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, 2002 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 15,792,206 shares
of the Registrant's common stock par value $ .10 per share outstanding as of May
1, 2002.
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................1
Consolidated Statements of Financial Condition as of December 31, 2001
and March 31, 2002..................................................2
Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2002.............................................3
Consolidated Statements of Comprehensive Operations for the three months
ended March 31, 2001 and 2002.......................................4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2002.............................................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,
2001 2002
=============== =====================
ASSETS (In Thousands, except share data) CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 52,944 $ 53,119
Interest-bearing deposits................................................ 43,347 195,283
----------- -----------
Total cash and cash equivalents...................................... 96,291 248,402
----------- -----------
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 94,522 94,746
Mortgage-backed securities............................................... 201,533 175,075
Corporate debt securities................................................ 36,138 36,506
----------- -----------
Total assets available for sale...................................... 332,193 306,327
LOANS RECEIVABLE, Net......................................................... 1,583,425 1,667,220
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 59,235 60,256
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 14,577 15,763
REAL ESTATE OWNED, Net........................................................ 219 73
ACCRUED INTEREST RECEIVABLE................................................... 10,745 10,400
DEFERRED INCOME TAX ASSET..................................................... 5,253 5,256
OTHER ASSETS 34,997 35,174
----------- -----------
TOTAL ASSETS $ 2,136,935 $ 2,348,871
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 1,559,436 $ 1,738,560
OTHER BORROWED FUNDS.......................................................... 36,326 37,814
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 290,266 312,337
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 3,207 8,817
DRAFTS PAYABLE................................................................ 12,136 7,043
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................... 28,750 28,750
OTHER LIABILITIES............................................................. 29,202 35,591
----------- -----------
TOTAL LIABILITIES........................................................ 1,959,323 2,168,912
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
15,781,244 at December 31, 2001 and 15,790,056 shares outstanding at March 1,578 1,579
31, 2002
ADDITIONAL PAID IN CAPITAL.................................................... 117,889 117,985
RETAINED EARNINGS - substantially restricted.................................. 66,839 69,317
TREASURY STOCK - at cost, 338,332 shares at December 31, 2001 and
330,794 shares at March 31, 2002......................................... (1,721) (1,705)
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN....................... (4,969) (4,870)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (2,004) (2,347)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY............................................... 177,612 179,959
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 2,136,935 $ 2,348,871
=========== ===========
See Notes to Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Unaudited
For the
Three Months Ended
March 31,
2001 2002
========= ====================
(In Thousands, except share data)
Interest income:
Loans............................................................. $ 27,417 $ 29,586
Investment securities............................................. 832 980
Other investments................................................. 1,017 768
Mortgage-backed and corporate debt securities..................... 5,332 2,343
---------- ----------
Total interest income......................................... 34,598 33,677
---------- ----------
Interest expense:
Deposits.......................................................... 17,486 10,474
Advances from Federal Home Loan Bank and other borrowings......... 5,292 5,391
---------- ----------
Total interest expense........................................ 22,778 15,865
---------- ----------
Net interest income.................................................... 11,820 17,812
Provision for loan losses.............................................. 580 501
---------- ----------
Net interest income after provision for loan losses.................... 11,240 17,311
---------- ----------
Other income:
Service charges on deposit accounts............................... 1,172 1,618
Fees for other banking services................................... 1,307 1,656
Net gain on sale of loans, mortgage-backed securities and investments 241 22
Miscellaneous..................................................... 294 250
---------- ----------
Total other income............................................ 3,014 3,546
---------- ----------
Operating expense:
Employee compensation and benefits................................ 7,060 8,470
Occupancy and equipment........................................... 2,442 2,706
Gain on real estate owned......................................... (10) (14)
Marketing......................................................... 460 428
Federal deposit insurance premium................................. 69 72
Miscellaneous..................................................... 3,312 2,592
---------- ----------
Total operating expense....................................... 13,333 14,254
---------- ----------
Income before provision for income taxes............................... 921 6,603
---------- ----------
Provision for income taxes:
Current........................................................... 319 2,378
Deferred.......................................................... 44 217
---------- ----------
Total provision for income taxes.............................. 363 2,595
---------- ----------
Net income............................................... $ 558 $ 4,008
========== ==========
Earnings per share:
Basic............................................................. $ 0.04 $ 0.26
========== ==========
Diluted........................................................... $ 0.03 $ 0.26
========== ==========
See Notes to Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
Unaudited
For the
Three Months Ended
March 31,
2001 2002
=============== ===================
(In Thousands)
Net Income.................................................................... $ 558 $ 4,008
Other comprehensive income, net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period.............. 1,841 (343)
----------- ------------
Comprehensive income.......................................................... $ 2,399 $ 3,665
=========== ===========
- --------------------------------------------------------------------------------
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Unaudited
For the Three Months Ended
March 31,
2001 2002
========= ==============
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 558 $ 4,008
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 827 888
ESOP compensation expense........................................... - 179
Accretion of discounts, amortization of premiums and goodwill, and (293) (767)
other deferred yield items.........................................
Provision for loan losses........................................... 580 501
Provisions for losses and net (gains) losses on sales of
real estate owned.................................................. 16 (30)
Net (gain) loss on sale of:
Loans......................................................... (240) (22)
Mortgage-backed securities.................................... (1) -
Office properties and equipment............................... 76 8
Increase in accrued interest receivable................................ 462 345
Decrease (increase) in other assets.................................... 1,275 (165)
Increase (decrease) in drafts payable.................................. 3,164 (5,093)
Increase in deferred income taxes...................................... 43 855
(Decrease) increase in other liabilities............................... (4,330) 6,385
--------- --------
Net cash provided by operating activities..................... 2,137 7,092
-------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (54,275) (73,036)
Principal payments received on mortgage-backed securities.............. 7,767 37,460
Purchases of:
Loans............................................................... (5,854) (11,513)
Mortgage-backed securities.......................................... - (11,473)
Federal Home Loan Bank stock........................................ - (1,186)
Investment securities............................................... (72,000) (50,000)
Office properties and equipment..................................... (4,033) (1,947)
Proceeds from sales of:
Loans............................................................... 34,356 1,326
Real estate acquired in settlement of loans......................... - 219
Mortgage-backed securities available for sale....................... 94 -
Proceeds from maturities of municipal bonds and government and agency 27,115 49,000
securities
Other.................................................................. 269 (631)
-------- ---------
Net cash used for investing activities........................ (66,561) (61,781)
-------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of issuance costs.......... 33 33
Cash dividends paid.................................................... (743) (1,526)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 43,307 193,295
Certificates of deposit............................................. 11,555 (14,171)
Advances from Federal Home Loan Bank................................ (3,527) 22,071
Other borrowed funds................................................ 31,182 1,488
Advances by borrowers for taxes and insurance....................... 5,057 5,610
-------- --------
Net cash provided by financing activities..................... 86,864 206,800
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 22,440 152,111
CASH AND CASH EQUIVALENTS, Beginning of period......................... 100,309 96,291
-------- --------
CASH AND CASH EQUIVALENTS, End of period............................... $122,749 $248,402
======== ========
See Notes to 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 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 2001 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, 2002 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 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 has
adopted this accounting principle beginning January 1, 2001.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations". The
statement makes significant changes to the accounting for business combinations,
principally by the elimination of the pooling-of-interests method of accounting
for business combinations. This statement, which is effective for business
combinations completed after June 30, 2001, also clarifies the criteria for
recognition of intangible assets separately from goodwill. The Company has had
no business combinations subsequent to the effective date of this promulgation,
but would comply with the provisions of SFAS No. 141 in the event of future
acquisitions.
In June 2001, the FASB issued SFAF No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 discontinues the practice of amortizing goodwill and
intangible assets with indefinite lives and initiates an annual review for
impairment of these assets. The Company has adopted this accounting principle
beginning January 1, 2002. The Company does not anticipate any impairment in the
carrying value of goodwill arising from previous acquisitions. Amortization of
goodwill included in the Company's income statement for the quarter ended March
31, 2001 was $63,000.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement applies to legal obligations associated
with the retirement of a tangible long-lived asset that results from the
acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lessee obligations. The statement requires
these obligations be recorded at fair value as of the date of retirement and is
effective for fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of this accounting principle will have a significant
effect on it's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement establishes a
single accounting model for long-lived assets to be disposed of by sale, and
requires that long-lived assets to be abandoned, exchanged for similar
productive assets, or distributed to owners in a spinoff be considered held and
used until disposed. The Company has adopted this standard beginning January 1,
2002. The adoption did not have an effect on the Company's financial statements.
Certain amounts in the financial statements have been reclassified to
conform with the March 31, 2002 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, 2001 and March 31, 2002, consist of the
following:
December 31, March 31,
2001 2002
============== =================
(In Thousands)
One-to-four single family, residential real estate mortgages......... $ 944,046 $ 962,133
Commercial and multi-family real estate mortgages.................... 233,157 319,429
Real estate construction-primarily residential....................... 284,495 295,830
Land loans-primarily residential..................................... 25,627 31,677
---------- ----------
Total first mortgage loans........................................... 1,487,325 1,609,069
Consumer loans....................................................... 105,077 113,054
Commercial business loans............................................ 188,045 141,765
---------- ----------
Total gross loans.................................................... 1,780,447 1,863,888
Less:
Undisbursed portion of loans in process......................... 192,464 191,604
Unearned discounts, premiums and deferred loan fees (costs), net (2,289) (2,274)
Allowance for loan losses....................................... 6,847 7,338
---------- ----------
Loans receivable-net................................................. $1,583,425 $1,667,220
========== ==========
4. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the
year ended December 31, 2001 and the three months ended March 31, 2001 and 2002,
is as follows:
For the Year For the Three Months
Ended Ended
December 31, March 31,
2001 2001 2002
=========== =========== ===========
(In Thousands)
Balance at beginning of period.............................. $ 4,905 $ 4,905 $ 6,847
Current provision........................................... 2,054 580 501
Charge-offs................................................. (117) (34) (16)
Recoveries.................................................. 5 1 6
----------- ----------- -----------
Ending balance.............................................. $ 6,847 $ 5,452 $ 7,338
=========== =========== ===========
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, 2001 March 31, 2002
=========================== ============================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------- ------------- -------------- -------------
Impaired loan balances and related allowances:
Loans with related allowance for loan losses................ $ 1,242 $ 1,093 $ 1,716 $ 1,237
Loans without related allowance for loan losses............. 5,680 - 6,654 -
-------- -------- -------- --------
$ 6,922 $ 1,093 $ 8,370 $ 1,237
======== ======== ======== ========
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.
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, 2001 Stockholders'
Equity and ratio to total assets 8.0% $170,463
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,004
Goodwill............................. (2,175)
Disallowed servicing assets.......... (22)
--------
Tangible capital and ratio to
adjusted total assets........... 8.0% $170,270 1.5% $ 32,064
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 8.0% $170,270 3.0% $ 64,129 5.0% $ 106,881
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 12.0% $170,270 4.0% $ 56,524 6.0% $ 84,785
======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 5,633
--------
Total risk-based capital and ratio to
risk-weighted total assets...... 12.4% $175,903 8.0% $ 113,047 10.0% $ 141,309
======== ======== ====== ========= ====== =========
Total assets......................... $2,136,529
==========
Adjusted total assets................ $2,137,617
==========
Risk-weighted assets................. $1,413,088
==========
As of March 31, 2002 Stockholders'
Equity and ratio to total assets 7.4% $174,513
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,347
Goodwill............................. (2,175)
Disallowed servicing assets.......... (18)
--------
Tangible capital and ratio to
adjusted total assets........... 7.4% $174,667 1.5% $ 35,238
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.4% $174,667 3.0% $ 70,476 5.0% $ 117,460
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 11.3% $174,667 4.0% $ 61,985 6.0% $ 92,977
======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 6,053
----------
Total risk-based capital and ratio to
risk-weighted total assets...... 11.7% $180,720 8.0% $ 123,970 10.0% $ 154,962
======== ======== ====== ========= ====== =========
Total assets......................... $2,347,548
==========
Adjusted total assets................ $2,349,203
==========
Risk-weighted assets................. $1,549,619
==========
<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 March
31, 2001, retroactively adjusted to reflect the 2001 stock offering, are as
follows:
For the Three Months Ended
March 31, 2001
---------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
========================================
Net income................. $ 558,000
Basic EPS:
Mortgage loans.............
Income available to
common stockholders... $ 558,000 15,737,549 $ 0.04
=========
Effect of diluted shares:
Common stock options.. 152,539
-------
Diluted EPS:
Income available to
common stockholders... $ 558,000 15,890,088 $ 0.03
============ ========== =========
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, 2002, are as follows:
For the Three Months Ended
March 31, 2002
---------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
========================================
Net income................. $4,008,000
Basic EPS:
Mortgage loans.............
Income available to
common stockholders... $4,008,000 15,286,944 $ 0.26
=========
Effect of diluted shares:
Common stock options.. 150,513
----------
Diluted EPS:
Income available to
common stockholders... $4,008,000 15,437,457 $ 0.26
=========== ========== =========
<page>
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.
7. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended March 31, 2001 and 2002, is as follows:
For the Three For the Three
Months Ended Months Ended
March 31, 2001 March 31, 2002
------------------ ----------------
Unrealized Unrealized
Losses Losses
On Securities On Securities
================== ========== =================
(In Thousands)
Beginning Balance............................................. $ (4,019) $ (2,004)
Current-period change......................................... 1,841 (343)
--------- --------
Ending balance................................................ $ (2,178) $ (2,347)
========= ========
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, 2001 March 31, 2002
-------------------------------- --------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
========== ========== ========== === ========== ========== ==========
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains
(losses) arising during period......... $ 3,018 $(1,177) $ 1,841 $ (562) $ 219 $ (343)
======= ======== ======= ======== ======= ========
<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 Loss for the quarter ended March 31, 2002 was $343,000,
compared to Other Comprehensive Income of $1.0 million for the quarter ended
March 31, 2001. This represents a decrease of $2.2 million. This decrease in
Other Comprehensive Income resulted from a decrease in the market value of
assets classified as available for sale.
<page>
Changes in Financial Condition.
The Company's assets increased by $211.9 million to $2.3 billion at March
31, 2002 compared to December 31, 2001. Net loans receivable increased by $83.8
million. Cash increased by $151.9 million, but was accompanied by a decline in
assets available for sale of $25.9 million. The increase in cash is primarily
related to the Company's success in increasing core deposits during the quarter.
In addition, the Bank increased its investment in office properties and
equipment, primarily for new office sites, by $1.0 million, while all other
assets increased by $875,000. Funds for the increase in assets were provided
primarily as a result of an increase in deposits of $179.1 million, together
with increases in other liabilities in the amount of $30.5 million, of which
advances from Federal Home Loan Bank were $22.1 million. The Company's equity at
March 31, 2002 increased by $2.3 million from December 31, 2001. Accumulated
Other Comprehensive Loss increased by $343,000. Also affecting equity was net
income for the quarter of $4.0 million, which was partially offset by dividends
declared of $1.5 million.
Results of Operations.
Net income for the quarter ended March 31, 2002 was $4.0 million,
representing an increase of $3.5 million compared to $558,000 for the same
quarter in 2001. The primary reasons for this increase, which are more fully
described below, was a decrease in interest expense on deposits of $7.0 million
and an increase in interest income from loans of $2.2 million. Partially
offsetting this increase was an increase in the income tax provision to $2.6
million from $363,000 for the quarters ended March 31, 2002 and 2001,
receptively.
Interest Income.
Interest income for the quarter ended March 31, 2002, totaled $33.7
million, representing a decrease of $921,000 or 2.7% compared to the same
quarter in 2001. The Bank's interest income from loans increased by $2.2
million, primarily as a result of an increase of 18% in the average balance of
loans to $1.6 billion from $1.4 billion for the quarter ended March 31, 2002 and
2001, respectively. Interest income from investment securities also increased to
$980,000 for the quarter ended March 31, 2002 from $832,000 for the 2001
quarter. This increase was due to an increase in the average balance of
investment securities of $48.9 million, which was slightly offset by a decrease
in the average yield of such securities to 3.78% in 2002 from 6.08% in 2001.
There was a decline in interest income from mortgage-backed and other securities
of $3.0 million principally resulting from a decrease in the average balance of
these securities to $220.9 million for the quarter ended March 31, 2002 from
$319.5 million for the quarter ended March 31, 2001. Interest income also
decreased on other investments by $249,000 due mainly to a decrease in the
average yield on these investments to 2.17% from 5.85% for the quarters ended
March 31, 2002 and 2001, respectively.
Interest Expense.
Interest expense for the quarter ended March 31, 2002, totaled $15.9
million, a decrease of $6.9 million or 30.3% from the same quarter in 2001. The
principal cause for this decline was a decrease in interest expense on deposits
of $7.0 million. The average balance of deposits increased to $1.6 billion for
the quarter ended March 31, 2002 compared to $1.5 billion for the quarter ended
March 31, 2001, but the cost of those deposits declined to 2.54% compared to
4.62% for the same quarters. The decline in the cost of deposits had two
principal causes. The Bank's core deposits as a percentage of total deposits
improved from 40.9% at March 31, 2001 to 52.7% at March 31, 2002. In addition,
the majority of the Bank's certificates of deposit repriced in a lower rate
environment. Interest expense on borrowed funds increased by $99,000 caused
primarily by an increase in the average balance of such funds to $375.4 million
from $327.3 million. Partially offsetting this increase was a decrease in the
average cost to 5.74% for the quarter ended March 31, 2002 from 6.47% for the
comparable 2001 quarter.
Net Interest Income.
While the Company's interest income decreased by $921,000 for the quarter
ended March 31, 2002, compared to the same period in 2001, interest expense also
decreased by $6.9 million, resulting in net interest income of $17.8 million for
the quarter ended March 31, 2002. This represents a $6.0 million or 50.7%
increase in net interest income when compared to the same period in 2001.
<page>
Provision for Loan Losses.
Our provision for loan losses decreased by $79,000 to $501,000 for the
quarter ended March 31, 2002 from $580,000 for the quarter ended March 31, 2001.
The Bank's total allowance for loan losses at March 31, 2002 of $7.3 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% at March 31, 2002 and 2001, respectively.
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.
Other Income.
Other income for the quarter ended March 31, 2002 was $3.5 million, an
increase of $532,000 compared to the quarter ended March 31, 2001. This increase
is principally due to increases in service charges on deposit accounts,
resulting principally from the improvement in core deposits, of $446,000 and
fees for other banking services of $349,000. These increases were partially
offset by a decrease of $219,000 in net gain on sale of loans, mortgage-backed
securities and investments as well as a decrease in other miscellaneous income
of $44,000 for the quarter ended March 31, 2002 to the comparable 2001 quarter.
Operating Expense.
Operating expenses increased by $921,000 to $14.3 million for the quarter
ended March 31, 2002 as compared to the quarter ended March 31, 2001. Employee
compensation and benefits increased by $1.4 million. This increase, which
includes normal salary increases, also reflects an increase in the number of
full time equivalent employees from 596 at March 2001 to 635 at March 2002.
Occupancy and equipment costs increased by $264,000 due in part to additional
depreciation expenses relating to new computer equipment and new branch
facilities. Also contributing to this increase was a slight increase in federal
deposit insurance premiums of $3,000. Partially offsetting these increases was a
decrease in marketing expense of $32,000 and a decrease in other operating
expense of $720,000 for the quarters ended March 31, 2002 and 2001,
respectively. Other operating expense for the quarter ended March 31, 2001
included a $1.1 million charge relating to the termination of a data processing
service contract.
Income Taxes.
Provision for income taxes was $2.6 million for the quarter ended March 31,
2002 compared to $363,000 for the quarter ended March 31, 2001. This increase
was attributable to an increase in income before provision for income taxes of
$5.7 million to $6.6 million in 2002 from $921,000 in 2001. These expenses
approximate the rates paid by the Company for Federal and state income taxes
applied to the Company's pre-tax income.
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, 2002, the
Company does not own any trading assets, other than $1,097,000 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, 2002, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.
<page>
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, 2002.
Changes in Rates Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
============ ========== ============= =============
(Dollars in Thousands)
+200bp $ 259,677 $ (32,402) (11.09%)
+100bp 272,018 (20,061) (6.87%)
-0- 292,079 0 0.0%
-100bp 289,267 (2,812) (0.96%)
-200bp 281,228 (10,851) (3.72%)
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 .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% 0.00% 0.00% 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 16.81% during the month of March 2002. Liquidity
ratios averaged 16.01% for the quarter ended March 31, 2002. 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 $195.3 million at March 31, 2002. Other assets qualifying for
liquidity at March 31, 2002, including unpledged mortgage-backed securities
guaranteed by the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation, were $124.3 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, 2002, the Bank had $312.3 million in advances from
the FHLB. At March 31, 2002, the Bank had commitments outstanding to originate
or purchase loans of $186.1 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, 2002, totaled $692.3 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
<page>
New Accounting Prononucements - 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 has adopted this accounting principle beginning
January 1, 2001.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations". The
statement makes significant changes to the accounting for business combinations,
principally by the elimination of the pooling-of-interests method of accounting
for business combinations. This statement, which is effective for business
combinations completed after June 30, 2001, also clarifies the criteria for
recognition of intangible assets separately from goodwill. The Company has had
no business combinations subsequent to the effective date of this promulgation,
but would comply with the provisions of SFAS No. 141 in the event of future
acquisitions.
In June 2001, the FASB issued SFAF No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 discontinues the practice of amortizing goodwill and
intangible assets with indefinite lives and initiates an annual review for
impairment of these assets. The Company has adopted this accounting principle
beginning January 1, 2002. The Company does not anticipate any impairment in the
carrying value of goodwill arising from previous acquisitions. Amortization of
goodwill included in the Company's income statement for the quarter ended March
31, 2001 was $63,000.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement applies to legal obligations associated
with the retirement of a tangible long-lived asset that results from the
acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lessee obligations. The statement requires
these obligations be recorded at fair value as of the date of retirement and is
effective for fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of this accounting principle will have a significant
effect on it's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement establishes a
single accounting model for long-lived assets to be disposed of by sale, and
requires that long-lived assets to be abandoned, exchanged for similar
productive assets, or distributed to owners in a spinoff be considered held and
used until disposed. The Company has adopted this standard beginning January 1,
2002. The adoption did not have an effect on the Company's 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 13, 2002 By: /S/Vince A. Elhilow
------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: May 13, 2002 By: /S/Richard D. Aldred
------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer