[GRAPHIC LOGO OMITTED: EAGLE ON A SHIELD]
Fidelity
Bankshares, Inc.
Annual Report
1996
Table of Contents
Message from the President & CEO 2
Our Community - Watch Us Grow 4
Financial Highlights 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Independent Auditors' Report 20
Consolidated Financial Statements 21
Management's Assertions
as to the Effectiveness of its Internal Control
Structure over Financial Reporting and
Compliance with Designated Laws and
Regulations 46
Independent Accountants' Report 47
Board of Directors and Officers 48
Office Locations 50
Corporate Information Inside Back Cover
A Message From the President & CEO
[GRAPHIC OMITTED: PHOTO OF VINCE A. ELHILOW]
Vince A. Elhilow
President
Chief Executive Officer
To our stockholders:
Our message this year is one of exciting new opportunities. We have
important developments to report on a number of fronts; including our
new mid-tier stock holding company, rapid growth in deposits, loans and
assets, and many exciting new services.
Before addressing these developments, however, we must acknowledge that
our satisfaction is tempered by a sense of loss, resulting from the
passing of Director Fred DeHon. Mr. DeHon had been a member of our
board of directors since 1978, and a resident of this area since the
very earliest days of our bank. Those of us who were privileged to work
with him will miss his wisdom and guidance. For those who did not know
him, I urge you to read the memorial on page 48, where you can learn
more about the remarkable life of this esteemed leader and friend.
Following Mr. DeHon's death, the board of directors voted to reduce the
size of its membership to six.
During 1996, Fidelity Federal took a leadership position in the
industry, becoming the first federally chartered mutual holding company
to form a mid-tier stock holding company. As a result of the
reorganization, Fidelity Federal Savings Bank is now a wholly-owned
subsidiary of Fidelity Bankshares, Inc., a Delaware corporation.
Fidelity Bankshares, Inc., in turn, is now majority-owned by Fidelity
Bankshares, MHC, the mutual holding company parent. As part of this
reorganization, each share of the Bank's outstanding common stock was
automatically converted into one share of Fidelity Bankshares, Inc.
common stock.
The reorganization into a two-tier structure provides us with greater
flexibility. We now have broader investment capability, including the
possibility of repurchasing Fidelity Bankshares, Inc. common stock. In
addition, through Fidelity Bankshares, Inc., we are better positioned to
take advantage of other business opportunities which may arise. The
increased flexibility this structure offers should benefit our
stockholders and further enhance stockholder value.
The overall positive outlook for the Bank is reflected in the continuing
growth of both assets and deposits in 1996, including a substantial
increase in volume in all loan categories. As of December 31, 1996,
total assets stood at just under $874 million, an increase of 12.0
percent over the previous year. The most notable aspect of this
achievement was the $100 million increase in overall loan volume that
was achieved during the year. Total mortgage volume increased by 53.5
percent to more than $214 million. As we continue to operate more like
a Commercial Bank, our consumer lending increased by 47 percent and our
commercial loans increased 367 percent. Concurrent with this growth in
assets, total deposits increased to more than $694 million, a 16.7
percent increase over 1995's year-end figure.
In terms of return to investors, Fidelity Bankshares, Inc. continues to
outperform the market. The chart on the top of page three analyzes the
Bank's total return performance compared to other U.S.-based NASDAQ
stocks, other banks of comparable size, and all OTC-traded banks. In
each case, Fidelity Bankshares, Inc. compares quite favorably.
Fidelity Federal Savings
Total Return Performance
Based on the combined effect of dividends
and appreciation in stock value.
[GRAPHIC WORM CHART OMITTED: TOTAL RETURN PERFORMANCE]
The following table was used to create the line graph on page 3.
Period Ending
-------------------------------------------------
Index 1/7/94 9/30/94 6/30/95 3/31/96 12/31/96
- ------------------------------------------------------------------------
Fidelity Federal Savings 100.00 145.37 129.86 159.23 221.11
Nasdaq - Total US 100.00 98.22 121.07 143.73 168.90
Banks ($500M to $1B) 100.00 111.15 117.94 151.00 177.70
OTC Traded Banks 100.00 107.59 119.76 155.85 197.66
We believe this excellent performance reflects the energy and dedication
of our officers and employees, as well as the underlying strength of the
South Florida economy. Because of our confidence in this market area,
we continue to enhance our services to the community, both in terms of
new offices and new products. In 1996 we moved both our West Boynton
Beach and West Forest Hill Offices into new full-service facilities, and
also opened our first loan production office (LPO) to serve the fast-
growing south Palm Beach County and northern Broward County markets. We
later established a satellite LPO in Coral Springs to better serve
northern Broward County. Later this year we will open a new office in
Jupiter, and several other offices are planned during the next few
years.
We continue to expand our ATM network to better serve our customers. In
late 1996 we began service with our first remote ATM at the South
Florida Fairgrounds. This venture was the result of our commercial
banking relationship with the South Florida Fair. Five more ATMs are
planned for 1997, bringing our network to fourteen.
We are very excited about several innovative new products introduced
during the year. These include our new PC Banking, Telephone Bill Pay
services, and the Visa Check Card. We believe these services are an
added convenience, using technology for our customers' benefit. Other
new products include the Eagle Account, a personal investment account,
as well as the Business Reserve Account which is designed to enhance
business customers' ability to manage their cash flow. Additionally,
the Bank established a Worldwide Website - www.fidfed.com - to provide
information to customers.
Another innovative addition is our new Count On Us Checking account,
which offers a large number of "value-added" features such as discounts
at local merchant stores. This account has attracted many new
depositors, and enhanced our relationships with local business partners
who offer discounts under the program.
As we continue to enhance our competitive position by diversifying our
portfolio, we recognize we must remain true to those attributes which
have made Fidelity Federal what it is today. We are committed to our
role as a local community bank, as we have been for nearly 45 years.
Moreover, we are committed to returning maximum value to our
shareholders by continuing to focus on our strengths, while using our
enhanced flexibility to respond quickly to new opportunities as they
arise.
/S/VINCE A. ELHILOW
Vince A. Elhilow
President and Chief Executive Officer
Our Community - Watch Us Grow
Founded in 1952, Fidelity Federal is now in its 45th year as a leading
financial institution located in Palm Beach and Martin counties in south
Florida. When the Bank first opened its doors, the area was still
considered a winter resort, with its population and economy changing
drastically with the change of seasons. Now, in the 1990s, the area has
developed a vibrant year-round economy.
Fidelity Federal has grown with the community, and now has a network of
20 offices, with more to come. The Bank staff is working to meet the
challenges of the rapidly changing community as we look to the beginning
of the 21st century.
The 1995 estimated population of Palm Beach and Martin counties was just
over 1 million people. By the year 2010, the University of Florida's
Bureau of Economic and Business Research projects the area will be home
to more than 1.4 million people - an increase of 32.2% in just 15 years!
Even more important than the population growth rate are the desirable
demographic and economic characteristics of the communities we serve.
Among all counties in Florida, Palm Beach and Martin counties have
ranked among the top three in per capita income in each of the past 10
years, and for seven of those years they ranked first and second.
Moreover, these counties continually post income figures that are among
the highest of all metropolitan areas in the nation.
[GRAPHIC PHOTO OMITTED: PALM TREES AND A FOUNTAIN]
CityPlace's Church Plaza
Illustration provided by
City Place Partners
One of the facets of the growth is urban revitalization, with a prime
example being CityPlace in downtown West Palm Beach. Planned for
construction on formerly blighted parcels of land adjacent to a major
thoroughfare, CityPlace has a mixed-use urban plan combining cultural
activities, retail stores, fine restaurants, entertainment and
residential living. The area will complement the existing fine arts
center with an opera house and convention center with hotel. Current
plans call for 480,000 square feet for residential use, including 582
residential units. Leasing for CityPlace has begun and will continue
through 1997, with groundbreaking scheduled for 1998 and the initial
phase completed in 1999.
Downtown West Palm Beach has been home to Fidelity Federal's
headquarters and main office for nearly 45 years. The Bank will be in a
prime position to serve the banking needs of CityPlace's future
merchants, retailers and residents.
[GRAPHIC PHOTO OMITTED: TREELINED STREET WITH BUILDINGS]
ABACOA's Workplace Campus
Illustration provided by
de Guardiola Development, Inc.
Another example of the growth is illustrated by the development of
previously rural land in Jupiter (northern Palm Beach County) into the
2,000-acre community of ABACOA. This community received its initial
approval in 1996, with more than 2,000 residential units expected by
1999 and a total of more than 6,000 units at completion. Office space
will encompass 2.2 million square feet, with an additional 1 million
square feet planned for regional, community and neighborhood retail.
ABACOA will also be home of the 135-acre northern campus of Florida
Atlantic University, an 18-hole championship golf course, a 23-acre
municipal recreation facility, and a 7,500 seat baseball stadium, which
will be the spring training facility for two major league baseball
clubs.
Fidelity Federal has been one of the major lenders in northern Palm
Beach County for over 40 years. The ABACOA community will offer another
tremendous opportunity for future expansion.
Ambitious, long-term projects such as these are excellent examples of
the outstanding long-term potential to be found in the Palm Beaches. As
a leading local financial institution, Fidelity Federal is ideally
positioned to play an active role in such endeavors, and to continue
building on its consistent record of loan and deposit growth.
Financial Highlights
On January 7, 1994, Fidelity Federal Savings Bank of Florida completed a
reorganization from a mutual savings bank, into a stock savings bank,
with the majority of its shares owned by a mutual holding company. As a
result, certain comparative, stockholder data is unavailable prior to
1994.
On January 29, 1997, Fidelity Federal Savings Bank of Florida
consummated a tax-free reorganization, by becoming a wholly-owned
subsidiary of a Delaware chartered, stock holding company known as
Fidelity Bankshares, Inc. Each stockholder's common stock in Fidelity
Federal Savings Bank of Florida was converted into shares of common
stock in Fidelity Bankshares, Inc., in the same proportionate ownership
interest the stockholder held before the reorganization. In addition,
the reorganization was accounted for in the same manner as a pooling of
interests transaction. Consequently, the consolidated financial
statements required no accounting adjustments.
Fidelity Bankshares, Inc. common stock currently trades on the Nasdaq
National Market system under the symbol "FFFL" as Fidelity Federal's did
before the reorganization.
1992 1993 1994 1995 1996
FOR THE YEAR (In Thousands)
Interest income $50,387 $44,755 $43,420 $53,261 $60,240
Interest expense 23,171 18,415 17,776 28,095 32,131
Net interest income 27,216 26,340 25,644 25,166 28,109
Net income 8,554 6,497 5,262 4,815 3,550
PER COMMON SHARE (1)
Net Income:
Primary N/A N/A $0.80 $0.73 $0.53
Fully diluted N/A N/A 0.80 0.73 0.53
Book value N/A N/A 11.35 12.31 12.12
Stock price:
High N/A N/A 13.64 17.00 18.50
Low N/A N/A 9.09 10.23 11.75
Close N/A N/A 10.00 16.25 17.75
AVERAGE FOR THE YEAR (In Thousands)
Assets $623,814 $658,463 $669,506 $741,777 $824,025
Loans receivable, net 449,264 434,522 441,573 490,088 605,507
Mortgage-backed securities 60,685 75,325 83,550 145,405 135,973
Investments (2) 78,642 95,284 103,715 63,605 35,530
Deposits 563,516 568,470 553,184 567,493 636,297
Borrowed funds 8,254 15,758 30,231 79,905 85,608
Stockholders' equity 35,725 43,394 72,546 77,356 81,339
SELECTED PERFORMANCE RATIOS
Return on average assets 1.37% .99% .79% .65% .43%
Return on average equity 23.94% 14.97% 7.25% 6.22% 4.36%
Interest rate spread on average assets 4.57% 4.25% 3.85% 3.28% 3.30%
YEAR END (In Thousands)
Total assets $638,183 $678,928 $712,643 $779,620 $873,562
Investments (2) 95,505 127,154 82,410 43,108 41,740
Cash and amounts due from depository institutions 18,098 15,205 19,275 14,989 15,293
Loans receivable, net 437,564 434,967 456,543 532,333 661,700
Mortgage-backed securities 64,558 75,199 126,807 159,761 123,599
Deposits 573,623 586,527 538,235 595,180 694,718
Borrowed funds 12,412 15,934 88,319 86,549 83,621
Equity 40,002 46,786 74,404 81,266 81,723
(1) All per share items retroactively adjusted to reflect 10% stock
dividend distributed November 30, 1995.
(2) Includes Government and Agency securities, interest-bearing deposits
and Federal Home Loan Bank stock.
[DIVIDER PAGE OMITTED. TITLE ON DIVIDER PAGE READS: Fidelity Bankshares,
Inc.]
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, will 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's, 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.
Business Strategy
The Bank's current business strategy is to operate as a well-
capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Bank has
sought to implement this strategy by emphasizing retail deposits as its
primary source of funds and maintaining a substantial part of its assets
in locally-originated residential first mortgage loans, in mortgage-
backed securities and in other liquid investment securities.
Specifically, the Bank's business strategy incorporates the following
elements: (1) operating as a community-oriented financial institution,
maintaining a strong core customer base by providing quality service and
offering customers the access to senior management and services that a
community-based institution can offer; (2) maintaining high levels of
asset quality by emphasizing investment in residential mortgage loans,
mortgage-backed securities and other securities issued or guaranteed by
the United States Government or agencies thereof; (3) managing interest
rate risk exposure by maintaining adequate levels of liquidity, while
achieving desirable levels of profitability; and (4) maintaining capital
in excess of regulatory requirements and growing only to the extent that
adequate capital levels and asset quality can be maintained.
Highlights of the Bank's business strategy are as follows:
Community-Oriented Institution. The Bank is the second largest savings
institution headquartered in Palm Beach County, which in recent years
has experienced a significant influx of commercial banks and offices of
savings institutions headquartered outside of Florida. The Bank is
committed to meeting the financial needs of the communities in which it
operates. The Bank believes it is large enough to provide a full range
of personal and business financial services, and yet is small enough to
be able to provide such services on a personalized and efficient basis.
Management believes that the Bank can be more effective in servicing its
customers than many of its non-local competitors because of the Bank's
ability to quickly and effectively provide senior management responses
to customer needs and inquiries. The Bank's ability to provide these
services is enhanced by the stability of the Bank's senior management.
The Bank intends to maintain its operation as a community-oriented,
independent savings institution.
Asset Quality and Emphasis on Residential Mortgage Lending. Since its
inception, the Bank has emphasized residential real estate financing as
a portfolio lender, and anticipates a continued commitment to financing
the purchase or improvement of residential real estate in its market
area. To supplement local mortgage loan originations, the Bank also
invests in mortgage-backed securities that are issued or guaranteed by
the United States Government or agencies thereof. At December 31, 1996,
83.3% of the Bank's total gross loan portfolio consisted of one- to-
four family residential mortgage loans, including residential
construction loans, and 15.1% of the Bank's total assets consisted of
mortgage-backed securities and investments that are issued or guaranteed
by the United States government or agencies thereof.
Generally, the yield on mortgage loans originated by the Bank is greater
than that of mortgage-backed securities purchased by the Bank. However,
due to the highly competitive market in which the Bank operates, the
Bank may, from time to time, not be able to originate a sufficient
number of new mortgage loans to offset the amortization and prepayments
of its existing loan portfolio. In addition, new real estate development
opportunities in the Bank's market area may diminish, as well as the
adoption of growth controls by local governments, which could further
diminish lending opportunities of the Bank in the future. As a result of
these factors, new loan originations could be reduced in the future,
which may require the Bank to increase its investment in mortgage-backed
securities.
The percentage of small commercial business loans and consumer loans in
the Bank's portfolio has been below the levels of its peers. As a
result, the Bank's yield on its loan portfolio has been below peer
levels. The Bank has begun to expand its offering of commercial and
consumer loan services, but expects to continue to adhere to the Bank's
relatively conservative loan underwriting standards.
Interest Rate Risk Management. Deposit accounts typically react more
quickly to changes in market interest rates than interest-earning assets
such as mortgage loans, because of the relatively shorter maturities of
deposits. When interest rates are rising, the repricing of a higher
volume of interest-bearing liabilities compared to interest-earning
assets will result in interest expense increasing more rapidly than
interest income, while in a falling interest rate environment net
interest income will be benefited. The difference between interest-
earning assets and interest-bearing liabilities expressed as a
percentage of total assets, is a measure of interest rate risk and is
referred to as an institution's interest rate gap. A gap is considered
negative if interest-bearing liabilities maturing or repricing in a
particular time period exceed interest-earning assets maturing or
repricing within the same time period. Management seeks to manage the
Bank's interest rate risk exposure by monitoring the levels of interest
rate sensitive assets and liabilities while maintaining an acceptable
interest rate spread. At December 31, 1996, total interest-bearing
liabilities maturing or repricing within one year exceeded total
interest-earning assets maturing or repricing in the same period by
$ 99.7 million, representing a cumulative one-year gap ratio of a
negative 11.41%.
To reduce the potential volatility of the Bank's earnings in a changing
interest rate environment, the Bank has sought to manage interest rate
risk by investing a substantial part of its assets in relatively short-
and medium- term United States Government and agency securities, and in
ARM loans and mortgage-backed securities with adjustable interest rates.
Of the Bank's total investment of $ 785.3 million in loans and mortgage-
backed securities at December 31, 1996, $ 413.1 million, or 52.6%, had
adjustable interest rates. Another part of the Bank's interest rate risk
management strategy has been to extend the maturity of interest-bearing
liabilities, including using FHLB advances as a source of funds.
Strong Retail Deposit Base. The Bank has had a relatively strong retail
deposit base drawn from the 20 full-service offices in its market area.
At December 31, 1996, 32.9% of its deposit base of $ 694.7 million
consisted of core deposits, which included non-interest demand accounts,
passbook accounts, NOW accounts, and money market demand deposit
accounts. Core deposits are considered to be a more stable and lower
cost source of funds than certificates of deposit or outside borrowings.
The Bank will continue to emphasize retail deposits by maintaining and
seeking to expand its network of full-service offices, providing
depositors with a full range of accounts.
Capital Strength and Controlled Growth. The Bank's total equity at
December 31, 1996, was $ 81.7 million. As a result, the Bank's ratio of
total equity to total assets was 9.4%. While the Bank intends to
continue to increase retained earnings and maintain high capital ratios,
the present level of capital will permit the Bank significantly greater
growth opportunities than experienced in prior years.
Results of Operations
The earnings of the Bank depend primarily on its level of net interest
income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of mortgage loans,
mortgage securities and other investment securities, and the interest
paid on interest-bearing liabilities, consisting primarily of deposits.
Net interest income is a function of the Bank's interest rate spread,
which is the difference between the average yield earned on interest-
earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-
earning assets as compared to interest-bearing liabilities. The Bank's
earnings also are affected by its level of operating expenses and
service charges as well as other expenses, including employee
compensation and benefits, occupancy and equipment costs, and deposit
insurance premiums.
General. The Bank had net income of $ 3.6 million, or $ .53 per share,
for the year ended December 31, 1996. Net income totaled $ 4.8 million,
or $ .73 per share, and $ 5.3 million, or $ .80 per share, for fiscal
1995 and 1994, respectively. The decrease in net income for the year
ended December 31, 1996, compared to 1995 resulted primarily from the
one-time special assessment of $ 3.6 million charged against the Bank's
income to recapitalize the Savings Association Insurance Fund (SAIF). If
this one-time special assessment had not been incurred, earnings per
share of common stock would have been $ .86 for the year ended December
31, 1996 compared to $ .73 for the prior year.
Interest Income. Interest income increased by $ 6.9 million, or 13.0%,
to $ 60.2 million for the year ended December 31, 1996 from $ 53.3
million for the year ended December 31, 1995. The increase in interest
income was principally attributable to an increase in the average
balance of the Bank's interest-earning assets to $ 777.0 million from $
699.1 million and an increase in the yield on the Bank's average
interest-earning assets to 7.75% from 7.62%. The increase in average
interest-earning assets was primarily the result of a $ 95.8 million
increase in the average balance of mortgage loans and a $ 19.6 million
increase in average consumer and other loans, which was partially offset
by declines in average balances of $ 9.4 million in mortgage-backed
securities and $ 25.0 million in investment securities.
Interest income on mortgage loans increased by $ 7.6 million, or 21.0%,
to $ 43.9 million for the year ended December 31, 1996 from $ 36.3
million for the year ended December 31, 1995 primarily because of an
increase in the average balance of these loans to $ 560.2 million from
$ 464.4 million. Interest income on consumer loans increased by $ 1.7
million in 1996 as compared to 1995. While the average yield on consumer
and other loans decreased to 9.00% in 1996 from 9.43% in 1995, this was
more than offset by an increase in the average balance of these loans to
$ 45.3 million in 1996 from $ 25.7 million in 1995. Interest income on
mortgage-backed securities declined by $ 769,000 due mainly to a
decrease in the average balance to $ 136.0 million at December 31, 1996
from $ 145.4 million at December 31, 1995. Interest income on investment
securities decreased by $ 1.3 million. While the average yield on
investment securities increased to 6.49% in 1996 from 5.74% in 1995,
this was more than offset by a decrease in the average balance of these
securities by $ 25.0 million to $ 12.4 million at December 31, 1996 from
$ 37.4 million at December 31, 1995.
Interest income increased by $ 9.8 million, or 22.7%, to $ 53.3 million
for the year ended December 31, 1995 from $ 43.4 million for the year
ended December 31, 1994. The increase in interest income was principally
attributable to an increase in the average yield on the Bank's average
interest-earning assets to 7.62% from 6.90%, and an increase in the
balance of average interest-earning assets of $ 70.3 million, to $ 699.1
million from $ 628.8 million. The increase in average interest-earning
assets was the result of a $ 61.9 million increase in average mortgage-
backed securities and a $ 39.8 million increase in average mortgage
loans. The increase in average yield on interest-earning assets was also
caused by the increase in the average balance of mortgage-backed
securities along with an increase in the average yield on those
securities to 7.37% for 1995 from 5.09% during 1994. Also contributing
to this increase was an increase in the average balance of consumer and
other loans of $ 8.7 million along with an increase in the average yield
on these loans to 9.43% for 1995 from 8.81% during 1994.
Interest income on mortgage loans increased by $ 3.0 million, or 9.0%,
to $ 36.3 million for the year ended December 31, 1995 from $ 33.3
million for the year ended December 31, 1994, primarily because of an
increase in the average balance of mortgage loans to $ 464.4 million
from $ 424.6 million in 1994. Interest income on consumer and other
loans increased by $ 928,000 in 1995, as compared to 1994. While the
average yield on consumer and other loans increased from 8.81% in 1994
to 9.43% in 1995, the principal reason for the increase in interest
income was a 51.6% increase in the average balance of such loans in
1995, as compared to 1994. Interest income on mortgage-backed securities
increased by $ 6.5 million to $ 10.7 million. The increase in interest
income on mortgage-backed securities was caused by an increase in the
average balance of such securities by $ 61.9 million to $ 145.4 million.
Also, the average yield on these mortgage-backed securities increased to
7.37% at December 31, 1995, compared to 5.09% in 1994. Interest income
on investment securities decreased by $ 840,000 as a result of a
decrease in the average balance of these securities to $ 37.4 million in
1995 compared to $ 69.8 million in 1994. Income from other investments,
consisting of interest-earning deposits in other financial institutions
and FHLB stock increased by $ 290,000 to $ 1.7 million for the year
ended December 31, 1995, compared to $ 1.4 million in 1994. The average
balances of these investments decreased by $ 7.7 million in 1995, or
22.7%, compared to 1994 but were offset by an increase in average yield
to 6.41% at December 31, 1995 compared to 4.10% in 1994.
Interest Expense. Interest expense increased by $ 4.0 million, or 14.4%,
to $ 32.1 million for the year ended December 31, 1996 from $ 28.1
million for the year ended December 31, 1995. The increase is due mainly
to an increase in the average cost of interest-bearing deposits to 4.29%
from 4.12% and an increase in the average balance of interest-bearing
deposits to $ 611.0 million for the year ended December 31, 1996 from $
546.4 million for the same period in 1995. The average balance of FHLB
advances increased by $ 5.7 million to $ 85.6 million in 1996 compared
to $ 79.9 million in 1995. The Bank increased its FHLB advances
principally for liquidity purposes.
Interest expense increased by $ 10.3 million, or 58.1%, to $ 28.1
million for the year ended December 31, 1995 from $ 17.8 million for the
year ended December 31, 1994. The increase was attributable to an
increase in the average cost of the Bank's interest-bearing deposits to
4.12% from 3.00% and an increase in the average balance of interest-
bearing deposits of $ 10.9 million. The average balance of FHLB advances
increased by $ 49.7 million to $ 79.9 million in 1995 compared to $ 30.2
million in 1994. The Bank increased its FHLB advances as part of its
interest rate risk strategy of extending the maturity of its interest-
bearing liabilities and for liquidity purposes.
Net Interest Income. Net interest income increased by $ 2.9 million, or
11.7%, to $ 28.1 million from $ 25.2 million for the years ended
December 31, 1996 and 1995, respectively. The principal reason for this
increase in net interest income was an increase in the Bank's loans
receivable to $ 661.7 million at December 31, 1996 from $ 532.3 million
at December 31, 1995 and an increase in the Bank's average interest rate
spread to 3.14% from 3.13%.
Net interest income decreased slightly to $ 25.2 million for the year
ended December 31, 1995 from $ 25.6 million for the same period in 1994,
representing a decrease of $ 478,000, or 1.9%. The principal reason for
the reduction in net interest income was a decrease in the Bank's
average interest rate spread to 3.28% from 3.85%. This was partially
offset by a slight improvement in the Bank's ratio of average interest-
earning assets to average interest-bearing liabilities.
Provision for Loan Losses. The Bank's provision for loan losses
increased to $ 164,000 for the year ended December 31, 1996 compared to
a negative $ 210,000 for the year ended December 31, 1995. The 1995
negative provision was principally the result of reversing provisions on
two loans based on new appraisals performed during that year, while the
1996 provision reflects more normal circumstances. The Bank's total
allowance for loan losses at December 31, 1996 of $ 2.3 million was
deemed adequate by management, in light of the risks inherent in the
Bank's loan portfolio.
The Bank had a negative provision for loan losses of $ 210,000 for the
year ended December 31, 1995 compared to a positive $ 112,000 for the
year ended December 31, 1994. This was principally the result of
reversing specific valuation allowances for loan losses on two of the
Bank's significant loans, based on new appraisals performed during the
year.
The financial statements of the Bank are prepared in accordance with
generally accepted accounting principles and, accordingly, allowances
for loan losses are based on management's estimate of the fair value of
collateral, as applicable, and the Bank's actual loss experience and
standards applied by the OTS and FDIC. The Bank provides both general
valuation allowances (for unspecified, potential losses) and specific
valuation allowances (for known losses) in its loan portfolio. General
valuation allowances are added to the Bank's capital for purposes of
computing the Bank's regulatory risk-based capital. The Bank regularly
reviews its loan portfolio, including impaired loans, to determine
whether any loans require classification or the establishment of
appropriate valuation allowances.
Other Income. Other income increased by $ 1,855,000, or 61.4%, to $ 4.9
million for the year ended December 31, 1996 from $ 3.0 million for the
same period in 1995. This increase in other income was primarily the
result of a $ 1.2 million increase in gain on sale of loans, mortgage-
backed securities and investments. Also contributing to this increase,
were increases in the Bank's fee income and other income of $ 532,000
and $ 113,000, respectively.
Other income increased by $ 524,000, or 21.0%, to $ 3.0 million for the
year ended December 31, 1995, from $ 2.5 million for the same period in
1994. The increase in other income resulted primarily from an increase
in fee income of $ 518,000 and an increase in other income of $ 16,000
which was partially offset by a decrease in the gain on sale of loans,
mortgage-backed securities and investments of $ 10,000.
Operating Expense. Operating expense increased by $ 6.3 million, or
30.6%, to $ 26.7 million for the year ended December 31, 1996 from
$ 20.4 million for the same period in 1995. Employee compensation and
benefits represent $ 2.0 million, or 19.1%, of this increase. This
resulted primarily from additional personnel hired for the creation of a
legal department and loan production, including employees in the Bank's
Loan Production Office (LPO) opened in January, 1996 and the expansion
of a branch office in April, 1996. The Bank's occupancy and equipment
cost for the year ended December 31, 1996 was $ 456,000 more than
experienced in 1995, primarily as a result of opening the LPO office in
January, 1996 and operating and upgrading the previously mentioned
branch office. Federal deposit insurance premiums increased by $ 3.7
million to $ 4,958,000 for the year ended December 31, 1996 compared to
$ 1,279,000 in 1995. This increase resulted from the SAIF one-time
special assessment discussed earlier. Other operating expense increased
by $ 188,000 for the year ended December 31, 1996 when compared to the
1995. These increases were only partially offset by an increase in gain
on real estate owned of $ 98,000 and a decrease in marketing expense of
$ 13,000 for the year ended December 31, 1996 compared to 1995.
Operating expense increased by $ 1.1 million, or 5.5%, to $ 20.4 million
for the year ended December 31, 1995. Employee compensation and benefits
increased by $ 56,000 in 1995 to $ 10.7 million, representing an
increase of .52%. The Bank's employee compensation increased by
$ 406,000, largely as a result of an increase in personnel, principally in
loan originations, of 3.9%. In addition, the Bank's hospitalization
costs increased by $ 244,000. These costs were offset by decreases in
stock based compensation and officer incentives of $ 137,000 and
allocation of employee costs to the Bank's mutual holding company of
$ 299,000. Of the $ 555,000 increase in occupancy and equipment costs,
$ 327,000 is attributable to data processing expenses, resulting from the
installation and operation of new equipment, $ 114,000 represents an
increase in property taxes and the balance of the increase is due to
operating two new offices for the entire 1995 year compared to only four
months in 1994. Miscellaneous expense increased by $ 431,000 which is
comprised of an increase of $ 173,000 in audit and consulting fees, an
increase of $ 145,000 in goodwill amortization relating to the Bank's
acquisition of deposits from the RTC during the summer of 1994 and an
increase in temporary help expense of $ 108,000.
Income Taxes. Federal and state income taxes decreased by $ 571,000 to
$ 2.6 million for the year ended December 31, 1996 compared to $ 3.1
million for the year ended December 31, 1995. Lower taxes resulted from
the decline in income before provision for income taxes to $ 6.1 million
in 1996 from $ 7.9 million in 1995.
Income taxes for the year ended December 31, 1995 were $ 3.1 million, a
decrease of $ 259,000 for the comparable period in 1994 which was
attributable to a decrease in income before tax to $ 7.9 million from $
8.7 million.
Average Balance Sheet
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated and the
average yields earned and rates paid. Such yields and costs are derived
by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances
are derived from month-end balances.
Management does not believe that the use of month-end balances instead
of daily average balances has caused any material difference in the
information presented.
Average Balance Sheet
At December 31, 1995 At December 31, 1996 For the Year Ended December 31, 1994
Actual Actual Average Average
Balance Yield/Cost Balance Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans $500,461 7.88% $604,614 7.88% $424,626 $33,298 7.84%
Consumer and other loans 31,872 9.12% 57,086 8.64% 16,947 1,493 8.81%
Mortgage-backed securities 159,761 7.56% 123,599 7.29% 83,550 4,253 5.09%
Investment securities 26,986 6.44% 8,465 6.30% 69,773 2,984 4.28%
Other investments (1) 16,122 6.23% 33,275 5.58% 33,942 1,392 4.10%
--------- --------- --------- ---------
Total interest-earning
assets 735,202 7.78% 827,039 7.74% 628,838 43,420 6.90%
Non-interest-earning assets 44,418 46,523 40,668
--------- --------- ---------
Total assets $779,620 $873,562 $669,506
========= ========= =========
Interest-bearing liabilities:
Deposits $573,750 4.13% $668,312 4.26% $535,559 $16,059 3.00%
Borrowed funds 86,549 6.89% 83,621 6.76% 30,231 1,717 5.68%
Total interest-bearing --------- --------- --------- ---------
liabilities 660,299 4.48% 751,933 4.54% 565,790 17,776 3.14%
Non-interest-bearing liabilities 38,055 39,906 31,170 ---------
--------- --------- ---------
Total liabilities 698,354 791,839 596,960
Net worth 81,266 81,723 72,546
--------- --------- ---------
Total liabilities and
net worth $779,620 $873,562 $669,506
========= ========= =========
Net interest income: $25,644
Net interest rate spread (2) 3.30% 3.20% ======= 3.76%
Net yield on interest-earning ======== ========= =======
assets (3) 3.63% 3.61% 4.08%
Ratio of average interest-earning ======== ========= =======
assets to average interest-bearing
liabilities 107.84% 109.99% 111.14%
======== ========= =======
(1) Includes interest-bearing deposits in other financial institutions and FHLB stock.
(2) Net interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a percentage of
average interest-earning assets.
Average Balance Sheet
For the Years Ended December 31,
1995 1996
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans $464,392 $36,296 7.82% $560,233 $43,923 7.84%
Consumer and other loans 25,696 2,421 9.43% 45,274 4,074 9.00%
Mortgage-backed securities 145,405 10,718 7.37% 135,973 9,949 7.32%
Investment securities 37,380 2,144 5.74% 12,391 804 6.49%
Other investments (1) 26,225 1,682 6.41% 23,139 1,490 6.44%
Total interest-earning --------- --------- --------- ---------
assets 699,098 53,261 7.62% 777,010 60,240 7.75%
Non-interest-earning assets 42,679 47,015
--------- ---------
Total assets $741,777 $824,025
========= =========
Interest-bearing liabilities:
Deposits $546,453 $22,515 4.12% $611,031 $26,239 4.29%
Borrowed funds 79,905 5,580 6.98% 85,608 5,892 6.88%
Total interest-bearing --------- --------- --------- ---------
liabilities 626,358 28,095 4.49% 696,639 32,131 4.61%
Non-interest-bearing liabilities 38,063 --------- 46,047 ---------
--------- ---------
Total liabilities 664,421 742,686
Net worth 77,356 81,339
Total liabilities --------- ---------
and net worth $741,777 $824,025
========= =========
Net interest income $25,166 $28,109
Net interest rate spread (2) ========= 3.13% ======== 3.14%
-------- --------
Net yield on interest-earning
assets (3) 3.60% 3.62%
Ratio of average interest-earning ======== --------
assets to average interest-
bearing liabilities 111.61% 111.54%
======== ========
(1) Includes interest-bearing deposits in other financial institutions and FHLB stock.
(2) Net interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a percentage of
average interest-earning assets.
Rate Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods
indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to
(i) changes in average volume (changes in average volume multiplied by
old rate); (ii) changes in rate (change in rate multiplied by old
average volume); and (iii) the net change.
Years Ended December 31,
1995 vs 1994 1996 vs 1995
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
(In Thousands)
Interest income:
Mortgage loans $3,118 $(110) $(10) $2,998 $7,491 $113 $23 $7,627
Consumer and other loans 771 103 54 928 1,845 (109) (83) 1,653
Mortgage-backed securities 3,148 1,906 1,411 6,465 (695) (79) 5 (769)
Investment securities (1,385) 1,018 (473) (840) (1,433) 281 (188) (1,340)
Other investments (317) 785 (178) 290 (198) 7 (1) (192)
-------- -------- -------- -------- -------- ------- ----- -------
Total interest-earning
assets 5,335 3,702 804 9,841 7,010 213 (244) 6,979
======== ======== ======== ======== ======== ======= ===== =======
Interest expense:
Deposits 327 6,007 122 6,456 2,661 951 112 3,724
Borrowed funds 2,822 394 647 3,863 398 (81) (5) 312
-------- -------- -------- -------- -------- ------- ----- -------
Total interest-bearing
liabilities 3,149 6,401 769 10,319 3,059 870 107 4,036
-------- -------- -------- -------- -------- ------- ----- ------
Change in net interest
income $2,186 $(2,699) $35 $(478) $3,951 $(657) $(351) $2,943
======== ======== ======= ======== ======= ======= ===== ======
Asset and Liability Management - Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity
"gap." An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets and interest-
bearing liabilities maturing or repricing within that time period. A gap
is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. During a
period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to positively
affect net interest income. Similarly, during a period of falling
interest rates, a negative gap would tend to positively affect net
interest income while a positive gap would tend to adversely affect net
interest income.
The Bank's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its
interest rate sensitive assets and liabilities and by originating ARM
loans and other adjustable rate or short-term loans, as well as by
purchasing short-term investments. However, particularly in a low
interest rate environment borrowers typically prefer fixed rate loans to
ARM loans. The Bank seeks to lengthen the maturities of its deposits by
promoting longer-term certificates. The Bank does not solicit high-rate
jumbo certificates or brokered funds.
At December 31, 1996, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $ 99.7 million, representing
a cumulative one-year gap ratio of a negative 11.41%. 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 ratio requirements.
Gap Table
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996, which
are expected to reprice or mature, based upon certain assumptions, in
each of the future time periods shown. Except as stated below, the
amounts of assets and liabilities shown that reprice or mature during a
particular period were determined in accordance with the earlier of the
term of repricing or the contractual terms of the asset or liability.
The Bank has assumed that its passbook savings, interest-bearing NOW,
and money market accounts, which totaled $ 202.1 million at December 31,
1996, are withdrawn at the annual percentage rates set forth in the
table on the next page. For information regarding the contractual
maturities of the Bank's loans, investments, and deposits, see Notes to
Consolidated Financial Statements.
Amounts Maturing or Repricing
Within 3 6 Months to
Months 3-6 Months 1 Year 1-3 Years 3-5 Years Over 5 Years Total
(Dollars in Thousands)
Interest -earning assets:
Real estate loans:
Residential one-to four-family:
Current market index ARMs $24,437 $15,095 $22,736 $48,648 $26,726 $15,559 $153,201
Lagging market index ARMs 24,558 23,616 34,763 26,948 137 - 110,022
Fixed rate 22,284 10,920 18,582 61,816 46,597 126,933 287,132
Commercial and
multi-family:
ARMs 15,404 6,406 9,793 11,977 3,384 145 47,109
Fixed rate 1,095 650 964 1,851 902 2,074 7,536
Consumer and commercial
business 32,040 2,525 4,202 11,838 6,106 614 57,325
Investment securities 27,127 - 2,000 6,444 - - 35,571
FHLB stock 6,148 - - - - - 6,148
Mortgage-backed
securities:
Adjustable 44,168 1,906 735 - - - 46,809
Fixed 2,059 2,010 3,883 16,093 11,150 40,100 75,295
-------- -------- -------- -------- -------- -------- --------
Total interest-
earning assets (1) 199,320 63,128 97,658 185,615 95,002 185,425 826,148
-------- -------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Passbook accounts 15,074 9,033 14,060 31,251 11,469 6,647 87,534
NOW accounts 7,707 7,497 3,910 13,068 9,749 28,627 70,558
Money market accounts 1,932 708 1,372 5,046 4,409 30,545 44,012
Certificate accounts 140,670 90,969 127,272 79,893 27,323 81 466,208
Borrowed funds 13,844 25,393 359 29,824 6,411 7,791 83,622
-------- -------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities 179,227 133,600 146,973 159,082 59,361 73,691 751,934
-------- -------- -------- -------- -------- -------- --------
Interest-earning assets
less interest-
bearing liabilities
("interest rate
sensitivity gap") $20,093 $(70,472) $(49,315) $26,533 $35,641 $111,734 $74,214
======== ======== ======== ======== ======== ======== ========
Cumulative excess (deficiency) of
interest-sensitive
assets over interest-
sensitive liabilities $20,093 $(50,379) $(99,694) $(73,161) $(37,520) $74,214 $74,214
======== ======== ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap to
total assets 2.30% (5.77)% (11.41)% (8.38)% (4.30)% 8.50% 8.50%
======= ======== ======= ======= ======= ======== ========
Cumulative ratio of
interest-earning
assets to interest-bearing
liabilities 111.21% 83.90% 78.32% 88.18% 94.47% 109.87% 109.87%
======= ======== ======== ======= ======= ======== ========
(1) The above table shows expected cash flows within the time
periods presented. Accordingly, the balances do not reflect
adjustments for premiums, discounts, and market value adjustments.
In preparing the table above, it has been assumed, based on the Bank's
own internal calculation of loan prepayment rates, that the Bank's loan
portfolio will prepay at rates averaging 10%. It is also assumed that
mortgage-backed securities will prepay at rates ranging from 8.00% to
20.00% and NOW, passbook and money market accounts will decay, based on
a study of the Bank's actual experience, at the following rates:
Over 6
Months Over 1 Over 3 Over 5 Over 10
6 Months Through Through Through Through Through Over 20
or Less 1 Year 3 Years 5 Years 10 Years 20 Years Years
NOW accounts 38.08% 13.63% 13.63% 13.63% 13.63% 13.63% 13.63%
Passbook, club accounts 46.32% 39.42% 39.42% 39.42% 39.42% 39.42% 39.42%
Money market deposit accounts 9.23% 6.52% 6.52% 6.52% 6.52% 6.52% 6.52%
The above assumptions are annual percentages based on remaining balances
and should not be regarded as indicative of the actual prepayments and
withdrawals that may be experienced by the Bank in any given period.
Moreover, certain shortcomings are inherent in the analysis presented by
the foregoing tables. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates.
Also, interest rates on certain types of assets and liabilities may
fluctuate in advance of or lag behind changes in market interest rates.
Additionally, certain assets, such as ARM loans, have features that
restrict changes in interest rates on a short-term basis and over the
life of the assets. Moreover, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. For
information regarding the contractual maturities of the Bank's loans,
investments, and deposits, see Notes to Consolidated Financial
Statements.
Under OTS risk-based capital regulations, savings associations are
required to calculate the market value of their portfolio equity (MVPE).
These calculations are based upon data concerning interest-earning
assets, interest-bearing liabilities and other rate sensitive assets and
liabilities provided to the OTS on schedule CMR of the Quarterly Thrift
Financial Report. Commencing March 31, 1994, for purposes of measuring
interest rate risk, the OTS began using the MVPE calculations which
essentially discount the cash flows from an institution's assets and
liabilities to present value, using current market rates.
The amendments to the risk-based capital regulations require
institutions to hold additional risk-based capital in an amount equal to
one-half the amount an institution's interest rate risk exceeds the
normal amount of interest rate risk. Normal interest rate risk is
defined as 2% of the MVPE at static interest rates. If, after applying a
rate shock of 200 basis points ("bp") (one basis point equals .01%) of
either a decline or increase in rates, the resultant negative change in
MVPE exceeds 2% of MVPE at static interest rates, an institution is
deemed to have excess interest rate risk. At December 31, 1996, the Bank
was not required to hold additional risk-based capital for interest rate
risk.
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 6.15% during the
month of December 1996 and 8.4% during the month of December 1995.
Liquidity ratios averaged 6.78% and 11.8% for the years ended December
31, 1996 and 1995, respectively. The Bank adjusts its liquidity levels
in order to meet funding needs of deposit outflows, payment of real
estate taxes on mortgage loans, repayment of borrowings and loan
commitments. 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, maturities of
investment securities and other short-term investments, and earnings and
funds provided from operations. While scheduled principal repayments on
loans and mortgage-backed securities are a relatively predictable source
of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. 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 $ 27.0 million and $ 9.8 million at December 31,
1996 and 1995, respectively. Other assets qualifying for liquidity
outstanding at December 31, 1996, and 1995, amounted to $ 19.8 million
and $ 40.1 million, respectively. For additional information about cash
flows from the Bank'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, and
increases in deposit accounts along with 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 December 31, 1996, the Bank had $ 82.5
million in advances from the FHLB. The Bank engages in borrowing from
the FHLB in order to reduce interest rate risk, and for liquidity
purposes.
At December 31, 1996, the Bank had outstanding loan commitments of
$ 21.8 million to originate and/or purchase mortgage loans. This amount
does not include the unfunded portion of loans in process. Certificates
of deposit scheduled to mature in less than one year at December 31,
1996, totaled $ 322.0 million. Based on prior experience, management
believes that a significant portion of such deposits will remain with
the Bank, although their rates could increase.
Changes in Financial Condition
During 1996, the Bank's assets increased by $ 93.9 million. Loans
receivable increased in the amount of $ 129.4 million. Cash and cash
equivalents also increased by $ 17.5 million. These increases were
partially offset by a decline of $ 54.7 million in assets available for
sale. Of this decrease, $ 19.5 million resulted from the sale of
mortgage-backed securities. The Bank experienced deposit inflows during
1996 of $ 99.5 million, as a result of a more aggressive pricing of its
certificates of deposit, which together with an increase in equity, net
of the change in unrealized increase in fair value of assets available
for sale, of $ 2.3 million, provided the principal funds for the Bank's
asset growth.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Bank and notes thereto,
presented elsewhere herein, have been prepared in accordance with
generally accepted accounting principles, which require the measurement
of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power
of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Bank
are monetary. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the
same extent as the price of goods and services.
Impact of New Accounting Standards
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 122, "Accounting
for Mortgage Servicing Rights." The Statement, which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," requires mortgage
banking enterprises that acquire mortgage servicing rights through
either the purchase of or origination of mortgage loans and sell or
securitize those loans with servicing rights retained to allocate the
total cost of the mortgage loans to the mortgage servicing rights and
the loans based on their relative fair values. Mortgage banking
enterprises include commercial banks and thrift institutions that
conduct operations substantially similar to the primary operations of a
mortgage banking enterprise. SFAS No. 122 applies prospectively in
fiscal years beginning after December 15, 1995 to sales of mortgage
loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those
purchased before the adoption of this Statement. Management of the Bank
implemented SFAS No. 122, prospectively, as required. The adoption of
this accounting principle had the effect of increasing income before tax
by $ 196,000 for the fiscal year ended December 31, 1996.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement requires certain disclosures about stock-
based employee compensation arrangements, regardless of the method used
to account for them, defines a fair value based method of accounting for
an employee stock option or similar equity instrument, and encourages
all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for stock-based compensation plans
using the intrinsic value method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share, as if
the fair value method of accounting defined in this Statement had been
applied. Under the fair value method, compensation cost is measured at
the grant date based on the value of the award and is recognized over
the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the
stock. The disclosure requirements of this Statement are effective for
financial statements for fiscal years beginning after December 15, 1995.
Pro forma disclosures required for entities that elect to continue to
measure compensation cost using APB Opinion No. 25 must include the
effects of all awards granted in fiscal years that begin after December
15, 1994. Management has determined that the Bank will continue the
accounting set forth in APB Opinion No. 25 and will make such pro forma
disclosures as are required beginning with the year ended December 31,
1996. There were no stock options awarded during 1995 or 1996.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on a financial-components approach that focuses on control. Statement
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is
to be prospectively applied. Management of the Bank does not expect the
adoption of this promulgation to have a material effect on the Bank's
consolidated financial statements.
Independent Auditors' Report
Board of Directors of
Fidelity Bankshares, Inc.:
We have audited the accompanying consolidated statements of financial
position of Fidelity Bankshares, Inc. (the "Company") and its wholly
owned subsidiary, Fidelity Federal Savings Bank of Florida, as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Fidelity Bankshares,
Inc. and subsidiary at December 31, 1995 and 1996 and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting
Standard No. 122, "Accounting for Mortgage Servicing Rights," in 1996.
/S/Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, FL
February 21, 1997
CONSOLIDATED STATEMANTS OF FINANCIAL POSITION
AT DECEMBER 31, 1995 AND 1996
1995 1996
ASSETS (In Thousands)
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions $ 14,989 $ 15,293
Interest-bearing deposits 9,974 27,127
-------- --------
Total cash and cash equivalents (Note 1, 19) 24,963 42,420
ASSETS AVAILABLE FOR SALE (At Fair Value):
(Notes 1, 2, 3, 19)
Government and agency securities 26,986 8,465
Mortgage-backed securities 159,761 123,599
-------- --------
Total assets available for sale 186,747 132,064
LOANS RECEIVABLE, Net of allowance for loan losses - 1995, $2,265;
1996, $2,263 (Notes 1, 4, 19) 532,333 661,700
OFFICE PROPERTIES AND EQUIPMENT, Net (Notes 1, 5) 15,563 18,092
FEDERAL HOME LOAN BANK STOCK, At cost 6,148 6,148
REAL ESTATE OWNED, Net (Notes 1, 6) 643 93
ACCRUED INTEREST RECEIVABLE (Note 7) 4,627 4,614
OTHER ASSETS (Note 1, 11) 8,596 8,431
-------- --------
TOTAL ASSETS $ 779,620 $ 873,562
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS (Note 8, 19) $ 595,180 $ 694,718
ADVANCES FROM FEDERAL HOME LOAN BANK (Note 9, 19) 85,169 82,517
ESOP LOAN (Note 10, 19) 1,380 1,104
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 2,734 2,448
DRAFTS PAYABLE (Note 1) 3,663 2,957
OTHER LIABILITIES (Notes 1, 12) 7,368 7,209
DEFERRED INCOME TAXES (Notes 1, 11) 2,860 886
-------- --------
TOTAL LIABILITIES 698,354 791,839
COMMITMENTS AND CONTINGENCIES (Note 1, 15) ======== ========
STOCKHOLDERS' EQUITY (Notes 1, 11, 12, 13, 14, 17):
PREFERRED STOCK, 2,000,000 shares authorized, none issued - -
COMMON STOCK ($.10 par value) 8,200,000 authorized shares:
outstanding 6,717,821 and 6,744,689 at December 31, 1995 and 1996, respectively
672 675
ADDITIONAL PAID IN CAPITAL 37,170 37,397
RETAINED EARNINGS - substantially restricted 42,764 44,184
COMMON STOCK PURCHASED BY:
Employee stock ownership plan (1,644) (1,315)
Recognition and retention plan (280) -
NET UNREALIZED INCREASE IN FAIR VALUE OF ASSETS AVAILABLE FOR SALE
(Net of applicable income taxes) (Notes 1, 2, 3) 2,584 782
-------- --------
TOTAL STOCKHOLDERS' EQUITY 81,266 81,723
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 779,620 $ 873,562
========= =========
See Notes To Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
(In Thousands)
Interest income:
Loans $ 34,791 $ 38,717 $ 47,997
Investment securities 2,984 2,144 804
Other investments 1,392 1,682 1,490
Mortgage-backed securities 4,253 10,718 9,949
-------- -------- --------
Total interest income 43,420 53,261 60,240
-------- -------- --------
Interest expense:
Deposits (Note 8) 16,059 22,515 26,239
Advances from Federal Home Loan Bank and other borrowings 1,717 5,580 5,892
-------- -------- --------
Total interest expense 17,776 28,095 32,131
-------- -------- --------
Net interest income 25,644 25,166 28,109
Provision for loan losses (Note 4) 112 (210) 164
-------- -------- --------
Net interest income after provision for loan losses 25,532 25,376 27,945
-------- -------- --------
Other income:
Servicing income and other fees 2,151 2,669 3,201
Net gain on sale of loans, mortgage-backed securities and
investments 15 5 1,215
Miscellaneous 331 347 460
-------- -------- --------
Total other income 2,497 3,021 4,876
Operating expense:
Employee compensation and benefits 10,672 10,728 12,776
Occupancy and equipment 3,637 4,192 4,648
Loss (gain) on real estate owned (1) 29 (69)
Marketing 588 617 604
Federal deposit insurance premium 1,306 1,279 4,958
Miscellaneous 3,173 3,604 3,792
-------- -------- --------
Total operating expense 19,375 20,449 26,709
-------- -------- --------
Income before provision for income taxes 8,654 7,948 6,112
-------- -------- --------
Provision (benefit) for income taxes: (Note 11)
Current 3,183 3,194 3,417
Deferred 209 (61) (855)
-------- -------- --------
Total provision for income taxes 3,392 3,133 2,562
-------- -------- --------
Net income $ 5,262 $ 4,815 $ 3,550
======= ======= =======
Earnings per share, primary and fully diluted (Note 18) $ .80 $ .73 $ .53
======= ======= =======
See Notes To Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Net
Unrealized
Increase
(Decrease)
Retained Employee Recognition in Fair
Additional Earnings- Stock and Value of
Common Paid In Substantially Ownership Retention Assets
Stock Capital Restricted Plan Plan Available
for Sale Total
(In Thousands)
Balance - December 31, 1993 $ - $ - $ 46,499 $ - $ - $ 287 $ 46,786
Net Income for the year ended
December 31, 1994 - - 5,262 - - - 5,262
Issuance of Common Stock,
pursuant to
Reorganization, net of costs
of issuance of $1,344,000 579 23,745 - - - - 24,324
Purchase of shares by Employee Stock
Ownership Plan 19 1,913 - (1,932) - - -
Distribution of Common Stock to
Management
Recognition and Retention Plan 11 1,093 - - (1,104) - -
Assets distributed to Mutual Holding
Company
pursuant to Reorganization - - (530) - - - (530)
Recognition of unrealized decrease
in fair value of assets
available for sale, net of
income taxes, pursuant to
SFAS 115 - - - - - (1,152) (1,152)
Amortization of deferred
compensation - Employee Stock
Ownership Plan and Recognition
and Retention Plan - 85 - 276 496 - 857
Cash dividends declared - - (1,143) - - - (1,143)
Balance - December 31, 1994 609 26,836 50,088 (1,656) (608) (865) 74,404
Net Income for the year ended
December 31, 1995 - - 4,815 - - - 4,815
Stock Options exercised (Note 16) 2 15 - - - - 17
Effect of Reclassification of
assets held to maturity
to available for sale, net
of taxes - - - - - 2,253 2,253
Recognition of unrealized
increase in fair value
of assets available for
sale, net of income taxes,
pursuant to SFAS 115 - - - - - 1,196 1,196
Amortization of deferred
compensation - Employee
Stock Ownership Plan and
Recognition and Retention
Plan - 109 - 289 328 - 726
Refund of Reorganization costs - 13 - - - - 13
Distribution of 10% Stock dividend 61 10,197 (9,981) (277) - - -
Cash dividends declared - - (2,158) - - - (2,158)
Balance - December 31, 1995 672 37,170 42,764 (1,644) (280) 2,584 81,266
Net Income for the year ended
December 31, 1996 - - 3,550 - - - 3,550
Stock Options exercised 5 387 - - - - 392
Common Stock retired (2) (285) - - - - (287)
Recognition of unrealized
decrease in fair
value of assets
available for sale, net
of income taxes, pursuant
to SFAS 115 - - - - - (1,802) (1,802)
Amortization of deferred
compensation -
Employee Stock Ownership Plan
and Recognition and Retention
Plan - 125 - 329 280 - 734
Cash dividends declared - - (2,130) - - - (2,130)
Balance - December 31, 1996 $ 675 $ 37,397 $ 44,184 $ (1,315) $ - $ 782 $ 81,723
See Notes To Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income $ 5,262 $ 4,815 $ 3,550
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,048 1,108 1,238
ESOP and Recognition and Retention Plan Compensation expense 857 726 734
Accretion of discounts, amortization of premiums, and other
deferred yield items 801 (1,018) (1,122)
Provision for loan losses 112 (210) 164
Provisions for losses and net losses on sales of real estate owned (96) (29) (110)
Net (gain) loss on sale of:
Loans (34) (17) (340)
Investment securities 20 12 -
Mortgage-backed securities - - (875)
Other assets 12 - -
(Increase) decrease in accrued interest receivable (424) (525) (13)
(Increase) decrease in other assets 2,441 (446) 165
Increase (decrease) in drafts payable 1,753 1,170 (706)
Increase (decrease) in deferred income taxes (471) 2,145 (1,974)
Increase (decrease) in other liabilities (2,055) 1,681 (321)
------- ------- -------
Net cash from operating activities 9,226 9,412 416
------- ------- -------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans (25,405) (66,196) (124,601)
Principal payments received on mortgage-backed securities 14,510 17,796 23,608
Purchases of:
Loans (573) (12,398) (21,153)
Mortgage-backed securities (68,133) (45,625) (9,962)
Investment securities (41,440) (22,318) (10,029)
Office properties and equipment (2,712) (2,116) (3,985)
Proceeds from sales of:
Loans 2,846 2,914 17,357
Investment securities available for sale 37,891 5,981 -
Real estate acquired in settlement of loans and held for investment 2,191 1,318 1,195
Mortgage-backed securities available for sale - - 20,516
Office properties and equipment - 67 -
Proceeds from maturities of investment securities 24,000 41,000 28,490
Other (1,103) (2,323) 1,147
------- ------- -------
Net cash used for investing activities (57,928) (81,900) (77,417)
------- ------- -------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock 27,445 - -
Common stock options exercised - 100 105
Purchase of stock for ESOP (1,932) - -
Purchase of stock for RRP (1,104) - -
Cash dividends paid (707) (2,106) (1,971)
Deposits acquired from Resolution Trust Corporation
NOW accounts, demand deposits and savings accounts 3,509 - -
Certificates of deposit 21,501 - -
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts (43,420) (18,826) 8,046
Certificates of deposit (29,882) 75,771 91,492
Advances from Federal Home Loan Bank 70,725 (1,490) (2,652)
ESOP Loan 1,660 (280) (276)
Stock subscriptions payable (18,435) - -
Advances by borrowers for taxes and insurance (39) (56) (286)
------- ------- -------
Net cash from financing activities 29,321 53,113 94,458
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,381) (19,375) 17,457
CASH AND CASH EQUIVALENTS, Beginning of year 63,719 44,338 24,963
CASH AND CASH EQUIVALENTS, End of year $ 44,338 $ 24,963 $ 42,420
======== ======== ========
See Notes To Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fidelity Bankshares, Inc. ("the Company") became the parent of Fidelity
Federal Savings Bank of Florida ("the Bank") on January 29, 1997, as a
result of a tax-free reorganization, accounted for in the same manner as
a pooling of interests merger (See Note 17). Consequently, the Bank is
now a wholly-owned subsidiary of the Company. This transaction is
reflected in the accompanying financial statements as though it had
occurred on December 31, 1996. Separate holding company financial
statements have not been presented, as the Company had no operations in
any period presented.
The accounting and reporting policies of the Company and its subsidiary
conform, in all material respects, to generally accepted accounting
principles. The following summarizes the more significant of these
policies:
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, the Bank and the Bank's wholly-
owned subsidiary, Fidelity Realty and Appraisal Services, Inc. ("FRAS").
All significant intercompany balances and transactions have been
eliminated. Neither the Bank nor its subsidiary are or have been
involved in any joint ventures during any periods presented.
FRAS, principally, performs appraisals for and sells real estate owned
by the Bank.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents - For presentation purposes in both the consolidated
statements of financial position and the consolidated statements of cash
flows, the Bank considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
Assets Available for Sale - Securities available for sale are carried at
fair value, based upon market quotations. Deferred income taxes are
provided on any unrealized appreciation or decline in value. Such
appreciation or decline in value, net of deferred taxes is reflected as
an adjustment of equity. Gain or loss on sale of such securities is
based on the specific identification method. Debt securities are
classified as either available for sale or held for investment based on
management's intent.
Interest Rate Risk - The Bank is engaged principally in providing first
mortgage loans (both adjustable rate and fixed rate mortgage loans) to
individuals (see Note 4 for the composition of the mortgage loan
portfolio at December 31, 1995 and 1996). Mortgage loans and investment
securities are funded primarily with short-term liabilities which have
interest rates that vary with market rates over time. Net interest
income and the market value of net interest-earning assets will
fluctuate based on changes in interest rates and changes in the levels
of interest-sensitive assets and liabilities. The actual duration of
interest-earning assets and interest-bearing liabilities may differ
significantly from the stated duration as a result of prepayment, early
withdrawals, and similar factors.
Provisions for Loan Losses - Provisions for loan losses, which increase
the allowance for loan losses, are established by charges to income.
Such allowance represents the amounts which, in management's judgment,
are adequate to absorb charge-offs of existing loans which may become
uncollectible. The adequacy of the allowance is determined by
management's continuing evaluation of the loan portfolio in light of
past loss experience, present economic conditions, and other factors
considered relevant by management at the financial statement date.
Anticipated changes in economic factors which may influence the level of
the allowance are considered in the evaluation by management when the
likelihood of the changes can be reasonably determined. In estimating
the allowance for possible losses, consideration is given to asset
performance, the financial condition of borrowers or guarantors,
additional collateral provided, current and anticipated economic
conditions, appraisals, cost of disposal, and holding costs. While
management uses the best information available to make such evaluations,
future adjustments to the allowance may be necessary, which may be
material, if economic conditions differ substantially from the
assumptions used in the evaluation. If additions to the original
estimate of the allowance for loan losses are deemed necessary, they
will be reported in earnings in the period in which they become
reasonably estimable.
Uncollected Interest - The Bank reverses all accrued interest against
interest income when a loan is more than 90 days delinquent and ceases
accruing interest thereafter. Such interest ultimately collected is
credited to income in the period of recovery.
Real Estate Owned - Properties acquired through foreclosure, or a deed
in lieu of foreclosure are carried at the lower of fair value less
estimated costs to sell, or cost. If the fair value less the estimated
cost to sell an individual property declines below the cost of such
property, a provision for losses is charged to operations.
Subsequent costs relating to the improvement of property are
capitalized in amounts not to exceed the property's fair value. Costs
relating to holding the property are charged to expense when incurred.
The amounts the Bank could ultimately recover from property acquired by
foreclosure or deed in lieu of foreclosure, could differ materially from
the amounts used in arriving at the net carrying value of the assets
because of future market factors beyond the Bank's control or changes in
the Bank's strategy for recovering its investment.
Office Properties and Equipment - Office properties and equipment are
carried at cost less accumulated depreciation. Land is carried at cost.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets, which range from three to fifty years for
buildings and improvements and three to ten years for furniture and
equipment.
Goodwill - Goodwill resulting from the acquisition of deposits from the
Resolution Trust Corporation ("RTC") is being amortized on a straight-
line basis over five years. The balance of goodwill, included in other
assets at December 31, 1995 and 1996 was $ 1,057,000 and $ 755,000,
respectively.
Drafts Payable - Drafts payable represent checks drawn by the Bank on a
third party payer, for savings account withdrawals and payment of the
Bank's expenses. Under the agreement between the Bank and its third
party payer, the Bank funds the checks written on the day following
their issuance.
Loan Origination Fees and Costs - Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment
of the yield of the related loan. Deferred loan fees and costs are
amortized to income over the estimated life of the loans using the
interest method.
Unearned discounts on consumer loans are amortized to income using the
interest method.
Commitment Fees - Non-refundable fees received for commitments to make
or purchase loans in the future, net of direct costs of underwriting the
commitments, are deferred and, if the commitment is exercised,
recognized over the life of the loan as an adjustment of yield. If the
commitment expires unexercised, income is recognized upon expiration of
the commitment. Direct loan origination costs incurred to make a
commitment to originate a loan are offset against any related commitment
fee and the net amount recognized.
Pension and Retirement Plans - Benefits are accounted for in accordance
with Statement of Financial Accounting Standards No. 87, entitled
"Employers' Accounting for Pensions" ("SFAS No. 87"). Net periodic
pension costs (income) are actuarially determined.
Income Taxes - The Bank and its subsidiary file consolidated federal and
state income tax returns. Income taxes are allocated to the Bank and its
subsidiary as though separate tax returns are being filed. ( See Note
11).
Deferred income taxes are provided on items recognized for financial
reporting purposes in periods different than such items are recognized
for income tax purposes in accordance with the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109").
Earnings Per Common Share - Primary earnings per common share is
computed by dividing net income by the weighted average number of shares
of common stock outstanding and common stock equivalents, after giving
retroactive effect to the stock dividend in 1995, assumed outstanding
during the year less the weighted average unallocated ESOP and
Management Recognition Plan shares of common stock.
Fully diluted shares outstanding includes the maximum dilutive effect of
stock issuable upon exercise of common stock options and unallocated
ESOP and Management Recognition Plan shares of common stock.
Impact of New Accounting Issues - In May 1995, FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." The Statement, which amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities,"
requires mortgage banking enterprises that acquire mortgage servicing
rights through either the purchase of or origination of mortgage loans
and sell or securitize those loans with servicing rights retained to
allocate the total cost of the mortgage loans to the mortgage servicing
rights and the loans based on their relative fair values. Mortgage
banking enterprises include commercial banks and thrift institutions
that conduct operations substantially similar to the primary operations
of a mortgage banking enterprise. SFAS No. 122 applies prospectively in
fiscal years beginning after December 15, 1995 to sales of mortgage
loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those
purchased before the adoption of this Statement. Management of the Bank
implemented SFAS No. 122, prospectively, as required. The adoption of
this accounting principle had the effect of increasing income before tax
by $ 196,000 for the fiscal year ended December 31, 1996.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement requires certain disclosures about stock-
based employee compensation arrangements, regardless of the method used
to account for them, defines a fair value based method of accounting for
an employee stock option or similar equity instrument, and encourages
all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for stock-based compensation plans
using the intrinsic value method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share, as if
the fair value method of accounting defined in this Statement had been
applied. Under the fair value method, compensation cost is measured at
the grant date based on the value of the award and is recognized over
the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the
stock. The disclosure requirements of this Statement are effective for
financial statements for fiscal years beginning after December 15, 1995.
Pro forma disclosures required for entities that elect to continue to
measure compensation cost using APB Opinion No. 25 must include the
effects of all awards granted in fiscal years that begin after December
15, 1994. Management has determined that the Bank will continue the
accounting set forth in APB Opinion No. 25. Pro forma disclosures are
not required because no stock options were granted during 1995 or 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities
based on a financial-components approach that focuses on control. SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is
to be prospectively applied. Management of the Bank does not expect the
adoption of this promulgation to have a material effect on the Bank's
consolidated financial statements.
Reclassifications - Certain amounts in the 1994 and 1995 consolidated
financial statements have been reclassified to conform to the 1996
presentation.
2. GOVERNMENT AND AGENCY SECURITIES AVAILABLE FOR SALE
Securities available for sale are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
December 31, 1995:
Municipal Bonds $ 421 $ 19 $ - $ 440
United States Government and agency securities 26,441 105 - 26,546
------- ------- ------- -------
Total $ 26,862 $ 124 $ - $ 26,986
======= ======= ======= =======
Weighted average interest rate 6 76%
=======
December 31, 1996:
Municipal Bonds $ 419 $ 11 $ - $ 430
United States Government and agency securities 8,024 30 19 8,035
------- ------- ------- -------
Total $ 8,443 $ 41 $ 19 $ 8,465
======= ======= ======= =======
Weighted average interest rate 6.30%
=======
The following table sets forth the contractual maturity of the Bank's
securities available for
sale at December 31, 1995 and 1996
December 31, 1995 December 31, 1996
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
(In Thousands)
Due in one year or less $ 19,954 $ 20,034 $ 2,000 $ 1,995
Due after one year, through two years 6,908 6,952 6,443 6,470
-------- -------- -------- --------
Total $ 26,862 $ 26,986 $ 8,443 $ 8,465
======== ======== ======== ========
The Bank had total Government and Agency securities available for sale
pledged at December 31, 1995 and 1996 of $ 2,300,000 and $ 2,515,000,
respectively. Of the $ 2,515,000 of securities pledged at December 31,
1996, $ 515,000 was pledged for customer accounts that exceeded $
100,000 and the remaining $ 2,000,000 was pledged as collateral for
"Treasury, Tax and Loan" (TT&L) accounts held for the benefit of the
federal government.
Proceeds from the sale of securities available for sale were
$ 37,891,000 and $ 5,981,000 during the years ended December 31, 1994 and
1995. During the years ended December 31, 1994 and 1995, sales resulted
in gross realized gains of $ 0 and $ 18,000 and gross realized losses of
$ 12,000 and $ 38,000, respectively. There were no sales of securities
during the year ended December 31, 1996.
3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale at December 31, 1995 and
1996 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
December 31, 1995:
FHLMC-fixed rate $ 72,386 $ 1,747 $ 81 $ 74,052
FNMA-fixed rate 13,865 201 47 14,019
GNMA-fixed rate 25,017 2,179 - 27,196
FHLMC-adjustable rate 13,256 19 31 13,244
FNMA-adjustable rate 31,054 211 15 31,250
-------- -------- -------- --------
Total $ 155,578 $ 4,357 $ 174 $ 159,761
========= ========= ========= =========
December 31, 1996:
FHLMC-fixed rate $ 55,832 $ 856 $ 443 $ 56,245
FNMA-fixed rate 11,804 97 130 11,771
GNMA-fixed rate 7,670 474 - 8,144
FHLMC-adjustable rate 15,605 295 - 15,900
FNMA-adjustable rate 29,449 222 95 29,576
GNMA-adjustable rate 1,935 28 - 1,963
-------- -------- -------- --------
Total $ 122,295 $ 1,972 $ 668 $ 123,599
========= ========= ========= =========
There were no sales of mortgage-backed securities classified as
available for sale during the year ended December 31, 1995. There were
$ 19.6 million in sales of mortgage-backed securities classified as
available for sale during the year ended December 31, 1996. Proceeds
from the sale of mortgage-backed securities were $ 20.5 million for the
year ended December 31, 1996 which included gross realized gains of
$ 875,000 and no gross realized losses.
At December 31, 1995 and 1996, the Bank had $ 104,378,000 and
$ 94,913,000, respectively, of mortgage-backed securities available for
sale pledged as collateral for advances from the Federal Home Loan Bank
(See Note 9).
4. LOANS RECEIVABLE
Loans receivable at December 31, 1995 and 1996 consist of the following:
1995 1996
(In Thousands)
One-to-four single family, residential real estate mortgages $ 426,823 $ 524,434
Commercial real estate mortgages 45,107 42,811
Real estate construction-primarily residential 40,522 58,493
Participations-primarily residential 5,564 4,255
Land loans-primarily residential 10,769 11,875
-------- --------
Total first mortgage loans 528,785 641,868
Deposit account loans 244 158
Consumer and commercial business loans 32,445 57,905
-------- --------
Total gross loans 561,474 699,931
Less:
Undisbursed portion of loans in process 27,261 37,575
Unearned discounts, premiums and deferred loan fees (costs), net (385) (1,607)
Allowance for loan losses 2,265 2,263
--------- ---------
Loans receivable-net $ 532,333 $ 661,700
========= =========
The amount of loans on which the Bank has ceased accruing interest or
does not charge interest aggregated approximately $ 1,864,000 and
$ 3,035,000, net of specific valuation allowances of $ 128,000 and
$ 274,000, at December 31, 1995 and 1996, respectively. The amount of
interest not accrued relating to these loans was approximately $ 100,000
and $ 192,000 at December 31, 1995 and 1996, respectively. Management
believes the allowance for possible loan losses is adequate.
An analysis of the changes in the allowance for loan losses for the
years ended December 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996
(In Thousands)
Balance at beginning of period $ 2,865 $ 2,566 $ 2,265
Current provision 112 (210) 164
Charge-offs (411) (91) (166)
Recoveries - - -
------- ------- -------
Ending balance $ 2,566 $ 2,265 $ 2,263
======= ======= =======
The Bank originates both adjustable and fixed rate mortgage loans.
Included in the loans receivable at December 31, 1996 are $ 245,000 of
loans held for sale. These loans are recorded at the lower of cost or
market. There were no loans held for sale at December 31, 1995.
A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. An analysis of
the recorded investment in impaired loans owned by the Bank at December
31, 1995 and 1996 and the related allowance for those loans is as
follows:
1995 1996
(In Thousands)
Loan Related Loan Related
Balance Allowance Balance Allowance
Impaired loan balances and related allowances:
Loans performing in conformity with contractual terms $ 2,908 $ 316 $ 984 $ 164
Loans for which interest income is not being recognized 292 128 667 277
------- ------- ------- -------
Total $ 3,200 $ 444 $ 1,651 $ 441
======= ======= ======= =======
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.
At December 31, 1996, the composition and maturity or repricing of the
mortgage loan portfolio is presented below:
Fixed Rate Adjustable Rate
Term of Maturity Book Value Term to Rate Adjustment Book Value
(In Thousands) (In Thousands)
1 year or less $ 41,100 1 year or less $ 191,865
1 year-3 years 4,344 1 year-3 years 90,750
3 years-5 years 13,297 3 years-5 years 52,429
5 years-10 years 29,551 5 years-10 years 30,027
10 years-20 years 132,361 10 years-20 years 66
Over 20 years 113,611 Over 20 years 530
--------- ---------
Total $ 334,264 Total $ 365,667
========= =========
Adjustable rate mortgage loans originated prior to December 31, 1993
have interest rate adjustment limitations and are generally indexed to
the monthly weighted-average cost of funds for Savings Association
Insurance Fund ("SAIF") insured institutions headquartered in the Fourth
Federal Home Loan Bank ("FHLB") District. Adjustable rate mortgage loans
originated subsequent to December 31, 1993 are indexed to comparable
term U.S. Treasury securities. Future market factors may affect the
correlation of the interest rate adjustment with the rates the Bank pays
on the short-term deposits which have been primarily utilized to fund
those loans.
The Bank makes fixed rate loan commitments for periods generally not
exceeding sixty days. At December 31, 1995 and 1996 the Bank had
commitments outstanding to originate fixed rate mortgage loans as
follows:
1995 1996
(In Thousands)
15 Years to Maturity
6.76 - 7.00 $ 82 $ -
7.01 - 7.25 383 -
7.26 - 7.50 301 666
7.51 - 7.75 133 360
7.76 - 8.00 88 215
8.01 - 8.25 - 98
8.26 - 8.50 - 30
8.51 - 8.75 - -
8.76 - 9.00 - -
9.01 - 9.25 - 842
30 Years to Maturity
7.26 - 7.50 462 107
7.51 - 7.75 891 97
7.76 - 8.00 1,022 930
8.01 - 8.25 471 921
8.26 - 8.50 - 611
8.51 - 8.75 86 -
8.76 - 9.00 - -
9.01 - 9.25 - -
Over 9.25 - 100
-------- --------
Totals $ 3,919 $ 4,977
======== ========
Because the above commitments generally are funded within sixty days,
management of the Bank feels that related interest rate risk of the
commitments is minimal.
The Bank's lending markets are primarily concentrated in Palm Beach,
Martin and St. Lucie counties in Southeast Florida.
Commercial Real Estate Lending - The Bank originates and purchases
commercial real estate loans, which totaled $ 45,107,000 and
$ 42,811,000 at December 31, 1995 and 1996, respectively. These loans are
considered by management to be of somewhat greater risk of
uncollectibility due to the dependency on income production or future
development of the real estate. Accordingly, Bank management establishes
greater provisions for probable but not yet identified losses on these
loans than on less risky residential mortgage loans. The composition of
commercial real estate loans and its primary collateral at December 31,
1995 and 1996 are approximately as follows:
1995 1996
(In Thousands)
Office buildings $ 10,522 $ 9,576
Retail buildings 10,214 9,517
Warehouses 9,665 9,032
Rental property 13,748 13,781
Hotels and motels 65 60
Other property improvements 332 300
Other 561 545
-------- --------
Total $ 45,107 $ 42,811
======== ========
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), a federally chartered savings and loan association's
aggregate commercial real estate loans may not exceed 400% of its
capital as determined under the capital standards provisions of FIRREA.
The Bank is federally chartered and subject to this limitation. FIRREA
does not require divestiture of any loan that was lawful when it was
originated. At December 31, 1996, the Bank estimates that, while
complying with this limitation, it could originate an additional $ 284.0
million of commercial real estate loans, though the Bank's current
business plan indicates no intentions to do so.
Loans to One Borrower Limitation - The Bank may not make real estate
loans to one borrower in excess of 15% of its unimpaired capital and
surplus except for loans not to exceed $ 500,000. This 15% limitation
results in a dollar limitation of approximately $ 12.3 million at
December 31, 1996. At December 31, 1996, the Bank met the loans to one
borrower limitation under current existing regulations.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial position. The unpaid balances of
these loans at December 31, 1995 and 1996 were $ 33,941,000 and
$ 45,539,000, respectively. Custodial escrow balances maintained in
connection with the foregoing loan servicing were $ 186,078 and
$ 186,343 at December 31, 1995 and 1996, respectively.
The Bank offers loans to its employees, including Directors and Senior
Management at prevailing market interest rates. These loans are made in
the ordinary course of business and on substantially the same terms and
collateral requirements as those of comparable transactions prevailing
at the time.
The loans to Directors, Executive Officers, and associates of such
persons amounted to $ 1,246,000 and $ 1,184,000 at December 31, 1995 and
1996, respectively, which did not exceed 5% of retained earnings.
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1995 and 1996 are
summarized as follows:
1995 1996
(In Thousands)
Land $ 4,839 $ 5,657
Buildings and improvements 11,321 13,627
Furniture and equipment 7,280 7,710
-------- --------
Total 23,440 26,994
Less accumulated depreciation 7,877 8,902
-------- --------
Office properties and equipment - net $ 15,563 $ 18,092
======== ========
6. REAL ESTATE OWNED
Real estate owned at December 31, 1995 and 1996 consists of the
following:
1995 1996
(In Thousands)
Real estate owned $ 643 $ 93
Valuation allowance - -
----- ----
Real estate owned - net $ 643 $ 93
===== =====
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1995 and 1996 consists of
the following:
1995 1996
(In Thousands)
Loans $ 2,891 $ 3,474
Investments 669 298
Mortgage-backed securities 1,067 842
------- -------
Accrued interest receivable $ 4,627 $ 4,614
======= =======
8. DEPOSITS
The weighted-average interest rates on deposits at December 31, 1995 and
1996 were 4.13% and 4.26%, respectively. Deposit accounts, by type and
range of rates at December 31, 1995 and 1996 consist of the following:
Account Type and Rate 1995 1996
(In Thousands)
Non-interest-bearing NOW accounts $ 21,430 $ 26,406
NOW, Super NOW and funds transfer accounts
1995 and 1996, 1.00 % and 1.02 %, respectively. 67,886 70,558
Passbook and statement accounts
1995 and 1996, 1.99 % and 2.05 %, respectively. 86,471 87,534
Variable-rate money market accounts
1995 and 1996, 2.47 % and 2.51 %, respectively. 44,677 44,012
-------- --------
Total non-certificate accounts 220,464 228,510
-------- --------
Certificates:
1.01% - 2.00% 834 949
2.01% - 3.00% 2 2
3.01% - 4.00% 1,198 20
4.01% - 5.00% 49,308 34,308
5.01% - 6.00% 205,595 333,998
6.01% - 7.00% 109,737 93,788
7.01% - 8.00% 8,025 3,079
8.01% - 9.00% 17 64
-------- --------
Total certificates 374,716 466,208
-------- --------
Total $ 595,180 $ 694,718
========= =========
Individual deposits greater than $ 100,000 at December 31, 1995 and 1996
aggregated approximately $ 37,571,000 and $ 53,680,000, respectively.
Interest on deposit accounts, presented in the consolidated statements
of operations, is net of interest forfeited by depositors on early
withdrawal of certificate accounts of approximately $ 74,000, $ 115,000
and $ 106,000, for the years ended December 31, 1994, 1995 and 1996,
respectively.
Scheduled maturities of certificate accounts are as follows:
December 31,
1995 1996
Amount Percent Amount Percent
Maturity (Dollars In Thousands)
Less than 1 year $ 275,749 73.59% $ 322,042 69.08%
1 year-2 years 51,148 13.65 75,043 16.10
2 years-3 years 16,925 4.52 28,603 6.13
3 years-4 years 11,503 3.07 17,031 3.65
4 years-5 years 17,469 4.66 21,867 4.69
Thereafter 1,922 .51 1,622 .35
--------- --------- -------- -------
Totals $ 374,716 100.00% $ 466,208 100.00%
========= ========= ========= =======
Under FIRREA, any insured depository institution that does not meet its
applicable minimum capital requirements may not accept brokered deposits
after December 7, 1992. This prohibition includes renewals and rollovers
of existing brokered deposits and deposit solicitations at higher than
prevailing interest rates paid by institutions in the Bank's normal
market area. Even though the Bank meets all of the applicable minimum
capital requirements at December 31, 1996, the Bank had no brokered
deposits.
Interest expense on deposits consists of the following during the years
ended December 31, 1994, 1995 and 1996:
1994 1995 1996
(In Thousands)
Passbook accounts $ 1,848 $ 1,812 $ 1,723
NOW accounts 828 812 937
Money market accounts 1,255 1,139 1,075
Certificate accounts 12,128 18,752 22,504
-------- -------- --------
Total $ 16,059 $ 22,515 $ 26,239
======== ======== ========
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank had outstanding advances from the FHLB of $ 85,169,000 with
interest rates ranging from 5.21% to 8.21% and $ 82,517,000 with
interest rates ranging from 5.21% to 8.21% at December 31, 1995 and
1996, respectively. The advances at December 31, 1996 are repayable as
follows:
Years Ending
December 31, Amount
(In Thousands)
1997 $ 37,779
1998 -
1999 28,349
2000 56
2001 6,327
Thereafter 10,006
--------
Total $ 82,517
========
The Bank has entered into a security agreement with the FHLB under which
the Bank is required to maintain as collateral for its advances,
securities in an amount at least equal to 100% of the Bank's total
advances outstanding from the FHLB. Pledged assets to secure FHLB
advances at December 31, 1995 and 1996 include FHLMC and FNMA securities
totaling $ 104,378,000 and $ 94,913,000 respectively (See Note 3).
10. EMPLOYEE STOCK OWNERSHIP PLAN LOAN
In connection with the Bank's plan of reorganization into a mutual
holding company, which was consummated January 7, 1994, the Bank
established an Employee Stock Ownership Plan (ESOP) which was funded by
proceeds from a loan with an unrelated financial institution in the
original amount of $ 1,932,000. Terms of the loan require equal
quarterly payments, together with interest, for seven years, with a
right of prepayment of the loan after three years. The loan bears
interest at .25% below the New York prime rate (8.25% at December 31,
1996).
Collateral for the loan will be released and allocated to employee
accounts proportional to the payments on the loan. The collateral for
this loan at December 31, 1996 is 121,440 shares of the Company's stock
held and owned by the ESOP. In addition, the loan contains several
restrictive covenants requiring certain minimum levels of financial
performance be maintained by the Bank. The Bank is in compliance with
these covenants.
Although the loan contains only minimal guarantees by Fidelity
Bankshares M.H.C. (the Company's mutual holding company), as was
permitted by the OTS, the Bank intends to make contributions to the ESOP
trust for the repayment of the loan in accordance with its terms.
The balance of this loan at December 31, 1996 was $ 1,104,000.
11. INCOME TAXES
In accordance with SFAS No. 109, deferred income tax assets and
liabilities are computed annually for differences between financial
statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable for the
period adjusted for the change during the period in deferred tax assets
and liabilities.
The components of the provisions for income taxes for the years ended
December 31, 1994, 1995 and 1996 are as follows:
1994 1995 1996
(In Thousands)
Current - federal $ 2,723 $ 2,784 $ 2,993
Current - state 460 410 424
------- ------- -------
Total current 3,183 3,194 3,417
Deferred - federal and state 209 (61) (855)
------- ------- -------
Total $ 3,392 $ 3,133 $ 2,562
======= ======= =======
The Bank's provision for income taxes differs from the amounts
determined by applying the statutory federal income tax rate to income
before income taxes for the following reasons:
Years Ended December 31,
1994 1995 1996
Amount % Amount % Amount %
(Dollars In Thousands)
Tax at federal tax rate $ 3,029 35.0% $ 2,781 35.0% $ 2,139 35.0%
State income taxes, net of federal
income tax benefits
327 3.8 265 3.3 220 3.6
Benefit of graduated rates (87) (1.0) (79) (1.0) (61) (1.0)
Other 123 1.4 166 1.8 264 4.3
-------- -------- -------- -------- -------- --------
Total provision and effective tax rate $ 3,392 39.2% $ 3,133 39.1% $ 2,562 41.9%
======== ======== ======== ======== ======== ========
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
December 31,
1995 1996
(In Thousands)
Deferred tax liabilities:
Depreciation $ 824 $ 978
Loan fee income 1,242 1,304
FHLB stock dividends 1,050 1,102
Unrealized appreciation in securities 1,662 543
Excess of tax bad debt reserve over book reserve 531 513
Deferred compensation 92 -
----- -----
Gross deferred tax liabilities 5,401 4,440
----- -----
Deferred tax assets:
Executive death benefit 283 347
Amortization 118 205
Retirement plan 1,461 2,182
Deferred compensation 591 686
Deferred state taxes - 17
Other 123 117
----- -----
Gross deferred tax assets 2,576 3,554
Less valuation allowances for deferred tax assets (35) -
----- -----
Net deferred tax assets 2,541 3,554
----- -----
Net deferred tax liability $ 2,860 $ 886
======= =======
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31,
1995. Section 593 allowed thrift institutions, including the Bank, to
use the percentage-of-taxable income bad debt accounting method, if more
favorable than the specific charge-off method, for Federal income tax
purposes. The excess reserves (deduction based on the percentage-of-
taxable income less the deduction based on the specific charge-off
method) accumulated post 1987 are required to be recaptured ratably over
a six year period beginning in 1996. The recapture has no effect on the
Company's statement of operations as taxes were provided for in prior
years in accordance with SFAS 109, "Accounting for Income Taxes." The
timing of this recapture may be delayed for a one or two year period to
the extent that the Bank originates more residential loans that the
average originations in the past six years. The Bank will meet the
origination requirement for 1996 and, therefore, will delay recapture at
least until the six year period beginning in 1997. The recapture amount
of $ 3.7 million will result in payments totaling $ 1.4 million which
has been previously accrued. The same legislation forgave the tax
liability on pre-1987 accumulated bad debt reserves which would have
penalized any thrift choosing to adopt a bank charter because the tax
would have become due and payable. The unrecorded potential liability
that was forgiven approximated $ 2.9 million.
12. PENSION AND EMPLOYEE BENEFIT PLANS
Pension Plan - The Bank's employees participate in the Bank's, qualified
defined benefit pension plan covering substantially all employees. The
plan calls for benefits to be paid to eligible employees at retirement
based primarily upon years of service with the Bank and compensation
rates during those years. Currently, the Bank's policy is to fund the
qualified retirement plan in an amount that falls between the minimum
contribution required by the Employee Retirement Income Security Act and
the maximum tax deductible contribution. Plan assets consist primarily
of common stock, U.S. Government obligations and certificates of
deposit.
Pension expense for the plan includes the following components:
For the Years Ended December 31,
1994 1995 1996
(In Thousands)
Service cost $ 344 $ 325 $ 410
Interest cost 436 554 535
Return on assets 270 (1,066) (816)
Net amortization and deferral (709) 680 433
----- ----- -----
Net periodic pension cost $ 341 $ 493 $ 562
===== ===== =====
For the years ended December 31, 1994, 1995 and 1996, pension expense
amounts were based upon actuarial computations.
In accordance with the actuarially determined computation under SFAS No.
87, the Bank funded $ 746,000 as required for the 1996 plan year.
The following sets forth the funded status of the qualified plan at
December 31:
1995 1996
(In Thousands)
Actuarial present value of benefit obligations:
Vested benefits $ 4,565 $ 3,569
Non-vested benefits 279 302
------- -------
Accumulated benefit obligation 4,844 3,871
Effect of anticipated future compensation levels
and other events 2,103 3,319
------- -------
Projected benefit obligation 6,947 7,190
Fair value of assets held in the plan (estimated) 5,169 6,284
------- -------
Unfunded plan assets over projected benefit obligation $ 1,778 $ 906
======= =======
The unfunded plan assets under projected benefit
obligation consists of the following:
Accrued pension cost (benefit) $ 445 $ 261
Unrecognized net loss due to changes in assumptions 1,607 889
Other, net (274) (244)
------- -------
Total $ 1,778 $ 906
======= =======
The weighted-average discount rate used to measure the projected benefit
obligation is 7.75% pre-retirement and 6.00% post-retirement in 1996,
compared to 7.25% pre-retirement and 6.00% post-retirement in 1995 and
8.50% pre-retirement and 6.50% post-retirement in 1994. The rate of
increase in future compensation levels is 6.50% in all years, and the
expected long-term rate of return on assets is 8.00% in all years.
Savings Plan - Effective January 1, 1988, the Board of Directors
approved a 401(k) deferred savings plan for all Bank employees who are
21 years of age with one or more years of service. The 401(k) deferred
savings plan allows qualified employees to save from 1% to 10% of their
income. Presently, one-half of an employee's contribution is matched by
the Bank, up to 3% of the employee's salary. The Bank's matching
percentage will be determined annually by the Board of Directors after
taking into consideration such factors as profit performance and ability
to meet capital requirements. The Bank's contribution to the plan
totaled $ 103,000, $ 145,000 and $ 170,000 for the years ended December
31, 1994, 1995 and 1996, respectively.
Retirement Plans - During 1989, the Bank established non-qualified
defined benefit plans for certain officers and directors. The director's
plan became effective on January 1, 1991. For the years ended December
31, 1994, 1995 and 1996, the net periodic pension expense for the
Supplemental Executive Retirement Plan for Officers totaled $ 626,000,
$ 615,000 and $ 964,000, respectively. The projected benefit obligation
as of December 31, 1994, 1995 and 1996, was estimated at $ 3,704,000,
$ 5,791,000 and $ 5,217,000, respectively. For 1994, 1995 and 1996,
respectively, the discount rates used to measure the projected benefit
obligation were 7.00%, 6.50% and 7.75%. The rate of increase in future
compensation levels in all years was 5.00%. For the years ended December
31, 1994, 1995 and 1996, the net periodic pension expense for the
Retirement Plan for the Director's totaled $ 337,000, $ 257,000 and
$ 273,000, respectively. The projected benefit obligation for the
Retirement Plan for Directors as of December 31, 1994, 1995 and 1996 was
estimated at $ 1,494,000, $ 1,678,000 and $ 1,514,000, respectively. For
1994, 1995 and 1996, the discount rates used to measure that projected
benefit obligation were 7.00%, 6.50% and 7.75%, respectively. The rate
of increase in future compensation levels for the Retirement Plan for
Directors was 5.00% in all years. The provisions of SFAS No. 87 require
recognition in the statement of financial position of the additional
minimum liability and related intangible asset for a retirement plan
with accumulated benefits in excess of plan assets. This resulted in the
recognition at December 31, 1995, of an additional liability and an
intangible asset of $ 2,050,000. There was no material effect on
earnings or cash requirements to fund the retirement plans. At December
31, 1996, the Bank recognized an additional liability of $ 592,000 and
an intangible asset of an equal amount. The additional liability and
intangible asset amounts as of December 31, 1995 and 1996 are recorded
in the account balances captioned other liabilities and other assets,
respectively, in the accompanying consolidated statements of financial
position.
Incentive Program - The Bank also has a Senior Management Performance
Incentive Award Program to provide the opportunity for those executives
to be rewarded in future earnings growth. A designated percentage of
income at December 31 of each year is used to determine the award fund
contribution. This percentage will be determined annually by the Board
of Directors after taking into consideration such factors as profit
performance and ability to meet capital requirements. Awards amounting
to $ 170,000, $ 164,000 and $ 120,000, were made during the calendar
years 1994, 1995 and 1996, respectively, for distribution in subsequent
years.
Employee Stock Ownership Plan - On January 7, 1994, in connection with
the Bank's Plan of Reorganization into a Mutual Holding Company (See
Note 17), the Bank adopted a tax qualified Employee Stock Ownership Plan
("ESOP") for all eligible employees. The ESOP purchased 193,200 shares
of the Bank's stock at the date of the Reorganization. The funds used to
purchase the shares were borrowed from a third party lender (See Note
10). The Bank will contribute to the ESOP sufficient funds to pay the
principal and interest on this loan over seven years. Benefits generally
become 100% vested after five years of credited service. However,
contributions to the ESOP and shares allocated among participants
proportional to repayment of the seven year ESOP loan will be allocated
among participants on the basis of compensation in the year of
allocation, subject to regulatory maximum limitations. The Bank
recognized $ 361,000, $ 398,000 and $ 462,000, by a charge against
income in 1994, 1995 and 1996, respectively, under this plan.
Bank Recognition and Retention Plans - On January 7, 1994, in connection
with the Bank's Plan of Reorganization into a Mutual Holding Company
(See Note 17), the Bank adopted two Recognition and Retention Plans to
encourage key employees and Directors to remain with the Bank. Both
plans, consisting of a total of 121,440 shares of restricted stock after
the 10% stock dividend, were awarded and will vest and be allocated to
the affected employees and Directors ratably over three years, subject
to various conditions requiring their acceleration. The Bank recognized
$ 496,000, $ 328,000 and $ 280,000 by a charge against income in 1994,
1995 and 1996, respectively, under this plan.
13. STOCK OPTION PLAN
The Bank has adopted stock option plans which granted options with an
exercise price equal to the market value of the stock at the date of
grant, to Directors and officers. The Directors may exercise their
options at any time up to ten years, while officer's options are
exercisable at a rate of twenty percent per year, not to exceed ten
years. Under these plans, after retroactively adjusting for the 10%
stock dividend distributed in November 1995, the Bank reserved 303,600
shares of authorized but unissued common stock for future issuance. The
following table shows a summary of transactions.
Options Price
Average
Number of Exercise
Options Price Per Aggregate
Outstanding Share Price
Options Outstanding
Balance - December 31, 1993 - - -
------- ------- ---------
Granted 303,600 $ 9.09 $ 2,759,724
Exercised - - -
Cancelled - - -
------- ------- ---------
Balance - December 31, 1994 303,600 9.09 2,759,724
------- ------- ---------
Granted - - -
Exercised (37,950) 9.09 (344,966)
Cancelled - - -
------- ------- ---------
Balance - December 31, 1995 265,650 9.09 2,414,758
------- ------- ---------
Granted - - -
Exercised (43,117) 9.09 (391,934)
Cancelled - - -
------- ------- ---------
Balance - December 31, 1996 222,533 $ 9.09 $ 2,022,824
======= ======= =========
14. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to
meet minimum capital requirements can initiate certain mandatory and
possible discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are
also subject to qualitative judgments by regulators about components,
risk-weighting and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
Tangible capital of not less than 1.5% of adjusted total assets, Total
capital to risk-weighted assets of not less than 8%, Tier I capital of
not less than 3.0% of adjusted total assets, and Tier I capital to risk-
weighted assets of 4.0% (as defined in the regulations). As of December
31, 1996, the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1996 the Bank is categorized as "Well Capitalized"
under the framework for prompt corrective action. To be considered well
capitalized under Prompt Corrective Action Provisions, the Bank must
maintain total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the following table.
The Bank's actual 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, 1995
Stockholders'
Equity and ratio
to total assets 10.4% $ 81,266
=========
Unrealized increase in
market value of
assets available
for sale (net of
applicable income
taxes) (2,584)
Goodwill (1,057)
Tangible capital and --------
ratio to adjusted
total assets 10.0% $ 77,625 1.5% $ 11,600
Tier I (core) capital ========= ========= ========= =========
and ratio to
adjusted total
assets 10.0% $ 77,625 3.0% $ 23,199 5.0% $ 38,666
Tier I (core) capital ========= ========= ========= ========= ========= =========
and ratio to
risk-weighted total
assets 21.0% $ 77,625 6.0% $ 22,173
========= ========= =========
General loan valuation
allowances 1,821
Equity investments (217)
--------
Tier 2 capital $ 1,604
--------
Total risk-based capital
and ratio to
risk-weighted total
assets 21.4% $ 79,229 8.0% $ 29,564 10.0% $ 36,955
========= ========= ========= ========= ========= =========
Total assets $ 779,620
=========
Adjusted total assets $ 773,314
=========
Risk-weighted assets $ 369,554
=========
As of December 31, 1996
Stockholders' Equity
and ratio to total
assets 9.4% $ 81,723
=========
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 I (core) capital and ========= ========= ========= =========
ratio to adjusted
total assets 9.2% $ 80,186 3.0% $ 26,144 5.0% $ 43,574
Tier I (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
=========
At periodic intervals, both the OTS and the FDIC routinely examine the
Bank's financial statements as part of their legally proscribed
oversight of the savings and loan industry. Based on these examinations,
the regulators can direct that the Bank's financial statements be
adjusted in accordance with their findings.
During the year ended December 31, 1996, an OTS examination resulted in
no significant adjustments to the consolidated financial statements.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank makes commitments to extend
credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established
in the contract. The interest rates on both fixed and variable rate
mortgage loans are generally based on the market rates in effect on the
date the loan application is taken. Commitments generally have fixed
expiration dates of no longer than 60 days and other termination clauses
and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained by the Bank upon extension of credit is
based on management's credit evaluation of the customer. Collateral held
varies but may include single-family homes, marketable securities and
income-producing residential and commercial properties. Credit losses
may occur when one of the parties fails to perform in accordance with
the terms of the contract. The Bank's exposure to credit risk is
represented by the contractual amount of the commitments to extend
credit. At December 31, 1996, the Bank had commitments to extend credit
for or purchase mortgage loans of $ 21,799,000 ($ 4,977,000 in fixed
rate commitments, see Note 4, and the balance of commitments in either
variable rate or for which rates had not yet been set). The Bank also
has a pre-approval program which commits dollar amounts to potential
loan customers based on their credit history. This program, however,
does not commit to locked in rates. No fees are received in connection
with such commitments.
The Bank leases various property for original periods ranging from one
to seventy-two years. Rent expense for the years ended December 31,
1994, 1995 and 1996, was approximately $ 568,000, $ 623,000 and
$ 682,000, respectively. At December 31, 1996, future minimum lease
payments under these operating leases are as follows:
Years Ending December 31, Amount
(In Thousands)
1997 $ 619,127
1998 606,237
1999 624,594
2000 656,754
2001 582,895
Thereafter 3,684,339
-----------
Total $ 6,773,946
===========
In connection with the Bank's reorganization in 1994, the Bank entered
into a three year employment agreement with its Chief Executive Officer.
This agreement, among other matters, would provide for severance
payments of up to three years salary in the event of termination for
reasons other than cause. In addition, the Bank has entered into
severance agreements with four of its executive officers. The severance
agreements would provide for payments of up to three years salary for
these executives, but only in the event of change of control of the
Bank.
For the Years Ended December 31,
1994 1995 1996
Supplemental Disclosure of Cash Flow Information: (In Thousands)
Cash paid for income taxes $ 3,540 $ 3,223 $ 2,810
======== ======== ========
Cash paid for interest on deposits and other borrowings $ 17,822 $ 27,906 $ 31,879
======== ======== ========
Supplemental Schedule of Noncash Investing and Financing Activities:
Real estate acquired in settlement of loans $ 2,191 $ 1,326 $ 593
======== ======== ========
17. CONVERSION TO HOLDING COMPANY
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 one dollar par value common stock would be converted into
one share of Fidelity Bankshares, Inc. ten cent par value 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 was completed as a tax-free transaction. In
addition, since the reorganization was accounted for in the same manner
as a pooling of interests merger, no significant accounting adjustments
were necessary to the consolidated financial statements. Common stock
and additional paid in capital reflect the change in par value described
above.
18. 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 years ended December
31, 1995 and 1996, retroactively adjusted to reflect the 10% stock
dividend distributed on November 30, 1995, are as follows:
1994 1995 1996
Primary Shares:
Shares Outstanding 6,699,440 6,709,492 6,723,409
Adjustments to reflect:
Uncommitted ESOP shares (200,786) (170,619) (140,291)
Unearned MRP shares (treasury stock method) (16,542) (9,031) -
Common stock options (treasury stock method) 75,089 77,894 84,380
--------- --------- ---------
Total 6,557,201 6,607,736 6,667,498
========= ========= =========
The computations of fully diluted shares outstanding is the same as for
primary shares, above.
Pursuant to Statement of Position 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, ESOP shares that have not been committed to be released are
not considered to be outstanding.
19. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107 ("SFAS No. 107"), "Disclosure About Fair Value of
Financial Instruments," as amended by SFAS 119, requires additional
disclosures of fair values of financial instruments in the notes to the
consolidated financial statements. Fair values of financial instruments
that are not actively traded are based on market prices of similar
instruments and/or valuation techniques using market assumptions.
Although management uses its best judgment in estimating the fair value
of these financial instruments, there are inherent limitations in any
estimation technique. Therefore, the fair value estimates presented
herein are not necessarily indicative of the amounts which the Bank
could realize in a current transaction.
December 31,
1995 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets: (In Thousands)
Cash and amounts due from depository institutions $ 14,989 $ 14,989 $ 15,293 $ 15,293
Interest-bearing deposits 9,974 9,974 27,127 27,127
Assets available for sale 186,747 186,747 132,064 132,064
Loans receivable (net) 532,333 542,483 661,700 664,667
Liabilities:
Deposits 595,180 595,835 694,718 697,163
Advances from the Federal Home Loan Bank 85,169 87,273 82,517 84,859
ESOP loan 1,380 1,380 1,104 1,104
The following methods and assumptions were used to estimate fair value
of each major class of financial instrument at December 31, 1995 and
1996.
Cash and Amounts due from Depository Institutions and Interest-Bearing
Deposits - The carrying amount of these assets is a reasonable estimate
of their fair value.
Assets Available for Sale - The fair value of these securities are based
on quoted market prices.
Loans Receivable - The fair value of loans is estimated by discounting
the future cash flows of the loans using the current rates at which
similar loans would be made to borrowers with similar credit rating for
the same remaining maturities.
Deposits - The fair value of demand deposits, savings accounts and money
market accounts are equal to the amount payable on demand at the
reporting date. The fair values of fixed maturity certificate accounts
are estimated by discounting the future cash flows of the certificates
using the current rates for advances from the Federal Home Loan Bank
with similar maturities.
Advances from the Federal Home Loan Bank - The fair value of these
advances is estimated by discounting the future cash flows of these
advances using the current rates at which similar term advances could be
obtained.
ESOP Loan - The carrying amount of this loan is a reasonable estimate of
fair market value.
Commitments to Extend Credit and Standby Letters of Credit - The fair
value of these commitments is insignificant.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands)
Year ended December 31, 1995:
Interest income $ 12,277 $ 12,924 $ 13,839 $ 14,221
Interest expense 6,013 6,842 7,617 7,623
-------- -------- -------- --------
Net interest income 6,264 6,082 6,222 6,598
-------- -------- -------- --------
Provision for loan losses (278) 16 (7) 59
Non-interest income 680 660 808 873
Non-interest expenses 4,938 5,025 5,099 5,387
Income taxes 884 663 762 824
-------- -------- -------- --------
Net Income $ 1,400 $ 1,038 $ 1,176 $ 1,201
======== ======== ======== ========
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands)
Year ended December 31, 1996:
Interest income $ 14,333 $ 14,709 $ 15,377 $ 15,821
Interest expense 7,579 7,591 8,247 8,714
-------- -------- -------- --------
Net interest income 6,754 7,118 7,130 7,107
-------- -------- -------- --------
Provision for loan losses 76 (16) 54 50
Non-interest income 1,420 864 968 1,624
Non-interest expenses 5,552 5,649 9,585 5,923
Income taxes 1,050 974 (617) 1,155
-------- -------- -------- --------
Net Income $ 1,496 $ 1,375 $ (924) $ 1,603
======== ======== ======== ========
Management's Assertions
as to the Effectiveness of its Internal Control Structure Over Financial
Reporting and Compliance with Designated Laws and Regulations
To the Stockholders:
Financial Statements
Management of Fidelity Bankshares, Inc. (the "Company") and its
subsidiary, Fidelity Federal Savings Bank of Florida (the "Bank"), is
responsible for the preparation, integrity and fair presentation of its
published financial statements and all other information presented in
this annual report. The financial statements have been prepared in
accordance with generally accepted accounting principles and, as such,
include amounts based on judgments and estimates made by management.
The financial statements have been audited by the independent accounting
firm, Deloitte & Touche LLP, which was given unrestricted access to all
financial records and related data, including minutes of all meetings of
stockholders, the Board of Directors and committees of the board.
Management believes that all representations made to the independent
auditors during their audit were valid and appropriate. The independent
auditors report accompanies the Company's audited financial statements.
Internal Control
Management is responsible for and does maintain a structure of internal
control over financial reporting, which is designed to provide
reasonable assurance to the Company's management and Board of Directors
regarding the preparation of reliable published financial statements,
including the Bank's reports to the Office of Thrift Supervision which
are based on both generally accepted accounting principles and
instructions for Thrift Financial Reports (TFR instructions). The
structure includes a documented organizational structure and division of
responsibility, established policies and procedures including a code of
conduct to foster a strong ethical climate, which are communicated
throughout the Bank, and the careful selection, training and development
of our people. Internal auditors monitor the operation of the internal
control system and report findings and recommendations to management and
the Board of Directors, and corrective actions are taken to address
control deficiencies and other opportunities for improving the system as
they are identified. The Board, operating through its audit committee,
which is composed entirely of directors who are not officers or
employees of the Company nor the Bank, provides oversight to the
financial reporting process.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control structure can provide only reasonable assurance with
respect to financial statement preparation. Furthermore, the
effectiveness of an internal control structure can change with
circumstances.
Management assessed its internal control structure over financial
reporting presented in conformity with both generally accepted
accounting principles and TFR instructions as of December 31, 1996 in
relation to criteria for effective internal control over financial
reporting described in "Internal Control--Integrated Framework" issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Management believes the Company and the Bank maintained an effective
internal control structure over financial reporting, presented in
conformity with generally accepted accounting principles and TFR
instructions, as of December 31, 1996.
Compliance with Designated Laws and Regulations
Management is also responsible for compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws
and regulations concerning dividend restrictions, both of which are
designated by the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with the designated safety and
soundness laws and regulations and has maintained records of its
determinations and assessments as required by the FDIC. Based on this
assessment, management believes that the Company and the Bank has
complied, in all material respects, with the designated safety and
soundness laws and regulations for the year ended December 31, 1996.
by:/S/Vince A. Elhilow by:/S/Richard D. Aldred
President and Chief Executive Officer Executive Vice President-
Chief Financial Officer
February 3, 1997
Independent Accountants' Report
To the Audit Committee
Fidelity Federal Savings Bank of Florida
West Palm Beach, Florida
We have examined management's assertion that, as of December 31, 1996,
Fidelity Federal Savings Bank of Florida maintained an effective
internal control structure over financial reporting presented in
conformity with both generally accepted accounting principles and the
Office of Thrift Supervision Instructions for Thrift Financial Reports
included in the accompanying Report on Management's Assertions as to the
Effectiveness of its Internal Control Structure over Financial Reporting
and Compliance with Designated Laws and Regulations.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly,
included obtaining an understanding of the internal control structure
over financial reporting, testing, and evaluating the design and
operating effectiveness of the internal control structure over financial
reporting, and such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable
basis for our opinion.
Because of inherent limitations in any internal control structure,
errors or irregularities may occur and not be detected. Also,
projections of any evaluation of the internal control structure over
financial reporting to future periods are subject to the risk that the
internal control structure may become inadequate because of changes in
conditions, or that the degree of compliance with the policies may
deteriorate.
In our opinion, management's assertion that, as of December 31, 1996,
Fidelity Federal Savings Bank of Florida maintained an effective
internal control structure over financial reporting presented in
conformity with both generally accepted accounting principles and the
Office of Thrift Supervision Instructions for Thrift Financial Reports
is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, FL
February 21, 1997
Fidelity Bankshares, Inc.
Board of Directors
[GRAPHIC PHOTO OMITTED: JOS. B. SHEARHOUSE, JR.]
Jos. B. Shearouse, Jr.
Chairman of the Board
[GRAPHIC PHOTO OMITTED: VINCE A. ELHILOW]
Vince A. Elhilow
President
Chief Executive Officer
[GRAPHIC PHOTO OMITTED: KEITH D. BEATY]
Keith D. Beaty
Chief Executive Officer
Implant Innovations, Inc.
[GRAPHIC PHOTO OMITTED: F. TED BROWN, JR.]
F. Ted Brown, Jr.
President
Ted Brown Real Estate, Inc.
[GRAPHIC PHOTO OMITTED: CHRISTOPHER H. COOK]
Christopher H. Cook
Executive Vice President
Corporate Counsel
[GRAPHIC PHOTO OMITTED: DONALD E. WARREN, M.D]
Donald E. Warren, M.D.
Retired Physician
[GRAPHIC PHOTO OMITTED: FREDERIC T. DEHON]
Frederic T. DeHon
Certified Public
Accountant
Frederic T. DeHon, a member of the Board of Directors of Fidelity
Federal Savings Bank of Florida, passed away on Tuesday, January 8,
1997. Mr. DeHon, a 1950 graduate of the University of Florida, had been
a practicing CPA in the West Palm Beach area since 1952, and a Director
of the Bank since 1978.
Mr. DeHon served in the US Navy during World War II as a carrier-based
fighter pilot and continued his military service as a Lieutenant in the
United States Naval Reserve through 1953 with a fighter unit and a
Carrier-based helicopter unit. He began his accounting career with Himes
& Himes, CPAs, in 1950, and was a partner in Holyfield, Elliott and
DeHon, P.A. at the time of his passing.
Mr. Dehon was a founding board member of Florida Atlantic University, a
member of the West Palm Beach Rotary Club for more than 30 years, and
was an active member of many other civic and social organization.
In his eighteen years on Fidelity Federal's Board of Directors, Mr.
DeHon served as Chairman of the Audit Committee, Chairman of the
Executive Compensation Committee and on many other committees and was
actively involved in all of the major decisions concerning the Bank
during his service on the Board.
We are grateful to Mr. DeHon for his valuable contribution to Fidelity
Federal and his community, and extend sympathies to his family and
friends.
Officers
Richard D. Aldred
Executive Vice President
Chief Financial Officer
Joseph C. Bova
Executive Vice President
Robert L. Fugate
Executive Vice President
Patricia C. Clager
Corporate Secretary
Fidelity Federal Savings Bank of Florida
Directors
Jos. B. Shearouse, Jr.
Chairman of the Board
Vince A. Elhilow
President
Chief Executive Officer
Christopher H. Cook
Executive Vice President
Corporate Counsel
Keith D. Beaty
Chief Executive Officer
Implant Innovations, Inc.
F. Ted Brown
President
Ted Brown Real Estate, Inc.
Donald E. Warren, M. D.
Retired Physician
Directors Emerti
Carl H. Anthony
President
Anthony Groves
Louis B. Bills, Sr.
Louis B. Bills Enterprises
George B. Preston
Chairman Emeritus
Raymond C. Tylander
President
Tylander Realty Corporation
Officers
EXECUTIVE OFFICER
Vince A. Elhilow
President
Chief Executive Officer
EXECUTIVE VICE PRESIDENTS
Richard D. Aldred
Chief Financial Officer
Joseph C. Bova
Lending Operations Manager
Christopher H. Cook
Corporate Counsel
Robert L. Fugate
Banking Operations Manager
J. Robert McDonald
President, Fidelity Realty & Appraisal Services, Inc.
VICE PRESIDENT/CORPORATE SECRETARY
Patricia C. Clager
Administrative Assistant to the Chairman
SENIOR VICE PRESIDENTS
David R. Hochstetler
Director of Marketing/CRA Officer
Brian C. Mahoney
Controller
Janice R. Newlands
Director of Human Resources
Debra K. Schiavone
Mortgage Loan Administration
Shellie R. Schmidt
Banking Administration
Joseph B. Shearouse, III
Commercial Loan Manager
Kenneth B. Stone, Jr.
Mortgage Loan Production
Daniel F. Turk
Property and Risk Management
VICE PRESIDENT/ASSISTANT SECRETARY
Arlene Metz
Administrative Assistant to the President
Martin County Advisory Board
Richard Q. Pennick, M.D., Chairman
Retired Physician
J. David Girlinghouse, D.D.S.
Dentist
C. Norris Tilton, Esq.
Attorney
Owen C. Schwaderer
President
Jensen Beach Land Company
Francis X. Wilson
President
Wilson Builders
Palm Beach County Offices
[GRAPHIC OMITTED: MAP OF FLORIDA BRANCH OFFICES]
MAIN OFFICE
218 Datura Street
West Palm Beach, FL 33401
(561) 659-9900
45th Street
4520 Broadway
West Palm Beach, FL 33407
(561) 848-5577
Bear Lakes
701 Village Blvd.
West Palm Beach, FL 33409
(561) 689-8800
Boynton Beach
At I-95 & Woolbright Road
1501 Corporate Drive
Boynton Beach, FL 33426
(561) 734-3300
Century Corners
4835 Okeechobee Blvd.
West Palm Beach, FL 33417
(561) 689-5305
Forest Hill
399 Forest Hill Blvd.
West Palm Beach, FL 33405
(561) 585-5552
Northlake
950 Northlake Blvd.
Lake Park, FL 33408
(561) 842-4266
Palm Beach
245 Royal Poinciana Way
Palm Beach, FL 33480
(561) 659-0666
Palm Beach Gardens
Garden Square Shoppes
10973 North Military Trail
Palm Beach Gardens, FL 33410
(561) 775-7600
Royal Palm Beach
100 Royal Palm Beach Blvd.
Royal Palm Beach, FL 33411
(561) 793-3270
Singer Island
1200 East Blue Heron Blvd.
Riviera Beach, FL 33404
(561) 848-8675
Tequesta
171 Tequesta Drive
Tequesta, FL 33469
(561) 747-5100
Wellington
12000 W. Forest Hill Blvd.
West Palm Beach, FL 33414
(561) 793-4501
West Boynton Beach
9875 Jog Road
Boynton Beach, FL 33437
(561) 731-2122
West Delray Beach
5017 West Atlantic Avenue
Delray Beach, FL 33484
(561) 499-7002
West Forest Hill
3989 Forest Hill Blvd.
West Palm Beach, FL 33406
(561) 969-3333
West Lake Worth
6535 Lake Worth Road
Lake Worth, FL 33467
(561) 968-1040
Martin County Offices
Jensen Beach
1021 N.E. Jensen Beach Blvd.
Jensen Beach, FL 34957
(561) 334-1600
Martin Square
2980 S. Federal Highway
Stuart, FL 34994
(561) 287-6600
Kanner/Monterey
2401 South Kanner Highway
Stuart, FL 34994
(561) 288-6767
STOCK PRICE INFORMATION
Fidelity Bankshares, Inc.'s
common stock is traded on the Nasdaq
National Market under the symbol "FFFL".
Newspaper stock tables list the holding company as "Fidelbksh". The
Bank's common stock has been trading since January 7, 1994.
INVESTOR RELATIONS
Vince A. Elhilow, President & CEO
Richard D. Aldred, Executive Vice President & CFO
Fidelity Federal Savings Bank of Florida
218 Datura Street
West Palm Beach, Florida 33401
(561) 659-9900
SHAREHOLDER SERVICES &
DIVIDEND REINVESTMENT PLAN
Fidelity Federal Savings Bank of Florida
David R. Hochstetler, Senior Vice President
Lucy A. Carr, Assistant Secretary
218 Datura Street
West Palm Beach, Florida 33401
(561) 659-9931
ANNUAL REPORT ON FORM 10-K
A copy of the Company's report on Form 10-K, as filed with the
Securities and Exchange Commission, is available without charge by
written request addressed as set forth under Shareholder Services above.
DATE AND PLACE OF ANNUAL MEETING
April 15, 1997, 10:00 a.m. (EDT)
Omni Hotel
1601 Belvedere Road
West Palm Beach, Florida 33401
GENERAL COUNSEL
Brackett, Sned, Welch, D'Angio, Tucker & Farach P.A.
218 Datura Street
West Palm Beach, Florida 33401
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1645 Palm Beach Lakes Blvd., Suite 900
West Palm Beach, Florida 33401
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449
STOCKHOLDER INFORMATION
- -----------------------------------------------------------
Quarter Ended
-------------
3/31/96 6/30/96 9/30/96 12/31/96
Stock Price
- -----------
High $ 16.50 $ 14.50 $ 15.50 $ 18.50
---------------------------------------
Low $ 13.25 $ 12.75 $ 11.75 $ 15.00
Dividends
declared $ .15 $ .15 $ .20 $ .20
- -----------------------------------------------------------
ELECTRONIC COMMUNICATIONS
News releases issued through PR Newswire are
available through Company News On-Call via fax
(1-800-758-5804, ext. 281429) or Internet website
(http://www.prnewswire.com).
[GRAPHIC OMITTED: BACK COVER TEXT]
2516FIDO.fil PAGE 79 TO FIDELITY