SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
__________________________
FORM 10-Q
(Mark One)
[|X|] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
Number)
218 Datura Street, West Palm Beach, Florida 33401
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report
Indicate by check |X| whether the Registrant has filed all reports
required to be filed by Sections 13, or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 6,855,368 shares
of the Registrant's common stock outstanding as of May 1, 2001.
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................1
Consolidated Statements of Financial Condition as of
December 31, 2000 and March 31, 2001...................2
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 2001...................3
Consolidated Statements of Comprehensive Operations for
the three months ended March 31, 2000 and 2001.........4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 2001...................5
Notes to Unaudited Consolidated Financial Statements.......6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................12
PART II. OTHER INFORMATION..................................................20
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------------------------------------
Unaudited
December 31, March 31,
2000 2001
=================================
(In Thousands, except share data)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions....................... $ 43,986 $ 45,296
Interest-bearing deposits............................................... 56,323 77,453
-------------- -------------
Total cash and cash equivalents..................................... 100,309 122,749
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities, including municipal bonds............. 34,122 79,338
Mortgage-backed and other securities.................................... 283,993 279,143
Corporate debt securities............................................... 38,230 37,709
-------------- -------------
Total assets available for sale..................................... 356,345 396,190
LOANS RECEIVABLE............................................................. 1,361,232 1,387,077
OFFICE PROPERTIES AND EQUIPMENT, Net ........................................ 53,969 57,131
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market............. 14,718 14,718
REAL ESTATE OWNED, Net....................................................... 27 180
ACCRUED INTEREST RECEIVABLE.................................................. 10,244 9,782
DEFERRED INCOME TAX ASSET.................................................... 5,454 4,234
OTHER ASSETS................................................................. 20,599 19,252
-------------- -------------
TOTAL ASSETS................................................................. $ 1,922,897 $ 2,011,313
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS..................................................................... $ 1,497,818 $ 1,552,680
OTHER BORROWED FUNDS......................................................... 6,890 38,072
ADVANCES FROM FEDERAL HOME LOAN BANK......................................... 274,365 270,838
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................ 3,493 8,550
DRAFTS PAYABLE............................................................... 4,335 7,499
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES.......................................... 28,750 28,750
OTHER LIABILITIES............................................................ 15,595 11,577
-------------- -------------
TOTAL LIABILITIES....................................................... 1,831,246 1,917,966
-------------- -------------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued.................... - -
COMMON STOCK ($ .10 par value) 8,200,000 shares authorized,
6,851,084 shares outstanding at December 31, 2000, and
6,855,368 shares outstanding at March 31, 2001.......................... 685 686
ADDITIONAL PAID-IN CAPITAL................................................... 41,101 41,384
RETAINED EARNINGS - substantially restricted................................. 62,925 62,740
TREASURY STOCK, at cost, 478,957 shares at December 31, 2000 and
476,542 shares at March 31, 2001........................................ (9,041) (9,285)
ACCUMULATED OTHER COMPREHENSIVE LOSS......................................... (4,019) (2,178)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY.............................................. 91,651 93,347
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 1,922,897 $ 2,011,313
============== =============
See Notes to Unaudited Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------
Unaudited
For the
Three Months Ended
March 31,
2000 2001
===========================
Interest income:
Loans..................................................... $ 23,102 $ 27,417
Investment securities..................................... 619 832
Other investments......................................... 553 1,017
Mortgage-backed and other securities...................... 6,202 5,332
------------ -----------
Total interest income.................................. 30,476 34,598
------------ -----------
Interest expense:
Deposits.................................................. 14,724 17,486
Advances from Federal Home Loan Bank and other borrowings. 4,365 5,292
------------ -----------
Total interest expense................................. 19,089 22,778
------------ -----------
Net interest income........................................... 11,387 11,820
Provision for loan losses..................................... 201 580
------------ -----------
Net interest income after provision for loan losses........... 11,186 11,240
------------ -----------
Other income:
Service charges on deposit accounts....................... 845 1,172
Fees for other banking services........................... 833 1,149
Net gain on sale of loans, investments
and mortgage-backed securities......................... - 241
Miscellaneous............................................. 2,634 294
------------ -----------
Total other income..................................... 4,312 2,856
------------ -----------
Operating expense:
Employee compensation and benefits........................ 6,320 7,060
Occupancy and equipment................................... 2,214 2,442
Gain on real estate owned................................. (50) (10)
Marketing................................................. 249 460
Federal deposit insurance premium......................... 68 69
Other..................................................... 1,880 3,154
------------ -----------
Total operating expense................................ 10,681 13,175
------------ -----------
Income before provision for income taxes...................... 4,817 921
------------ -----------
Provision for income taxes:
Current................................................... 737 319
Deferred.................................................. 1,105 44
------------ -----------
Total provision for income taxes....................... 1,842 363
------------ -----------
Net income.................................................... $ 2,975 $ 558
============ ===========
Earnings per share:
Basic..................................................... $ 0.46 $ 0.09
============ ===========
Diluted................................................... $ 0.46 $ 0.08
============ ===========
See Notes to Unaudited Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- -----------------------------------------------------------------------------------
Unaudited
For the
Three Months Ended
March 31,
2000 2001
========================
(In Thousands)
Net income.......................................................... $ 2,975 $ 558
Other comprehensive income (losses) gains, net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding (losses) gains arising during period...... (1,636) 1,841
---------- ----------
Comprehensive income................................................ $ 1,339 $ 2,399
========== ==========
See Notes to Unaudited Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND 2001
- --------------------------------------------------------------------------------------------
Unaudited
For the Three Months Ended
March 31,
2000 2001
====================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................... $ 2,975 $ 558
Adjustments to reconcile net income to net cash used for (provided by)
operating activities:
Depreciation and amortization...................................... 694 827
ESOP and Recognition and Retention Plan compensation expense....... 104 -
Accretion of discounts, amortization of premiums, and other
deferred yield items (103) (293)
Provision for loan losses.......................................... 201 580
Provisions for (gains) losses and net (gains) losses on sales of
real estate owned.................................................. (88) 16
Gain on securities received from insurance carrier's
demutualization.................................................... (2,416) -
Net (gain) loss on sale of:
Loans.......................................................... - (240)
Mortgage-backed securities..................................... - (1)
Office properties and equipment................................ - 76
(Decrease) increase in accrued interest receivable....................... (401) 462
Decrease in other assets................................................. 487 1,275
Decrease (increase) in drafts payable.................................... (2,117) 3,164
Decrease in deferred income tax asset.................................... 1,110 43
Decrease in other liabilities............................................ (2,799) (4,330)
--------------------
Net cash used for (provided by) operating activities........... (2,353) 2,137
--------------------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans........................ (50,926) (54,275)
Principal payments received on mortgage-backed securities................ 9,421 7,767
Purchases of:
Loans.............................................................. (7,000) (5,854)
Federal Home Loan Bank stock....................................... (653) -
Investment securities.............................................. (20,115) (72,000)
Office properties and equipment.................................... (2,705) (4,033)
Proceeds from sales of:
Loans.............................................................. - 34,356
Federal Home Loan Bank stock....................................... 1,500 -
Mortgage-backed securities......................................... - 94
Real estate acquired in settlement of loans........................ 435 -
Proceeds from maturities of municipal bonds and government and agency
securities............................................................... 2,000 27,115
Other.................................................................... 259 269
--------------------
Net cash used for investing activities......................... (67,784) (66,561)
--------------------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock............................. 26 33
Cash dividends........................................................... (731) (743)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts................ 69,226 43,307
Certificates of deposit............................................ 8,798 11,555
Advances from Federal Home Loan Bank............................... 3,071 (3,527)
Other borrowed funds............................................... (411) 31,182
Advances by borrowers for taxes and insurance...................... 3,960 5,057
--------------------
Net cash provided by financing activities...................... 83,939 86,864
--------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 13,802 22,440
CASH AND CASH EQUIVALENTS, Beginning of period........................... 60,801 100,309
--------------------
CASH AND CASH EQUIVALENTS, End of period................................. $ 74,603 $ 122,749
====================
See Notes to Unaudited Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Bank & Trust (the "Bank") conform
to generally accepted accounting principles and to predominant practices within
the thrift industry. The Company has not changed its accounting and reporting
policies from those disclosed in its 2000 Annual Report on Form 10-K.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at March 31, 2001 and
the results of its consolidated operations and cash flows for the period then
ended, all of which are of a normal and recurring nature, have been included.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time of
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after July 1, 2000 and, accordingly, would apply to the
Company beginning on January 1, 2001. The Company has not engaged in derivatives
and hedging activities covered by the new standard, and does not expect to do so
in the foreseeable future. Accordingly, the adoption of SFAS No. 133 did not
have a material impact on the Company's financial statements.
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. As stated in the previous paragraph, the Company has
not engaged in derivative and hedging activities covered by this standard and
does not expect to do so in the foreseeable future. Accordingly, the adoption of
SFAS No. 138 did not have a material impact on the Company's financial
statements.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces the accounting and reporting standards of SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on a
financial-components approach that focuses on control. The statement also
requires reclassification of financial assets pledged as collateral in the
statement of financial position separately from other assets not so encumbered
or disclosure of such assets in footnotes to the financial statements based on
certain criteria. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does not
expect adoption of this standard to have a material effect on the Company's
consolidated financial statements.
Certain amounts in the financial statements have been reclassified to conform
with the March 31, 2001 presentation.
2. LOANS RECEIVABLE
Loans receivable at December 31, 2000 and March 31, 2001, consist of the
following:
December 31, March 31,
2000 2001
==================================
(In Thousands)
One-to-four single family, residential real
estate mortgages.............................. $ 1,008,306 $ 1,008,530
Commercial real estate mortgages.................... 143,987 156,993
Real estate construction-primarily residential...... 86,901 100,741
Land loans-primarily residential.................... 14,421 15,560
-------------- ---------------
Total first mortgage loans.................... 1,253,615 1,281,824
Consumer loans...................................... 85,407 91,054
Commercial business loans........................... 152,524 158,908
-------------- ---------------
Total gross loans............................. 1,491,546 1,531,786
Less:
Undisbursed portion of loans in process....... 128,116 141,889
Unearned discounts, premiums and deferred
loan fees, net........................... (2,707) (2,632)
Allowance for loan losses..................... 4,905 5,452
-------------- ---------------
Loans receivable-net................................ $ 1,361,232 $ 1,387,077
============== ===============
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 2000 and the three months ended March 31, 2000 and 2001, is as
follows:
For the Year For the Three Months
Ended Ended
December 31, March 31,
2000 2000 2001
========== ==========================
(In Thousands)
Balance at beginning of period..................... $ 3,609 $ 3,609 $ 4,905
Current provision.................................. 1,328 201 580
Charge-offs........................................ (142) (49) (34)
Recoveries......................................... 110 4 1
---------- --------------------------
Ending balance..................................... $ 4,905 $ 3,765 $ 5,452
========== ==========================
An analysis of the recorded investment in impaired loans owned by the Company at
the end of each period and the related specific valuation allowance for those
loans is as follows:
December 31, 2000 March 31, 2001
====================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
----------------------------------------------------
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loans losses..... $ 207 $ 151 $ 642 $ 441
Loans without related allowance for loan losses... 4,844 - 4,607 -
------------ ---------- ---------- ----------
Total.................................. $ 5,051 $ 151 $ 5,249 $ 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.
4. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Bank & Trust, is a regulated
financial institution. Its regulatory capital amounts and ratios are presented
in the following table:
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provisions
-------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
-------------------------------------------------------------------
(Dollars In Thousands)
As of December 31, 2000 Stockholders' Equity
and ratio to total assets.................... 6.3% $ 120,322
========
Net unrealized decrease in market value of
assets available for sale (net of
applicable income taxes)..................... 4,019
Goodwill......................................... (2,504)
Disallowed servicing assets and deferred
tax assets.................................. (37)
-------------
Tangible capital and ratio to adjusted
total assets................................ 6.3% $ 121,800 1.5% $ 28,922
======== ============= ======= ===========
Tier 1 (core) capital and ratio to adjusted
total assets................................. 6.3% $ 121,800 3.0% $ 57,844 5.0% $ 96,406
======== ============= ======= =========== ======== ============
Tier 1 (core) capital and ratio to
risk-weighted total assets................... 10.6% $ 121,800 4.0% $ 45,773 6.0% $ 68,660
======== ======= =========== ======== ============
Allowable Tier 2 capital:
General loan valuation allowances............ 4,433
-------------
Total risk-based capital and ratio to
risk-weighted total assets............... 11.0% $ 126,233 8.0% $ 91,546 10.0% $ 114,433
======== ============= ======= =========== ======== ============
Total assets..................................... $1,923,633
=============
Adjusted total assets............................ $1,928,129
=============
Risk-weighted assets............................. $1,144,330
=============
As of March 31, 2001 Stockholders' Equity
and ratio to total assets................... 6.0% $ 121,165
========
Net unrealized decrease in market value of
assets available for sale (net of
applicable income taxes)................... 2,178
Goodwill....................................... (2,442)
Disallowed servicing assets and deferred
tax assets................................. (33)
-------------
Tangible capital and ratio to adjusted
total assets............................... 6.0% $ 120,868 1.5% $ 30,352
======== ============= ======= ===========
Tier 1 (core) capital and ratio to adjusted
total assets............................... 6.0% $ 120,868 3.0% $ 60,705 5.0% $ 101,174
======== ============= ======= =========== ======== ============
Tier 1 (core) capital and ratio to
risk-weighted total assets................ 10.0% $ 120,868 4.0% $ 48,111 6.0% $72,167
======== ======= =========== ======== ============
Allowable Tier 2 capital:
General loan valuation allowances......... 4,733
-------------
Total risk-based capital and ratio to
risk-weighted total assets............ 10.4% $ 125,601 8.0% $ 96,222 10.0% $ 120,278
======== ============= ======= =========== ======== ============
Total assets.................................. $2,021,942
=============
Adjusted total assets......................... $2,023,486
=============
Risk-weighted assets.......................... $1,202,775
=============
5. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP) and stock options for the three months ended March
31, 2000, are as follows:
For the Three Months Ended
March 31, 2000
----------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
==============================================
Net income......................................... $2,975,000
==============
Basic EPS:
Income available to
common stockholders............................ $2,975,000 6,465,460 $ 0.46
============== =============
Effect of diluted shares:
Common stock options........................... 43,374
-------------
Diluted EPS:
Income available to
common stockholders............................ $2,975,000 6,508,834 $ 0.46
============== ============= =============
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's stock options for
the three months ended March 31, 2001, are as follows:
For the Three Months Ended
March 31, 2001
----------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
==============================================
Net income......................................... $ 558,000
==============
Basic EPS:
Income available to
common stockholders............................. $ 558,000 6,512,538 $ 0.09
============== =============
Effect of diluted shares:
Common stock options............................ 63,124
-------------
Diluted EPS:
Income available to
common stockholders............................. $ 558,000 6,575,662 $ 0.08
============== ============= =============
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.
6. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended March 31, 2000 and 2001, is as follows:
For the Three Months Ended For the Three Months Ended
March 31, 2000 March 31, 2001
--------------------------- -------------------------
Unrealized Unrealized
Losses Losses
on Securities on Securities
===========================================================
(In Thousands)
Beginning balance.................... $(6,098) $ (4,019)
Current-period change................ (1,636) 1,841
--------- ---------
Ending balance....................... $(7,734) $ (2,178)
========= =========
An analysis of the related tax effects allocated to Other Comprehensive Loss is
as follows:
For the Three Months Ended For the Three Months Ended
March 31, 2000 March 31, 2001
----------------------------- ----------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
============================================================
(In Thousands)
Unrealized gain (loss) on assets
available for sale:
Unrealized holding gains (losses)
arising during period.............. $ (2,639) $ 1,003 $ (1,636) $ 3,018 $ (1,177) $ 1,841
----------------------------- ----------------------------
Other comprehensive income (loss)........ $ (2,639) $ 1,003 $ (1,636) $ 3,018 $ (1,177) $ 1,841
============================= ============================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Bank & Trust ("Fidelity Federal" or the "Bank"). The Company conducts no
business other than holding the common stock of the Bank. Consequently, its net
income is derived from the Bank. The Bank's net income is primarily dependent on
its net interest income, which is the difference between interest income earned
on its investments in mortgage loans and mortgage-backed securities, other
investment securities and loans, and its cost of funds consisting of interest
paid on deposits and borrowings. The Bank's net income also is affected by its
provision for loan losses, as well as by the amount of other income, including
income from fees and service charges, net gains and losses on sales of
investments, and operating expense such as employee compensation and benefits,
deposit insurance premiums, occupancy and equipment costs, and income taxes.
Earnings of the Bank also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of the Bank. In particular, the general level of market
interest rates tends to be highly cyclical.
Forward-Looking Statements.
When used in this report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
Recent Developments.
In January 2001, the Company filed a registration statement with the Securities
and Exchange Commission, in connection with the mutual to stock conversion of
Fidelity Bankshares, MHC, the Company's mutual holding company parent. As part
of the conversion, existing stockholders will have their shares of common stock
canceled and exchanged for new shares of common stock pursuant to an exchange
ratio determined as of the closing of the conversion. In addition to the
exchange of existing shares, Fidelity Bankshares, Inc. is offering for sale
between 6,576,808 and 8,898,034 shares which represent the 55.27% ownership
interest in Fidelity Bankshares, Inc. by Fidelity Bankshares, MHC. It is
expected that the conversion and offering will be complete during the second
quarter of 2001.
Other Comprehensive Income/Loss.
Accumulated Other Comprehensive Loss for the quarter ended March 31, 2001
decreased by $1.8 million. This decrease in the loss resulted from an increase
in the market value of Assets Available for Sale which was caused by a decrease
in market interest rates for comparable instruments. Accumulated Other
Comprehensive Loss for the quarter ended March 31, 2000 increased by $1.6
million, due to a decrease in the market value of Assets Available for Sale
which was caused by an increase in market interest rates for comparable
instruments.
Results of Operations.
Net income for the quarter ended March 31, 2001 was $558,000, representing a
decrease of $2.4 million compared to $3.0 million for the same period in 2000.
The primary reasons for this decrease, as more fully described later herein, was
a one-time charge of $1.1 million during the quarter ended March 31, 2001
relating to the Company's planned computer upgrade. Net income for the quarter
ended March 31, 2000 included non-recurring income of approximately $2.4 million
that resulted from the receipt of common stock in connection with the
demutualization of the John Hancock Financial Services Company. Provision for
loan losses increased by $379,000 in March 2001 compared to 2000. An increase in
the gain on sale of loans of $241,000 and a decrease in provision for income
taxes of $1.5 million offset these amounts.
Interest Income.
Interest income for the quarter ended March 31, 2001, totaled $34.6 million,
representing an increase of $4.1 million or 13.5% compared to the same 2000
quarter. The primary reason for this increase was an increase in the Bank's
interest income from loans of $4.3 million. This increase was primarily the
result of an increase of 15.6% in the average balance of loans to $1.4 billion
from $1.2 billion for the quarter ended March 31, 2001 and 2000, respectively.
Interest income from investment securities also increased to $832,000 for the
quarter ended March 31, 2001 from $619,000 for the 2000 quarter. This increase
was due to an increase in the average balance of investment securities of $17.4
million, which was slightly offset by a decrease in the average yield of such
securities to 6.08% in 2001 from 6.63% in 2000. Interest income also increased
on other investments by $464,000 to $1.0 million for the quarter ended March 31,
2001 from $553,000 for the same quarter in 2000. Offsetting these increases,
interest income from mortgage-backed and other securities decreased by $870,000
resulting from a decrease in the average balance of these securities to $319.5
million at March 31, 2001 from $367.8 million at March 31, 2000.
Interest Expense.
Interest expense for the quarter ended March 31, 2001, totaled $22.8 million, an
increase of $3.7 million or 19.3% from the same quarter in 2000. The principal
cause for this increase was an increase in interest expense on deposits of $2.8
million. This resulted from an increase in the average balance of deposits to
$1.5 billion for the quarter ended March 31, 2001 compared to $1.4 billion for
the same quarter in 2000 and an increase in the average cost of these deposits
to 4.62% compared to 4.33% for the quarter ended March 31, 2000. Interest
expense on borrowed funds also increased by $927,000 caused primarily by an
increase in the average balance of such funds to $327.3 million from $286.1
million and an increase in the average cost to 6.47% for the quarter ended March
31, 2001 from 6.10% for the comparable 2000 quarter.
Net Interest Income.
While the Company's interest income increased by $4.1 million for the quarter
ended March 31, 2001, compared to the same period in 2000, interest expense also
increased by $3.7 million, resulting in net interest income of $11.8 million for
the quarter ended March 31, 2001. This represents a $433,000 or 3.8% increase in
net interest income when compared to the same period in 2000.
.
Provision for Loan Losses.
The Company's provision for loan losses increased by $379,000 to $580,000 for
the quarter ended March 31, 2001 from $201,000 for the quarter ended March 31,
2000, principally as the result of the increased credit risk associated with
increased originations of commercial real estate mortgages, consumer loans and
commercial business loans along with an additional specific loan loss provision
of $280,000 relating to a non-performing commercial loan credit. The Bank's
total allowance for loan losses at March 31, 2001 of $5.5 million is maintained
at a level that represents management's best estimate of losses in the loan
portfolio at the balance sheet date that were both probable and reasonably
estimable. The Bank's ratio of non-performing loans to total loans was .36% and
.28% at March 31, 2001 and 2000, respectively.
The financial statements of the Company are prepared in accordance with
generally accepted accounting principles and, accordingly, allowances for loan
losses are based on management's estimate of the fair value of collateral, as
applicable, and the Bank's actual loss experience and standards applied by the
OTS and FDIC. We provide both general valuation allowances (for unspecified,
probable losses) and specific valuation allowances (for known losses) in our
loan portfolio. General valuation allowances are added to the Bank's capital for
purposes of computing the Bank's regulatory risk-based capital. We regularly
review our loan portfolio, including impaired loans, to determine whether any
loans require classification or the establishment of appropriate valuation
allowances. Since we are increasing our origination of commercial business loans
and commercial real estate mortgages and since such loans are deemed to have
more credit risk than residential mortgage loans, our provision for loan losses
is likely to increase in future periods.
Other Income.
Other income for the quarter ended March 31, 2001 was $2.9 million, a decrease
of $1.5 million compared to the same quarter in 2000. This decrease is
principally due to the receipt of approximately $2.4 million of common stock in
connection with the demutualization of John Hancock Financial Services in the
quarter ended March 31, 2000. This amount was slightly offset by a gain of
$241,000 on the sale of mortgage loans in the quarter ended March 31, 2001. Also
offsetting this decrease was an increase in service charges on deposit accounts
of $327,000 and an increase in fees for other banking services of $316,000. Of
the $316,000 increase in fees for other banking services, $117,000 came as a
result of increased sales of insurance and annuity products compared to the
prior year.
Operating Expense.
Operating expenses increased by $2.5 million to $13.2 million for the quarter
ended March 31, 2001 as compared to the quarter ended March 31, 2000. During the
quarter ended March 31, 2001, we incurred a one-time charge to other operating
expense of $1.1 million in connection with our plans to substantially upgrade
our data processing services. In addition, employee compensation and benefits
increased by $740,000 or 11.7%. This increase, which includes normal salary
increases, has increased primarily due to the 9.0% increase in the number of
full time equivalent employees from 547 at March 2000 to 596 at March 2001. This
increase also includes an increase in medical benefits of approximately
$148,000, again due mainly to the increase in the number of employees at March
31, 2001 compared to 2000. Occupancy and equipment costs increased by $228,000
due in part to additional depreciation expenses relating to new computer
equipment and new branch facilities. Also contributing to this increase was an
increase in marketing costs of $211,000 for the quarter ended March 31, 2001
compared to 2000.
Income Taxes.
Provision for income taxes was $363,000 for the quarter ended March 31, 2001
compared to $1.8 million for the quarter ended March 31, 2000. This decrease was
attributable to a decrease in income before provision for income taxes of $3.9
million to $921,000 in 2001 from $4.8 million in 2000. These expenses
approximate the rates paid by the Company for Federal and State income taxes
applied to the Company's pre-tax income.
Changes in Financial Condition.
The Company's assets increased by $88.4 million to $2.0 billion at March 31,
2001 compared to December 31, 2000. Net loans receivable increased by $25.8
million, while cash and assets available for sale increased by $62.3 million. In
addition, the Bank increased its investment in office properties and equipment,
primarily for new office sites, by $3.2 million, while all other assets
decreased by $2.9 million. Funds for the increase in assets were provided
primarily by an increase in the Bank's deposits of $54.9 million, together with
increases in other liabilities, principally other borrowed funds, of $31.9
million The Company's equity at March 31, 2001 increased by $1.7 million from
December 31, 2000, primarily as a result of an increase in Accumulated Other
Comprehensive Income of $1.8 million. Also affecting equity was net income for
the quarter of $558,000, which was offset by dividends declared of $743,000.
Market Risk Analysis.
As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, other than those which
possess a short term to maturity. Since the majority of the Company's
interest-bearing liabilities and nearly all of the Company's interest-earning
assets are held by the Bank, virtually all of the Company's interest rate risk
exposure lies at the Bank level. As a result, all significant interest rate risk
management procedures are performed by management of the Bank. Based upon the
nature of the Bank's operations, the Bank is not subject to foreign currency
exchange or commodity price risk. The Bank's loan portfolio is concentrated
primarily in Palm Beach, Martin and Broward Counties in Florida and is therefore
subject to risks associated with the local economy. As of March 31, 2001, the
Company does not own any trading assets, other than $973,000 of assets held by
the SMPIAP Trust which can be actively traded by and are held for the benefit of
senior management. Income in these accounts accrues to and losses are solely
absorbed by senior management. At March 31, 2001, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
The majority of the Company's assets and liabilities are monetary in nature
which subjects the Company to significant interest rate risk. As stated above,
the majority of the Company's interest-bearing liabilities and nearly all of the
Company's interest-earning assets are held by the Bank and therefore virtually
all of the Company's interest rate risk exposure lies at the Bank level.
The Bank monitors interest rate risk by various methods including analyzing
changes in its Market Value of Portfolio Equity ("MVPE"). MVPE is generally
defined as the difference between the market value of the Bank's assets and the
market value of the Bank's liabilities. The Bank uses an internal model that
generates estimates of the Bank's MVPE over a range of interest rate scenarios.
The model calculates MVPE essentially by discounting the cash flows from the
Bank's assets and liabilities to present value using current market rates and
adjusting those discount rates accordingly for various interest rate scenarios.
The following table sets forth the Bank's estimated internal calculations of
MVPE as of March 31, 2001.
Changes in Rates Net Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
-------------------- --------------------------------
+200bp 221,302 (21,878) (9.0%)
+100bp 236,169 (7,011) (2.9%)
-0- 243,180 - -
-100bp 237,183 (5,997) (2.5%)
-200bp 227,984 (15,196) (6.2%)
In preparing the MVPE table above, the Bank has estimated prepayment rates for
its loans ranging from 8% to 22% depending on interest rate scenario. These
rates are management's best estimate based on prior repayment experience.
Decay rates for liabilities indicate an assumed annual rate at which an
interest-bearing liability will be withdrawn in favor of an account with a more
favorable interest rate. Decay rates have been assumed for demand deposits, NOW
accounts, passbook and money market deposits. During 1999, the Bank contracted
with a third party consultant to perform an analysis of its core deposit
accounts. The purpose of this analysis was to obtain an estimate of the actual
deposit balance trends over various interest rate scenarios in the Bank's
previous five years and to use that data to provide a forecast of future balance
trends over various interest rate scenarios. The following decay rates are based
on this analysis.
6 Months 1 Year 3 Years 5 Years
Through Through Through Through Over 10
0-6 Months 1 Year 3 Years 5 Years 10 Years Years
---------------------------------------------------------------
NOW accounts .27% .27% 1.54% 1.51% 3.75% 100.00%
Passbook, club accounts .00% .00% .03% .92% 10.63% 100.00%
Money market deposit accounts 6.49% 6.49% 29.49% 36.16% 100.00% 100.00%
The above assumptions are estimates of annual percentages based on remaining
balances and while management believes these rates to be a reasonable analysis
of future deposit trends based on past performance, they should not be regarded
as indicative of the actual prepayments and withdrawals that may be experienced
by the Bank in any given period. Certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in MVPE requires the making of certain assumptions that may or may not reflect
how actual yields and costs respond to changes in market rates. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Also, interest rates on certain types of assets and liabilities may
fluctuate in advance of or lag behind changes in market interest rates.
Additionally, certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the assets.
Moreover, in the event of a change in interest rates, prepayment and early
withdrawal levels may possibly deviate significantly from those assumed in
calculating the above table. Management has also made estimates of fair value
discount rates that it believes to be reasonable. However, due to the fact that
there is no quoted market for many of the assets and liabilities, management has
no definitive basis to determine whether the fair values presented would be
indicative of the value negotiated in an actual sale.
Accordingly, while the above table provides an estimate of the Bank's interest
rate risk exposure at a particular point in time, it is not intended to provide
a precise forecast of the effect of market changes on the Bank's MVPE and net
interest income, as actual results may vary.
Under OTS risk-based capital regulations, savings associations are required to
calculate the 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. There are significant differences between the
Bank's internal assumptions used to calculate the previously presented MVPE and
those used by the OTS. For example, the Bank's internal decay rates for NOW,
passbook and money market accounts produce an average expected life for these
instruments of 16.63 years, 12.45 years and 10.30 years, respectively. The OTS
standard assumptions for these same instruments at December 31, 2000 result in
an expected average life of 2.9 years, 3.3 years and 0.6 years, respectively.
Accordingly, the Bank's previously presented MVPE calculations are not
representative of those which would be produced by the OTS.
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 does not solicit
high-rate jumbo certificates or brokered funds.
Liquidity and Capital Resources.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio currently is 4.0%. The Bank's
liquidity ratio averaged 20.65% during the month of March 2001. Liquidity ratios
averaged 20.59% for the quarter ended March 31, 2001. The Bank adjusts its
liquidity levels in order to meet funding needs of loan originations, deposit
outflows, payment of real estate taxes on mortgage loans, and repayment of
borrowings and loan commitments. The Bank also adjusts liquidity as appropriate
to meet its asset and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities and other short-term investments, as well
as earnings and funds provided from operations. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Bank manages
the pricing of its deposits to maintain a desired deposit balance. In addition,
the Bank invests excess funds in short-term interest-earning and other assets,
which provide liquidity to meet lending requirements. Short-term
interest-bearing deposits with the FHLB of Atlanta amounted to $77.5 million at
March 31, 2001. Other assets qualifying for liquidity at March 31, 2001,
including unpledged mortgage-backed securities guaranteed by the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
were $260.9 million. For additional information about cash flows from the
Company's operating, financing and investing activities, see Consolidated
Statements of Cash Flows included in the Financial Statements. The primary
sources of cash are net income, principal repayments on loans and
mortgage-backed securities, increases in deposit accounts and advances from the
FHLB.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At March 31, 2001, the Bank had $270.8 million in advances from
the FHLB. At March 31, 2001, the Bank had commitments outstanding to originate
or purchase loans of $131.8 million. This amount does not include the unfunded
portion of loans in process. Certificates of deposit scheduled to mature in less
than one year at March 31, 2001, totaled $758.9 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
FASB Statement on Derivatives and Hedging Activities - In June 1998, the FASB
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments and for hedging activities. The Statement requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
at fair value. If certain conditions are met, a derivative may be specifically
designated as a fair value hedge, a cash flow hedge, or a foreign currency
hedge. Entities may reclassify securities from the held-to-maturity category to
the available-for-sale category at the time of adopting SFAS No. 133. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after July 1,
2000 and, accordingly, would apply to the Company beginning on January 1, 2001.
The Company has not engaged in derivatives and hedging activities covered by the
new standard, and does not expect to do so in the foreseeable future.
Accordingly, the adoption of SFAS No. 133 did not have a material impact on the
Company's financial statements.
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. As stated in the previous paragraph, the Company has
not engaged in derivative and hedging activities covered by this standard and
does not expect to do so in the foreseeable future. Accordingly, the adoption of
SFAS No. 138 did not have a material impact on the Company's financial
statements.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces the accounting and reporting standards of SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on a
financial-components approach that focuses on control. The statement also
requires reclassification of financial assets pledged as collateral in the
statement of financial position separately from other assets not so encumbered
or disclosure of such assets in footnotes to the financial statements based on
certain criteria. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does not
expect adoption of this standard to have a material effect on the Company's
consolidated financial statements.
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation,
nor is the Company aware of any pending litigation, other than legal
proceedings incident to the business of the Company, such as
foreclosure actions filed on behalf of the Company. Management,
therefore, believes the results of any current litigation would be
immaterial to the consolidated financial condition or results of
operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under Consolidated
Financial Statements (pages 2 through 5), Notes to Unaudited
Consolidated Financial Statements (pages 6 through 11) and
Management's Discussion and Analysis of Financial Condition and
Results of Operations (pages 12 through 19), and are
incorporated by reference, herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIDELITY BANKSHARES, INC.
Date: May 10, 2001 By: /S/Vince A. Elhilow
----------------------
Vince A. Elhilow
President and Chief
Executive Officer
Date: May 10, 2001 By: /S/Richard D. Aldred
----------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer