SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
__________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
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 6,834,463 shares
of the Registrant's common stock outstanding as of November 1, 1999.
FIDELITY BANKSHARES, INC.
FIDELITY BANKSHARES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................... 1
Consolidated Statements of Financial Condition as
of December 31, 1998 and September 30, 1999............ 2
Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1999...... 3
Consolidated Statements of Comprehensive Operations
for the three and nine months ended September 30,
1998 and 1999.......................................... 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1999............... 5
Notes to Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
PART II. OTHER INFORMATION.................................................. 21
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Unaudited
December 31, September 30,
1998 1999
==============================
(In Thousands)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions..................................... $ 27,951 $ 33,128
Interest-bearing deposits............................................................. 32,075 41,617
---------- ----------
Total cash and cash equivalents.................................................... 60,026 74,745
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities...................................................... 18,824 50,759
Mortgage-backed securities............................................................ 389,263 361,086
Corporate debt securities............................................................. 44,488 39,038
---------- ----------
Total assets available for sale.................................................... 452,575 450,883
LOANS RECEIVABLE, Net (Notes 2, 3)...................................................... 977,166 1,120,408
OFFICE PROPERTIES AND EQUIPMENT, Net.................................................... 37,708 44,009
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market........................ 15,658 15,118
REAL ESTATE OWNED, Net.................................................................. 907 349
ACCRUED INTEREST RECEIVABLE............................................................. 7,549 8,360
DEFERRED INCOME TAX ASSET............................................................... 1,443 2,980
OTHER ASSETS............................................................................ 13,895 17,040
---------- ----------
TOTAL ASSETS............................................................................ $1,566,927 $1,733,892
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS................................................................................ $1,120,746 $1,278,613
OTHER BORROWED FUNDS.................................................................... 6,981 11,725
ADVANCES FROM FEDERAL HOME LOAN BANK.................................................... 303,140 302,352
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE........................................... 3,081 16,470
DRAFTS PAYABLE.......................................................................... 9,605 4,484
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................................ 28,750 28,750
OTHER LIABILITIES....................................................................... 9,625 10,252
---------- ----------
TOTAL LIABILITIES..................................................................... 1,481,928 1,652,646
---------- ----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued............................... - -
COMMON STOCK ($.10 par value) 8,200,000 authorized shares:
6,803,042 shares outstanding at December 31, 1998, and................................
6,834,463 shares outstanding at September 30, 1999.................................... 680 683
ADDITIONAL PAID IN CAPITAL.............................................................. 40,535 39,338
RETAINED EARNINGS - substantially restricted............................................ 52,018 53,353
TREASURY STOCK - at cost, 394,029 shares at December 31, 1998, and
489,796 shares at September 30, 1999.................................................. (7,258) (7,658)
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN................................. (658) (411)
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 6)........................................... (318) (4,059)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (Note 4)................................................... 84,999 81,246
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................................. $1,566,927 $1,733,892
========== ==========
See Notes to Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Unaudited Unaudited
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
=============================================================
(In Thousands, except per share data)
Interest income:
Loans................................................. $18,030 $20,986 $53,463 $59,483
Investment securities.................................. 270 613 779 1,491
Other investments...................................... 907 839 2,511 2,378
Mortgage-backed and other securities................... 6,295 6,184 16,030 18,294
------- ------- ------- -------
Total interest income............................... 25,502 28,622 72,783 81,646
------- ------- ------- -------
Interest expense:
Deposits............................................... 11,817 13,169 32,815 37,737
Advances from Federal Home Loan Bank and
other borrowings.................................... 5,238 5,346 14,630 15,801
------- ------- ------- -------
Total interest expense.............................. 17,055 18,515 47,445 53,538
------- ------- ------- -------
Net interest income...................................... 8,447 10,107 25,338 28,108
Provision for (recovery from) loan losses................ 6 161 (43) 268
------- ------- ------- -------
Net interest income after provision for loan losses...... 8,441 9,946 25,381 27,840
------- ------- ------- -------
Other income:
Fee income from deposits and other banking services.... 1,185 1,423 3,397 3,996
Net gain on sale of loans, investments
and mortgage-backed securities...................... 555 64 1,979 342
Miscellaneous.......................................... 686 425 1,251 1,285
------- ------- ------- -------
Total other income.................................. 2,426 1,912 6,627 5,623
------- ------- ------- -------
Operating expense:
Employee compensation and benefits..................... 4,165 5,443 12,003 15,181
Occupancy and equipment................................ 1,510 1,762 4,471 5,220
Loss (gain) on real estate owned....................... (98) (67) (64) (192)
Marketing.............................................. 159 229 598 713
Federal deposit insurance premium...................... 141 168 408 492
Other Miscellaneous.................................... 1,492 1,664 4,299 4,909
------- ------- ------- -------
Total operating expense............................. 7,369 9,199 21,715 26,323
------- ------- ------- -------
Income before provision for income taxes................. 3,498 2,659 10,293 7,140
------- ------- ------- -------
Provision for income taxes:
Current............................................... 1,234 916 3,703 2,466
Deferred.............................................. 124 103 364 280
------- ------- ------- -------
Total provision for income taxes.................... 1,358 1,019 4,067 2,746
------- ------- ------- -------
Net income............................................... $ 2,140 $ 1,640 $ 6,226 $ 4,394
======= ======= ======= =======
Earnings per share: (Note 5)
Basic.................................................. $.32 $.0.25 $.93 $0.68
======= ======= ======= =======
Diluted................................................ $.31 $.0.25 $.91 $0.68
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
3
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
Unaudited Unaudited
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
======================================================
(In Thousands, except per share data)
Net income................................................. $2,140 $ 1,640 $6,226 $ 4,394
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period. 648 (1,611) 1,115 (3,698)
Less: Reclassification adjustment for gains realized
in net income.................................... (286) (40) (606) (43)
------ ------- ------ -------
Comprehensive income (loss) (Note 6)....................... $2,502 $ (11) $6,735 $ 653
====== ======= ====== =======
See Notes to Consolidated Financial Statements.
4
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999
- --------------------------------------------------------------------------------
Unaudited
For the Nine Months Ended
September 30,
1998 1999
============================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................................... $ 6,226 $ 4,394
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization........................................................... 1,216 1,689
ESOP and Recognition and Retention Plan compensation expense............................ 630 380
Accretion of discounts, amortization of premiums and other deferred yield items....... 352 1,352
Provision for loan losses and real estate losses........................................ (43) 294
Provisions for (gains) losses and net (gains) losses on sales of real estate owned.... (48) (214)
Net (gain) loss on sale of:
Loans............................................................................... (1,000) (273)
Corporate bonds..................................................................... (108) (5)
Mortgage-backed securities.......................................................... (869) (65)
Office properties and equipment..................................................... - 66
(Increase) decrease in accrued interest receivable....................................... (1,209) (810)
Decrease (increase) in other assets...................................................... (1,527) (2,805)
Increase (decrease) in drafts payable.................................................... (1,648) (5,121)
(Increase) decrease in deferred income tax asset......................................... 560 653
Increase in other liabilities............................................................ 1,940 65
--------- ---------
Net cash from operating activities.................................................. 4,472 (400)
--------- ---------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans........................................ (88,561) (137,069)
Principal payments received on mortgage-backed securities................................ 83,086 77,718
Purchases of:............................................................................
Loans................................................................................. (34,914) (21,005)
Mortgage-backed securities.............................................................. (239,108) (57,286)
Corporate debt securities............................................................... (55,431) -
Federal Home Loan Bank stock............................................................ (4,974) -
Investment securities................................................................... (4,989) (40,839)
Office properties and equipment......................................................... (13,737) (8,162)
Proceeds from sales of:
Loans................................................................................. 47,771 14,548
Federal Home Loan Bank stock............................................................ 1,175 540
Corporate debt securities............................................................... 9,843 4,958
Real estate acquired in settlement of loans............................................. 1,482 1,833
Mortgage-backed securities.............................................................. 27,523 696
Office properties and equipment......................................................... (7) -
Proceeds from maturities of investment securities........................................ 2,220 8,455
Cash used to purchase Florida Consolidated Agency,
net of cash received relating to purchase............................................. - (175)
Other.................................................................................... 2,365 377
--------- ---------
Net cash used for investing activities.............................................. (266,256) (155,411)
--------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock............................................. 74 274
Purchase of treasury stock............................................................... (962) (1,906)
Sale of subordinated debentures, net..................................................... 27,389 -
Cash dividends........................................................................... (2,534) (3,050)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts...................................... 18,904 68,826
Certificates of deposit................................................................. 146,483 89,041
Advances from Federal Home Loan Bank.................................................... 65,979 (788)
Other borrowed funds.................................................................... 917 4,744
Advances by borrowers for taxes and insurance........................................... 12,334 13,389
--------- ---------
Net cash from financing activities.................................................. 268,584 170,530
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 6,800 14,719
CASH AND CASH EQUIVALENTS, Beginning of period.......................................... 55,824 60,026
--------- ---------
CASH AND CASH EQUIVALENTS, End of period................................................. $ 62,624 $ 74,745
========= =========
See Notes to Consolidated Financial Statements.
5
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 1998 Annual Report
on Form 10-K.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at September 30, 1999
and the results of its consolidated operations and cash flows for the period
then ended, all of which are of a normal and recurring nature, have been
included.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met,
a derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time of
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after July 1, 2000 and, accordingly, would apply to the
Company beginning on January 1, 2001. The Company plans to adopt the standard
at that time and does not presently intend to reclassify securities between
categories. The Company has not engaged in derivatives and hedging activities
covered by the new standard, and does not expect to do so in the foreseeable
future. Accordingly, SFAS No. 133 is not expected to have a material impact on
the Company's financial statements.
In October 1998 the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." Statement No. 65, as amended by Statement No. 115
and Statement No. 125, required that after securitization of a mortgage loan
held for sale, a mortgage banking enterprise classify the resulting security as
a trading security. Statement No. 134 amends this section to require that after
the securitization of mortgage loans held for sale, the entity classify the
resulting mortgage-backed security or other retained interests based on its
ability and intent to sell or hold those investments. SFAS 134 is effective
beginning in the first quarter after December 15, 1998. The Company has not
engaged in retaining securities after the securitization of its mortgage loans
held for sale and does not expect to do so in the foreseeable future.
Accordingly, SFAS No. 134 has not had a material impact on the Company's
financial statements.
Certain amounts in the financial statements have been reclassified to conform
with the September 30, 1999 presentation.
6
2. LOANS RECEIVABLE
Loans receivable at December 31, 1998 and September 30, 1999, consist of the
following:
December 31, September 30,
1998 1999
==========================================
(In Thousands)
One-to-four single family, residential real estate mortgages................ $ 828,929 $ 928,573
Commercial and multi-family real estate mortgages........................... 74,671 106,795
Real estate construction-primarily residential.............................. 53,515 30,401
Land loans-primarily residential............................................ 8,583 10,063
---------- ----------
Total first mortgage loans.................................................. 965,698 1,075,832
Consumer Loans.............................................................. 48,270 56,380
Commercial business loans................................................... 46,958 84,096
---------- ----------
Total gross loans........................................................... 1,060,926 1,216,308
Less:
Undisbursed portion of loans in process................................... 84,155 95,382
Unearned discounts, premiums and deferred loan fees (costs), net.......... (3,621) (2,900)
Allowance for loan losses................................................. 3,226 3,418
---------- ----------
Loans receivable-net........................................................ $ 977,166 $1,120,408
========== ==========
7
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 1998 and the three and nine months ended September 30, 1998 and
1999, is as follows:
Unaudited Unaudited Unaudited
For the Year For the Three For the Nine
Ended Months Ended Months Ended
December 31, September 30, September 30,
1998 1998 1999 1998 1999
=================================================================
(In Thousands)
Balance at beginning of period......................... $3,294 $3,142 $3,252 $3,294 $3,226
Current provision (recovery), net................... 77 6 161 (43) 268
Charge-offs............................................ (145) (4) 5 (107) (76)
------ ------ ------ ------ ------
Ending balance......................................... $3,226 $3,144 $3,418 $3,144 $3,418
====== ====== ====== ====== ======
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, 1998 September 30, 1999
==========================================================
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....................................... $ 324 $162 $ 240 $122
Loans for which interest income is
not being recognized.................................... 3,685 - 2,941 -
------ ---- ------ ----
Total Net income................................. $4,009 $162 $3,181 $122
====== ==== ====== ====
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.
8
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, 1998 Stockholders' Equity
and ratio to total assets................... 6.8% $ 106,244
====
Unrealized increase in market value of
assets available for sale (net of
applicable income taxes).................... 318
Goodwill..................................... (2,394)
Disallowed servicing assets.................. (53)
----------
Tangible capital and ratio to adjusted total
assets...................................... 6.6% $ 104,115 1.5% $23,472
==== ========== ==== =======
Tier I (core) capital and ratio to adjusted
total assets................................ 6.7% $ 104,115 3.0% $46,943 5.0% $78,239
==== ========== ==== ======= ==== =======
Tier I (core) capital and ratio to
risk-weighted total assets.................. 12.0% $ 104,115 4.0% $34,814 6.0% $52,221
==== ==== ======= ==== =======
Allowable Tier 2 capital:
General loan valuation allowances............ 2,352
Equity investments........................... -
----------
Total risk-based capital and ratio to
risk-weighted total assets.................. 12.2% $ 106,467 8.0% $69,628 10.0% $87,036
==== ========== ==== ======= ==== =======
Total assets................................. $1,566,900
==========
Adjusted total assets........................ $1,564,771
==========
Risk-weighted assets......................... $ 870,355
==========
As of September 30, 1999 Stockholders'
Equity and ratio to total assets............ 6.2% $ 107,855
====
Unrealized decrease in market value of
assets available for sale (net of
applicable income taxes).................... 4,059
Goodwill..................................... (2,815)
Disallowed servicing assets.................. (56)
----------
Tangible capital and ratio to adjusted total
assets...................................... 6.3% $ 109,043 1.5% $26,048
==== ========== ==== =======
Tier I (core) capital and ratio to adjusted
total assets................................ 6.3% $ 109,043 3.0% $52,096 5.0% $86,826
==== ========== ==== ======= ==== =======
Tier I (core) capital and ratio to
risk-weighted total assets.................. 13.2% $ 109,043 4.0% $32,996 6.0% $49,493
==== ==== ======= ==== =======
Allowable Tier 2 capital:
General loan valuation allowances............ 2,617
Equity investments........................... -
----------
Total risk-based capital and ratio to
risk-weighted total assets.................. 13.5% $ 111,660 8.0% $65,991 10.0% $82,489
==== ========== ==== ======= ==== =======
Total assets................................. $1,732,853
==========
Adjusted total assets........................ $1,736,529
==========
Risk-weighted assets......................... $ 824,888
==========
9
5. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the three months ended September 30, 1998 and 1999, are as follows:
For the Three Months Ended For the Three Months Ended
September 30, 1998 September 30, 1999
-------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
====================================== ======================================
(Dollars in Thousands) (Dollars in Thousands)
Net income....................... $2,140,000 $1,640,000
========== ==========
Basic EPS:
Income available to
common stockholders............ $2,140,000 6,725,320 $0.32 $1,640,000 6,438,175 $0.25
========== ===== ========== =====
Effect of diluted shares:
Common stock options........... 100,322 55,116
--------- ---------
Diluted EPS:
Income available to
common stockholders............ $2,140,000 6,825,642 $0.31 $1,640,000 6,493,291 $0.25
========== ========= ===== ========== ========= =====
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the nine months ended September 30, 1998 and 1999, are as follows:
For the Nine Months Ended For the Nine Months Ended
September 30, 1998 September 30, 1999
-------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
====================================== ======================================
(Dollars in Thousands) (Dollars in Thousands)
Net income....................... $6,226,000 $4,394,000
========== ==========
Basic EPS:
Income available to
common stockholders............ $6,226,000 6,715,266 $0.93 $4,394,000 6,428,200 $0.68
========== ====== ========== ======
Effect of diluted shares:
Common stock options........... 105,488 58,208
--------- ---------
Diluted EPS:
Income available to
common stockholders............ $6,226,000 6,820,754 $0.91 $4,394,000 6,486,408 $0.68
========== ========= ====== ========== ========= ======
Pursuant to Statement of Position (SOP), 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AICPA), ESOP shares that have not been committed to be released are not
considered to be outstanding.
10
6. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Income (Loss) for
the periods ended September 30, 1998 and 1999, is as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
-------------- -------------- -------------- --------------
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on Securities on Securities
========================================================================
(In Thousands)
Beginning balance.................... $1,552 $(2,408) $1.405 $ (318)
Current-period change................ 362 (1,651) 509 (3,741)
----------- ------------ ----------- -------------
Ending balance....................... $1,914 $(4,059) $1,914 $(4,059)
=========== ============ =========== =============
An analysis of the related tax effects allocated to Other Comprehensive Income
(Loss) is as follows:
For the Three Months Ended For the Three Months Ended
September 30, 1998 September 30, 1999
-------------------------------------- -----------------------------------
Tax Tax
Before-tax (Expense) Net-of-tax Before-tax (Expense) Net-of-tax
Amount Benefit Amount Amount Benefit Amount
=================================================================================
(In Thousands)
Unrealized gain (loss) on assets available
for sale:
Unrealized holding gains (losses)
arising during period.................... $1,045 $(397) $ 648 $(2,598) $ 987 $(1,611)
Less: reclassification adjustment for
gains realized in net income............. (461) 175 (286) (65) 25 (40)
----------------------------------- ---------------------------------
Other comprehensive income (loss)......... $ 584 $(222) $ 362 $(2,663) $1,012 $(1,651)
=================================== =================================
For the Three Months Ended For the Three Months Ended
September 30, 1998 September 30, 1999
-------------------------------------- -----------------------------------
Tax Tax
Before-tax (Expense) Net-of-tax Before-tax (Expense) Net-of-tax
Amount Benefit Amount Amount Benefit Amount
=================================================================================
(In Thousands)
Unrealized gain (loss) on assets available
for sale:
Unrealized holding gains (losses)
arising during period.................... $1,798 $(683) $1,115 $(5,964) $2,266 $(3,698)
Less: reclassification adjustment for
gains realized in net income............. (977) 371 (606) (70) 27 (43)
-------------------------------------- ----------------------------------
Other comprehensive income (loss)......... $ 821 $(312) $ 509 $(6,034) $2,293 $(3,741)
====================================== ==================================
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.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Savings Bank of Florida ("Fidelity Federal" or the "Bank"). The Company
conducts no business other than holding the common stock of the Bank.
Consequently, its net income is derived from the Bank. The Bank's net income is
primarily dependent on its net interest income, which is the difference between
interest income earned on its investments in mortgage loans and mortgage-backed
securities, other investment securities and loans, and its cost of funds
consisting of interest paid on deposits and borrowings. The Bank's net income
also is affected by its provision for loan losses, as well as by the amount of
other income, including income from fees and service charges, net gains and
losses on sales of investments, and operating expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, and income taxes. Earnings of the Bank also are affected significantly
by general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Bank. In particular, the general level of
market interest rates tends to be highly cyclical.
Forward-Looking Statements.
When used in this report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, uncertainties
related to year 2000 that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. The Company wishes to
advise readers that the factors listed above could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
Recent Developments.
On July 16, 1999, the Company's subsidiary, Fidelity Federal Savings Bank
acquired Dunn & Noel, Inc., a full-service insurance agency based in Juno Beach,
Florida. Dunn & Noel was founded in 1947, originally as Burns & Company.
Following the acquisition, the agency, a wholly owned subsidiary of the Bank,
was renamed Florida Consolidated Agency, Inc., doing business as Fidelity
Insurance. Fidelity Insurance will continue to operate as an independent agency
and licensed agents will make insurance products available through the Fidelity
Federal's branch offices.
The Bank's scheduled closing in the second quarter of 1999 on the sale of the
property it owns in downtown West Palm Beach has been postponed by mutual
agreement and is expected to occur during the fourth quarter of 1999. As of
September 30, 1999, the Bank holds $805,000 in non-refundable deposits relating
to this sale.
Fidelity Federal opened three new branches during the quarter ended September
30, 1999. So far this year, the Bank has opened six new branches. The Bank
anticipates opening three new branches in October 1999 and one in December 1999,
bringing the total new branches to ten for the year ended December 31, 1999. As
of September 30, 1999, the six new branches had originated $59 million in new
deposits.
One of Palm Beach County's largest employers, Pratt & Whitney, has announced
that it will be closing its operations in Florida by September, 2000. Employees
will be offered transfers to Pratt & Whitney's Connecticut operations, early
retirement or be terminated. Of the estimated four thousand employees affected,
approximately two thirds reside in Palm Beach County, while the remainder live
in Martin County. Both counties are within the Bank's primary service area.
Management is unable to estimate the effects on the Bank's operations, if any,
as a result of Pratt & Whitney's plant closing.
13
Other Comprehensive Income/Loss.
Accumulated Other Comprehensive Loss for the nine months ended September 30,
1999 increased by $3.7 million to $4.1 million. This increase was due to a
decrease in the market value of Assets Available for Sale which resulted from an
increase in market interest rates for these instruments. Accumulated Other
Comprehensive Income for the nine months ended September 30, 1998 increased by
$509,000, due to an increase in the market value of Assets Available for Sale
which resulted from a modest decrease in market interest rates for these
instruments.
Accumulated Other Comprehensive Loss for the quarter ended September 30, 1999
increased by $1,651,000. This increase resulted from a decrease in the market
value of Assets Available for Sale which was caused by an increase in market
interest rates for these instruments. Accumulated Other Comprehensive Income
for the quarter ended September 30, 1998 increased by $362,000, due to an
increase in the market value of Assets Available for Sale which was caused by a
modest decrease in market interest rates for these instruments.
Results of Operations.
Net income for the nine months ended September 30, 1999 was $4.4 million,
representing a decrease of $1.8 million compared to $6.2 million for the same
period in 1998. The primary reasons for this decrease, as more fully described
later herein, was a decrease in other income of $1.0 million and an increase in
operating expenses of $4.6 million. These amounts were partially offset by an
increase in net interest income of $2.8 million and a decrease in the provision
for income taxes of $1.3 million.
Net income for the quarter ended September 30, 1999 was $1.6 million, a decrease
of $500,000 when compared to $2.1 million for the quarter ended September 30,
1998. The primary reasons for this decrease, as more fully described later
herein, was a decrease in other income of $514,000 along with an increase in
operating costs of $1.8 million. Offsetting these factors was an increase in
net interest income of $1.6 million and a decrease in the provision for income
taxes of $339,000.
Interest Income.
Interest income for the nine months ended September 30 1999, totaled $81.6
million, representing an increase of $8.9 million or 12.2% compared to the same
1998 period. The primary reason for this increase was an increase in the Bank's
interest income from loans of $6.0 million. This increase was primarily the
result of an increase of 10.6% in the average balance of loans to $1.0 billion
from $904.2 million for the period ended September 30, 1999 and 1998,
respectively. Interest income from mortgage-backed securities increased to
$18.3 million for the nine months ended September 30, 1999 from $16.0 million
for the 1998 period. This increase was due to an increase in the average
balance of mortgage-backed securities of $80.9 million, which was partially
offset by a decline in the average rate of such securities to 5.82% in 1999 from
6.32% in 1998. The Bank's interest income from investment securities also
increased by $712,000. This increase resulted from the average balance of
investment securities increasing to $34.4 million from $18.4 million for the
periods ended September 30, 1999 and 1998, respectively. Partially offsetting
these increases was a decrease in interest income from other investments of
$133,000, which resulted from a decrease in the average rate on these
investments to 5.87% from 6.63% for the nine months ended September 30, 1999 and
1998, respectively.
Interest income for the quarter ended September 30, 1999, totaled $28.6 million,
an increase of $3.1 million or 12.2% from the same quarter in 1998. The
principal reasons for this increase was an increase in interest income on the
Bank's loans of $3.0 million and an increase in interest income from the Bank's
investment securities of $343,000. The increase from loans resulted from an
increase in the average balance of these loans to $1.1 billion for the quarter
ended September 30, 1999 compared to $924.6 million for the comparable 1998
quarter. The increase in investment securities resulted from an increase in the
average balance of these securities to $41.1 million for the quarter ended
September 30, 1999 from $19.0 million for the same quarter in 1998. Slightly
offsetting these increases was a decrease in interest income from other
investments of $68,000.
14
Interest Expense.
Interest expense for the nine months ended September 30, 1999, totaled $53.5
million, an increase of $6.1 million or 12.8% from the same period in 1998. The
reasons for this increase were an increase in interest expense on deposits of
$4.9 million and an increase in interest expense on borrowed funds of $1.2
million. The increase in interest expense on deposits resulted from an increase
in the average balance of these deposits to $1.2 billion in 1999 from $962.5
million in 1998, reflecting the expansion of the Bank's branch network.
Slightly offsetting this increase was a decrease in the average cost of these
deposits to 4.21% for the nine months ended September 30, 1999 from 4.55% for
the nine months ended September 30, 1998. The increase in interest expense on
borrowed funds resulted from an increase in the average balance of these funds
to $343.3 million for the nine months ended September 30, 1999 compared to
$309.7 million for the comparable 1998 period. This was partially offset by a
decrease in the average cost of borrowed funds to 6.14% from 6.30% for the nine
months ended September 30, 1999 and 1998, respectively.
Interest expense was $18.5 million for the quarter ended September 30, 1999,
representing a $1.5 million or 8.6% increase when compared to the same quarter
in 1998. The principal cause for this increase was an increase in interest
expense on deposits of $1.4 million. This resulted from an increase in the
average balance of deposits to $1.2 billion for the quarter ended September 30,
1999 compared to $1.0 billion for the same quarter in 1998. Interest expense on
borrowed funds also increased by $108,000 caused primarily by an increase in the
average balance on such funds to $346.0 million for the quarter ended September
30, 1999 from $340.3 million for the comparable 1998 quarter. These increases
were partially offset by a decrease in the average yield on deposits to 4.22%
from 4.62% for the quarters ended September 30, 1999 and 1998, respectively.
Net Interest Income.
While the Bank's interest income increased by $8.9 million for the nine months
ended September 30, 1999, compared to the same period in 1998, interest expense
also increased by $6.1 million, resulting in net interest income of $28.1
million for the nine months ended September 30, 1999. This represents a $2.8
million or 10.9% increase in net interest income when compared to the same
period in 1998.
During the quarter ended September 30, 1999, the Bank's interest income
increased by $3.1 million compared to the same quarter in 1998, while interest
expense increased by $1.5 million, resulting in net interest income of $10.1
million for the quarter ended September 30, 1999, $1.6 million or 19.7% more
than realized in 1998.
Provision for Loan Losses.
The provision for loan losses was $268,000 for the nine months ended September
30, 1999. The Bank experienced a credit provision for loan losses of $43,000
for the nine months ended September 30, 1998. The credit provision primarily
resulted from the payoff of several delinquent loans on which the Bank had
previously provided specific loan loss allowances. The increase in the
provision for loan losses is principally attributable to the Bank's 45.5%
increase in commercial real estate mortgages, consumer loans and commercial
business loans since December 31, 1998. The Bank's total allowance for loan
losses as a percentage of net loans receivable was approximately .31% at
September 30, 1999 which management believes to be adequate considering the
Bank's loan composition and historical loss experience.
The provision for loan losses was $161,000 for the quarter ended September 30,
1999, compared to $6,000 for the quarter ended September 30, 1998. The
provision for the quarter ended September 30, 1999 is deemed adequate by
management in light of the Bank's historical loan loss experience.
The financial statements of the Company are prepared in accordance with
generally accepted accounting principles and, accordingly, allowances for loan
losses are based on management's estimate of the fair value of collateral, as
applicable, and the Bank's actual loss experience and standards applied by the
OTS and FDIC. The Bank provides both general valuation allowances (for
unspecified, potential losses) and specific valuation allowances (for known
losses) in its loan portfolio. General valuation allowances are added to the
Bank's capital for purposes of computing the Bank's regulatory risk-based
15
capital. The Bank regularly reviews its loan portfolio, including impaired
loans, to determine whether any loans require classification or the
establishment of appropriate valuation allowances. Since the Bank is increasing
its production of commercial business loans and since such loans are deemed to
have more credit risk than mortgage loans, the Bank's provision for loan losses
is likely in increase in future periods.
Other Income.
Other income for the nine months ended September 30, 1999 was $5.6 million or
$1.0 million less than the same period in 1998. Included in other income for
the nine months ended September 30, 1998 was $1.6 million more in non-recurring
gains on the sale of loans, investments and mortgage-backed securities than in
the same period in 1999 and 1998 included non-recurring income of $355,000 from
the maturing of an option on the sale of the Bank's downtown property.
Partially offsetting this $2.0 million decrease in non-recurring income were
increases in fees from deposits and other banking services of $600,000 as well
as increases in miscellaneous income, primarily from the sale of investment
products to customers.
Other income for the quarter ended September 30, 1999 was $1.9 million, a
decrease of $514,000 compared to the same quarter in 1998. Again, as explained
above, the quarter ended September 30, 1998 included $491,000 more in non-
recurring income from gains on the sale of investments, loans and mortgage-
backed securities and the $355,000 received from the maturing of the option on
the sale of the Bank's downtown property. Partially offsetting this decrease in
non-recurring income of $846,000 in 1999 as compared to 1998 was an increase in
fee income from deposits and other banking services of $238,000 and other
miscellaneous income.
Operating Expense.
Operating expenses were $26.3 million, representing a $4.6 million increase for
the nine months ended September 30, 1999 when compared to $21.7 million for the
nine months ended September 30, 1998. Employee compensation and benefits
increased by $3.2 million. This increase, which includes normal salary
increases, is due mainly to the hiring of additional personnel in connection
with the Bank's planned branch expansion in 1999 as well as expansion of the
Bank's commercial loan production capabilities. As a result, the Bank's full
time equivalent personnel increased by 117 at September 30, 1999 to 495 compared
to 378 at September 30, 1998. Occupancy and equipment costs increased by
$749,000 due in part to increases in real estate tax assessments on the Bank's
properties along with additional depreciation expenses relating to new computer
equipment and new branch office facilities opened during 1999. In addition,
there were increases in marketing costs of $115,000, federal deposit insurance
premiums of $84,000 and other operating expense of $610,000 for the nine months
ended September 30, 1999 and 1998, respectively. These increases were only
slightly offset by an increase in gains on the sale of real estate owned of
$128,000 for the nine months ended September 30, 1999 compared to 1998.
Operating expenses increased by $1.8 million to $9.2 million for the quarter
ended September 30, 1999 as compared to the quarter ended September 30, 1998.
Employee compensation and benefits increased by $1.3 million. This increase as
stated above, is due largely to the hiring of additional personnel in connection
with the Bank's planned branch expansion and the expansion of the Bank's
commercial loan production capabilities. Occupancy and equipment costs
increased by $252,000 due in part, as explained above, to increases in real
estate tax assessments on the Bank's properties and additional depreciation
expenses relating to new computer equipment and new branch facilities. Also
contributing to this increase was an increase in data processing charges caused
by increased usage by the Bank and a 5% rate increase. In addition, there were
increases in marketing costs of $70,000, federal deposit insurance premiums of
$27,000 and other operating expense of $172,000. Gains on sale of real estate
owned decreased by $31,000 for the quarter ended September 30, 1999 compared to
the same 1998 quarter.
Income Taxes.
Provision for incomes taxes was $2.7 million for the nine months ended September
30, 1999 compared to $4.1 million for the nine months ended September 30, 1998.
This decrease was attributable to a decrease in income before provision for
income taxes of $3.2 million to $7.1 million in 1999 from $10.3 million in 1998.
These expenses approximate the rates paid by the Company for Federal and State
income taxes applied to the Company's pre-tax income.
16
The income tax provision was $1.0 million for the quarter ended September 30,
1999 compared to $1.4 million for the quarter ended September 30, 1998. These
expenses approximate the rates paid for Federal and State income taxes applied
to the Company's pre-tax income.
Changes in Financial Condition.
The Company's assets increased by $167.0 million from December 31, 1998 to
September 30, 1999. Net loans receivable increased by $143.2 million, while
cash and investments increased by $13.0 million. In addition, the Bank
increased its investment in office properties and equipment, primarily for new
office sites, by $6.3 million, while all other assets increased by $4.5 million.
Funds for the increase in assets were provided primarily by an increase in the
Bank's deposits of $157.9 million and an increase in other borrowed funds of
$4.7 million. The Company's equity at September 30, 1999 decreased by $3.8
million from December 31, 1998 primarily as a result of the increase in
accumulated other comprehensive loss which reflects the decline in market value
of the Bank's assets available for sale.
Market Risk Analysis
As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets, other than those which possess a short term to
maturity. Since the majority of the Company's interest-bearing liabilities and
nearly all of the Company's interest-earning assets are held by the Bank,
virtually all of the Company's interest rate risk exposure lies at the Bank
level. As a result, all significant interest rate risk management procedures
are performed by management of the Bank. Based upon the nature of the Bank's
operations, the Bank is not subject to foreign currency exchange or commodity
price risk. The Bank's loan portfolio is concentrated primarily in Palm Beach,
Martin and Broward Counties in Florida and is therefore subject to risks
associated with the local economy. As of September 30, 1999, the Company does
not own any trading assets, other than $693,000 of assets held by the SMPIAP
Trust which can be actively traded by and are held for the benefit of senior
management. Income in these accounts accrues to and losses are solely absorbed
by senior management. At September 30, 1999, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
The Bank also monitors interest rate risk by various methods including analyzing
changes in its Market Value of Portfolio Equity (MVPE). MVPE is generally
defined as the difference between the market value of the Bank's assets and the
market value of the Bank's liabilities. The Bank uses an internal model that
generates estimates of the Bank's MVPE over a range of interest rate scenarios.
The model calculates MVPE essentially by discounting the cash flows from the
Bank's assets and liabilities to present value using current market rates and
adjusting those discounts rates accordingly for various interest rate scenarios.
The following table sets forth the Bank's estimated internal calculations of
MVPE as of September 30, 1999.
Changes in Rates Net Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
- ---------------- ---------- -------- ---------
+200bp 178,307 (50,630) -22.1%
+100bp 207,606 (21,331) -9.3%
-0- 228,937 - -
-100bp 256,222 27,285 11.9%
-200bp 273,675 44,738 19.5%
17
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in MVPE requires the making of certain
assumptions that may or may not reflect how actual yields and costs respond to
changes in market rates. Accordingly, while the above table provides an
estimate of the Bank's interest rate risk exposure at a particular point in
time, it is not intended to provide a precise forecast of the effect of market
changes on the Bank's MVPE and net interest income as actual results may vary.
Liquidity and Capital Resources.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio currently is 4.0%. The
Bank's liquidity ratio averaged 25.62% during the month of September 1999.
Liquidity ratios averaged 27.03% for the quarter ended September 30, 1999. 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.
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 $41.6 million at September
30, 1999. Other assets qualifying for liquidity at September 30, 1999,
including unpledged mortgage-backed securities guaranteed by the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
were $302.2 million. For additional information about cash flows from the
Company's operating, financing and investing activities, see Consolidated
Statements of Cash Flows included in the Financial Statements. 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 are net income, principal repayments on loans and mortgage-
backed securities, increases in deposit accounts and advances from the FHLB.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At September 30, 1999, the Bank had $302.4 million in advances
from the FHLB. At September 30, 1999, the Bank had commitments outstanding to
originate or purchase loans of $47.2 million. This amount does not include the
unfunded portion of loans in process. Certificates of deposit scheduled to
mature in less than one year at September 30, 1999, totaled $732.8 million.
Based on prior experience, management believes that a significant portion of
such deposits will remain with the Bank.
Year 2000 Preparations.
Like many financial institutions, the Bank relies upon computers for the daily
conduct of its business and for data processing generally. There is concern
that on January 1, 2000 computers will be unable to "read" the new year and as a
consequence, there may be widespread computer malfunctions. To address this
contingency the Bank formed a Year 2000 Committee in March 1997, comprised of
the Bank's Senior Management, which meets monthly to review the Bank's plan to
achieve compliance with the issues associated with the year 2000 and progress to
date and report such progress to the Board of Directors. The Bank's Year 2000
Project Plan includes five phases; assessment, evaluation, renovation,
validation and implementation. The Bank has substantially completed all of the
above phases for its internal applications and systems, except for final
installation of additional hardware and software, which is in progress.
Management of the Bank believes all "mission critical" applications have been
identified. The Bank has identified 270 potential information and non
information technology applications including, for example, electrical
utilities, phone service, alarm systems and elevators which might have problems
associated with the year 2000. Most of these applications are not mission
critical. Of these applications, 226 providers assert they are or will be year
2000 compliant. To the extent applications suppliers assert their applications
are
18
year 2000 ready, whether they are information technology or non information
technology related, the Bank is currently testing and validating their claims,
while working toward solutions with others. However, legal recourse against the
Bank's third party vendors may be limited to having the third party vendor
correct any service deficiency that fails in the event the service is not year
2000 compliant. Management does not believe that it would be able to obtain any
material compensatory or punitive damages in the event a vendor is not year 2000
compliant. Substantially all costs to modernize the Bank's hardware and
software to achieve year 2000 readiness have been incurred and paid. These
costs, which have been funded through operating cash flow, have been capitalized
and expensed in conformity with generally accepted accounting principles. The
Bank does not separately track internal costs associated with the year 2000
plan, including salaries and benefits for all employees working on the project.
The Bank contracts with a data processing service bureau, FiServ-Orlando to
provide all direct processing of the Bank's loan and deposit transactions,
together with calculations of interest income and expense thereon. Management
of the Bank is in regular contact with the service bureau and closely monitors
the service bureau's reports on it progress in becoming year 2000 ready. Based
on its most recent report, the service bureau asserts its systems are
substantially year 2000 ready on all mission critical applications. The Bank is
participating in the testing of these applications. While the service bureau
assures management of the Bank that it will achieve year 2000 readiness,
management is unable to predict whether the service bureau will achieve year
2000 readiness on a timely basis or the magnitude of the financial consequences
to the Bank in the event of the service bureau's failure to achieve such
readiness.
Since the Bank's business relies on the ability of computers to track and credit
deposits and loan repayments, the failure of the Bank's computer systems would
materially and adversely affect the Bank's ability to conduct its business. The
Bank's loan portfolio primarily consists of loans secured by residential real
estate. Consequently, the Bank does not believe that its residential real
estate lending operations are dependent on borrowers' compliance with the year
2000 issue. With respect to outstanding loans made to commercial borrowers, the
Bank has reviewed all commercial loan files and assigned risk factors to each
loan relating to credit problems which might arise with respect to year 2000
issues. In addition, the Bank's loan officers have asked their commercial
borrowers to advise the Bank of the exposure of the borrower's business to the
year 2000 issue and how the borrower is addressing the year 2000 issue. In this
regard, the Bank has sent its commercial loan customers a letter asking them if
they are aware of the year 2000 issue, and of the potential exposure of the
customer's business to the year 2000 issue and asking the customer to advise the
Bank of the steps that have been taken to remediate any problems the customer's
business might have in becoming year 2000 compliant. Bank personnel follow-up
the letter by making a telephone call to its customers to discuss each
customer's exposure to the year 2000 and the customer's contingency plans to
become year 2000 compliant. With respect to new commercial loans, all borrowers
must describe how dependent their business is on computer technology, the
actions taken by the borrower to ensure that their business or property will not
be adversely affected by the year 2000 issue, and the contingency planning the
borrower is undertaking to ensure their business is year 2000 compliant. As
part of the loan underwriting process, commercial borrowers must indicate in
writing to the Bank that they are aware of the year 2000 issue and are either
year 2000 compliant, or are taking steps to become year 2000 compliant. As a
result of its actions, the Bank believes that its commercial borrowers are aware
of the year 2000 issue and are taking actions to become year 2000 compliant.
The Bank has adopted and is testing contingency plans which address operational
policies and procedures in the event of data processing, electrical power supply
and/or phone service failures associated with the year 2000. In addition to
extensive training of its personnel, the Bank has organized a local financial
institutions "user group," comprised of financial institutions in Palm Beach,
Broward, Martin, St. Lucie and Indian River counties of Florida. The purpose of
the group is to meet and share ideas and solutions for solving issues associated
with the year 2000.
19
FASB Statement on Derivatives and Hedging Activities - In June, 1998, the FASB
issued SFAS No. 133 which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Statement requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value hedge, a cash flow hedge, or a foreign
currency hedge. Entities may reclassify securities from the held-to-maturity
category to the available-for-sale category at the time adopting SFAS No. 133.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after July 1, 2000 and, accordingly, would apply to the Company beginning on
January 1, 2001. The Company plans to adopt the standard at that time and does
not presently intend to reclassify securities between categories. The Company
has not engaged in derivatives and hedging activities covered by the new
standard, and does not expect to do so in the foreseeable future. Accordingly,
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
FASB Statement on Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise - In October,
1998 the FASB issued SFAS No. 134 which amends SFAS No. 65 "Accounting for
Certain Mortgage Banking Activities". Statement No. 65, as amended by Statement
No. 115 and Statement No. 125, required that after securitization of a mortgage
loan held for sale, a mortgage banking enterprise classify the resulting
security as a trading security. Statement No. 134 amends this section to
require that after the securitization of mortgage loans held for sale, the
entity classify the resulting mortgage-backed security or other retained
interests based on its ability and intent to sell or hold those investments.
SFAS 134 is effective for the first quarter beginning after December 15, 1998.
The Company has not engaged in retaining securities after the securitization of
its mortgage loans held for sale and does not expect to do so in the foreseeable
future. Accordingly, SFAS No. 134 has not had a material impact on the
Company's financial statements.
20
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor
is the Company aware of any pending litigation, other than legal
proceedings incident to the business of the Company, such as foreclosure
actions filed on behalf of the Company. Management, therefore, believes
the results of any current litigation would be immaterial to the
consolidated financial condition or results of operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under Consolidated
Financial Statements (pages 2 through 5), Notes to Unaudited
Consolidated Financial Statements (pages 6 through 11) and
Management's Discussion and Analysis of Financial Condition and
Results of Operations (pages 12 through 20), and are incorporated
by reference, herein.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIDELITY BANKSHARES, INC.
Date: November 10, 1999 By: /S/ Vince A. Elhilow
-----------------------------
Vince A. Elhilow
President and Chief Executive
Officer
Date: November 10, 1999 By: /S/ Richard D. Aldred
-----------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
22