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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to___________________
Commission File Number 0-29040 ____________________________________
--------
Fidelity Bankshares, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 Datura Street, West Palm Beach, Florida 33401
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code.)
(561) 803-9900
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark 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 Indicate by check mark
whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). 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 |X| No
SEC 1296 (1-04) Potential persons who are to respond to the collection of
information contained in this form are not required to respond
unless the form displays a currently valid OMB control number.
<page>
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Unaudited Condensed Consolidated Statements of Financial Condition as of
December 31, 2003 and March 31, 2004................................2
Unaudited Condensed Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2004................................3
Unaudited Condensed Consolidated Statements of Comprehensive Operations
for the three months ended March 31, 2003 and 2004..................4
Unaudited Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2004...............................5
Notes to Unaudited Condensed Consolidated Financial Statements........6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk............17
Item 4. Controls and Procedures..............................................23
PART II. OTHER INFORMATION....................................................24
Item 1. Legal Proceedings....................................................24
Item 2. Changes in Securities................................................25
Item 3. Default Upon Senior Securities.......................................25
Item 4. Submissions of matters to a Vote of Security.........................25
Item 5. Other Information....................................................25
Item 6. Exhibits and Reports on Form 8-K.....................................25
EXHIBITS
Section 302 Certification
Section 906 Certification
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
December 31, March 31,
2003 2004
========================================
ASSETS (In thousands, except share and per share
data)
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 76,090 $ 109,739
Interest-earning deposits................................................ 33,797 192,170
----------- -----------
Total cash and cash equivalents...................................... 109,887 301,909
----------- -----------
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 122,731 143,293
Mortgage-backed securities............................................... 471,228 360,961
----------- ------------
Total assets available for sale...................................... 593,959 504,254
LOANS RECEIVABLE, Net......................................................... 2,191,696 2,280,624
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 73,553 75,083
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 13,322 13,055
REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS................................ - 17
ACCRUED INTEREST RECEIVABLE................................................... 11,127 11,001
DEFERRED INCOME TAX ASSET..................................................... 7,598 5,561
OTHER ASSETS 47,080 49,282
----------- -----------
TOTAL ASSETS $ 3,048,222 $ 3,240,786
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 2,460,101 $ 2,641,322
OTHER BORROWED FUNDS.......................................................... 42,089 38,829
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 264,561 261,107
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 2,816 9.351
DRAFTS PAYABLE................................................................ 202 807
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................... 52,320 52,320
OTHER LIABILITIES............................................................. 41,624 44,366
----------- -----------
TOTAL LIABILITIES........................................................ 2,863,713 3,048,102
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
15,024,648 shares issued at December 31, 2003 and 15,070,258 shares issued at 1,502 1,507
March 31, 2004................................................................
ADDITIONAL PAID IN CAPITAL.................................................... 106,392 105,369
RETAINED EARNINGS - substantially restricted.................................. 89,793 95,755
TREASURY STOCK - at cost, 314,694 shares at December 31, 2003 and
297,706 shares at March 31, 2004......................................... (1,794) (1,741)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan............................................ (4,257) (4,169)
Recognition and retention plan........................................... (4,410) (4,032)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (2,717) (5)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................... 184,509 192,684
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 3,048,222 $ 3,240,786
============= ==============
See Notes to Unaudited Condensed Consolidated Financial Statements.
1
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Three Months Ended
March 31,
2003 2004
====================================
(In Thousands, except per share data)
Interest income:
Loans............................................................. $ 31,881 32,759
Investment securities............................................. 397 568
Other investments................................................. 524 286
Mortgage-backed and corporate debt securities..................... 2,029 4,449
------- ------
Total interest income......................................... 34,831 38,062
------- ------
Interest expense:
Deposits.......................................................... 9,428 9,373
Advances from Federal Home Loan Bank and other borrowings......... 4,618 4,776
------- -----
Total interest expense........................................ 14,046 14,149
------- ------
Net interest income.................................................... 20,785 23,913
Provision for loan losses.............................................. 790 596
------- ------
Net interest income after provision for loan losses.................... 19,995 23,317
------- ------
Other income:
Service charges on deposit accounts............................... 1,902 2,839
Fees for other banking services................................... 2,294 2,672
Net gain on sale of loans......................................... 2,559 105
Net gain on sale of Investments................................... - 587
Miscellaneous..................................................... 256 260
------- ------
Total other income............................................ 7,011 6,463
------- ------
Operating expense:
Employee compensation and benefits................................ 11,096 11,944
Occupancy and equipment........................................... 3,416 4,010
(Gain)/loss on real estate owned and other repossessed assets..... 63 (8)
Marketing......................................................... 497 589
Federal deposit insurance premium................................. 77 90
Miscellaneous..................................................... 3,511 3,841
------- ------
Total operating expense....................................... 18,660 20,466
------- ------
Income before provision for income taxes............................... 8,346 9,314
------- ------
Provision for income taxes:
Current........................................................... 2,960 3,324
Deferred.......................................................... 269 303
------- ------
Total provision for income taxes.............................. 3,229 3,627
------- ------
Net income............................................... $ 5,117 $ 5,687
======= ======
Earnings per share:
Basic............................................................. $ 0.36 $ 0.39
======= =======
Diluted........................................................... $ 0.35 $ 0.38
======= =======
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
For the
Three Months Ended
March 31,
2003 2004
===============================
(In Thousands)
Net Income.............................................................. $ 5,117 $ 5,687
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period........ (651) 2,712
------ --------
Comprehensive income................................................ ... $ 4,466 $ 8,399
======= =======
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
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FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31,
2003 2004
==========================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 5,117 $ 5,687
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 985 1,430
ESOP and recognition and retention plan compensation expense........ 599 697
Accretion of discounts, amortization of premiums and goodwill, and (638) (475)
other deferred yield items.........................................
Provision for loan losses........................................... 790 596
Provisions for losses and net (gains) losses on sales of real estate
owned and other repossessed assets............................ - (8)
Net (gain) loss on sale of:
Loans......................................................... (2,559) (105)
Mortgage-backed securities.................................... - (587)
Office properties and equipment............................... - 7
Decrease (increase) in accrued interest receivable.................. (688) 126
Increase in other assets............................................ (4,106) (2,229)
Decrease in drafts payable.......................................... 4,182 605
Decrease in deferred income taxes................................... (147) 303
Increase in other liabilities....................................... 7,774 2,750
-------- --------
Net cash provided by operating activities..................... 11,309 8,797
-------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (91,387) (88,243)
Principal payments received on mortgage-backed securities.............. 29,902 47,626
Purchases of:
Loans............................................................... (12,231) (8,523)
Mortgage-backed securities.......................................... (270,201) (48,581)
Federal Home Loan Bank stock........................................ (955) (2,511)
Investment securities............................................... (40,000) (20,162)
Office properties and equipment..................................... (1,751) (2,983)
Proceeds from sales of:
Loans............................................................... 86,431 8,329
Federal Home Loan Bank stock........................................ - 2,778
Real estate and other assets acquired in settlement of loans........ - 35
Mortgage-backed securities available for sale....................... - 115,394
Proceeds from maturities of municipal bonds and government and agency 79,000 -
securities
Other.................................................................. 252 436
-------- --------
Net cash used for investing activities........................ (220,940) 3,595
-------- --------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options, 108 45
net of issuance costs..................................................
Purchase of treasury stock............................................. (10) -
Cash dividends paid.................................................... (1,437) (1,457)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 240,152 189,651
Certificates of deposit............................................. (10,419) (8,430)
Advances from Federal Home Loan Bank................................ 21,595 (3,454)
Other borrowed funds................................................ (10,307) (3,260)
Advances by borrowers for taxes and insurance....................... 3,413 6,535
-------- --------
Net cash provided by financing activities..................... 243,095 179,630
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 33,464 192,022
CASH AND CASH EQUIVALENTS, Beginning of period......................... 129,666 109,887
-------- --------
CASH AND CASH EQUIVALENTS, End of period............................... $163,130 $301,909
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
<page>
NOTES TO UNAUDITED CONDENSED 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 2003 Annual
Report on Form 10-K.
In December 2002, the FASB issued 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
are effective for interim periods beginning after December 15, 2002, with early
application encouraged. The adoption of the disclosure provisions of SFAS No.
148 did not have a material effect on the Company's results of operations or
financial position. The disclosures pursuant to SFAS No. 148 may be found in
Note 2.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" which addresses consolidation of variable interest entities ("VIEs")
certain of which are also referred to as special purpose entities ("SPEs"). The
FASB revised FIN 46 in December 2003. VIEs are 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. Under the
provisions of FIN 46, a company is to consolidate a VIE if the company has a
variable interest (or combination of variable interests) that will absorb a
majority of the VIE's expected losses if they occur, receive a majority of the
VIE's expected residual returns if they occur, or both. The implementation of
FIN 46 is required for public entities at the end of the first interim period
ending after March 15, 2004 if the VIE was created before February 1, 2003, with
early adoption allowed, and immediately for entities created after February 1,
2003. The Company early adopted FIN 46 and has deconsolidated the Fidelity
Capital Trust I at December 31, 2003. The deconsolidation of Fidelity Capital
Trust I did not have a material impact on the Company's consolidated financial
position or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
was effective May 31, 2003 for all new and modified financial instruments and
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. SFAS No. 150 changes the accounting for certain financial
instruments that, under previous guidance, could be accounted for as equity.
SFAS No. 150 requires that those instruments be classified as liabilities or in
some circumstances assets. In November 2003, the FASB indefinitely deferred the
effective date for the classification and measurement provisions of certain
mandatorily redeemable noncontrolling interests under SFAS No. 150. The adoption
of this statement did not have a material impact on the Company's results of
operations or financial conditions.
In November 2003, the EITF reached a consensus on the disclosure provisions of
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." EITF No. 03-1 requires that certain
quantitative and qualitative disclosures be made for certain debt securities
classified as available-for-sale under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. Debt securities within the scope of EITF Issue No. 99-20, are not
5
<page>
subject to these disclosure provisions. The disclosures are required for fiscal
years ending after December 15, 2003, and accordingly the Company has adopted
the disclosure provisions of EITF No. 03-1 for the year ended December 31, 2003.
In December 2003, the FASB Issued Statement of Financial Accounting Standards
No. 132 (revised 2003), "Employees Disclosures about Pensions and Other
Postretirement Benefits," an amendment of FASB Statements No. 87, 88 and 106, to
address the increasing significance of corporate pension plans to company
financial statements and the call for greater transparency in financial reports.
The statement requires additional disclosures, regarding plan assets, investment
strategy, measurement date, plan obligations, cash flows and components of net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. However, it does not change the measurement or recognition of
those plans required by SFAS No. 87, SFAS No. 88 and SFAS No. 106. The Company
has adopted the disclosure provisions of EITF No. 03-1 for the year ended
December 31, 2003.
Certain amounts in the financial statements have been reclassified to conform
with the March 31, 2004 presentation.
6
2. STOCK OPTION PLANS
At March 31, 2004, 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 option-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,
2003 2004
============================
(In Thousands)
Net Income, as reported................................................... $ 5,117 $ 5,687
Add: Total stock-based employee compensation expense included
in reported net earnings, net of related tax effects................ 259 230
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects.......................... (384) (479)
------- --------
Pro forma net income...................................................... $ 4,992 $ 5,438
========== =========
Basic - as reported................................................ 0.36 0.39
Basic - pro forma.................................................. 0.35 0.37
Diluted - as reported.............................................. 0.35 0.38
Diluted - pro forma................................................ 0.34 0.36
3. LOANS RECEIVABLE
Loans receivable at December 31, 2003 and March 31, 2004, consist of the
following:
December 31, March 31,
2003 2004
============== ==============
(In Thousands)
One-to-four single family, residential real estate mortgages......... $1,002,573 $1,016,989
Commercial and multi-family real estate mortgages.................... 753,890 785,814
Real estate construction-primarily residential....................... 470,016 483,703
Land loans-primarily residential..................................... 36,660 44,396
---------- ----------
Total first mortgage loans........................................... 2,263,139 2,330,902
Consumer loans....................................................... 185,450 190,984
Commercial business loans............................................ 131,292 133,174
---------- ----------
Total gross loans.................................................... 2,579,881 2,655,060
Add/(deduct):
Undisbursed portion of loans in process......................... (374,974) (360,507)
Unearned discounts, premiums and deferred loan fees (costs), net 2,092 (2,277)
Allowance for loan losses....................................... (11,119) (11,652)
----------- -----------
Loans receivable-net................................................. $2,191,696 $2,280,624
========== ==========
7
<page>
During the quarter ended March 31, 2004, the Company sold $8.2 million in loans,
which resulted in net gains of approximately $105,000. 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, 2004, the Company held
$1.2 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, 2003 and the three month periods ended March 31, 2003 and 2004, is
as follows:
For the Year For the Three Months
Ended Ended
December 31, March 31,
2003 2003 2004
==================== ==========================
(In Thousands) (In Thousands)
Balance at beginning of period...... $ 8,318 $ 8,318 $ 11,119
Current provision................... 3,122 790 596
Charge-offs......................... (322 (72) (67)
Recoveries.......................... 1 - 4
------------ ----------- -----------
Ending balance...................... $ 11,119 $ 9,036 $ 11,652
============ =========== ===========
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, 2003 March 31, 2004
=====================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------- ------------- -------------- -------------
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loan losses................ $ 3,508 $ 598 $ 3,398 $ 538
Loans without related allowance for loan losses............. 9,162 - 9,295 -
-------- -------- -------- --------
Total.............................................. $ 12,670 $ 598 $ 12,693 $ 538
======== ======== ======== ========
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.
8
5. DEPOSITS
The weighted-average interest rates on deposits at December 31, 2003 and March
31, 2004 were 1.51% and 1.49%, respectively. Deposit accounts, by type at
December 31, 2003 and March 31, 2004 consist of the following:
December 31, March 31,
Account Type and Rate 2003 2004
========= ==============
(In Thousands)
Non-interest-bearing checking accounts..................... $ 294,358 $339,255
Interest-bearing checking and funds transfer accounts...... 566,028 612,861
Passbook and statement accounts............................ 615,972 666,019
Variable-rate money market accounts........................ 297,864 345,738
Certificates of deposit.................................... 685,879 677,449
---------- ----------
Total...................................................... $2,460,101 $2,641,322
========== ==========
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, 2003 Stockholders'
Equity and ratio to total assets 7.2% $ 220,528
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 1,060
Goodwill............................. (5,615)
Disallowed servicing assets.......... (124)
---------
Tangible capital and ratio to
adjusted total assets........... 7.1% $ 215,849 1.5% $ 45,630
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.1% $ 215,849 3.0% $ 91,259 5.0% $ 152,099
======== ========== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.3% $ 215,849 4.0% $ 83,790 6.0% $ 125,685
======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 10,149
----------
Total risk-based capital and ratio to
risk-weighted total assets...... 10.8% $ 225,998 8.0% $ 167,580 10.0% $ 209,475
======== ========== ====== ========= ====== =========
Total assets......................... $3,045,981
==========
Adjusted total assets................ $3,041,980
==========
Risk-weighted assets................. $2,094,753
==========
9
<page>
As of March 31, 2004 Stockholders'
Equity and ratio to total assets 7.1% $ 229,583
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) (1,652)
Goodwill............................. (5,559)
Disallowed servicing assets.......... (123)
----------
Tangible capital and ratio to
adjusted total assets........... 6.9% $ 222,249 1.5% $ 48,449
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 6.9% $ 222,249 3.0% $ 96,898 5.0% $ 161,496
======== ========== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.2% $ 222,249 4.0% $ 87,399 6.0% $ 131,099
======== ========== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 10,749
----------
Total risk-based capital and ratio to
risk-weighted total assets...... 10.7% $ 232,998 8.0% $ 174,798 10.0% $ 218,498
======== ========== ====== ========= ====== =========
Total assets......................... $3,238,312
==========
Adjusted total assets................ $3,229,922
==========
Risk-weighted assets................. $2,184,981
==========
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, 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
============ ========== ==========
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, 2004, are as follows:
For the Three Months Ended
March 31, 2004
---------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
========================================
Net income................. $ 5,687,000
Basic EPS:
Mortgage loans.............
Income available to
common stockholders... $ 5,687,000 14,618,229 $ 0.39
============ ==========
Effect of diluted shares:
Common stock options.. 341,978
MRP shares............ 156,295
-------
Diluted EPS:
Income available to
common stockholders... $ 5,687,000 15,121,711 $ 0.38
============ ========== ==========
10
<page>
ESOP shares that have not been committed to be released are not considered to be
outstanding.
8. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended March 31, 2003 and 2004, is as follows:
For the Three For the Three
Months Ended Months Ended
March 31, 2003 March 31, 2004
---------------- ---------------
Unrealized Unrealized
Losses Losses
On Securities On Securities
==========================================
(In Thousands)
Beginning Balance.................................................. $ (3,535) $ (2,717)
Current-period change.............................................. (651) 2,712
----- -----
Ending balance..................................................... $ (4,186) $ (5)
====== =====
An analysis of the related tax effects allocated to Other Comprehensive Income
(Loss) is as follows:
For the Three Months Ended For the Three Months Ended
March 31, 2003 March 31, 2004
-------------------------------- --------------------------------
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
during period........................... $(1,067) $ 416 $ (651) $ 5,033 $(1,963) $ 3,070
Reclassification adjustment
for (gains) losses
realized in net income................. - - - (587) 229 (358)
-------- -------- -------- ------- -------- --------
Other comprehensive income (loss)........... $(1,067) $ 416 $ (651) $ 4,446 $(1,734) $ 2,712
========= ======== ========= ======== ========= ========
9. CONTINGENCIES
The Company is subject to various claims, legal actions and complaints arising
in the ordinary course of business. In the Company's opinion, the disposition of
these matters will not have a material adverse effect on our financial
condition, results of operations or cash flows.
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 three
months ended March 31, 2004 and 2003 is the change in the unrealized gain or
loss on assets available for sale.
Other comprehensive income for the quarter ended March 31, 2004 was $2.7 million
compared to other comprehensive loss of $651,000 for the quarter ended March 31,
2003. During the quarter ended March 31, 2004, the market value of the Company's
assets available for sale increased by $4.4 million, which net of income tax
benefit of $1.7 million resulted in other comprehensive income of $2.7 million.
During the quarter ended March 31, 2003, the value of the Company's assets
available for sale decreased by $1.1 million which net of $416,000 in income tax
benefit resulted in other comprehensive loss of $651,000.
12
<page>
Changes in Financial Condition.
The Company's assets increased by $192.6 million to $3.24 billion at March 31,
2004 from $3.05 billion at December 31, 2003. Cash and assets available for sale
increased by $102.3 million, while net loans receivable increased by $88.9
million. All other assets increased by $1.4 million. Funds were provided for
these increases in assets by an increase in deposits of $181.2 million, an
increase in all other liabilities of $3.2 million and an increase in equity of
$8.2 million. The increase in equity is primarily due to net income of $5.7
million, net of dividends declared, and an increase in unrealized increase in
market value of assets available for sale.
Results of Operations.
Net income for the quarter ended March 31, 2004 was $5.7 million, an increase of
$570,000 when compared to $5.1 million for the quarter ended March 31, 2003.
While net interest income after provision for loan losses increased by $3.3
million, this increase was partially offset by a decline in other income of
$548,000 and increases in operating expense of $1.8 million, together with an
increase in the provision for income taxes of $398,000.
Interest Income.
Interest income for the quarter ended March 31, 2004 increased by $3.2 million
to $38.1 million, representing an increase of 9.3% when compared to the same
quarter in 2003. Interest income from loans increased by $878,000. Although the
average balance of loans during the quarter ended March 31, 2004 increased by
$273.1 million, an increase of 14.0% compared to the same quarter in 2003, to
$2.2 billion, this was offset by a decline in interest rates on loans. Interest
income on securities increased by $2.6 million during the quarter ended March
31, 2004 to $5.0 million, an increase of 106.8% compared to the quarter ended
March 31, 2003. This increase is attributable to an increase of 110.9% in the
average balance of the Company's investments.
Interest Expense.
Interest expense for the quarter totaled $14.1 million, an increase of $103,000
compared to the quarter ended March 31, 2003. Interest expense on deposits
declined by $55,000 during the quarter ended March 31, 2004 compared to the same
quarter in 2003. While the average balance of deposits increased by $506.9
million, or 25.3%, to $2.5 billion, this increase was offset by a decline in the
cost of these deposits to 1.50% during the quarter ended March 31, 2004,
compared to 1.89% during the quarter ended March 31, 2003. The decline in the
cost of deposits is principally due to the increase in the Company's core
deposits, consisting of lower costing checking, savings and money market
accounts, to 74.4% of all the company's deposits at March 31, 2004 compared to
64.4% at March 31, 2003. The increase in interest expense on borrowings of
$158,000 is attributable to interest expense on the Company's subordinated
debentures, issued in connection with the Company's December, 2003, issuance of
$22.0 million in trust preferred securities.
Net Interest Income.
Net interest income for the quarter ended March 31, 2004 increased by $3.1
million to $23.9 million compared to the quarter ended March 31, 2003. This
increase was due to the Company's $3.2 million increase in interest income,
reduced by the $103,000 increase in interest expense.
13
<page>
Provision for Loan Losses.
The provision for loan losses was $596,000 for the quarter ended March 31, 2004
compared to $790,000 for the quarter ended March 31, 2003. The provision for
loan losses is deemed by management to be adequate, considering the risks
inherent in the Bank's loan portfolio. The ratio of valuation allowances to net
loans receivable at March 31, 2004 and December 31, 2003 was 0.51% compared to
0.46% at March 31, 2003.
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, 2004 was $6.5 million, reflecting a
$548,000 decline from $7.0 million for the quarter ended March 31, 2003. Income
from service charges on deposit accounts increased by $937,000 as a result of
the increase in the Bank's core deposits. There was an increase in fees for
other banking services which reflects increased commissions on insurance policy
sales and appraisal fees of $378,000. The Company had gains on the sales of
securities of $587,000 during the quarter ended March 31, 2004 for which there
were no comparable sales during the same quarter in 2003. Offsetting these
increases was a decline on income from loan sales of $2.5 million in the quarter
ended March 31, 2004, compared to 2003. During the quarter ended March 31, 2003
the Bank sold a $50 million pool of loans which resulted in a gain of $1.5
million. There was no such comparable sale in 2004. In addition, the Company
experienced a decline in other loan sales, much of which is attributable to a
decline in production of 30 year fixed rate loans, which were being sold to
minimize interest rate risk in the event of an increasing rate environment.
Operating Expense.
Operating expense increased by $1.8 million to $20.5 million during the quarter
ended March 31, 2004 compared to the same quarter in 2003. Of this amount,
$594,000 relates to increased occupancy and equipment costs, reflecting the
Company's continued branch office and franchise expansion. Salaries and benefits
increased by $848,000, or 7.6%, which includes the additional personnel to staff
the branches as well as normal compensation increases. The increase of $330,000
in miscellaneous expense reflects increased costs for telephone, utilities,
office supplies, general insurance costs and armored car services to serve the
Bank's increased number of loan and deposit customers.
14
Income Taxes.
The income tax provision was $3.6 million for the quarter ended March 31, 2004
compared to $3.2 million for the quarter ended March 31, 2003. The provision
reflects the current rates paid for Federal and State income taxes applied to
the Company's pre-tax income. 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, 2004, the
Company does not own any trading assets other than $1.3 million 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, 2004, 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 our assets and liabilities are monetary in nature, which
subjects us to significant interest rate risk. As stated above, the majority of
our interest-bearing liabilities and nearly all of our interest-earning assets
are held by Fidelity Federal Bank & Trust and, therefore, nearly all of our
interest rate risk is at the Fidelity Federal Bank & Trust level.
We monitor interest rate risk by various methods, including "gap" analysis and
analyzing changes in the net present value of our assets, liabilities and
off-balance sheet items (our net portfolio value or "NPV") which analysis, is
reviewed with the Board of Directors on a quarterly basis. We use an internal
model that generates estimates of our NPV over a range of interest rate
scenarios. The model calculates NPV essentially by discounting the cash flows
from our assets and liabilities to present value using current market rates, and
adjusting those discount rates accordingly for various interest rate scenarios.
15
The following table sets forth our estimated internal calculations of NPV as of
March 31, 2004, for instantaneous and parallel shifts in the yield curve in 100
basis point increments up and down. Due to the low interest rate environment
that existed at March 31, 2004, an analysis of a 200 basis point downward shift
in interest rates is not shown.
Changes in Rates Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
============ =============================================
(Dollars in Thousands)
+200bp $ 321,074 $ (76,665) (19.3)%
+100bp 361,079 (36,660) ( 9.2)%
-0- 397,739 0 0.0%
-100bp 371,105 (26,634) (6.7)%
Fidelity Federal Bank & Trust's internal calculation of NPV at December 31, 2003
shows the negative effects of rate caps and floors in certain interest earning
assets and particularly interest bearing liabilities in both rising and falling
interest rate scenarios. As shown in the previous table, NPV was negatively
affected in both rising and falling rate scenarios as a result of these interest
rate caps and floors. In preparing the NPV table above, we have estimated
prepayment rates for our loans ranging from 8% to 30%, depending on the interest
rate scenario and loan type. These rates are management's best estimate based on
prior repayment experience.
In preparing the NPV 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 NPV requires the making of
certain assumptions that may or may not reflect how actual yields and costs
respond to changes in market rates. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, interest rates
on certain types of assets and liabilities may fluctuate in advance of or lag
behind changes in market interest rates. Additionally, certain assets, such as
ARM loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the assets. Moreover, in the event of a change in
interest rates, prepayment and early withdrawal levels may possibly deviate
significantly from those assumed in calculating the above table. Management has
also made estimates of fair value discount rates that it believes to be
reasonable. However, due to the fact that there is no quoted market for many of
the assets and liabilities, management has no definitive basis to determine
whether the fair values presented would be indicative of the value negotiated in
an actual sale.
Accordingly, while the above table provides an estimate of the Bank's interest
rate risk exposure at a particular point in time, it is not intended to provide
a precise forecast of the effect of market changes on the Bank's NPV and net
interest income, as actual results may vary.
Under OTS risk-based capital regulations, savings associations are required to
calculate the NPV. 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
16
<page>
Thrift Financial Report. Commencing September 30, 1994, for purposes of
measuring interest rate risk, the OTS began using the NPV 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 NPV 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 NPV 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.
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. As shown in the following
table, the Company's cumulative one-year interest rate sensitivity gap at March
31, 2004 was a positive 22.19%.
More Than One More Than Three
Within Three Four to Twelve Year to Three Years to Five Over Five
Months Months Years Years Years
---------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets (1):
Residential mortgage loans: (2)
Fixed rate........................ $ 56,397 $ 125,057 $ 230,082 $ 138,144 $ 187,111
Adjustable rate................... 100,500 189,270 128,641 142,518 --
Commercial mortgage loans: (2)
Fixed rate........................ 9,946 19,447 26,332 14,036 16,556
Adjustable rate................... 220,926 358,293 3,873 3,884 --
Other loans (2)
Fixed rate.................... 15,940 22,061 31,218 10,062 6,053
Adjustable rate................... 219,837 17,345 -- -- --
Mortgage-backed securities
Fixed rate........................ 8,331 23,326 41,848 24,947 32,171
Adjustable rate................... 147,946 13,560 26,265 24,625 17,141
Municipal bonds and government and
agency securities - fixed rate...... -- 5,255 117,110 -- 20,162
Other interest earning assets -
adjustable $ 205,224 -- -- -- --
========== ======== ========= ========= ========
Total 985,047 773,614 $ 605,369 $ 325,216 $ 279,194
========== ======== ========= ========== ========
Interest-bearing liabilities
Deposits: (3)
Checking and funds transfer accounts $ 49,690 $154,349 $ 224,186 $ 112,932 $ 382,983
Passbook accounts................. 31,521 109,357 182,471 96,096 246,574
Money market accounts............. 30,699 99,294 119,848 45,874 66,216
Certificate accounts (4).......... 105,478 359,753 168,152 44,067 --
Borrowings: (4)...................... 64,743 34,800 152,518 70,419 29,776
--------- -------- -------- --------- ---------
Total $ 282,131 $757,553 847,175 369,387 $ 725,549
========== ======== ======== ========= =========
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities..................... $ 702,916 $ 16,061 $(241,806) (11,171) (446,355)
========== ======== ========== ========= =========
Cumulative excess of interest-earning
assets over interest-bearing
liabilities..................... $ 702,916 $718,977 $ 477,171 $ 466,000 $ 19,645
========= ========= ======= ========= =========
Cumulative excess of interest-earning
assets over interest-bearing liabilities
as a percent of total assets 21.69% 22.19% 14.72% 14.38% 0.61%
===== ===== ===== ===== ====
17
<page>
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due. Fixed rate assets are included in the periods in which
they are scheduled to be repaid based on scheduled amortization. In both
cases, amounts are adjusted to reflect estimated prepayments. For this
table, all loans and mortgage-backed securities were assigned a 20%
prepayment rate.
(2) Balances are shown net of loans in process and are not adjusted for
premiums, discounts, reserves and unearned fees.
(3) All of the Company's non-certificate deposits are generally subject to
immediate withdrawal. However, management considers a significant portion
of these accounts to be core deposits having longer effective maturities
based on the Company's actual retention of such deposit accounts in various
interest rate environments. In the year 2001, we contracted with a
third-party consultant to perform an analysis of the core deposit accounts
to obtain an estimate of the actual deposit balance trends over various
interest rates scenarios over the previous five years. We then used the
information obtained to provide a forecast of future balance trends. We
then used the information obtained to provide a forecast of future balance
trends. Management does not feel that the deposit trends have changed
materially since 2001.
(4) Certificate accounts and Borrowings are assumed to have no prepayments and
are shown in the period in which they contractually mature.
Certain shortcomings are inherent in any methodology used to calculate interest
rate sensitivity. The asset prepayment speed and deposit decay rate assumptions
are based on past experience and should not be regarded as indicative of the
actual prepayments and withdrawals that may be experienced in any given period.
In the event of changes in interest rates, prepayment and early withdrawal would
possibly deviate significantly from those assumed in calculating the above
table. Also, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react differently to changes in market
interest rates. Certain assets such as adjustable rate mortgage loans have
features that restrict changes in interest rates on a short term basis and over
the life of the asset.
In recent years our policy has been to reduce our exposure to interest rate risk
generally by better matching the maturities of our 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. We do 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 12.72% during the
month of March 31, 2004. Liquidity ratios averaged 11.47% for the quarter ended
March 31, 2004. 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 $192.2 million at
March 31, 2004. Other assets qualifying for liquidity at March 31, 2004,
including unpledged mortgage-backed securities guaranteed by the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation,
were $193.6 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 Unaudited 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.
18
<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, 2004, the Bank had $261.1 million in advances from
the FHLB. At March 31, 2004, the Bank had commitments outstanding to originate
or purchase loans of $270.3 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, 2004 totaled $465.1 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank. Contractual Obligations and Commercial Commitments
Our long-term debt, which in the aggregate totals $313.4 million, consists of
obligations to the FHLB totaling $261.1 million and $52.3 million in obligations
resulting from the issuance of trust preferred securities from Fidelity Capital
Trust I in January 1998 as well as Fidelity Capital Trust II in December 2003.
The obligations arising from the issuance of trust preferred securities,
presented as Guaranteed Preferred Beneficial Interests in Company Debentures in
our balance sheet at March 31, 2004 are due in the amount of $29.6 million in
January, 2028 and $22.7 million in January 2034. In addition, we have leasehold
obligations totaling $16.4 million. These contractual obligations are set forth
in the table below as of March 31, 2004.
The tables below summarize the Company's contractual obligations, commercial and
other commitments at March 31 2004.
Less Than After 5
Total 1 year 1-3 Years 3-5 Years Years
------------------------------------------------------------------------
(In Thousands)
Long-term Debt(1)................ $313,427 $ 38,774 $152,417 $ 69,717 $ 52,519
Capital Lease Obligations........ -- -- -- -- --
Operating Lease Obligations...... 16,404 1,585 3,132 2,978 8,709
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations $ 329,831 $ 40,359 $155,549 $ 72,695 $ 61,228
========== ========== ========== ========== ==========
(1) Includes advances from the Federal Home Loan Bank and Guaranteed Preferred
Beneficial Interests in Debentures.
Commercial and Other Commitments
Less Than After 5
Total 1 year 1-3 Years 3-5 Years Years
------------------------------------------------------------------------
(In Thousands)
Lines of Credit(1)............... $183,734 $ 5,068 $ 9,015 $ 31,675 $137,976
Standby Letters of Credit........ 8,135 7,109 1,026 -- --
Other Commercial Commitments..... 136,268 136,268 -- -- --
Other Commitments................ 115,782 115,782 -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations $ 443,919 $ 264,227 $ 10,041 $ 31,675 $137,976
========== ========== ========== ========== ==========
(1) Includes $145.3 million in undisbursed lines of credit.
New Accounting Pronouncements
In December 2002, the FASB issued 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
are effective for interim periods beginning after December 15, 2002, with early
application encouraged. The adoption of the disclosure provisions of SFAS No.
148 did not have a material effect on the Company's results of operations or
financial position. The disclosures pursuant to SFAS No. 148 may be found in
Note 2.
19
<page>
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" which addresses consolidation of variable interest entities ("VIEs")
certain of which are also referred to as special purpose entities ("SPEs"). The
FASB revised FIN 46 in December 2003. VIEs are 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. Under the
provisions of FIN 46, a company is to consolidate a VIE if the company has a
variable interest (or combination of variable interests) that will absorb a
majority of the VIE's expected losses if they occur, receive a majority of the
VIE's expected residual returns if they occur, or both. The implementation of
FIN 46 is required for public entities at the end of the first interim period
ending after March 15, 2004 if the VIE was created before February 1, 2003, with
early adoption allowed, and immediately for entities created after February 1,
2003. The Company early adopted FIN 46 and has deconsolidated the Fidelity
Capital Trust I at December 31, 2003. The deconsolidation of Fidelity Capital
Trust I did not have a material impact on the Company's consolidated financial
position or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
was effective May 31, 2003 for all new and modified financial instruments and
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. SFAS No. 150 changes the accounting for certain financial
instruments that, under previous guidance, issuers could be accounted for as
equity. SFAS No. 150 requires that those instruments be classified as
liabilities or in some circumstances assets. In November 2003, the FASB
indefinitely deferred the effective date for the classification and measurement
provisions of certain mandatorily redeemable noncontrolling interests under SFAS
No. 150. The adoption of this statement did not have a material impact on the
Company's results of operations or financial conditions.
In November 2003, the EITF reached a consensus on the disclosure provisions of
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." EITF No. 03-1 requires that certain
quantitative and qualitative disclosures be made for certain debt securities
classified as available-for-sale under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. Debt securities within the scope of EITF Issue No. 99-20, are not
subject to these disclosure provisions. The disclosures are required for fiscal
years ending after December 15, 2003, and accordingly the Company has adopted
the disclosure provisions of EITF No. 03-1 for the year ended December 31, 2003.
In December 2003, the FASB Issued Statement of Financial Accounting Standards
No. 132 (revised 2003), "Employees Disclosures about Pensions and Other
Postretirement Benefits," an amendment of FASB Statements No. 87, 88 and 106, to
address the increasing significance of corporate pension plans to company
financial statements and the call for greater transparency in financial reports.
The statement requires additional disclosures, regarding plan assets, investment
strategy, measurement date, plan obligations, cash flows and components of net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. However, it does not change the measurement or recognition of
those plans required by SFAS No. 87, SFAS No. 88 and SFAS No. 106. The Company
has adopted the disclosure provisions of EITF No. 03-1 for the year ended
December 31, 2003.
20
<page>
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the 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-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the fiscal year (the "Evaluation Date"). 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.
See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
21
<page>
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
There are various claims and lawsuits in which Fidelity Federal Bank &
Trust is periodically involved incident to our business. Other than as
set forth below, we believe these legal proceedings, in the aggregate,
are not material to our financial condition or results of operations.
On July 1, 2003, Fidelity Federal Bank & Trust was named as defendant
in the lawsuit, James Kehoe v. Fidelity Federal Bank & Trust, filed in
the United States District Court for the Southern District of Florida.
In this action, James Kehoe ("Kehoe"), on behalf of himself and other
similarly situated persons, has alleged that Fidelity Federal violated
the Driver Privacy Protection Act by obtaining driver registration
information from the State of Florida for use in its marketing
efforts. Kehoe seeks as damages the statutory minimum of $2,500 per
violation. As a result of Kehoe's suing on behalf of a class of
plaintiffs, the potential award, should Kehoe prevail, would be
material. At this time, however, the size of the class has not been
asserted by Kehoe. Fidelity Federal is currently in the process of
drafting a response to the complaint and discovery has only recently
commenced. Fidelity Federal, in consultation with counsel, has
concluded that the lawsuit is without merit and Fidelity Federal
intends to vigorously defend against Kehoe's claim.
On December 31, 2003, Fidelity Federal Bank & Trust was named as
defendant in two lawsuits, Kenneth A. Welt, as Chapter 7 Trustee vs.
Fidelity Federal Bank & Trust. The two lawsuits have been brought by
the same plaintiff in the Circuit Court in the Fifteenth Judicial
Circuit in and for Palm Beach County and also in the United States
Bankruptcy Court Southern District of Florida, West Palm Beach
Division. The plaintiff has alleged that the Bank knew or should have
known that the bankrupt Thomas Abrams through various corporate
plaintiffs, including The Phoenix Financial Group, Phoenix,
Administrative Services, Inc. and Swiss Capital Management Ltd., was
operating a "Ponzi Scheme". Fidelity Federal is seeking to consolidate
the two lawsuits in the United States Bankruptcy Court. Fidelity
Federal has filed an answer to the complaints. The plaintiff seeks (i)
an accounting of all fees, commissions and other income received by
the Bank as a result of Thomas Abrams' actions, and damages for such
amounts, plus interest and costs in United States Bankruptcy Court,
(ii) and seeks relief of unspecified compensatory damages, plus
interest and costs in the Circuit Court. Fidelity Federal, in
consultation with counsel, has concluded that the claims made by the
plaintiff on behalf of the bankrupt corporation are without merit and
the Bank intends to vigorously defend itself in the two suits.
On February 18, 2004, Fidelity Federal Bank & Trust was named as
defendant in a lawsuit William Adams et al., vs. Thomson Financial,
Inc., Fidelity Federal Bank & Trust, N.A., Fidelity Investments
Services, L.L.C., d/b/a Fidelity Investments, National Financial
Services, L.L.C., f/k/a National Financial Services Corporation, Zoe
22
<page>
Marrero, filed in the Fifteenth Judicial Circuit in and for Palm Beach
County, Florida. The plaintiffs in this case have alleged against the
various defendants causes of action which arise from their investing
in various Abrams entities, based upon the same factual allegations
set forth in Kenneth A. Welt, as Chapter 7 Trustee vs. Fidelity
Federal Bank & Trust. Fidelity Federal is named in one cause of action
alleging aiding and abetting breaches of fiduciary duty. The various
allegations are based upon Fidelity Federal allowing Abrams to set up
accounts with Fidelity Federal, deposit monies in them, issue bank
checks based upon the deposits and generally offer banking services to
the Abrams entities. Additionally, there are allegations that Fidelity
Federal solicited clients for the Abrams entities and pressured
clients to place deposits with the Abrams entities and Fidelity
Federal. There is no specific request for damages, other than the
jurisdictional amount of in excess of $15,000.
Fidelity Federal has not yet answered the complaint, but intends to
vigorously defend itself. Fidelity Federal, in consultation with
counsel, has concluded that the claims made by the plaintiffs are
without merit.
Item 2 Changes in Securities and Stock Repurchases
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
31.1 302 Certification
31.2 302 Certification
32.1 906 Certification
On January 20, 2004 the Company filed a Form 8-K to report its fiscal year end
earnings.
23
<page>
Item 6 Exhibits 31.1, 31.2 and 32.1
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 Fidelity Bankshares,
Inc.;
2. Based on my knowledge, this 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting;
May 7, 2004 /s/ Vince A. Elhilow
- ------------ -----------------------------------
Date Vince A. Elhilow
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, Chief Financial Officer and
Treasurer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Fidelity Bankshares,
Inc.;
2. Based on my knowledge, this 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting;
May 7, 2004 /s/ Richard D. Aldred
- ------------ ---------------------------
Date Richard D. Aldred
Executive Vice President,
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
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, Chief Financial Officer and Treasurer of Fidelity
Bankshares, Inc. (the "Company") each certify in his capacity as an officer of
the Company that he has reviewed the annual report of the Company on Form 10-Q
for the fiscal ended March 31, 2004 and that to the best of his 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.
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 7, 2004 /s/ Vince A. Elhilow
- ------------- -------------------------------------
Date President and Chief Executive Officer
May 7, 2004 /s/ Richard D. Aldred
- ------------- ------------------------------------
Date Executive Vice President,
Chief Financial Officer and Treasurer
<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 7, 2004 By: /s/Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: May 7, 2004 By: /s/Richard D. Aldred
-------------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer