SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
--------------------------
FORM 10-Q
(Mark One)
[|X|] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
205 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 15,767,038 shares
of the Registrant's common stock par value $ .10 per share outstanding as of
November 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 September 30, 2001.......................2
Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and 2001..............................3
Consolidated Statements of Comprehensive Operations for the three
and nine months ended September 30, 2000 and 2001..............4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 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...............................................21
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
December 31, September 30,
2000 2001
=======================================
(In Thousands, except share data)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ .$ 43,986 $ 53,206
Interest-bearing deposits................................................. 56,323 53,754
-------- --------
Total cash and cash equivalents...................................... 100,309 106,960
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities, including municipal bonds............... 34,122 105,121
Mortgage-backed and other securities...................................... 283,993 231,915
Corporate debt securities................................................. 38,230 37,392
-------- --------
Total assets available for sale...................................... 356,345 374,428
LOANS RECEIVABLE................................................................ 1,361,232 1,512,363
OFFICE PROPERTIES AND EQUIPMENT, Net ........................................... 53,969 60,614
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market................ 14,718 14,042
REAL ESTATE OWNED, Net.......................................................... 27 51
ACCRUED INTEREST RECEIVABLE..................................................... 10,244 10,883
DEFERRED INCOME TAX ASSET....................................................... 5,454 2,742
OTHER ASSETS.................................................................... 31,267 30,522
-------- --------
TOTAL ASSETS.................................................................... $ 1,933,565 $2,112,605
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS........................................................................ $ 1,497,818 $1,562,263
OTHER BORROWED FUNDS............................................................ 6,890 37,341
ADVANCES FROM FEDERAL HOME LOAN BANK............................................ 274,365 256,964
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................... 3,493 18,768
DRAFTS PAYABLE.................................................................. 4,335 6,026
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES............................................ 28,750 28,750
OTHER LIABILITIES............................................................... 26,263 25,467
----------- ----------
TOTAL LIABILITIES......................................................... 1,841,914 1,935,579
----------- ----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued....................... - -
COMMON STOCK ($ .10 par value) 30,000,000 shares authorized,
6,851,084 shares outstanding at December 31, 2000, and
15,767,038 shares outstanding at September 30, 2001....................... 685 1,577
ADDITIONAL PAID-IN CAPITAL...................................................... 41,101 117,746
RETAINED EARNINGS - substantially restricted.................................... 62,925 64,657
TREASURY STOCK, at cost, 478,957 shares at December 31, 2000 and
337,816 shares at September 30, 2001...................................... (9,041) (1,714)
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN......................... - (5,069)
ACCUMULATED OTHER COMPREHENSIVE LOSS............................................ (4,019) (171)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY................................................ 91,651 177,026
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 1,933,565 $ 2,112,605
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
<page>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
======================== ========================
(In Thousands, except share data)
Interest income:
Loans........................................................ $ 25,877 $ 28,671 $.73,503 $ 84,025
Investment securities........................................ 1,349 1,540 2 ,854 3,954
Other investments............................................ 965 573 2,382 2,521
Mortgage-backed and other securities......................... 6,255 3,910 18,784 13,746
---------- --------- ----------
Total interest income.................................... 34,446 34,694 97,523 104,246
---------- --------- ---------- ----------
Interest expense:
Deposits..................................................... 16,539 14,625 46,689 49,014
Advances from Federal Home Loan Bank and other borrowings.... 6,100 5,108 15,807 15,569
---------- --------- ----------
Total interest expense................................... 22,639 19,733 62,496 64,583
---------- --------- ---------- ---------
Net interest income.............................................. 11,807 14,961 35,027 39,663
Provision for loan losses........................................ 363 483 928 1,389
---------- --------- ---------- ----------
Net interest income after provision for loan losses.............. 11,444 14,478 34,099 38,274
---------- --------- ---------- ----------
Other income:
Service charges on deposit accounts.......................... 1,068 1,347 2,870 3,736
Fees for other banking services.............................. 1,101 1,509 2,972 4,093
Net gain on sale of loans, investments
and mortgage-backed securities........................... 623 163 658 525
Miscellaneous................................................ 191 166 3,141 697
---------- --------- ---------- ----------
Total other income....................................... 2,983 3,185 9,641 9,051
---------- --------- ---------- ----------
Operating expense:
Employee compensation and benefits........................... 6,906 8,103 19,734 23,047
Occupancy and equipment...................................... 2,185 2,696 6,608 7,779
Loss (gain) on real estate owned............................. 3 (17) (126) (73)
Marketing.................................................... 265 444 817 1,345
Federal deposit insurance premium............................ 71 72 207 211
Other........................................................ 2,034 2,541 5,848 8,113
---------- --------- ---------- ----------
Total operating expense.................................. 11,464 13,839 33,088 40,422
---------- --------- ---------- ----------
Income before provision for income taxes......................... 2,963 3,824 10,652 6,903
------------ --------- ---------- ----------
Provision for income taxes:
Current...................................................... 1,012 1,388 2,782 2,479
Deferred..................................................... 104 123 1,315 252
------------ --------- ---------- ----------
Total provision for income taxes......................... 1,116 1,511 4,097 2,731
------------ --------- ---------- ----------
Net income....................................................... $.1,847$ 2,313 $ 6,555 $ 4,172
============ ========= ========== ==========
Earnings per share:
Basic........................................................ $.0.12 $ 0.15 $ 0.42 $ 0.27
============ ========= ========== ==========
Diluted...................................................... $.0.12 $.0.15 $ 0.42 $ 0.27
============ ========= ========== ==========
<page>
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
======================== ========================
(In Thousands) (In Thousands)
Net income...................................................... $ 1,847 $ 2,313 $ 6,555 $ 4,172
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealizied holding (losses) gians arising during period.... 1,102 1,639 (1,243) 3,848
-------- ------- -------- -------
Comprehensive income............................................. $ 2,949 $ 3,952 $ 5,312 $ 8,020
======== ======= ======== =======
See Notes to Unaudited Consolidated Financial Statements
<page>
FIDELITY BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended`
September 30,
==========================
2000 2001
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income ................................................................... $ 6,555 $ 4,172
Adjustments to reconcile net income to net cash (used for) provided
by operating activities:
Depreciation and amortization .............................................. 2,181 2,536
ESOP and Recognition and Retention Plan compensation expense ............... 377 204
Accretion of discounts, amortization of premiums, and other deferred
yield items ................................................................ (989) (1,158)
Provision for loan losses .................................................. 928 1,389
Provisions for gains and net gains on sales of real estate owned ........... (151) (63)
Gain on securities received from insurance carrier's demutualization ....... (2,503) -
Net (gain) loss on sale of:
Loans ..................................................................... - (268)
Mortgage-backed securities ................................................ - (156)
Equity securities ......................................................... (658) -
Office properties and equipment ........................................... 77 91
Other assets .............................................................. - (99)
Increase in accrued interest receivable ...................................... (1,523) (639)
(Increase) decrease in other assets .......................................... (36) 565
(Decrease) increase in drafts payable ........................................ (1,083) 1,691
Decrease in deferred income tax asset ........................................ 2,745 251
(Decrease) increase in other liabilities ..................................... (2,821) (1,578)
Net cash provided by operating activities ................................. 3,099 10,861
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans ............................ (142,316) (164,460)
Principal payments received on mortgage-backed securities .................... 29,294 47,566
Purchases of:
Loans ...................................................................... (21,101) (21,691)
Federal Home Loan Bank stock ............................................... (4,638) -
Investment securities ...................................................... (65,112) (136,995)
Office properties and equipment ............................................ (8,034) (9,397)
Proceeds from sales of:
Loans ...................................................................... - 35,871
Federal Home Loan Bank stock ............................................... 1,500 676
Mortgage-backed securities ................................................. - 10,310
Real estate acquired in settlement of loans ................................ 894 353
Office properties and equipment ............................................ 500 -
Other assets ............................................................... - 100
Proceeds from maturities of municipal bonds and government and agency securities 12,240 66,655
Other ........................................................................ (346) (1,386)
Net cash used in investing activities .................................. (197,119) (173,549)
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Sale of common stock - net of issuance costs ................................. 84 79,580
Cash dividends ............................................................... (2,194) (3,011)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts ....................... 95,019 70,864
Certificates of deposit ................................................... (4,096) (6,419)
Advances from Federal Home Loan Bank ...................................... 79,216 (17,401)
Other borrowed funds ...................................................... 2,107 30,451
Advances by borrowers for taxes and insurance ............................. 14,027 15,275
Net cash provided by financing activities ............................... 184,163 169,339
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... (9,857) 6,651
CASH AND CASH EQUIVALENTS, Beginning of period ............................... 60,801 100,309
CASH AND CASH EQUIVALENTS, End of period ..................................... $ 50,944 $ 106,960
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<page>
1. GENERAL The accounting and reporting policies of Fidelity Bankshares,
Inc. (the "Company") and its subsidiary Fidelity Federal Bank & Trust (the
"Bank") conform to accounting principles generally accepted in the United States
of America 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 September 30, 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 June 30,
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 adoption of this
standard did not have a material effect on the Company's consolidated financial
statements.
<page>
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company has not yet determined the impact, of any, the
adoption of SFAS No. 144 will have on the Company's consolidated financial
statements.
Certain amounts in the financial statements have been reclassified to
conform with the September 30, 2001 presentation.
2. REORGANIZATION AND SECOND STEP CONVERSION
The Company completed the mutual-to-stock conversion of its mutual holding
company parent on May 15, 2001 and the related common stock offering resulted in
the Company selling 8,695,943 shares of common stock for $10.00 per share to
certain customers of Fidelity Federal Bank & Trust, its benefit plans, including
the employee stock ownership plan, and to existing public stockholders of
Fidelity Bankshares, Inc. In addition, 7,048,207 shares were issued to the
existing stockholders based on an exchange rate of 2.4165 new shares of common
stock for each existing share. At the completion of the conversion, the Company
had 15,744,150 shares outstanding
The conversion was accounted for as a change in corporate form with no
subsequent change in the historical basis of the Company's assets, liabilities
and equity. All references in the consolidated financial statements and notes
thereto to share data (including number of shares and per-share amounts) have
been restated giving retroactive recognition to the exchange rate.
3. LOANS RECEIVABLE Loans receivable at December 31, 2000 and September 30,
2001, consist of the following:
December 31, September 30,
2000 2001
(In Thousands)
One-to-four single family, residential real estate
mortgages .................................................................$ 1,008,306 $ 1,089,332
Commercial real estate mortgages ..............................................143,987 207,453
Real estate construction-primarily residential .................................86,901 112,470
Land loans-primarily residential ...............................................14,421 23,933
Total first mortgage loans ..................................................1,253,615 1,433,188
Consumer loans .................................................................85,407 101,031
Commercial business loans .....................................................152,524 170,711
Total gross loans ...........................................................1,491,546 1,704,930
Less:
Undisbursed portion of loans in process .......................................128,116 189,150
Unearned discounts, premiums and deferred loan
fees, net .....................................................................(2,707) (2,778)
Allowance for loan losses .......................................................4,905 6,195
Loans receivable-net ......................................................$ 1,361,232 $ 1,512,363
<page>
4. 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 and nine
months ended September 30, 2000 and 2001, is as follows:
For the Year For the Three Months For the Nine Months
Ended Ended Ended
December 31, September 30, September 30,
2000 2000 2001 2000 2001
-------------- -------- -------- -------- -------
(In Thousands) (In Thousands) (In Thousands)
Balance at beginning of period. $ 3,609 $ 4,117 $ 5,732 $ 3,609 $ 4,905
Current provision ............. 1,328 363 483 928 1,389
Charge-offs ................... (142) (16) (21) (80) (104)
Recoveries .................... 110 2 1 9 5
--------- ------- ------- ------- -------
Ending balance. $ 4,905 $ 4,466 $ 6,195 $ 4,466 $ 6,195
========= ======= ======= ======= =======
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 September 30, 2001
====================================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loan losses ............ $ 207 $ 151 $ 956 $ 799
Loans with no related allowance for loan losses. 4,844 - 3,993 -
------- ----- ------- -------
Total ........................................ $ 5,051 $ 151 $ 4,949 $ 799
======= ===== ======= =======
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.
<page>
5. 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 September 30, 2001 Stockholders' Equity
and ratio to total assets ............................... 7.9% $ 168,245
===
Net unrealized decrease in market value of assets
available for sale (net of applicable
income taxes) ........................................... 171
Goodwill.................................................. (2,317)
Disallowed servicing assets and deferred tax assets....... (25)
---------
Tangible capital and ratio to adjusted total assets ..... 7.9% $ 166,074 1.5% $ 31,642
=== ========= === ========
Tier 1 (core) capital and ratio to adjusted
total assets ............................................ 7.9% $ 166,074 3.0% $ 63,283 5.0% $105,472
=== ========= === ======== === ========
Tier 1 (core) capital and ratio to risk-weighted
total assets ............................................ 12.8% $ 166,074 4.0% $ 52,014 6.0% $78,021
==== ========= === ======== === =======
Allowable Tier 2 capital:
General loan valuation allowances ........................ 5,333
---------
Total risk-based capital and ratio to risk-weighted
total assets ............................................ 13.2% $ 171,407 8.0% $ 104,027 10.0% $130,034
==== ========= === ========= ==== ========
Total assets ............................................. $2,111,495
==========
Adjusted total assets .................................... $2,109,434
==========
Risk-weighted assets ..................................... $1,300,343
==========
<page>
6. EARNINGS PER SHARE The weighted-average number of shares used to
calculate basic and diluted earning per share, including the adjustments for the
Bank's leveraged Employee Stock Ownership Plan (ESOP) and stock options for the
three months ended September 30, 2000 and 2001, are as follows:
For the Three Months Ended For the Three Months Ended
September 30, 2000 September 30, 2001
---------------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator
Amount
======================================== =======================================
Net income ..........................$ 1,847,000 $ 2,313,000
=========== ===========
Basic EPS:
Income available to
common stockholders .................$ 1,847,000 15,677,944 $ 0.12 $ 2,313,000 15,254,071 $ 0.15
=========== ====== =========== ======
Effect of diluted shares:
Common stock adjustments. 129,992 156,317
Diluted EPS: ------- -------
Income available to
common stockholders ..............$ 1,847,000 15,807,936 $ 0.12 $ 2,313,000 15,410,388 $ 0.15
=========== ========== ====== =========== ========== ======
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 nine months ended September 30, 2000 and 2001, are as follows:
For the Nine Months Ended For the Nine Months Ended
September 30, 2000 September 30, 2001
----------------------------------------- --------------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
========================================= ============================================
Net income .........................$ 6,555,000 $ 4,172,000
Basic EPS: =========== ===========
Income available to
common stockholders ................$ 6,555,000 15,650,745 $ 0.42 $ 4,172,000 15,410,886 $ 0.27
=========== ====== =========== ======
Effect of diluted shares:
Common stock adjustments............ 113,382 149,020
Diluted EPS: ---------- ----------
Income available to
common stockholders ................$ 6,555,000 15,764,127 $ 0.42 $ 4,172,000 15,559,906 $ 0.27
=========== ========== ====== =========== ========== ======
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. At September 30, 2001 and 2000, the ESOP plans held 52,175 shares
and 13,041 shares, respectively which were not committed to be released.
<page>
7. OTHER COMPREHENSIVE INCOME (LOSS) An analysis of the changes in
Accumulated Other Comprehensive Loss for the periods ended September 30, 2000
and 2001, is as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
---------------------- --------------------------
Unrealized Unrealized
Losses Losses
on Securities on Securities
====================== ==========================
(In Thousands)
Beginning balance ...............................$ (8,443) $ (1,810) $ (6,098) $ (4,019)
Current-period change. 1,102 1,639 (1,243) 3,848
-------- -------- --------- ---------
Ending balance ..................................$ (7,341) $ (171) $ (7,341) $ (171)
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
September 30, 2000 September 30, 2001
--------------------------------- -----------------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Provision Amount Amount Provision Amount
================================== ===================================
(In Thousands)
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period .........................................$ 1,807 $ (705) $ 1,102 $ 2,686 $ (1,047) $ 1,639
Other comprehensive income (loss). $ 1,807 $ (705) $ 1,102 $ 2,686 $ (1,047) $ 1,639
For the Nine Months Ended For the Nine Months Ended
September 30, 2000 September 30, 2001
--------------------------------- -----------------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Benefit Amount Amount Provision Amount
================================= ====================================
(In Thousands)
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains (losses) arising
during period ........................................$ (2,038) $ 795 $ (1,243) $ 6,308 $ (2,460) $ 3,848
Other comprehensive income (loss). $ (2,038) $ 795 $ (1,243) $ 6,308 $ (2,460) $ 3,848
<page>
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.
The Company completed the mutual-to-stock conversion of its mutual holding
company parent on May 15, 2001 and the related common stock offering resulted in
the Company selling 8,695,943 shares of common stock for $10.00 per share to
certain customers of Fidelity Federal Bank & Trust, its benefit plans, including
the employee stock ownership plan, and to existing public stockholders of
Fidelity Bankshares, Inc. In addition, 7,048,207 shares were issued to the
existing stockholders based on an exchange rate of 2.4165 new shares of common
stock for each existing share. At the completion of the conversion, the company
had 15,744,150 shares outstanding
The conversion was accounted for as a change in corporate form with no
subsequent change in the historical basis of the Company's assets, liabilities
and equity. All references in the consolidated financial statements and notes
thereto to share data (including number of shares and per-share amounts) have
been restated giving retroactive recognition to the exchange rate.
Other Comprehensive Income/Loss.
Other Comprehensive Income for the nine months ended September 30, 2001 was
$3.8 million, representing an increase of $5.1 million compared to the same 2000
period. This increase in income resulted from an increase in the market value of
assets classified as available for sale which was caused by a decrease in market
interest rates for comparable instruments.
Other Comprehensive Income for the quarter ended September 30, 2001 was
$1.6 million, representing an increase of $537,000 compared to the same 2000
period. This increase in the income resulted from an increase in the market
value of assets classified as available for sale which was caused by a decrease
in market interest rates for comparable instruments.
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Changes in Financial Condition.
The Company's assets increased by $179.0 million to $2.1 billion at
September 30, 2001 compared to December 31, 2000. Net loans receivable increased
by $151.1 million, while cash and assets available for sale increased by $24.7
million. In addition, the Bank increased its investment in office properties and
equipment, primarily for new office sites, by $6.6 million, while all other
assets decreased by $3.5 million. Funds for the increase in assets were provided
primarily as a result of the completion of the mutual-to-stock conversion and
related common stock offering which raised $79.5 million, net of issuance costs.
Also the Bank increased its deposits by $64.4 million, together with increases
in other liabilities, principally other borrowed funds, of $29.2 million The
Company's equity at September 30, 2001 increased by $85.4 million from December
31, 2000, primarily as a result of the net conversion proceeds of $79.5 million.
Other Comprehensive Income increased by $5.1 million. Also affecting equity was
net income for the nine months of $4.2 million, which was offset by dividends
declared of $3.8 million.
Results of Operations.
Net income for the nine months ended September 30, 2001 was $4.2 million,
representing a decrease of $2.4 million compared to $6.6 million for the same
period in 2000. One of the primary reasons for this decrease, which are more
fully described below, was a one-time charge of $1.1 million during the nine
months ended September 30, 2001 relating to the Company's computer upgrade. Net
income for the nine months ended September 30, 2000 included non-recurring
income of approximately $2.4 million from the receipt of common stock in
connection with the demutualization of the John Hancock Financial Services
Company. The provision for loan losses increased by $461,000 in September 2001
compared to 2000. A decrease in provision for income taxes of $1.4 million
offset these amounts.
Net income for the quarter ended September 30, 2001 was $2.3 million,
representing an increase of $466,000 from $1.9 million for the same period in
2000. This increase, which is more fully described below, was principally the
result of an increase in net interest income of $3.2 million. Offsetting this
increase was an increase in operating expense of $2.4 million, and an increase
in the provision for income taxes of $395,000.
Interest Income.
Interest income for the nine months ended September 30, 2001, totaled
$104.2 million, representing an increase of $6.7 million or 6.9% compared to the
same period in 2000. The Bank's interest income from loans increased by $10.5
million, primarily as a result of an increase of 14.6% in the average balance of
loans to $1.4 billion from $1.2 billion for the nine months ended September 30,
2001 and 2000, respectively. Interest income from investment securities also
increased to $4.0 million for the nine months ended September 30, 2001 from $2.9
million for the 2000 period. This increase was due to an increase in the average
balance of investment securities of $30.6 million, which was slightly offset by
a decrease in the average yield of such securities to 6.13% in 2001 from 6.88%
in 2000. Another contributing factor was an increase in other investments of
$139,000 for the nine months ended September 30, 2001 compared to the 2000
period. Offsetting these increases was a decline in interest income from
mortgage-backed and other securities of $5.0 million principally resulting from
a decrease in the average balance of these securities to $303.9 million for the
nine months ended September 30, 2001 from $357.4 million for the nine months
ended September 30, 2000.
Interest income for the quarter ended September 30, 2001, totaled $34.7
million, representing an increase of $248,000 or .72% compared to the quarter
ended September 30, 2000. The primary reason for this increase was an increase
in the Bank's interest income from loans of $2.8 million, which resulted from an
increase of 18.6% in the average balance of loans to $1.5 billion from $1.3
billion for the quarter ended September 30, 2001 and 2000, respectively.
Interest income from investment securities also increased to $1.5 million for
the quarter ended September 30, 2001 compared to $1.3 million for the 2000
quarter. This increase was due to an increase in the average balance of
investment securities of $30.6 million, which was slightly offset by a decrease
in the average yield of such securities to 5.82% in 2001 from 7.17% in 2000.
Offsetting these increases, interest income from mortgage-backed and other
securities decreased by $2.3 million as the average balance of these securities
declined to $286.8 million for the quarter ended September 30, 2001 from $347.2
million for the quarter ended September 30, 2000. Interest income also decreased
on other investments by $392,000 to $573,000 for the quarter ended September 30,
2001 from $965,000 for the same quarter in 2000.
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Interest Expense.
Interest expense for the nine months ended September 30, 2001, totaled
$64.6 million, an increase of $2.1 million or 3.3% from the same period in 2000.
The principal cause for this increase was an increase in interest expense on
deposits of $2.3 million. The average balance of deposits increased to $1.5
billion for the nine ended September 30, 2001 compared to $1.4 billion for the
same period in 2000, but the cost of those deposits declined to 4.28% compared
to 4.49% for the same periods. Interest expense on borrowed funds decreased by
$238,000 caused primarily by a decrease in the average balance of such funds to
$328.4 million from $330.9 million and a decrease in the average cost to 6.32%
for the nine months ended September 30, 2001 from 6.37% for the comparable 2000
period.
Interest expense for the quarter ended September 30, 2001, totaled $19.7
million, a decrease of $2.9 million or 12.8% from the same quarter in 2000. The
principal cause for this decrease was a decline in interest expense on deposits
of $1.9 million. This resulted in the average yield on deposits decreasing to
3.81% for the quarter ended September 30, 2001 compared to 4.69% for the same
quarter in 2000. Also contributing, was a decrease in interest expense on
borrowed funds of $992,000, as the average balance of such funds decreased to
$330.5 million from $372.9 million and the average cost decreased to 6.18% for
the quarter ended September 30, 2001 from 6.54% for the comparable 2000 quarter.
Net Interest Income.
While the Company's interest income increased by $6.7 million for the nine
months ended September 30, 2001, compared to the same period in 2000, interest
expense also increased by $2.1 million, resulting in net interest income of
$39.7 million for the nine months ended September 30, 2001. This represents a
$4.6 million or 13.2% increase in net interest income when compared to the same
period in 2000. . During the quarter ended September 30, 2001, the Company's
interest income increased by $248,000 compared to the same quarter in 2000,
while interest expense decreased by $2.9 million, resulting in net interest
income of $15.0 million for the quarter ended September 30, 2001, $3.2 million
or 26.7% more than realized in 2000.
Provision for Loan Losses.
Our provision for loan losses increased by $461,000 to $1.4 million for the
nine months ended September 30, 2001 from $928,000 for the nine months ended
September 30, 2000, reflecting 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 September 30, 2001 of $6.2 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 .32% and .39% at September 30, 2001 and 2000, respectively.
The provision for loan losses was $483,000 for the quarter ended September
30, 2001, compared to $363,000 for the quarter ended September 30, 2000. The
provision for the quarter ended September 30, 2001 also reflects the increased
credit risk associated with increased originations of commercial real estate
mortgages, consumer loans and commercial business loans. Our financial
statements are prepared in accordance with generally accepted accounting
principles and, accordingly, allowances for loan losses are based on
management's estimate of the losses inherent in the loan portfolio. 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.
<page>
Other Income.
Other income for the nine months ended September 30, 2001 was $9.1 million,
a decrease of $590,000 compared to the nine months period ended September 30,
2000. We received approximately $2.4 million of common stock in connection with
the demutualization of John Hancock Financial Services during the nine months
ended September 30, 2000. No such amounts were received in the nine months ended
September 30, 2001, which results in a comparative decline in other income. The
decline was partially offset by an increase of $1.1 million in fees for other
banking services as well as an increase in service charges on deposit accounts
of $866,000 for the nine months ended September 30, 2001.
Other income for the quarter ended September 30, 2001 was $3.2 million, an
increase of $202,000 compared to the same quarter in 2000. This increase is
principally due to increases in fees for other banking services of $408,000 and
service charges on deposits of $279,000. Slightly offsetting these increases
were decreases in gain on sale of loans, investment and mortgage-backed
securities and other miscellaneous income of $460,000 and $25,000 for the
quarters ended September 30, 2001 and 2000, respectively.
Operating Expense.
Operating expenses increased by $7.3 million to $40.4 million for the nine
months ended September 30, 2001 as compared to the nine months ended September
30, 2000. During the nine months ended September 30, 2001, we incurred a
one-time charge of $1.1 million in other operating expense in connection with
our plans to upgrade our data processing services. In addition, employee
compensation and benefits increased by $3.3 million or 16.8%. This increase,
which includes normal salary increases, was primarily due to the 11.8% increase
in the number of full time equivalent employees from 553 at September 2000 to
618 at September 2001. Occupancy and equipment costs increased by $1.2 million
due in part to additional depreciation expenses relating to new computer
equipment and new branch facilities. Also contributing to this increase were
increases in marketing costs of $528,000 and other operating expense of $2.3
million for the nine months ended September 30, 2001 compared to 2000.
During the quarter ended September 30, 2001, operating expenses increased
by $2.4 million to $13.8 million compared to the quarter ended September 30,
2000. Employee compensation and benefits increased by $1.2 million. This
increase as stated above, is due largely to the increase in the number of full
time equivalent employees. Occupancy and equipment costs increased by $511,000
due in part, as explained above, to additional depreciation expenses relating to
new computer equipment and new branch facilities. Also contributing to this
increase were increases in marketing costs of $179,000 and other operating
expense of $507,000 for the quarter ended September 30, 2001 compared to 2000.
Partially offsetting these increases was a decrease in gain on real estate owned
of $20,000.
Income Taxes.
Provision for income taxes was $2.7 million for the nine months ended
September 30, 2001 compared to $4.1 million for the nine months ended September
30, 2000. This decrease was attributable to a decrease in income before
provision for income taxes of $3.8 million to $6.9 million in 2001 from $10.7
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.
The income tax provision was $1.5 million for the quarter ended September
30, 2001 compared to $1.1 million for the quarter ended September 30, 2000.
These expenses approximate the rates paid for Federal and state income taxes
applied to the Company's pre-tax income.
<page>
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 September 30, 2001,
the Company does not own any trading assets, other than $889,000 of assets held
by the SMPIAP Trust which can be actively traded by and are held for the benefit
of senior management. Income in these accounts accrues to and losses are solely
absorbed by senior management. At September 30, 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 September 30, 2001.
Changes in Rates Net Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change %Change
---------------- ------------------------------------
+200bp 229,791 (40,706) (15.0%)
+100bp 252,054 (18,443) ( 6.8%)
-0- 270,497 - -
-100bp 272,406 1,909 0.7%
-200bp 268,820 (1,677) (0.6%)
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.
<page>
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 .88% .88% .68% .67% 1.69% 100.00%
Passbook, club accounts .00% .00% .27% .77% 10.29% 100.00%
Money market deposit accounts 1.56% 1.56% .00% .00% 36.55% 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.
<page>
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 June 30, 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 16.60% during the month of September 2001.
Liquidity ratios averaged 18.48% for the quarter ended September 30, 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 $53.8 million at September 30, 2001. Other assets qualifying for
liquidity at September 30, 2001, including unpledged mortgage-backed securities
guaranteed by the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation, were $236.7 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.
<page>
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At September 30, 2001, the Bank had $257.0 million in advances
from the FHLB. At September 30, 2001, the Bank had commitments outstanding to
originate or purchase loans of $165.3 million. This amount does not include the
unfunded portion of loans in process. Certificates of deposit scheduled to
mature in less than one year at September 30, 2001, totaled $711.1 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 June 30,
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 adoption of this
standard did not have a material effect on the Company's consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company has not yet determined the impact, of any, the
adoption of SFAS No. 144 will have on the Company's consolidated financial
statements.
<page>
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation,
nor is the Company aware of any pending litigation, other than
legal proceedings incident to the business of the Company, such as
foreclosure actions filed on behalf of the Company. Management,
therefore, believes the results of any current litigation would be
immaterial to the consolidated financial condition or results of
operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under
Consolidated Financial Statements (pages 2 through 5), Notes
to Unaudited Consolidated Financial Statements (pages 6
through 11) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 12
through 20), and are incorporated by reference, herein.
<page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIDELITY BANKSHARES, INC.
Date: November 13, 2001 By: /S/Vince A. Elhilow
-----------------------------
Vince A. Elhilow
President and Chief Executive
Officer
Date: November 13, 2001 By: /S/Richard D. Aldred
-----------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer