SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
- ------------------------------- ---------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 Datura Street, West Palm Beach, Florida 33401
-------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last report
Indicate by check X whether the Registrant has filed all reports
required to be filed by Sections 13, or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 6,802,112 shares
of the Registrant's common stock outstanding as of May 1, 1998.
FIDELITY BANKSHARES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................................1
Consolidated Statements of Financial Condition as of
December 31, 1997 and March 31, 1998.................................................2
Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1998..............................................................3
Consolidated Statements of Comprehensive Operations for the three months
ended March 31, 1997 and 1998........................................................4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1998..............................................................5
Notes to Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................12
PART II. OTHER INFORMATION..................................................................................18
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Unaudited
December 31, March 31,
1997 1998
==============================
(In Thousands)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions .......... $ 22,136 $ 22,573
Interest-bearing deposits .................................. 33,688 16,841
----------- -----------
Total cash and cash equivalents ....................... 55,824 39,414
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities ........................... 16,077 19,045
Mortgage-backed and other securities ....................... 234,132 299,683
----------- -----------
Total assets available for sale ....................... 250,209 318,728
LOANS RECEIVABLE, Net (Notes 2, 3) ............................. 861,257 899,698
OFFICE PROPERTIES AND EQUIPMENT, Net ........................... 21,440 28,453
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates
market...................................................... 11,955 13,021
REAL ESTATE OWNED, Net ......................................... 967 881
ACCRUED INTEREST RECEIVABLE .................................... 6,404 7,012
OTHER ASSETS ................................................... 12,211 13,462
----------- -----------
TOTAL ASSETS ................................................... $ 1,220,267 $ 1,320,669
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ....................................................... $ 872,340 $ 921,378
OTHER BORROWED FUNDS ........................................... 3,780 4,170
ADVANCES FROM FEDERAL HOME LOAN BANK ........................... 239,091 253,896
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE .................. 2,783 6,459
DRAFTS PAYABLE ................................................. 5,349 5,773
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES ............................. -- 28,750
OTHER LIABILITIES .............................................. 9,038 11,305
DEFERRED INCOME TAXES .......................................... 499 412
----------- -----------
TOTAL LIABILITIES .......................................... 1,132,880 1,232,143
----------- -----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, 2,000,000 shares authorized, none issued ...... -- --
COMMON STOCK ($.10 par value) 8,200,000 authorized shares,
6,784,958 shares outstanding at December 31, 1997, and
6,801,986 shares outstanding at March 31, 1998 ............. 678 680
ADDITIONAL PAID IN CAPITAL ..................................... 38,347 38,567
RETAINED EARNINGS - substantially restricted ................... 47,943 48,925
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN ........ (986) (904)
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 6) ................ 1,405 1,258
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (Note 4) ........................ 87,387 88,526
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 1,220,267 $ 1,320,669
=========== ===========
See Notes to Unaudited Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Unaudited
For the Three Months Ended
March 31,
1997 1998
============================
(In Thousands, except per share amounts)
Interest income:
Loans ................................................... $ 13,378 $ 17,335
Investment securities ................................... 159 245
Other investments ....................................... 530 836
Mortgage-backed and other securities .................... 2,230 4,404
-------- --------
Total interest income .............................. 16,297 22,820
-------- --------
Interest expense:
Deposits ................................................ 7,572 10,015
Advances from Federal Home Loan Bank and other
borrowings............................................. 1,395 4,265
-------- --------
Total interest expense ............................. 8,967 14,280
-------- --------
Net interest income ........................................ 7,330 8,540
Provision for loan losses .................................. 51 (69)
-------- --------
Net interest income after provision for loan losses ........ 7,279 8,609
-------- --------
Other income:
Servicing income and other fees ......................... 796 1,089
Net gain on sale of loans, investments
and mortgage-backed securities ..................... 4 671
Miscellaneous ........................................... 102 154
-------- --------
Total other income ................................. 902 1,914
-------- --------
Operating expense:
Employee compensation and benefits ...................... 3,414 3,807
Occupancy and equipment ................................. 1,165 1,437
Loss on real estate owned ............................... 21 17
Marketing ............................................... 179 258
Federal deposit insurance premium ....................... 109 132
Other ................................................... 1,153 1,362
-------- --------
Total operating expense ............................ 6,041 7,013
-------- --------
Income before provision for income taxes ................... 2,140 3,510
-------- --------
Provision for income taxes:
Current ................................................. 833 1,297
Deferred ................................................ 73 120
-------- --------
Total provision for income taxes ................... 906 1,417
-------- --------
Net income ................................................. $ 1,234 $ 2,093
======== ========
Earnings per share (Note 5):
Basic ................................................... $ 0.19 $ 0.31
======== ========
Diluted ................................................. $ 0.18 $ 0.31
======== ========
See Notes to Unaudited Consolidated Financial Statements.
3
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
Unaudited
For the Three Months Ended
March 31,
1997 1998
==========================
(In Thousands)
Net income ................................................................ $ 1,234 $ 2,093
Other comprehensive income, net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period ............. (893) 173
Less: reclassification adjustment for gains realized in net income.. - (320)
------- -------
Comprehensive income (Note 6) ............................................. $ 341 $ 1,946
======= =======
See Notes to Unaudited Consolidated Financial Statements.
4
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998
- --------------------------------------------------------------------------------
Unaudited
For the Three Months Ended
March 31,
1997 1998
==========================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income ................................................................................. $ 1,234 $ 2,093
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization ........................................................ 310 385
ESOP and Recognition and Retention Plan compensation expense ......................... 152 234
Accretion of discounts, amortization of premiums, and other deferred yield items ..... (167) (89)
Provision for loan losses and real estate losses ..................................... 51 (69)
Provisions for losses and net (gains) losses on sales of real estate owned ........... (13) 14
Net gain on sale of:
Other assets .................................................................... - -
Mortgage-backed securities ...................................................... - (516)
Loans ........................................................................... (4) (154)
Increase in accrued interest receivable .................................................... (222) (608)
Decrease in other assets ................................................................... 446 110
Increase in drafts payable ................................................................. 864 424
Decrease in deferred income taxes .......................................................... (548) (87)
Increase in other liabilities .............................................................. 731 1,865
------------------------
Net cash from operating activities .............................................. 2,834 3,602
------------------------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans .......................................... (23,026) (33,688)
Principal payments received on mortgage-backed securities .................................. 4,113 16,796
Purchases of:
Loans ................................................................................ (4,526) (12,082)
Mortgage-backed and other securities ................................................. (25,667) (94,963)
Federal Home Loan Bank stock ......................................................... (511) (1,066)
Investment securities ................................................................ (4,568) (4,989)
Office properties and equipment ...................................................... (1,070) (7,401)
Proceeds from sales of:
Loans ................................................................................ 316 7,491
Real estate acquired in settlement of loans .......................................... 75 455
Mortgage-backed securities ........................................................... - 12,137
Proceeds from maturities of investment securities .......................................... 2,000 2,000
Other ...................................................................................... 543 639
------------------------
Net cash used for investing activities .......................................... (52,321) (114,671)
------------------------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock ............................................... 218 70
Sale of subordinated debentures, Net ....................................................... - 27,389
Cash dividends ............................................................................. (616) (709)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts .................................. 7,184 16,970
Certificates of deposit .............................................................. 41,948 32,068
Advances from Federal Home Loan Bank ................................................. (2,448) 14,805
ESOP loan ............................................................................ (69) -
Other borrowed funds ................................................................. 2,776 390
Advances by borrowers for taxes and insurance ........................................ 2,855 3,676
------------------------
Net cash from financing activities .............................................. 51,848 94,659
------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................... 2,361 (16,410)
CASH AND CASH EQUIVALENTS, Beginning of period ............................................. 42,420 55,824
------------------------
CASH AND CASH EQUIVALENTS, End of period ................................................... $ 44,781 $ 39,414
========================
See Notes to Unaudited Consolidated Financial Statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Savings Bank of Florida (the
"Bank") conform to generally accepted accounting principles and to predominant
practices within the thrift industry. The Company has not changed its accounting
and reporting policies from those disclosed in its 1997 Annual Report on Form
10-K.
On January 29, 1997, Fidelity Federal Savings Bank of Florida (the "Bank")
consummated a tax-free reorganization, by becoming a wholly-owned subsidiary of
a Delaware chartered, stock holding company known as Fidelity Bankshares, Inc.
(the "Company"). Each outstanding share of common stock in Fidelity Federal
Savings Bank of Florida was converted into a share of common stock in Fidelity
Bankshares, Inc., in the same proportionate ownership interest the stockholder
held before the reorganization. In addition, the reorganization was accounted
for in the same manner as a pooling of interests transaction. Consequently, the
consolidated financial statements required no accounting adjustments.
On January 21, 1998 the Company issued $28.375 million of mandatorily
redeemable, Preferred Securities out of a grantor trust, Fidelity Capital Trust
I, a Delaware statutory trust, which was created by the Company for this sole
purpose. As its only asset, the trust holds junior subordinated debentures due
January 31, 2028 of the Company, purchased with the proceeds of the preferred
security's issuance. Interest from the junior subordinated debt securities is
payable quarterly at a rate of 8.375%, annually. The interest will be used to
fund distributions quarterly at the rate of 8.375% on the Preferred Securities.
As a result of the above, the Preferred Securities of the trust are considered
fully and unconditionally guaranteed by the Company.
Distributions on the Preferred Securities are cumulative and are payable at the
same rate as the junior subordinated debentures, described above. The junior
subordinated debentures are redeemable in whole, in the event the Company's
mutual holding company parent converts to stock form beginning January 31, 2000
at 107% of principal amount and in any event the junior subordinated debentures
are redeemable at 100% of principal amount in whole or in part, commencing
January 31, 2003. The Preferred Securities are subject to mandatory redemption,
in whole or in part as applicable, upon the repayment of the junior subordinated
debentures. The proceeds from the securities, to the extent invested in common
stock of the Bank, are considered to be tier 1 capital for regulatory purposes.
Of the net proceeds of $27.1 million from the sale of the Preferred Securities,
the Company invested $25 million in common stock of the Bank. The Preferred
Securities are traded on the Nasdaq National Market system under the symbol
"FFFLP."
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at March 31, 1998 and
the results of its consolidated operations and cash flows for the period then
ended, all of which are of a normal and recurring nature, have been included.
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income", which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and No. 131 "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Both statements
are effective for fiscal years beginning after December 15, 1997. On January 1,
1998 the Company adopted these pronouncements.
Certain amounts in the financial statements have been reclassified to conform
with the March 31, 1998 presentation.
6
On December 5, 1997, the Bank acquired BankBoynton, a local savings institution
having three offices, $55 million in assets and $41.7 million in deposits, for
$5.7 million in cash. Using the purchase method of accounting, the transaction
resulted in an excess of cost over net assets of approximately $2.3 million,
which will be charged against operations over a period of fifteen years, using
the straight-line method of amortization. As the offices of BankBoynton were
located in the vacinity of existing Fidelity offices, the BankBoynton offices
were closed and the deposits transferred to the Bank's existing offices.
On January 30, 1998, the Bank acquired an office building in downtown West Palm
Beach for $6.6 million from Barnett Bank/NationsBank. While the seller has
leased back most of the building for a period of up to two years, it is the
intent of the Company to locate its corporate headquarters in this building in
an effort to better serve the community.
2. LOANS RECEIVABLE
Loans receivable at December 31, 1997 and March 31, 1998, consist of the
following:
December 31, March 31,
1997 1998
===================================
(In Thousands)
One-to-four single family, residential real estate
mortgages .................................... $ 717,610 $ 775,079
Commercial real estate mortgages ...................... 39,946 39,614
Real estate construction-primarily residential ........ 38,577 25,136
Participations-primarily residential .................. 3,172 2,939
Land loans-primarily residential ...................... 12,116 11,292
--------- ----------
Total first mortgage loans ................... 811,421 854,060
Consumer and commercial business loans ................ 105,047 110,535
--------- ----------
Total gross loans ............................ 916,468 964,595
Less:
Undisbursed portion of loans in process ...... 54,471 64,547
Unearned discounts, premiums and deferred loan
fees, net ............................. (2,554) (2,875)
Allowance for loan losses .................... 3,294 3,225
--------- ----------
Loans receivable-net .................................. $ 861,257 $ 899,698
========= ==========
7
3. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year ended
December 31, 1997 and the three months ended March 31, 1997 and 1998, is as
follows:
For the Year For the Three Months
Ended Ended
December 31, March 31,
1997 1997 1998
================================================
(In Thousands)
Balance at beginning of period ..................... $ 2,263 $ 2,263 $ 3,294
Increase in allowance due to purchase of BankBoynton 1,167 -- --
Current provision (recovery) ....................... 170 51 (69)
Charge-offs ........................................ (306) (184) --
-------- -----------------------
Ending balance ..................................... $ 3,294 $ 2,130 $ 3,225
======== =======================
An analysis of the recorded investment in impaired loans owned by the Company at
the end of each period and the related specific valuation allowance for those
loans is as follows:
March 31, 1997 March 31, 1998
===========================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
-----------------------------------------------------------
(In Thousands)
Impaired loan balances and related
specific valuation allowances:
Loans performing in conformity with
contractual terms .................. $ 201 $ 98 $ 959 $ 294
Loans for which interest income is
not being recognized ............... 1,786 -- 3,566 --
------------------------- ----------------------
Total ......................... $1,987 $ 98 $4,525 $ 294
========================= ======================
The Bank's policy on interest income on impaired loans is to reverse all accrued
interest against interest income if a loan becomes more than 90 days delinquent
and cease accruing interest thereafter. Such interest ultimately collected is
credited to income in the period of recovery.
8
4. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Savings Bank of Florida, 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 March 31, 1997 Stockholders' Equity
and ratio to total assets............................ 8.8% $ 81,579
========
Net unrealized increase in market value of assets
available for sale (net of applicable
income taxes)........................................ 111
Goodwill................................................ (679)
-----------
Tangible capital and ratio to adjusted total assets..... 8.7% $ 81,011 1.5% $ 13,895
======= =========== ====== ==========
Tier 1 (core) capital and ratio to adjusted
total assets......................................... 8.7% $ 81,011 3.0% $ 27,790 5.0% $ 46,316
======= =========== ====== ========== ====== ============
Tier 1 (core) capital and ratio to risk-weighted
total assets......................................... 17.4% $ 81,011 6.0% $ 28,005
======= ====== ============
General loan valuation allowances....................... 1,822
Equity investments...................................... (97)
-----------
Tier 2 capital.......................................... $ 1,725
===========
Total risk-based capital and ratio to risk-weighted
total assets......................................... 17.7% $ 82,736 8.0% $ 37,340 10.0% $ 46,674
======= =========== ====== ========== ====== ============
Total assets............................................ $ 926,891
===========
Adjusted total assets................................... $ 926,323
===========
Risk-weighted assets.................................... $ 466,744
===========
As of March 31, 1998 Stockholders' Equity
and ratio to total assets............................ 8.6% $ 112,797
=======
Net unrealized increase in market value of assets
available for sale (net of applicable
income taxes)........................................ (1,258)
Goodwill................................................ (2,673)
Disallowed servicing assets and deferred tax assets..... (39)
-----------
Tangible capital and ratio to adjusted total assets..... 8.3% $ 108,827 1.5% $ 19,727
======= =========== ====== ==========
Tier 1 (core) capital and ratio to adjusted
total assets......................................... 8.3% $ 108,827 3.0% $ 39,454 5.0% $ 65,756
======= =========== ====== ========== ====== ============
Tier 1 (core) capital and ratio to risk-weighted
total assets......................................... 15.3% $ 108,827 6.0% $ 42,579
======= ====== ============
General loan valuation allowances....................... 2,242
Equity investments...................................... -
-----------
Tier 2 capital.......................................... $ 2,242
===========
Total risk-based capital and ratio to risk-weighted
total assets......................................... 15.7% $ 111,069 8.0% $ 56,773 10.0% $ 70,966
======= =========== ====== ========== ====== ============
Total assets............................................ $1,319,096
===========
Adjusted total assets................................... $1,315,126
===========
Risk-weighted assets.................................... $ 709,658
===========
9
5. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the three months ended March 31, 1997 and 1998, are as follows:
For the Three Months Ended March 31,
1997
-----------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=====================================================
(Dollars In Thousands)
Net income............................. $ 1,234,000
===============
Basic EPS:
Income available to
common stockholders.................. $ 1,234,000 6,634,997 $ 0.19
=============== ============== ===============
Effect of diluted shares:
Common stock options................. 102,571
--------------
Diluted EPS:
Income available to
common stockholders.................. $ 1,234,000 6,737,568 $ 0.18
=============== ============== ===============
For the Three Months Ended March 31,
1998
-----------------------------------------------------
Income Shares Per-Share
Numerator Denominator Amount
=====================================================
(Dollars In Thousands)
Net income............................. $ 2,093,000
===============
Basic EPS:
Income available to
common stockholders.................. $ 2,093,000 6,701,332 $ 0.31
=============== ===============
Effect of diluted shares:
Common stock options................. 109,845
--------------
Diluted EPS:
Income available to
common stockholders.................. $ 2,093,000 6,811,177 $ 0.31
=============== ============== ===============
Pursuant to Statement of Position (SOP), 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AICPA), ESOP shares that have not been committed to be released are not
considered to be outstanding.
10
6. OTHER COMPREHENSIVE INCOME
An analysis of the changes in Accumulated Other Comprehensive Income for the
quarters ended March 31, 1997 and 1998, is as follows:
For the Three Months Ended For the Three Months Ended
March 31, 1997 March 31, 1998
--------------------------- ---------------------------
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on Securities on Securities
========================================================
(In Thousands)
Beginning balance ........................................ $ 782 $ 1,405
Current-period change .................................... (893) (147)
-------- --------
Ending balance ........................................... $ (111) $ 1,258
======== ========
An analysis of the related tax effects allocated to Other Comprehensive Income
is as follows:
For the Three Months Ended For the Three Months Ended
March 31, 1997 March 31, 1998
--------------------------------- ---------------------------------
Tax Tax
Before-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:
Unrealized holding gains (losses) arising
during period ...................................... $(1,514) $ 621 $ (893) $ 279 $ (106) $ 173
Less: reclassification adjustment for gains
realized in net income ............................. -- -- -- (516) 196 (320)
------------------------------ -------------------------------
Other comprehensive income ............................... $(1,514) $ 621 $ (893) $ (237) $ 90 $ (147)
============================== ===============================
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
On January 29, 1997, Fidelity Federal Savings Bank of Florida (the "Bank")
consummated a tax-free reorganization, by becoming a wholly-owned subsidiary of
a Delaware chartered, stock holding company known as Fidelity Bankshares, Inc.
(the "Company"). Each outstanding share of common stock in Fidelity Federal
Savings Bank of Florida was converted into a share of common stock in Fidelity
Bankshares, Inc., in the same proportionate ownership interest the stockholder
held before the reorganization. In addition, the reorganization was accounted
for in the same manner as a pooling of interests transaction. Consequently, the
consolidated financial statements required no accounting adjustments.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is 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 rates tends to be highly cyclical. In periods of high interest rates,
earnings of the Bank are likely to be depressed, which in turn would be likely
to have a detrimental effect on the market value of any investment in the Bank's
common stock. In addition, legislative and regulatory actions may result in
diminishing the value of any investment in the Bank.
Recent Developments.
On January 21, 1998 the Company issued $28.375 million of mandatorily
redeemable, Preferred Securities out of a grantor trust, Fidelity Capital Trust
I, a Delaware statutory trust, which was created by the Company for this sole
purpose. As its only asset, the trust holds junior subordinated debentures due
January 31, 2028 of the Company, purchased with the proceeds of the preferred
security's issuance. Interest from the junior subordinated debt securities is
payable quarterly at a rate of 8.375%, annually. The interest will be used to
fund distributions quarterly at the rate of 8.375% on the Preferred Securities.
As a result of the above, the Preferred Securities of the trust are considered
fully and unconditionally guaranteed by the Company.
Distributions on the Preferred Securities are cumulative and are payable at the
same rate as the junior subordinated debentures, described above. The junior
subordinated debentures are redeemable in whole, in the event the Company's
mutual holding company parent converts to stock form beginning January 31, 2000
at 107% of principal amount and in any event the junior subordinated debentures
are redeemable at 100% of principal amount in whole or in part, commencing
January 31, 2003. The Preferred Securities are subject to mandatory redemption,
in whole or in part as applicable, upon the repayment of the junior subordinated
debentures. The proceeds from the securities, to the extent invested in common
stock of the Bank, are considered to be tier 1 capital for regulatory purposes.
Of the net proceeds of $27.1 million from the sale of the Preferred Securities,
the Company invested $25 million in common stock of the Bank. The Preferred
Securities are traded on the Nasdaq National Market system under the symbol
"FFFLP."
13
On December 5, 1997, the Bank acquired BankBoynton, a local savings institution
having three offices, $55 million in assets and $41.7 million in deposits, for
$5.7 million in cash. Using the purchase method of accounting, the transaction
resulted in an excess of cost over net assets of approximately $2.3 million,
which will be charged against operations over a period of fifteen years, using
the straight-line method of amortization. As the offices of BankBoynton were
located in the vacinity of existing Fidelity offices, the BankBoynton offices
were closed and the deposits transferred to the Bank's existing offices.
On January 30, 1998, the Bank acquired an office building in downtown West Palm
Beach for $6.6 million from Barnett Bank/NationsBank. While the seller has
leased back most of the building for a period of up to two years, it is the
intent of the Company to locate its corporate headquarters in this building in
an effort to better serve the community.
Other Comprehensive Income.
Accumulated Other Comprehensive Income for the quarter ended March 31, 1998
increased by $173,000 which was offset by the reclassification of $320,000 of
such gains included in net income for the period, resulting in an aggregated
decrease of $147,000. This increase, which was caused by an increase in the
market value of Assets Available for Sale, resulted from a modest decrease in
market interest rates for these instruments.
The decrease in Accumulated Other Comprehensive Income for the quarter ended
March 31, 1997 of $893,000, which consisted of a decrease in the market value of
Assets Available for Sale, resulted from an increase in market interest rates on
similar instruments.
Results of Operations.
Net income for the quarter ended March 31, 1998 was $2.1 million, representing
an increase of $859,000 when compared to $1.2 million for the same quarter ended
March 31, 1997. The primary reasons for this increase, as more fully described
later herein, were an increase in net interest income of $1.2 million and an
increase in other income of $1.0 million. Partially offsetting these factors was
an increase in operating expenses of $972,000 and an increase in the provision
for income taxes of $511,000.
Interest Income.
Interest income for the quarter ended March 31, 1998, totaled $22.8 million, an
increase of $6.5 million or 40.0% from the same quarter in 1997. The principal
cause of this increase was an increase in interest income on the Bank's loans of
$4.0 million. This increase resulted from an increase in the average balance of
these loans to $878.3 million for the quarter ended March 31, 1998 compared to
$674.7 million for the comparable 1997 quarter. Interest income from
mortgage-backed securities for the quarter ended March 31, 1998 was $4.4
million, an increase of $2.2 million or 97.5% compared to $2.2 million for the
same quarter in 1997. The primary reason for this increase was an increase in
the average balance of these securities to $265.9 million for the quarter ended
March 31, 1998 from $129.0 million for the same quarter in 1997, which was
partially offset by a decline in yields on these securities to 6.63% during 1998
compared to 6.91% for 1997. Interest income also increased on investment
securities and other investments by $86,000 and $306,000, respectively. These
increases resulted from an increase in the average balance of investment
securities to $17.6 million from $10.1 million and an increase in the average
balance of other investments to $48.2 million from $31.6 million for the
quarters ended March 31, 1998 and 1997, respectively.
14
Interest Expense.
Interest expense was $14.3 million for the quarter ended March 31, 1998,
representing a $5.3 million or 59.3% increase when compared to the same quarter
in 1997. The principal cause for this increase was an increase in interest
expense on borrowed funds of $2.9 million, of which approximately $500,000 is
attributable to interest on the Company's subordinated debenture securities. As
a result of the subordinated debenture issue and additional FHLB borrowings, the
Company experienced an increase in the average balance on such funds to $267.5
million for the quarter ended March 31, 1998 compared to $82.6 million for the
same quarter in 1997, which was partially offset by a decrease in the average
yield on borrowed funds to 6.38% from 6.75% for the quarters ended March 31,
1998 and 1997, respectively. Interest expense on deposits also increased by $2.4
million, caused primarily by a increase in the average balance of deposits to
$898.7 million for the quarter ended March 31, 1998 compared to $714.8 million
for the same quarter in 1997 and an increase in the average yield to 4.46% from
4.24% for the quarters ended March 31, 1998 and 1997, respectively.
Net Interest Income.
While the Bank's interest income increased by $6.5 million for the quarter ended
March 31, 1998, compared to the same quarter in 1997, interest expense also
increased by $5.3 million, resulting in net interest income of $8.5 million for
the quarter ended March 31, 1998. This represents a $1.2 million or 16.5%
increase when compared to the same quarter in 1997.
Provision for Loan Losses.
The Bank maintains an allowance for loan losses based upon management's estimate
of the fair value of collateral, as applicable, current and anticipated future
economic conditions, and the Bank's actual loss experience and guidelines
applied by the OTS and FDIC. The Bank experienced a credit provision for loan
losses of $69,000 for the quarter ended March 31, 1998 compared to a charge
against income of $51,000 for the quarter ended March 31, 1997. The credit
provision for loan losses for the quarter ended March 31, 1998 primarily
resulted from the payoff of several delinquent loans on which the Bank had
previously provided specific loan loss allowances. The Bank's total allowance
for loan losses as a percentage of net loans receivable was approximately .36%
at March 31, 1998 which management believes to be adequate considering the
Bank's loan composition and historical loss experience.
Other Income.
Other income for the quarter ended March 31, 1998 was $1.9 million, an increase
of $1.0 million compared to the same quarter in 1997. This increase is due
primarily to an increase of $667,000 in net gain on sale of loans, investments
and mortgage-backed securities. In addition, there were increases in servicing
income and other fees and other miscellaneous income of $293,000 and $52,000 for
the quarters ended March 31, 1998 and 1997, respectively.
Operating Expense.
Operating expenses increased by $972,000 to $7.0 million for the quarter ended
March 31, 1998 as compared to the same quarter ended March 31, 1997. Employee
compensation and benefits represent $393,000 of this increase. The principal
cause of this increase are commissions to loan officers which are greater in
1998 compared to 1997 due to increased loan volume, together with normal salary
increases. The Bank's occupancy and equipment cost for the quarter ended March
31, 1998 were $272,000 more than experienced in 1997, of which approximately
$96,000 pertains to expenses of the Bank's new office building acquired in
January 1998 and $24,000 relating to rent expenses on certain properties
acquired in the BankBoynton acquisition. Also contributing to the increase in
operating expense were increases in marketing costs of $79,000, federal deposit
insurance premiums of $23,000 and other operating expenses of $209,000. These
increases were only slightly
15
offset by a decrease in losses on real estate owned of $4,000 for the quarter
ended March 31, 1998 when compared to the same quarter in 1997.
Income Taxes.
The income tax provision increased by $511,000 to $1.4 million for the quarter
ended March 31, 1998 from $906,000 for the comparable 1997 quarter. This
increase was attributable to an increase in income before provision for income
tax of $1.4 million to $3.5 million in 1998 from $2.1 million in 1997. These
expenses approximate the rates paid by the Company for Federal and State income
taxes applied to the Company's pre-tax income.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
At March 31, 1998, the Bank's total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $112.6 million, representing a cumulative
one-year gap ratio of a negative 8.5%. This compares to a negative gap ratio of
10.4% at December 31, 1997, at which date the Bank had total interest bearing
liabilities maturing or repricing within one year that exceeded total
interest-earning assets maturing or repricing during the same period by $126.6
million. The Bank has an Asset-Liability Management Committee which is
responsible for reviewing the Bank's assets and liability policies. The
Committee meets weekly and reports monthly to the Board of Directors on interest
rate risks and trends, as well as liquidity and capital ratios and requirements.
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 required ratio currently is 4.0%. The Bank's
liquidity ratio averaged 6.02% during the month of March 1998. Liquidity ratios
averaged 8.24% for the quarter ended March 31, 1998. The Bank adjusts its
liquidity levels in order to meet funding needs of 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 $16.8 million and
$32.4 million at March, 31, 1998 and December 31, 1997, respectively. Other
assets qualifying for liquidity at March 31, 1998 and December 31, 1997,
amounted to $28.1 million and $24.8 million, respectively. For additional
information about cash flows from the Company's operating, financing and
investing activities, see Consolidated Statements of Cash Flows included in the
Financial Statements. A major portion of the Bank's liquidity consists of cash
and cash equivalents, which are a product of its operating, investing and
financing activities. The primary sources of cash were net income, principal
repayments on loans and mortgage-backed securities, increases in deposit
accounts and additional advances from the FHLB.
16
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At March 31, 1998, the Bank had $253.9 million in advances from
the FHLB. At March 31, 1998, the Bank had commitments outstanding to originate
or purchase loans of $71.9 million. This amount does not include the unfunded
portion of loans in process. Certificates of deposit scheduled to mature in less
than one year at March 31, 1998, totaled $460.9 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
Commitments and Contingencies.
The Bank formed a Year 2000 Committee in March 1997, which meets regularly to
review the Bank's plan to achieve compliance with the issues associated with the
year 2000 and progress to date and report such progress to the Board of
Directors. The Bank's Year 2000 Project Plan includes five phases; assessment,
evaluation, renovation, validation and implementation. While in some instances
the Bank is in the final stages of assessments, certain applications are in the
renovation and validation stages. Management of the Bank believes all "mission
critical" applications have been identified. To the extent application suppliers
assert their applications are year 2000 ready, the Bank is currently validating
their claims, while working toward solutions with others. Management has
concluded that the cost of modernizing the Bank's computer hardware and
software, on an accelerated basis, will cost approximately $2.3 million. These
costs are expected to be capitalized and expensed in conformity with generally
accepted accounting principles.
Changes in Financial Condition.
The Company's assets increased by $100.4 million from December 31, 1997 to March
31, 1998. Loans receivable-net increased by $38.4 million. In addition, assets
available for sale, principally mortgage-backed securities, increased by $68.5
million, while the Bank's office properties increased by $7.0 million as a
result of the acquisition of an office building. Funds for the increase in
assets were provided by a decrease in cash and cash equivalents of $16.4
million, an increase in the Bank's deposits and repurchase agreements of $49.4
million, advances from the FHLB of $14.8 million and increases in all other
liabilities of $6.3 million. An additional $28.7 million was generated through
the issuance of subordinated debentures, pursuant to the issuance of trust
preferred securities. The Company's equity at March 31, 1998 increased by $1.1
million from December 31, 1997 as a result of net income for the quarter of $2.1
million plus a change in the fair value of assets available for sale, net of
applicable income taxes. This amount was offset by dividends declared for the
quarter of $1.1 million.
New Accounting Pronouncements - In June 1997, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income", which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources; and No. 131 "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Both statements
are effective for fiscal years beginning after December 15, 1997. On January 1,
1998, the Company adopted these promulgations.
17
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation,
nor is the Company aware of any pending litigation, other than
legal proceedings incident to the business of the Company, such as
foreclosure actions filed on behalf of the Company. Management,
therefore, believes the results of any current litigation would be
immaterial to the consolidated financial condition or results of
operation of the Company.
Item 2 Changes in Securities
On January 21, 1998 the Company issued $28.375 million of
mandatorily redeemable, Preferred Securities out of a grantor
trust, Fidelity Capital Trust I, a Delaware statutory trust, which
was created by the Company for this sole purpose. As its only
asset, the trust holds junior subordinated debentures due January
31, 2028 of the Company, purchased with the proceeds of the
preferred security's issuance. Interest from the junior
subordinated debt securities is payable quarterly at a rate of
8.375%, annually. The interest will be used to fund distributions
on the Preferred Securities. As a result of the above, the
Preferred Securities of the trust are considered fully and
unconditionally guaranteed by the Company.
Distributions on the Preferred Securities are cumulative and are
payable at the same rate as the junior subordinated debentures,
described above. The junior subordinated debentures are redeemable
in whole, in the event the Company's mutual holding company parent
converts to stock form beginning January 31, 2000 at 107% of
principal amount and in any event the junior subordinated
debentures are redeemable at 100% of principal amount in whole or
in part, commencing January 31, 2003. The Preferred Securities are
subject to mandatory redemption, in whole or in part as
applicable, upon the repayment of the junior subordinated
debentures. The proceeds from the securities, to the extent
invested in common stock of the Bank, are considered to be tier 1
capital for regulatory purposes. Of the net proceeds of $27.1
million from the sale of the Preferred Securities, the Company
invested $25 million in common stock of the Bank. The Preferred
Securities are traded on the Nasdaq National Market system under
the symbol "FFFLP."
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.
18
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under
Consolidated Financial Statements (pages 2 through 5), Notes
to Unaudited Consolidated Financial Statements (pages 6
through 11) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 12
through 17), and are incorporated by reference, herein.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIDELITY BANKSHARES, INC.
Date: May 12, 1998 By: /s/ Vince A. Elhilow
------------ ----------------------------
Vince A. Elhilow
President and Chief
Executive Officer
Date: May 12, 1998 By: /s/ Richard D. Aldred
------------ ----------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
20