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, 2005
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 65-1101656
- -------------------------------------------------------------------------------
(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 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 24,952,786 shares
of the Registrant's common stock par value $.10 per share outstanding as of
April 30, 2005.
<page>
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................................2
Unaudited Condensed Consolidated Statements of Financial Condition
as of December 31, 2004 and March 31, 2005......................2
Unaudited Condensed Consolidated Statements of Operations for the
three months ended March 31, 2004 and 2005.....................3
Unaudited Condensed Consolidated Statements of Comprehensive
Operations for the three months ended
March 31, 2004 and 2005........................................4
Unaudited Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2005.....................5
Notes to Unaudited Condensed Consolidated Financial Statements......6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................14
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........20
Item 4. Controls and Procedures............................................25
PART II. OTHER INFORMATION..................................................26
Item 1. Legal Proceedings..................................................26
Item 2. Changes in Securities and Stock Repurchases........................27
Item 3. Default Upon Senior Securities.....................................27
Item 4. Submission of matters to a Vote of Security........................27
Item 5. Other Information..................................................27
Item 6. Exhibits...........................................................27
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,
2004 2005
================ ================
ASSETS (In thousands, except share and per share
data)
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 108,327 $ 81,432
Interest-earning deposits................................................ 41,082 35,762
----------- -----------
Total cash and cash equivalents...................................... 149,409 117,194
----------- -----------
SECURITIES AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 65,156 64,376
Mortgage-backed securities............................................... 440,473 416,354
----------- -----------
Total assets available for sale...................................... 505,629 480,730
SECURITIES HELD TO MATURITY (At Cost):
Mortgage-backed securities............................................... 89,167 285,685
LOANS RECEIVABLE, Net......................................................... 2,556,700 2,449,695
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 83,439 85,300
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 17,399 16,968
REAL ESTATE OWNED, Net........................................................ - 7
ACCRUED INTEREST RECEIVABLE................................................... 12,379 13,484
DEFERRED INCOME TAX ASSET..................................................... 7,883 11,359
OTHER ASSETS 48,534 48,870
----------- -----------
TOTAL ASSETS $ 3,470,539 $ 3,509,292
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 2,814,670 $ 2,867,569
OTHER BORROWED FUNDS.......................................................... 46,097 49,818
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 250,855 222,460
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 3,166 8,710
DRAFTS PAYABLE................................................................ - 185
JUNIOR SUBORDINATED DEBENTURES................................................ 53,608 53,608
OTHER LIABILITIES............................................................. 50,860 54,960
----------- -----------
TOTAL LIABILITIES........................................................ 3,219,256 3,257,310
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
24,425,050 shares issued at December 31, 2004 and 24,427,375 shares issued at
March 31, 2005....................................................... 2,442 2,443
ADDITIONAL PAID IN CAPITAL.................................................... 152,398 152,585
RETAINED EARNINGS - substantially restricted.................................. 105,556 110,463
TREASURY STOCK - at cost, 441,082 shares at December 31, 2004 and
421,260 shares at March 31, 2005......................................... (1,756) (1,770)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan............................................ (3,909) (3,822)
Recognition and retention plan........................................... (3,045) (2,730)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (403) (5,187)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................... 251,283 251,982
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 3,470,539 $ 3,509,292
============= ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the
Three Months Ended
March 31,
2004 2005
==================== =====================
(In thousands, except share and per share data)
Interest income:
Loans............................................................. $ 32,759 $ 37,342
Investment securities............................................. 568 429
Other investments................................................. 286 403
Mortgage-backed and corporate debt securities..................... 4,449 7,150
---------- --------
Total interest income......................................... 38,062 45,324
---------- --------
Interest expense:
Deposits.......................................................... 9,373 10,818
Advances from Federal Home Loan Bank and other borrowings......... 4,776 4,433
---------- --------
Total interest expense........................................ 14,149 15,251
---------- --------
Net interest income.................................................... 23,913 30,073
Provision for loan losses.............................................. 596 572
---------- --------
Net interest income after provision for loan losses.................... 23,317 29,501
---------- --------
Other income:
Service charges on deposit accounts............................... 2,839 2,501
Fees for other banking services................................... 2,672 2,896
Net gain on sale of loans......................................... 105 352
Net gain on sale of investments................................... 587 -
Miscellaneous..................................................... 260 387
---------- --------
Total other income............................................ 6,463 6,136
---------- --------
Operating expense:
Employee compensation and benefits................................ 11,944 13,949
Occupancy and equipment........................................... 4,010 4,788
(Gain)/loss on real estate owned and other repossessed assets..... (8) 2
Marketing......................................................... 589 786
Federal deposit insurance premium................................. 90 95
Miscellaneous..................................................... 3,841 4,979
---------- --------
Total operating expense....................................... 20,466 24,599
---------- --------
Income before provision for income taxes............................... 9,314 11,038
---------- --------
Provision for income taxes............................................. 3,627 4,222
---------- --------
Net income............................................... $ 5,687 $ 6,816
========== =========
Earnings per share (Note 1):
Basic............................................................. $ 0.26 $ 0.29
========== =========
Diluted........................................................... $ 0.25 $ 0.28
========== =========
Dividends declared per share........................................... $ 0.07 $ 0.08
========== =========
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
For the
Three Months Ended
March 31,
2004 2005
============ ===========
Net Income.................................................................. $ 5,687 $ 6,816
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale................. 2,712 (4,784)
--------- --------
Comprehensive income........................................................ $ 8,399 $ 2,032
========== =========
See Notes to Unaudited Condensed Consolidated Financial
Statements.
4
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FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2004 2005
========== ===========
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 5,687 $6,816
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 1,430 1,523
ESOP and recognition and retention plan compensation expense........ 697 614
Accretion of discounts, amortization of premiums and goodwill, and (475) (1,409)
other deferred yield items.........................................
Provision for loan losses........................................... 596 572
Provisions for losses and net (gains) losses on sales of real
estate owned....................................................... (8) 2
Net (gain) loss on sale of:
Loans......................................................... (105) (352)
Mortgage Backed Securities.................................... (587) -
Office properties and equipment............................... 7 10
Decrease (increase) in accrued interest receivable.................. 126 (1,105)
Decrease (increase) in other assets................................. (2,229) 1,549
Increase in drafts payable.......................................... 605 185
Increase (decrease) in deferred income taxes........................ 303 (503)
Increase in other liabilities....................................... 2,750 4,097
-------- ------
Net cash provided by operating activities..................... 8,797 11,841
-------- ------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (88,243) (93,392)
Principal payments received on mortgage-backed securities.............. 47,626 23,886
Purchases of:
Loans............................................................... (8,523) (11,683)
Mortgage-backed securities.......................................... (48,581) (2,332)
Federal Home Loan Bank stock........................................ (2,511) (1,688)
Investment securities............................................... (20,162) -
Office properties and equipment..................................... (2,983) (3,497)
Proceeds from sales of:
Loans............................................................... 8,329 10,327
Federal Home Loan Bank stock........................................ 2,778 2,119
Repossessed assets acquired in settlement of loans.................. 35 -
Mortgage backed securities.......................................... 115,394 -
Other.................................................................. 436 158
-------- --------
Net cash provided by (used for) investing activities.......... 3,595 (75,944)
-------- --------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options, 45 31
net of issuance costs..............................................
Cash dividends paid................................................. (1,457) (1,912)
Principal payments on long-term advances from Federal Home Loan Bank (3,454) (28,395)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts................ 189,651 88,996
Certificates of deposit........................................... (8,430) (36,097)
Other borrowed funds.............................................. (3,260) 3,721
Advances by borrowers for taxes and insurance..................... 6,535 5,544
-------- ------
Net cash provided by financing activities..................... 179,630 31,888
-------- ------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS.................... 192,022 (32,215)
CASH AND CASH EQUIVALENTS, beginning of period......................... 109,887 149,409
-------- -------
CASH AND CASH EQUIVALENTS, end of period............................... $301,909 $117,194
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
5
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
with accounting principles generally accepted in the United States of America
and with predominant practices within the banking and thrift industry. The
Company has not changed its accounting and reporting policies from those
disclosed in its 2004 Annual Report on Form 10-K.
These consolidated financial statements have been prepared in accordance with
the instructions for Form 10-Q and Item 303 (b) of Regulation S-K and do not
include all disclosures required by accounting principles generally accepted in
the United States of America for a complete presentation of our financial
condition and results of operations. In the opinion of management, the
information reflects all adjustments (consisting only of normal recurring
adjustments) which are necessary in order to make the financial statements not
misleading and for a fair presentation of the results of operations for such
periods. The results for the period ended March 31, 2005 should not be
considered as indicative of results for a full year. For further information,
refer to the consolidated financial statements and footnotes included in our
annual report on Form 10-K for the year ended December 31, 2004.
Stock Splits - During 2004, the Company announced a 3 for 2 common stock split
in the form of a stock dividend paid on January 15, 2005 to stockholders of
record on December 31, 2004. All share and per share data have been restated to
give retroactive effect to this stock split.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts in the financial statements have been reclassified to conform
with the March 31, 2005 presentation.
6
<Page>
2. STOCK OPTION PLANS
The Company has one stock-based compensation plan which it accounts for using
the intrinsic value method. The only stock-based compensation expense reflected
in net income relates to restricted stock grants. 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 proforma effect
on net income and earnings per share if the Company had applied the fair value
recognition provisions to stock-based employee compensation using the
Black-Scholes model.
For the
Three Months Ended
March 31,
2004 2005
============= ============
(In Thousands)
Net Income, as reported............................................... $ 5,687 $ 6,816
Add: Total stock-based employee compensation expense included
in reported net earnings, net of related tax effects............ 230 195
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects...................... (479) (322)
---------- ----------
Pro forma net income.................................................. $ 5,438 $ 6,689
========== ==========
Basic - as reported................................................ 0.26 0.29
Basic - pro forma.................................................. 0.25 0.28
Diluted - as reported.............................................. 0.25 0.28
Diluted - pro forma................................................ 0.24 0.27
The weighted-average number of shares used to calculate basic and diluted
earnings per share for the quarter ended March 31, 2004 is retroactively
adjusted to reflect the 2004 3 for 2 stock split.
In December 2004, the FASB issued FAS 123 (revised 2004), Share-Based Payment.
Under this promulgation, companies are required to reflect costs associated with
employee stock options in their income statements at fair value. In April 2005,
the SEC amended the date for compliance with FAS 123 (revised 2004) so that each
registrant that is not a small business issuer will be required to prepare
financial statements in accordance with statement 123 (revised 2004) beginning
with the first interim or annual reporting period of the registrant's first
fiscal year beginning on or after June 15, 2005. The Company will begin
reflecting stock option costs under the fair value method commencing in the
quarter beginning January 1, 2006 as required. The Company is still evaluating
the effects of adoption of this principle.
7
<Page>
3. DEFINED BENEFIT PENSION PLAN
Employees hired prior to January 1, 2001 participate in the Bank's qualified
defined benefit pension plan covering substantially all such employees. The plan
calls for benefits to be paid to eligible employees at retirement based
primarily upon years of service with the Bank and compensation rates during
those years, The Bank's policy is to fund the qualified retirement plan in an
amount that falls between the minimum contribution required by the Employee
Retirement Income Security Act and maximum tax deductible contribution. Plan
assets consist primarily of common stock, U.S. Government obligations and
certificates of deposit.
Components of net periodic benefit cost are as follows:
March 31,
-----------------------------
2004 2005
============= ===============
Service cost........................................... $ 555 $ 596
Interest cost.......................................... 396 407
Expected return on assets.............................. (389) (405)
Amortization of prior service cost..................... 1 13
Amortization of actuarial loss......................... 206 243
------ ------
Net periodic pension expense........................... $ 769 $ 854
======= ========
The Company previously disclosed in its financial statements for the year ended
December 31, 2004 that it expected to contribute $3.6 million to its pension
plan in 2005. As of March 31, 2005 the Company estimates that it will contribute
$4.8 million during the year 2005.
4. LOANS RECEIVABLE
Loans receivable at December 31, 2004 and March 31, 2005, consist of the
following:
December 31, March 31,
2004 2005
============== ==============
(In Thousands)
One-to four- family, residential real estate mortgages............... $1,023,448 $ 859,704
Commercial and multi-family real estate mortgages.................... 831,165 861,116
Real estate construction-primarily residential....................... 308,044 323,432
Land loans-primarily residential..................................... 57,661 57,825
---------- ----------
Total first mortgage loans........................................... 2,220,318 2,102,077
Consumer loans....................................................... 231,333 245,169
Commercial business loans............................................ 121,331 119,401
---------- ----------
Total loans, net of loans in process................................. 2,572,982 2,466,647
Deduct:
Unearned discounts, premiums and deferred loan fees, net of costs (2,654) (2,754)
Allowance for loan losses....................................... (13,628) (14,198)
----------- -----------
Loans receivable-net................................................. $2,556,700 $2,449,695
========== ==========
During the quarter ended March 31, 2005, the Company sold $10.0 million in
loans, which resulted in net gains of $352,000. In addition, the Company
securitized $202.8 million of its one- to four-family mortgage loans during the
quarter ended March 31, 2005, and received mortgage-backed securities secured by
these loans. During the quarter ended March 31, 2004, the Company sold $8.2
million in loans, which resulted in net gains of approximately $105,000.
8
<Page>
At December 31, 2004 and March 31, 2005, the Bank had $226.1 million and $1.4
million in loans held for sale or transfer, respectively. Of the $226.1 million
in loans held for sale or transfer as of December 31, 2004, $224.8 million
related to the securitization of one- to four-family mortgage loans where the
Bank will retain the resulting mortgage-backed securities.
5. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 2004 and the three months ended March 31, 2004 and 2005, is as
follows:
For the Year For the Three Months
Ended Ended
December 31, March 31,
2004 2004 2005
================== ===========================
(In Thousands) (In Thousands)
Balance at beginning of period...... $ 11,119 $ 11,119 $ 13,628
Current provision................... 2,736 596 572
Charge-offs......................... (252) (67) (2)
Recoveries.......................... 25 4 -
----------- --------- --------
Ending balance...................... $ 13,628 $ 11,652 $ 14,198
=========== ========= ========
An analysis of the recorded investment in impaired loans owned by the Bank at
the end of each period and the related specific valuation allowance for those
loans is as follows:
December 31, 2004 March 31, 2005
=========================== ============================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------- ------------- -------------- -------------
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loan losses................ $ 1,650 $ 487 $ 1,887 $ 613
Loans without related allowance for loan losses............. 8,172 - 5,723 -
-------- -------- -------- --------
Total.............................................. $ 9,822 $ 487 $ 7,610 $ 613
======== ======== ======== ========
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 to cease accruing interest thereafter. Interest ultimately
collected is credited to income in the period of recovery.
6. DEPOSITS
The weighted-average interest rates on deposits at December 31, 2004 and March
31, 2005 were 1.53% and 1.61%, respectively. Deposit accounts, by type at
December 31, 2004 and March 31, 2005 consist of the following:
December 31, March 31,
Account Type and Rate 2004 2005
========= ==============
(In Thousands)
Non-interest-bearing checking accounts..................... $ 386,790 $ 443,714
Interest-bearing checking and funds transfer accounts...... 689,533 701,884
Passbook and statement accounts............................ 770,124 754,499
Variable-rate money market accounts........................ 335,573 370,919
Certificates of deposit.................................... 632,650 596,553
---------- ----------
Total...................................................... $2,814,670 $2,867,569
========== ==========
9
<Page>
7. 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, 2004 Stockholders'
Equity and ratio to total assets 8.3% $ 286,594
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) (1,546)
Goodwill............................. (2,930)
Disallowed servicing assets.......... (213)
----------
Tangible capital and ratio to
adjusted total assets........... 8.1% $ 281,905 1.5% $ 51,966
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 8.1% $ 281,905 3.0% $ 103,932 5.0% $ 173,220
======== ========== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 11.3% $ 281,905 4.0% $ 99,862 6.0% $ 149,793
======== ========== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 12,639
----------
Total risk-based capital and ratio to
risk-weighted total assets...... 11.8% $ 294,544 8.0% $ 199,725 10.0% $ 249,656
======== ========== ====== ========= ====== =========
Total assets......................... $3,470,068
==========
Adjusted total assets................ $3,464,391
==========
Risk-weighted assets................. $2,496,558
==========
As of March 31, 2005 Stockholders'
Equity and ratio to total assets 8.2% $ 289,031
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 3,238
Goodwill............................. (2,923)
Disallowed servicing assets.......... (407)
----------
Tangible capital and ratio to
adjusted total assets........... 8.2% $ 288,939 1.5% $ 52,654
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 8.2% $ 288,939 3.0% $ 105,307 5.0% $ 175,512
======== ========== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 11.9% $ 288,939 4.0% $ 97,289 6.0% $ 145,934
======== ========== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 13,089
----------
Total risk-based capital and ratio to
risk-weighted total assets...... 12.4% $ 302,028 8.0% $ 194,579 10.0% $ 243,224
======== ========== ====== ========= ====== =========
Total assets......................... $3,508,343
==========
Adjusted total assets................ $3,510,235
==========
Risk-weighted assets................. $2,432,235
==========
10
<Page>
8. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including adjustments for stock options and unvested stock
grants, for the three months ended March 31, 2004, retroactively adjusted for
the 2004 3 for 2 stock split, is 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 21,927,343 $ 0.26
========== =========
Effect of diluted shares:
Common stock options.................... 512,967
Recognition and retention plan shares... 234,443
----------
Diluted EPS:
Income available to
common stockholders..................... $5,687,000 22,674,753 $ 0.25
========== ========== ========
The weighted-average number of shares used to calculate basic and diluted
earning per share, including adjustments for stock options and unvested stock
grants, for the three months ended March 31, 2005, is as follows:
For the Three Months Ended
March 31, 2005
---------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
Net income.................................. $6,816,000
==========
Basic EPS:
Mortgage loans...............................
Income available to
common stockholders..................... $6,816,000 23,838,307 $ 0.29
========== =========
Effect of diluted shares:
Common stock options.................... 544,098
Recognition and retention plan shares... 189,062
----------
Diluted EPS:
Income available to
common stockholders..................... $6,816,000 24,571,467 $ 0.28
========== ========== =========
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
An analysis of the components of Accumulated Other Comprehensive Loss as of
December 31, 2004 and March 31, 2005, is as follows:
December 31, 2004 March 31, 2005
================== ========== ================
(In Thousands)
Unrealized gain (loss) on assets available for sale,
net of tax............................................ $ 1,546 $ (3,238)
Minimum pension liability, net of tax.................
(1,949) (1,949)
------- -------
Ending balance........................................ $ (403) $ (5,187)
========= ===========
11
<Page>
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, 2004 March 31, 2005
-------------------------------- --------------------------------
Before-tax Tax Net-of-Tax Before-tax Tax Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
========== ========== ========== === ========== ========== ==========
(In Thousands)
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains
(losses) arising
during period.................... $ 5,033 $(1,963) $ 3,070 $(7,756) $ 2,972 $(4,784)
Reclassification adjustment
for (gains) losses
realized in net income........... (587) 229 (358) - - -
----- --- ----- -------- ------- -------
Other comprehensive
income (loss) ..... $ 4,446 $(1,734) $ 2,712 $(7,756) $ 2,972 $(4,784)
======== ========= ======== ========= ======= =======
The Company's only component of Other Comprehensive Operations for the three
months ended March 31, 2005 and 2004 is the change in the unrealized gain or
loss on assets available for sale.
Other comprehensive loss for the quarter ended March 31, 2005 was $4.8 million
compared to other comprehensive income of $2.7 million for the quarter ended
March 31, 2004. During the three months ended March 31, 2005, due to increasing
market interest rates, the market value of the Company's assets available for
sale decreased by $7.8 million which, net of income tax of $3.0 million,
resulted in other comprehensive loss of $4.8 million. During the three months
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 of $1.7 million,
resulted in other comprehensive income of $2.7 million.
At March 31, 2005, the Company held no securities available for sale that were
in a continuous unrealized loss position for twelve months or longer.
10. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
March 31,
-----------------------------
2004 2005
=============== =============
Mortgage-backed securities retained from the
securitization of mortgage loans............. $ - $202,816
======== ========
11. COMMITMENTS AND 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 consolidated
financial condition, results of operations or cash flows.
12
<Page>
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 sought as damages a statutory
minimum of $2,500.00 per violation on behalf of the class of plaintiffs. On June
14, 2004, the Court granted Fidelity Federal's Motion for Summary Judgment and
entered a Final Judgment in favor of the bank against Mr. Kehoe. A Notice of
Appeal was filed by Mr. Kehoe's lawyers on June 28, 2004. Fidelity Federal, in
consultation with counsel, has concluded that the lawsuit is without merit and
intends to defend against the Plaintiff's Appeal of the Court's Final Judgment
in the bank's favor.
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 Marrero, filed in the Fifteenth Judicial Circuit in
and for Palm Beach County, Florida. The plaintiffs in this case have alleged
various causes of action against numerous defendants which arise from
plaintiffs' investments in various entities controlled and generated by Thomas
Abrams, who was convicted for running a Ponzi Scheme. Fidelity Federal is a
named defendant in one count of the complaint alleging aiding and abetting
breaches of fiduciary duty. The 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 instructions from authorized
signatures on the accounts and generally offer banking services to the Abrams
entities. There are additional allegations that Fidelity Federal solicited
clients for the Abrams entities and pressured clients to place deposits with the
Abrams entities and Fidelity Federal, which are without basis. There is no
specific request for damages, other than the jurisdictional amount of in excess
of $15,000. The Plaintiffs allege they lost in excess of $18,000,000 investing
with Abrams. The actual amount of losses incurred by the plaintiffs are
undetermined as of this time. The Bank has moved to dismiss the second amended
complaint, and intends to vigorously defend its position on the basis that the
Bank acted solely as a depository bank in the transactions and allegations of
improper conduct by the Bank are factually inaccurate.
12. SUBSEQUENT EVENTS
On April 1, 2005, the Company completed its acquisition of First Community
Bancorp. At closing, First Community Bancorp had assets of $157.5 million and
deposits of $137.7 million. The $137.7 million in deposits consists of $45.1
million in non-interest bearing checking accounts, $53.3 million in money market
and savings accounts and $20.4 million in certificates of deposit. First
Community Bancorp was acquired for $13.1 million in cash and 525,000 shares of
Fidelity Bankshares, Inc. common stock. The Company expects to incur
approximately $1.0 million in merger related charges during the second quarter
and expects the transaction to be accretive to net income thereafter.
13
<Page>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Bank & Trust ("Fidelity Federal" or the "Bank"). The Company conducts no
business other than holding the common stock of the Bank and its special purpose
trusts, Fidelity Capital II and Fidelity Capital III. 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.
Recent Developments.
On April 1, 2005, the Company completed its acquisition of First Community
Bancorp. At closing, First Community Bancorp had assets of $157.5 million and
deposits of $137.7 million. The $137.7 million in deposits consists of $45.1
million in non-interest bearing checking accounts, $53.3 million in money market
and savings accounts and $20.4 million in certificates of deposit. First
Community Bancorp was acquired for $13.1 million in cash and 525,000 shares of
Fidelity Bankshares, Inc. common stock. The Company expects to incur
approximately $1.0 million in merger related charges during the second quarter
and expects the transaction to be accretive to net income thereafter.
15
<Page>
Other Comprehensive Income (Loss).
The Company's only component of Other Comprehensive Operations for the three
months ended March 31, 2005 and 2004 is the change in the unrealized gain or
loss on securities available for sale.
Other comprehensive loss for the quarter ended March 31, 2005 was $4.8 million
compared to other comprehensive income of $2.7 million for the quarter ended
March 31, 2004. During the three months ended March 31, 2005, due to increasing
market interest rates, the market value of the Company's securities available
for sale decreased by $7.8 million which, net of income tax of $3.0 million,
resulted in other comprehensive loss of $4.8 million. During the three months
ended March 31, 2004, the market value of the Company's securities available for
sale increased by $4.4 million, which net of income tax of $1.7 million,
resulted in other comprehensive income of $2.7 million.
At March 31, 2005, the Company held no securities available for sale that were
in a continuous unrealized loss position for twelve months or longer.
Changes in Financial Condition.
Our assets increased by $38.8 million to $3.5 billion at March 31, 2005 as
compared to December 31, 2004. Assets held to maturity, consisting of
mortgage-backed securities secured by one- to-four family mortgages increased by
$196.5 million from December 31, 2004 to March 31, 2005. During the quarter
ended March 31, 2005 the Company securitized $202.8 million of residential
mortgage loans and received securities secured by these loans. This
securitization of some of the Company's residential mortgages, was undertaken to
improve the Company's regulatory, risk-based capital. Loans receivable decreased
during the quarter ended March 31, 2005 by $107.0 million due to the above
securitization offsetting loan growth of approximately $95.8 million. Another
use of funds was the repayment of borrowings from the Federal Home Loan Bank of
$28.4 million. Funds used to provide the asset growth shown above and reduction
of Federal Home Loan Bank advances came mainly from an increase in deposits from
December 31, 2004 to March 31, 2005 of $52.9 million, a decrease in cash and
cash equivalents of $32.2 million and a decrease in assets available for sale of
$24.9 million. In addition, all other assets increased by $6.4 million and all
other liabilities decreased by $13.5 million.
Results of Operations.
Our net income for the quarter ended March 31, 2005 was $6.8 million or $.29
basic and $.28 diluted earnings per share. By comparison, our net income for the
quarter ended March 31, 2004 was $5.7 million or $.26 basic and $.25 diluted
earnings per share. A number of factors contributed to our increase in net
income. The primary reason for the increase was our increase in net interest
income of $6.2 million, or 25.8%, from $23.9 million for the quarter ended March
31, 2004 to $30.1 million for the quarter ended March 31, 2005. This improvement
resulted from an increase in interest income of $7.3 million, or 19.1%, from
$38.1 million to $45.3 million for the quarters ended March 31, 2004 and 2005,
respectively, partially offset by an increase in interest expense of $1.1
million, or 7.8%, from $14.1 million for the quarter ended March 31, 2004 to
$15.3 million for the quarter ended March 31, 2005. Our provision for loan
losses remained relatively stable at $572,000 and $596,000 for the quarters
ended March 31, 2005 and 2004, respectively. Similarly, our other income was
relatively stable at $6.1 million and $6.5 million for the quarters ended March
31, 2005 and 2004, respectively. Offsetting our improvement in income was an
increase in operating expense of $4.1 million, or 20.2%, from $20.5 million for
the quarter ended March 31, 2004 to $24.6 million for the quarter ended March
31, 2005. Interest Income.
16
<Page>
Interest income increased by $7.3 million, or 19.1%, to $45.3 million for the
quarter ended March 31, 2005, from $38.1 million for the same quarter in 2004.
Our average interest earning assets increased by $336.5 million, or 11.6%, to
$3.2 billion for the quarter ended March 31, 2005 from $2.9 billion for the
quarter ended March 31, 2004. In addition, the yield on average interest earning
assets improved to 5.60% from 5.25% for the quarters ended March 31, 2005 and
2004, respectively. Interest income on mortgage loans increased to $32.0
million, or 12.9% from $28.3 million, for the quarters ended March 31, 2005 and
2004, respectively, due almost entirely to the increase of 12.7% in the average
balances of these loans. The yield on these loans was 5.93% for the quarter
ended March 31, 2005, compared to 5.92% for the quarter ended March 31, 2004.
The average balances of consumer and other loans increased by $37.5 million, or
12.0% to $350.3 million from $312.8 million for the quarters ended March 31,
2005 and 2004, respectively, and the yield on these loans improved to 6.13%
during the quarter ending in 2005 from 5.68% during the quarter ending in 2004.
As a result, interest income on consumer and other loans increased by $925,000,
or 20.8%, to $5.4 million for the quarter ended March 31, 2005 from $4.4 million
for the quarter ended March 31, 2004. Interest income on mortgage-backed
securities increased by $2.7 million, or 60.7%, to $7.2 million for the quarter
ended March 31, 2005 from $4.4 million for the quarter ended March 31, 2004.
During the quarter ended March 31, 2005, for regulatory, risk-based capital
purposes, we securitized approximately $202.8 million of residential loans in
our loan portfolio and transferred these mortgage-backed securities to assets
held to maturity. As a result, the average balances of our mortgage-backed
securities increased by $142.0 million, or 30.4%, to $609.1 million from $467.1
million for the quarters ended March 31, 2005 and 2004, respectively. In
addition, the yield on these investments increased to 4.70% from 3.81%. In the
aggregate, interest income on our investment securities and other investments
remained relatively constant at $832,000 for the quarter ended March 31, 2005
and $854,000 for the quarter ended March 31, 2004.
Interest Expense.
Interest expense increased by $1.1 million, or 7.8%, to $15.3 million for the
quarter ended March 31, 2005. For the quarter ended March 31, 2004, interest
expense was $14.1 million. While the average balances of our deposits increased
by $312.7 million, or 12.5%, to $2.8 billion during the quarter ended March 31,
2005 from $2.5 billion during the quarter ended March 31, 2004, interest expense
on these deposits increased by $1.4 million, or 15.4%, to $10.8 million from
$9.4 million. We experienced an increase in the cost of deposits to 1.53% from
1.50% for the quarters ended March 31, 2005 and 2004, respectively. The average
balances of our borrowed funds declined slightly to $347.9 million for the
quarter ended March 31, 2005 from $357.1 million for the quarter ended March 31,
2004 and was accompanied by a decline in the cost of these borrowings to 5.10%
from 5.35%. As a result, interest expense on borrowings declined by $343,000, or
7.2%, to $4.4 million from $4.8 million for the quarters ended March 31, 2005
and 2004, respectively.
Net Interest Income.
Our net interest income increased by $6.2 million, or 25.8%, to $30.1 million
for the quarter ended March 31, 2005, compared to $23.9 million for the quarter
ended March 31, 2004. This is attributable to the improvement in our net
interest margin from 3.30% during the quarter ended March 31, 2004 to 3.71%
during the quarter ended March 31, 2005.
17
<Page>
Provision for Loan Losses.
Our provision for loan losses remained stable at $572,000 and $596,000 for the
quarters ended March 31, 2005 and 2004, respectively.
Our financial statements are prepared in accordance with generally accepted
accounting principles. Accordingly, allowances for loan losses are based on
management's estimate of 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 portfolio. General valuation
allowances are added to our capital for purposes of calculating our regulatory
risk-based capital. We conduct a monthly review of our loan portfolio, including
impaired loans, to determine whether any loans require classification or the
establishment of appropriate valuation allowances. As we continue to increase
our origination of commercial business loans, consumer loans and commercial real
estate loans, and such loans traditionally have a higher risk of loss than
residential mortgage loans, our provision for loan losses is likely to increase
in future periods.
Other Income.
Other income decreased by 5.1%, or $327,000 for the quarter ended March 31, 2005
to $6.1 million, from $6.5 million for the quarter ended March 31, 2004. Fees
for other banking services, which includes insurance sales commissions,
increased by $224,000 and gains on sale of loans increased by $247,000 for the
quarter ended March 31, 2005, compared to the quarter ended March 31, 2004.
Miscellaneous income also increased by $127,000. Offsetting these increases,
however, were decreases of $338,000 in service charges on deposit accounts and
$587,000 from the sales of investments.
Operating Expense.
Operating expense increased by $4.1 million, or 20.2%, to $24.6 million for the
quarter ended March 31, 2005, from $20.5 million for the quarter ended March 31,
2004. Employee compensation and benefits increased by $2.0 million, or 16.8%. Of
this amount, $866,000 resulted from increased employee health and pension costs.
The remainder is primarily attributable to increased personnel, increased
commissions on insurance sales and loan production, as well as normal salary
increases. Occupancy and equipment expense increased by $778,000. Building
maintenance and taxes increased by $232,000, while data processing costs and
related depreciation of equipment increased by $362,000. Marketing expense
increased by $198,000, coinciding with the acquisition of First Community.
Miscellaneous operating expense increased by $1.1 million. While there was no
one significant reason for the increase, we experienced increases of $194,000 in
consulting fees, $137,000 in bad check charge-offs, $113,000 in increased
consumer loan production costs, $98,000 for audit and examination fees, $90,000
in postage costs and $83,000 in insurance expense.
Income Taxes.
Our provision for income taxes for the quarter ended March 31, 2005 was $4.2
million, an increase of $595,000 from $3.6 million for the year ended March 31,
2004. Our provision for income taxes reflects our current rate applied to
income, before taxes.
18
<Page>
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 5.88% during the
month of March 31, 2005. Liquidity ratios averaged 6.37% for the quarter ended
March 31, 2005. 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 $35.8 million at
March 31, 2005. Other assets qualifying for liquidity at March 31, 2005,
including unpledged mortgage-backed securities guaranteed by Fannie Mae and
Freddie Mac, were $153.8 million. For additional information about cash flows
from the Company's operating, financing and investing activities, see the
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.
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, 2005, the Bank had $222.5 million in advances from
the FHLB. At March 31, 2005, the Bank had commitments outstanding to originate
or purchase loans of $276.5 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, 2005 totaled $378.3 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
19
<Page>
Contractual Obligations and Commercial Commitments
Our long-term debt, which in the aggregate totals $276.1 million, consists of
obligations to the FHLB totaling $222.5 million and $53.6 million in obligations
resulting from the issuance of trust preferred securities from Fidelity Capital
Trust II in December 2003 as well as Fidelity Capital Trust III in October 2004.
The obligations arising from the issuance of trust preferred securities,
presented as Junior Subordinated Debentures in our balance sheet at March 31,
2005 are due in the amount of $22.7 million in January, 2034 and $30.9 million
in November 2034. In addition, we have leasehold obligations for the next 49
years totaling $24.3 million.
The tables below summarize the Company's contractual obligations, commercial and
other commitments at March 31, 2005.
Payments Due by Period
--------------------------------------------------------------------------
Less Than After 5
Total 1 year 1-3 Years 3-5 Years Years
--------------------------------------------------------------------------
(In Thousands)
Time Deposits.................... $ 596,553 $ 378,304 $ 200,266 $ 17,983 $ -
Long-term Debt(1)................ 276,068 138,582 26,331 57,344 53,811
Operating Lease Obligations...... 24,303 1,945 3,947 3,473 14,938
Pension Obligations.............. 14,294 4,745 9,549 - -
---------- ---------- ---------- -------- ----------
Total Contractual Cash Obligations $ 911,218 $ 523,576 $ 240,093 $ 78,800 $ 68,749
========== ========== ========== ========= =========
(1) Includes advances from the Federal Home Loan Bank and Junior Subordinated
Debentures.
Commercial and Other Commitments
- ---------------------------------
Amount of Commitment Expirations per Period
Less Than After 5
Total 1 year 1-3 Years 3-5 Years Years
-------------------------------------------------------------------------
(In Thousands)
Lines of Credit(1)............... $ 248,751 $ 6,979 $ 12,015 $ 21,282 $ 208,475
Standby Letters of Credit........ 15,686 15,137 543 - 6
Other Commercial Commitments..... 94,540 94,540 - - -
Other Commitments................ 132,204 132,204 - - -
-------- -------- -------- -------- ---------
Total Contractual Cash Obligations $ 491,181 $248,860 $ 21,558 $ 21,282 $ 208,481
========= ======== ========= ======== =========
20
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New Accounting Pronouncements
In December 2004, the FASB issued FAS 123 (revised 2004), Share-Based Payment.
Under this promulgation, companies are required to reflect costs associated with
employee stock options in their income statements at fair value. In April 2005,
the SEC amended the date for compliance with FAS 123 (revised 2004) so that each
registrant that is not a small business issuer will be required to prepare
financial statements in accordance with statement 123 (revised 2004) beginning
with the first interim or annual reporting period of the registrant's first
fiscal year beginning on or after June 15, 2005. The Company will begin
reflecting stock option costs under the fair value method commencing in the
quarter beginning January 1, 2006 as required. The Company is still evaluating
the effects of adoption of this principle.
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, 2005, the
Company does not own any trading assets other than $1.2 million of assets held
in trust by the Senior Management Performance Incentive Award Program, a
deferred compensation plan, 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, 2005, 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. Gap
analysis attempts to measure the difference between the amount of interest
earning assets expected to mature or reprice within a specific period of time
compared to the amount of interest-bearing liabilities maturing or repricing
within a specified period of time. An interest rate sensitive gap is considered
positive when the amount of interest-earning assets exceeds the amount of
interest-bearing liabilities maturing or repricing within a specified period of
time. An interest rate sensitive gap is considered negative when the amount of
interest-bearing liabilities exceeds the amount of interest-earning assets
maturing or repricing within a specified period of time. Companies with a
positive gap can expect net interest income to increase during periods of rising
interest rates and decline in periods of falling interest rates.
21
<Page>
In preparing the gap analysis table below, the Company makes various assumptions
including loan prepayment rates and deposit decay rates. 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. Certain
shortcomings are inherent in any methodology used in interest rate risk
measurements. 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. Therefore, 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.
Accordingly, while the 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 net interest
income, as actual results may vary.
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.
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<Page>
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, 2005 was a positive 26.60%.
Time to Maturity
----------------------------------------------------------------------
Four to One Year Three Years
Within Three Twelve to Three to Five Over Five
Months Months Years Years Years
(Dollars in Thousands)
Interest-earning assets (1):
Residential mortgage loans: (2)
Fixed rate........................ 24,628 67,419 139,833 95,027 175,023
Adjustable rate................... 119,116 221,922 162,929 234,932 -
Commercial mortgage loans: (2)
Fixed rate........................ 6,843 16,902 31,666 20,854 33,225
Adjustable rate................... 279,644 454,221 15,092 5,382 -
Other loans (2)
Fixed rate.................... 19,238 29,261 31,186 12,931 3,138
Adjustable rate................... 259,384 11,017 - - -
Mortgage-backed securities
Fixed rate........................ 31,761 86,699 178,395 120,497 200,576
Adjustable rate................... 87,562 - - - -
Municipal bonds and government and
agency securities - fixed rate.. - 25,425 10,241 30,224 -
Other interest earning assets - adjustable 52,730 - - - -
--------- -------- -------- -------- ---------
Total 880,906 912,866 569,342 519,847 411,962
---------- -------- -------- -------- --------
Interest-bearing liabilities
Deposits: (3)
Checking and funds transfer accounts 24,077 72,231 94,959 71,407 867,383
Passbook accounts................. 21,579 64,736 129,359 91,399 447,425
Money market accounts............. 14,861 44,584 62,855 39,541 236,050
Certificate accounts (4).......... 115,243 263,186 200,141 17,983 -
Borrowings: (4)..................... 205,040 34,859 51,891 32,487 -
------- -------- ------ -------- -
Total 380,800 479,596 539,205 252,817 1,550,858
------- -------- ------- -------- ---------
Excess (deficiency) of interest-earning
assets
over interest-bearing liabilities..... 500,106 433,270 30,137 267,030 (1,138,896)
Cumulative excess of interest-earning
assets
over interest-bearing liabilities..... 500,106 933,376 963,513 1,230,543 91,647
Cumulative excess of interest-earning
assets
over interest-bearing liabilities as a
percent
of total assets....................... 14.25% 26.60% 27.46% 35.07% 2.61%
(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 15%
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, in preparation of this table the Company has
used national decay rates calculated by a leading Bank consulting firm.
These national decay rates consider a significant portion of these accounts
to be core deposits having longer effective maturities based on the firm's
calculations of national average deposit runoff. These decay rates may be
different than the actual decay rates experienced by the Company.
4) Certificate accounts and Borrowings are assumed to have no prepayments and
are shown in the period in which they contractually mature.
23
<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 March 31, 2005. 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 changes made in our internal controls during the period
covered by this report or, to our knowledge, in other factors that has
materially affected or is reasonably likely to materially affect these internal
controls over financial reporting.
See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
24
<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 sought as damages a statutory minimum of $2,500.00 per
violation on behalf of the class of plaintiffs. On June 14, 2004, the
Court granted Fidelity Federal's Motion for Summary Judgment and
entered a Final Judgment in favor of the bank against Mr. Kehoe. A
Notice of Appeal was filed by Mr. Kehoe's lawyers on June 28, 2004.
Fidelity Federal, in consultation with counsel, has concluded that the
lawsuit is without merit and intends to defend against the Plaintiff's
Appeal of the Court's Final Judgment in the bank's favor.
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
Marrero, filed in the Fifteenth Judicial Circuit in and for Palm Beach
County, Florida. The plaintiffs in this case have alleged various
causes of action against numerous defendants which arise from
plaintiffs' investments in various entities controlled and generated
by Thomas Abrams, who was convicted for running a Ponzi Scheme.
Fidelity Federal is a named defendant in one count of the complaint
alleging aiding and abetting breaches of fiduciary duty. The
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 instructions from authorized
signatures on the accounts and generally offer banking services to the
Abrams entities. There are additional allegations that Fidelity
Federal solicited clients for the Abrams entities and pressured
clients to place deposits with the Abrams entities and Fidelity
Federal, which are without basis. There is no specific request for
damages, other than the jurisdictional amount of in excess of $15,000.
The Plaintiffs allege they lost in excess of $18,000,000 investing
with Abrams. The actual amount of losses incurred by the plaintiffs
are undetermined as of this time. The Bank has moved to dismiss the
second amended complaint, and intends to vigorously defend its
position on the basis that the Bank acted solely as a depository bank
in the transactions and allegations of improper conduct by the Bank
are factually inaccurate.
25
<Page>
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
31.1 302 Certification
31.2 302 Certification
32.1 906 Certification
Item 6 Exhibits 31.1, 31.2 and 32.1
26
<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 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
quarterly 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 officer(s) 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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 quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) 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
d) 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 9, 2005 /S/ Vince A. Elhilow
- ---------------- --------------------------------------
Date Vince A. Elhilow
President and Chief Executive Officer
27
<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
quarterly 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 officer(s) 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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 quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) 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
d) 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 9, 2005 /S/ Richard D. Aldred
- ---------------- ------------------------------------------
Date Richard D. Aldred
Executive Vice President,
Chief Financial Officer
28
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
29
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 quarterly report of the Company on Form
10-Q 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 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 9, 2005 /S/ Vince A. Elhilow
- ----------------- ----------------------------------------
Date President and Chief Executive Officer
May 9, 2005 /S/ Richard D. Aldred
- ----------------- ----------------------------------------
Date Executive Vice President, Chief Financial
Officer and Treasurer
30
<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 9, 2005 By: /S/ Vince A. Elhilow
--------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: May 9, 2005 /S/ Richard D. Aldred
--------------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer