UNITED STATES
SECURITIES AND EXCHAGE 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, 1999
Commission File Number: 001-15089
Fidelity BancShares (N.C.), Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 56-1586543
-------- ----------
(state or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
100 South Main Street, Fuquay-Varina, North Carolina 27526
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(919) 552-2242
- --------------------------------------------------------------------------------
(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 ninety days.
Yes [ ] No [X]
Common Stock - $25 Par Value, - 28,170 shares
- --------------------------------------------------------------------------------
(Number of shares outstanding, by class, as of November 10, 1999)
INDEX
PAGE(S)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1999,
December 31, 1998, and September 30, 1998 4
Consolidated Statements of Income for the three-month and
nine-month periods ended September 30, 1999 and
September 30, 1998 5
Consolidated Statements of Changes in Shareholders' Equity
for the nine-month periods ended September 30, 1999 and
September 30, 1998 6-7
Consolidated Statements of Cash Flows for the nine-month periods
ended September 30, 1999 and September 30, 1998 8
Notes to Consolidated Financial Statements 9-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-24
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25-26
Item 6. Exhibits and Reports on Form 8-K 27
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
----------------- ------------------ ------------------
(unaudited) (unaudited)
ASSETS
Cash and due from banks $ 60,995,994 $ 31,137,382 $ 25,117,589
Federal funds sold 36,350,000 87,050,000 47,600,000
----------------- ------------------ ------------------
Total cash and cash equivalents 97,345,994 118,187,382 72,717,589
Investment securities:
Held to maturity (estimated fair value of $141,633,497,
$90,567,934, and $102,771,646, respectively) 143,021,548 90,146,476 102,086,458
Available for sale (cost of $2,644,600) 8,439,752 9,608,000 10,074,502
----------------- ------------------ ------------------
Total investment securities 151,461,300 99,754,476 112,160,960
----------------- ------------------ ------------------
Loans 535,869,316 439,207,586 398,033,174
Allowance for loan losses (4,802,454) (4,601,000) (3,675,170)
----------------- ------------------ ------------------
Loans, net 531,066,862 434,606,586 394,358,004
----------------- ------------------ ------------------
Federal Home Loan Bank of Atlanta stock, at cost 2,059,300 1,862,402 1,862,400
Premises and equipment, net 30,536,041 24,877,879 23,146,070
Accrued interest receivable 4,349,615 3,651,655 2,860,377
Intangible assets 14,178,389 10,395,185 6,490,003
Other assets 1,714,332 798,698 813,424
----------------- ------------------ ------------------
Total assets $ 832,711,833 $ 694,134,263 $ 614,408,827
================= ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand deposits $ 106,656,737 $ 87,883,295 $ 79,152,164
Savings and interest-bearing deposits 254,738,033 218,615,950 190,509,424
Time deposits 345,733,431 303,147,090 262,602,049
----------------- ------------------ ------------------
Total deposits 707,128,201 609,646,335 532,263,637
Short-term borrowings 26,796,416 11,617,344 10,627,343
Long-term borrowings 23,000,000 - -
Accrued interest payable 4,624,758 4,123,464 3,636,051
Other liabilities 2,776,574 3,938,944 4,100,126
----------------- ------------------ ------------------
Total liabilities 764,325,949 629,326,087 550,627,157
----------------- ------------------ ------------------
Commitments and contingencies
Shareholders' equity
Common stock ($25 par value; 29,200 shares
authorized; 28,170, 28,410, and 28,410 shares
issued and outstanding, respectively) 704,250 710,250 710,250
Surplus 6,198,366 6,251,174 6,251,174
Accumulated other comprehensive income 3,483,373 4,186,818 4,466,992
Retained earnings 57,999,895 53,659,934 52,353,254
----------------- ------------------ ------------------
Total shareholders' equity 68,385,884 64,808,176 63,781,670
----------------- ------------------ ------------------
Total liabilities and shareholders' equity $ 832,711,833 $ 694,134,263 $ 614,408,827
================= ================== ==================
See accompanying notes to consolidated financial statements.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- -----------------------------------------
1999 1998 1999 1998
------------------ -------------------- ------------------- --------------------
(unaudited) (unaudited)
Interest income:
Interest and fees on loans $ 11,678,783 $ 9,616,734 $ 32,720,429 $ 27,586,957
Interest and dividends on investment
securities:
Non taxable interest income - - - 21,840
Taxable interest and dividend income 2,431,353 1,514,086 5,861,858 4,830,188
Interest on federal funds sold 238,440 584,577 1,210,771 1,710,662
---------------- ---------------- ---------------- ----------------
Total interest income 14,348,576 11,715,397 39,793,058 34,149,647
---------------- ---------------- ---------------- ----------------
Interest expense:
Deposits 5,443,695 4,859,982 15,480,680 14,354,929
Short-term borrowings 193,139 107,805 428,052 299,552
Long-term borrowings 489,940 - 575,639 -
---------------- ---------------- ---------------- ----------------
Total interest expense 6,126,774 4,967,787 16,484,371 14,654,481
---------------- ---------------- ---------------- ----------------
Net interest income 8,221,802 6,747,610 23,308,687 19,495,166
Provision for loan losses 300,000 150,000 900,000 330,000
---------------- ---------------- ---------------- ----------------
Net interest income after provision for
loan losses 7,921,802 6,597,610 22,408,687 19,165,166
---------------- ---------------- ---------------- ----------------
Noninterest income:
Service charges on deposit accounts 751,292 645,824 2,139,977 1,858,704
Other service charges, commissions and fees 483,639 488,534 1,581,115 1,357,594
Gain on sale of mortgage servicing rights - - - 507,456
Other income 16,018 19,858 42,231 55,930
---------------- ---------------- ---------------- ----------------
Total noninterest income 1,250,949 1,154,216 3,763,323 3,779,684
---------------- ---------------- ---------------- ----------------
Noninterest expense:
Salaries and employee benefits 3,144,608 2,381,053 9,168,962 6,800,482
Occupancy and equipment 1,204,680 973,301 3,100,576 2,536,811
Data processing 583,138 358,563 1,354,714 1,015,941
Other 1,325,578 1,082,478 3,725,686 2,839,221
---------------- ---------------- ---------------- ----------------
Total noninterest expense 6,258,004 4,795,395 17,349,938 13,192,455
---------------- ---------------- ---------------- ----------------
Net income before income taxes 2,914,747 2,956,431 8,822,072 9,752,395
Income tax expense 962,100 1,050,500 3,381,000 3,636,984
---------------- ---------------- ---------------- ----------------
Net income $ 1,952,647 $ 1,905,931 $ 5,441,072 $ 6,115,411
================ ================ ================ ================
Per share information:
Net income $ 69.32 $ 67.09 $ 192.16 $ 215.26
Cash dividends declared $ 8.00 $ 8.00 $ 24.00 $ 24.00
Weighted average shares outstanding 28,170 28,410 28,316 28,410
See accompanying notes to consolidated financial statements.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Accumulated
Common Stock other
------------------------- comprehensive Retained
Shares Amount Surplus income earnings
---------- ------------- --------------- ---------------- ----------------
Balance December 31, 1997 28,410 $ 710,250 $ 6,251,174 $ 5,235,996 $ 46,919,683
Net income 6,115,411
Cash dividends ($24.00 per share) (681,840)
Unrealized loss on securities available
for sale, net of deferred tax benefit of
$509,619 (769,004)
------------ ------------ ------------ ------------ ------------
Comprehensive income
Balance September 30, 1998 28,410 710,250 6,251,174 4,466,992 52,353,254
------------ ------------ ------------ ------------ ------------
Balance December 31, 1998 28,410 710,250 6,251,174 4,186,818 53,659,934
Net income 5,441,072
Cash dividends ($24.00 per share) (679,920)
Purchase and retirement of common stock (240) (6,000) (52,808) (421,191)
Unrealized loss on securities available
for sale, net of deferred tax benefit of
$464,803 (703,445)
------------ ------------ ------------ ------------ ------------
Comprehensive income
Balance September 30, 1999 28,170 $ 704,250 $ 6,198,366 $ 3,483,373 $ 57,999,895
============ ============ ============ ============ ============
Total
Comprehensive shareholders'
income equity
---------------- -----------------
Balance December 31, 1997 $ 59,117,103
Net income $ 6,115,411 6,115,411
Cash dividends ($24.00 per share) (681,840)
Unrealized loss on securities available
for sale, net of deferred tax benefit of
$509,619 (769,004) (769,004)
------------ ------------
Comprehensive income $ 5,346,407
============
Balance September 30, 1998 63,781,670
------------
Balance December 31, 1998 64,808,176
Net income $ 5,441,072 5,441,072
Cash dividends ($24.00 per share) (679,920)
Purchase and retirement of common stock (479,999)
Unrealized loss on securities available
for sale, net of deferred tax benefit of
$464,803 (703,445) (703,445)
------------ ------------
Comprehensive income $ 4,737,627
============
Balance September 30, 1999 $ 68,385,884
============
See accompanying notes to consolidated financial statements.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
------------- -------------
(UNAUDITED)
Cash flows from operating activities:
Net income $ 5,441,072 $ 6,115,411
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,236,270 1,736,731
Amortization (accretion) on investment securities 117,617 (4,909)
Gain on sale of premises and equipment (2,000) (10,000)
Provision for loan losses 900,000 330,000
Origination of loans held for sale (11,522,750) (12,500,450)
Proceeds from sales of loans held for sale 11,560,040 12,546,372
Gain on sale of loans held for sale (37,290) (45,922)
(Increase) decrease in accrued interest receivable (697,960) 1,208,667
(Increase) decrease in other assets (915,634) 27,715
Increase (decrease) in other liabilities (697,567) 324,102
Increase in accrued interest payable 501,294 332,604
------------- -------------
Net cash provided by operating activities 6,883,092 10,060,321
------------- -------------
Cash flows from investing activities:
Purchase of securities held to maturity (102,996,900) (65,153,906)
Return of capital on securities available for sale -- 456,000
Proceeds from maturities and issuer calls of securities held to maturity 50,004,211 95,203,396
Purchase of FHLB of Atlanta stock (196,898) (59,100)
Net increase in loans (69,601,832) (40,582,551)
Purchases of premises and equipment (6,168,555) (3,562,756)
Proceeds from sale of premises and equipment 2,000 10,000
Net cash received on purchases of bank and branches 66,305,756 --
------------- -------------
Net cash used by investing activities (62,652,218) (13,688,917)
------------- -------------
Cash flows from financing activities
Net increase (decrease) in deposits (2,091,415) 27,026,567
Net increase (decrease) in short-term borrowings 15,179,072 (423,972)
Issuance of long-term borrowings 23,000,000 --
Cash dividends paid (679,920) (681,840)
Purchase and retirement of common stock (479,999) --
------------- -------------
Net cash provided by financing activities 34,927,738 25,920,755
------------- -------------
Net increase (decrease) in cash and cash equivalents (20,841,388) 22,292,159
Cash and cash equivalents at beginning of the period 118,187,382 50,425,430
------------- -------------
Cash and cash equivalents at end of the period $ 97,345,994 $ 72,717,589
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 15,983,077 $ 9,225,186
============= =============
Cash paid during the period for income taxes $ 3,462,959 $ 3,193,126
============= =============
Supplemental disclosures of noncash financing and and investing activities:
Unrealized losses on available-for-sale
securities, net of deferred tax benefit of $464,803
and $509,619 respectively $ (703,445) $ (769,004)
============= =============
See accompanying notes to consolidated financial statements.
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 60 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 generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements.
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 generally accepted accounting principles 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 financial
statements and notes included in the Fidelity BancShares (N.C.), Inc.
Registration Statement on Form S-1. Certain amounts for prior periods have been
reclassified to conform with statement presentations for 1999. 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 applicable to
common shares by the weighted average number of shares outstanding during the
period. For all periods presented, BancShares had no potential common stock.
NOTE 3. Allowance for Loan Losses
A summary of the allowance for loan losses follows:
NOTE 3 INSERT FOR FINANCIAL STATEMENT FOOTNOTES.
(Unaudited)
Nine months ended September 30,
-------------------------------------
1999 1998
-------------- --------------
Balance at beginning of year $ 4,601,000 $ 4,144,752
Provision for loan losses 900,000 330,000
Allowance for loan losses on purchased loans 280,000 0
Loans charged off (1,262,771) (1,423,789)
Loan recoveries 284,225 624,207
-------------- --------------
Balance at end of the period $ 4,802,454 $ 3,675,170
============== ==============
Note 4. Long Term Borrowings
The $23.0 million long-term obligations at June 30, 1999 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 June 30,
2004. The sole asset of the Trust is $23.0 million of 8.50% Junior Subordinated
Debentures of BancShares due 2029. Considered together, the undertakings
constitute a full and unconditional guarantee by BancShares of the Trust's
obligations under the Capital Trust Securities.
Note 5. Acquisition of Branches
On August 20, 1999, the Bank purchased seven branches from First-Citizens Bank &
Trust Company ("FCB"), a related party. Loans and deposits acquired were
approximately $28,038,000 and $99,573,000, respectively. An intangible asset of
approximately $4,427,000 resulted from this purchase.
TABLE I.
FINANCIAL SUMMARY
(QUARTERLY INFORMATION)
1999 1998
----------------------------------- -----------------------
THIRD SECOND FIRST FOURTH THIRD
(thousands, except share and per share data QUARTER QUARTER QUARTER QUARTER QUARTER
(unaudited)) ---------------------- --------- --------- ---------
SUMMARY OF OPERATIONS
Interest income $ 14,349 13,059 $ 12,386 $ 12,420 $ 11,716
Interest expense 6,127 5,220 5,138 5,237 4,968
--------- --------- --------- --------- ---------
Net interest income 8,222 7,839 7,248 7,183 6,748
Provision for loan losses 300 300 300 300 150
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 7,922 7,539 6,948 6,883 6,598
Non interest income 1,251 1,251 1,261 1,697 1,154
Non interest expense 6,258 5,563 5,529 6,230 4,795
--------- --------- --------- --------- ---------
Net income before income taxes 2,915 3,227 2,680 2,350 2,957
Income taxes 962 1,358 1,061 820 1,051
--------- --------- --------- --------- ---------
Net income $ 1,953 1,869 $ 1,619 $ 1,530 $ 1,906
========= ========= ========= ========= =========
SELECTED PERIOD-END BALANCES
Total assets $ 832,712 728,432 $ 701,534 $ 694,134 $ 614,409
Investment securities and fed funds sold 187,811 159,615 181,169 186,804 159,761
Loans, gross 535,869 479,322 458,962 439,208 398,033
Interest-earning assets 725,740 640,996 642,190 627,874 559,657
Deposits 707,128 613,031 612,244 609,646 532,264
Interest-bearing liabilities 650,268 558,005 538,929 533,380 463,739
Shareholders' equity $ 68,386 66,857 $ 65,647 $ 64,808 $ 63,782
Common shares outstanding 28,170 28,170 28,410 28,410 28,410
========= ========= ========= ========= =========
SELECTED AVERAGE BALANCES
Total assets $ 723,229 703,043 $ 687,866 $ 671,713 $ 598,606
Investment securities and fed funds sold 165,402 172,152 173,944 184,043 153,049
Loans, gross 505,844 471,391 452,637 425,017 394,063
Interest-bearing assets 673,237 643,792 628,457 610,922 548,975
Deposits 658,449 610,277 602,031 585,547 516,993
Interest-bearing liabilities 604,424 539,539 532,770 513,281 453,872
Shareholders' equity $ 67,274 66,077 $ 64,945 $ 65,269 $ 63,253
Common shares outstanding 28,170 28,370 28,410 28,410 28,410
========= ========= ========= ========= =========
PROFITABILITY RATIOS
Return (annualized) on average total assets 1.08% 1.06% 0.94% 0.91% 1.27%
Return (annualized) on average shareholders' equity 11.61 11.31 9.97 9.38 12.05
Dividend payout ratio 11.62 12.15 14.04 14.85 11.92
========= ========= ========= ========= =========
LIQUIDITY AND CAPITAL RATIOS (AVERAGES)
Loans to deposits 76.82% 77.24% 75.18% 72.58% 76.22%
Shareholders' equity to total assets 9.30 9.40 9.44 9.72 10.57
========= ========= ========= ========= =========
PER SHARE OF COMMON STOCK
Net income $ 69.32 65.90 $ 56.98 $ 53.85 $ 67.23
Cash dividends 8.00 8.00 8.00 8.00 8.00
Book value 2,427.62 2,373.34 2,310.70 2,281.17 2,245.05
========= ========= ========= ========= =========
ASSET QUALITY RATIOS
Nonperforming assets to total gross loans
and other real estate owned 0.00% 0.01% 0.01% 0.01% 0.01%
Annualized net charge-offs (recoveries) to
average loans 0.62 0.15 0.02 (0.59) 0.19
Total allowance for loan losses to total loans 0.90 1.04 1.06 1.05 0.92
========= ========= ========= ========= =========
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS - THIRD QUARTER
TABLE 2
1999 1998
------------------------------ ------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- -------- ------ -------- -------- ------
INTEREST EARNING ASSETS
Loans $505,844 $ 11,679 9.16% $394,063 $ 9,617 9.68%
Taxable investment security 145,196 2,358 6.44% 102,079 1,452 5.64%
Federal funds sold 13,601 239 6.97% 40,789 585 5.69%
Other 8,596 73 3.37% 12,044 62 2.04%
-------- -------- ---- -------- -------- ----
TOTAL INTEREST EARNING ASSETS 673,237 14,349 8.46% 548,975 11,716 8.47%
-------- -------- ---- -------- -------- ----
NONINTEREST EARNING ASSETS
Cash and due from banks 57,367 18,385
Premises and equipment 28,993 23,012
Other 18,360 8,234
-------- --------
$777,957 $598,606
======== ========
INTEREST BEARING LIABILITIES
Demand deposits $182,508 $ 1,186 2.58% $ 75,392 $ 1,019 5.36%
Savings deposits 55,119 240 1.73% 45,529 286 2.49%
Time deposits 323,191 4,018 4.93% 323,066 3,555 4.37%
Short Term borrowings 20,605 193 3.72% 9,885 108 4.33%
Long Term borrowings 23,001 490 8.45% -- -- --
-------- -------- ---- -------- -------- ----
TOTAL INTEREST BEARING LIABILITIES 604,424 6,127 4.02% 453,872 4,968 4.34%
-------- -------- ---- -------- -------- ----
NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits 97,631 73,006
Other 8,628 8,475
Shareholders' equity 67,274 63,253
-------- --------
$777,957 $598,606
======== ========
Interest rate spread 4.44% 4.13%
======== ========
Net interest income and net interest margin $8,222 4.85% $ 6,748 4.88%
======== ======== ======== ========
INCREASE (DECREASE) DUE TO:
--------------------------------
Yield/ Total
Volume Rate Change
-------- -------- --------
INTEREST EARNING ASSETS
Loans $ 2,727 $ (516) $ (149)
Taxable investment security 613 206 87
Federal funds sold (390) 132 (88)
Other (18) 40 (11)
-------- -------- --------
TOTAL INTEREST EARNING ASSETS 2,932 (138) (161)
-------- -------- --------
NONINTEREST EARNING ASSETS
Cash and due from banks
Premises and equipment
Other
INTEREST BEARING LIABILITIES
Demand deposits 1,447 (528) (752)
Savings deposits 60 (87) (19)
Time deposits 1 456 6
Short Term borrowings 117 (15) (17)
Long Term borrowings -- -- 490
-------- -------- --------
TOTAL INTEREST BEARING LIABILITIES 1,625 (174) (292)
-------- -------- --------
NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits
Other
Shareholders' equity
Interest rate spread
Net interest income and net interest margin 1,307 36 131
======== ======== ========
CONSOLIDATED TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS - NINE MONTHS
TABLE 3
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-------------------------------- ---------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- -------- ---- -------- -------- ----
INTEREST EARNING ASSETS
Loans $476,750 $ 32,720 9.18% $378,416 $ 27,587 9.75%
Taxable investment security 128,804 5,650 5.86% 107,810 4,630 5.74%
Non taxable inv sec -- -- #DIV/0! 762 33 5.79%
Federal funds sold 32,907 1,211 4.92% 41,554 1,711 5.51%
Other 10,142 212 2.79% 13,420 200 1.99%
-------- -------- ---- -------- -------- ----
TOTAL INTEREST EARNING ASSETS 648,603 B 39,793 8.20% 541,962 34,161 8.43%
-------- -------- ---- -------- -------- ----
NONINTEREST EARNING ASSETS
Cash and due from banks 34,470 17,834
Premises and equipment 27,374 22,267
Other 12,782 7,544
-------- --------
$723,229 $589,607
======== ========
INTEREST BEARING LIABILITIES
Demand deposits $171,827 $ 3,164 2.46% $111,166 $ 2,877 3.46%
Savings deposits 52,650 724 1.84% 45,590 848 2.49%
Time deposits 309,433 11,592 5.01% 284,104 10,630 5.00%
Short Term borrowings 16,139 428 3.55% 9,205 300 4.36%
Long Term borrowings 9,099 576 8.46% -- -- --
-------- -------- ---- -------- -------- ----
TOTAL INTEREST BEARING LIABILITIES 559,148 16,484 3.94% 450,065 14,655 4.35%
-------- -------- ---- -------- -------- ----
NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits 89,852 68,637
Other 8,126 8,854
Shareholders' equity 66,103 62,051
-------- --------
$723,229 $589,607
======== ========
Interest rate spread 4.26% 4.08%
==== ====
Net interest income and net interest margin $23,309 4.80% $19,506 4.81%
======= ==== ======= ====
INCREASE (DECREASE) DUE TO:
---------------------------------
Yield/ Total
Volume Rate Change
-------- -------- --------
INTEREST EARNING ASSETS
Loans $ 7,171 $ (1,613) $ (425)
Taxable investment security 901 97 22
Non taxable inv sec (33) (33) 33
Federal funds sold (356) (183) 39
Other (49) 80 (19)
-------- -------- --------
TOTAL INTEREST EARNING ASSETS 7,634 (1,652) (350)
-------- -------- --------
NONINTEREST EARNING ASSETS
Cash and due from banks
Premises and equipment
Other
INTEREST BEARING LIABILITIES
Demand deposits 1,570 (831) (452)
Savings deposits 131 (222) (33)
Time deposits 947 21 (6)
Short Term borrowings 226 (56) (42)
Long Term borrowings -- -- 576
-------- -------- --------
TOTAL INTEREST BEARING LIABILITIES 2,874 (1,088) 43
-------- -------- --------
NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits
Other
Shareholders' equity
Interest rate spread
Net interest income and net interest margin 4,760 (564) (393)
===== ==== ====
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, 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 sixty branches in
North Carolina.
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
NET INCOME. In the first nine months of 1999, BancShares' net income
decreased $674,000 from $6.1 million in the first nine months of 1998 to $5.4
million in the first nine months of 1999, a decrease of 11.03%. Net income for
the third quarter of 1999 increased $47,000 or 2.45% when compared to the same
period of 1998. The reduction in net income for the nine months ended September
30, 1999 was largely due to increased operating expenses associated with DE NOVO
branch openings during 1999 and 1998 and branch purchases during 1999 and 1998
combined with the absence of a $507,456 non-recurring gain on the sale of
mortgage servicing rights during the first quarter of 1998. BancShares purchased
seven branches from First-Citizens Bank & Trust Company ("FCB") during August of
1999. Loans and deposits acquired were approximately $28,038,000 and
$99,573,000, respectively. An intangible asset of $4,427,000 resulted from this
purchase. BancShares is likely to continue to incur additional operating and
capital expenses during 1999 as a result of its expansion program, and these
increased expenses could cause BancShares' 1999 earnings to decline from
earnings in 1998.
Net income per share for the first nine months of 1999 was $192.16, a
decrease of $23.10 per share, or 10.73%, from $215.26 per share in 1998. For the
third quarter of 1999, net income per share was $69.32, an increase of $2.23 per
share or 3.32%, from $67.09 per share for the third quarter of 1998. The return
on average equity for the nine months ended September 30, 1999 was 10.97%,
compared to 13.14% for the nine months ended September 30, 1998. For the third
quarter of 1999 and 1998, return on average equity was 11.61% and 12.05%,
respectively. Return on average assets for the nine months ended September 30,
1999 and 1998 was 1.00% and 1.38%, respectively. For the third quarter of 1999
and 1998, return on average assets was 1.08% and 1.27%, 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 presented in
Table 2 for the third quarter and Table 3 for the first nine months of 1999 and
1998.
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 nine months ended September 30, 1999, net
interest income was $23.3 million compared to $19.5 million for the same period
of 1998, an increase of $3.8 million, or 19.56%. The net interest margin for the
nine months ended September 30, 1999 was 4.80%, a slight decline from the 4.81%
for the same period of 1998. Net interest income and net interest margin for
third quarter 1999 and 1998 were $8.2 million and 4.85% and $6.7 million and
4.88%, respectively.
Interest income for the first nine months of 1999 was $39.8 million
compared to $34.1 million in 1998, an increase of 16.53%. The 1999 increase in
interest income is primarily attributable to increased average loan balances
outstanding from $378.4 million to $476.8 million from September 30, 1998 to
September 30, 1999, an increase of 25.99%. Loan growth is due to acquired
branches, de novo branch openings, and growth within the existing branch
network. Earnings from investments and federal funds sold provided the balance
of interest income, contributing $7.1 million and $6.6 million for the nine
months ended September 30, 1999 and 1998, respectively. Average interest-earning
assets for the first nine months of 1999 increased to $648.6 million, a 19.68%
increase, from $542.0 million in 1998. The yield on interest-earnings assets for
the first nine months of 1999 and 1998 was 8.20% and 8.43%, respectively. Trends
for the third quarter 1999 compared to 1998 were similar and are shown in Table
2 to the consolidated financial statements.
Interest expense for the first nine months of 1999 was $16.5 million
compared to $14.7 million in 1998, an increase of 12.49%. The increase in 1999
interest expense is primarily attributable to increased average deposit
balances. Average deposits increased $93.1 million or 21.11% for the first nine
months of 1999 compared to 1998. Borrowings contributed $1.0 million in interest
expense during the first nine months of 1999 compared to $226,000 in 1998. The
increase in borrowings was due to the Trust's $23.0 million 8.50% offering
during the second quarter of 1999, (see the notes to the consolidated financial
statements). There were no long-term borrowings in 1998. Average
interest-bearing liabilities increased $109.1 million or 24.24%, from $559.1
million in 1998 to $450.1 million in 1999. The yield on interest-bearing
liabilities for the first nine months of 1999 and 1998 was 3.94% and 4.35%,
respectively. Trends for the third quarter 1999 compared to 1998 were similar
and are shown in Table 2 to the consolidated financial statements.
ASSET QUALITY AND PROVISION FOR LOAN LOSSES. For the nine months ended
September 30, 1999 and 1998, management added $900,000 and $330,000,
respectively as additions to the allowance for loan losses. The increased
provision was prompted by the strong growth within the loan portfolio, as
mentioned above, and an increase in net charge-off's during 1999 compared to
1998. During the nine months of 1999 management charged-off loans totaling
$1,263,000 and received recoveries of $284,000, resulting in net charge-offs of
$979,000. During the same period in 1998, $1,424,000 in loans were charged-off
and recoveries of $624,000 were received resulting in net charge-offs of
$808,000. The following table presents BancShares' comparative asset quality
ratios:
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
Ratio of annualized net loans charged off to average loans 0.26 % 0.04 %
Allowance for loan losses to loans 0.90 1.05
Non-performing assets to total gross loans and other real estate owned 0.00 0.03
Management considers the September 30, 1999 allowance for loan losses
adequate to cover the losses and risks inherent in the loan portfolio at
September 30, 1999 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, 1999. 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 loan losses.
Such agencies may require the Bank to recognize adjustments to the allowance
based on the examiners' judgements about information available to them at the
time of their examinations.
NONINTEREST INCOME. Noninterest income decreased $16,000 or 0.43% for
the nine month period ended September 30, 1999 compared to the same period of
1998. Excluding the one time gain on the sale of mortgage servicing rights of
$507,456 in 1998, noninterest income for the first nine months of 1999 would
have been $491,000 or 15.00% higher than the first nine months of 1998.
Noninterest income was higher within service charges on deposit accounts as
average deposit balances increased 21.11% for the first nine months of 1999 over
1998 due to expansion of the branch network through acquisitions, DE NOVO branch
openings, and internal growth. Additionally, other service charges, commission
and fees increased $224,000 or 16.46% from $1.6 million for the first nine
months of 1999 compared to $1.4 million for the same period of 1998, due to
increased miscellaneous customer fees. For the third quarter of 1999,
noninterest income increased $97,000 or 8.38% over the same period of 1998.
Noninterest income does not include any securities gains for either nine month
or quarterly period.
NONINTEREST EXPENSE. Noninterest expense increased $4.2 million or
31.51%, from $13.2 million for the nine months ended September 30, 1998 to $17.3
million for the nine months ended September 30, 1999. For the third quarter,
noninterest expense increased $1.5 million or 30.50% from $4.8 million in 1998
to $6.3 million in 1999. Noninterest expense increases are primarily
attributable to increased personnel expenses of $2.4 million, occupancy and
equipment expenses of $564,000, data processing expenses of $339,000, and other
expense increases of $886,000 during the first nine months of 1999 compared to
1998. These increases are principally due to growth in the existing branch
network through acquisitions and internal growth. Similar increases occurred in
the third quarter of 1999 when compared to 1998.
INCOME TAXES. In the nine months ended September 30, 1999, BancShares
had income tax expense of $3.4 million, a decrease of $256,000 or 7.04%, from
$3.6 million in the prior year period. The resulting effective income tax rates
based on the accruals for the nine months ended September 30, 1999 and 1998 were
38.32% and 37.29%, respectively. For the third quarter, BancShares had income
tax expense of $962,000, a decrease of $88,000 or 8.42% from $1.1 million in the
third quarter of 1998. The effective income tax rates for the third quarters of
1999 and 1998 were 33.01% and 35.53%, 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,
have 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, 1999 was 9.48%.
At December 31, 1998, BancShares' leverage capital ratio was 7.65%.
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, 1999, the Total Capital
Ratio was 12.96%. At December 31, 1998, the Total Capital Ratio was 11.87%.
The following table presents capital adequacy calculations and ratios
of BancShares:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
Tier 1 capital $ 72,695 $ 50,656
Total capital 78,779 58,381
Tier 1 capital ratio 11.96 % (1) 10.30 % (1)
Total capital ratio 12.96 (1) 11.87 (1)
Leverage capital ratio 9.48 (1) 7.65 (1)
(1) These ratios exceed the minimum required regulatory capital ratios.
At September 30, 1999 and December 31, 1998, the Bank 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 the Bank's assets resulting from acquisitions of branch
offices and the opening of DE NOVO branches has reduced, and is expected to
continue to reduce, the Bank's capital ratios. Between October 1998 and August
of 1999, the Bank purchased assets and assumed the deposit liabilities of twelve
branch offices of First-Citizens Bank & Trust Company ("FCB"), a related party.
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 cash and due from banks, federal funds sold
and investment securities available-for-sale. The liquidity ratio, which is
defined as cash plus short-term and marketable securities divided by deposits
and short-term liabilities, was 32.67% at September 30, 1999 and 34.85% at
December 31, 1998.
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, 1999 and 1998. 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.
Almost all jumbo deposit customers have other relationships with the Bank,
including savings, demand and other time deposits, and in some cases, loans. At
September 30, 1999 and December 31, 1998 jumbo time deposits represented 9.62%
and 9.63%, 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 AND INTEREST SENSITIVITY. Management is of the opinion that
as of September 30, 1999 there have been no material changes in BancShares'
market risk and interest sensitivity since December 31, 1998.
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, 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' plans to adopt this Statement on January 1,
2001, and does not anticipate any material effect on its consolidated financial
statements.
In October 1998, FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement allows mortgage
banking firms to account for certain securities and other interest retained
after securitizing mortgage loans that were held for sale based on the intent
and ability to hold or sell such investments. This statement is effective for
the first fiscal quarter beginning after December 15, 1998. Adoption of this
pronouncement did not have a material effect on BancShares' consolidated
financial statements.
Management is not aware of any other trends, events, uncertainties, or
current recommendations by regulatory authorities that will have or that are
reasonably likely to have a material effect on BancShares' liquidity, capital
resources or other operations.
YEAR 2000 ISSUE
INTRODUCTION.
The year 2000 ("Y2K") issue confronting BancShares and its suppliers,
customers, customers' suppliers and competitors centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems originally were programmed with six digit dates that provided only two
digits to identify the calendar year in the date field. With the impending new
millennium, these programs and computers could recognize "00" as the year 1900
rather than the year 2000. These problems may also arise from other sources as
well, such as the use of special codes and conventions in software that make use
of the date field.
Financial institution regulators recently have issued guidance
concerning the responsibilities of senior management and directors. The Federal
Financial Institutions Examination Council ("FFIEC") has issued several
interagency statements on Y2K Project Management Awareness. These statements
require financial institutions to, among other things, examine the Y2K
implications of their reliance on vendors and with respect to data exchange and
the potential impact of the Y2K issue on their customers, suppliers and
borrowers. These statements also require each federally regulated financial
institution to
survey its exposure, measure its risk and prepare a plan to address the Y2K
issue. In addition, the federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Y2K problems. The federal banking agencies
have asserted that Y2K testing and certification is a key safety and soundness
issue in conjunction with regulatory exams and, thus, that an institution's
failure to address appropriately the Y2K issue could result in supervisory
action, including the reduction of the institution's supervisory ratings, the
denial of applications for approval of mergers or acquisitions or the imposition
of civil money penalties.
RISKS.
Like most financial service providers, BancShares and its operations
may be significantly affected by the Y2K issue due to its dependence on
information technology and date-sensitive data. Computer hardware and software
and other equipment, both within and outside BancShares' direct control, and
third parties with whom BancShares electronically or operationally interfaces
(including without limitation its customers and third party vendors) could be
affected. If computer systems are not modified in order to be able to identify
the year 2000, many computer applications could fail or create erroneous
results. As a result, many calculations which rely on date field information,
such as interest, payment or due dates and other operating functions, could
generate results which are significantly misstated, and BancShares could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities. Likewise, under certain circumstances, a
failure to adequately address the Y2K issue could adversely affect the viability
of BancShares' suppliers and creditors and the creditworthiness of its
borrowers. Thus, if not adequately addressed, the Y2K issue could result in a
significant adverse impact on BancShares' operations and, in turn, its financial
condition and results of operations.
STATE OF READINESS.
During October 1997, BancShares developed its plan to address the Y2K
issue. A substantial portion of BancShares' data processing functions are
performed by FCB on its mainframe systems and/or on systems supported by FCB,
which also provides similar services to several other financial institutions.
Therefore, BancShares' plan for addressing the Y2K issue divides information
technology systems ("IT Systems") into groups which include (i) FCB's mainframe
systems used for processing BancShares' data ("Group A Systems"), (ii)
BancShares' non-mainframe systems which are supported by FCB ("Group B
Systems"), and (iii) BancShares' separate non-mainframe systems ("Group C
Systems"). BancShares' Y2K plan also addresses non-information technology system
("Non-IT Systems"). As to Group A Systems and Group B Systems, BancShares' Y2K
plan necessarily is designed to be implemented jointly with FCB. FCB has
retained an outside consultant to plan and direct its Y2K compliance efforts,
and BancShares participates in a committee made up of representatives of the
consultant, FCB and each of the financial institutions for which FCB provides
data processing services that meets periodically to monitor the status of FCB's
compliance efforts. Periodic progress reports are made to BancShares' Board of
Directors.
Separate from its Y2K plan, during 1997 the Bank installed new local
area networks at all of its offices. This installation had previously been
planned and was not made solely in response to the Y2K issue. However, the
timing was such that the new equipment, when acquired, was Y2K-ready, which
eliminated the need to include many issues relating to that equipment in
BancShares' Y2K plan.
The following paragraphs summarize the phases of Bancshares' Y2K plan:
ASSESSMENT PHASE. During the assessment phase, a Y2K corporate
inventory and business risk assessment was made (jointly with FCB in the case of
Group A Systems and Group B Systems, and separately in the case of Group C
Systems and Non-IT Systems) to quantify the extent of BancShares' Y2K exposure
and identify systems that required remediation. IT Systems identified as being
affected by the Y2K issue were designated as (i) "Priority 1" or "mission
critical" (where core operations could be sustained for up to three days in the
event of failure), (ii) "Priority 2" (where core operations could be sustained
for up to seven days in the event of failure), and (iii) "Priority 3" (where
core operations could be sustained for more than seven days in the event of a
failure). A general plan for dealing with each system was developed and
responsibilities for each system were assigned. This phase has been completed.
REMEDIATION AND TESTING. With respect to IT Systems, this phase
contemplates the implementation of modification, upgrades or system replacements
determined to be necessary to achieve Y2K compliance and the testing of modified
or upgraded systems to determine their functionality and operating capability.
FCB's outside consultant is responsible for coordinating necessary
modifications, upgrades or replacements, and testing with respect to Group A
Systems and Group B Systems. This phase has been completed as to all Group A
Systems and Group B Systems. As to Group C Systems, BancShares' staff is
coordinating remediation (which, in most cases, entails the installation of
upgrades provided by outside vendors) and testing, and this phase has been
completed as to substantially all systems (with completion of this phase as to
remaining systems scheduled to be completed during the fourth quarter of 1999).
VALIDATION. The validation phase contemplates intensive testing, in an
isolated environment, of the ability of new and modified systems, which have
been determined to be functional, to accurately process date sensitive data
beginning January 1, 2000. Validation testing as to Group A Systems and Group B
Systems, is being conducted by FCB's outside consultant and has been completed
as to all Group A Priority 1 Systems and Group B Priority 1 Systems. As to Group
C Systems, validation testing has been completed.
IMPLEMENTATION. Under BancShares' plan, once new and modified systems
were tested for functionality, they were being put into production before
validation testing was actually completed. All BancShares' Group A Systems and
Group B Priority 1 Systems currently are in production.
INTEGRATED TESTING. During 1999, primary emphasis is being placed on
continued testing to determine that Group A Systems, which have been or are
being tested independently, properly process year 2000 dates in an integrated
mainframe environment. That testing process was completed during early August
1999.
NON-IT SYSTEMS, LOAN CUSTOMERS AND THIRD PARTY SERVICE PROVIDERS.
Activities under BancShares' plan with respect to Non-IT Systems (including
security systems, office equipment, etc.), substantially all of which have been
categorized as Priority 3, primarily involve identifying potential Y2K problems
and insuring that outside vendors provide necessary upgrades or replacements.
Each system has been assigned to an officer of BancShares whose responsibility
it is to communicate with the vendor of that system and coordinate any necessary
remediation. Validation testing for Non-IT Systems I is complete.
During early 1998, BancShares identified those borrowing customers
whose existing aggregate borrowings from BancShares exceeded $500,000 and whose
businesses were of a nature that they could be adversely affected by the Y2K
issue. A meeting was held individually with each such borrowing customer to
assess the customer's plan for and progress toward addressing the Y2K issue, and
BancShares plans to schedule individual follow-up meeting with certain of those
customers during 1999. With respect to loans to new borrowers, BancShares has
assessed Y2K risk and steps being taken by those borrowers to address the Y2K
issue as part of the credit approval process.
COSTS.
BancShares is expensing all costs associated with required system
changes as those costs are incurred, and such costs are being funded through
operating cash flows. Because a substantial portion of BancShares' data
processing functions are performed by FCB on its mainframe system and/or on
systems supported by FCB, FCB is bearing a substantial portion of the expenses
related to the remediation and testing of systems that affect BancShares.
BancShares has budgeted $332,000 for its separate Y2K project costs. Expenses
expected to be incurred subsequent to June 30, 1999 are not considered material.
BancShares does not expect significant increases in future data processing costs
related to Y2K compliance.
CONTINGENCY PLANS.
During the assessment phase, BancShares began to identify a back-up or
contingency plan for each of its Priority 1 systems. Virtually all of
BancShares' Priory 1 systems are dependent upon third party vendors or service
providers, therefore, contingency plans with respect to system failures during
the remediation and validation phases included selecting a new vendor or service
provider and converting to their system. In the event a current vendor's system
fails during continued testing and it is determined that the vendor is unable or
unwilling to correct the failure, BancShares will convert to a new system from a
pre-selected list of prospective vendors. Together with FCB and the other
institutions for which FCB provides data processing services, BancShares is
assessing business risks associated with a Priority 1 Group A System or Group B
System failure on or after January 1, 2000 and business continuation plans for
dealing with such failures have been developed. BancShares has developed a "Year
2000 Business Contingency Plan", which includes contingency plans with respect
to Non-IT Systems and matters such as interruptions in electric or telephone
service or in deliveries of business supplies. While interruptions in certain
services could make it difficult or impossible for BancShares to conduct normal
operations, its contingency plans will include things such as increased
inventories of critical business forms and other supplies and methods of
providing for reduced operations until interrupted services are restored.
Validation testing of the "Year 2000 Business Contingency Plan" is complete.
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 judgements 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) During 1998, Bancshares filed a registration statement on form S-1. The
following information is provided pursuant to rule 463 and Item 701 of
regulation S-K:
(1) Effective date of Registration Statement on Form S-1: June
10, 1999 Commission file number: 333-62225
(2) Dare offering commenced: June 10, 1999
(3) (i) The offering terminated after the sale of all securities
registered.
(ii) Underwriters: Wheat First Union, a division of First Union
Capital Markets Corp.
(iii) Title of class of securities registered: Junior Subordinated
Deferrable Interest Debentures.
(iv) Amount registered: $23,000,000
Aggregate offering price of amount registered: $23,000,000
Amount Sold: $23,000,000
Aggregate offering price of amount sold: $23,000,000
(v) Estimated Expenses:
Underwriting discounts and commissions: $ 862,500
Finders' fees: -
Expenses paid to or for underwriters -
Other expenses: 278,194
------------
Total estimated expenses: $ 1,140,694
None of such expenses were paid to or for any of
BancShares' Directors, officers, or principal
shareholders.
(vi) Net offering proceeds to BancShares after deduction of total
expenses. $21,859,306
(vii) Application of net proceeds:
Construction of plant, building and facilities: $ -
Purchases and installation of machinery and equipment: $ -
Purchase of real estate: $ -
Acquisition of other businesses: $ -
Working capital: $ 20,000,000
Temporary investments (Federal Funds Sold): $ 1,859,306
None of such proceeds were paid by any of BancShares'
directors, officers or Principal shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Bancshares' financial data schedule is filed herewith as Exhibit 27.
(b) Not applicable.
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.
(registrant)
Dated: November 10, 1999 By: /s/ Mary A. Woodard
----------------------------------
Mary A. Woodard
Chief Financial Officer and Treasurer