Financial Statements (pages 5 through 11) and
Management's Discussion and Analysis of Operations (pages 12
through 17), and are incorporated by reference, herein.
(b) There were no reports filed on Form 8-K
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIDELITY BANKSHARES, INC.
Date: August 13, 1997 By: /s/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: August 13, 1997 By: /s/ Richard D. Aldred
-------------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
20