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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
--------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
- ----------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
205 Datura Street, West Palm Beach, Florida 33401
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check |X| whether the Registrant has filed all reports required
to be filed by Sections 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 15,802,206 shares
of the Registrant's common stock par value $ .10 per share outstanding as of
August 1, 2002.
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................1
Consolidated Statements of Financial Condition as of
December 31, 2001 and June 30, 2002..............................2
Consolidated Statements of Operations for the three and the six
months ended June 30, 2001 and 2002..............................3
Consolidated Statements of Comprehensive Operations for the three
and the six months ended June 30, 2001 and 2002..................4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2002.....................................5
Notes to Unaudited Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................12
PART II. OTHER INFORMATION.................................................20
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
2001 2002
==================== =====================
ASSETS (In Thousands, except share data) CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 52,944 $ 57,438
Interest-bearing deposits................................................ 43,347 128,341
----------- -----------
Total cash and cash equivalents...................................... 96,291 185,779
----------- -----------
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 94,522 105,174
Mortgage-backed securities............................................... 201,533 155,448
Corporate debt securities................................................ 36,138 35,996
----------- -----------
Total assets available for sale...................................... 332,193 296,618
LOANS RECEIVABLE, Net......................................................... 1,583,425 1,744,594
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 59,235 62,322
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 14,577 15,763
REAL ESTATE OWNED, Net........................................................ 219 -
ACCRUED INTEREST RECEIVABLE................................................... 10,745 10,564
DEFERRED INCOME TAX ASSET..................................................... 5,253 4,078
OTHER ASSETS 34,997 35,882
----------- -----------
TOTAL ASSETS $ 2,136,935 $ 2,355,600
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 1,559,436 $ 1,745,556
OTHER BORROWED FUNDS.......................................................... 36,326 39,854
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 290,266 308,515
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 3,207 14,674
DRAFTS PAYABLE................................................................ 12,136 4,569
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................... 28,750 28,750
OTHER LIABILITIES............................................................. 29,202 33,357
----------- -----------
TOTAL LIABILITIES........................................................ 1,959,323 2,175,275
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
15,781,244 at December 31, 2001 and 15,802,206 shares outstanding at June 1,578 1,580
30, 2002
ADDITIONAL PAID IN CAPITAL.................................................... 117,889 125,014
RETAINED EARNINGS - substantially restricted.................................. 66,839 71,905
TREASURY STOCK - at cost, 338,332 shares at December 31, 2001 and
526,496 shares at June 30, 2002.......................................... (1,721) (5,675)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan............................................ (4,969) (4,783)
Recognition and retention plan........................................... - (6,866)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (2,004) (850)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................... 177,612 180,325
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 2,136,935 $ 2,355,600
=========== ===========
See Notes to Unaudited Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
================= ================ ============== =============
(In Thousands, except share data)
Interest income:
Loans....................................................... $ 27,937 $ 30,266 $ 55,354 $ 59,852
Investment securities....................................... 1,582 1,034 2,414 2,014
Other investments........................................... 931 807 1,948 1,575
Mortgage-backed and corporate debt securities............... 4,504 2,196 9,836 4,539
---------- ---------- --------- --------
Total interest income................................... 34,954 34,303 69,552 67,980
---------- ---------- --------- --------
Interest expense:
Deposits.................................................... 16,903 10,333 34,389 20,807
Advances from Federal Home Loan Bank and other borrowings... 5,169 5,451 10,461 10,842
---------- ---------- --------- --------
Total interest expense.................................. 22,072 15,784 44,850 31,649
---------- ---------- --------- --------
Net interest income.............................................. 12,882 18,519 24,702 36,331
Provision for loan losses........................................ 326 316 906 817
---------- ---------- --------- --------
Net interest income after provision for loan losses.............. 12,556 18,203 23,796 35,514
---------- ---------- --------- --------
Other income:
Service charges on deposit accounts......................... 1,217 1,727 2,389 3,345
Fees for other banking services............................. 1,592 1,953 2,899 3,609
Net gain on sale of loans, mortgage-backed securities
and investments............................................. 121 21 362 43
Miscellaneous............................................... 237 256 531 506
---------- ---------- --------- --------
Total other income...................................... 3,167 3,957 6,181 7,503
---------- ---------- --------- --------
Operating expense:
Employee compensation and benefits.......................... 7,942 9,138 15,002 17,608
Occupancy and equipment..................................... 2,641 2,840 5,083 5,546
Gain on real estate owned................................... (46) (107) (56) (121)
Marketing................................................... 440 461 901 889
Federal deposit insurance premium........................... 70 69 139 141
Miscellaneous............................................... 2,518 3,003 5,829 5,595
---------- ---------- --------- --------
Total operating expense................................. 13,565 15,404 26,898 29,658
---------- ---------- --------- --------
Income before provision for income taxes......................... 2,158 6,756 3,079 13,359
---------- ---------- --------- --------
Provision for income taxes:
Current..................................................... 772 2,434 1,091 4,812
Deferred.................................................... 85 221 129 438
---------- ---------- --------- --------
Total provision for income taxes........................ 857 2,655 1,220 5,250
---------- ---------- --------- --------
Net income......................................... $ 1,301 $ 4,101 $ 1,859 $ 8,109
========== ========== ========= ========
Earnings per share:
Basic....................................................... $ 0.09 $ 0.27 $ 0.12 $ 0.53
========== ========== ========= ========
Diluted..................................................... $ 0.08 $ 0.27 $ 0.12 $ 0.53
========== ========== ========= ========
See Notes to Unaudited Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
============= ============ =========== ============
(In Thousands) (In Thousands)
Net Income.................................................... $ 1,301 $ 4,101 $ 1,859 $ 8,109
Other comprehensive income, net of tax:
Unrealized gains on assets available for sale:
Unrealized holding gains arising during period....... 368 1,497 2,209 1,154
-------- ----------- ---------- -----------
Comprehensive income.......................................... $ 1,669 $ 5,598 $ 4,068 $ 9,263
======== =========== ========== ===========
See Notes to Unaudited Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Six Months Ended
June 30,
2001 2002
=========== ===============
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 1,859 $ 8,109
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 1,690 1,790
Share based compensation expense.................................... 72 553
Accretion of discounts, amortization of premiums and goodwill, and (737) (1,400)
other deferred yield items.........................................
Provision for loan losses........................................... 906 817
Provisions for losses and net (gains) losses on sales of real estate (40) (123)
owned
Net (gain) loss on sale of:
Loans......................................................... (261) (43)
Mortgage-backed securities.................................... (1) -
Office properties and equipment............................... 91 (1)
Other assets.................................................. (99) -
(Increase) decrease in accrued interest receivable..................... (1,018) 181
(Increase) decrease in other assets.................................... 1,854 (813)
Increase (decrease) in drafts payable.................................. 4,298 (7,567)
Increase in deferred income taxes...................................... 129 438
Increase in other liabilities.......................................... 3,321 4,170
-------- --------
Net cash provided by operating activities..................... 12,064 6,111
-------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (108,605) (142,494)
Principal payments received on mortgage-backed securities.............. 24,726 58,992
Purchases of:
Loans............................................................... (13,011) (21,254)
Mortgage-backed securities.......................................... - (11,473)
Federal Home Loan Bank stock........................................ - (1,186)
Investment securities............................................... (101,995) (90,000)
Office properties and equipment..................................... (6,607) (5,032)
Proceeds from sales of:
Loans............................................................... 35,457 3,325
Federal Home Loan Bank stock........................................ 676 -
Real estate acquired in settlement of loans......................... 200 991
Mortgage-backed securities available for sale....................... 94 -
Other assets........................................................ 100 -
Proceeds from maturities of municipal bonds and government and agency 32,655 79,445
securities
Other.................................................................. (1,816) (366)
--------- ---------
Net cash used for investing activities........................ (138,126) (129,052)
-------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options, 79,580 79
net of issuance costs..................................................
Purchase of treasury stock............................................. (3,958)
Cash dividends paid.................................................... (2,268) (3,056)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 45,830 231,963
Certificates of deposit............................................. (27,828) (45,843)
Advances from Federal Home Loan Bank................................ (15,451) 18,249
Other borrowed funds................................................ 31,221 3,528
Advances by borrowers for taxes and insurance....................... 9,969 11,467
-------- --------
Net cash provided by financing activities..................... 121,053 212,429
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (5,009) 89,488
CASH AND CASH EQUIVALENTS, Beginning of period......................... 100,309 96,291
-------- --------
CASH AND CASH EQUIVALENTS, End of period............................... $ 95,300 $185,779
======== ========
See Notes to Unaudited Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Bank & Trust (the "Bank") conform
to accounting principles generally accepted in the United States of America and
to predominant practices within the thrift industry. The Company has not changed
its accounting and reporting policies from those disclosed in its 2001 Annual
Report on Form 10-K.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at June 30, 2002 and
the results of its consolidated operations and cash flows for the period then
ended, all of which are of a normal and recurring nature, have been included.
In June 2001, the FASB issued SFAF No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 discontinues the practice of amortizing goodwill and
intangible assets with indefinite lives and initiates an annual review for
impairment of these assets. The Company has adopted this accounting principle
beginning January 1, 2002 and did not identify any impairment in the carrying
value of goodwill arising from previous acquisitions. Amortization of goodwill
included in the Company's income statement for the quarter and six months ended
June 30 2001 was $63,000 and $125,000, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement applies to legal obligations associated
with the retirement of a tangible long-lived asset that results from the
acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lessee obligations. The statement requires
these obligations be recorded at fair value as of the date of retirement and is
effective for fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of this accounting principle will have a significant
effect on it's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement establishes a
single accounting model for long-lived assets to be disposed of by sale, and
requires that long-lived assets to be abandoned, exchanged for similar
productive assets, or distributed to owners in a spinoff be considered held and
used until disposed. The Company has adopted this standard beginning January 1,
2002. The adoption did not have an effect on the Company's financial statements.
Certain amounts in the financial statements have been reclassified to
conform with the June 30, 2002 presentation.
2. REORGANIZATION AND SECOND STEP CONVERSION
The Company completed the mutual-to-stock conversion of its mutual holding
company parent on May 15, 2001 and the related common stock offering resulted in
the Company selling 8,695,943 shares of common stock for $10.00 per share to
certain customers of Fidelity Federal Bank & Trust, its benefit plans, including
the employee stock ownership plan, and to existing public stockholders of
Fidelity Bankshares, Inc. In addition, 7,048,207 shares were issued to the
existing stockholders based on an exchange rate of 2.4165 new shares of common
stock for each existing share. At the completion of the conversion, the Company
had 15,744,150 shares outstanding
The conversion was accounted for as a change in corporate form with no
subsequent change in the historical basis of the Company's assets, liabilities
and equity. All references in the consolidated financial statements and notes
thereto to share data (including number of shares and per-share amounts) have
been restated giving retroactive recognition to the exchange rate.
3. LOANS RECEIVABLE
Loans receivable at December 31, 2001 and June 30, 2002, consist of the
following:
December 31, June 30,
2001 2002
============== =================
(In Thousands)
One-to-four single family, residential real estate mortgages......... $ 944,046 $ 997,630
Commercial and multi-family real estate mortgages.................... 233,157 370,523
Real estate construction-primarily residential....................... 284,495 309,186
Land loans-primarily residential..................................... 25,627 28,656
---------- ----------
Total first mortgage loans........................................... 1,487,325 1,705,995
Consumer loans....................................................... 105,077 123,585
Commercial business loans............................................ 188,045 140,917
---------- ----------
Total gross loans.................................................... 1,780,447 1,970,497
Less:
Undisbursed portion of loans in process......................... 192,464 220,444
Unearned discounts, premiums and deferred loan fees (costs), net (2,289) (1,982)
Allowance for loan losses....................................... 6,847 7,441
---------- ----------
Loans receivable-net................................................. $1,583,425 $1,744,594
========== ==========
4. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year
ended December 31, 2001 and the three and six months ended June 30, 2001 and
2002, is as follows:
For the Year For the Three Months For the Six Months
Ended Ended Ended
December 31, June 30, June 30,
2001 2002 2001 2002 2001
=============== =========== ============ ========== ==========
(In Thousands) (In Thousands) (In Thousands)
Balance at beginning of period............ $ 4,905 $ 5,452 $ 7,338 $ 4,905 $ 6,847
Current provision......................... 2,054 316 326
Charge-offs............................... (117) (49) (223) (83) (239)
Recoveries................................ 5 3 10 4 16
-------- ------- --------- ---------- --------
Ending balance............................ $ 6,847 $5,732 $ 7,441 $ 5,732 $ 7,441
======= ======= ========= ========== ========
An analysis of the recorded investment in impaired loans owned by the
Company at the end of each period and the related specific valuation allowance
for those loans is as follows:
December 31, 2001 June 30, 2002
=========================== ============================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------- ------------- -------------- -------------
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loan losses................ $ 1,242 $ 1,093 $ 1,257 $ 847
Loans without related allowance for loan losses............. 5,680 - 6,750 -
-------- -------- -------- --------
Total.............................................. $ 6,922 $ 1,093 $ 8,007 $ 847
======== ======== ======== ========
The Bank's policy on interest income on impaired loans is to reverse all
accrued interest against interest income if a loan becomes more than 90 days
delinquent and cease accruing interest thereafter. Such interest ultimately
collected is credited to income in the period of recovery.
5. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Bank & Trust, is a regulated
financial institution. Its regulatory capital amounts and ratios are presented
in the following table:
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provisions
------------- ------------ -------------- ------------- ------------- --------------
Ratio Amount Ratio Amount Ratio Amount
------------- ------------ -------------- ------------- ------------- --------------
(Dollars in Thousands)
As of December 31, 2001 Stockholders'
Equity and ratio to total assets 8.0% $170,463
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,004
Goodwill............................. (2,175)
Disallowed servicing assets.......... (22)
--------
Tangible capital and ratio to
adjusted total assets........... 8.0% $170,270 1.5% $ 32,064
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 8.0% $170,270 3.0% $ 64,129 5.0% $ 106,881
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 12.0% $170,270 4.0% $ 56,524 6.0% $ 84,785
======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 5,633
----------
Total risk-based capital and ratio to
risk-weighted total assets...... 12.4% $175,903 8.0% $ 113,047 10.0% $ 141,309
======== ======== ====== ========= ====== =========
Total assets......................... $2,136,529
==========
Adjusted total assets................ $2,137,617
==========
Risk-weighted assets................. $1,413,088
==========
As of June 30, 2002 Stockholders'
Equity and ratio to total assets 7.6% $180,622
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 850
Goodwill............................. (2,174)
Disallowed servicing assets.......... (15)
--------
Tangible capital and ratio to
adjusted total assets........... 7.6% $179,283 1.5% $ 35,262
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.6% $179,283 3.0% $ 70,524 5.0% $ 117,539
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 11.2% $179,283 4.0% $ 64,285 6.0% $ 96,427
======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 6,530
----------
Total risk-based capital and ratio to
risk-weighted total assets...... 11.6% $185,813 8.0% $ 128,570 10.0% $ 160,712
======== ======== ====== ========= ====== =========
Total assets......................... $2,349,992
==========
Adjusted total assets................ $2,350,788
==========
Risk-weighted assets................. $1,607,119
==========
6. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP) and stock options for the three months ended June
30, 2001 and 2002, are as follows:
For the Three Months For the Three Months
Ended June30, 2001 Ended June
30, 2002
----------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
(In Thousands, except per share data)
Net income................. $1,301,000 $4,101,000
Basic EPS:
Mortgage loans.............
Income available to
common stockholders... $1,301,000 15,226,659 $ 0.09 $4,101,000 15,254,992 $ 0.27
====== ========
Effect of diluted shares:
Common stock options.. 150,664 146,464
---------- -----------
Diluted EPS:
Income available to
common stockholders... $1,301,000 15,377,323 $ 0.08 $4,101,000 15,401,046 $ 0.27
========== ========== ====== ========== ========== ========
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's stock options for
the six months ended June 30, 2001 and 2002, are as follows:
For the Six Months For the Six Months
Ended June Ended
30, 2001 June 30, 2002
----------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
(In Thousands, except per share data)
Net income................. $1,859,000 $8,109,000
Basic EPS:
Mortgage loans.............
Income available to
common stockholders... $1,859,000 15,221,114 $ 0.12 $8,109,000 15,270,880 $ 0.53
====== =======
Effect of diluted shares:
Common stock options.. 144,911 144,022
---------- ----------
Diluted EPS:
Income available to
common stockholders... $1,859,000 15,366,025 $ 0.08 $8,109,000 15,414,902 $ 0.53
========== ========== ====== ========== ========== =======
Pursuant to Statement of Position, 93-6, entitled "Employers' Accounting
for Employee Stock Ownership Plans," issued by the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants,
ESOP shares that have not been committed to be released are not considered to be
outstanding.
7. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended June 30, 2001 and 2002, is as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------------- ---------------------------
Unrealized Unrealized
Losses Losses
On Securities On Securities
============================ ============================
(In Thousands)
Beginning Balance............... $ (2,178) $ (2,347) $ (4,019) $ (2,004)
Current-period change........... 368 1,497 2,209 1,154
----------- ------------ ----------- ----------
Ending balance.................. $ (1,810) $ (850) $ (1,810) $ (850)
========== ========== ========== ==========
An analysis of the related tax effects allocated to Other Comprehensive
Loss is as follows:
For the Three Months Ended For the Three Months Ended
June 30, 2001 June 30, 2002
------------------------------------ -----------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
=========== ============ =========== =========== =========== ===========
(In Thousands)
Unrealized gain on assets available for sale:
Unrealized holding gains
arising during period................... $ 604 $ (236) $ 368 $ 2,454 $ (957) $ 1,497
======== ======== ======= ======= ======== =======
For the Six Months Ended For the Six Months Ended
June 30, 2001 June 30, 2002
------------------------------------ -----------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
=========== ============ =========== =========== =========== ===========
(In Thousands)
Unrealized gain on assets available for sale:
Unrealized holding gains
arising during period.................... $ 3,624 $(1,414) $ 2,210 $ 1,892 $ (738) $ 1,154
Reclassification adjustments
for gains realized in net 2 (1) 1 - - -
-------- --------- -------- -------- -------- --------
income
Other comprehensive income.................... $ 3,622 $(1,413) $ 2,209 $ 1,892 $ (738) $ 1,154
======= ========= ======== ======== ========= ========
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Bank & Trust ("Fidelity Federal" or the "Bank"). The Company conducts no
business other than holding the common stock of the Bank. Consequently, the
Company's net income is primarily derived from the Bank. The Bank's net income
is primarily dependent on its net interest income, which is the difference
between interest income earned on its investments in mortgage loans and
mortgage-backed securities, other investment securities and loans, and its cost
of funds consisting of interest paid on deposits and borrowings. The Bank's net
income also is affected by its provision for loan losses, as well as by the
amount of other income, including income from fees and service charges, net
gains and losses on sales of investments, and operating expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, and income taxes. Earnings of the Bank also are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Bank. In particular, the general level of
market interest rates tends to be highly cyclical.
The Company completed the mutual-to-stock conversion of its mutual holding
company parent on May 15, 2001 and the related common stock offering resulted in
the Company selling 8,695,943 shares of common stock for $10.00 per share to
certain customers of Fidelity Federal Bank & Trust, its benefit plans, including
the employee stock ownership plan, and to existing public stockholders of
Fidelity Bankshares, Inc., which net of expenses raised $79.6 million in cash
for the Company. In addition, 7,048,207 shares were issued to the existing
stockholders based on an exchange rate of 2.4165 new shares of common stock for
each existing share. At the completion of the conversion, the Company had
15,744,150 shares outstanding. At June 30, 2002 there were 15,802,206 shares of
common stock outstanding.
Forward-Looking Statements.
When used in this report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
Other Comprehensive Income/Loss.
The Company's only component of Other Comprehensive Income for the quarter
and six months ended June 30, 2002 and 2001 is the change in the unrealized gain
or loss on assets available for sale.
Other comprehensive income for the six months ended June 30, 2002 was $1.2
million compared to $2.2 million for the six months ended June 30, 2001. During
the six months ended June 30, 2002, the market value of the Company's assets
available for sale increased by $1.9 million, which net of income tax of
$738,000 resulted in other comprehensive income of $1.2 million. During the six
months ended June 30, 2001, the value of the Company's assets available for sale
increased by $3.6 million which net of $1.4 million in income tax resulted in
other comprehensive income of $2.2 million.
Other comprehensive income for the quarter ended June 30, 2002 was $1.5
million compared to $368,000 for the quarter ended June 30, 2001, representing
an increase of $1.1 million. During the quarter ended June 30, 2002, the market
value of the Company's assets available for sale increased by $2.5 million,
which net of income tax of $957,000 resulted in Other Comprehensive Income of
$1.5 million. During the quarter ended June 30, 2001, the value of the Company's
assets available for sale increased by $604,000 which net of $236,000 in income
tax resulted in other comprehensive income of $368,000.
Changes in Financial Condition.
The Company's assets increased by $218.7 million to $2.4 billion at June
30, 2002 from $2.1 billion at December 31, 2001. Net loans receivable increased
by $161.2 million, while cash and assets available for sale increased by $53.9
million. In addition, the Bank increased its investment in office properties and
equipment, primarily for new office sites, by $3.1 million, while all other
assets increased by $496,000. Funds for the increase in assets were provided
primarily as a result of an increase in deposits of $186.1 million, together
with increases in other liabilities in the amount of $29.8 million, of which
advances from Federal Home Loan Bank were $18.2 million. The Company's equity at
June 30, 2002 increased by $2.7 million from December 31, 2001. Equity increased
as a result of net income for the six months of $8.1 million and other
comprehensive income of $1.2 million. Partially offsetting these increases in
equity were dividends declared of $3.1 million and the purchase of 195,500
shares of the Company's common stock for $4.0 million during the six months.
Results of Operations.
Net income for the six months ended June 30, 2002 was $8.1 million,
representing an increase of $6.3 million compared to $1.9 million for the same
period in 2001. The primary reasons for this increase, which are more fully
described below, were an increase in net interest income of $11.6 million along
with an increase in other income of $1.3 million. The increase in net interest
income was caused by a decrease in interest expense on deposits of $13.6
million, along with a decrease in interest income of $1.6 million. These
increases were partially offset by an increase in operating expenses of $2.8
million and an increase in the income tax provision of $4.0 million.
Net income for the quarter ended June 30, 2002 was $4.1 million, a $2.8
million increase compared to $1.3 million for the same 2001 quarter. The
principal causes for this increase, which are more fully described below, were
an increase in net interest income of $5.6 million along with an increase in
other income of $790,000. The increase in net interest income consisted of a
decrease in interest expense of $6.3 million along with a decrease in interest
income of $651,000. These increases were partially offset by an increase in
operating expenses of $1.8 million and an increase in the provision for income
taxes of $1.8 million for the quarter ended June 30, 2002 compared to June 30,
2001.
Interest Income.
Interest income for the six months ended June 30, 2002 was $68.0 million, a
decrease of $1.6 million or 2.3% compared to the six months ended June 30, 2001.
The primary reason for this decrease was a decrease in interest income from
mortgage-backed and corporate debt securities of $5.3 million. This decline was
due to a decrease in the average balance of theses securities to $216.4 million
from $320.0 million as well as a decrease in the average yield to 4.20% compared
to 6.15 % for the six months ended June 30, 2002 and 2001, respectively.
Interest income from investment securities also decreased by .$400,000 as a
result of a decrease in the average yield to 3.60% from 6.27% for the six months
ended June 30, 2002 and 2001, respectively. Partially offsetting these decreases
was an increase in interest income from loans to $59.9 million for the six
months ended June 30, 2002 from $55.4 million for the same period in 2001.
Interest income for the quarter ended June 30, 2002, totaled $34.3 million,
representing a decrease of $651,000 or 1.9% compared to the same quarter in
2001. The Bank's interest income from loans increased by $2.3 million, primarily
as a result of an increase of 20.1% in the average balance of loans to $1.7
billion from $1.4 billion for the quarter ended June 30, 2002 and 2001,
respectively. Interest income from mortgage-backed and corporate debt securities
decreased to $2.2 million for the quarter ended June 30, 2002 from $4.5 million
for the 2001 quarter. This decrease was due to a decrease in the average balance
of such securities of $108.6 million, as well as a decrease in the average yield
of these securities to 4.27% in 2002 from 5.73% in 2001. There was a decline in
interest income from investment securities of $548,000 principally resulting
from a decrease in the average yield of these securities to 3.39% for the
quarter ended June 30, 2002 from 6.23% for the quarter ended June 30, 2001.
Interest income also decreased on other investments by $124,000 due mainly to a
decrease in the average yield on these investments to 2.45% from 6.20% for the
quarters ended June 30, 2002 and 2001, respectively.
Interest Expense.
Interest expense for the six months ended June 30, 2002 was $31.6 million,
a decrease of $13.2 million or 29.4% from the comparable 2001 period. The
principal cause for this decrease was a decrease in interest expense on deposits
of $13.6 million caused primarily by a decrease in the average cost of deposits
to 2.42% in 2002 from 4.50% in 2001 due to a lower rate environment. The average
balance of deposits increased to $1.7 billion for the six months ended June 30,
2002 compared to $1.5 billion for the six months ended June 30, 2001. The Bank's
interest expense on borrowed funds increased by $381,000 as a result of an
increase in the average balance of these funds to $376.5 million from $328.8
million. This increase was partially offset by a decrease in the average cost of
borrowed funds to 5.76% for the six months ended June 30, 2002 compared to 6.36%
for the 2001 period.
Interest expense for the quarter ended June 30, 2002, totaled $15.8
million, a decrease of $6.3 million or 28.5% from the same quarter in 2001. The
principal cause for this decline was a decrease in interest expense on deposits
of $6.6 million. The average balance of deposits increased to $1.8 billion for
the quarter ended June 30, 2002 compared to $1.6 billion for the quarter ended
June 30, 2001, but the cost of those deposits declined to 2.36% compared to
4.36% for the comparative quarters. The decline in the cost of deposits had two
principal causes. The Bank's core deposits, which consist of interest-bearing
and non interest-bearing transaction accounts, money market accounts and
passbook accounts increased as a percentage of total deposits from 42.0% at June
30, 2001 to 53.9% at June 30, 2002. In addition, the majority of the Bank's
certificates of deposit repriced in a lower rate environment. Interest expense
on borrowed funds increased by $282,000 caused primarily by an increase in the
average balance of such funds to $378.0 million from $327.4 million. Partially
offsetting this increase was a decrease in the average cost of borrowed funds to
5.77% for the quarter ended June 30, 2002 from 6.32% for the comparable 2001
quarter.
Net Interest Income.
While the Company's interest income decreased by $1.6 million for the six
months ended June 30, 2002, compared to the same period in 2001, interest
expense decreased by $13.2 million, resulting in net interest income of $36.3
million for the six months ended June 30, 2002. This represents a $11.6 million
or 47.1% increase in net interest income when compared to the same period in
2001.
During the quarter ended June 30, 2002, the Company's interest income
decreased by $651,000 compared to the same quarter in 2001, while interest
expense decreased by $6.3 million, resulting in net interest income of $18.5
million for the quarter ended June 30, 2002, $5.6 million or 43.8% more than
realized in 2001.
Provision for Loan Losses.
Our provision for loan losses decreased by $89,000 to $817,000 for the six
months ended June 30, 2002 from $906,000 for the six months ended June 30, 2001.
However, during the six months ended June 30, 2001 the Bank had a specific loan
loss provision in the amount of $280,000. Net of this specific provision, our
provision for the period would have increased compared to last year by $191,000
which management considers reasonable in light of the Bank's continued increased
originations of consumer, commercial business and commercial real estate loans.
The Bank's total allowance for loan losses at June 30, 2002 of $7.4 million is
maintained at a level that represents management's best estimate of losses in
the loan portfolio at the balance sheet date that were both probable and
reasonably estimable. The Bank's ratio of non-performing loans to total loans
was .33% and .31% at June 30, 2002 and 2001, respectively.
The provision for loan losses was $316,000 for the quarter ended June 30,
2002, compared to $326,000 for the quarter ended June 30, 2001. The provision
for the quarter ended June 30, 2002 is deemed adequate by management in light of
the risks inherent in the Bank's loan portfolio.
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and, accordingly,
allowances for loan losses are based on management's estimate of the losses
inherent in the loan portfolio. We provide both general valuation allowances
(for unspecified, probable losses) and specific valuation allowances (for known
losses) in our loan portfolio. General valuation allowances are added to the
Bank's capital for purposes of computing the Bank's regulatory risk-based
capital. We regularly review our loan portfolio, including impaired loans, to
determine whether any loans require classification or the establishment of
appropriate valuation allowances. Since we are increasing our origination of
commercial business loans and commercial real estate mortgages and since such
loans are deemed to have more credit risk than residential mortgage loans, our
provision for loan losses is likely to increase in future periods.
Other Income.
Other income for the six months ended June 30, 2002 was $7.5 million, an
increase of $1.3 million compared to the six months ended June 30, 2001. This
increase is due in part to an increase in service charges on deposit accounts of
$956,000, resulting principally from an increase in business and personal
checking accounts. Also fees for other banking services, which includes income
from insurance sales and trust services increased by $710,000 in 2002 compared
to 2001. These increases were partially offset by a decrease of $319,000 in net
gain on sale of loans, mortgage-backed securities and investments as well as a
decrease in other miscellaneous income of $25,000 for the six months ended June
30, 2002 to the comparable 2001 period.
Other income for the quarter ended June 30, 2002 was $4.0 million,
representing an increase of $790,000 compared to the same quarter in 2001. This
increase is principally due to increases in service charges on deposit accounts
of $510,000 and fees for other banking services of $361,000. Also contributing
to this increase was an increase in other miscellaneous income of $19,000.
Partially offsetting these increases was a decrease in net gain on sale of
loans, mortgage-backed securities and investments of $100,000 to $21,000 from
$121,000 for the quarters ended June 30, 2002 and 2001, respectively.
Operating Expense.
Operating expenses increased by $2.8 million to $30.0 million for the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001.
Employee compensation and benefits increased by $2.6 million. The increase in
employee compensation, which includes normal salary increases, also includes
increases in commission based pay caused by growth in the Bank's loans, deposits
and insurance sales. Also contributing to this increase are increases in pension
costs of $549,000, an increase in medical expenses of $156,000, an increase in
cost due to the Bank's Employee Stock Ownership Plan (ESOP) of $299,000 and
expense related to the Company's Recognition and Retention Plan (RRP),
established May 21, 2002, of $182,000. With respect to the increase in ESOP
expense, the period ending June 30, 2001 reflects expense for one and one half
months while the same period in 2002 includes six months of such expense.
Occupancy and equipment costs increased by $463,000 due in part to additional
depreciation expenses relating to new computer equipment and new branch
facilities. Partially offsetting these increases was a slight increase in gain
on real estate owned of $65,000 and a decrease in marketing expense of $12,000.
While other operating expense decreased by $234,000 for the six months ended
June 30, 2002 and 2001, this included a $1.1 million charge relating to the
termination of a data processing service contract during the six months ended
June 30, 2001. Had this charge not occurred, other operating expenses for the
six months increased by approximately $865,000. This increase in other operating
expense is due mainly to the growth in the Bank's loans and deposits and
includes increases in telephone, office supplies, general insurance costs,
armored car services and other expenses.
During the quarter ended June 30, 2002, operating expenses increased by
$1.8 million to $15.4 million from $13.6 million for the quarter ended June 30,
2001. Employee compensation and benefits increased by $1.2 million. The increase
in employee compensation, which includes normal salary increases, also includes
increases in commission based pay caused by growth in the Bank's loans, deposits
and insurance sales. Also contributing to the increase are increases in pension
costs of $192,000 and an increase in cost due to the Bank's ESOP of $120,000 and
MRP of $182,000. Occupancy and equipment costs increased by $199,000 due in
part, as explained above, to additional depreciation expenses relating to new
computer equipment and new branch facilities. Also contributing to this increase
were increases in gain on real estate owned of $61,000, marketing costs of
$21,000 and other operating expense of $485,000 for the quarter ended June 30,
2002 compared to 2001. This increase in other operating expense is due mainly to
the growth in the Bank's loans and deposits and includes increases in telephone,
office supplies, general insurance costs, armored car services, temporary help
and other miscellaneous expenses.
Income Taxes.
Provision for income taxes was $5.3 million for the six months ended June
30, 2002 compared to $1.2 million for the six months ended June 30, 2001. This
increase was attributable to an increase in income before provision for income
taxes of $10.3 million to $13.4 million in 2002 from $3.1 million in 2001. These
expenses approximate the rates paid by the Company for Federal and state income
taxes applied to the Company's pre-tax income.
The income tax provision was $2.7 million for the quarter ended June 30,
2002 compared to $857,000 for the quarter ended June 30, 2001. These expenses
approximate the rates paid for Federal and State income taxes applied to the
Company's pre-tax income.
Market Risk Analysis.
As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, other than those which
possess a short term to maturity. Since the majority of the Company's
interest-bearing liabilities and nearly all of the Company's interest-earning
assets are held by the Bank, virtually all of the Company's interest rate risk
exposure lies at the Bank level. As a result, all significant interest rate risk
management procedures are performed by management of the Bank. Based upon the
nature of the Bank's operations, the Bank is not subject to foreign currency
exchange or commodity price risk. The Bank's loan portfolio is concentrated
primarily in Palm Beach, Martin and Broward Counties in Florida and is therefore
subject to risks associated with the local economy. As of June 30, 2002, the
Company does not own any trading assets, other than $1,027,000 of assets held by
the SMPIAP Trust which can be actively traded by and are held for the benefit of
senior management. Income in these accounts accrues to and losses are solely
absorbed by senior management. At June 30, 2002, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.
Asset and Liability Management-Interest Rate Sensitivity Analysis.
The majority of the Company's assets and liabilities are monetary in nature
which subjects the Company to significant interest rate risk. As stated above,
the majority of the Company's interest-earning assets and interest-bearing
liabilities are held by the Bank and therefore virtually all of the Company's
interest rate risk exposure lies at the Bank level.
The Bank monitors interest rate risk by various methods including analyzing
changes in its Market Value of Portfolio Equity ("MVPE"). MVPE is generally
defined as the difference between the market value of the Bank's assets and the
market value of the Bank's liabilities. The Bank uses an internal model that
generates estimates of the Bank's MVPE over a range of interest rate scenarios.
The model calculates MVPE essentially by discounting the cash flows from the
Bank's assets and liabilities to present value using current market rates and
adjusting those discount rates accordingly for various interest rate scenarios.
The following table sets forth the Bank's estimated internal calculations
of MVPE as of June 30, 2002.
Changes in Rates Market Value of Portfolio Equity
(Rate Shock) $ Amount $ Change % Change
============ ========================================
(Dollars in Thousands)
+200bp $ 322,878 $ (2,315) 0.71%
+100bp 325,555 362 0.11%
-0- 325,193 0 0.0%
-100bp 306,925 (18,268) 5.62%
In preparing the MVPE table above, the Company makes various assumptions to
determine the net portfolio value at the assumed changes in interest rate. These
assumptions include loan prepayment rates, deposit decay rates and market values
of certain assets and liabilities under the various interest rate scenarios.
While management believes these assumptions to be reasonable there can be no
assurance that our assets and liabilities would be impacted as indicated in the
table above. Certain shortcomings are inherent in any methodology used in
interest rate risk measurements. Modeling changes in MVPE requires the making of
certain assumptions that may or may not reflect how actual yields and costs
respond to changes in market rates. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, interest rates
on certain types of assets and liabilities may fluctuate in advance of or lag
behind changes in market interest rates. Additionally, certain assets, such as
ARM loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the assets. Moreover, in the event of a change in
interest rates, prepayment and early withdrawal levels may possibly deviate
significantly from those assumed in calculating the above table. Management has
also made estimates of fair value discount rates that it believes to be
reasonable. However, due to the fact that there is no quoted market for many of
the assets and liabilities, management has no definitive basis to determine
whether the fair values presented would be indicative of the value negotiated in
an actual sale.
Accordingly, while the above table provides an estimate of the Bank's
interest rate risk exposure at a particular point in time, it is not intended to
provide a precise forecast of the effect of market changes on the Bank's MVPE
and net interest income, as actual results may vary.
Under OTS risk-based capital regulations, savings associations are required
to calculate the MVPE. These calculations are based upon data concerning
interest-earning assets, interest-bearing liabilities and other rate sensitive
assets and liabilities provided to the OTS on schedule CMR of the quarterly
Thrift Financial Report. Commencing June 30, 1994, for purposes of measuring
interest rate risk, the OTS began using the MVPE calculations which essentially
discount the cash flows from an institution's assets and liabilities to present
value, using current market rates. There are differences between the Bank's
internal assumptions used to calculate the previously presented MVPE and those
used by the OTS. For example, the Bank's internally calculated decay rates for
certain NOW, passbook and money market accounts produces an average expected
life for these instruments which is longer than the average expected life using
the OTS standard assumptions for these same instruments. Accordingly, the Bank's
previously presented MVPE calculations are not representative of those that
would be produced by the OTS.
The Bank's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by originating ARM loans and other
adjustable rate or short-term loans, as well as by purchasing short-term
investments. However, particularly in a low interest rate environment, borrowers
typically prefer fixed rate loans to ARM loans. The Bank does not solicit
high-rate jumbo certificates or brokered funds.
Liquidity and Capital Resources.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The Bank's liquidity ratio averaged 11.14%
during the month of June 2002. Liquidity ratios averaged 12.20% for the quarter
ended June 30, 2002. The Bank adjusts its liquidity levels in order to meet
funding needs of loan originations, deposit outflows, payment of real estate
taxes on mortgage loans, and repayment of borrowings and loan commitments. The
Bank also adjusts liquidity as appropriate to meet its asset and liability
management objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities and other short-term
investments, as well as earnings and funds provided from operations. While
scheduled principal repayments on loans and mortgage-backed securities are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Bank manages the pricing of its deposits to maintain a desired
deposit balance. In addition, the Bank invests excess funds in short-term
interest-earning and other assets, which provide liquidity to meet lending
requirements. Short-term interest-bearing deposits with the FHLB of Atlanta
amounted to $128.3 million at June 30, 2002. Other assets qualifying for
liquidity at June 30, 2002, including unpledged mortgage-backed securities
guaranteed by the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation, were $122.0 million. For additional information about
cash flows from the Company's operating, financing and investing activities, see
Consolidated Statements of Cash Flows included in the Financial Statements. The
primary sources of cash are net income, principal repayments on loans and
mortgage-backed securities, increases in deposit accounts and advances from the
FHLB.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 2002, the Bank had $308.5 million in advances from
the FHLB. At June 30, 2002, the Bank had commitments outstanding to originate or
purchase loans of $212.0 million. This amount does not include the unfunded
portion of loans in process. Certificates of deposit scheduled to mature in less
than one year at June 30, 2002, totaled $640.2 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
In June 2001, the FASB issued SFAF No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 discontinues the practice of amortizing goodwill and
intangible assets with indefinite lives and initiates an annual review for
impairment of these assets. The Company has adopted this accounting principle
beginning January 1, 2002 and did not identify any impairment in the carrying
value of goodwill arising from previous acquisitions. Amortization of goodwill
included in the Company's income statement for the quarter and six months ended
June 30 2001 was $63,000 and $125,000, respectively
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement applies to legal obligations associated
with the retirement of a tangible long-lived asset that results from the
acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lessee obligations. The statement requires
these obligations be recorded at fair value as of the date of retirement and is
effective for fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of this accounting principle will have a significant
effect on it's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement establishes a
single accounting model for long-lived assets to be disposed of by sale, and
requires that long-lived assets to be abandoned, exchanged for similar
productive assets, or distributed to owners in a spinoff be considered held and
used until disposed. The Company has adopted this standard beginning January 1,
2002. The adoption did not have an effect on the Company's financial statements.
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor is
the Company aware of any pending litigation, other than legal proceedings
incident to the business of the Company, such as foreclosure actions filed on
behalf of the Company. Management, therefore, believes the results of any
current litigation would be immaterial to the consolidated financial condition
or results of operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
On May 21, 2002, several matters were submitted to the security holders, in
connection with the Company's annual meeting of stockholders, all of which were
set forth in the Company's proxy materials. The result of such votes are as
follows:
Ballot No. 1
------------
The election of Keith D. Beaty to serve as director for a term of three
years or until his successor has been elected and qualified.
For Withheld
--- --------
Keith D. Beaty 12,770,867 -
Ballot No. 2
------------
The ratification of the Fidelity Bankshares, Inc. 2002 Incentive Stock
Benefit Plan.
For Against Abstain
--- ------- --------
Number of Votes 7,452,311 1,673,101 128,894
Ballot No. 3
------------
The ratification of the appointment of Deloitte & Touche LLP, as auditors
for the Company for the fiscal year ended December 31, 2002.
For Against Abstain
--- ------- --------
Number of Votes 12,744,070 199,688 15,571
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under Consolidated Financial
Statements (pages 2 through 5), Notes to Unaudited Consolidated Financial
Statements (pages 6 through 11) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 12 through 19), and
are incorporated by reference, herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIDELITY BANKSHARES, INC.
Date: August 13, 2002 By: /S/Vince A. Elhilow
----------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: August 13, 2002 By: /S/Richard D. Aldred
-----------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
EXHIBIT 99.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Vince A. Elhilow, Chief Executive Officer and Richard D. Aldred, Chief
Financial Officer of Fidelity Bankshares, Inc. (the "Company") each certify in
his capacity as an officer of the Company that he has reviewed the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 2002 and that to
the best of his knowledge:
(1) the report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(1) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 13, 2002 /S/Vince A. Elhilow
---------------------------
Vince A. Elhilow,
Chief Executive Officer
Date: August 13, 2002 /S/Richard D. Aldred
---------------------------
Richard D. Aldred,
Chief Financial Officer