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 quarterly period ended March 31, 2003
--------------
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 incorporation or organization) (I.R.S. Employer Identification Number)
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 ninety days.
Yes [X] No [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [_] No [X]
Common Stock - $25 Par Value, - 28,011 shares
- --------------------------------------------------------------------------------
(Number of shares outstanding, by class, as of May 12, 2003)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31,
-------------- --------------- --------------
2003 2002 2002
-------------- --------------- --------------
(unaudited) (unaudited,
Restated-see
Note 1)
Assets
Cash and due from banks $ 42,404,579 $ 47,809,871 $ 35,517,716
Interest bearing deposits in other banks 35,949,275 32,106,848 21,839,824
Overnight funds sold 44,000,000 50,800,000 45,600,000
-------------- --------------- --------------
Total cash and cash equivalents 122,353,854 130,716,719 102,957,540
-------------- --------------- --------------
Investment securities:
Held to maturity (estimated fair value of $120,168,201,
$94,622,654, and $130,507,130, respectively) 119,845,472 94,085,650 130,311,999
Available for sale (cost of $3,405,228, $3,468,310, and
$3,635,241, respectively) 11,610,313 11,512,609 12,082,716
-------------- --------------- --------------
Total investment securities 131,455,785 105,598,259 142,394,715
-------------- --------------- --------------
Loans 718,957,053 729,101,387 685,901,182
Allowance for loan losses (11,911,051) (11,838,076) (9,240,232
-------------- --------------- --------------
Loans, net 707,046,002 717,263,311 676,660,950
-------------- --------------- --------------
Federal Home Loan Bank of Atlanta stock, at cost 2,656,700 2,467,600 2,467,600
Premises and equipment, net 34,286,720 34,590,338 35,231,687
Accrued interest receivable 2,887,420 3,588,368 4,466,206
Intangible assets 16,925,782 17,002,830 17,233,976
Other assets 1,522,083 1,496,949 1,545,256
-------------- --------------- --------------
Total assets $1,019,134,346 $ 1,012,724,374 $ 982,957,930
============== =============== ==============
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand deposits $ 163,266,781 $ 156,932,202 $ 140,710,288
Savings and interest-bearing deposits 317,192,960 318,460,309 301,867,111
Time deposits 393,237,582 393,940,013 395,382,521
-------------- --------------- --------------
Total deposits 873,697,323 869,332,524 837,959,920
Short-term borrowings 22,671,696 22,591,378 26,892,069
Long-term borrowings 23,000,000 23,000,000 23,000,000
Accrued interest payable 3,027,174 3,515,541 5,067,368
Other liabilities 2,486,896 1,949,293 3,135,832
-------------- --------------- --------------
Total liabilities 924,883,089 920,388,736 896,055,189
-------------- --------------- --------------
Shareholders' equity:
Common stock ($25 par value; 29,200 shares
authorized; 28,011
shares issued and outstanding) 700,275 700,275 700,275
Surplus 6,163,380 6,163,380 6,163,380
Accumulated other comprehensive income 4,949,265 4,866,801 5,110,722
Retained earnings 82,438,337 80,605,182 74,928,364
-------------- --------------- --------------
Total shareholders' equity 94,251,257 92,335,638 86,902,741
-------------- --------------- --------------
Total liabilities and shareholders' equity $1,019,134,346 $ 1,012,724,374 $ 982,957,930
============== =============== ==============
See accompanying notes to consolidated financial statements.
3
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended March 31,
-------------------------------
2003 2002
------------ --------------
(Restated- see
Note 1)
Interest income:
Interest and fees on loans $ 11,896,832 $ 12,502,916
Interest and dividends on investment securities:
Taxable interest income 658,075 1,347,399
Dividend income 68,443 66,358
Interest on overnight funds sold 106,710 186,077
------------ ------------
Total interest income 12,730,060 14,102,750
------------ ------------
Interest expense:
Deposits 3,365,550 4,609,510
Short-term borrowings 62,713 65,577
Long-term borrowings 488,750 488,750
------------ ------------
Total interest expense 3,917,013 5,163,837
------------ ------------
Net interest income 8,813,047 8,938,913
Provision for loan losses 200,000 750,000
------------ ------------
Net interest income after provision for
loan losses 8,613,047 8,188,913
------------ ------------
Noninterest income:
Service charges on deposit accounts 1,589,544 1,565,137
Other service charges and fees 918,659 851,450
Other income 104,982 42,213
Loss on marketable equity securities (65,488) -
------------ ------------
Total noninterest income 2,547,697 2,458,800
------------ ------------
Noninterest expense:
Salaries and employee benefits 4,611,001 4,513,882
Occupancy and equipment 1,228,978 1,228,566
Data processing 858,928 784,983
Amortization of intangibles 77,048 77,048
Other expense 1,177,435 1,175,894
------------ ------------
Total noninterest expense 7,953,390 7,780,373
------------ ------------
Net income before income taxes 3,207,354 2,867,340
Income tax expense 1,150,111 1,026,892
------------ ------------
Net income $ 2,057,243 $ 1,840,448
============ ============
Per share information:
Net income $ 73.44 $ 65.68
Cash dividends declared $ 8.00 $ 8.00
Weighted average shares outstanding 28,011 28,023
See accompanying notes to consolidated financial statements.
4
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, 2001 28,026 $ 700,650 $ 6,166,681 $ 4,817,106 $ 73,345,948 $ 85,030,385
--------- --------- ----------- ------------ ------------ ------------
Net income (Restated- see -- -- -- -- 1,840,448 $ 1,840,448 1,840,448
Note 1)
Cash dividends
($8.00 per share) -- -- -- -- (224,208) (224,208)
Purchase and retirement
of common stock (15) (375) (3,301) -- (33,824) (37,500)
Unrealized gain on securities
available for sale, net of
deferred taxes of
$191,701 -- -- -- 293,616 -- 293,616 293,616
--------- --------- ----------- ------------ ------------ ------------- ------------
Comprehensive income $ 2,134,064
=============
Balance March 31, 2002 28,011 $ 700,275 $ 6,163,380 $ 5,110,722 $ 74,928,364 $ 86,902,741
========= ========= =========== ============ ============ ============
Balance December 31, 2002 28,011 $ 700,275 $ 6,163,380 $ 4,866,801 $ 80,605,182 $ 92,335,638
--------- --------- ----------- ------------ ------------ ------------
Net income -- -- -- -- 2,057,243 $ 2,057,243 2,057,243
Cash dividends
($8.00 per share) -- -- -- -- (224,088) (224,088)
Unrealized gain on securities
available for sale, net of
deferred taxes of
$63,510 -- -- -- 97,275 -- 97,275 97,275
Additional pension charge
related to unfunded pension
liability, net of deferred
taxes of $9,664 -- -- -- (14,811) -- (14,811) (14,811)
--------- --------- ----------- ------------ ------------ ------------- ------------
Comprehensive income $ 2,139,707
=============
Balance March 31, 2003 28,011 $ 700,275 $ 6,163,380 $ 4,949,265 $ 82,438,337 $ 94,251,257
========= ========= =========== ============ ============ ============
See accompanying notes to consolidated financial statements.
5
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31,
-------------------------------
2003 2002
---------- --------------
(Restated- see
Note 1)
Cash flows from operating activities:
Net income $ 2,057,243 1,840,448
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 643,553 699,408
(Accretion) amortization on investment securities (154,219) 144,366
Loss (gain) on disposition or abandonment of premises
and equipment 1,485 (12,947)
Provision for loan losses 200,000 750,000
Impairment loss on marketable equity securities 65,488 --
(Gain) loss on other real estate (57,324) 1,421
Decrease in accrued interest receivable 700,948 986,829
Decrease (increase) in other assets, net 16,977 (353,173)
Increase in other liabilities, net 430,494 1,021,543
Decrease in accrued interest payable (488,367) (1,190,555)
------------ -------------
Net cash provided by operating activities 3,416,278 3,887,340
------------ -------------
Cash flows from investing activities:
Purchase of securities held to maturity (99,605,666) (50,010,354)
Purchase of securities available for sale (3,166) (1,464)
Proceeds from sale of securities available for sale 759 --
Proceeds from maturities and issuer calls of
securities held to maturity 74,000,063 45,000,156
Proceeds from sales of other real estate owned and repossessed assets 219,000 --
Purchase of FHLB of Atlanta stock (189,100) (158,200)
Net decrease (increase) in loans 9,842,309 (17,756,679)
Purchase of premises and equipment (264,371) (265,658)
------------ -------------
Net cash used by investing activities (16,000,172) (23,192,199)
------------ -------------
Cash flows from financing activities:
Net increase (decrease) in deposits 4,364,799 (3,475,384)
Net increase (decrease) in short-term borrowings 80,318 (180,623)
Cash dividends paid (224,088) (224,208)
Purchase and retirement of common stock -- (37,500)
------------ -------------
Net cash provided (used) by financing activities 4,221,029 (3,917,715)
------------ -------------
Net decrease in cash and cash equivalents (8,362,865) (23,222,574)
Cash and cash equivalents at beginning of year 130,716,719 126,180,114
------------ -------------
Cash and cash equivalents at end of year $122,353,854 102,957,540
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 4,405,380 6,354,392
============ =============
Cash paid during the period for income taxes $ 1,899,047 1,696,995
============ =============
Supplemental disclosure of noncash financing and investing activities:
Unrealized gains on available-for-sale secuities, net of
deferred tax effects of $63,510 and $191,071, respectively $ 97,275 293,616
============ =============
Transfer of foreclosed loans to other real estate and repossessed assets $ 175,000 17,500
============ =============
See accompanying notes to consolidated financial statements.
6
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 62 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 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, including
the restatement of 2002 for the application of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of
Financial Accounting Standards No. 147, "Acquisitions of Certain Financial
Institutions" (see Note 2). All other 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 financial
statements and notes included in Fidelity BancShares (N.C.), Inc.'s Form 10K
filed with the Securities and Exchange Commission.
Note 2. Adoption of New Accounting Standards
In August 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143 (Statement 143),
"Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement cost. This
standard requires BancShares to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development and or normal use of the assets.
BancShares also is to record a corresponding increase to the carrying amount of
the related long-lived asset and to depreciate that cost over the life of the
asset. The liability is changed at the end of each period to reflect the passage
of time and changes in the estimated future cash flows underlying the initial
fair value measurement. This statement is effective for fiscal years beginning
after June 15, 2002. BancShares adopted SFAS No. 143 on January 1, 2003 with no
material effect on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of FASB Statement No.
123, "Accounting for Stock- Based Compensation." Statement No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. This Statement is effective for fiscal years
ending after December 15, 2002 and for interim periods beginning after December
15, 2002 with early application encouraged. BancShares does not expect to be
impacted by this Statement, as there currently are no stock options outstanding.
In November 2002, the Financial Accounting Standards Board issued Financial
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," which addresses the disclosure to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees. FIN 45
requires the guarantor to recognize a liability for the non-contingent component
of the guarantee, such as
7
the obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple elements. The disclosure requirements are effective
for interim and annual financial statements ending after December 15, 2002. The
initial recognition and measurement provisions are effective for all guarantees
within the scope of FIN 45 issued or modified after December 31, 2002.
BancShares issues standby letters of credit whereby BancShares guarantees
performance if a specified triggering event or condition occurs. The guarantees
generally mature within one year and may be automatically renewed depending on
the terms of the guarantee and the credit-worthiness of the customer. The
maximum potential amount of undiscounted future payments related to standby
letters of credit at March 31, 2003 is $3,509,000. At March 31, 2003, BancShares
has recorded no liability for the current carrying amount of the obligation to
perform as a guarantor, as such amounts are deemed immaterial.
In July 2001, the FASB issued Statement 141, "Business Combinations," and
Statement 142, "Goodwill and Other Intangible Assets." Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 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. Statement 142 requires 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 Statement 142. Statement 142 also requires 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 Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Upon adoption of Statement 142, BancShares reassessed the useful lives and
residual values of all identifiable intangible assets acquired in purchase
business combinations, and as a result was not required to make any necessary
amortization period adjustments. In addition, any intangible assets classified
as goodwill under Statement 142 were subjected to a transitional impairment test
during the first six months of 2002 based on the level of goodwill as of January
1, 2002. As a result of this testing, no impairment charges were recorded.
In October 2002, the FASB issued Statement of Financial Accounting Standards No.
147 (Statement 147), "Acquisitions of Certain Financial Institutions", which
addresses the financial accounting and reporting for the acquisition of all or
part of a financial institution. This standard removes certain acquisitions of
financial institutions from the scope of Statement of Financial Accounting
Standards No. 72 (Statement 72). This statement requires financial institutions
to reclassify goodwill, which was created from a qualified business acquisition,
from Statement 72 goodwill to goodwill subject to the provisions of Statement
142. The reclassified goodwill will no longer be amortized but will be subject
to an annual impairment test, pursuant to Statement 142. Statement 147 required
BancShares to retroactively restate its previously issued 2002 interim financial
statements, to reverse Statement 72 goodwill amortization expense recorded in
the first three quarters of the 2002 fiscal year, the year in which BancShares
adopted Statement 142. BancShares adopted Statement 147 on October 1, 2002.
BancShares had $14.0 million of Statement 72 goodwill which was reclassified and
will no longer be amortized. This resulted in the reversal of $854,000 ($538,000
or $19.20 earnings per share, after-tax), of amortization expense for the nine
months ended September 30, 2002, including $284,000 ($180,000 or $6.44 earnings
per share, after tax) for the three months ended March 31, 2002. In accordance
with Statement 147, BancShares performed a transitional impairment test of this
goodwill in the fourth quarter of 2002. As a result of this testing, no
impairment charges were recorded. BancShares will perform an annual impairment
test of the goodwill in 2003 and thereafter.
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of March 31, 2003 and December
31, 2002 and the carrying amount of unamortized intangible assets as of March
31, 2003 and December 31, 2002.
8
March 31, 2003 December 31, 2002
(Dollars in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------------------------- --------------------------------
Amortized intangible assets:
Branch acquisitions $ 4,626 $ 2,396 $ 4,626 $ 2,319
-------------------------------- --------------------------------
Unamortized intangible assets:
Goodwill $ 14,696 - $ 14,696 -
================================ ================================
The scheduled amortization expense for intangible assets for the years ended
December 31, 2003, 2004, 2005, 2006, 2007 and thereafter is as follows:
Scheduled
(Dollars in thousands) Amortization Expense
-------------------------------------------------------------------
2003 $ 308
2004 308
2005 308
2006 308
2007 308
2008 and after 767
------------------------
Total $ 2,307
========================
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" (FIN 46). FIN 46
addresses the consolidation by business enterprises of variable interest
entities as defined in the interpretation. FIN 46 applies immediately to
variable interests in variable interest entities created after January 31, 2003,
and to variable interest entities obtained after January 31, 2003. The
application of FIN 46 is not expected to have an impact on BancShares'
consolidated financial statements.
Note 3. 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 4. Allowance for Loan Losses
A summary of the allowance for loan losses follows:
(Unaudited)
Three months ended March 31,
-------------------------------
2003 2002
------------- ------------
Balance at beginning of year $ 11,838,076 $ 9,312,384
Provision for loan losses 200,000 750,000
Loans charged off (210,707) (1,070,885)
Loan recoveries 83,682 248,733
------------ -----------
Balance at end of the period $ 11,911,051 $ 9,240,232
============ ===========
9
At March 31, 2003 the Bank had $1,106,000 of nonperforming assets which included
$917,000 of impaired loans, all of which were on nonaccrual status, and $189,000
of other real estate and repossessed assets. At December 31, 2002, the Bank had
$757,000 of nonperforming assets which included $724,000 of impaired loans, all
of which were on nonaccrual status, and $33,000 of other real estate owned. At
March 31, 2003, and December 31, 2002 the Bank had $594,000 and $424,000,
respectively, of accruing loans 90 days or more past due.
Note 5. Long Term Borrowings
The $23.0 million long-term obligations at March 31, 2003 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 $23.7 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 6. Branch Acquisitions
On February 11, 2003 BancShares entered into an agreement to purchase four
branches, two located in Virginia and two in North Carolina from First-Citizens
Bank & Trust Company, a related party (see Note 8 to the consolidated financial
statements). Assets and deposits to be acquired are $30,687,000 and
$116,158,000, respectively. An intangible asset of approximately $9,200,000
would result from this purchase, although BancShares has not yet completed its
estimates of purchase accounting adjustments. This purchase is subject to
applicable regulatory approval. The purchase is expected to close in the second
quarter of 2003.
Note 7. Loss on Marketable Equity Securities
During the first quarter of 2003, BancShares wrote down the carrying value of
certain available for sale equity securities to their current market value and
recognized a loss of $65,488. This was a result of unrealized losses that were
deemed to be other than temporary.
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 March 31, 2003, beneficially owned 11,155
shares, or 39.82%, 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 March 31, 2003, beneficially owned 2,529,419 shares, or
28.76%, and 1,384,121 shares, or 15.74%, of the Corporation's outstanding Class
A common stock, and 650,958 shares, or 38.79%, and 199,052 shares, or 11.86%, of
the Corporation's outstanding Class B common stock. The above totals include
472,855 Class A common shares, or 5.38%, and 104,644 Class B Common shares, or
6.24%, 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:
10
(Dollars in thousands) (Unaudited)
Three Months Ended March 31,
---------------------------
2003 2002
-------- --------
Data and item processing $856 $782
Forms, supplies and equipment 38 61
Trustee for employee benefit plans 14 15
Other 1 --
--------- --------
$909 $858
========= ========
BancShares also has a correspondent relationship with the Corporation.
Correspondent account balances with the Corporation included in cash and due
from banks and overnight funds sold totaled $31,985,124 and $38,454,633 at
March 31, 2003 and December 31, 2002, respectively.
BancShares is related through common ownership with Southern Bank and Trust
Co. ("Southern") in that the aforementioned two significant shareholders of
BancShares and certain of their related parties are also significant
shareholders of Southern. BancShares has contracted with Southern to service
on its behalf $3.6 million of BancShares' mortgage loans.
See Note 6 for a discussion of a pending branch purchase from a subsidiary of
the Corporation.
TABLE 1.
Financial Summary
11
(Dollars in thousands, except
per share data) 2003 2002
----------- ---------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- --------- ---------
Summary of Operations
Interest income $ 12,730 $ 13,693 $ 13,970 $ 13,962 $ 14,103
Interest expense 3,917 4,344 4,562 4,770 5,164
----------- ----------- ----------- --------- ---------
Net interest income 8,813 9,349 9,408 9,192 8,939
Provision for loan losses 200 1,225 550 700 750
----------- ----------- ----------- --------- ---------
Net interest income after provision
for loan losses 8,613 8,124 8,858 8,492 8,189
Noninterest income 2,548 2,823 2,588 2,563 2,459
Noninterest expense 7,954 7,716 7,665 7,976 7,781
----------- ----------- ----------- --------- ---------
Net income before income taxes 3,207 3,231 3,781 3,079 2,867
Income taxes 1,150 1,253 1,389 1,099 1,027
----------- ----------- ----------- --------- ---------
Net income $ 2,057 $ 1,978 $ 2,392 $ 1,980 $ 1,840
=========== =========== =========== ========= =========
Selected Period-End Balances
Total assets $ 1,019,134 $ 1,012,724 $ 1,003,188 $ 985,947 $ 982,958
Investment securities and overnight
funds sold 175,456 156,398 178,451 165,785 187,994
Loans, gross 718,957 729,101 722,207 707,361 685,901
Interest earning assets 933,019 920,074 915,103 899,990 898,203
Deposits 873,697 869,333 864,959 841,899 837,960
Long-term obligations 23,000 23,000 23,000 23,000 23,000
Interest bearing liabilities 756,103 757,991 745,948 738,021 747,142
Shareholders' equity 94,251 92,336 90,817 89,205 86,903
Common shares outstanding 28,011 28,011 28,011 28,011 28,011
----------- ----------- ----------- --------- ---------
Selected Average Balances
Total assets $ 1,002,090 $ 1,004,513 $ 983,802 $ 974,639 $ 973,996
Investment securities and overnight
funds sold 154,421 165,288 168,124 168,825 184,895
Loans, gross 727,288 725,231 714,084 696,944 677,628
Interest earning assets 919,624 921,630 903,991 893,310 889,398
Deposits 857,172 863,213 843,403 833,664 832,021
Long-term obligations 23,000 23,000 23,000 23,000 23,000
Interest bearing liabilities 754,192 752,411 739,436 738,015 743,768
Shareholders' equity 94,046 92,119 90,344 88,377 86,530
Common shares outstanding 28,011 28,011 28,011 28,011 28,023
----------- ----------- ----------- --------- ---------
Profitability Ratios
Rate of return (annualized) on:
Total assets 0.83% 0.78% 0.96% 0.81% 0.77%
Shareholders' equity 8.87% 8.52% 10.51% 8.98% 8.63%
Dividend payout ratio (1) 10.89% 11.33% 9.37% 11.32% 12.18%
----------- ----------- ----------- --------- ---------
Liquidity and Capital Ratios (averages)
Loans to deposits 84.85% 83.45% 84.67% 83.60% 81.44%
Shareholders' equity to total assets 9.39% 9.17% 9.18% 9.07% 8.88%
----------- ----------- ----------- --------- ---------
Per Share of Common Stock
Net income $ 73.44 $ 70.60 $ 85.40 $ 70.66 $ 65.68
Cash dividends 8.00 8.00 8.00 8.00 8.00
Book value (2) 3,364.79 3,296.41 3,242.17 3,184.64 3,102.45
----------- ----------- ----------- --------- ---------
(1) For each indicated period, total common dividends declared divided by net
income.
(2) At the end of each indicated period, shareholders' equity divided by the
number of common shares outstanding.
12
TABLE 2.
Consolidated Taxable Equivalent Rate/Volume Variance Analysis - First Quarter
2003 2002
----------------------------- ---------------------------
(Dollars in thousands) Interest Interest Increase (decrease) due to:
-------------------------------
Average Income/ Yield/ Average Income/ Yield/ Yield/ Total
Balance Expense Rate Balance Expense Rate Volume Rate Change
----------- -------- ------ --------- -------- ------ ------ -------- ---------
ASSETS
Interest earning assets:
Loans (1)(2) $ 727,288 $ 11,911 6.64 % $ 677,628 $ 12,518 7.49 % $ 865 $ (1,472) $ (607)
Taxable investment
securities 105,847 557 2.13 128,818 1,248 3.93 (172) (519) (691)
Overnight funds sold 37,313 107 1.16 44,310 187 1.71 (25) (55) (80)
Other investments 13,756 68 2.00 14,094 66 1.90 - 2 2
Interest bearing deposits in
other banks 35,420 101 1.16 24,548 99 1.64 37 (35) 2
----------- -------- ------ --------- -------- ------ ------ -------- ---------
Total interest earning assets $ 919,624 $ 12,744 5.62 % $ 889,398 $ 14,118 6.44 % $ 705 $ (2,079) $ (1,374)
----------- -------- ------ --------- -------- ------ ------ -------- ---------
Noninterest earning assets:
Cash and due from banks 38,102 35,484
Premises and equipment 34,578 35,518
Other assets 21,649 22,886
Reserve for loan losses (11,863) (9,290)
----------- ---------
Total assets $ 1,002,090 $ 973,996
=========== =========
LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits $ 116,233 $ 85 0.30 % $ 109,879 $ 89 0.33 % $ 6 $ (10) $ (4)
Savings deposits 198,969 470 0.96 187,001 733 1.59 33 (296) (263)
Time deposits 393,759 2,811 2.90 399,556 3,788 3.84 (48) (929) (977)
Short-term borrowings 22,231 63 1.15 24,332 66 1.10 (6) 3 (3)
Long-term borrowings 23,000 488 8.60 23,000 488 8.60 - - -
----------- -------- ------ --------- -------- ------ ------ -------- ---------
Total interest bearing liabilities $ 754,192 $ 3,917 2.11 % $ 743,768 $ 5,164 2.82 % $ (15) $ (1,232) $ (1,247)
----------- -------- ------ --------- -------- ------ ------ -------- ---------
Noninterest bearing
liabilities:
Demand deposits 148,211 135,585
Other liabilities 5,641 8,113
Shareholders' equity 94,046 86,530
----------- ---------
Total liabilities and equity $ 1,002,090 $ 973,996
=========== =========
Interest rate spread (3) 3.51 % 3.62 %
====== ======
Net interest income and net
interest margin (4) $ 8,827 3.89 % $ 8,954 4.08 % $ 720 $ (847) $ (127)
======== ====== ======== ===== ====== ======== =========
(1) Average balances include non-accrual loans.
(2) The average rate on nontaxable loans has been adjusted to a tax
equivalent yield using a 39.485% tax rate for 2003 and 2002. The taxable
equivalent adjustment was approximately $14,000 and $15,000 for the
periods in 2003 and 2002, respectively.
(3) Interest rate spread is the difference between earning asset yield and
interest bearing liability rate.
(4) Net interest margin is net interest income divided by average earning
assets.
13
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 62 branches in North
Carolina.
Critical Accounting Policies
BancShares' significant accounting policies are set forth in note 1 of the
consolidated financial statements in the annual report on Form 10K. Of these
significant accounting policies, BancShares considers its policy regarding the
allowance for loan losses to be a critical accounting policy, because it
requires management's most subjective and complex judgments. In addition,
changes in economic conditions can have a significant impact on the allowance
for loan losses and therefore the provision for loan losses and results of
operations. BancShares has developed appropriate policies and procedures for
assessing the adequacy of the allowance for loan losses, recognizing that this
process requires a number of assumptions and estimates with respect to its loan
portfolio. BancShares' assessments may be impacted in future periods by changes
in economic conditions, the impact of regulatory examinations, and the discovery
of information with respect to borrowers which is not known to management at the
time of the issuance of the consolidated financial statements. For additional
discussion concerning BancShares' allowance for loan losses and related matters,
see Asset Quality and Provision for Loan Losses.
Financial Condition and Results of Operations.
Net Income. In the first quarter of 2003, BancShares' net income
increased $217,000 to $2.1 million from $1.8 million in the first quarter of
2002, an increase of 11.78%. The increase in net income in the first quarter of
2003 compared to the same period in the prior year resulted primarily from a
decrease in the provision for loan losses.
Net income per share for the first quarter of 2003 was $73.44, an
increase of $7.76 per share, or 11.81%, from $65.68 per share in 2002. Return on
average assets for the first quarter of 2003 and 2002 was 0.83% and 0.77%,
respectively. Return on average equity for first quarter of 2003 and 2002 was
8.87% and 8.63%, 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 quarter of 2003, net interest income
was $8.8 million as compared to $8.9 million for the same period in 2002, a
decrease of $126,000 or 1.41%. Of the $127,000 decrease in net interest income,
$847,000 resulted from interest rate changes on interest earning assets and
interest bearing liabilities, the affect of which was offset by the impact of
increases in volume which contributed to a $720,000 increase in the net interest
income. The net interest margin for first quarter 2003 and 2002 was 3.89% and
4.08%, respectively.
Interest income for the first quarter of 2003 was $12.7 million as
compared to $14.1 million in 2002, a decrease of $1.4 million, or 9.73%. The
decrease in interest income from the first quarter of 2002 to the first quarter
of 2003 is attributable to a decline in interest rates. Interest income from
loans amounted to $11.9 million in the first quarter of 2003 as compared to
$12.5 million in the first quarter of 2002, a decrease of $606,000 or 4.85%.
BancShares' loan growth is largely due to growth within the existing branch
network. Earnings from investments and overnight funds sold provided the balance
of interest income, contributing $833,000 and $1.6 million for the first quarter
of 2003 and 2002, respectively. Average interest-earning assets for the first
quarter of 2003 increased to $919.6 million, a 3.40% increase, from $889.4
million in the first quarter of 2002. The yield on interest earnings assets for
the first quarter of 2003 and 2002 was 5.62% and 6.44%, respectively. Trends in
interest earning assets are shown in Table 2.
Interest expense for the first quarter of 2003 was $3.9 million
compared to $5.2 million in 2002, a decrease of $1.3 million or 24.15%. The
decrease in interest expense in the first quarter of 2003, compared to the first
quarter of 2002, is attributable to decreased interest rates on deposit
balances, primarily time deposits and savings accounts. Average interest
14
bearing deposits increased $12.5 million or 1.80%, from $696.4 million in the
first quarter of 2002 to $709.0 million in the first quarter of 2003. The
average rate paid on interest-bearing deposits was 1.93% and 2.68% for the first
quarter of 2003 and 2002, respectively. Borrowings contributed $551,000 in
interest expense during the first quarter of 2003 compared to $554,000 during
the first quarter of 2002, a decrease of $3,000 or .54%. The yield on interest
bearing liabilities for the first quarter of 2003 and 2002 was 2.11% and 2.82%,
respectively. Trends in interest bearing liabilities are shown in Table 2.
Asset Quality and Provision for Loan Losses. Because BancShares' loan
portfolio represents its largest earning asset, BancShares continually monitors
the quality of its loan portfolio. The Bank operates in a diversified economic
environment and, in the opinion of management, is not unduly exposed to any one
particular industry. For the first quarter of 2003 and 2002, management added
$200,000 and $750,000, respectively, to the allowance for loan losses as
provisions for loan losses. The decrease in the provision for loan losses is
primarily attributable to a decline in net charge-offs. During the first quarter
of 2003, management charged-off loans totaling $211,000 and had recoveries of
$84,000 resulting in net charge-offs of $127,000. During the same period in
2002, management charged-off $1.1 million in loans and had recoveries of
$249,000, resulting in net charge-offs of $822,000. Charge-offs were higher for
the first quarter of 2002 than the same period of 2003 due to charge-offs of
three real estate loans. The ratio of allowance for loan losses to loans
increased to 1.66% at March 31, 2003 from 1.62% at December 31, 2002. The
following table presents BancShares' comparative asset quality ratios:
March 31, December 31,
2003 2002
--------- ------------
Ratio of annualized net loans charged off to average loans 0.07 % 0.10 %
Allowance for loan losses to loans 1.66 1.62
Non-performing assets to total gross loans and other real estate owned 0.15 0.13
Non-performing assets to total assets 0.11 0.09
Management considers the March 31, 2003 allowance for loan losses
adequate to cover probable losses inherent in the loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's experience, the estimated value of any
underlying collateral, current economic conditions, analysis of peer bank
trends, and other risk factors. Management believes it has established the
allowance in accordance with accounting principles generally accepted in the
United States of America and in consideration of the current economic
environment. While management uses the best information available to make
evaluations, future adjustments may be necessary if economic or other conditions
differ substantially from the assumptions used. No significant changes were made
to allocations of the allowance for loan losses during the first quarter.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and losses on other real estate owned. Such agencies may require the Bank to
recognize adjustments to the allowances based on the examiners' judgements about
information available to them at the time of their examinations.
BancShares had impaired loans of $917,000 at March 31, 2003 (all of
which are on non-accrual status) and $91,000 at March 31, 2002. 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.
Noninterest Income. Noninterest income increased $89,000 or 3.62% for the
first quarter of 2003 over the first quarter of 2002. Noninterest income for the
first quarter of 2003 includes a gain on the sale of other real estate of
$57,000 as well as a securities loss of $65,000. Service charges on deposit
accounts and other service charges and fees, increased $92,000 or 3.79% during
the first quarter of 2003 primarily due to an increased deposit base from de
novo branch openings and growth in the existing branch network. BancShares'
average deposits increased $25.2 million or 3.02% to $857.2 million in the first
quarter of 2003 from $832.0 million in the first quarter of 2002.
15
Noninterest Expense. Noninterest expense increased $173,000 or 2.22%, from
$7.8 million in the first quarter of 2002 to $8.0 million in the first quarter
of 2003, including increases of $97,000 in salaries and employee benefits and
$74,000 in data processing cost. The changes represented increases of 2.15% in
salaries and employee benefits and 9.42% in data processing costs over the first
quarter of 2002.
Income Taxes. In the first of quarter 2003, BancShares had income tax
expense of $1.2 million, an increase of $123,000 or 12.00%, from $1.0 million in
the prior year period. The resulting effective income tax rates, based on the
accruals for the three months ended March 31, 2003 and 2002, were 35.86% and
35.81%, 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 March 31, 2003 was 9.68% as compared
to 9.46% at December 31, 2002.
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 March 31, 2003, the Total Capital
Ratio was 14.90% as compared to 14.26% at December 31, 2002.
The following table presents capital adequacy calculations and ratios of
BancShares:
(Dollars in thousands) March 31, December 31,
2003 2002
--------------- ------------
Tier 1 capital $ 95,347 $ 93,466
Total capital 108,147 106,445
Leverage capital ratio 9.68% (1) 9.46% (1)
Tier 1 capital ratio 13.14 (1) 12.52 (1)
Total capital ratio 14.90 (1) 14.26 (1)
____________
(1) These ratios exceed the minimum required regulatory capital ratios.
At March 31, 2003, and December 31, 2002, BancShares and the Bank were in
compliance with all of their regulatory capital requirements, and all of their
regulatory capital ratios exceed the minimum ratios required for it to be
classified as "well capitalized."
Commitments, Contingencies and Off-balance sheet risk
BancShares is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, lines of
credit and standby letters of credit. These instruments involve elements of
credit risk in excess of amounts recognized in the accompanying consolidated
financial statements. Substantially all such instruments expire within one to
three years.
BancShares' risk of loss in the event of nonperformance by the other party
to the commitment to extend credit, line of credit or standby letter of credit
is represented by the contractual amount of these instruments. BancShares uses
the same credit policies on the borrower in making commitments under such
instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include accounts receivable,
inventory, real estate and time deposits with financial institutions. Since many
of the
16
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
As of March 31, 2003 and December 31, 2002, outstanding financial
instruments whose contract amounts represent credit risk were as follows:
March 31, December 31,
2003 2002
-------------- -------------
Outstanding commitments to lend, unfunded loans
and lines of credit $ 226,931,514 231,232,246
============== =============
Standby letters of credit $ 3,509,268 3,781,003
============== =============
BancShares does not have any special purpose entities or other similar
forms of off-balance sheet financing arrangements.
BancShares' lending is concentrated primarily in central North Carolina and
the surrounding communities in which it operates. Credit has been extended to
certain of BancShares' customers through multiple lending transactions; however,
there is no concentration to any single customer or industry.
BancShares and the Bank are defendants in certain claims and legal actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated operations,
liquidity or financial position of BancShares or the Bank.
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), overnight funds sold, interest bearing deposits in other banks and
cash and due from banks less the federal reserve requirement. These assets
represented 18.04% of deposits at March 31, 2003, an increase from 16.07% at
December 31, 2002. BancShares' liquidity ratio, which is defined as cash plus
short-term marketable securities (minus pledged securities) less the federal
reserve requirement divided by deposits and short-term liabilities, was 19.31%
at March 31, 2003, compared to 17.22% at December 31, 2002.
The consolidated statements of cash flows disclose the principal sources
and uses of cash from operating, investing and financing activities for the
three months ended March 31, 2003 and 2002. 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 March 31, 2003, and
December 31, 2002, jumbo time deposits represented 11.52% and 11.27%,
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.
17
BancShares has obligations under existing contractual obligations that will
require payments in future periods. The following table presents aggregated
information about such payments to be made in future periods. Transaction
deposit accounts with indeterminate maturities have been classified as having
payments due in less than one year.
CONTRACTUAL OBLIGATIONS
As of March 31, 2003
Payments due by period
(dollars in thousands)
Less than
---------
1 year 1-3 years 4-5 years Over 5 years Total
------ --------- --------- ------------ -----
Deposits $ 754,126 98,837 20,734 - 873,697
Short-term borrowings 22,672 - - - 22,672
Long-term borrowings - - - 23,000 23,000
Lease obligations 327 325 254 714 1,620
-------------------------------------------------------------------
Total contractual cash obligations $ 777,125 99,162 20,988 23,714 920,989
===================================================================
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 March 31, 2003. The expected maturity categories take into consideration
historical prepayment experience as well as management's expectations based on
the interest rate environment as of March 31, 2003. 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 March 31,
--------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total Fair Value
---------- ---------- ---------- ---------- ---------- -------------- --------- ------------
(Dollars in thousands)
Assets
Loans:
Fixed rate $ 77,976 $ 98,752 $ 64,799 $ 11,282 $ 8,600 $ 9,028 $ 270,437 $ 271,069
Average rate (%) 8.67% 7.89% 7.85% 7.41% 7.03% 7.60% 8.05%
Variable rate $ 217,240 $ 45,777 $ 53,642 $ 19,007 $ 13,011 $ 99,843 $ 448,520 $ 448,520
Average rate (%) 5.13% 4.95% 5.09% 4.81% 4.81% 4.87% 5.11%
Investment securities (1):
Fixed rate $ 99,764 $ 20,075 - - - $ 6 $ 119,845 $ 120,168
Average rate (%) 1.19% 3.11% - - - 10.93% 1.51%
Liabilities
18
Savings and interest bearing
checking:
Fixed rate $ 317,193 - - - - - $ 317,193 $ 317,193
Average rate (%) 0.63% - - - - - 0.63%
Certificates of
deposit:
Fixed rate $ 273,667 $ 78,716 $ 20,121 $ 20,734 - - $ 393,238 $ 399,195
Average rate (%) 2.30% 3.54% 4.10% 4.48% - - 2.75%
Short-term obligations:
Variable rate $ 22,672 - - - - - $ 22,672 $ 22,672
Average rate (%) 0.92% - - - - - 0.92%
Long-term obligations:
Fixed rate - - - - - $ 23,000 $ 23,000 $ 24,840
Average rate (%) - - - - - 8.50% 8.50%
___________
(1) Marketable equity securities with a cost of approximately $3,405,228 and
a fair value of approximately $11,610,313 have been excluded from this
table.
Interest Sensitivity. The table below presents BancShares' interest
sensitivity position at March 31, 2003. 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 the period
are considered interest-sensitive. The interest-sensitivity position has meaning
only as of the date for which it was prepared. Gaps are identified as either
positive (interest sensitive assets in excess of interest sensitive liabilities)
or negative (interest sensitive liabilities in excess of interest sensitive
assets).
As of March 31, 2003, BancShares had a positive one-year cumulative gap
position of 28.40% and a positive total cumulative gap position of 18.96%. At
December 31, 2002, BancShares had a one-year positive cumulative gap position of
23.51% and a total positive cumulative gap position of 17.62%.
March 31, 2003
---------------------------------------------------------------------------------------------
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 $ 413,776 $ 45,975 $ 12,303 $ 24,605 $ 496,659 $ 222,298 $ 718,957
Investment securities 14,999 49,891 34,875 14,995 114,760 16,696 131,456
Overnight funds sold 44,000 - - - 44,000 - 44,000
Other - - - - - 2,657 2,657
Interest bearing deposits
in other banks 35,949 - - - 35,949 - 35,949
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total interest earning
Assets $ 508,724 $ 95,866 $ 47,178 $ 39,600 $ 691,368 $ 241,651 $ 933,019
=========== =========== =========== =========== =========== =========== ==========
Liabilities:
- ------------
Savings and checking
with interest $ - $ - $ - $ - $ - $ 187,135 $ 187,135
Money market savings 130,058 - - - 130,058 - 130,058
Time deposits 52,115 69,952 76,230 75,370 273,667 119,571 393,238
19
Short-term borrowings 22,672 - - - 22,672 - 22,672
Long-term borrowings - - - - - 23,000 23,000
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total interest bearing
liabilities $ 204,845 $ 69,952 $ 76,230 $ 75,370 $ 426,397 $ 329,706 $ 756,103
=========== =========== =========== =========== =========== =========== ==========
Interest-sensitivity gap $ 303,879 $ 25,914 $ (29,052) $ (35,770) $ 264,971 $ (88,055) $ 176,916
=========== =========== =========== =========== =========== =========== ==========
Cumulative interest
sensitivity gap $ 303,879 $ 329,793 $ 300,741 $ 264,971 $ 264,971 $ 176,916 $ 176,916
Cumulative interest
sensitivity gap to total
interest earning assets 32.57% 35.35% 32.23% 28.40% 28.40% 18.96% 18.96%
Accounting and Other Matters.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" (FIN 46). FIN 46
addresses the consolidation by business enterprises of variable interest
entities as defined in the interpretation. FIN 46 applies immediately to
variable interests in variable interest entities created after January 31, 2003,
and to variable interest entities obtained after January 31, 2003. The
application of FIN 46 is not expected to have an impact on BancShares'
consolidated financial statements.
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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their evaluation,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect the disclosure controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of BancShares' shareholders was held on January 27,
2003. At the meeting, the shareholders elected a complete board of directors
consisting of the six individuals named below, and ratified the reappointment of
KPMG LLP as BancShares' independent public accountants for 2003.
The results of voting at the annual meeting were as follows:
1. Election of Directors:
Nominee Votes "For" Votes Withheld
------------------ ----------- --------------
F. Ray Allen 25,916 0
Haywood A. Lane, Jr. 25,916 0
D. Gary McRae 25,916 0
Wallace H. Mitchell 25,916 0
Sam C. Riddle, Jr. 25,916 0
David E. Royal 25,876 40
Ernest W. Whitley, Jr. 25,916 0
Billy T. Woodard 25,916 0
2. Ratification of appointment of independent accountants:
Votes "For" Votes "Against" Abstain
----------- --------------- -------
25,916 0 0
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) The following exhibits are included or incorporated into this report.
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 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)
21
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)
__________
(b) No reports on Form 8-K were filed during the quarter ended March 31, 2003.
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: May 12, 2003 By:/s/ Mary W. Willis
===============================
Mary W. Willis
Chief Financial Officer and Treasurer
22
CERTIFICATION
I, Billy T. Woodard, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Fidelity BancShares
(N.C), Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosures controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions);
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 By:/s/ Billy T. Woodard
=========================
Billy T. Woodard
Chief Executive Officer
23
CERTIFICATION
I, Mary W. Willis, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Fidelity BancShares
(N.C), Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosures controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions);
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 By:/s/ Mary W. Willis
=========================
Mary W. Willis
Chief Financial Officer
and Treasurer
24
CERTIFICATION
(Pursuant to 18 U.S.C. Section 1350)
The undersigned hereby certifies that (i) the foregoing Quarterly Report on
Form 10-Q filed by Fidelity BancShares (N.C.), Inc. (the "Company") for the
quarter ended March 31, 2003, fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in that Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
By:/s/ Billy T. Woodard
===============================
Date: May 12, 2003
Billy T. Woodard
Chief Executive Officer
By:/s/ Mary W. Willis
===============================
Date: May 12, 2003
Mary W. Willis
Chief Financial Officer and Treasurer
25