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, 2003
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) 803-9900
- --------------------------------------------------------------------------------
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 14,940,354 shares
of the Registrant's common stock par value $ .10 per share outstanding as of May
2, 2003.
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..............................................1
Unaudited Consolidated Statements of Financial Condition as of
December 31, 2002 and March 31, 2003..........................1
Unaudited Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2003.........................2
Unaudited Consolidated Statements of Comprehensive Operations for
the three months ended March 31, 2002 and 2003................3
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2003..........................4
Notes to Unaudited Consolidated Financial Statements..............5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................12
Item 3. Quantitative and Qualitative Disclosure About Market Risk........17
Item 4. Controls and Procedures..........................................18
PART II. OTHER INFORMATION...............................................19
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, March 31,
2002 2003
================= =======================
ASSETS (In thousands, except share and per share
data)
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 66,178 $ 67,359
Interest-bearing deposits................................................ 63,488 95,771
----------- -----------
Total cash and cash equivalents...................................... 129,666 163,130
----------- -----------
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 89,879 50,808
Mortgage-backed securities............................................... 109,755 349,107
Corporate debt securities................................................ 35,384 35,093
----------- -----------
Total assets available for sale...................................... 235,018 435,008
LOANS RECEIVABLE, Net......................................................... 1,935,999 1,955,141
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 67,784 68,397
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 12,919 13,874
REAL ESTATE OWNED, Net........................................................ - 726
ACCRUED INTEREST RECEIVABLE................................................... 9,698 10,386
DEFERRED INCOME TAX ASSET..................................................... 6,785 6,932
OTHER ASSETS 41,528 45,753
----------- -----------
TOTAL ASSETS $ 2,439,397 $ 2,699,347
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 1,898,341 $ 2,128,074
OTHER BORROWED FUNDS.......................................................... 44,416 34,109
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 253,371 274,966
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 3,185 9,594
DRAFTS PAYABLE................................................................ 6,181 7,367
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................... 28,750 28,750
OTHER LIABILITIES............................................................. 36,066 43,847
----------- -----------
TOTAL LIABILITIES........................................................ 2,270,310 2,526,707
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
15,869,787 shares at December 31, 2002 and 15,919,278 shares at March 31, 2003 1,587 1,592
ADDITIONAL PAID IN CAPITAL.................................................... 125,648 125,823
RETAINED EARNINGS - substantially restricted.................................. 77,687 81,360
TREASURY STOCK - at cost, 1,340,420 shares at December 31, 2002 and
1,341,842 shares at March 31, 2003....................................... (21,705) (21,871)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan............................................ (4,609) (4,518)
Recognition and retention plan........................................... (5,986) (5,560)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (3,535) (4,186)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................... 169,087 172,640
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 2,439,397 $ 2,699,347
============ ===========
See Notes to Unaudited Consolidated Financial Statements.
1
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Three Months Ended
March 31,
2002 2003
============== ==================
(In Thousands, except per share
data)
Interest income:
Loans............................................................. $ 29,586 $ 31,881
Investment securities............................................. 980 397
Other investments................................................. 768 524
Mortgage-backed and corporate debt securities..................... 2,343 2,029
---------- ----------
Total interest income......................................... 33,677 34,831
---------- ----------
Interest expense:
Deposits.......................................................... 10,474 9,428
Advances from Federal Home Loan Bank and other borrowings......... 5,391 4,618
---------- ----------
Total interest expense........................................ 15,865 14,046
---------- ----------
Net interest income.................................................... 17,812 20,785
Provision for loan losses.............................................. 501 790
---------- ----------
Net interest income after provision for loan losses.................... 17,311 19,995
---------- ----------
Other income:
Service charges on deposit accounts............................... 1,618 1,902
Fees for other banking services................................... 1,831 2,294
Net gain on sale of loans......................................... 22 2,559
Miscellaneous..................................................... 250 256
---------- ----------
Total other income............................................ 3,721 7,011
---------- ----------
Operating expense:
Employee compensation and benefits................................ 8,495 11,096
Occupancy and equipment........................................... 2,706 3,416
(Gain)/loss on real estate owned.................................. (14) 63
Marketing......................................................... 428 497
Federal deposit insurance premium................................. 72 77
Miscellaneous..................................................... 2,742 3,511
---------- ----------
Total operating expense....................................... 14,429 18,660
---------- ----------
Income before provision for income taxes............................... 6,603 8,346
---------- ----------
Provision for income taxes:
Current........................................................... 2,378 2,960
Deferred.......................................................... 217 269
---------- ----------
Total provision for income taxes.............................. 2,595 3,229
---------- ----------
Net income............................................... $ 4,008 $ 5,117
========== ==========
Earnings per share:
Basic............................................................. $ 0.26 $ 0.36
========== ==========
Diluted........................................................... $ 0.26 $ 0.35
========== ==========
See Notes to Unaudited Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
For the
Three Months Ended
March 31,
2002 2003
================ ==================
(In Thousands)
Net Income.................................................................... $ 4,008 $ 5,117
Other comprehensive income, net of tax:
Unrealized loss on assets available for sale:
Unrealized holding loss arising during period........................ (343) (651)
------------ ------------
Comprehensive income.......................................................... $ 3,665 $ 4,466
=========== ===========
See Notes to Unaudited Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
3
<page>
For the Three Months Ended
March 31,
2002 2003
========= =================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 4,008 $ 5,117
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 888 985
ESOP and recognition and retention plan compensation expense........ 179 599
Accretion of discounts, amortization of premiums and goodwill, and (767) (638)
other deferred yield items.........................................
Provision for loan losses........................................... 501 790
Provisions for losses and net (gains) losses on sales of
real estate owned................................................. (30) -
Net (gain) loss on sale of:
Loans......................................................... (22) (2,559)
Office properties and equipment............................... 8 -
(Increase) decrease in accrued interest receivable.................. 345 (688)
Increase in other assets............................................ (165) (4,106)
Increase (decrease) in drafts payable............................... (5,093) 4,182
Increase (decrease) in deferred income taxes........................ 855 (147)
Increase in other liabilities....................................... 6,385 7,774
-------- --------
Net cash provided by operating activities..................... 7,092 11,309
-------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (73,036) (91,387)
Principal payments received on mortgage-backed securities.............. 37,460 29,902
Purchases of:
Loans............................................................... (11,513) (12,231)
Mortgage-backed securities.......................................... (11,473) (270,201)
Federal Home Loan Bank stock........................................ (1,186) (955)
Investment securities............................................... (50,000) (40,000)
Office properties and equipment..................................... (1,947) (1,751)
Proceeds from sales of:
Loans............................................................... 1,326 86,431
Real estate acquired in settlement of loans......................... 219 -
Proceeds from maturities of municipal bonds and government and agency 49,000 79,000
securities
Other.................................................................. (631) 252
--------- --------
Net cash used for investing activities........................ (61,781) (220,940)
-------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options, 33 108
net of issuance costs..................................................
Purchase of treasury stock............................................. - (10)
Cash dividends paid.................................................... (1,526) (1,437)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 193,295 240,152
Certificates of deposit............................................. (14,171) (10,419)
Advances from Federal Home Loan Bank................................ 22,071 21,595
Other borrowed funds................................................ 1,488 (10,307)
Advances by borrowers for taxes and insurance....................... 5,610 3,413
-------- --------
Net cash provided by financing activities..................... 206,800 243,095
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 152,111 33,464
CASH AND CASH EQUIVALENTS, Beginning of period......................... 96,291 129,666
-------- --------
CASH AND CASH EQUIVALENTS, End of period............................... $248,402 $163,130
======== ========
See Notes to Unaudited Consolidated Financial Statements.
4
<page>
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 2002 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, 2003 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 December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of Statement 148 became effective for interim periods beginning after
December 15, 2002. See note 2 - Stock Options, in the unaudited consolidated
financial statements.
In November 2002, the FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. This interpretation requires
elaborating on the disclosures that must be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure requirements of
this Interpretation became effective for statements issued after December 15,
2002 and its recognition requirements are applicable for guarantees issued or
modified after December 31, 2002. The adoption of this statement did not have a
material impact on the Company's financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The provisions of this Interpretation are effective immediately
for variable interest companies created after January 31, 2003, and variable
interest after that date. The provisions of this Interpretation are effective in
the first fiscal year or interim period beginning after June 15, 2003, for
variable interest companies in which an enterprise holds a variable interest
that it acquired before February 1, 2003. This statement is not expected to have
a material effect on the Company's financial statements.
Certain amounts in the financial statements have been reclassified to conform
with the March 31, 2003 presentation.
5
<page>
2. STOCK OPTION PLANS
At March 31, 2003, the Company has three stock-based compensation plans. The
Company accounts for these plans using the intrinsic value method.
prescribed by APB Opinion No. 25 "Accounting for Stock Issued to Employees", and
related interpretations. Accordingly, no stock-based employee compensation cost
is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation.
For the Three Months
Ended March 31,
2002 2003
-------------- -----------------
(In Thousands, except per share data)
Net Income, as reported...................................................... $ 4,008 $ 5,117
Add: Total stock-based employee compensation expense
included in reported net earnings, net of related tax effects...... - 336
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards,
net of related tax effects......................................... - (461)
--------- ---------
Pro forma net income............................ $ 4,008 $ 4,992
========= =========
Basic - as reported........................... 0.26 0.36
Basic - pro forma............................. 0.26 0.35
Diluted - as reported......................... 0.26 0.35
Diluted - pro forma........................... 0.26 0.34
The Company has reserved 550,237 shares of common stock under our 1994 Incentive
Stock Option Plan, which was approved by stockholders on January 7, 1994. The
plan provides for the granting of options to key employees until it expires on
January 6, 2004. All options were granted at the closing price on the date of
grant and were exercisable at a rate of twenty percent per year, not to exceed
ten years. At March 31, 2002 and 2003 there were 94,597 and 30,570 options
outstanding and exercisable. All of these options expire on January 6, 2004.
The Company has reserved 183,410 shares of common stock under our 1994 Stock
Option Plan for Outside Directors, which was approved by stockholders on January
7, 1994. The plan provides for the granting of options to directors until it
expires on January 6, 2004. All options were granted at the closing price on the
date of grant and are exercisable at any time up to ten years. At March 31, 2002
and 2003 there were 97,519 and 66,014 options outstanding and exercisable. All
of these options expire on January 6, 2004.
On May 21, 2002, the Company adopted and stockholders approved the 2002
Incentive Stock Benefit Plan. Under the 2002 plan, the Company has reserved
869,594 shares of common stock, of which options to purchase 829,950 shares were
granted to key employees and outside directors. The term of the stock option
awards is ten years from the date of grant. The 703,900 option awards granted to
outside directors and certain executive officers will vest commencing with the
first 16 2/3% vested on the date of grant and the remaining shares vesting at 16
2/3% per year over a 5 year period. The remaining 126,050 options granted to
other key employees vest at a rate of 20% each year and will be fully vested
five years after the date of grant. At March 31, 2003, 39,644 options remained
available for grant.
6
<page>
3. LOANS RECEIVABLE
Loans receivable at December 31, 2002 and March 31, 2003, consist of the
following:
December 31, March 31,
2002 2003
============== =================
(In Thousands)
One-to-four single family, residential real estate mortgages......... $1,062,956 $1,029,273
Commercial and multi-family real estate mortgages.................... 459,054 509,137
Real estate construction-primarily residential....................... 364,346 381,730
Land loans-primarily residential..................................... 29,181 29,281
---------- ----------
Total first mortgage loans........................................... 1,915,537 1,949,421
Consumer loans....................................................... 141,343 148,908
Commercial business loans............................................ 146,205 127,630
---------- ----------
Total gross loans.................................................... 2,203,085 2,225,959
Less:
Undisbursed portion of loans in process......................... 260,380 262,575
Unearned discounts, premiums and deferred loan fees (costs), net (1,612) (793)
Allowance for loan losses....................................... 8,318 9,036
---------- ----------
Loans receivable-net................................................. $1,935,999 $1,955,141
========== ==========
During the quarter ended March 31, 2003, the Company sold $84 million in loans,
which resulted in net gains of approximately $2.6 million. The Company has
initiated a loan sales program to provide additional non interest income, reduce
interest rate risk and as a capital management tool. At March 31, 2003, the
Company held $8.3 million in loans available for sale.
4. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 2002 and the three months ended March 31, 2002 and 2003, is as
follows:
For the Year For the Three Months
Ended Ended
December 31, March 31,
2002 2002 2003
================= ============ ===========
(In Thousands) (In Thousands)
Balance at beginning of period................... $ 6,847 $ 6,847 $ 8,318
Current provision................................ 1,986 501 790
Charge-offs...................................... (575) (16) (72)
Recoveries....................................... 60 6 -
-------- --------- ---------
Ending balance................................... $ 8,318 $ 7,338 $ 9,036
======== ========= ========
7
<page>
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, 2002 March 31, 2003
=========================== ============================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------- ------------- -------------- -------------
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loan losses................ $ 1,145 $ 546 $ 1,026 $ 516
Loans without related allowance for loan losses............. 7,248 - 10,626 -
-------- -------- -------- --------
Total.............................................. $ 8,393 $ 546 $ 11,652 $ 516
======== ======== ======== ========
The Bank's policy for 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. DEPOSITS
The weighted-average interest rates on deposits at December 31, 2002 and March
31, 2003 were 1.95% and 1.86%, respectively. Deposit accounts, by type at
December 31, 2002 and March 31, 2003 consist of the following:
December 31, March 31,
Account Type and Rate 2002 2003
========= ==============
(In Thousands)
Non-interest-bearing checking accounts..................... $ 209,695 $ 190,259
Interest-bearing checking and funds transfer accounts...... 388,179 481,810
Passbook and statement accounts............................ 340,709 477,162
Variable-rate money market accounts........................ 192,003 221,507
Certificates of deposit.................................... 767,755 757,336
---------- ----------
Total...................................................... $1,898,341 $2,128,074
========== ==========
8
<page>
6. 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, 2002 Stockholders'
Equity and ratio to total assets 7.7% $187,501
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,084
Goodwill............................. (2,175)
Disallowed servicing assets.......... (8)
--------
Tangible capital and ratio to
adjusted total assets........... 7.7% $187,402 1.5% $ 38,613
======== ======== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.7% $187,402 3.0% $ 73,227 5.0% $ 122,044
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.6% $187,402 4.0% $ 70,861 6.0% $ 106,291
======== ======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 7,679
--------
Total risk-based capital and ratio to
risk-weighted total assets...... 11.0% $195,081 8.0% $ 141,721 10.0% $ 177,152
======== ======== ====== ========= ====== =========
Total assets......................... $2,439,654
==========
Adjusted total assets................ $2,440,887
==========
Risk-weighted assets................. $1,771,518
==========
As of March 31, 2003 Stockholders'
Equity and ratio to total assets 7.0% $189,736
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,735
Goodwill............................. (2,175)
Disallowed servicing assets.......... (39)
--------
Tangible capital and ratio to
adjusted total assets........... 7.0% $190,257 1.5% $ 40,516
======== ======== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.0% $190,257 3.0% $ 81,031 5.0% $ 135,052
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.4% $190,257 4.0% $ 73,204 6.0% $ 109,806
======== ======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 8,429
--------
Total risk-based capital and ratio to
risk-weighted total assets...... 10.9% $198,686 8.0% $ 146,408 10.0% $ 183,010
======== ======== ====== ========= ====== =========
Total assets......................... $2,698,772
==========
Adjusted total assets................ $2,701,042
==========
Risk-weighted assets................. $1,830,100
==========
9
<page>
7. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the 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
============ ========== ==========
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, 2003, are as
follows:
For the Three Months Ended
March 31, 2003
---------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=========================================
Net income....... $5,117,000
Basic EPS:
Mortgage loans.............
Income available to
common stockholders... $5,117,000 14,388,549 $ 0.36
=======
Effect of diluted shares:
Common stock options.. 124,286
-------
Diluted EPS:
Income available to
common stockholders... $5,117,000 14,512,835 $ 0.35
============ ========== =======
ESOP shares that have not been committed to be released are not considered to be
outstanding.
10
<page>
8. OTHER COMPREHENSIVE LOSS
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended March 31, 2002 and 2003, is as follows:
For the Three For the Three
Months Ended Months Ended
March 31, 2002 March 31, 2003
------------------ ----------------
Unrealized Unrealized
Losses Losses
On Securities On Securities
================== ========== =================
(In Thousands)
Beginning Balance............................................. $ (2,004) $ (3,535)
Current-period change......................................... (343) (651)
---------- ---------
Ending balance................................................ $ (2,347) $ (4,186)
========= =========
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, 2002 March 31, 2003
-------------------------------- --------------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
========== ========== ========== === ========== ========== ==========
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains
(losses) arising $ (562) $ 219 $ (343) $(1,067) $ 416 $ (651)
======== ======= ======== ======== ======= ========
during period..........................................
9. SUBSEQUENT EVENTS
On May 23, 2002, the Company announced a plan to acquire up to 1.1 million
shares of its outstanding common stock. As of March 31, 2003, the Company had
repurchased into Treasury 1,019,460 shares. Management has determined that these
shares should be retired in order to clarify the financial reporting of the
Company's outstanding common stock. All shares repurchased were forwarded to the
Company's transfer agent, American Stock Transfer & Trust Company, for
retirement on May 1, 2003.
11
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, the
Company's net income is primarily 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.
Other Comprehensive Operations.
The Company's only component of Other Comprehensive Operations for the quarter
ended March 31, 2003 and 2002 is the change in the unrealized gain or loss on
assets available for sale.
Other comprehensive loss for the quarter ended March 31, 2003 was $651,000,
representing an increase of $308,000 when compared to other comprehensive loss
of $343,000 for the quarter ended March 31, 2002. During the quarter ended March
31, 2003, the market value of the Company's assets available for sale decreased
by $1.1 million, which net of income tax benefit of $416,000 resulted in other
comprehensive loss of $651,000. During the quarter ended March 31, 2002, the
value of the Company's assets available for sale decreased by $562,000 which net
of $219,000 in income tax resulted in other comprehensive loss of $343,000.
Changes in Financial Condition.
The Company's assets increased by $260.0 million to $2.7 billion at March 31,
2003 from $2.4 billion at December 31, 2002. Net loans receivable increased by
$19.1 million, while cash and assets available for sale increased by $233.5
million. In addition, the Company increased its investment in office properties
and equipment, primarily for new office sites, by $613,000, while all other
assets increased by $6.8 million. Funds for the increase in assets were provided
primarily as a result of an increase in deposits of $229.7 million, together
with increases in all other liabilities in the amount of $26.7 million, of which
advances from Federal Home Loan Bank were $21.6 million. In addition to these
increases in liabilities, equity increased by $3.5 million to $172.6 million at
March 31, 2003 from $169.1 million at December 31, 2002 resulting mainly from
net income for the quarter of $5.1 million which was offset by dividends
declared of $1.4 million.
12
<page>
Results of Operations.
Net income for the quarter ended March 31, 2003 was $5.1 million, a $1.1 million
increase compared to $4.0 million for the same 2002 quarter. This increase was
attributable to an increase in net interest income of $3.0 million along with an
increase in other income of $3.3 million. The increase in net interest income
consisted of a decrease in interest expense of $1.8 million along with an
increase in interest income of $1.2 million. The increase in other income
included gain on the sale of loans of $2.6 million for the quarter ended March
31, 2003. Partially offsetting these increases were an increase in operating
expenses of $4.2 million and an increase in the provision for income taxes of
$634,000 for the quarter ended March 31, 2003 compared to the quarter ended
March 31, 2002.
Interest Income.
Interest income for the quarter ended March 31, 2003, totaled $34.8 million,
representing an increase of $1.2 million or 3.4% compared to the same quarter in
2002. Interest income from loans increased by $2.3 million, primarily as a
result of a 21.0% increase in the average balance of loans to $2.0 billion from
$1.6 billion for the quarters ended March 31, 2003 and 2002, respectively.
Interest income from mortgage-backed and corporate debt securities decreased to
$2.0 million for the quarter ended March 31, 2003 from $2.3 million for the 2002
quarter. This decrease was due to a decrease in the average balance of such
securities of $15.9 million, as well as a decrease in the average yield of these
securities to 3.84% in 2003 from 4.13% in 2002. There was a decline in interest
income from investment securities of $583,000 principally resulting from a
decrease in the average yield of these securities to 2.32% for the quarter ended
March 31, 2003 from 3.87% for the quarter ended March 31, 2002. Interest income
on other investments also decreased by $244,000 due mainly to a decrease in the
average balance on these investments to $135.6 million from $145.8 million for
the quarters ended March 31, 2003 and 2002, respectively.
Interest Expense.
Interest expense for the quarter ended March 31, 2003, totaled $14.0 million, a
decrease of $1.8 million or 11.5% from the same quarter in 2002. The principal
cause for this decline was a decrease in interest expense on deposits of $1.0
million. While the average balance of deposits increased to $2.0 billion for the
quarter ended March 31, 2003 compared to $1.7 billion for the quarter ended
March 31, 2002, the cost of those deposits declined to 1.89% compared to 2.54%
for the comparative quarter. The decline in the cost of deposits had two
principal causes: (a) the Bank's core deposits, which consist of
interest-bearing and non interest-bearing transaction accounts, money market
accounts and passbook accounts increased as a percentage of total deposits from
51.9% at March 31, 2002 to 64.4% at March 31, 2003, and (b) the majority of the
Bank's certificates of deposit repriced in a lower rate environment. Interest
expense on borrowed funds also decreased by $773,000 caused primarily by an
decrease in the average balance of such funds to $340.3 million from $375.0
million and a decrease in the average cost of borrowed funds to 5.43% for the
quarter ended March 31, 2003 from 5.75% for the comparable 2002 quarter.
Net Interest Income.
During the quarter ended March 31, 2003, the Company's interest income increased
by $1.2 million compared to the same quarter in 2002, while interest expense
decreased by $1.8 million, resulting in net interest income of $20.8 million for
the quarter ended March 31, 2003, a $3.0 million or, 16.7% increase from the
quarter ended March 31, 2002.
13
<page>
Provision for Loan Losses.
The provision for loan losses was $790,000 for the quarter ended March 31, 2003,
compared to $501,000 for the quarter ended March 31, 2002. The provision for the
quarter ended March 31, 2003 is deemed adequate by management in light of the
risks inherent in the Bank's loan portfolio.
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America 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, 2003 was $7.0 million, representing
an increase of $3.3 million compared to the same quarter in 2002. This increase
is principally due to an increase in net gain on sale of loans of $2.5 million,
resulting directly from the sale of $84 million in loans in the quarter ended
March 31, 2003. These sales included a non-recurring gain of approximately $1.5
million on the sale of approximately $50.0 million of loans. The balance of loan
sales of approximately $34.0 million, which generated $1.0 million in net gain,
represented the Company's commencement of loan sales into the secondary markets.
The Company has initiated the loan sales program to provide additional non
interest income, reduce interest rate risk and as a capital management tool.
Also contributing to the increase in other income were an increase in fees for
other banking services of $463,000 to $2.3 million from $1.8 million and an
increase in service charges on deposit accounts of $284,000 to $1.9 million from
$1.6 million for the quarters ended March 31, 2003 and 2002, respectively.
Operating Expense.
During the quarter ended March 31, 2003, operating expense increased by $4.3
million to $18.7 million from $14.4 million for the quarter ended March 31,
2002. Employee compensation and benefits increased by $2.6 million.
Approximately $1.6 million of this increase in employee compensation is due to
the increase in the number of full time equivalent employees and includes
increases in commission based pay caused by growth in the Bank's loans, deposits
and insurance sales, together with normal salary increases. In addition, the
Company incurred increases in its employee health insurance costs of $465,000,
an increase of $425,000 due to the Company's Recognition and Retention Plan
approved by stockholders in May, 2002, together with other employee benefit
increases. Occupancy and equipment costs increased by $710,000 due in part to
additional depreciation expenses relating to new branch facilities and new
computer equipment. Also contributing to this increase were increases in the
cost of real estate owned of $77,000, marketing costs of $69,000 and other
operating expense of $769,000 for the quarter ended March 31, 2003 compared to
the same 2002 quarter. The increase in other operating expense is due mainly to
the growth in the Bank's loans and deposits and includes increases in telephone,
office supplies, general insurance costs, armored car services, temporary help
and other miscellaneous expenses.
Income Taxes.
The income tax provision was $3.2 million for the quarter ended March 31, 2003
compared to $2.6 million for the quarter ended March 31, 2002. These expenses
approximate the rates paid for Federal and State income taxes applied to the
Company's pre-tax income.
14
<page>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
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, 2003, the
Company does not own any trading assets other than $971,000 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, 2003, 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-earning assets and interest-bearing
liabilities 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, 2003.
Changes in Rates Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
============ ========= =============== ==============
(Dollars in Thousands)
+200bp $ 352,014 $ 1,801 0.5%
+100bp 349,829 (384) (0.1)%
-0- 350,213 0 0.0%
- -100bp 318,863 (31,350) (9.0)%
In preparing the MVPE table above, the Company makes various assumptions to
determine the net portfolio value at the assumed changes in interest rate. These
assumptions include loan prepayment rates, deposit decay rates and market values
of certain assets and liabilities under the various interest rate scenarios.
While management believes these assumptions to be reasonable there can be no
assurance that our assets and liabilities would be impacted as indicated in the
table above. Certain shortcomings are inherent in any methodology used in
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.
15
<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 September 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 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 internally calculated decay rates
for certain NOW, passbook and money market accounts produces an average expected
life for these instruments which is longer than the average expected life using
the OTS standard assumptions for these same instruments. Accordingly, the Bank's
previously presented MVPE calculations are not representative of those that
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 Bank's liquidity ratio averaged 10.30% during the
month of March 2003. Liquidity ratios averaged 8.50% for the quarter ended March
31, 2003. 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 $95.8 million at
March 31, 2003. Other assets qualifying for liquidity at March 31, 2003,
including unpledged mortgage-backed securities guaranteed by the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
were $69.3 million. For additional information about cash flows from the
Company's operating, financing and investing activities, see Unaudited
Consolidated Statements of Cash Flows included in the Consolidated 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.
16
<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 March 31, 2003, the Bank had $275.0 million in advances from
the FHLB. At March 31, 2003, the Bank had commitments outstanding to originate
or purchase loans of $239.3 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 March 31, 2003, totaled $490.4 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of Statement 148 became effective for interim periods beginning after
December 15, 2002 See note 2 - Stock Options, in the unaudited consolidated
financial statements.
In November 2002, the FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. This interpretation requires
elaborating on the disclosures that must be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure requirements of
this Interpretation became effective for statements issued after December 15,
2002 and its recognition requirements are applicable for guarantees issued or
modified after December 31, 2002. The adoption of this statement did not have a
material impact on the Company's financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The provisions of this Interpretation are effective immediately
for variable interest companies created after January 31, 2003, and variable
interest after that date. The provisions of this Interpretation are effective in
the first fiscal year or interim period beginning after June 15, 2003, for
variable interest companies in which an enterprise holds a variable interest
that it acquired before February 1, 2003. This statement is not expected to have
a material effect on the Company's financial statements.
17
<page>
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Underthe supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange
Act) as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation
Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us (or our
consolidated subsidiaries) required to be included in our periodic SEC
filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
18
<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 12) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 13 through 19), and
are incorporated by reference, herein.
19
<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: May 12, 2003 By: /s/ Vince A. Elhilow
----------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: May 12, 2003 By: /s/ Richard D. Aldred
----------------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
<page>
Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Vince A. Elhilow, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of and for the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 12, 2003 /S/Vince A. Elhilow
- ----------------- -------------------------------------
Date President and Chief Executive Officer
<page>
Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Richard D. Aldred, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of and for the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 12, 2003 /S/Richard D. Aldred
- ----------------- -----------------------------------
Date Executive Vice President and
Chief Financial Officer
<page>
Exhibit 99.1
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Vince A. Elhilow, President and Chief Executive Officer, and Richard D. Aldred,
Executive Vice President and Chief Financial Officer of Fidelity Bankshares,
Inc. (the "Company"), each certify in his/her capacity as an officer of the
Company that he/she has reviewed the Quarterly Report of the Company on Form
10-Q for the quarter ended March 31, 2003 and that to the best of his/her
knowledge:
(1) the report fully complies with the requirements of Sections 13(a) of the
Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
May 12, 2003 /S/Vince A. Elhilow
- ------------------ ------------------------------------
Date President and Chief Executive Officer
May 12, 2003 /S/Richard D. Aldred
- ----------------- ------------------------------------
Date Executive Vice President and
Chief Financial Officer