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 June 30, 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 Datura Street, West Palm Beach, Florida 33401
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(Address of principal executive offices) (Zip Code.)
(561) 803-9900
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(Registrant's telephone number, including area code)
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(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 25,099,255 shares
of the Registrant's common stock par value $.10 per share outstanding as of July
31, 2005.
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, 2004 and June 30, 2005..................................................2
Unaudited Condensed Consolidated Statements of Operations for the three
and the six months ended June 30, 2004 and 2005.....................................3
Unaudited Condensed Consolidated Statements of Comprehensive Operations
for the three and the six months ended June 30, 2004 and 2005.......................4
Unaudited Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 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..........................................................18
Item 3. Quantitative and Qualitative Disclosure About Market Risk...............................27
Item 4. Controls and Procedures.................................................................30
PART II. OTHER INFORMATION..................................................................................31
Item 1. Legal Proceedings.......................................................................31
Item 2. Changes in Securities and Stock Repurchases.............................................32
Item 3. Default Upon Senior Securities..........................................................32
Item 4. Submission of matters to a Vote of Security.............................................32
Item 5. Other Information.......................................................................32
Item 6. Exhibits................................................................................32
EXHIBITS
Section 302 Certification..........................................................................32
Section 906 Certification..........................................................................32
37
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
December 31, June 30,
2004 2005
=========== ===========
(In thousands, except share and per share data)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions ........... $ 108,327 $ 134,609
Interest-earning deposits ................................... 41,082 5,207
----------- -----------
Total cash and cash equivalents ......................... 149,409 139,816
----------- -----------
SECURITIES AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities ........ 65,156 64,816
Mortgage-backed securities .................................. 440,473 402,948
----------- -----------
Total assets available for sale ......................... 505,629 467,764
SECURITIES HELD TO MATURITY (At Cost):
Mortgage-backed securities .................................. 89,167 270,278
LOANS RECEIVABLE, Net ............................................ 2,556,700 2,718,696
OFFICE PROPERTIES AND EQUIPMENT, Net ............................. 83,439 91,543
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market . 17,399 12,847
REAL ESTATE OWNED, Net ........................................... -- 7
ACCRUED INTEREST RECEIVABLE ...................................... 12,379 14,019
GOODWILL ......................................................... 2,171 14,372
CORE DEPOSIT INTANGIBLES ......................................... -- 6,908
DEFERRED INCOME TAX ASSET ........................................ 7,883 7,933
OTHER ASSETS ..................................................... 46,363 52,652
----------- -----------
TOTAL ASSETS ..................................................... $ 3,470,539 $ 3,796,835
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ......................................................... $ 2,814,670 $ 3,197,784
OTHER BORROWED FUNDS ............................................. 46,097 77,358
ADVANCES FROM FEDERAL HOME LOAN BANK ............................. 250,855 124,163
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE .................... 3,166 15,590
DRAFTS PAYABLE ................................................... -- 954
JUNIOR SUBORDINATED DEBENTURES ................................... 53,608 53,608
OTHER LIABILITIES ................................................ 50,860 52,630
----------- -----------
TOTAL LIABILITIES ........................................... 3,219,256 3,522,087
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued ........ -- --
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
outstanding 24,425,050 at December 31, 2004 and 25,097,604 at
June 30, 2005 ............................................... 2,442 2,510
ADDITIONAL PAID IN CAPITAL ....................................... 152,398 165,585
RETAINED EARNINGS - substantially restricted ..................... 105,556 117,149
TREASURY STOCK - at cost, 441,082 shares at December 31, 2004 and
417,384 shares at June 30, 2005 ............................. (1,756) (1,767)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan ............................... (3,909) (3,735)
Recognition and retention plan .............................. (3,045) (2,415)
ACCUMULATED OTHER COMPREHENSIVE LOSS ............................. (403) (2,579)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY .................................. 251,283 274,748
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 3,470,539 $ 3,796,835
=========== ===========
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2005 2004
======== ======== ======== ========
(In Thousands, except per share data)
Interest income:
Loans ......................................................... $ 33,921 $ 40,846 $ 66,680 $ 78,188
Investment securities ......................................... 927 520 1,495 949
Other investments ............................................. 356 367 642 770
Mortgage-backed and corporate debt securities ................. 3,887 8,343 8,336 15,493
-------- -------- -------- --------
Total interest income ..................................... 39,091 50,076 77,153 95,400
-------- -------- -------- --------
Interest expense:
Deposits ...................................................... 9,591 13,808 18,964 24,626
Advances from Federal Home Loan Bank and other borrowings ..... 4,915 3,536 9,691 7,969
-------- -------- -------- --------
Total interest expense .................................... 14,506 17,344 28,655 32,595
-------- -------- -------- --------
Net interest income ................................................ 24,585 32,732 48,498 62,805
Provision for loan losses .......................................... 794 422 1,391 994
-------- -------- -------- --------
Net interest income after provision for loan losses ................ 23,791 32,310 47,107 61,811
-------- -------- -------- --------
Other income:
Service charges on deposit accounts ........................... 2,795 2,799 5,634 5,300
Fees for other banking services ............................... 2,997 3,226 5,669 6,122
Net gain on sale of loans ..................................... 151 121 257 473
Net gain on sale of investments ............................... 467 -- 1,053 --
Miscellaneous ................................................. 747 457 1,007 844
-------- -------- -------- --------
Total other income ........................................ 7,157 6,603 13,620 12,739
-------- -------- -------- --------
Operating expense:
Employee compensation and benefits ............................ 12,521 14,215 24,466 28,164
Occupancy and equipment ....................................... 3,943 5,029 7,953 9,817
(Gain)/loss on real estate owned and other repossessed
assets ...................................................... (2) -- (10) 2
Marketing ..................................................... 520 729 1,108 1,515
Federal deposit insurance premium ............................. 93 103 183 198
Miscellaneous ................................................. 4,472 4,903 8,313 9,882
-------- -------- -------- --------
Total operating expense ................................... 21,547 24,979 42,013 49,578
-------- -------- -------- --------
Income before provision for income taxes ........................... 9,401 13,934 18,714 24,972
-------- -------- -------- --------
Provision for income taxes:
Current ....................................................... 3,407 5,919 6,731 10,644
Deferred ...................................................... 306 (632) 608 (1,135)
-------- -------- -------- --------
Total provision for income taxes .......................... 3,713 5,287 7,339 9,509
-------- -------- -------- --------
Net income........................................... $ 5,688 $ 8,647 $ 11,375 $ 15,463
======== ======== ======== ========
Earnings per share: (Note 1)
Basic......................................................... $ 0.26 $ 0.35 $ 0.52 $ 0.64
======== ======== ======== ========
Diluted....................................................... $ 0.25 $ 0.35 $ 0.50 $ 0.63
======== ======== ======== ========
Dividends declared per share....................................... $ 0.07 $ 0.08 $ 0.13 $ 0.16
======== ======== ======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
======== ======== ======== ========
(In Thousands)
Net Income ............................................... $ 5,688 $ 8,647 $ 11,375 $ 15,463
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale (8,140) 2,607 (5,428) (2,176)
-------- -------- -------- --------
Comprehensive income (loss) .............................. $ (2,452) $ 11,254 $ 5,947 $ 13,287
======== ======== ======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
2004 2005
========= =========
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income ............................................................ $ 11,375 $ 15,463
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ....................................................... 2,893 3,226
Amortization of core deposit intangibles ........................... -- 190
ESOP and recognition and retention plan compensation expense ....... 1,359 1,275
Accretion of discounts, amortization of premiums and intangible
assets, and other deferred yield items ............................ (1,370) (3,440)
Provision for loan losses .......................................... 1,391 994
Provisions for losses and net (gains) losses on sales of real estate
owned............................................................ (10) 2
Net (gain) loss on sale of:
Loans ........................................................ (257) (473)
Mortgage backed securities ................................... (1,053) --
Office properties and equipment .............................. (429) 52
Decrease (increase) in accrued interest receivable ................. (998) (1,140)
Decrease (increase) in other assets ................................ 900 (4,855)
Increase in drafts payable ......................................... 2,184 954
Increase (decrease) in deferred income taxes ....................... 608 (693)
Increase in other liabilities ...................................... 2,457 939
--------- ---------
Net cash provided by operating activities .................... 19,050 12,494
--------- ---------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans ..................... (250,237) (364,926)
Principal payments received on mortgage-backed securities ............. 119,280 58,944
Purchases of:
Loans .............................................................. (21,558) 76,351
Mortgage-backed securities ......................................... (282,822) (4,536)
Federal Home Loan Bank stock ....................................... (12,373) (3,422)
Investment securities .............................................. (49,647) --
Office properties and equipment .................................... (6,552) (7,428)
Proceeds from sales of:
Loans .............................................................. 16,728 22,003
Federal Home Loan Bank stock ....................................... 5,790 8,542
Investment securities .............................................. -- 24,667
Repossessed assets acquired in settlement of loans ................. 59 --
Office properties and equipment .................................... 502 --
Mortgage backed securities ......................................... 125,865 8,246
Proceeds from maturities of investment securities ..................... -- 50
Net cash received from acquisitions ................................... -- 6,577
Other ................................................................. 974 402
--------- ---------
Net cash used for investing activities ....................... (353,991) (174,530)
--------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options
net of issuance costs................................................ 133 173
Cash dividends paid ................................................... (2,922) (3,820)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts ................. 256,343 124,366
Certificates of deposit ............................................ (40,440) 121,258
Advances from Federal Home Loan Bank ............................... 123,118 (133,205)
Other borrowed funds ............................................... (7,437) 31,262
Advances by borrowers for taxes and insurance ...................... 13,554 12,409
--------- ---------
Net cash provided by financing activities .................... 342,349 152,443
--------- ---------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS ................... 7,408 (9,593)
CASH AND CASH EQUIVALENTS, beginning of period ........................ 109,887 149,409
--------- ---------
CASH AND CASH EQUIVALENTS, end of period .............................. $ 117,295 $ 139,816
========= =========
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 June 30, 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.
Goodwill and Other Intangible Assets - Goodwill represents the excess of the
cost of an acquisition over the fair value of the net assets acquired. Other
intangible assets represent purchased assets that also lack physical substance
but can be separately distinguished from goodwill because of contractual or
other legal rights or because the asset is capable of being sold or exchanged
either on its own or in combination with a related contract, asset, or
liability. Goodwill is tested at least annually for impairment.
Intangible assets with finite lives are primarily core deposits. Intangible
assets are subject to impairment testing whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Core
deposit intangibles are amortized over their useful lives, approximately 10
years using the straight-line amortization method.
Stock Splits - During 2004, the Company announced a 3 for 2 common stock split
in the form of a stock dividend paid on January 14, 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 June 30, 2005 presentation.
6
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 pro forma 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 For the
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
========= ========= ========== ==========
(In Thousands) (In Thousands)
Net Income, as reported .................................. $ 5,688 $ 8,647 $ 11,375 $ 15,463
Add: Total stock-based employee compensation expense
included in reported net earnings, net of
related tax effects............................ 218 195 448 391
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects ......... (390) (487) (870) (811)
--------- --------- ---------- ----------
Pro forma net income ..................................... $ 5,516 $ 8,355 $ 10,953 $ 15,043
========= ========= ========== ==========
Basic - as reported .................................. 0.26 0.35 0.52 0.64
Basic - pro forma .................................... 0.25 0.34 0.50 0.62
Diluted - as reported ................................ 0.25 0.35 0.50 0.63
Diluted - pro forma .................................. 0.24 0.33 0.48 0.61
The weighted-average number of shares used to calculate basic and diluted
earnings per share for the quarter ended June 30, 2004 is retroactively adjusted
to reflect the three for two stock split in 2004.
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
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:
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
======= ======= ======= =======
(In Thousands) (In Thousands)
Service cost ..................... $ 555 $ 596 $ 1,111 $ 1,192
Interest cost .................... 396 407 793 814
Expected return on assets ........ (389) (375) (779) (781)
Amortization of prior service cost 1 13 3 25
Amortization of actuarial loss ... 206 243 412 487
------- ------- ------- -------
Net periodic pension expense ..... $ 769 $ 884 $ 1,540 $ 1,737
======= ======= ======= =======
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. During 2005, the actual amount contributed to the plan to date has
amounted to $4.7 million, and it is not known if any additional contributions
will be made during the year.
4. LOANS RECEIVABLE
Loans receivable at December 31, 2004 and June 30, 2005, consist of the
following:
December 31, June 30,
2004 2005
=========== ===========
(In Thousands)
One-to four- family, residential real estate mortgages ............... $ 1,023,448 $ 935,648
Commercial and multi-family real estate mortgages .................... 831,165 976,174
Real estate construction-primarily residential ....................... 308,044 350,312
Land loans-primarily residential ..................................... 57,661 67,820
----------- -----------
Total first mortgage loans ........................................... 2,220,318 2,329,954
Consumer loans ....................................................... 231,333 275,011
Commercial business loans ............................................ 121,331 132,312
----------- -----------
Total loans .......................................................... 2,572,982 2,737,277
Deduct:
Unearned discounts, premiums and deferred loan fees, net of costs (2,654) (3,062)
Allowance for loan losses ....................................... (13,628) (15,519)
----------- -----------
Loans receivable-net ................................................. $ 2,556,700 $ 2,718,696
=========== ===========
8
During the quarter ended June 30, 2005, the Company sold $11.6 million in loans,
which resulted in net gains of $121,000. During the quarter ended June 30, 2004,
the Company sold $8.0 million in loans, which resulted in net gains of
approximately $151,000.
At December 31, 2004 and June 30, 2005, the Bank had $226.1 million and $7.5
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 retained 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 and the six months ended June 30, 2004 and 2005,
is as follows:
For the Year For the Three Months For the Six Months
Ended Ended Ended
December 31, June 30, June 30,
2004 2004 2005 2004 2005
======== ======== ======== ======== ========
(In Thousands) (In Thousands) (In Thousands)
Balance at beginning of period.. $ 11,119 $ 11,652 $ 14,198 $ 11,119 $ 13,628
Current provision .............. 2,736 794 422 1,391 994
Effect of acquisition .......... -- -- 995 -- 995
Charge-offs .................... (252) (31) (96) (99) (98)
Recoveries ..................... 25 21 -- 25 --
-------- -------- -------- -------- --------
Ending balance ................. $ 13,628 $ 12,436 $ 15,519 $ 12,436 $ 15,519
======== ======== ======== ======== ========
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 June 30, 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 $ 3,407 $ 824
Loans without related allowance for loan losses............. 8,172 -- 3,238 --
-------- -------- -------- --------
Total.............................................. $ 9,822 $ 487 $ 6,645 $ 824
======== ======== ======== ========
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.
9
6. ACQUISITION OF FIRST COMMUNITY BANCORP, INC.
On April 1, 2005, the Company acquired 100 percent of the outstanding common
stock of First Community Bancorp, Inc. The results of First Community's
operations have been included in the Company's consolidated financial statements
since that date.
The aggregate purchase price was $27.9 million, consisting of $15.0 million in
cash and 525,000 shares of the Company's common stock, valued at $12.9 million.
The value of the Company's common stock was determined by the average of closing
prices for the three day period before and the three day period subsequent to
the date on which the terms of the acquisition were agreed to and announced.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
April 1, 2005
=============
Fair Value
-------------
(In Thousands)
Assets:
Cash and cash equivalents ................... $ 21,668
Investment securities ....................... 33,176
Loans receivable-net ........................ 95,547
Office properties and equipment ............. 4,057
FHLB stock .................................. 568
Goodwill .................................... 12,201
Core deposit intangibles .................... 7,098
Other assets ................................ 891
--------
Total assets ............................. $175,206
========
Liabilities:
Deposits .................................... $137,490
Borrowings from the FHLB .............. 6,513
Deferred tax liabilities .................... 2,459
Other liabilities .......................... 795
--------
Total liabilities ........................ 147,257
Net assets acquired ........................ 27,949
--------
Total liabilities and net assets acquired $175,206
========
10
The following pro forma consolidated financial information presents the combined
results of operations of the Company and First Community Bancorp as if the
acquisition had occurred as of the beginning of 2004 and 2005.
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2004 2005 2004 2005
======= ======= ======= =======
(In Thousands, except per share data)
Net interest income ............................... $25,959 $32,732 $51,203 $64,385
Provision for loan losses ......................... 825 422 1,451 994
------- ------- ------- -------
Net interest income after provision for loan losses 25,134 32,310 49,752 63,391
Total other income ................................ 7,560 6,603 14,357 13,076
Total operating expense ........................... 22,842 24,979 44,614 51,181
------- ------- ------- -------
Income before provision for income taxes .......... 9,852 13,934 19,495 25,286
Provision for income taxes ........................ 3,874 5,287 7,626 9,628
------- ------- ------- -------
Net income ........................................ $ 5,978 $ 8,647 $11,86 $15,658
======= ======= ======= =======
Earnings per share:
Basic ............................................ $ 0.27 $ 0.35 $ 0.53 $ 0.65
======= ======= ======= =======
Diluted .......................................... $ 0.26 $ 0.35 $ 0.51 $ 0.63
======= ======= ======= =======
7. GOODWILL AND CORE DEPOSIT INTANGIBLES
The following summarizes the balances of goodwill and deposit intangibles at
December 31, 2004 and June 30, 2005.
December 31, June 30,
2004 2005
======== ========
(In Thousands)
Goodwill:
Bank Boynton ......................................... $ 1,767 $ 1,767
Dunn & Noel insurance company ........................ 404 404
First Community Bancorp .............................. -- 12,201
-------- --------
Total goodwill .................................... 2,171 14,372
-------- --------
Deposit intangibles:
Core deposit intangibles, amortized on a straight-line
basis, .................................................. -- 7,098
over 9.3 years
Accumulated amortization ............................. -- (190)
-------- --------
Core deposit intangibles, net ..................... -- 6,908
-------- --------
Total goodwill and core deposit intangibles ............. $ 2,171 $ 21,280
======== ========
Amortization expense of core deposit intangibles was $190,000 for the three and
six months ended June 30, 2005. Amortization expense for the year ending
December 31, 2005 is expected to be $570,000. Amortization expense is expected
to be $760,000 for each of the four years thereafter.
11
8. DEPOSITS
The weighted-average interest rates on deposits at December 31, 2004 and June
30, 2005 were 1.53% and 1.94%, respectively. Deposit accounts, by type at
December 31, 2004 and June 30, 2005 consist of the following:
December 31, June 30,
Account Type and Rate 2004 2005
========== ==========
(In Thousands)
Non-interest-bearing checking accounts .............. $ 386,790 $ 449,021
Interest-bearing checking and funds transfer accounts 689,533 754,514
Passbook and statement accounts ..................... 770,124 779,176
Variable-rate money market accounts ................. 335,573 440,926
Certificates of deposit ............................. 632,650 774,147
---------- ----------
Total ............................................... $2,814,670 $3,197,784
========== ==========
12
9. 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 June 30, 2005 Stockholders'
Equity and ratio to total assets 8.3% $ 313,723
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 630
Goodwill............................. (21,685)
Disallowed servicing assets.......... (392)
------------
Tangible capital and ratio to
adjusted total assets........... 7.7% $ 292,276 1.5% $ 56,615
======== ============ ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.7% $ 292,276 3.0% $ 113,230 5.0% $ 188,716
======== ============ ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.7% $ 292,276 4.0% $ 109,348 6.0% $ 164,023
======== ============ ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 14,247
-----------
Total risk-based capital and ratio to
risk-weighted total assets...... 11.2% $ 306,523 8.0% $ 218,697 10.0% $ 273,371
======== ============ ====== ========= ====== =========
Total assets......................... $ 3,795,380
===========
Adjusted total assets................ $ 3,774,319
===========
Risk-weighted assets................. $ 2,733,709
===========
13
10. 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 June 30, 2004 and 2005, retroactively
adjusted for the 2004 three for two stock split, is as follows:
For the Three Months Ended For the Three Months Ended
June 30, 2004 June 30, 2005
----------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
(Dollars In Thousands, except per share data)
Net income .................. $ 5,688,000 $ 8,647,000
=========== ===========
Basic EPS:
Mortgage loans
Income available to
common stockholders .... $ 5,688,000 21,995,923 $ 0.26 $ 8,647,000 24,436,475 $ 0.35
=========== =========== ======== =========== =========== ========
Effect of diluted shares:
Common stock options
and grants............ 718,943 558,920
Diluted EPS: ----------- -----------
Income available to
common stockholders .... $ 5,688,000 22,714,866 $ 0.25 $ 8,647,000 24,995,395 $ 0.35
=========== =========== ======== =========== =========== ========
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 six months ended June 30, 2004 and 2005, retroactively adjusted
for the 2004 three for two stock split, is as follows:
For the Six Months Ended For the Six Months Ended
June 30, 2004 June 30, 2005
----------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
(Dollars In Thousands, except per share data)
Net income................. $11,375,000 $15,463,000
=========== ===========
Basic EPS:
Income available to
common stockholders... $11,375,000 21,958,122 $ 0.52 $15,463,000 24,139,049 $ 0.64
=========== =========== ======== =========== =========== ========
Effect of diluted shares:
Common stock options
and grants......... 741,282 577,709
----------- -----------
Diluted EPS:
Income available to
common stockholders... $11,375,000 22,699,404 $ 0.50 $15,463,000 24,716,758 $ 0.63
=========== =========== ======== =========== =========== ========
14
11. ACCUMULATED OTHER COMPREHENSIVE LOSS An analysis of the components of
Accumulated Other Comprehensive Loss as of December 31, 2004 and June 30, 2005,
is as follows:
December 31, 2004 June 30, 2005
================= =============
(In Thousands)
Unrealized gain (loss) on assets available
for sale, net of tax ............................. $ 1,546 $ (630)
Minimum pension liability, net of tax .............. (1,949) (1,949)
------------ ------------
Ending balance ..................................... $ (403) $ (2,579)
============ ============
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
June 30, 2004 June 30, 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 .................... $(13,811) $ 5,386 $ (8,425) $ 4,205 $ (1,598) $ 2,607
Reclassification adjustment
for (gains) losses realized
in net income ............. (467) 182 (285) -- -- --
-------- -------- -------- -------- -------- --------
Other comprehensive
income (loss) ............. $(13,344) $ 5,204 $ (8,140) $ 4,205 $ (1,598) $ 2,607
======== ======== ======== ======== ======== ========
For the Six Months Ended For the Six Months Ended
June 30, 2004 June 30, 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 ............ $(9,951) $ 3,881 $(6,070) $(3,509) $ 1,333 $(2,176)
Reclassification adjustment
for (gains) losses
realized in net income ... (1,053) 411 (642) -- -- --
------- ------- ------- ------- ------- -------
Other comprehensive
income (loss) ............ $(8,898) $ 3,470 $(5,428) $(3,509) $ 1,333 $(2,176)
======= ======= ======= ======= ======= =======
The Company's only change in Other Comprehensive Operations for the three and
six ended June 30, 2005 and 2004 is the change in the unrealized gain or loss on
securities available for sale.
15
Other comprehensive income for the quarter ended June 30, 2005 was $2.6 million
compared to other comprehensive loss of $8.1 million for the quarter ended June
30, 2004. During the three months ended June 30, 2005, due to increasing market
interest rates, the market value of the Company's assets available for sale
increased by $4.2 million which, net of income tax of $1.6 million, resulted in
other comprehensive income of $2.6 million. During the three months ended June
30, 2004, the market value of the Company's assets available for sale decreased
by $13.3 million, which net of income tax benefit of $5.2 million, resulted in
other comprehensive loss of $8.1 million.
At June 30, 2005, the Company held no securities available for sale that were in
a continuous unrealized loss position for twelve months or longer.
12. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
For the Six Months Ended
June 30,
2004 2005
======================
(In Thousands)
Mortgage-backed securities retained from the
securitization of mortgage loans ....... $ -- $202,595
=========== ========
Common stock issued for acquisitions ...... $ -- $ 12,857
=========== ========
13. 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.
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 its marketing efforts. Kehoe sought as damages a statutory
minimum of $2,500 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. The Appellate court
ordered mediation which is to take place on August 22, 2005. Fidelity Federal,
in consultation with counsel, has concluded that the lawsuit is without merit
and intends to vigorously 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 operated by Thomas
Abrams, who was convicted of running a Ponzi Scheme. Fidelity Federal is a
16
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
signatories on the accounts and generally offer banking services to the Abrams
entities. Plaintiffs make 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 as of
yet undetermined. On May 20, 2005, the Court entered an Order granting in part
Fidelity Federal's Motion to Dismiss the Second Amended Complaint. The Court
struck all of Plaintiff's claims for non-economic damages (e.g., custodial
damages), and dismissed the aiding and abetting breach of fiduciary duty claim,
with leave to amend, based on each Plaintiff's failure to allege specific
ultimate facts that the bank's alleged actions were the proximate cause of
plaintiff's losses. A Third Amended Complaint has been filed which attempts to
add a second claim against Fidelity Federal, alleging a violation of Florida's
Fraudulent Transfer Statute. We intend to vigorously defend our position on the
basis that we acted solely as a depository bank in the transactions and
allegations of improper conduct by the bank are factually inaccurate.
On April 8, 2005, Fidelity Federal Bank & Trust was named as defendant in a
lawsuit CORINTHIAN LLC vs. FIDELITY FEDERAL BANK & TRUST , filed in the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida. The plaintiffs
in this case have alleged damages for specific performance in connection with a
contract for sale of bank property where the bank was forced to default
Plaintiff for failure to perform. Regardless of the outcome, the Bank will
suffer no material loss.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
18
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 common shares in
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 with a book value of
$155.8 million and deposits with a book value 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 an
aggregate purchase price of $27.9 million, consisting of $15.0 million in cash
and 525,000 shares of Fidelity Bankshares, Inc. common stock valued at $12.9
million. Goodwill of $12.2 million resulted from the acquisition.
19
Other Comprehensive Income (Loss).
The Company's only change in Other Comprehensive Operations for the three and
six months ended June 30, 2005 and 2004 is the change in the unrealized gain or
loss on securities available for sale.
Other comprehensive loss for the six months ended June 30, 2005 was $2.2 million
compared to other comprehensive loss of $5.4 million for the six months ended
June 30, 2004. During the six months ended June 30, 2005, the market value of
the Company's assets available for sale decreased by $3.5 million, which net of
income tax benefit of $1.3 million resulted in other comprehensive loss of $2.2
million. During the six months ended June 30, 2004, the market value of the
Company's assets available for sale decreased by $8.9 million, which net of
income tax benefit of $3.5 million resulted in other comprehensive loss of $5.4
million.
Other comprehensive income for the quarter ended June 30, 2005 was $2.6 million
compared to other comprehensive loss of $8.1 million for the quarter ended June
30, 2004. During the quarter ended June 30, 2005, the market value of the
Company's assets available for sale increased by $4.2 million, which net of
income tax expense of $1.6 million resulted in other comprehensive income of
$2.6 million. During the quarter ended June 30, 2004, the market value of the
Company's assets available for sale decreased by $13.3 million, which net of
income tax benefit of $5.2 million resulted in other comprehensive loss of $8.1
million.
Changes in Financial Condition.
Our assets increased by $326.3 million, from $3.5 billion at December 31, 2004
to $3.8 billion at June 30, 2005. The Company closed on its acquisition of First
Community on April 1, 2005, which added $175.2 million in assets. Assets held to
maturity, consisting of mortgage-backed securities secured by one-to four-
family mortgages from the Company's loan portfolio, increased by $181.1 million.
This securitization of residential mortgages was undertaken to improve the
Bank's regulatory, risk-based capital ratios. The loan portfolio increased by
$162.0 million, net. The components of this net increase were a decrease of
$181.1 million from the securitization of loans, an increase in loans receivable
of $95.5 million due to the acquisition of First Community and an increase of
$247.3 million from loan production. Office property and equipment increased by
$8.1 million, while all other assets decreased by $24.9 million. Borrowings from
the Federal Home Loan Bank decreased by $126.7 million. Funds were provided for
asset growth from cash and cash equivalents which decreased by $9.6 million, an
increase in deposits of $383.1 million, of which $137.7 million was attributable
to the Company's acquisition of First Community, and an increase of $46.4
million in other liabilities. $12.9 million of common stock was issued in
connection with the acquisition of First Community.
20
Results of Operations.
Our net income for the six months ended June 30, 2005 was $15.5 million compared
to $11.4 million for the six months ended June 30, 2004. This increase of $4.1
million, or 36%, was primarily attributable to an increase of $14.3 million in
net interest income, which was offset by a decline in other income of $881,000,
an increase of $7.6 million in operating expense and an increase in income taxes
of $2.2 million.
Net income for the quarter ended June 30, 2005 was $8.6 million, an increase of
$2.9 million, or 52%, compared to $5.7 million for the quarter ended June 30,
2004. The increase in net income is primarily due to an increase in net interest
income of $8.1 million, offset by a decline in other income of $554,000, an
increase in operating expense of $3.4 million and an increase in income taxes of
$1.6 million.
Interest Income.
Interest income increased by $18.2 million, or 23.7%, for the six months ended
June 30, 2005 to $95.4 million, from $77.2 million for the six months ended June
30, 2004. Interest income on mortgage loans increased by $8.7 million, or 15.1%,
to $66.4 million for the six months ended June 30, 2005, compared to $57.7
million for the same period in 2004. The increase was due to an increase of
$206.0 million, or 10.4%, in the average balances of these loans to $2.2 billion
in 2005, from $2.0 billion in 2004, together with an increase in the yield on
these loans from 5.83% in 2004 to 6.08% in 2005. The interest income on consumer
and other loans increased by $2.8 million, or 31.3%, to $11.7 million for the
six months ended June 30, 2005, from $8.9 million for the six months ended June
30, 2004. The increase is attributable to an increase in the average balances of
these loans of $56.9 million, or 18.0%, together with an increase in yield on
the loans from 5.66% in 2004 to 6.29% in 2005. Interest income on mortgaged
backed securities increased by $7.2 million, or 85.9%, to $15.5 million for the
six months ended June 30, 2005, from $8.3 million for the same period in 2004.
The average balances of these securities increased by $197.9 million, or 43.7%,
from $453.2 million in 2004 to $651.1 million in 2005. This increase in average
balances was due to the securitization of mortgage loans, to improve the Bank's
regulatory risk based capital. In addition, the yield on these securities
increased from 3.68% in 2004 to 4.76% in 2005. Interest income on investment
securities decreased by $546,000, to $949,000 for the six months ended June 30,
2005 from $1.5 million for the same period in 2004. While the average balances
on these investments declined by $73.0 million, or 51.2%, this was partially
offset by an increase in yield from 2.09% in 2004 to 2.72% in 2005. Interest
income on other investments increased by $128,000 for the six months ended June
30, 2005 to $770,000, from $642,000 for the same period in 2004. Although the
average balances of these investments declined by $47.7 million, or 49.8%, in
2005 compared to 2004, the yield on the investments increased from 1.34% in 2004
to 3.21% in 2005.
Interest income for the quarter ended June 30, 2005 increased by $11.0 million,
or 28.1%, to $50.1 million, from $39.1 million for the quarter ended June 30,
2004. These amounts include results from the Company's acquisition of First
Community, which closed on April 1, 2005. This acquisition contributed
approximately $95.5 million in loans and $33.7 million in investments to the
Company's
21
interest earning assets. Interest income from mortgage loans increased by $5.1
million, or 17.2%, to $34.5 million for the quarter ended June 30, 2005, from
$29.4 million for the quarter ended June 30, 2004. This increase was due to an
increase in the average balances of these loans of $168.2 million, or 8.2%, to
$2.2 billion in 2005, from $2.0 billion in 2004, together with an increase in
yield on these loans from 5.75% in 2004 to 6.23% in 2005. Consumer and other
loan income increased by $1.9 million, or 41.6%, to $6.4 million in 2005, from
$4.5 million in 2004. The average balances of consumer and other loans increased
by $76.1 million, or 23.8%, to $396.1 million in 2005, from $320.1 million in
2004 and was accompanied by an increase in yield from 5.63% in 2004 to 6.44% in
2005. Interest income from mortgage backed securities increased by $4.5 million,
or 114.6%, to $8.3 million in 2005, from $3.9 million in 2004. The average
balances of these securities increased, as a result of the Company's
securitization of loans, by $253.3 million, or 57.7%, to $692.6 million in 2005,
from $439.3 million in 2004 and was accompanied by an increase in yield from
3.54% in 2004 to 4.82% in 2005. Interest income from investment securities
decreased by $407,000, or 43.9%, to $520,000 in 2005, from $927,000 in 2004. The
average balances of these investments declined by $89.2 million, or 54.8%, which
was partially offset by an increase in yield from 2.28% in 2004 to 2.83% in
2005. Interest income from other investments increased only slightly by $11,000,
to $367,000 for the quarter ended June 30, 2005, from $356,000 for the quarter
ended June 30, 2004. Although the average balances of these investments declined
by $65.7 million, or 62.0%, during 2005, compared to 2004, the yield on the
investments increased from 1.34% in 2004 to 3.65% in 2005.
Interest Expense.
Interest expense increased by $3.9 million, or 13.8%, to $32.6 million for the
six months ended June 30, 2005, from $28.7 million for the six months ended June
30, 2004. Interest expense on deposits increased by $5.7 million, or 30.0%, to
$24.6 million for the six months ended June 30, 2005, from $19.0 million for the
same period in 2004. The average balances of deposits increased by $369.8
million, or 14.3%, to $3.0 billion in 2005, compared to $2.6 billion in 2004. A
portion of the increase in average deposit balances is the result of the
Company's acquisition of First Community on April 1, 2005, which provided $137.7
million of deposits to the Company. As a result of the rising interest rate
environment in short-term maturities and the increase in the balances of
certificates of deposit to fund FHLB loan repayments, the Company's cost of
deposits increased from 1.47% for the six months ended June 30, 2004 to 1.67%
for the same period in 2005. Interest expense on borrowed funds decreased by
$1.7 million, or 17.8%, to $8.0 million in 2005, from $9.7 million in 2004. As a
result of the Company's repayment of FHLB advances during the period, the
average balance of borrowed funds decreased by $56.1 million, or 14.9%, to
$320.2 million in 2005, from $376.2 million in 2004. In addition, the cost of
these borrowings declined, due to repayment of higher costing borrowings, from
5.15% in 2004, to 4.98% in 2005.
Interest expense for the quarter ended June 30, 2005, increased by $2.8 million,
or 19.6%, to $17.3 million, compared to $14.5 million for the quarter ended June
30, 2004. Interest expense on deposits increased by $4.2 million, or 44.0%, to
$13.8 million in 2005, from $9.6 million in 2004. The average balances of
deposits during the quarter ended June 30, 2005 increased by $425.6 million, or
16.0%, to $3.1 billion in 2005, from $2.7 billion in 2004. This increase
includes deposits from the Company's acquisition of First Community, which
closed on April 1, 2005, and an increase in certificate of deposit balances,
which the Company used to repay FHLB advances. The cost of deposits increased to
1.79% for the quarter ended June 30, 2005, from 1.45% for the same period in
2004. This reflects increases in short term interest rates and the Company's
increased utilization of certificates of deposit to repay higher costing FHLB
advances. Interest expense on borrowings decreased by $1.4 million, or 28.1%, to
$3.5 million for the quarter ended June 30, 2005, compared to $4.9 million for
the same
22
period in 2004. The average balance of borrowings decreased, as a result of the
Company's repayment of FHLB advances, by $102.6 million, or 25.9%, to $292.7
million during the quarter ended June 30, 2005, from $395.4 million in 2004. In
addition, the cost of these borrowings declined from 4.97% in 2004 to 4.83% in
2005.
Net Interest Income.
Our net interest income increased by $14.3 million, or 29.5%, to $62.8 million
for the six months ended June 30, 2005, from $48.5 million for the six months
ended June 30, 2004. This is attributable to the Company's improvement in net
interest margin to 3.77% during the period ended June 30, 2005, compared to
3.25% for the same period in 2004.
For the quarter ended June 30, 2005, our net interest income increased by $8.1
million, or 33.1%, to $32.7 million for the quarter ended June 30, 2005, from
$24.6 million for the same quarter in 2004. This also is due to the improvement
in our net interest margin to 3.83% for the quarter ended June 30, 2005,
compared to 3.20% for the same quarter in 2004.
Provision for Loan Losses.
Our provision for loan losses was $994,000 for the six months ended June 30,
2005, compared to $1.4 million for the six months ended June 30, 2004.
For the quarter ended June 30, 2005, our provision for loan losses was $422,000,
compared to $794,000 for the same quarter in 2004.
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 $881,000, or 6.5%, for the six months ended June 30,
2005 to $12.7 million, from $13.6 million for the six months ended June 30,
2004. The principal reason for the decline was that for the six months ended
June 30, 2004, the Company reported $1.1 million of gains on sale of securities,
whereas for the same period in 2005 there were no such sales. The Company
experienced a decrease of $334,000 in service charges on deposit accounts for
the six months ended June 30, 2005 compared to the same period in 2004.
Similarly, we received $163,000 less in miscellaneous income in the 2005 period,
compared to 2004. Offsetting these decreases in other income were increases of
$453,000 in fees for other banking services, which includes trust income and
insurance sale income, as well as an increase of $216,000 in gains on the sale
of loans.
23
For the quarter ended June 30, 2005, other income decreased by $554,000, or
7.7%, to $6.6 million, compared to $7.2 million for the same quarter in 2004.
The decrease is mostly due to there being no gains on the sale of securities in
2005, compared to $467,000 of such gains reported in 2004. Miscellaneous other
income decreased by $290,000 in 2005, compared to 2004. Offsetting these
decreases were increases of $4,000 in fees on deposit accounts and $229,000 in
fees for other banking services.
Operating Expense.
Operating expense increased by $7.6 million, or 18.0%, to $49.6 million for the
six months ended June 30, 2005, from $42.0 million for the six months ended June
30, 2004. The Company completed its acquisition of First Community on April 1,
2005, which added five branch offices and additional loan personnel.
Accordingly, the operation of this acquisition is included in operations of the
Company for the full quarter ended June 30, 2005. Employee compensation and
benefits expense increased by $3.7 million, or 15.1%, to $28.2 million for the
six months ended June 30, 2005, compared to $24.5 million for the six months
ended June 30, 2004 in part due to an increase in the number of full time
equivalent employees from 749 at June 30, 2004 to 852 at June 30, 2005. In
addition to increased direct compensation for branch operation and loan
personnel, as well as additional commission expense for increased insurance
sales, the Company has experienced increased pension costs of $1.1 million.
Occupancy and equipment expense increased by $1.9 million, or 23.4%, to $9.8
million in 2005, compared to $8.0 million for the six months ended June 30,
2004. This increase reflects the costs of operating additional branch
facilities, but also includes an increase of $495,000 for data processing
expense. Due to increased marketing costs, particularly associated with the
acquisition, this expense increased by $407,000 for the six months ended June
30, 2005, compared to the same period in 2004. Miscellaneous operating expense
increased by $1.6 million, to $9.9 million in 2005, compared to $8.3 million for
the six months ended June 30, 2004. We experienced significant increases of
$517,000 for consulting and auditing, $148,000 for postage expense and $146,000
for insurance. The remaining increase in expense largely reflects the costs of
operating additional branch facilities.
Operating expense for the quarter ended June 30, 2005 increased by $3.4 million,
or 15.9%, to $25.0 million, from $21.5 million for the quarter ended June 30,
2004. Of this increase, $1.7 million pertains to employee compensation and
benefits. In addition to increased direct compensation expense related to the
operation of additional branch facilities, we experienced an increase of
$510,000 for pension expense. Principally due to the operation of additional
branch facilities, occupancy and equipment costs increased by $1.1 million, to
$5.0 million for the quarter ended June 30, 2005, compared to $3.9 million for
the same period in 2004. Also contributing to this increase was an increase in
data processing costs of $293,000. Marketing expense increased by $209,000 and
miscellaneous operating expense increased by $431,000. Of the increased
miscellaneous operating expense, $224,000 was caused by increased consulting and
auditing costs.
Income Taxes.
Our provision for income taxes for the six months ended June 30, 2005 was $9.5
million, an increase of $2.2 million from $7.3 million for the six months ended
June 30, 2004. Our provision reflects our current rate applied to higher levels
of income before taxes.
The provision for income taxes for the quarter ended June 30, 2005 was $5.3
million, an increase of $1.6 million from our provision of $3.7 million for the
quarter ended June 30, 2004. This provision reflects our current rate applied to
higher levels of income before taxes.
24
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 5.48% during the
month of June 30, 2005. Liquidity ratios averaged 6.32% for the quarter ended
June 30, 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 $5.2 million at
June 30, 2005. Other assets qualifying for liquidity at June 30, 2005, including
unpledged mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac,
were $205.9 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 June 30, 2005, the Bank had $124.2 million in advances from
the FHLB. At June 30, 2005, the Bank had commitments outstanding to originate or
purchase loans of $234.8 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 June 30, 2005 totaled $564.8 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
25
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
Our long-term debt, which in the aggregate totals $177.8 million, consists of
obligations to the FHLB totaling $124.2 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 June 30,
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 $27.2 million.
The tables below summarize the Company's contractual obligations, commercial and
other commitments at June 30, 2005.
Payments Due by Period
----------------------------------------------------
Less Than After 5
Total 1 year 1-3 Years 3-5 Years Years
-------- -------- -------- -------- --------
(In Thousands)
Time Deposits .................... $774,147 $564,881 $196,495 $ 12,771 $ --
Long-term Debt(1) ................ 177,672 43,582 25,081 55,201 53,808
Operating Lease Obligations ...... 27,171 2,226 4,741 3,954 16,250
Pension Obligations .............. 9,549 -- 9,549 -- --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $988,539 $610,689 $235,866 $ 71,926 $ 70,058
======== ======== ======== ======== ========
- -------------------------------------
(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) ............... $250,687 $ 6,999 $ 12,125 $ 16,806 $214,757
Standby Letters of Credit ........ 17,685 16,734 285 18 648
Other Commercial Commitments ..... 162,409 162,409 -- -- --
Other Commitments ................ 148,015 148,015 -- -- --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $578,796 $334,157 $ 12,410 $ 16,824 $215,405
======== ======== ======== ======== ========
26
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.
In December 2003, the AICPA issued SOP 03-3, Accounting for Certain Loans or
Debt Securities Acquired in a Transfer. SOP 03-3 requires acquired loans,
including debt securities and loans acquired in a business combination, to be
recorded at the amount of the purchaser's initial investment and prohibits
carrying over valuation allowances from the seller for these loans that have
evidence of deterioration in credit quality since origination, and it is
probable all contractual cash flows on the loan will be unable to be collected.
The provisions of this SOP became effective for loans acquired in fiscal years
beginning after December 15, 2004. The adoption of this SOP has not had a
material impact on the Company to date, nor is it anticipated to in the future.
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 June 30, 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 June 30, 2005, the Company does not
have any hedging transactions in place such as interest rate swaps and caps.
27
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 the Bank and, therefore, nearly all of our interest rate risk is at
the Bank 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.
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 the current 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.
28
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 June
30, 2005 was a positive 24.02%.
Time to Maturity
--------------------------------------------------------------------------
More Than More Than
One Year to Three Years
Within Three Four to Twelve Three to Five Over Five
Months Months Years Years Years
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Interest-earning assets (1):
Residential mortgage loans: (2)
Fixed rate .......................... $ 26,610 $ 72,154 $ 150,228 $ 101,672 $ 189,477
Adjustable rate ..................... 139,537 234,477 179,749 261,279 --
Commercial mortgage loans: (2)
Fixed rate .......................... 11,219 24,477 40,437 23,660 37,125
Adjustable rate ..................... 248,488 563,372 24,873 951 --
Other loans (2)
Fixed rate .......................... 21,343 33,011 39,623 18,097 6,585
Adjustable rate ..................... 273,711 12,408 -- -- --
Mortgage-backed securities
Fixed rate .......................... 30,522 83,290 171,219 115,457 189,468
Adjustable rate ..................... 82,779 -- -- -- --
Municipal bonds and government and
agency securities - fixed rate ..... 5,011 30,280 235 30,210 --
Other interest earning assets - adjustable 18,054 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total .................. $ 857,274 $ 1,053,469 $ 606,364 $ 551,326 $ 422,655
=========== =========== =========== =========== ===========
Interest-bearing liabilities
Deposits: (3)
Checking and funds transfer accounts $ 25,518 $ 76,554 $ 100,750 $ 75,890 $ 908,884
Passbook accounts ................... 22,284 66,852 133,588 94,387 462,053
Money market accounts ............... 17,487 52,461 73,960 46,527 277,757
Certificate accounts (4) ............ 168,866 396,167 196,342 12,771 --
Borrowings: (4) ....................... 132,600 39,918 75,754 5,151 --
----------- ----------- ----------- ----------- -----------
Total .................. $ 366,755 $ 631,952 $ 580,394 $ 234,726 $ 1,648,694
=========== =========== =========== =========== ===========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities.. $ 490,519 $ 421,517 $ 25,970 $ 316,600 $(1,226,039)
=========== =========== =========== =========== ===========
Cumulative excess of interest-earning
assets over interest-bearing liabilities.. $ 490,519 $ 912,036 $ 938,006 $ 1,254,606 $ 28,567
=========== =========== =========== =========== ===========
Cumulative excess of interest-earning
assets
over interest-bearing liabilities as a
percent
of total assets .......................... 12.92% 24.02% 24.70% 33.04% 0.75%
=========== =========== =========== =========== ===========
- ----------------------------
(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.
29
(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.
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 June 30, 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 material 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.
30
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 its marketing efforts. Kehoe sought
as damages a statutory minimum of $2,500 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. The
Appellate court ordered mediation which is to take place on August
22, 2005. Fidelity Federal, in consultation with counsel, has
concluded that the lawsuit is without merit and intends to
vigorously 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 operated by Thomas Abrams, who was convicted of
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 signatories on the accounts and
generally offer banking services to the Abrams entities.
Plaintiffs make 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
31
allege they lost in excess of $18,000,000 investing with Abrams.
The actual amount of losses incurred by the plaintiffs are as of
yet undetermined. On May 20, 2005, the Court entered an Order
granting in part Fidelity Federal's Motion to Dismiss the Second
Amended Complaint. The Court struck all of Plaintiff's claims for
non-economic damages (e.g., custodial damages), and dismissed the
aiding and abetting breach of fiduciary duty claim, with leave to
amend, based on each Plaintiff's failure to allege specific
ultimate facts that the bank's alleged actions were the proximate
cause of plaintiff's losses. A Third Amended Complaint has been
filed which attempts to add a second claim against Fidelity
Federal, alleging a violation of Florida's Fraudulent Transfer
Statute. We intend to vigorously defend our position on the basis
that we acted solely as a depository bank in the transactions and
allegations of improper conduct by the bank are factually
inaccurate.
On April 8, 2005, Fidelity Federal Bank & Trust was named as
defendant in a lawsuit CORINTHIAN LLC vs. FIDELITY FEDERAL BANK &
TRUST , filed in the Fifteenth Judicial Circuit in and for Palm
Beach County, Florida. The plaintiffs in this case have alleged
damages for specific performance in connection with a contract for
sale of bank property where the bank was forced to default
Plaintiff for failure to perform. Regardless of the outcome, the
Bank will suffer no material loss.
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
Ballot No. 1
The election of F. Ted Brown, Jr. and Keith D. Beaty to serve
as directors for a term of three years, or until their successors
have been elected and qualified.
For Withheld
--- --------
F. Ted Brown, Jr. 19,802,621 342,139
Keith D. Beaty 19,768,932 375,828
Item 5 Other Information
None.
32
Item 6 Exhibits
31.1 302 Certification
31.2 302 Certification
32.1 906 Certification
33
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: August 9, 2005 By: /S/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: August 9, 2005 By: /S/ Richard D. Aldred
-------------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
34