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 September 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
- --------------------------------------------------------------------------------
(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
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No |X|
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 25,100,515 shares
of the Registrant's common stock par value $.10 per share outstanding as of
October 31, 2005.
<Page>
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...............................................1
Unaudited Condensed Consolidated Statements of Financial Condition
as of December 31, 2004 and September 30, 2005...................1
Unaudited Condensed Consolidated Statements of Operations for the
three and the nine months ended September 30, 2004 and 2005......2
Unaudited Condensed Consolidated Statements of Comprehensive
Operations for the three and the nine months ended
September 30, 2004 and 2005......................................3
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2005....................4
Notes to Unaudited Condensed Consolidated Financial Statements.....5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................17
Item 3. Quantitative and Qualitative Disclosure About Market Risk.........25
Item 4. Controls and Procedures...........................................28
PART II. OTHER INFORMATION...............................................29
Item 1. Legal Proceedings.................................................29
Item 2. Changes in Securities and Stock Repurchases.......................30
Item 3. Default Upon Senior Securities....................................30
Item 4. Submission of matters to a Vote of Security Holders...............30
Item 5. Other Information.................................................30
Item 6. Exhibits..........................................................31
EXHIBITS
Section 302 Certification.........................................32
Section 906 Certification.........................................35
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
December 31, September 30,
2004 2005
================ =================
ASSETS (In thousands)
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 108,327 $ 108,768
Interest-earning deposits................................................ 41,082 37,098
----------- ----------
Total cash and cash equivalents...................................... 149,409 145,866
----------- ----------
SECURITIES AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 65,156 59,599
Mortgage-backed securities............................................... 440,473 379,658
----------- ----------
Total assets available for sale...................................... 505,629 439,257
----------- -----------
SECURITIES HELD TO MATURITY (At Cost):
Mortgage-backed securities............................................... 89,167 255,878
LOANS RECEIVABLE, Net......................................................... 2,556,700 2,896,565
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 83,439 90,977
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 17,399 12,694
REAL ESTATE OWNED, Net........................................................ - 1,793
ACCRUED INTEREST RECEIVABLE................................................... 12,379 14,856
GOODWILL .................................................................... 2,171 14,376
CORE DEPOSIT INTANGIBLES...................................................... - 6,718
DEFERRED INCOME TAX ASSET..................................................... 7,883 9,038
OTHER ASSETS 46,363 51,927
----------- ----------
TOTAL ASSETS $ 3,470,539 $ 3,939,945
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 2,814,670 $ 3,317,751
OTHER BORROWED FUNDS.......................................................... 46,097 90,693
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 250,855 120,769
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 3,166 22,009
DRAFTS PAYABLE................................................................ - 1,314
JUNIOR SUBORDINATED DEBENTURES................................................ 53,608 53,608
OTHER LIABILITIES............................................................. 50,860 54,184
----------- ----------
TOTAL LIABILITIES........................................................ 3,219,256 3,660,328
----------- ----------
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 25,100,515 at
September 30, 2005................................................... 2,442 2,510
ADDITIONAL PAID IN CAPITAL.................................................... 152,398 165,945
RETAINED EARNINGS - substantially restricted.................................. 105,556 123,445
TREASURY STOCK - at cost, 441,082 shares at December 31, 2004 and
416,186 shares at September 30, 2005..................................... (1,756) (1,777)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan............................................ (3,909) (3,648)
Recognition and retention plan........................................... (3,045) (2,100)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (403) (4,758)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY............................................... 251,283 279,617
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 3,470,539 $ 3,939,945
============= ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
1
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2005 2004 2005
==================================================
(In Thousands, except per share data)
Interest income:
Loans............................................................. $ 36,778 $ 44,920 $ 103,458 $ 123,109
Investment securities............................................. 1,022 509 2,517 1,457
Other investments................................................. 234 584 876 1,354
Mortgage-backed and corporate debt securities..................... 4,952 7,970 13,288 23,464
--------- -------- -------- --------
Total interest income......................................... 42,986 53,983 120,139 149,384
--------- -------- -------- --------
Interest expense:
Deposits.......................................................... 9,945 17,262 28,909 41,889
Advances from Federal Home Loan Bank and other borrowings......... 5,301 3,049 14,992 11,017
--------- -------- -------- --------
Total interest expense........................................ 15,246 20,311 43,901 52,906
--------- -------- -------- --------
Net interest income.................................................... 27,740 33,672 76,238 96,478
Provision for loan losses.............................................. 783 304 2,174 1,298
-------- -------- ------- -------
Net interest income after provision for loan losses.................... 26,957 33,368 74,064 95,180
-------- -------- ------- -------
Other income:
Service charges on deposit accounts............................... 2,740 2,972 8,374 8,272
Fees for other banking services................................... 2,830 3,250 8,499 9,371
Net gain on sale of loans......................................... 134 170 391 643
Net gain on sale of investments................................... 81 - 1,134 -
Miscellaneous..................................................... 460 540 1,467 1,384
-------- -------- ------- --------
Total other income............................................ 6,245 6,932 19,865 19,670
-------- -------- ------- -------
Operating expense:
Employee compensation and benefits................................ 13,110 15,073 37,576 43,237
Occupancy and equipment........................................... 4,403 5,484 12,356 15,301
(Gain)/loss on real estate owned and other repossessed
assets (8) 46 (18) 47
Marketing......................................................... 523 714 1,631 2,230
Federal deposit insurance premium................................. 96 99 279 297
Miscellaneous..................................................... 4,953 5,573 13,266 15,455
------- ------- ------- -------
Total operating expense....................................... 23,077 26,989 65,090 76,567
------- ------- ------- -------
Income before provision for income taxes............................... 10,125 13,311 28,839 38,283
Provision for income taxes............................................. 3,943 5,052 11,282 14,561
------- ------- ------- -------
Net income.................................................. $ 6,182 $ 8,259 $17,557 $ 23,722
======= ======= ======= ========
Earnings per share: (Note 1)
Basic............................................................. $ 0.28 $ 0.34 $ 0.80 $ 0.98
======= ======== ======= ========
Diluted........................................................... $ 0.27 $ 0.33 $ 0.78 $ 0.95
======= ======== ======= ========
Dividends declared per share........................................... $ 0.07 $ 0.08 $ 0.20 $ 0.24
======= ======== ======= ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
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FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2005 2004 2005
====================================================
(In Thousands)
Net Income........................................................ $ 6,182 $ 8,259 $17,557 $23,722
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale........ 7,738 (2,179) 2,310 (4,355)
----- -------- -------- --------
Comprehensive income (loss)....................................... $13,920 $ 6,080 $19,867 $19,367
======= ======== ======== =======
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
<Page>
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
2004 2005
==========================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 17,557 $ 23,722
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 4,354 5,246
Amortization of core deposit intangibles............................ - 380
ESOP and recognition and retention plan compensation expense........ 1,998 1,989
Accretion of discounts, amortization of premiums and intangible
assets, and other deferred yield items............................. (2,719) (5,275)
Provision for loan losses........................................... 2,174 1,298
Provisions for losses and net (gains) losses on sales of real
estate owned...................................................... (12) (130)
Net (gain) loss on sale of:
Loans......................................................... (391) (643)
Government & agency securities................................ (126) -
Mortgage backed securities.................................... (1,008) -
Office properties and equipment............................... (394) 46
Change in operating assets and liabilities, net of acquisitions:
Increase in accrued interest receivable............................. (2,385) (1,977)
Increase in other assets............................................ (385) (2,651)
Increase in drafts payable.......................................... 2,270 1,314
Increase (decrease) in deferred income taxes........................ 936 (1,741)
Increase in other liabilities....................................... 5,308 2,493
-------- -------
Net cash provided by operating activities..................... 27,177 24,071
-------- -------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (358,670) (450,854)
Principal payments received on mortgage-backed securities.............. 148,065 96,123
Purchases of:
Loans............................................................... (29,020) (29,809)
Mortgage-backed securities.......................................... (323,446) (6,947)
Federal Home Loan Bank stock........................................ (16,567) (3,422)
Government & agency securities...................................... (59,755) -
Office properties and equipment..................................... (9,252) (9,202)
Proceeds from sales of:
Loans............................................................... 26,559 35,907
Federal Home Loan Bank stock........................................ 10,626 8,695
Government & agency securities...................................... 4,922 24,667
Repossessed assets acquired in settlement of loans.................. 74 160
Office properties and equipment..................................... 502 -
Mortgage backed securities.......................................... 177,606 8,246
Proceeds from maturities of investment securities...................... - 5,050
Net cash received from acquisitions.................................... - 6,577
Other.................................................................. 1,088 (141)
-------- --------
Net cash used for investing activities........................ (427,268) (314,950)
--------- --------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options,
net of issuance costs.................................................. 164 212
Cash dividends paid.................................................... (4,394) (5,292)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 280,666 232,810
Certificates of deposit............................................. (47,241) 132,781
Advances from Federal Home Loan Bank................................ 120,689 (136,599)
Other borrowed funds................................................ (4,273) 44,596
Advances by borrowers for taxes and insurance....................... 21,180 18,828
-------- --------
Net cash provided by financing activities..................... 366,791 287,336
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............................. (33,300) (3,543)
CASH AND CASH EQUIVALENTS, beginning of period......................... 109,887 149,409
-------- --------
CASH AND CASH EQUIVALENTS, end of period............................... $ 76,587 $145,866
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
4
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 September 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 declared a three for two 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 September 30, 2005 presentation.
5
<Page>
2. STOCK-BASED COMPENSATION
The Company has one stock-based compensation plan which it accounts for using
the intrinsic value method. During the nine months ended September 30, 2005
total stock options granted, exercised or expired/forfeited were 95,535, 87,506
and 4,695, respectively. Also during the same period 101,708 shares of common
stock were issued through the vesting of restricted stock grants. 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 Nine Months Ended
September 30, September 30,
2004 2005 2004 2005
===================================================
(In Thousands, except per share data)
Net Income, as reported............................................. $ 6,182 $ 8,259 $17,557 $23,722
Add: Total stock-based employee compensation expense
included
in reported net earnings, net of related tax effects.......... 192 195 640 586
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects.................... (317) (334) (1,190) (1,143)
Pro forma net income................................................ $ 6,057 $ 8,120 $17,007 $23,165
======== ========= ======== ========
Basic - as reported............................................ 0.28 0.34 0.80 0.98
Basic - pro forma.............................................. 0.27 0.33 0.77 0.95
Diluted - as reported.......................................... 0.27 0.33 0.78 0.95
Diluted - pro forma............................................ 0.27 0.32 0.75 0.93
The weighted-average number of shares used to calculate basic and diluted
earnings per share for the quarter ended September 30, 2004 was retroactively
adjusted to reflect the three for two stock split declared in 2004 and paid in
January 2005.
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.
6
<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:
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2005 2004 2005
======================== =========================
(In Thousands) (In Thousands)
Service cost....................................... $ 555 $ 596 $1,667 $1,788
Interest cost...................................... 396 407 1,190 1,221
Expected return on assets.......................... (389) (375) (1,169) (1,156)
Amortization of prior service cost................. 1 13 4 38
Amortization of actuarial loss..................... 206 243 617 730
------ ------ ------ -------
Net periodic pension expense....................... $ 769 $ 884 $2,309 $2,621
====== ====== ====== ========
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 expected that any additional
contributions will be made during the year.
4. LOANS RECEIVABLE
Loans receivable at December 31, 2004 and at September 30, 2005, consist of the
following:
December 31, September 30,
2004 2005
================================
(In Thousands)
One-to four- family, residential real estate mortgages............... $1,023,448 $1,001,984
Commercial and multi-family real estate mortgages.................... 831,165 1,043,737
Real estate construction-primarily residential....................... 308,044 360,579
Land loans-primarily residential..................................... 57,661 72,874
---------- ----------
Total first mortgage loans........................................... 2,220,318 2,479,174
Consumer loans....................................................... 231,333 285,750
Commercial business loans............................................ 121,331 151,135
---------- ----------
Total loans.......................................................... 2,572,982 2,916,059
Deduct:
Unearned discounts, premiums and deferred loan fees, net of costs (2,654) (3,839)
Allowance for loan losses....................................... (13,628) (15,655)
---------- ----------
Loans receivable-net................................................. $2,556,700 $2,896,565
========== ==========
7
<Page>
During the quarter ended September 30, 2005, the Company sold $13.8 million in
loans, which resulted in net gains of $170,000. During the quarter ended
September 30, 2004, the Company sold $9.0 million in loans, which resulted in
net gains of approximately $134,000.
At December 31, 2004 and September 30, 2005, the Bank had $1.3 million and
$812,000 in loans held for sale or transfer, respectively. In addition to the
$1.3 million in loans held for sale at December 31, 2004, the Company also had
$224.8 million of one- to four- family mortgage loans held for securitization
where the Bank retained the resulting mortgage-backed securities. The
securitization was finalized in February 2005.
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 nine months ended September 30, 2004 and
2005, is as follows:
For the Year For the Three Months For the Nine Months
Ended Ended Ended
December 31, September 30, September 30,
2004 2004 2005 2004 2005
================== ==================== ====================
(In Thousands) (In Thousands) (In Thousands)
Balance at beginning of period...... $ 11,119 $12,436 $15,519 $11,119 $13,628
Current provision................... 2,736 783 304 2,174 1,298
Effect of acquisition............... - - - - 995
Charge-offs......................... (252) (150) (168) (249) (266)
Recoveries.......................... 25 - - 25 -
-------- ------- ------- ------- -------
Ending balance...................... $ 13,628 $13,069 $15,655 $13,069 $15,655
======== ======= ======= ======= =======
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 September 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 $ 3,993 $ 849
Loans without related allowance for loan losses............. 8,172 - 16,663 -
-------- -------- -------- --------
Total.............................................. $ 9,822 $ 487 $ 20,656 $ 849
======== ======== ======== ========
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.
8
<Page>
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.
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............................................ 12,205
Core deposit intangibles............................ 7,098
Other assets........................................ 891
------------
Total assets..................................... $ 175,210
============
Liabilities:
Deposits............................................ $ 137,490
Borrowings from the FHLB............................ 6,513
Deferred tax liabilities............................ 2,459
Other liabilities................................... 799
------------
Total liabilities................................ 147,261
Net assets acquired................................ 27,949
Total liabilities and net assets acquired....... $ 175,210
============
9
<Page>
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 Nine Months Ended
September 30, September 30,
2004 2005 2004 2005
====================================================
(In Thousands, except per share data)
Net interest income..................................... $ 29,199 $ 33,672 $ 80,402 $ 98,058
Provision for loan losses............................... 813 304 2,264 1,298
-------- -------- -------- --------
Net interest income after provision for loan losses..... 28,386 33,368 78,138 96,760
Total other income...................................... 6,613 6,932 20,970 20,007
Total operating expense................................. 24,428 26,989 69,042 78,170
-------- -------- -------- --------
Income before provision for income taxes................ 10,571 13,311 30,066 38,597
Provision for income taxes.............................. 4,112 5,052 11,738 14,680
-------- -------- -------- --------
Net income.............................................. $ 6,459 $ 8,259 $18,328 $ 23,917
======== ======== ======== ========
Earnings per share:
Basic.................................................. $ 0.29 $ 0.34 $ 0.81 $ 0.98
======== ======== ======== ========
Diluted................................................ $ 0.28 $ 0.33 $ 0.79 $ 095
======== ======== ======== ========
7. GOODWILL AND CORE DEPOSIT INTANGIBLES
The following summarizes the balances of goodwill and deposit intangibles at
December 31, 2004 and September 30, 2005.
December 31, September 30,
2004 2005
=============================
(In Thousands)
Goodwill:
Bank Boynton............................................ $ 1,767 $ 1,767
Dunn & Noel insurance company........................... 404 404
First Community Bancorp................................. - 12,205
--------- --------
Total goodwill....................................... 2,171 14,376
--------- --------
Deposit intangibles:
Core deposit intangibles, amortized on a straight-line
basis, over 9.3 years................................. - 7,098
Accumulated amortization................................ - (380)
--------- --------
Core deposit intangibles, net........................ - 6,718
--------- --------
Total goodwill and core deposit intangibles................ $ 2,171 $21,094
========= ========
Amortization expense of core deposit intangibles was $190,000 for the three
months and $380,000 for the nine months ended September 30, 2005, respectively.
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.
10
<Page>
8. DEPOSITS
The weighted-average interest rates on deposits at December 31, 2004 and
September 30, 2005 were 1.53% and 2.21%, respectively. Deposit accounts, by type
at December 31, 2004 and September 30, 2005 consist of the following:
December 31, September 30,
Account Type and Rate 2004 2005
===========================
(In Thousands)
Non-interest-bearing checking accounts..................... $ 386,790 $ 485,682
Interest-bearing checking and funds transfer accounts...... 689,533 745,525
Passbook and statement accounts............................ 770,124 812,870
Variable-rate money market accounts........................ 335,573 488,005
Certificates of deposit.................................... 632,650 785,669
----------- ------------
Total...................................................... $ 2,814,670 $ 3,317,751
=========== ============
11
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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 September 30, 2005
Stockholders' Equity and ratio
to total assets................. 8.1% $320,434
=======
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,810
Goodwill............................. (21,417)
Disallowed servicing assets.......... (380)
--------
Tangible capital and ratio to
adjusted total assets........... 7.7% $301,447 1.5% $ 58,812
======== ======== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.7% $301,447 3.0% $ 117,624 5.0% $ 196,040
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.8% $301,447 4.0% $ 111,148 6.0% $ 166,722
======== ======= ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 14,804
--------
Total risk-based capital and ratio to
risk-weighted total assets...... 11.4% $316,251 8.0% $ 222,296 10.0% $ 277,870
======== ======== ====== ========= ====== =========
Total assets......................... $3,938,059
Adjusted total assets................ $3,920,794
==========
Risk-weighted assets................. $2,778,702
==========
12
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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 September 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
September 30, 2004 September 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................. $6,182,000 $8,259,000
========== ==========
Basic EPS:
Income available to
common stockholders... $6,182,000 22,066,215 $ 0.28 $8,259,000 24,538,667 $ 0.34
========== ======= ========== ========
Effect of diluted shares:
Common stock options
and grants 651,304 719,075
------------ ----------
Diluted EPS:
Income available to
common stockholders... $6,182,000 22,717,519 $ 0.27 $8,259,000 25,257,742 $ 0.33
========== ============ ======= ========== ============ ========
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 nine months ended September 30, 2004 and 2005, retroactively
adjusted for the 2004 three for two stock split, is as follows:
For the Nine Months Ended For the Nine Months Ended
September 30, 2004 September 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................. $17,557,000 $23,722,000
=========== ===========
Basic EPS:
Income available to
common stockholders... $17,557,000 21,994,416 $ 0.80 $23,722,000 24,273,719 $ 0.98
=========== ====== =========== =======
Effect of diluted shares:
Common stock options
and grants.......... 640,549 636,288
--------- ---------
Diluted EPS:
Income available to
common stockholders... $17,557,000 22,634,965 $ 0.78 $23,722,000 24,910,007 $ 0.95
=========== =========== ======= =========== ========== =======
13
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11. ACCUMULATED OTHER COMPREHENSIVE LOSS
An analysis of the components of Accumulated Other Comprehensive Loss as of
December 31, 2004 and September 30, 2005, is as follows:
December 31, 2004 September 30, 2005
============================================
(In Thousands)
Unrealized gain (loss) on assets available for sale,
net of tax............................................ $ 1,546 $(2,809)
Minimum pension liability, net of tax................. (1,949) (1,949)
--------- --------
Ending balance........................................ $ (403) $(4,758)
========= ========
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
September 30, 2004 September 30, 2005
------------------------------------ ---------------------------------
Tax
Before-tax Tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
========== ============== ========== == ========== =========== ==========
(In Thousands)
Unrealized gain (loss) on assets available for sale:
Holding gains (losses)
arising during period................ $ 12,766 $(4,979) $ 7,787 $(3,516) $ 1,337 $(2,179)
Reclassification adjustment for (gains)
losses realized in net income.......... (81) 32 (49) - - -
-------- -------- -------- -------- ------- --------
Other comprehensive income (loss)......... $ 12,685 $(4,947) $ 7,738 $(3,516) $ 1,337 $(2,179)
========= ========= ======== ======= ======== =========
For the Nine Months Ended For the Nine Months Ended
September 30, 2004 September 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:
Holding gains (losses)
arising during period.................. $ 4,922 $(1,920) $ 3,002 $ (7,065) $ 2,710 $(4,355)
Reclassification adjustment for (gains)
losses realized in net income.......... (1,134) 442 (692) - - -
-------- -------- -------- --------- -------- ---------
Other comprehensive
income (loss).......................... $ 3,788 $(1,478) $ 2,310 $ (7,065) $ 2,710 $(4,355)
========= ========= ======== ========= ======== =========
The Company's only change in Other Comprehensive Operations for the three and
nine months ended September 30, 2005 and 2004 is the change in the unrealized
gain or loss on securities available for sale.
14
<Page>
At September 30, 2005, the Company held no material securities available for
sale that were in a continuous unrealized loss position for twelve months or
longer which the Bank did not have the ability or intent to hold.
12. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
For the Nine Months Ended
-----------------------------
September 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 sued as the sole 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, alleged that Fidelity Federal violated the Driver Privacy Protection
Act by obtaining driver registration information from the State of Florida for
use in Fidelity Federal's marketing efforts. Kehoe seeks as damages the
statutory minimum of $2,500 per class member. Kehoe has alleged that the class
numbers over 560,000 individuals. On June 14, 2004, the Court granted Fidelity
Federal's Motion for Summary Judgment and entered a Final Judgment in favor of
Fidelity Federal against Kehoe ruling that there could be no statutory minimum
damages award unless there were some actual damages. Kehoe pled no and had no
actual damages. This issue was only one of several issues raised by Fidelity
Federal. The Court did not rule on the other issues. Kehoe appealed that ruling
to the 11th Circuit Court of Appeals and on August 26, 2005, the Circuit Court
reversed the Trial Court's Order of Summary Judgment and remanded this case back
to the Trial Court for further proceedings, stating that if there was a finding
of damages that such damages could be no less than the statutory minimum per
class member. Consequently, the potential damages that could be awarded would be
the result of multiplying the statutory minimum of $2,500 per class member by
the total class of defendants. However, the Circuit Court also stated that the
Trial Court, "in its discretion, may fashion what it deems to be an appropriate
award." The Circuit Court also stated that, "the use of the word `may' suggests
that the award of any damages is permissive and discretionary." Fidelity Federal
intends to petition the Supreme Court for a Writ of Certiorari to appeal the
Circuit Court's ruling. In addition, Fidelity Federal intends to schedule a
class certification hearing and at the hearing to assert a variety of theories
opposing certification. Fidelity Federal in consultation with counsel, has
concluded that the case should not be certified as a class action and that, even
if it were, given the facts of this case, the damages would be minimal, at best.
Therefore, Fidelity Federal intends to vigorously defend the case.
15
<Page>
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 allege they lost in excess of $18.0 million 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. The Court has recently granted a partial Summary Judgment in
favor of Fidelity's Co-defendant, and the Bank has moved for Summary Judgment in
its favor. Regardless of the outcome, the Bank will suffer no material loss.
16
<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 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.
17
<Page>
Hurricane Wilma.
On Monday, October 24, 2005, our service area was severely impacted by hurricane
Wilma. We suffered significant damage to three of our 48 offices. We currently
estimate the cost of these damages to be approximately $250,000. At November 4,
2005, 46 offices are fully operational. For security reasons, we have chosen not
to reopen branch offices until power has been restored to the branch office. As
power is restored, additional offices will be opening. Currently, customers are
being directed to the nearest operational office.
Other Comprehensive Income (Loss).
The Company's only change in Other Comprehensive Operations for the three and
nine months ended September 30, 2005 and 2004 is the change in the unrealized
gain or loss on securities available for sale.
Other comprehensive loss for the nine months ended September 30, 2005 was $4.4
million compared to other comprehensive income of $2.3 million for the nine
months ended September 30, 2004. During the nine months ended September 30,
2005, due to rising market interest rates, the market value of the Company's
assets available for sale decreased by $7.1 million which, net of income tax of
$2.7 million, resulted in other comprehensive loss of $4.4 million. During the
nine months ended September 30, 2004, the market value of the Company's assets
available for sale increased by $3.8 million, which net of income tax of $1.5
million, resulted in other comprehensive income of $2.3 million.
Other comprehensive loss for the quarter ended September 30, 2005 was $2.2
million compared to other comprehensive income of $7.7 million for the quarter
ended September 30, 2004. During the quarter ended September 30, 2005, due to
rising market interest rates, the market value of the Company's assets available
for sale decreased by $3.5 million which, net of income tax of $1.3 million,
resulted in other comprehensive loss of $2.2 million. During the quarter ended
September 30, 2004, the market value of the Company's assets available for sale
increased by $12.7 million, which net of income tax of $5.0 million, resulted in
other comprehensive income of $7.7 million.
Changes in Financial Condition.
Our assets increased by $469.4 million, from $3.5 billion at December 31, 2004
to $3.9 billion at September 30, 2005. The Company completed its acquisition of
First Community on April 1, 2005, which added $175.2 million in assets.
Securities held to maturity, consisting of mortgage-backed securities secured by
one-to four- family mortgages from the Company's loan portfolio, increased by
$166.7 million, net of repayments during the period. This securitization of
residential mortgages was undertaken to improve the Bank's regulatory,
risk-based capital ratios. Securities available for sale decreased by $66.4
million, as the Bank has been using the cash flow from these securities to fund
loan production. The loan portfolio increased by $339.9 million, net. The
components of this net increase were a decrease of $200.9 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 $445.3 million from loan
production, net of loan repayments. Office property and equipment increased by
$7.5 million, while all other assets increased by $21.7 million. Borrowings from
the Federal Home Loan Bank decreased by $130.1 million. Funds were provided for
asset growth and the decrease in borrowings from the Federal Home Loan Bank
primarily from an increase in stockholders' equity of $28.3 million and an
increase in deposits of $503.1 million, of which $137.5 million was attributable
to the Company's acquisition of First Community. Shares of common stock with an
approximate value of $12.9 million was issued in connection with the acquisition
of First Community.
18
<Page>
Results of Operations.
Net income for the nine months ended September 30, 2005 was $23.7 million, a
$6.2 million increase compared to $17.6 million for the same 2004 period. This
increase was attributable to an increase in net interest income of $20.2 million
and a decrease in the provision for loan losses of $876,000, which was partially
offset by a decrease in other income of $195,000, an increase in operating
expenses of $11.5 million and an increase in the provision for income taxes of
$3.3 million for the nine months ended September 30, 2005 compared to the nine
months ended September 30, 2004.
Net income for the quarter ended September 30, 2005 was $8.3 million, a $2.1
million increase compared to $6.2 million for the same 2004 quarter. This
increase was attributable to an increase of $5.9 million in net interest income
together with an increase in other income of $687,000. The increase in net
interest income consisted of an increase in interest income of $11.0 million was
partially offset by an increase in interest expense of $5.1 million. In
addition, net income was affected by increases in operating expenses of $3.9
million, an increase in the provision for income taxes of $1.1 million and a
decrease in the provision for loan losses of $479,000 for the quarter ended
September 30, 2005 compared to the quarter ended September 30, 2004.
Interest Income.
Interest income for the nine months ended September 30, 2005, totaled $149.4
million, representing an increase of $29.2 million or 24.3% compared to $120.1
million for the same period in 2004. Interest income from loans increased by
$19.7 million, primarily as a result of an 11.7% increase in the average balance
of loans to $2.6 billion from $2.4 billion for the nine months ended September
30, 2005 and 2004, respectively along with an increase in the average yield on
loans to 6.21% for the nine months ended September 30, 2005 from 5.83% for the
same period in 2004. Interest income from mortgage-backed securities increased
to $23.5 million for the nine months ended September 30, 2005 from $13.3 million
for the 2004 period. This 76.6% increase was due to a 39.4% increase in the
average balance of these securities of $184.6 million, together with the average
yield on mortgage-backed securities for the nine months ended September 30, 2005
increasing to 4.79% from 3.78%. There was a decrease in interest income from
investment securities of $1.1 million principally resulting from a decrease in
the average balance of such securities to $67.0 million for the nine months
ended September 30, 2005 from $153.1 million for the nine months ended September
30, 2004. The decrease in the average balance of investment securities was
slightly offset by an increase in the average yield on these securities to 2.90%
for the nine months ended September 30, 2005 from 2.19% for the same period in
2004. Interest income on other investments increased by $478,000 due mainly to
an increase in the average yield on these investments to 3.10% from 1.54%
slightly offset by a decrease in the average balance to $58.3 million from $75.8
million for the nine months ended September 30, 2005 and 2004, respectively.
Interest income for the quarter ended September 30, 2005, totaled $54.0 million,
representing an increase of $11.0 million or 25.6% from $43.0 million for the
same quarter in 2004. Interest income from loans increased by $8.1 million,
primarily as a result of a 12.2% increase in the average balance of loans to
$2.8 billion from $2.5 billion for the quarters ended September 30, 2005 and
2004, respectively along with an increase in the average yield on loans to 6.40%
for the quarter ended September 30, 2005 from 5.88% for the same period ended
19
<Page>
September 30, 2004. Interest income from mortgage-backed securities increased to
$8.0 million for the quarter ended September 30, 2005 from $5.0 million for the
2004 quarter. This 60.9% increase was attributable to the average balance of
these securities increasing 31.7% to $657.1 million from $498.8 million and the
average yield increasing to 4.85% from 3.97% There was a decrease in interest
income from investment securities of $513,000 resulting from a decrease in the
average balance of these securities to $61.6 million from $173.5 million,
slightly offset by an increase in the average yield of these securities to 3.31%
for the quarter ended September 30, 2005 from 2.36% for the quarter ended
September 30, 2004. We have been using proceeds from the repayment of these
securities to fund loan growth. Interest income on other investments increased
by $350,000 due mainly to an increase in the average balance of these
investments to $78.6 million from $36.5 million for the quarters ended September
30, 2005 and 2004, respectively.
Interest Expense.
Interest expense for the nine months ended September 30, 2005, totaled $52.9
million, an increase of $9.0 million, or 20.5%, from $43.9 million for the same
period in 2004. The reason for this increase was an increase in interest expense
on deposits of $13.0 million, partially offset by a decrease in interest expense
of $4.0 million from Advances from the Federal Home Loan Bank and other
borrowings. The average balance of deposits increased by 16.9% to $3.1 billion
for the nine months ended September 30, 2005 compared to $2.6 billion for the
nine months ended September 30, 2004, and the average cost of those deposits
increased to 1.82% compared to 1.47% for the comparative period. Of the $443.1
million increase in average deposits, $137.5 million resulted from the
acquisition of First Community Bancorp on April 1, 2005. The decrease in
interest expense on borrowings is caused primarily by a decrease in the average
balance of borrowings to $298.9 million from $404.4 million along with a slight
decrease in the average cost of borrowed funds to 4.91% for the nine months
ended September 30, 2005 from 4.94% for the comparable 2004 period. The Company
has reduced its borrowings from the Federal Home Loan Bank by $264.5 million
since September 30, 2004.
Interest expense for the quarter ended September 30, 2005, totaled $20.3
million, an increase of $5.1 million, or 33.2%, from $15.2 million for the same
quarter in 2004. The reason for this increase was an increase in interest
expense on deposits of $7.3 million offset by a decrease in interest expense
from borrowings of $2.3 million. The average balance of deposits increased by
$586.4 million, or 21.8% to $3.3 billion for the quarter ended September 30,
2005 compared to $2.7 billion for the quarter ended September 30, 2004 and the
average cost of those deposits also increased to 2.11% compared to 1.48% for the
comparative quarter. The decrease in interest expense on borrowings was caused
by a decrease in the average balance of these borrowings to $257.1 million from
$460.1 million, offset by a slight increase in the average cost of borrowed
funds to 4.74% for the quarter ended September 30, 2005 from 4.61% for the
comparable 2004 quarter. As mentioned above, the Company has reduced its
borrowings from the Federal Home Loan Bank.
Net Interest Income.
During the nine months ended September 30, 2005, the Company's interest income
increased by $29.2 million compared to the same period in 2004, while interest
expense increased by $9.0 million, resulting in net interest income of $96.5
million for the nine months ended September 30, 2005, a $20.2 million or 26.5%
increase from the nine months ended September 30, 2004. This improvement was
attributable to an improvement in our net interest margin to 3.76% for the nine
20
<Page>
months ended September 30, 2005 compared to 3.32% for the same period in 2004
and an increase in interest earning assets. During the quarter ended September
30, 2005, the Company's interest income increased by $11.0 million compared to
the same quarter in 2004, while interest expense increased by $5.1 million,
resulting in net interest income of $33.7 million for the quarter ended
September 30, 2005, a $5.9 million or, 21.4% increase from the quarter ended
September 30, 2004. As indicated above, this improvement is due to an
improvement in our net interest margin and an increase in interest earning
assets.
Provision for Loan Losses.
The provision for loan losses was $1.3 million for the nine months ended
September 30, 2005, compared to $2.2 million for the nine months ended September
30, 2004. The provision for the nine months ended September 30, 2005 is deemed
adequate by management, considering the risks known and inherent in the Bank's
loan portfolio. The decrease in the loan loss provision reflects the decrease in
our ratio of non-performing assets to total assets to 0.10% at September 30,
2005, compared to 0.19% at September 30, 2004.
The provision for loan losses was $304,000 for the quarter ended September 30,
2005, compared to $783,000 for the quarter ended September 30, 2004. The
provision for the quarter ended September 30, 2005 is deemed adequate by
management, reflecting the risks inherent in the Bank's loan portfolio. As
indicated above, the decrease in our loan loss provision reflects the decrease
in our ratio of non performing assets to total assets.
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 for the nine months ended September 30, 2005 was $19.7 million
compared to $19.9 million for the same period in 2004. Fees for other banking
services, which includes insurance premium sales, increased by $872,000 to $9.4
million from $8.5 million. Gains from the sale of loans also increased by
$252,000 to $643,000 from $391,000. Offsetting these increases was a decrease in
net gain on sale of investments of $1.1 million. During the nine months ended
September 30, 2004 the Company sold investments resulting in a gain of $1.1
million. There were no such sales of investments during the nine months ended
September 30, 2005.
Other income for the quarter ended September 30, 2005 was $6.9 million,
representing an increase of $687,000 compared to the same quarter in 2004. The
increase is attributable to an increase in service charges on deposit accounts
of $232,000 along with an increase in fees for other banking services, which
include insurance sales, of $420,000. Offsetting these increases was a $45,000
decrease in gain on the sale of loans and securities.
21
<Page>
Operating Expense.
Operating expense increased by $11.5 million to $76.6 million for the nine
months ended September 30, 2005 when compared to the same nine month period in
2004. As a result of our acquisition of First Community Bancorp on April 1,
2005, we are now operating five more offices. Of this increase, $5.7 million is
attributable to employee compensation and benefits expense. The increase in
compensation costs are principally due to additional personnel to staff new and
acquired offices, compensation for expansion of the Company's lending and other
income production activities, increased incentive compensation due to increased
profitability, increased commissions on insurance sales, together with normal
salary increases. At September 30, 2005, the Company employed 872 full time
equivalent employees, compared to 760 at September 30, 2004. The increase of
$2.9 million in occupancy and equipment costs reflects the Company's continued
expansion of offices and investment in technology to better serve our customers.
Marketing costs increased by $599,000 due in large part to costs associated with
our acquisition of First Community Bancorp. Miscellaneous operating costs
increased by $2.2 million and included an increase in consulting costs, auditing
costs and regulatory examination costs of $484,000 due mainly to Sarbanes Oxley
compliance. We also experienced an increase in legal costs of $459,000, and
increases in postage costs of $163,000. Also included in miscellaneous operating
costs for 2005 is the increase in amortization of core deposit intangibles of
$380,000 which is also a result of our acquisition of First Community Bancorp.
Compared to the quarter ending September 30, 2004, operating expense for the
quarter ending September 30, 2005 increased by $3.9 million to $27.0 million. As
mentioned above, we are now operating an additional five branch offices as a
result of our acquisition of First Community Bancorp on April 1, 2005. Of this
increase, $2.0 million is attributable to employee compensation and benefits.
Increases in employee compensation and benefits expense were primarily
attributable to an increase in incentive compensation as a result of increased
profitability, additional personnel to serve deposit and loan customers,
additional personnel as a result of the acquisition, as well as production of
increased fee based income, together with normal salary increases. Occupancy and
equipment costs increased by $1.1 million which reflects our continued growth in
customer service facilities and technology equipment. Miscellaneous operating
costs also increased by $620,000 to $5.6 million for the quarter ended September
30, 2005 compared to the same quarter in 2004 and included increases in legal
costs of $261,000 and an increase in amortization of core deposit intangibles of
$190,000 as a result of our acquisition of First Community Bancorp.
Income Taxes.
The income tax provision was $14.6 million for the nine months ended September
30, 2005 compared to $11.3 million for the nine months ended September 30, 2004.
The provision reflects the current rates paid for Federal and State income taxes
applied to the Company's pre-tax income.
The income tax provision was $5.1 million for the quarter ended September 30,
2005 compared to $3.9 million for the quarter ended September 30, 2004. The
provision reflects the current rates paid for Federal and State income taxes
applied to the Company's pre-tax income.
22
<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 5.83% during the
month of September 2005. Liquidity ratios averaged 6.36% for the quarter ended
September 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 $21.0 million at
September 30, 2005. Other assets qualifying for liquidity at September 30, 2005,
including unpledged mortgage-backed securities guaranteed by Fannie Mae and
Freddie Mac, were $176.1 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 September 30, 2005, the Bank had $120.8 million in advances
from the FHLB. At September 30, 2005, the Bank had commitments outstanding to
originate or purchase loans of $317.0 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 September 30, 2005 totaled $614.3 million. Based
on prior experience, management believes that a significant portion of such
deposits will remain with the Bank.
Contractual Obligations and Commercial Commitments
Our long-term debt, which in the aggregate totals $174.4 million, consists of
obligations to the FHLB totaling $120.8 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 September
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 $26.6 million.
23
<Page>
The tables below summarize the Company's contractual obligations, commercial and
other commitments at September 30, 2005.
Payments Due by Period
-------------------------------------------------------------------------
Less Than After 5
Total 1 year 1-3 Years 3-5 Years Years
----- -------- --------- --------- --------
(In Thousands)
Time Deposits...................... $ 785,710 $ 614,340 $ 162,621 $ 8,749 $ -
Long-term Debt(1).................. 174,277 43,582 73,831 3,059 53,805
Operating Lease Obligations........ 26,640 2,373 4,753 3,758 15,756
Pension Obligations................ 14,324 4,776 9,548 - -
---------- ---------- ---------- --------- ---------
Total Contractual Cash Obligations.. $1,000,951 $ 665,071 $ 250,753 $15,566 $69,561
========== ========== ========== ========= =========
(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.................... $261,591 $ 5,941 $ 12,070 $ 14,503 $229,077
Standby Letters of Credit.......... 16,213 15,037 510 18 648
Other Commercial Commitments....... 165,922 165,922 - - -
Other Commitments.................. 134,943 134,943 - - -
---------- --------- --------- --------- ---------
Total Contractual Cash Obligations.. $578,669 $321,843 $ 12,580 $ 14,521 $229,725
========== ========= ========= ========= =========
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.
24
<Page>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market Risk Analysis.
As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, other than those which
possess a short term to maturity. Since the majority of the Company's
interest-bearing liabilities and nearly all of the Company's interest-earning
assets are held by the Bank, virtually all of the Company's interest rate risk
exposure lies at the Bank level. As a result, all significant interest rate risk
management procedures are performed by management of the Bank. Based upon the
nature of the Bank's operations, the Bank is not subject to foreign currency
exchange or commodity price risk. The Bank's loan portfolio is concentrated
primarily in Palm Beach, Martin and Broward Counties in Florida and is therefore
subject to risks associated with the local economy. As of September 30, 2005,
the Company does not own any trading assets other than $1.4 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 September 30, 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 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.
25
<Page>
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.
26
<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
September 30, 2005 was a positive 24.81%.
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........................ $ 27,877 $ 76,403 $ 158,986 $ 107,748 $ 202,409
Adjustable rate................... 129,480 267,173 193,710 278,485 -
Commercial mortgage loans: (2)
Fixed rate........................ 13,132 25,673 42,752 25,638 40,182
Adjustable rate................... 324,240 548,362 18,525 947 -
Other loans (2)
Fixed rate.................... 27,488 35,298 41,288 17,813 6,895
Adjustable rate................... 300,141 9,377 - - -
Mortgage-backed securities
Fixed rate........................ 29,222 79,720 163,739 110,242 178,483
Adjustable rate................... 77,213 - - - -
Municipal bonds and government and
agency securities - fixed rate.. 5,125 25,083 235 30,197 -
Other interest earning assets - adjustable 49,792 - - - -
--------- ----------- ---------- ---------- ---------
Total $983,710 $1,067,089 $ 619,235 $ 571,070 $427,969
========= =========== ========== ========== =========
Interest-bearing liabilities
Deposits: (3)
Checking and funds transfer accounts $ 25,925 $ 77,774 $ 102,275 $ 76,943 $931,158
Passbook accounts................. 23,248 69,744 139,367 98,471 482,041
Money market accounts............. 19,150 57,451 80,996 50,953 304,179
Certificate accounts (4).......... 147,417 466,992 162,552 8,749 -
Borrowings: (4)..................... 170,900 14,811 74,144 3,507 -
--------- --------- --------- --------- ----------
Total $386,640 $686,772 $ 559,334 $ 238,623 1,717,378
========= ========= ========= ========= ==========
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities......................... $597,070 $380,317 $ 59,901 $ 332,447 $(1,289,409)
========= ========= ========= ========== ===========
Cumulative excess of interest-earning
assets over interest-bearing
liabilities........................ $597,070 $977,387 $1,037,288 $1,369,735 $ 80,326
========= ========= ========== =========== ==========
Cumulative excess of interest-earning assets
over interest-bearing liabilities as a
percent of total assets................. 15.15% 24.81% 26.33% 34.77% 2.04%
========= ========= ========= =========== ==========
(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.
27
<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 September 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.
28
<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 sued as the sole
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, alleged that Fidelity
Federal violated the Driver Privacy Protection Act by obtaining driver
registration information from the State of Florida for use in Fidelity
Federal's marketing efforts. Kehoe seeks as damages the statutory
minimum of $2,500 per class member. Kehoe has alleged that the class
numbers over 560,000 individuals. On June 14, 2004, the Court granted
Fidelity Federal's Motion for Summary Judgment and entered a Final
Judgment in favor of Fidelity Federal against Kehoe ruling that there
could be no statutory minimum damages award unless there were some
actual damages. Kehoe pled no and had no actual damages. This issue
was only one of several issues raised by Fidelity Federal. The Court
did not rule on the other issues. Kehoe appealed that ruling to the
11th Circuit Court of Appeals and on August 26, 2005, the Circuit
Court reversed the Trial Court's Order of Summary Judgment and
remanded this case back to the Trial Court for further proceedings,
stating that if there was a finding of damages that such damages could
be no less than the statutory minimum per class member. Consequently,
the potential damages that could be awarded would be the result of
multiplying the statutory minimum of $2,500 per class member by the
total class of defendants. However, the Circuit Court also stated that
the Trial Court, "in its discretion, may fashion what it deems to be
an appropriate award." The Circuit Court also stated that, "the use of
the word `may' suggests that the award of any damages is permissive
and discretionary." Fidelity Federal intends to petition the Supreme
Court for a Writ of Certiorari to appeal the Circuit Court's ruling.
In addition, Fidelity Federal intends to schedule a class
certification hearing and at the hearing to assert a variety of
theories opposing certification. Fidelity Federal in consultation with
counsel, has concluded that the case should not be certified as a
class action and that, even if it were, given the facts of this case,
the damages would be minimal, at best. Therefore, Fidelity Federal
intends to vigorously defend the case.
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
29
<Page>
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 $18.0 million 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.
The Court has recently granted a partial Summary Judgment in favor of
Fidelity's Co-defendant, and the Bank has moved for Summary Judgment
in its favor. 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
None.
Item 5 Other Information
None.
30
<Page>
Item 6 Exhibits
31.1 302 Certification
31.2 302 Certification
32.1 906 Certification
31
<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;
November 7, 2005 /S/ Vince A. Elhilow
- ----------------- ------------------------------------------
Date Vince A. Elhilow
President and Chief Executive Officer
32
<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;
November 7, 2005 /S/ Richard D. Aldred
- ----------------- ---------------------------------------
Date Richard D. Aldred
Executive Vice President,
Chief Financial Officer
33
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
34
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.
November 7, 2005 /S/ Vince A. Elhilow
- ---------------- ------------------------------------------
Date President and Chief Executive Officer
November 7, 2005 /S/ Richard D. Aldred
- ---------------- ------------------------------------------
Date Executive Vice President, Chief Financial
Officer and Treasurer
35
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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: November 7, 2005 By: /S/ Vince A. Elhilow
-------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: November 7, 2005 By: /S/ Richard D. Aldred
----------------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
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