SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 6,802,442 shares
of the Registrant's common stock outstanding as of July 31, 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 June 30, 1998..................................................2
Consolidated Statements of Operations for the three and six months ended
June 30, 1997 and 1998...............................................................3
Consolidated Statements of Comprehensive Operations for the three and six
months ended June 30, 1997 and 1998..................................................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 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..................................................................................20
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Unaudited
December 31, June 30,
1997 1998
=================================
(In Thousands)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions ............ $ 22,136 $ 21,843
Interest-bearing deposits .................................... 33,688 46,760
----------- -----------
Total cash and cash equivalents ............................ 55,824 68,603
ASSETS AVAILABLE FOR SALE (At Fair Value):
Government and agency securities ............................. 16,077 19,044
Mortgage-backed and other securities ......................... 234,132 396,398
----------- -----------
Total assets available for sale ............................ 250,209 415,442
LOANS RECEIVABLE, Net (Notes 2, 3) ............................. 861,257 913,948
OFFICE PROPERTIES AND EQUIPMENT, Net ........................... 21,440 31,263
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market 11,955 16,350
REAL ESTATE OWNED, Net ......................................... 967 841
ACCRUED INTEREST RECEIVABLE .................................... 6,404 7,486
OTHER ASSETS ................................................... 12,211 14,418
----------- -----------
TOTAL ASSETS ................................................... $ 1,220,267 $ 1,468,351
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ....................................................... $ 872,340 $ 1,012,921
OTHER BORROWED FUNDS ........................................... 3,780 3,731
ADVANCES FROM FEDERAL HOME LOAN BANK ........................... 239,091 306,998
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE .................. 2,783 11,069
DRAFTS PAYABLE ................................................. 5,349 3,010
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES ............................... -- 28,750
OTHER LIABILITIES .............................................. 9,038 10,838
DEFERRED INCOME TAXES .......................................... 499 713
----------- -----------
TOTAL LIABILITIES ............................................ 1,132,880 1,378,030
----------- -----------
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
6,802,442 shares outstanding at June 30, 1998 ................ 678 680
ADDITIONAL PAID IN CAPITAL ..................................... 38,347 38,706
RETAINED EARNINGS - substantially restricted ................... 47,943 50,205
COMMON STOCK PURCHASED BY EMPLOYEE STOCK OWNERSHIP PLAN ........ (986) (822)
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 6) ................ 1,405 1,552
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (Note 4) .......................... 87,387 90,321
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 1,220,267 $ 1,468,351
=========== ===========
See Notes to Unaudited Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Unaudited Unaudited
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1997 1998 1997 1998
=========================================================
(In Thousands, except per share amounts)
Interest income:
Loans ................................................. $ 14,163 $ 18,098 $ 27,541 $ 35,433
Investment securities ................................. 192 264 351 509
Other investments ..................................... 424 768 954 1,604
Mortgage-backed and other securities .................. 2,638 5,331 4,868 9,735
-------- -------- -------- --------
Total interest income ............................... 17,417 24,461 33,714 47,281
-------- -------- -------- --------
Interest expense:
Deposits ................................................ 8,320 10,983 15,892 20,998
Advances from Federal Home Loan Bank and other
borrowings .......................................... 1,579 5,127 2,974 9,392
-------- -------- -------- --------
Total interest expense .............................. 9,899 16,110 18,866 30,390
-------- -------- -------- --------
Net interest income ..................................... 7,518 8,351 14,848 16,891
Provision for loan losses ............................... 21 20 72 (49)
-------- -------- -------- --------
Net interest income after provision for loan losses ..... 7,497 8,331 14,776 16,940
-------- -------- -------- --------
Other income:
Servicing income and other fees ....................... 867 1,123 1,663 2,212
Net gain on sale of loans, investments
and mortgage-backed securities ...................... 8 753 12 1,424
Miscellaneous ......................................... 128 411 230 565
-------- -------- -------- --------
Total other income .................................. 1,003 2,287 1,905 4,201
-------- -------- -------- --------
Operating expense:
Employee compensation and benefits .................... 3,402 4,031 6,816 7,838
Occupancy and equipment ............................... 1,220 1,524 2,385 2,961
Loss on real estate owned ............................. 30 17 51 34
Marketing ............................................. 169 181 348 439
Federal deposit insurance premium ..................... 112 135 221 267
Other ................................................. 1,034 1,445 2,187 2,807
-------- -------- -------- --------
Total operating expense ............................. 5,967 7,333 12,008 14,346
-------- -------- -------- --------
Income before provision for income taxes ................ 2,533 3,285 4,673 6,795
-------- -------- -------- --------
Provision for income taxes:
Current ............................................... 987 1,172 1,820 2,469
Deferred .............................................. 81 120 154 240
-------- -------- -------- --------
Total provision for income taxes .................... 1,068 1,292 1,974 2,709
-------- -------- -------- --------
Net income .............................................. $ 1,465 $ 1,993 $ 2,699 $ 4,086
======== ======== ======== ========
Earnings per share (Note 5):
Basic ................................................. $ 0.22 $ 0.30 $ 0.41 $ 0.61
======== ======== ======== ========
Diluted ............................................... $ 0.22 $ 0.29 $ 0.40 $ 0.60
======== ======== ======== ========
See Notes to Unaudited Consolidated Financial Statements.
3
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
Unaudited Unaudited
For the For the
Three Month Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
====================== ======================
(In Thousands) (In Thousands)
Net income ................................................... $ 1,465 $ 1,993 $ 2,699 $ 4,086
Other comprehensive income, net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period... 906 294 13 467
Less: reclassification adjustment for gains realized
in net income ......................................... -- -- -- (320)
------- ------- ------- -------
Comprehensive income (Note 6) ................................ $ 2,371 $ 2,287 $ 2,712 $ 4,233
======= ======= ======= =======
4
FIDELITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998
- --------------------------------------------------------------------------------
Unaudited
For the Six Months Ended
June 30,
1997 1998
=============================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income ................................................................................. $ 2,699 $ 4,086
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization ............................................................ 626 786
ESOP and Recognition and Retention Plan compensation expense ............................. 302 451
Accretion of discounts, amortization of premiums, and other deferred yield items ......... (404) 37
Provision for loan losses and real estate losses ......................................... 72 (49)
Provisions for (gains) losses and net (gains) losses on sales of real estate owned ....... (5) 25
Net(gain) on sale of:
Mortgage-backed securities ............................................................. -- (906)
Loans .................................................................................. (12) (516)
Decrease (increase)in accrued interest receivable .......................................... (877) (1,082)
Decrease (increase) in other assets ........................................................ 298 (846)
Increase (decrease) in drafts payable ...................................................... 358 (2,339)
Increase (decrease)in deferred income taxes ................................................ 163 214
Increase (decrease) in other liabilities ................................................... 353 1,796
-----------------------------
Net cash from operating activities ..................................................... 3,573 1,657
-----------------------------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans .......................................... (62,680) (70,210)
Principal payments received on mortgage-backed securities .................................. 9,424 61,759
Purchases of:
Loans .................................................................................... (12,688) (24,465)
Mortgage-backed and other securities ..................................................... (58,085) (237,410)
Federal Home Loan Bank stock ............................................................. (511) (4,974)
Investment securities .................................................................... (6,567) (4,989)
Office properties and equipment .......................................................... (1,566) (10,634)
Proceeds from sales of:
Loans .................................................................................... 722 42,634
Federal Home Loan Bank stock ............................................................. -- 579
Real estate acquired in settlement of loans .............................................. 557 826
Mortgage-backed securities ............................................................... -- 12,137
Proceeds from maturities of investment securities .......................................... 2,000 2,000
Other ...................................................................................... 104 1,501
-----------------------------
Net cash used for investing activities ................................................. (129,290) (231,246)
-----------------------------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Gross proceeds from the sale of common stock ............................................... 184 74
Sale of subordinated debentures, Net ....................................................... -- 27,389
Cash dividends ............................................................................. (1,237) (1,820)
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts ...................................... 10,043 14,181
Certificates of deposit .................................................................. 74,797 126,400
Advances from Federal Home Loan Bank ..................................................... 28,787 67,907
ESOP loan ................................................................................ (162) --
Other borrowed funds ..................................................................... 2,736 (49)
Advances by borrowers for taxes and insurance ............................................ 6,691 8,286
-----------------------------
Net cash from financing activities ..................................................... 121,839 242,368
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................... (3,878) 12,779
CASH AND CASH EQUIVALENTS, Beginning of period ............................................. 42,420 55,824
-----------------------------
CASH AND CASH EQUIVALENTS, End of period ................................................... $ 38,542 $ 68,603
=============================
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 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 June 30, 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.
In February, 1998, the FASB issued SFAS No. 132 which standardizes the
disclosure requirements for pensions and other postretirement benefits; requires
additional information on changes in the benefit obligations and fair values of
plan assets; and eliminates certain present disclosure requirements. The
Statement does not change the measurement or recognition requirements for
postretirement benefits. SFAS no. 132 is effective for fiscal years beginning
after December 15, 1997 and, accordingly, will be adopted by the Company in the
year ending December 31, 1998. Management does not expect that this standard
will significantly affect the Company's financial reporting.
In June, 1998, the FASB issued SFAS No. 133 which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Statement requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and, accordingly, would apply to the
Company beginning on April 1, 2000. The Company plans to adopt the standard at
that time and does not presently intend to reclassify securities between
categories. The Company has not engaged in derivatives and hedging activities
covered by the new standard, and does not expect to do so in the foreseeable
future. Accordingly, SFAS No. 133 is not expected to have a material impact on
the Company's financial statements.
6
Certain amounts in the financial statements have been reclassified to conform
with the June 30, 1998 presentation.
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 acquired 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 vicinity 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 June 30, 1998, consist of the
following:
December 31, June 30,
1997 1998
=================================
(In Thousands)
One-to-four single family, residential real estate
mortgages ...................................... $ 717,610 $ 767,045
Commercial real estate mortgages ................. 64,525 69,829
Real estate construction-primarily residential ... 38,577 47,333
Participations-primarily residential ............. 3,172 2,663
Land loans-primarily residential ................. 12,116 10,863
--------------- --------------
Total first mortgage loans ..................... 836,000 897,733
Consumer and commercial business loans ........... 80,468 85,411
--------------- --------------
Total gross loans .............................. 916,468 983,144
Less:
Undisbursed portion of loans in process ........ 54,471 69,104
Unearned discounts, premiums and deferred loan
fees, net .................................... (2,554) (3,050)
Allowance for loan losses ...................... 3,294 3,142
--------------- --------------
Loans receivable-net ............................. $ 861,257 $ 913,948
=============== ==============
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 and six months ended June 30, 1997 and 1998, is
as follows:
For the Year For the Three Months For the Six Months
Ended Ended Ended
December 31, June 30, June 30,
1997 1997 1998 1997 1998
=============================================================================
(In Thousands)
Balance at beginning of period ...... $ 2,263 $ 2,130 $ 3,225 $ 2,263 $ 3,294
Increase in allowance due to purchase
of BankBoynton .................... 1,167 - - - -
Current provision (recovery) ........ 170 21 20 72 (49)
Charge-offs ......................... (306) (42) (103) (226) (103)
----------- ------------------------- --------------------------
Ending balance ...................... $ 3,294 $ 2,109 $ 3,142 $ 2,109 $ 3,142
----------- ------------------------- --------------------------
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:
June 30, 1997 June 30, 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 ............... $ 238 $ 123 $ 561 $ 201
Loans for which interest income is
not being recognized ............ 2,758 - 3,477 -
--------------------------- -------------------------
Total ......................... $ 2,996 $ 123 $ 4,038 $ 201
=========================== =========================
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 June 30, 1997 Stockholders' Equity
and ratio to total assets ......................... 8.3% $ 82,442
=====
Net unrealized increase in market value of assets
available for sale (net of applicable
income taxes) ..................................... (795)
Goodwill ............................................ (604)
Disallowed servicing assets and deferred tax assets . (186)
------------
Tangible capital and ratio to adjusted total assets . 8.1% $ 80,857 1.5% $ 14,954
===== ============ ===== ============
Tier 1 (core) capital and ratio to adjusted
total assets ...................................... 8.1% $ 80,857 3.0% $ 29,907 5.0% $ 49,845
===== ============ ===== ============ ===== ============
Tier 1 (core) capital and ratio to risk-weighted
total assets ...................................... 15.9% $ 80,857 6.0% $ 30,421
===== ===== ============
Allowable Tier 2 capital:
General loan valuation allowances ................. 1,737
Equity investments ................................ (97)
------------
Total risk-based capital and ratio to risk-weighted
total assets .................................... 16.3% $ 82,497 8.0% $ 40,562 10.0% $ 50,702
===== ============ ===== ============ ===== ============
Total assets ........................................ $ 998,305
============
Adjusted total assets ............................... $ 996,906
============
Risk-weighted assets ................................ $ 507,019
============
As of June 30, 1998 Stockholders' Equity
and ratio to total assets ......................... 7.9% $ 115,526
=====
Net unrealized increase in market value of assets
available for sale (net of applicable
income taxes) ..................................... (1,552)
Goodwill ............................................ (2,579)
Disallowed servicing assets and deferred tax assets . (47)
------------
Tangible capital and ratio to adjusted total assets . 7.6% $ 111,348 1.5% $ 21,938
===== ============ ===== ============
Tier 1 (core) capital and ratio to adjusted
total assets ...................................... 7.6% $ 111,348 3.0% $ 43,877 5.0% $ 73,128
===== ============ ===== ============ ===== ============
Tier 1 (core) capital and ratio to risk-weighted
total assets ...................................... 14.9% $ 111,348 6.0% $ 44,914
===== ===== ============
Allowable Tier 2 capital:
General loan valuation allowances ................. 2,242
Equity investments ................................ -
------------
Total risk-based capital and ratio to risk-weighted
total assets .................................... 15.2% $ 113,590 8.0% $ 59,886 10.0% $ 74,857
===== ============ ===== ============ ===== ============
Total assets ........................................ $ 1,466,742
============
Adjusted total assets ............................... $ 1,462,564
============
Risk-weighted assets ................................ $ 748,569
============
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 June 30, 1997 and 1998, are as follows:
For the Three Months Ended June 30, For the Three Months Ended June 30,
1997 1998
-------------------------------------------- --------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
============================================ ==================================================
(Dollars In Thousands) (Dollars In Thousands)
Net income .............. $1,465,000 $1,993,250
============ ============
Basic EPS:
Income available to
common stockholders ... $1,465,000 6,654,777 $ 0.22 $1,993,250 6,718,883 $ 0.30
============ ============ ============ ============
Effect of diluted shares:
Common stock options .. 100,455 105,975
----------- -----------
Diluted EPS:
Income available to
common stockholders ... $1,465,000 6,755,232 $ 0.22 $1,993,250 6,824,858 $ 0.29
============ =========== =========== ============ =========== ============
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 six months ended June 30, 1997 and 1998, are as follows:
For the Six Months Ended June 30, For the Six Months Ended June 30,
1997 1998
------------------------------------------------ -----------------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
================================================ ===============================================
(Dollars In Thousands) (Dollars In Thousands)
Net income .............. $2,699,000 $4,086,373
============ ============
Basic EPS:
Income available to
common stockholders ... $2,699,000 6,644,943 $ 0.41 $4,086,373 6,710,156 $ 0.61
============ ============ ============ ============
Effect of diluted shares:
Common stock options .. 99,690 107,795
------------ -----------
Diluted EPS:
Income available to
common stockholders ... $2,699,000 6,744,633 $ 0.40 $4,086,373 6,817,951 $ 0.60
============ ============ ============ ============ ============ ============
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
periods ended June 30, 1997 and 1998, is as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1997 1998 1997 1998
----------------------------------- ----------------------------
Unrealized Unrealized
Gains (Losses) Gains (Losses)
on Securities on Securities
=============================================================================
(In Thousands)
Beginning balance ......................... $ (111) $1,258 $ 782 $1,405
Current-period change ..................... 906 294 13 147
---------- --------- -------- ---------
Ending balance ............................ $ 795 $1,552 $ 795 $1,552
========== ========= ======== =========
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
June 30, 1997 June 30, 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 .................................. $1,535 $ (629) $ 906 $ 474 $ (180) $ 294
Less: reclassification adjustment for gains
realized in net income ......................... -- -- -- -- -- --
------------------------------- --------------------------------------
Other comprehensive income ......................... $1,535 $ (629) $ 906 $ 474 $ (180) $ 294
=============================== ======================================
For the Six Months Ended For the Six Months Ended
June 30, 1997 June 30, 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 .................................. $ 22 $ (9) $ 13 $ 753 $ (286) $ 467
Less: reclassification adjustment for gains
realized in net income ......................... - - - (516) 196 (320)
------------------------------- --------------------------------------
Other comprehensive income ......................... $ 22 $ (9) $ 13 $ 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.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Savings Bank of Florida (the "Bank"). 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.
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."
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 vicinity 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.
13
Other Comprehensive Income.
Accumulated Other Comprehensive Income for the six months ended June 30, 1998
increased by $467,000 which was offset by the reclassification of $320,000 of
such gains included in net income for the period, resulting in an aggregate
increase of $147,000. This increase in the market value of Assets Available for
Sale, resulted from a modest decrease in market interest rates for these
instruments. The increase in Accumulated Other Comprehensive Income for the six
months ended June 30, 1997 of $906,000, which consisted of an increase in the
market value of Assets Available for Sale, resulted from a modest decrease in
market interest rates on similar instruments.
Accumulated Other Comprehensive Income for the quarter ended June 30, 1998
increased by $294,000. This increase in the market value of Assets Available for
Sale, resulted from a modest decrease in market interest rates for these
instruments. The increase in Accumulated Other Comprehensive Income for the
quarter ended June 30, 1997 of $906,000, which consisted of an increase in the
market value of Assets Available for Sale, resulted from a decrease in market
interest rates on similar instruments.
Results of Operations.
Net income for the six months ended June 30, 1998 was $4.1 million, an increase
of $1.4 million when compared to $2.7 million for the six months ended June 30,
1997. The primary reasons for this increase, as more fully described later
herein, were an increase in net interest income of $2.0 million and an increase
in other income of $2.3 million. Offsetting these increases was an increase in
operating expenses of $2.3 million and an increase in provision for income taxes
of $735,000 due to increased income.
Net income for the quarter ended June 30, 1998 was $2.0 million, representing an
increase of $528,000 when compared to $1.5 million for the same quarter ended
June 30, 1997. The primary reasons for this increase, as more fully described
later herein, were an increase in net interest income of $833,000 and an
increase in other income of $1.3 million. Partially offsetting these factors was
an increase in operating expenses of $1.4 million and an increase in provision
for income taxes of $224,000.
Interest Income.
Interest income for the six months ended June 30, 1998, totaled $47.3 million,
representing an increase of $13.6 million or 40.2% compared to the same 1997
period. The primary reason for this increase was an increase in the Bank's
interest income from loans of $7.9 million. This increase was primarily the
result of an increase in the average balance of these loans to $894.0 million
from $695.3 million for the periods ended June 30, 1998 and 1997, respectively.
Interest income from mortgage-backed securities increased to $9.7 million for
the six months ended June 30, 1998 from $4.9 million for the 1997 period. This
increase was due to an increase in the average balance on these securities of
$166.2 million, which was partially offset by a decline in the average rate of
such securities to 6.34% in 1998 from 6.90% in 1997. The Bank's interest income
from investment securities and other investments also increased by $158,000 and
$650,000, respectively. These increases resulted from an increase in the average
balance of investment securities to $18.2 million from $11.3 million and an
increase in the average balance of other investments to $49.9 million from $29.6
million for the periods ended June 30, 1998 and 1997, respectively. These
increases were slightly offset by a decrease in the average yield on investment
securities to 5.59% in 1998 from 6.19% in 1997.
14
Interest income for the quarter ended June 30, 1998, totaled $24.5 million, an
increase of $7.0 million or 40.4% from the same quarter in 1997. The principal
cause of this increase was an increase in interest income on the Bank's loans of
$3.9 million. This increase resulted from an increase in the average balance of
these loans to $911.9 million for the quarter ended June 30, 1998 compared to
$714.1 million for the comparable 1997 quarter. Interest income from
mortgage-backed securities for the quarter ended June 30, 1998 was $5.3 million,
an increase of $2.7 million or 102.1% compared to $2.6 million for the same
quarter in 1997. The primary reason for this increase was an increase in the
average balance of these securities to $346.8 million for the quarter ended June
30, 1998 from $153.7 million for the same quarter in 1997. Interest income also
increased on investment securities and other investments by $72,000 and
$344,000, respectively. These increases resulted from an increase in the average
balance of investment securities to $19.1 million from $12.5 million and an
increase in the average balance of other investments to $46.6 million from $28.5
million for the quarters ended June 30, 1998 and 1997, respectively.
Interest Expense.
Interest expense for the six months ended June 30, 1998, totaled $30.4 million,
an increase of $11.5 million or 61.1% from the same period in 1997. The reasons
for this increase were an increase in interest expense on borrowed funds of $6.4
million, of which approximately $1.1 million is attributable to interest on the
Company's subordinated debenture securities, and an increase in interest expense
on deposits of $5.1 million. The increase in interest expense on borrowed funds
resulted from an increase in the average balance of these funds to $295.7
million for the six months ended June 30, 1998 compared to $89.2 million for the
comparable 1997 period. This was slightly offset by a decrease in the average
cost of borrowed funds to 6.35% from 6.67% for the six months ended June 30,
1998 and 1997, respectively. The increase in interest expense on deposits
resulted from an increase in the average balance of these deposits to $935.4
million from $737.2 million and an increase in the average cost of these
deposits to 4.49% from 4.31% for the periods ending June 30, 1998 and 1997,
respectively.
Interest expense was $16.1 million for the quarter ended June 30, 1998,
representing a $6.2 million or 62.7% 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 $3.5 million, of which approximately $600,000 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 of such funds to $322.5
million for the quarter ended June 30, 1998 compared to $95.2 million for the
same quarter in 1997. This was partially offset by a decrease in the average
yield on borrowed funds to 6.36% from 6.63% for the quarters ended June 30, 1998
and 1997, respectively. Interest expense on deposits also increased by $2.7
million. This was caused by an increase in the average balance of deposits to
$968.7 million for the quarter ended June 30, 1998 compared to $761.3 million
for the same quarter in 1997 and an increase in the average yield to 4.54% from
4.37% for the quarters ended June 30, 1998 and 1997, respectively.
Net Interest Income.
While the Bank's interest income increased by $13.6 million for the six months
ended June 30, 1998, compared to the same period in 1997, interest expense also
increased by $11.5 million, resulting in net interest income of $16.9 million
for the period ended June 30, 1998. This represents a $2.0 million or 13.8%
increase in net interest income when compared to the same period in 1997.
During the quarter ended June 30, 1998, the Bank's interest income increased by
$7.0 million compared to the same quarter in 1997, while interest expense
increased by $6.2 million, resulting in net interest income of $8.4 million for
the quarter ended June 30, 1998, $833,000 or 11.1% more than realized in 1997.
15
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 $49,000 for the six months ended June 30, 1998 compared to a charge
against income of $72,000 for the six months ended June 30, 1997. The credit
provision for loan losses for the six months ended June 30, 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 .34%
at June 30, 1998 which management believes to be adequate considering the Bank's
loan composition and historical loss experience.
The provision for loan losses was $20,000 for the quarter ended June 30, 1998,
compared to $21,000 for the quarter ended June 30, 1997. The provision for the
quarter ended June 30, 1998 is deemed adequate by management in light of the
Bank's historical loan loss experience.
Other Income.
Other income for the six months ended June 30, 1998 was $4.2 million or $2.3
million more than the same period in 1997. This increase is primarily
attributable to a gain of $634,000 on the sale of the Bank's wholesale loan
production in June, 1998 and mortgage-backed securities in March, 1998, the
sales of which are reflected in the Company's $1.4 million net gain on sale of
loans, investments and mortgage-backed securities. This increase also resulted
from an increase in the Bank's servicing income and other fees of $549,000 and
an increase in other miscellaneous income of $335,000 for the six months ended
June 30, 1998 and 1997, respectively. The primary reason for the increase in
miscellaneous income was $279,000 of rental income received from Barnett
Bank/NationsBank for leasing back most of the downtown property acquired from
them in January of 1998.
Other income for the quarter ended June 30, 1998 was $2.3 million, an increase
of $1.3 million compared to the same quarter in 1997. This increase is due
primarily to a net gain of $634,000 on the previously mentioned sale of loans in
June, 1998. In addition, there were increases in servicing income and other fees
and other miscellaneous income of $256,000 and $283,000 for the quarters ended
June 30, 1998 and 1997, respectively. As discussed above, the majority of the
increase in miscellaneous income was due to rental income received on leasing
back the newly acquired office building by Barnett Bank/NationsBank.
Operating Expense.
Operating expenses increased by $2.3 million to $14.3 million for the six months
ended June 30, 1998 as compared to the same six months ended June 30, 1997.
Employee compensation and benefits represent $1.0 million 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, additional
personnel to staff two offices which were opened subsequent to June, 1997,
additional customer service personnel as a result of the Bank's 30% increase in
deposits during the past year, together with normal salary increases. The Bank's
occupancy and equipment cost for the six months ended June 30, 1998 were
$576,000 more than experienced in 1997. Contributing the this increase are
approximately $89,000 pertaining to expenses of the Bank's new office building
acquired in January, 1998, $48,000 relating to rent expenses on certain
properties acquired in the BankBoynton acquisition and approximately $43,000 in
cost to operate new offices which opened subsequent to June 30, 1997. Also
contributing to the increase in operating expense were increases in marketing
costs of $91,000, federal deposit insurance premiums of $46,000 and other
operating expenses of $620,000, which includes $82,000 of amortization of
goodwill related to the acquisition of BankBoynton. These increases were only
slightly offset by a decrease in losses on real estate owned of $17,000 for the
six months ended June 30, 1998 when compared to the same six months in 1997.
16
Operating expenses increased by $1.4 million to $7.3 million for the quarter
ended June 30, 1998 as compared to the quarter ended June 30, 1997. Employee
compensation and benefits increased by $629,000 which, as explained above, is
primarily attributable to an increase in commissions to loan officers due to
increased loan volume, additional customer service personnel and normal salary
increases. Occupancy and equipment costs increased by $304,000 due partly, as
stated above, to expenses on the Bank's new office building, rent expenses on
certain properties acquired in the BankBoynton acquisition along with costs of
operating two new offices opened subsequent to June 30, 1997. In addition, there
were increases in marketing costs of $12,000, federal deposit insurance premiums
of $23,000 and other operating expense of $411,000 for the quarters ended June
30, 1998 and 1997, respectively. Included in the increase in other operating
expense is $39,000 of amortization of goodwill relating to the acquisition of
BankBoynton. Partially offsetting these increases was a decrease in the loss on
real estate owned of $13,000.
Income Taxes.
The income tax provision increased by $735,000 to $2.7 million for the six ended
June 30, 1998 from $2.0 million for the comparable 1997 period. This increase
was attributable to an increase in income before provision for income tax of
$2.1 million to $6.8 million in 1998 from $4.7 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.
The income tax provision was $1.3 million for the quarter ended June 30, 1998
compared to $1.1 million for the quarter ended June 30, 1997. These expenses
approximate the rates paid for Federal and State income taxes applied to the
Company's pre-tax income.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
At June 30, 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 $93.2 million, representing a cumulative
one-year gap ratio of a negative 6.4%. 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 6.99% during the month of June 1998. Liquidity ratios
averaged 6.08% for the quarter ended June 30, 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 $46.6 million and
$32.4 million at June, 30, 1998 and December 31, 1997, respectively. Other
assets qualifying for liquidity at June 30, 1998 and December 31, 1997, amounted
to $32.5 million and $24.8 million, respectively.
17
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.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 1998, the Bank had $307.0 million in advances from
the FHLB. At June 30, 1998, the Bank had commitments outstanding to originate or
purchase loans of $54.6 million. This amount does not include the unfunded
portion of loans in process. Certificates of deposit scheduled to mature in less
than one year at June 30, 1998, totaled $496.9 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
Year 2000 Preparations.
The Bank formed a Year 2000 Committee in March 1997, which meets monthly 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. The Bank has completed
the assessment and evaluation phases and has begun the renovation and validation
phases for its internal applications and systems. Management of the Bank
believes all "mission critical" applications have been identified. To the extent
applications suppliers assert their applications are year 2000 ready, the Bank
is currently testing and 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, of which approximately $785,000 has already been incurred. These
costs are being capitalized and expensed in conformity with generally accepted
accounting principles.
The Bank contracts with a data processing service bureau, FiServ-Orlando to
provide all direct processing of the Bank's loan and deposit transactions,
together with calculations of interest income and expense thereon. Management of
the Bank is in regular contact with the service bureau and closely monitors the
service bureau's reports on its progress in becoming year 2000 ready. While the
service bureau assures Management of the Bank that it will achieve year 2000
readiness by 1999, Management is unable to predict whether the service bureau
will achieve year 2000 readiness on a timely basis or the magnitude of the
financial consequences to the Bank in the event of the service bureau's failure
to achieve such readiness. As a consequence, the Bank has contacted other
providers of such data processing services, who assert they are year 2000 ready,
to determine the latest possible date the Bank could convert to their systems.
The Bank is currently working on contingency plans which address operational
policies and procedures in the event of data processing, electrical power supply
and/or phone service failures associated with the year 2000. In addition, the
Bank has organized a local financial institutions "user group", comprised of
financial institutions in Palm Beach, Broward, Martin, St. Lucie and Indian
River counties of Florida. The purpose of the group is to meet and share ideas
and solutions for solving issues associated with the year 2000.
18
Changes in Financial Condition.
The Company's assets increased by $248.1 million from December 31, 1997 to June
30, 1998. Loans receivable-net increased by $52.7 million. In addition, assets
available for sale, principally mortgage-backed securities, increased by $165.2
million, while the Bank's office properties increased by $9.8 million as a
result of the acquisition of an office building. Funds for the increase in
assets were provided by an increase in the Bank's deposits of $140.6 million,
advances from the FHLB of $67.9 million and increases in all other liabilities
of $7.9 million. An additional $28.8 million was generated through the issuance
of subordinated debentures, pursuant to the issuance of trust preferred
securities. The Company's equity at June 30, 1998 increased by $2.9 million from
December 31, 1997 as a result of net income for the six months of $4.1 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 six months of
$1.9 million.
FASB Statement on Employer Disclosures about Pensions and Postretirement
Benefits - In February, 1998, the FASB issued SFAS No. 132 which standardizes
the disclosure requirements for pensions and other postretirement benefits;
requires additional information on changes in the benefit obligations and fair
values of plan assets; and eliminates certain present disclosure requirements.
The Statement does not change the measurement or recognition requirements for
postretirement benefits. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997 and, accordingly, will be adopted by the Company in the
year ending December 31, 1998. Management does not expect that this standard
will significantly affect the Company's financial reporting.
FASB Statement on Derivatives and Hedging Activities - In June, 1998, the FASB
issued SFAS No. 133 which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Statement requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value hedge, a cash flow hedge, or a foreign
currency hedge. Entities may reclassify securities from the held-to-maturity
category to the available-for-sale category at the time adopting SFAS No. 133.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999 and, accordingly, would apply to the Company beginning on
April 1, 2000. The Company plans to adopt the standard at that time and does not
presently intend to reclassify securities between categories. The Company has
not engaged in derivatives and hedging activities covered by the new standard,
and does not expect to do so in the foreseeable future. Accordingly, SFAS No.
133 is not expected to have a material impact on the Company's financial
statements.
19
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.
20
Item 4 Submission of Matters to a Vote of Security Holders
On April 21, 1998, several matters were submitted to the security
holders, in connection with the Company's annual meeting of
stockholders, all of which were set forth in the Company's proxy
materials. The results of such votes are as follows:
Ballot No. 1
------------
The election of F. Ted Brown, Jr. to serve as director for a
term of three years, or until his successor has been elected and
qualified.
For Withheld
--- --------
F. Ted Brown, Jr. 5,905,266 13,823
On April 3, 1998, prior to the annual meeting of stockholders,
Christopher H. Cook resigned from the Board of Directors of the
Company. In his resignation he stated that his resignation is not
because of any disagreement on any matter relating to the operations,
policies or practices of the Company, its subsidiaries or affiliates.
Following Mr. Cook's resignation, the Board of Directors voted to
reduce the size of its membership to five.
Ballot No. 2
------------
The ratification of the appointment of Deloitte and Touche,
LLP, as auditors for the Company for the fiscal year ended December
31, 1998.
For Against Abstain
--- ------- -------
Number of Votes 5,905,629 2,582 10,878
Item 5 Other Information
None.
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 19), and are incorporated
by reference, herein.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FIDELITY BANKSHARES, INC.
Date: August 10, 1998 By: /s/ Vince A. Elhilow
---------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: August 10, 1998 By: /s/ Richard D. Aldred
---------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
22