UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the period ended September 30, 2001
------------------
Commission File Number: 001-15089
Fidelity BancShares (N.C.), Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 56-1586543
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
100 South Main Street, Fuquay-Varina, North Carolina 27526
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(Address of principal executive offices) (Zip code)
(919) 552-2242
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 one hundred eighty-one days.
Yes [X] No [_]
Common Stock, $25 Par Value - 28,026 shares
- --------------------------------------------------------------------------------
(Number of shares outstanding, by class, as of November 9, 2001)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30,
------------- ------------- --------------
2001 2000 2000
------------- ------------- --------------
(unaudited) (unaudited)
Assets
Cash and due from banks................................................... $ 38,337,277 $ 35,657,872 $ 36,590,816
Interest bearing deposits in other banks.................................. 23,251,220 27,178,095 19,195,527
Overnight funds sold...................................................... 55,100,000 28,850,000 12,650,000
------------- ------------- -------------
Total cash and cash equivalents.................................... 116,688,497 91,685,967 68,436,343
------------- ------------- -------------
Investment securities:
Held to maturity (estimated fair value of $142,352,947,
$142,796,950, and $141,498,693, respectively)...................... 140,743,082 142,904,792 142,840,759
Available for sale (cost of $3,647,604, $2,644,602, and $2,644,602).. 10,139,501 8,799,080 7,839,255
------------- ------------- -------------
Total investment securities........................................ 150,882,583 151,703,872 150,680,014
------------- ------------- -------------
Loans..................................................................... 647,894,005 614,817,472 601,673,849
Allowance for loan losses................................................. (9,125,322) (7,297,833) (6,848,193)
------------- ------------- -------------
Loans, net......................................................... 638,768,683 607,519,639 594,825,656
------------- ------------- -------------
Federal Home Loan Bank of Atlanta stock, at cost.......................... 2,309,400 2,169,700 2,169,700
Premises and equipment, net............................................... 35,135,314 34,749,653 35,110,307
Accrued interest receivable............................................... 5,515,275 5,961,767 5,345,289
Intangible assets......................................................... 17,691,551 12,777,041 13,057,311
Other assets.............................................................. 1,628,161 1,102,807 1,541,072
------------- ------------- -------------
Total assets....................................................... $ 968,619,464 $ 907,670,446 $ 871,165,692
============= ============= =============
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand deposits................................... $ 133,096,367 $ 110,191,311 $ 118,113,119
Savings and interest-bearing demand deposits.......................... 283,675,811 288,374,723 258,495,749
Time deposits......................................................... 408,671,531 373,953,911 365,093,619
------------- ------------- -------------
Total deposits..................................................... 825,443,709 772,519,945 741,702,487
Short-term borrowings..................................................... 27,712,037 26,641,586 23,747,320
Long-term borrowings...................................................... 23,000,000 23,000,000 23,000,000
Accrued interest payable.................................................. 7,674,065 6,306,181 5,658,178
Other liabilities......................................................... 2,270,800 1,689,965 1,985,758
------------- ------------- -------------
Total liabilities.................................................. 886,100,611 830,157,677 796,093,743
------------- ------------- -------------
Shareholders' equity:
Common stock ($25 par value; 29,200 shares authorized; 28,026,
28,070, and 28,070 shares issued and outstanding, respectively).... 700,650 701,750 701,750
Surplus............................................................... 6,166,681 6,176,362 6,176,362
Accumulated other comprehensive income................................ 3,927,598 3,688,615 3,079,124
Retained earnings..................................................... 71,723,924 66,946,042 65,114,713
------------- ------------- -------------
Total shareholders' equity......................................... 82,518,853 77,512,769 75,071,949
------------- ------------- -------------
Total liabilities and shareholders' equity......................... $ 968,619,464 $ 907,670,446 $ 871,165,692
============= ============= =============
See accompanying notes to consolidated financial statements.
2
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
-------------- ------------ -------------- ------------
(unaudited) (unaudited)
Interest income:
Interest and fees on loans ................................ $ 13,918,258 $ 14,546,324 $ 42,806,054 $ 41,432,452
Interest and dividends on investment securities:
Non taxable interest income ............................ - 12,488 - 50,588
Taxable interest income ................................ 1,952,682 2,165,693 6,383,127 7,022,306
Dividend income ........................................ 75,948 81,788 225,994 219,320
Interest on overnight funds sold .......................... 427,900 233,042 1,399,844 574,104
-------------- ------------ -------------- ------------
Total interest income ............................... 16,374,788 17,039,335 50,815,019 49,298,770
-------------- ------------ -------------- ------------
Interest expense:
Deposits .................................................. 6,608,458 7,126,618 21,239,897 19,967,805
Short-term borrowings ..................................... 167,292 257,345 632,259 735,805
Long-term borrowings ...................................... 488,750 488,750 1,466,250 1,466,250
-------------- ------------ -------------- ------------
Total interest expense .............................. 7,264,500 7,872,713 23,338,406 22,169,860
-------------- ------------ -------------- ------------
Net interest income ................................. 9,110,288 9,166,622 27,476,613 27,128,910
Provision for loan losses ..................................... 750,000 750,000 2,250,000 1,875,000
-------------- ------------ -------------- ------------
Net interest income after provision for
loan losses ...................................... 8,360,288 8,416,622 25,226,613 25,253,910
-------------- ------------ -------------- ------------
Noninterest income:
Service charges on deposit accounts ....................... 1,652,809 1,140,201 4,457,873 3,055,647
Other service charges and fees ............................ 819,084 621,352 2,373,214 1,827,462
Other income .............................................. 39,204 101,895 86,799 271,799
Gain on exchange of marketable equity securities .......... - - 458,395 -
Gain on sale of marketable equity securities .............. - 106,572 43,083 106,572
-------------- ------------ -------------- ------------
Total noninterest income ............................ 2,511,097 1,970,020 7,419,364 5,261,480
-------------- ------------ -------------- ------------
Noninterest expenses:
Salaries and employee benefits ............................ 4,172,300 3,839,876 12,601,241 11,291,881
Occupancy and equipment ................................... 1,166,525 1,211,426 3,562,626 3,529,631
Data processing ........................................... 723,187 676,482 2,224,104 1,891,400
Amortization of intangibles ............................... 380,527 280,270 1,108,163 840,809
Other expense ............................................. 1,358,879 1,324,273 3,923,692 3,466,090
Impairment loss (recovery) on fixed assets ................ (7,232) - 470,740 -
-------------- ------------ -------------- ------------
Total noninterest expense ........................... 7,794,186 7,332,327 23,890,566 21,019,811
-------------- ------------ -------------- ------------
Net income before income taxes ...................... 3,077,199 3,054,315 8,755,411 9,495,579
Income tax expense ............................................ 1,130,448 1,110,114 3,204,966 3,450,202
-------------- ------------ -------------- ------------
Net income .......................................... $ 1,946,751 $ 1,944,201 $ 5,550,445 $ 6,045,377
============== ============ ============== ============
Per share information:
Net income ................................................ $ 69.45 $ 69.14 $ 197.83 $ 214.73
Cash dividends declared ................................... $ 8.00 $ 8.00 $ 24.00 $ 24.00
Weighted average shares outstanding ....................... 28,031 28,119 28,057 28,153
See accompany notes to consolidated statements.
3
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Accumulated
other Total
Common Stock comprehensive Retained Comprehensive shareholders'
--------------------
Shares Amount Surplus income earnings income equity
-------- --------- ----------- ------------- ------------ ------------- -------------
Balance December 31, 1999 ......... 28,170 $ 704,250 $ 6,198,366 $ 3,021,971 $ 59,970,112 $ 69,894,699
-------- --------- ----------- ------------- ------------ -------------
Net income .................... - - - - 6,045,377 $ 6,045,377 6,045,377
Cash dividends
($24.00 per share) .......... - - - - (675,280) (675,280)
Purchase and retirement
of common stock ............. (100) (2,500) (22,004) - (225,496) (250,000)
Unrealized gain on securities
available for sale, net of
deferred taxes of $32,850 ... - - - 57,153 - 57,153 57,153
-------- --------- ----------- ------------- ------------ ------------- -------------
Comprehensive income .......... 6,102,530
=============
Balance September 30, 2000 ........ 28,070 $ 701,750 $ 6,176,362 $ 3,079,124 $ 65,114,713 $ 75,071,949
======== ========= =========== ============= ============ =============
Balance December 31, 2000 ......... 28,070 $ 701,750 $ 6,176,362 $ 3,688,615 $ 66,946,042 $ 77,512,769
-------- --------- ----------- ------------- ------------ -------------
Net income .................... - - - - 5,550,445 $ 5,550,445 5,550,445
Cash dividends
($24.00 per share) .......... - - - - (673,344) (673,344)
Purchase and retirement
of common stock ............. (44) (1,100) (9,681) - (99,219) (110,000)
Unrealized gain on securities
available for sale, net of
deferred taxes of $98,434 ... - - - 238,983 - 238,983 238,983
-------- --------- ----------- ------------- ------------ ------------- -------------
Comprehensive income .......... $ 5,789,428
=============
Balance September 30, 2001 ........ 28,026 $ 700,650 $ 6,166,681 $ 3,927,598 $ 71,723,924 $ 82,518,853
======== ========= =========== ============= ============ =============
See accompanying notes to consolidated financial statements.
4
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended September 30,
----------------------------------
2001 2000
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Cash flows from operating activities:
Net income .......................................................................... $ 5,550,445 $ 6,045,377
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................................... 2,913,897 2,696,372
Accretion on investment securities ............................................... (163,560) (181,864)
Loss (gain) on disposition of premises and equipment ............................ 661 (7,220)
Impairment loss on fixed assets ................................................. 470,740 -
Provision for loan losses ........................................................ 2,250,000 1,875,000
Origination of loans held for sale ............................................... (5,972,250) (3,269,200)
Proceeds from sales of loans held for sale ....................................... 6,004,882 3,293,282
Gain on sales of loans held for sale ............................................. (32,632) (24,082)
Gain on exchange of marketable equity securities ................................. (458,395) -
Gain on sale of marketable equity securities ..................................... (43,083) (106,572)
Proceeds from sales of other real estate owned ................................... 172,055 229,861
Loss (gain) on other real estate ................................................. 14,945 (138,235)
Decrease (increase) in accrued interest receivable ............................... 446,492 (521,022)
(Increase ) decrease in other assets, net ........................................ (297,352) 218,155
Increase (decrease) in other liabilities, net .................................... 482,401 (524,062)
Increase in accrued interest payable ............................................. 1,367,884 928,393
------------- -------------
Net cash provided by operating activities ..................................... 12,707,130 10,514,183
------------- -------------
Cash flows from investing activities:
Purchase of securities held to maturity ............................................. (130,675,124) (39,653,069)
Purchase of securities available for sale ........................................... (1,003,003) -
Proceeds from maturities and issuer calls of securities held to maturity ............ 133,000,395 32,000,617
Proceeds from sale of securities available for sale ................................. 501,478 106,572
Purchase of FHLB of Atlanta stock ................................................... (139,700) (110,400)
Proceeds from sale of assets acquired in settlement of loans ........................ - -
Net increase in loans ............................................................... (30,037,837) (50,694,160)
Purchases of premises and equipment ................................................. (1,770,373) (4,123,708)
Net cash received on branch purchases ............................................... 38,694,108 -
------------- -------------
Net cash provided (used) by investing activities .............................. 8,569,944 (62,474,148)
------------- -------------
Cash flows from financing activities:
Net increase in deposits ............................................................ 3,438,349 25,688,860
Net increase in short-term borrowings ............................................... 1,070,451 774,769
Cash dividends paid ................................................................. (673,344) (675,280)
Purchase and retirement of common stock ............................................. (110,000) (250,000)
------------- -------------
Net cash provided by financing activities ..................................... 3,725,456 25,538,349
------------- -------------
Net increase (decrease) in cash and cash equivalents ..................................... 25,002,530 (26,421,616)
Cash and cash equivalents at beginning of year ........................................... 91,685,967 94,857,959
------------- -------------
Cash and cash equivalents at end of year ................................................. $ 116,688,497 $ 68,436,343
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............................................ $ 21,970,522 $ 22,753,066
============= =============
Cash paid during the period for income taxes ........................................ $ 3,791,160 $ 4,302,564
============= =============
Supplemental disclosure of noncash financing and investing activities:
Unrealized gains on available-for-sale securities, net of deferred taxes
of $98,434 and $32,850, respectively ............................................. $ 238,983 $ 57,153
============= =============
Foreclosed loans transferred to other real estate ................................... $ 415,000 $ 76,161
============= =============
See accompanying notes to consolidated financial statements.
5
Fidelity BancShares (N.C.), Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
Fidelity BancShares (N.C.), Inc. ("BancShares") is the holding company for The
Fidelity Bank (the "Bank"), which operates 64 branches primarily in central
North Carolina, and FIDBANK Capital Trust I (the "Trust"), a statutory business
trust created under the laws of the State of Delaware that issued $23.0 million
of 8.50% Capital Securities (the "Capital Securities") in June 1999 maturing in
2029. The Bank also has two wholly owned subsidiaries, Fidelity Properties, Inc.
and TFB Financial Services.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated financial
statements.
In June 1998, The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
BancShares adopted the provisions of SFAS No. 133 on January 1, 2001, but, as a
result of BancShares' limited use of derivative instruments, the adoption of
SFAS No. 133 did not have a material impact on its consolidated financial
statements.
In September 2000, FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125." SFAS No. 140 supersedes and replaces the guidance in
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 140 revises the standards for
accounting for securitization and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of the
provisions of SFAS No. 125 without reconsideration. SFAS No. 140 also is
effective for transfers of financial assets occurring after March 31, 2001; it
is applied prospectively. SFAS No. 140 also is effective for recognition and
reclassification of collateral and for disclosures relating to securization
transactions and collateral in financial statements for fiscal years ended after
December 15, 2000. BancShares adopted the required provisions of SFAS No. 140 on
April 1, 2001 and December 31, 2000, respectively. The adoption of SFAS No. 140
had no impact on BancShares consolidated financial statements.
On July 20, 2001, The Financial Accounting Standards Board (FASB) issued
Statement No. 141, "Business Combinations"; and Statement No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 141 also specifies criteria which must be met for intangible assets
acquired in a purchase method business combination to be recognized and reported
apart from goodwill. SFAS No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 will also require that identifiable intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of".
BancShares was required to adopt the provisions of SFAS No. 141 as of June 30,
2001 and will adopt SFAS No. 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate accounting literature issued prior to SFAS No.
142. Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of SFAS
No. 142. Because of the extensive effort needed to comply with adopting SFAS No.
141 and 142, it is not practicable to reasonably estimate the impact of adopting
these statements on BancShares' consolidated financial statements at this time,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
6
In the opinion of management, the consolidated financial statements contain all
material adjustments necessary to present fairly the consolidated financial
position of BancShares as of and for each of the periods presented, and all such
adjustments are of a normal recurring nature. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
These financial statements should be read in conjunction with consolidated
financial statements and notes included in Fidelity BancShares (N.C.), Inc.'s
Form 10K filed with the Securities and Exchange Commission. Certain amounts for
prior periods have been reclassified to conform with statement presentations for
2001. However, the reclassifications have no effect on shareholders' equity or
net income as previously reported.
Note 2. Net Income Per Share
Net income per share has been computed by dividing net income by the weighted
average number of shares outstanding during the period. For all periods
presented, BancShares had no potential dilutive common stock.
Note 3. Allowance for Loan Losses
A summary of the allowance for loan losses follows:
(Unaudited)
Nine months ended September 30,
------------------------------
2001 2000
----------- -----------
Balance at beginning of year ............. $ 7,297,833 $ 5,141,647
Provision for loan losses ........... 2,250,000 1,875,000
Loans charged off ................... (1,193,380) (1,022,537)
Loan recoveries ..................... 770,869 854,083
----------- -----------
Balance at end of the period ............. $ 9,125,322 $ 6,848,193
=========== ===========
Note 4. Long Term Borrowings
The $23.0 million long-term obligations at September 30, 2001 are Capital Trust
Securities of the Trust. These long-term obligations, which qualify as Tier 1
Capital for BancShares, bear interest at 8.50% and mature in 2029. BancShares
may redeem the long-term obligations in whole or in part on or after September
30, 2004. The sole asset of the Trust is $23.7 million of 8.50% Junior
Subordinated Debentures of BancShares due 2029. BancShares has entered into a
guaranty agreement which, when taken together with its obligations under the
trust agreement under which the Trust exists, the junior subordinated
debentures, and the indenture under which the debentures were issued, provides a
full and unconditional guarantee on a subordinated basis by BancShares of the
Trust's payment of distributions and other payments on the capital securities.
Note 5. Branch Acquisitions
In February 2001, BancShares acquired the Mebane, Rockingham and Yanceyville,
North Carolina branches of First Union National Bank. This acquisition was
accounted for as a purchase, and, therefore the results of operations prior to
purchase of the branches are not included in the consolidated financial
statements. The combined loans and deposits acquired were $3.9 million and $49.5
million, respectively, and the purchase included $6.0 million in intangible
assets.
Note 6. Gain on Marketable Equity Securities
During the first quarter of 2001, BancShares recognized a nonrecurring
securities gain of $458,395. This gain was recognized as a result of a business
combination involving a company in which BancShares had an equity interest.
During the second quarter of 2001, BancShares recognized a nonrecurring
securities gain of $43,083 when the equity interest received in the business
combination was sold.
Note 7. Impairment Loss on Fixed Assets
In April 2001, BancShares analyzed the results of operations for two branches
through the first three months taking into consideration recent economic
conditions and the performance of these branches during the first quarter.
BancShares concluded that the carrying value of these branches was impaired and
therefore recorded an impairment loss of $304,656 to reduce the carrying value
of these branches to fair value. The fixed assets consisted primarily of
leasehold improvements,
7
which are deemed to have very minimal fair value. This impairment charge was
recognized in the first quarter and the branches were considered assets to be
held and used. In late April 2001, BancShares approved the closing of the two
branches in the second and third quarters of 2001. BancShares recorded an
additional charge of $173,000 in the second quarter, which is primarily related
to the remaining lease payments and costs to close these branches. During the
third quarter of 2001 management revised its estimate of closing costs and
recorded a recovery of $7,232.
Note 8. Related Parties
BancShares has entered into various service contracts with another bank holding
company (the "Corporation") and its subsidiary. The Corporation has two
significant shareholders, who also are significant shareholders of BancShares.
The first significant shareholder at September 30, 2001, beneficially owned
11,155 shares, or 39.80%, of BancShares' outstanding common stock. At the same
date, the second significant shareholder beneficially owned 1,696 shares, or
6.05%, of BancShares' outstanding common stock.
These two significant shareholders are directors and executive officers of the
Corporation and at September 30, 2001, beneficially owned 2,529,991 shares, or
28.71%, and 1,452,494 shares, or 16.48%, of the Corporation's outstanding Class
A common stock, and 649,188 shares, or 38.28%, and 199,052 shares, or 11.74%, of
the Corporation's outstanding Class B common stock. The above totals include
478,728 Class A common shares, or 5.43%, and 104,644 Class B Common shares, or
6.17%, that are considered to be beneficially owned by both of the shareholders
and, therefore, are included in each of their totals.
The following table lists the various charges paid to the Corporation:
(Dollars in thousands) (Unaudited)
Nine Months Ended September 30,
-------------------------------
2001 2000
--------- ---------
Data and item processing $ 2,303 $ 1,917
Forms, supplies and equipment 237 298
Trustee for employee benefit plans 56 71
Other services - 5
-------- -------
$ 2,596 $ 2,291
======== =======
TABLE 1.
Financial Summary
2001 2000
---------------------------- ---------------------- Nine months ended
Third Second First Fourth Third September 30,
Quarter Quarter Quarter Quarter Quarter 2001 2000
------- -------- -------- -------- ---------- ------ ----------
Summary of Operations
Interest income ................................ $ 16,375 $ 16,957 $ 17,483 $ 17,748 $ 17,039 $ 50,815 $ 49,299
Interest expense ............................... 7,265 7,848 8,226 8,304 7,873 23,338 22,170
-------- -------- -------- -------- -------- -------- --------
Net interest income ............................ 9,110 9,109 9,257 9,444 9,166 27,477 27,129
Provision for loan losses ...................... 750 750 750 750 750 2,250 1,875
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses ........................... 8,360 8,359 8,507 8,694 8,416 25,227 25,254
Noninterest income ............................. 2,511 2,445 2,463 1,905 1,970 7,419 5,261
Noninterest expense ............................ 7,794 8,087 8,009 7,376 7,332 23,891 21,020
-------- -------- -------- -------- -------- -------- --------
Net income before income taxes ................. 3,077 2,717 2,961 3,223 3,054 8,755 9,495
Income taxes ................................... 1,130 993 1,081 1,167 1,110 3,205 3,450
-------- -------- -------- -------- -------- -------- --------
Net income ..................................... $ 1,947 $ 1,724 $ 1,880 $ 2,056 $ 1,944 $ 5,550 $ 6,045
======== ======== ======== ======== ======== ======== ========
Selected Period-End Balances
Total assets ................................... $968,619 $964,849 $959,336 $907,670 $871,166 $968,619 $871,166
Investment securities and overnight
funds sold ................................ 205,983 183,471 185,940 180,554 163,330 205,983 163,330
Loans, gross ................................... 647,894 631,042 625,722 614,817 601,674 647,894 601,674
Interest earning assets ........................ 879,437 874,266 842,813 824,719 786,369 879,437 786,369
Deposits ....................................... 825,444 819,883 819,863 772,520 741,702 825,444 741,702
Interest bearing liabilities ................... 743,060 741,408 737,166 711,971 670,337 743,060 670,337
Shareholders' equity ........................... 82,519 82,454 80,587 77,513 75,072 82,519 75,072
Common shares outstanding ...................... 28,026 28,070 28,070 28,070 28,070 28,026 28,070
-------- -------- -------- -------- -------- -------- --------
Selected Average Balances
Total assets ................................... $957,883 $953,347 $911,741 $877,015 $853,104 $941,159 $845,329
Investment securities and overnight
funds sold ................................ 202,344 189,354 177,115 165,536 165,513 189,697 172,934
Loans, gross ................................... 640,277 628,356 621,868 609,556 596,915 630,234 580,051
Interest earning assets ........................ 874,718 868,094 826,812 799,046 771,519 856,717 766,154
Deposits ....................................... 813,840 812,867 775,293 744,188 726,281 800,808 720,060
Interest bearing liabilities ................... 735,973 736,776 709,705 679,141 661,843 727,581 659,202
Shareholders' equity ........................... 83,627 81,522 79,321 76,641 74,358 81,506 72,551
Common shares outstanding ...................... 28,031 28,070 28,070 28,070 28,119 28,057 28,153
-------- -------- -------- -------- -------- -------- --------
Profitability Ratios
Rate of return (annualized) on:
Total assets ................................. 0.81% 0.73% 0.84% 0.93% 0.91% 0.79% 0.96%
Shareholders' equity ......................... 9.24 8.48 9.61 10.67 10.34 9.10 11.11
Dividend payout ratio .......................... 11.52 13.02 11.95 10.92 11.55 12.13 11.17
-------- -------- -------- -------- -------- -------- --------
Liquidity and Capital Ratios (averages)
Loans to deposits .............................. 78.67% 77.30% 80.21% 81.91% 82.19% 78.70% 80.56%
Shareholders' equity to total assets ........... 8.73 8.55 8.70 8.74 8.77 8.66 8.60
-------- -------- -------- -------- -------- -------- --------
Per Share of Common Stock
Net income ..................................... $ 69.45 $ 61.42 $ 66.96 $ 73.24 $ 69.14 $ 197.83 $ 214.73
Cash dividends ................................. 8.00 8.00 8.00 8.00 8.00 24.00 24.00
Book value ..................................... 2,944.37 2,937.44 2,870.92 2,761.42 2,674.45 2,944.37 2,674.45
-------- -------- -------- -------- -------- -------- --------
TABLE 2.
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Year to date
September 30, 2001
2001 2000 Increase (decrease) due to:
------------------------------- --------------------------------- -----------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
Balance Expense Rate Balance Expense Rate Volume Rate Change
--------- ---------- --------- ----------- ---------- ------- ---------- ----------- ----------
ASSETS
Interest earning assets:
Loans ..................... $630,234 $42,876 9.10% $580,051 41,504 9.56% $ 3,502 $(2,130) $ 1,372
Taxable investment
securities ............... 133,164 5,240 5.26 151,561 6,511 5.74 (757) (514) (1,271)
Non taxable investment
securities ............... - - - 1,766 80 6.05 (40) (40) (80)
Overnight funds sold ...... 45,471 1,400 4.12 12,627 574 6.07 1,252 (426) 826
Other investments ......... 13,327 226 2.27 9,114 219 3.21 54 (47) 7
Interest bearing deposits
in other banks ........... 34,521 1,143 4.43 11,035 511 6.19 933 (301) 632
--------- --------- -------- --------- -------- ------- -------- --------- ---------
Total interest earning assets $856,717 $50,885 7.94% $766,154 $ 49,399 8.61% $ 4,944 $(3,458) $ 1,486
--------- --------- -------- --------- -------- ------- -------- --------- ---------
Noninterest earning assets:
Cash and due from banks ... 33,129 29,746
Premises and equipment .... 34,881 34,498
Other assets .............. 24,827 20,682
Reserve for loan losses ... (8,395) (5,751)
--------- ---------
Total assets ................ $941,159 $845,329
========= =========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits ........... $104,930 $ 663 0.84% $102,362 $ 1,195 1.56% $ (46) $ (486) $ (532)
Savings deposits .......... 169,984 3,423 2.69 157,568 4,133 3.50 354 (1,064) (710)
Time deposits ............. 404,166 17,155 5.67 354,386 14,640 5.52 2,085 430 2,515
Short-term borrowings ..... 25,501 632 3.31 21,886 736 4.49 103 (207) (104)
Long-term borrowings ...... 23,000 1,466 8.52 23,000 1,466 8.51 - - -
--------- --------- -------- --------- -------- ------- -------- --------- ---------
Total interest bearing
liabilities ............... $727,581 $23,339 4.29% $659,202 $22,170 4.49% $ 2,496 $(1,327) $ 1,169
--------- --------- -------- --------- -------- ------- -------- --------- ---------
Noninterest bearing
liabilities:
Demand deposits ........... 121,728 105,744
Other liabilities ......... 10,344 7,832
Shareholders' equity ...... 81,506 72,551
--------- ---------
Total liabilities
and equity ................ $941,159 $845,329
========= =========
Interest rate spread ........ 3.65% 4.12%
======== =======
Net interest income and net
interest margin ........... $27,546 4.30% $27,229 4.75% $ 2,448 $(2,131) $ 317
========= ======== ======== ======= ======== ========= =========
TABLE 3.
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - Third quarter
September 30, 2001
September 30,2001
2001 2000
------------------------------- -----------------------------
Increase (decrease) due to:
Interest Interest -------------------------------
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
Balance Expense Rate Balance Expense Rate Volume Rate Change
---------- ------- ------ -------- --------- ------- ------- -------- -------
ASSETS
Interest earning assets:
Loans ..................... $ 640,277 $ 13,938 8.64% $ 596,915 $ 14,570 9.71% $ 1,001 $ (1,633) $ (632)
Taxable investment
securities .............. 139,592 1,685 4.79 $ 142,799 $ 2,056 5.73 (42) (329) (371)
Non taxable investment
securities .............. -- -- -- 1,304 20 6.10 (10) (10) (20)
Overnight funds sold ...... 50,547 428 3.36 14,582 233 6.36 440 (245) 195
Other investments ......... 14,514 76 2.08 8,998 82 3.63 26 (32) (6)
Interest bearing deposits
in other banks ........... 29,788 268 3.57 6,918 109 6.27 283 (124) 159
--------- --------- ---- --------- --------- ---- -------- --------- --------
Total interest earning
assets........................ $ 874,71 $ 16,395 7.44% $ 771,516 $ 17,070 8.80% $ 1,698 $ (2,373) $ (675)
--------- --------- ---- --------- --------- ---- -------- --------- --------
Noninterest earning assets:
Cash and due from banks ... 32,627 31,996
Premises and equipment .... 34,974 35,108
Other assets .............. 24,503 20,886
Reserve for loan losses ... (8,939) (6,402)
--------- ---------
Total assets................... $ 957,883 $ 853,104
========= =========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits ........... $ 101,893 $ 133 0.52% $ 95,950 $ 349 1.45% $ (5) $ (211) $ (216)
Savings deposits .......... 175,013 1,018 2.31 158,756 1,478 3.70 136 (596) (460)
Time deposits ............. 409,656 5,458 5.29 362,556 5,300 5.82 658 (500) 158
Short-term borrowings ..... 26,411 167 2.51 21,581 257 4.74 45 (135) (90)
Long-term borrowings ...... 23,000 489 8.44 23,000 489 8.46 -- -- --
--------- --------- ---- --------- --------- ---- -------- --------- --------
Total interest bearing
liabilities ................ $ 735,973 $ 7,265 3.92% $ 661,843 $ 7,873 4.73% $ 834 $ (1,442) $ (608)
========= ========= ==== ========= ========= ==== ======== ========= ========
Noninterest bearing
liabilities:
Demand deposits ........... 127,278 109,019
Other liabilities ......... 11,005 7,884
Shareholders' equity ...... 83,627 74,358
--------- ---------
Total liabilities and equity .. $ 957,883 $ 853,104
========= =========
Interest rate spread .......... 3.52% 4.08%
==== ====
Net interest income and net
interest margin ........... $ 9,130 4.14% $ 9,197 4.74% $ 864 $ (931) $ (67)
========== ==== ========= ==== ========= ========= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
Management's discussion and analysis of earnings and related financial
data are presented to assist in understanding the financial condition and
results of operations of Fidelity BancShares (N.C.), Inc. and Subsidiaries
("BancShares"). This discussion and analysis should be read in conjunction with
the unaudited Consolidated Financial Statements and related notes presented
within this report. The focus of this discussion concerns BancShares' banking
subsidiary, The Fidelity Bank (the "Bank"), which operates 64 branches in North
Carolina.
Financial Condition and Results of Operations.
Net Income. In the first nine months of 2001, BancShares' net income
decreased $495,000 to $5.6 million from $6.0 million in the first nine months of
2000, a decrease of 8.19%. Net income for the third quarter of 2001 increased
$3,000 or .13% when compared to the same period of 2000. The decrease in net
income for the nine month period resulted primarily from increases in the
provision for loan losses and noninterest expense, which were only partially
offset by growth in net interest income and noninterest income. Net income for
the third quarter of 2001 includes operations not present in the third quarter
of 2000 from three branches which were acquired from First Union National Bank
("First Union") during the first quarter of 2001. Loans and deposits acquired
from First Union were approximately $3.9 million and $49.5 million,
respectively. The acquisition resulted in BancShares recording an intangible
asset of approximately $6.0 million.
Net income per share for the first nine months of 2001 was $197.83, a
decrease of $16.90 per share, or 7.87%, from $214.73 per share in 2000. For the
third quarter of 2001, net income per share was $69.45 an increase of $0.31 or
0.45%, from $69.14 per share for the third quarter of 2000. Return on average
assets for the first nine months of 2001 and 2000 was 0.79% and 0.96%,
respectively. For the third quarter of 2001 and 2000, return on average assets
was .81% and .91%, respectively. Return on average equity for first nine months
of 2001 and 2000 was 9.10% and 11.11%, respectively. For the third quarter of
2001 and 2000, return on equity was 9.24% and 10.34% respectively. Various
profitability, liquidity and capital ratios are presented in Table 1. To
understand the changes and trends in interest-earning assets and
interest-bearing liabilities, refer to the average balance sheets and net
interest income analysis presented in Table 2.
Net Interest Income. The greatest portion of BancShares' earnings is
from net interest income, which is the difference between interest income on
interest-earning assets and interest paid on deposits and other interest-bearing
liabilities. The primary factors affecting net interest income are changes in
the volume and yields/rates on interest-earning assets and interest-bearing
liabilities, and the ability to respond to changes in interest rates through
asset/liability management. For the first nine months of 2001, net interest
income was $27.5 million as compared to $27.2 million for the same period in
2000, an increase of $348,000 or 1.28%. Of the $348,000 increase in net interest
income, $2.4 million resulted from an increase in the volume of interest earning
assets and interest bearing liabilities, the effect of which was partially
offset by the impact of rate changes which contributed to a $2.1 million
decrease in the net interest income. The net interest margin for the first nine
months of 2001 and 2000 was 4.30% and 4.75%, respectively. Net interest income
and net interest margin for the third quarter of 2001 and 2000 were $9.1 million
and 4.14% compared to $9.2 million and 4.74%, respectively.
Interest income for the first nine months of 2001 was $50.9 million as
compared to $49.4 million in 2000, an increase of $1.5 million or 3.01%. The
increase in interest income from the first nine months of 2000 over the first
nine months of 2001 is primarily attributable to an increase in average loan
balances outstanding from $580.1 million to $630.2 million, an increase of $50.2
million or 8.65%. Interest income from loans amounted to $42.9 million in the
first nine months of 2001 as compared to $41.5 million in the first nine months
of 2000, an increase of $1.4 million or 3.31%. BancShares' loan growth is
largely due to growth within the existing branch network. Earnings from
investments and federal funds sold provided the balance of interest income,
contributing $8.0 million and $7.9 million for the first nine months of 2001 and
2000, respectively. Average interest-earning assets for the first nine months of
2001 increased to $856.7 million, an 11.82% increase, from $766.2 million in the
first nine months of 2000. The yield on interest-earnings assets for the first
nine months of 2001 and 2000 was 7.94% and 8.61%, respectively. The decrease in
average yields is attributable to declines in market rates. Trends in interest
earning assets are shown in Tables 2 and 3.
Interest income for the three months ended September 30, 2001 and 2000
was $16.4 million and $17.1 million, respectively. The decreases in interest
income between these two periods is due to the decline in market rates. The
average yield on interest earning assets for the three months ended September
30, 2001 was 7.44% compared to 8.80% for the three months ended September 30,
2000.
9
Interest expense for the first nine months of 2001 was $23.3 million
compared to $22.2 million in 2000, an increase of $1.2 million or 5.27%. The
increase in interest expense in the first nine months of 2001, compared to the
first nine months of 2000, is primarily attributable to increased average
interest-bearing deposit balances, primarily time deposits and savings accounts
(from the first quarter 2001 acquisition). Average interest-bearing deposits
increased $64.8 million or 10.54%, from $614.3 million in the first nine months
of 2000 to $679.1 million in the first nine months of 2001. The average rate
paid on interest-bearing deposits was 4.18% and 4.34% for the first nine months
of 2001 and 2000, respectively. Borrowings contributed $2.1 million in interest
expense during the first nine months of 2001 compared to $2.2 million during the
first nine months of 2000, a decrease of $104,000 or .05%. The yield on
interest-bearing liabilities for the first nine months of 2001 and 2000 was
4.29% and 4.49%, respectively. Trends in interest bearing liabilities are shown
in Tables 2 and 3.
Interest expense for the three months ended September 30, 2001 and 2000
was $7.3 million and $7.9 million, respectively. The decreases in interest
expense between these two periods is due to the decline in market rates between
the two periods. The average rate on interest bearing liabilities for the three
months ended September 30, 2001 was 3.92% compared to 4.73% for the three months
ended September 30, 2000.
Asset Quality and Provision for Possible Loan Losses. For the first
nine months of 2001 and 2000, management added $2.3 million and $1.9 million,
respectively, to the allowance for loan losses as provisions for loan losses.
The increased provision in the first nine months of 2001 was prompted by strong
loan portfolio growth, the entering of new markets through de novo branches in
2000 and 2001, an increase in net charge-offs, and the impact of the declining
economy on borrowers. During the first nine months of 2001, management
charged-off loans totaling $1.2 million and had recoveries of $771,000,
resulting in net charge-offs of $423,000. During the same period in 2000,
management charged-off $1.0 million in loans and had recoveries of $854,000,
resulting in net charge-offs of $168,000. The ratio of allowance for loan losses
to loans increased to 1.41% at September 30, 2001 from 1.19% at December 31,
2000. The following table presents BancShares' comparative asset quality ratios:
September 30, December 31,
2001 2000
------------- ------------
Ratio of annualized net loans charged off to average loans..................... 0.09 % 0.08 %
Allowance for loan losses to loans............................................. 1.41 1.19
Non-performing assets to total gross loans and other real estate owned......... 0.05 0.01
Non-performing assets to total assets.......................................... 0.03 0.01
Management considers the allowance for loan losses, at September 30,
2001, to be adequate to cover the losses and risks inherent in the loan
portfolio at that date and will continue to monitor its portfolio and to adjust
the relative level of the allowance as needed. BancShares had no impaired loans
at September 30, 2001. Management actively maintains a current loan watch list
and knows of no other loans which are material and (i) represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources, or (ii)
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible loan
losses. Such agencies have the authority to require the Bank to increase the
allowance based on the examiners' judgements about information available to them
at the time of their examinations.
Noninterest Income. Noninterest income increased $2.2 million or 41.01%
for the first nine months of 2001 over the first nine months of 2000.
Noninterest income, consisting primarily of service charges on deposit accounts
and other service charges and fees, increased during the first nine months of
2001 primarily due to increased deposit base from acquired branches, de novo
branch openings during the second and third quarters of 2000 and growth in the
existing branch network. BancShares' average deposits increased $80.7 million or
11.21% to $800.8 million in the first nine months of 2001 from $720.1 million in
the first nine months of 2000. Noninterest income includes a nonrecurring
securities gain of $501,478. This gain was recognized as a result of an exchange
and subsequent sale of an equity investment in the first and second quarters.
For the third quarter of 2001, noninterest income increased $541,000 or 27.47%
over the same period of 2000. This increase was primarily due to an increase in
deposit service charges, as discussed for the nine month periods.
10
Noninterest Expense. Noninterest expense increased $2.9 million or
13.66% from $21.0 million in the first nine months of 2000 to $23.9 million in
the first nine months of 2001, including increases of $1.3 million in salaries
and employee benefits, $33,000 in occupancy and equipment expense, $333,000 in
data processing cost, $458,000 in other expenses and $267,000 in intangibles
amortization. The increases represented increases of 11.60% in salaries and
employee benefits, 0.93% in occupancy and equipment expenses, 17.59% in data
processing costs, 13.20% in other expenses and 31.80% in intangibles
amortization over the first nine months of 2000. For the third quarter of 2001
noninterest expense increased $462,000 or 6.30% over the same period in 2000.
Noninterest expense increased due to expansion of BancShares' branch network.
BancShares acquired three branches during the first nine months of 2001, opened
five de novo branches during the second and third quarters of 2000, and has seen
increased activity within the existing branch network. BancShares also had a one
time impairment loss of $471,000 on fixed assets during the nine months ended
September 30, 2001. During April, BancShares analyzed the results of operations
of two branches through the first three months of 2001 taking into consideration
recent economic conditions and the projected performance of these branches.
BancShares concluded the carrying value of these branches were impaired and
therefore recorded an impairment loss of $304,656 in the first quarter to reduce
the carrying value of these branches to fair value. The fixed assets consisted
primarily of leasehold improvements, which are deemed to have very minimal fair
value. In the second quarter the Board of Directors of BancShares approved to
closed these two branches and recorded an additional charge of $173,000 for the
remaining lease payments and costs to close these branches. An adjustment of
$7,000 to management's estimates was recorded as a recovery in the third
quarter.
Income Taxes. In the first nine months of 2001, BancShares had income
tax expense of $3.2 million, a decrease of $245,000 or 7.11%, from $3.5 million
in the first nine months of 2000. The resulting effective income tax rates,
based on the accruals for the three months ended September 30, 2001 and 2000,
were 36.61% and 36.34%, respectively.
Capital Resources.
Shareholders' Equity and Capital Adequacy. Sufficient levels of capital
are necessary to sustain growth and absorb losses. To this end, the Federal
Reserve, which regulates BancShares, and the FDIC, which regulates the Bank, has
established minimum capital guidelines for the institutions they supervise.
Regulatory guidelines define minimum requirements for BancShares'
leverage capital ratio. Leverage capital equals total equity and certain
long-term borrowings less goodwill and certain other intangibles and is measured
relative to total adjusted assets as defined by regulatory guidelines. According
to these guidelines, BancShares' leverage ratio at September 30, 2001 was 8.92%
as compared to 9.72% at December 31, 2000.
BancShares is also required to meet minimum requirements for risk-based
capital ("RBC"). BancShares' assets, including loan commitments and other
off-balance sheet items, are weighted according to federal guidelines for the
risk considered inherent in each asset. At September 30, 2001, the Total Capital
Ratio was 13.89% as compared to 14.28% at December 31, 2000.
The following table presents regulatory capital amounts calculations
and ratios of BancShares:
September 30 December 31,
2001 2000
------------ ------------
Tier 1 capital................... $83,900 $94,114
Total capital.................... 95,405 84,047
Leverage capital ratio........... 8.92 % (1) 9.72 % (1)
Tier 1 capital ratio............. 12.22 (1) 12.75 (1)
Total capital ratio.............. 13.89 (1) 14.28 (1)
____________
(1) These ratios exceed the minimum required regulatory capital ratios.
At September 30, 2001, and December 31, 2000, BancShares was in
compliance with its regulatory capital requirements, and all of its regulatory
capital ratios exceed the minimum ratios required for it to be classified as
"well capitalized." Growth in BancShare's assets resulting from acquisitions of
branch offices and the opening of de novo branches has reduced, and is expected
to continue to reduce, BancShare's capital ratios.
11
Liquidity, Market Risk and Interest Sensitivity.
Liquidity. Liquidity refers to the ability of BancShares to generate
sufficient funds to meet its financial obligations and commitments at a
reasonable cost. Maintaining liquidity ensures that funds will be available for
reserve requirements, customer demand for loans, withdrawal of deposit balances
and maturities of other deposits and liabilities. Past experiences help
management anticipate cyclical demands and amounts of cash required. These
obligations can be met by existing cash reserves or funds from maturing loans
and investments, but in the normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentration, competition and BancShares' overall financial condition.
BancShares' liquid assets include all investment securities (minus pledged
securities), federal funds sold, interest-bearing deposits in other banks and
cash and due from banks. These assets represented 23.10% of deposits at
September 30, 2001, an increase from 20.52% at December 31, 2000. BancShares'
liquidity ratio, which is defined as cash plus short-term marketable securities
(minus pledged securities) divided by deposits and short-term liabilities, was
22.35% at September 30, 2001, compared to 19.78% at December 31, 2000. These
ratios have increased due to deposit growth exceeding loan growth in the first
quarter of 2001, primarily due to the acquisition of three First Union Branches.
The consolidated statements of cash flows disclose the principal
sources and uses of cash from operating, investing and financing activities for
the nine months ended September 30, 2001 and 2000. BancShares has no brokered
deposits. Jumbo time deposits are considered to include all time deposits of
$100,000 or more. BancShares has never aggressively bid on these deposits. Most
jumbo deposit customers have other relationships with the Bank, including
savings, demand and other time deposits, and in some cases, loans. At September
30, 2001, and December 31, 2000, jumbo time deposits represented 11.30% and
10.47%, respectively, of total deposits.
Management believes that BancShares has the ability to generate
sufficient amounts of cash to cover normal requirements and any additional
needs, which arise, within realistic limitations, and management is not aware of
any known demands, commitments or uncertainties that will affect liquidity in a
material way.
Market Risk. Market risk reflects the risk of economic loss resulting
from adverse changes in market price and interest rates. The risk of loss can be
reflected in either diminished current market values or reduced potential net
interest income in future periods.
BancShares' market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. Management seeks to
manage this risk through the use of short-term maturities. The composition and
size of the investment portfolio is managed so as to reduce the interest rate
risk in the deposit and loan portfolios while at the same time maximizing the
yield generated by the portfolio.
The table below presents in tabular form the contractual balances and
the estimated fair value of financial instruments at their expected maturity
dates as of September 30, 2001. The expected maturity categories take into
consideration historical prepayment experience as well as management's
expectations based on the interest rate environment as of September 30, 2001.
For core deposits without contractual maturity (i.e. interest bearing checking,
savings and money market accounts), the table presents principal cash flows as
maturing in one year since they are subject to immediate repricing.
Maturing in period ended September 30,
---------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total Fair Value
----------- ---------- ----------- ---------- --------- ---------- ----- ----------
(Dollars in thousands)
Assets
Loans:
Fixed rate ......... $ 108,623 $ 76,936 $ 104,112 $ 20,980 $ 14,696 $ 19,851 $ 345,198 $ 346,269
Average rate (%) ... 9.17% 8.96% 8.45% 8.21% 7.68% 7.74% 8.70%
Variable rate ...... $ 163,172 $ 20,641 $ 22,399 $ 6,963 $ 3,973 $ 85,548 $ 302,696 $ 302,696
Average rate (%) ... 6.84% 6.69% 6.72% 6.72% 6.69% 7.48% 6.99%
Investment securities (1):
Fixed rate ......... $ 125,681 $ 15,054 -- -- -- $ 8 $ 140,743 $ 142,353
Average rate (%) ... 4.75% 4.72% -- -- -- 10.89% 4.75%
Liabilities
Savings and interest
bearing checking:
Fixed rate ......... $ 283,676 -- -- -- -- -- $ 283,676 $ 283,676
Average rate (%) ... 0.80% -- -- -- -- -- 0.80%
Certificates of
deposit:
Fixed rate ......... $ 332,823 $ 49,986 $ 11,939 $ 13,923 -- -- $ 408,671 $ 414,414
Average rate (%) ... 4.79% 5.37% 5.37% 6.02% -- -- 4.92%
Short-term obligations:
Variable rate ...... $ 27,712 -- -- -- -- -- $ 27,712 $ 27,712
Average rate (%) ... 1.36% -- -- -- -- -- 1.36%
Long-term obligations:
Fixed rate ......... -- -- -- -- -- $ 23,000 $ 23,000 $ 23,000
Average rate (%) ... -- -- -- -- -- 8.50% 8.50%
----------
(1) Marketable equity securities with a book value of approximately $3,647,604
and a fair value of approximately $10,139,501 have been excluded from this
table.
Interest Sensitivity. The table below presents BancShares interest
sensitivity position at September 30, 2001. The difference between interest
sensitive asset and interest sensitive liability repricing within
time periods is referred to as the interest rate sensitivity gap. Assets and
liabilities with maturities of one year or less and those that may be adjusted
within
12
the period are considered interest-sensitive. The interest-sensitivity position
has meaning only as of the date for which it was prepared.
As of September 30, 2001, BancShares had a positive one-year cumulative
gap position of 12.01% and a positive total cumulative gap position of 15.51%.
At December 31, 2000, BancShares had a one-year positive cumulative gap position
of 12.49% and a total positive cumulative gap position of 19.08%. The decrease
in the one-year cumulative gap position at September 30, 2001 is due to the
repositioning of securities, which at December 31, 2000, would mature in less
than one year and at September 30, 2001, will mature in greater than one year.
September 30, 2001
--------------------------------------------------------------------------------------------------------
1-30 31-90 91-180 181-365 Total Total
Days Days Days Days One-Year Non
Sensitive Sensitive Sensitive Sensitive Sensitive Sensitive Total
------------ ------------ ------------ ------------ ------------ ------------- ------------
Assets:
- ------
Loans ....................... $ 291,832 $ 32,426 $ 18,301 $ 36,603 $ 379,162 $ 268,732 $ 647,894
Investment securities ....... -- 14,989 45,188 65,504 125,681 25,202 150,883
Overnight funds sold ........ 55,100 -- -- -- 55,100 -- 55,100
Other ....................... -- -- -- -- -- 2,309 2,309
Interest bearing deposits
in other banks .......... 23,251 -- -- -- 23,251 -- 23,251
--------- --------- --------- --------- --------- --------- ---------
Total interest earning
assets ................ $ 370,183 $ 47,415 $ 63,489 $ 102,107 $ 583,194 $ 296,243 $ 879,437
========= ========= ========= ========= ========= ========= =========
Liabilities:
- -----------
Savings and checking
with interest ........... $ -- $ -- $ -- $ -- $ -- $ 166,618 $ 166,618
Money market savings ........ 117,058 -- -- -- 117,058 -- 117,058
Time deposits ............... 52,204 84,383 105,217 91,019 332,823 75,848 408,671
Short-term borrowings ....... 27,712 -- -- -- 27,712 -- 27,712
Long-term borrowings ........ -- -- -- -- -- 23,000 23,000
--------- --------- --------- --------- --------- --------- ---------
Total interest bearing
liabilities ........... $ 196,974 $ 84,383 $ 105,217 $ 91,019 $ 477,593 $ 265,466 $ 743,059
========= ========= ========= ========= ========= ========= =========
Interest-sensitivity gap .... $ 173,209 $ (36,968) $ (41,728) $ 11,088 $ 105,601 $ 30,777 $ 136,378
========= ========= ========= ========= ========= ========= =========
Cumulative interest
sensitivity gap ......... $ 173,209 $ 136,241 $ 94,513 $ 105,601 $ 105,601 $ 136,378 $ 136,378
Cumulative interest
sensitivity gap to total
interest earning assets.. 19.70 % 15.49 % 10.75 % 12.01 % 12.01 % 15.51 % 15.51 %
Accounting and Other Matters.
In June 1998, the Financial Accounting Standard Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This statement, as
amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Earlier application of all
provisions of this statement is encouraged. BancShares adopted this Statement on
January 1, 2001, with no material effect on its consolidated financial
statements.
In September 2000, FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125." SFAS No. 140 supersedes and replaces the
guidance in FASB Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Statement No. 140 revises
the standards for accounting for securitization and other transfers of financial
assets and collateral and requires certain disclosures, but carries over most of
the provisions of Statement No. 125 without reconsideration. Statement No. 140
also is effective for transfers of financial assets occurring after March 31,
2001; it is applied prospectively. Statement No. 140 also is effective for
recognition and reclassification of collateral and for disclosures relating to
securization transactions and collateral in financial statements for fiscal
years ended after December 15, 2000. BancShares adopted the required provisions
of SFAS No. 140 on April 1, 2001 and December 31, 2000, respectively. The
adoption of SFAS No. 140 had no impact on BancShares consolidated financial
statements.
On July 20, 2001, The Financial Accounting Standards Board (FASB)
issued Statement No. 141, "Business Combinations"; and Statement No. 142,
"Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria which must be met for intangible
assets acquired in a purchase method business combination to be recognized and
reported apart from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 will also require that identifiable
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
BancShares was required to adopt the provisions of SFAS No. 141 as of June
30, 2001 and will adopt SFAS No. 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate accounting literature issued prior to SFAS No.
142. Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be
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amortized prior to the adoption of SFAS No. 142. Because of the extensive effort
needed to comply with adopting SFAS No. 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these statements on BancShares'
consolidated financial statements at this time, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
Forward-Looking Statements
This discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act, which
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of
historical fact. Such statements are often characterized by the use of the
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," "anticipate," or other statements concerning
opinions or judgments of BancShares and its management about future events.
Factors that could influence the accuracy of such forward-looking statements
include, but are not limited to, the financial success or changing strategies of
BancShares' customers, actions of government regulators, the level of market
interest rates, and general economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This information is included in Item 2 in the text of BancShares'
Management Discussion and Analysis of Financial Condition and Results of
Operations (under the caption "Liquidity, Market Risk and Interest Sensitivity")
and is incorporated herein by reference.
PART II. OTHER INFORMATION
.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
3.1 BancShares' Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1 of BancShares' Registration Statement No.
333-62225 filed with the SEC on August 26, 1998)
3.2 BancShares' By-laws (incorporated herein by reference to Exhibit 3.2
of BancShares' Registration Statement No. 333-62225 filed with the SEC
on August 26, 1998)
4.1 Initial Trust Agreement of FIDBANK Capital Trust I, as amended
(incorporated herein by reference to Exhibit 4.1 of BancShares'
Registration Statement No. 333-62225 filed with the SEC on August 26,
1998)
4.2 Certificate of Trust of FIDBANK Capital Trust I (incorporated herein
by reference to Exhibit 4.2 of BancShares' Registration Statement No.
333-62225 filed with the SEC on August 26, 1998)
4.3 Form of Amended and Restated Trust Agreement of FIDBANK Capital Trust
I (incorporated herein by reference to Exhibit 4.3 of BancShares'
Amendment No. 3 to Registration Statement No. 333-62225 filed with the
SEC on May 25, 1999)
4.4 Form of Capital Security Certificate for FIDBANK Capital Trust I
(incorporated herein by reference to Exhibit 4.4 of BancShares'
Amendment No. 3 to Registration Statement No. 333-62225 filed with the
SEC on May 25, 1999)
4.5 Form of Guarantee Agreement (incorporated herein by reference to
Exhibit 4.5 of BancShares' Amendment No. 3 to Registration Statement
No. 333-62225 filed with the SEC on May 25, 1999)
4.6 Form of Junior Subordinated Indenture between BancShares and Bankers
Trust Company, as
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Debenture Trustee (incorporated herein by reference to Exhibit 4.6 of
BancShares' Amendment No. 3 to Registration Statement No. 333-62225
filed with the SEC on May 25, 1999)
4.7 Form of Junior Subordinated Debenture (incorporated herein by
reference to Exhibit 4.7 of BancShares' Amendment No. 3 to
Registration Statement No. 333-62225 filed with the SEC on May 25,
1999)
*10.1 Employee Death Benefit and Post-Retirement Noncompetition and
Consultation Agreement between Billy T. Woodard and The Fidelity Bank
(incorporated by reference to Exhibit 10.1 of BancShares' Registration
Statement No. 333-62225 filed with the SEC on August 26, 1998)
*10.2 First Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Billy T. Woodard and
The Fidelity Bank (incorporated by reference to Exhibit 10.2 of
BancShares' Registration Statement No. 333-62225 filed with the SEC on
August 26, 1998)
*10.3 Employee Death Benefit and Post-Retirement Noncompetition and
Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity
Bank (incorporated by reference to Exhibit 10.3 of BancShares'
Registration Statement No. 333-62225 filed with the SEC on August 26,
1998)
*10.4 First Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Haywood A. Lane,
Jr., and The Fidelity Bank (incorporated by reference to Exhibit 10.4
of BancShares' Registration Statement No. 333-62225 filed with the SEC
on August 26, 1998)
*10.5 Agreement for Banking Support Services (incorporated by reference to
Exhibit 10.5 of BancShares' Amendment No. 2 to Registration Statement
No. 333-62225 filed with the SEC on April 23, 1999)
*10.6 Second Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Billy T. Woodard and
The Fidelity Bank (incorporated by reference to Exhibit 10.6 of
BancShares' Amendment No. 2 to Registration Statement No. 333-62225
filed with the SEC on April 23, 1999)
*10.7 Second Amendment to Employee Death Benefit and Post-Retirement
Noncompetition and Consultation Agreement between Haywood A. Lane,
Jr., and The Fidelity Bank (incorporated by reference to Exhibit 10.7
of BancShares' Amendment No. 2 to Registration Statement No. 333-62225
filed with the SEC on April 23, 1999)
- ----------
* Denotes a management contract or compensatory contract or arrangement.
- ----------
(a) No reports on Form 8-K were filed during the quarter ended September
30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY BANCSHARES (N.C.), INC.
Dated: November 9, 2001 By:/s/ Mary A. Woodard
===============================
Mary A. Woodard
Chief Financial Officer and Treasurer
15