13
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, 2003
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) 803-9900
- --------------------------------------------------------------------------------
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 15,017,253 shares
of the Registrant's common stock par value $0.10 per share outstanding as of
August 1, 2003.
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..............................................1
Unaudited Consolidated Statements of Financial Condition as of
December 31, 2002 and June 30, 2003...........................2
Unaudited Consolidated Statements of Operations for the three and
the six months ended June 30, 2002 and 2003...................3
Unaudited Consolidated Statements of Comprehensive Operations for
the three and the six months ended June 30, 2002 and 2003.....4
Unaudited Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2003..................................5
Notes to Unaudited Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk........18
Item 4. Controls and Procedures..........................................21
PART II. OTHER INFORMATION...............................................22
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
2002 2003
================= =======================
ASSETS (In thousands, except share
and per share data)
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 66,178 $ 66,524
Interest-bearing deposits................................................ 63,488 87,216
----------- -----------
Total cash and cash equivalents...................................... 129,666 153,740
----------- -----------
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 89,879 35,772
Mortgage-backed securities............................................... 109,755 416,958
Corporate debt securities................................................ 35,384 35,135
----------- -----------
Total assets available for sale...................................... 235,018 487,865
LOANS RECEIVABLE, Net......................................................... 1,935,999 2,042,527
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 67,784 69,588
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 12,919 13,645
REAL ESTATE OWNED, Net........................................................ - 232
ACCRUED INTEREST RECEIVABLE................................................... 9,698 10,739
DEFERRED INCOME TAX ASSET..................................................... 6,785 6,317
OTHER ASSETS 41,528 44,052
----------- -----------
TOTAL ASSETS $ 2,439,397 $ 2,828,705
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 1,898,341 $ 2,263,965
OTHER BORROWED FUNDS.......................................................... 44,416 31,557
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 253,371 271,198
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 3,185 15,522
DRAFTS PAYABLE................................................................ 6,181 23
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................... 28,750 28,750
OTHER LIABILITIES............................................................. 36,066 40,336
----------- -----------
TOTAL LIABILITIES........................................................ 2,270,310 2,651,351
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
15,869,787 shares at December 31, 2002 and 15,015,197 shares at June 30, 2003 1,587 1,502
ADDITIONAL PAID IN CAPITAL.................................................... 125,648 105,942
RETAINED EARNINGS - substantially restricted.................................. 77,687 84,834
TREASURY STOCK - at cost, 1,340,420 shares at December 31, 2002 and
312,235 shares at June 30, 2003.......................................... (21,705) (1,690)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan............................................ (4,609) (4,431)
Recognition and retention plan........................................... (5,986) (5,166)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (3,535) (3,637)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................... 169,087 177,354
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 2,439,397 $ 2,828,705
============ =============
See Notes to Unaudited Consolidated Financial Statements.
1
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2002 2003 2002 2003
=========== ========== ============ ============
(In Thousands, except per share data)
Interest income:
Loans............................................................$30,266 $ 31,855 $ 59,852 $ 63,736
Investment securities............................................. 1,034 226 2,014 623
Other investments................................................. 807 467 1,575 991
Mortgage-backed and corporate debt securities..................... 2,196 3,788 4,539 5,817
------ ---------- ---------- ----------
Total interest income.........................................34,303 36,336 67,980 71,167
------ ---------- ---------- ----------
Interest expense:
Deposits..........................................................10,333 9,997 20,807 19,425
Advances from Federal Home Loan Bank and other 5,451 4,653 10,842 9,271
------- ---------- ---------- ----------
borrowings.............................................................
Total interest expense........................................15,784 14,650 31,649 28,696
------ ---------- ---------- ----------
Net interest income....................................................18,519 21,686 36,331 42,471
Provision for loan losses.............................................. 316 693 817 1,483
------ ---------- ---------- ----------
Net interest income after provision for loan losses....................18,203 20,993 35,514 40,988
------ ---------- ---------- ----------
Other income:
Service charges on deposit accounts............................... 1,727 2,202 3,345 4,104
Fees for other banking services................................... 2,149 2,563 3,980 4,857
Net gain on sale of loans......................................... 21 1,054 43 3,613
Miscellaneous..................................................... 256 201 506 457
------ ---------- ---------- ----------
Total other income............................................ 4,153 6,020 7,874 13,031
------ ---------- ---------- ----------
Operating expense:
Employee compensation and benefits................................ 9,113 11,304 17,608 22,400
Occupancy and equipment........................................... 2,840 3,415 5,546 6,831
(Gain)/loss on real estate owned.................................. (107) (29) (121) 34
Marketing......................................................... 461 503 889 1,000
Federal deposit insurance premium................................. 69 77 141 154
Miscellaneous..................................................... 3,224 3,616 5,966 7,127
------ ---------- ---------- ----------
Total operating expense.......................................15,600 18,886 30,029 37,546
------ ---------- ---------- ----------
Income before provision for income taxes............................... 6,756 8,127 13,359 16,473
------ ---------- ---------- ----------
Provision for income taxes:
Current........................................................... 2,434 2,933 4,812 5,893
Deferred.......................................................... 221 263 438 532
------ ---------- ---------- ----------
Total provision for income taxes.............................. 2,655 3,196 5,250 6,425
------ ---------- ---------- ----------
Net income..............................................$ 4,101 $ 4,931 $ 8,109 $ 10,048
======= ========== ========== ==========
Earnings per share:
Basic............................................................$ 0.27 $ 0.34 $ 0.53 $ 0.70
======== ========== ========== ==========
Diluted..........................................................$ 0.27 $ 0.34 $ 0.53 $ 0.69
======== =========== ========== ==========
See Notes to Unaudited Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2002 2003 2002 2003
=============== =============== ============= ===============
(In Thousands) (In Thousands)
Net Income............................................................$.....4,101 $ 4,931 $ 8,109 $ 10,048
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during 1,497 549 1,154 (102)
----------- ---------- --------- ----------
period
Comprehensive income..................................................$.....5,598 $ 5,480 $ 9,263 $ 9,946
= ===== ========== ========= ==========
See Notes to Unaudited Consolidated Financial
Statements.
3
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
2002 2003
========= =================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 8,109 $ 10,048
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 1,790 1,968
ESOP and recognition and retention plan compensation expense........ 553 1,186
Accretion of discounts, amortization of premiums and goodwill, and (1,400) (965)
other deferred yield items.........................................
Provision for loan losses........................................... 817 1,483
Provisions for losses and net (gains) losses on sales of real
estate owned (123) (22)
owned
Net (gain) loss on sale of:
Loans......................................................... (43) (3,613)
Office properties and equipment............................... (1) 58
Decrease (increase) in accrued interest receivable.................. 181 (1,041)
Increase in other assets............................................ (813) (2,418)
Decrease in drafts payable.......................................... (7,567) (6,158)
Decrease in deferred income taxes................................... 438 534
Increase in other liabilities....................................... 4,170 4,251
-------- --------
Net cash provided by operating activities..................... 6,111 5,311
-------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (142,494) (210,862)
Principal payments received on mortgage-backed securities.............. 58,992 71,361
Purchases of:
Loans............................................................... (21,254) (23,453)
Mortgage-backed securities.......................................... (11,473) (379,266)
Federal Home Loan Bank stock........................................ (1,186) (955)
Investment securities............................................... (90,000) (40,000)
Office properties and equipment..................................... (5,032) (4,472)
Proceeds from sales of:
Loans............................................................... 3,325 131,025
Federal Home Loan Bank stock........................................ - 229
Real estate acquired in settlement of loans......................... 991 630
Office properties and equipment..................................... - 550
Proceeds from maturities of municipal bonds and government and agency 79,445 94,000
securities
Other.................................................................. (366) (360)
--------- ---------
Net cash used for investing activities........................ (129,052) (361,573)
-------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options, 79 299
net of issuance costs..................................................
Purchase of treasury stock............................................. (3,958) (10)
Cash dividends paid.................................................... (3,056) (2,882)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 231,963 405,211
Certificates of deposit............................................. (45,843) (39,587)
Advances from Federal Home Loan Bank................................ 18,249 17,827
Other borrowed funds................................................ 3,528 (12,859)
Advances by borrowers for taxes and insurance....................... 11,467 12,337
-------- --------
Net cash provided by financing activities..................... 212,429 380,336
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 89,488 24,074
CASH AND CASH EQUIVALENTS, Beginning of period......................... 96,291 129,666
-------- --------
CASH AND CASH EQUIVALENTS, End of period............................... $185,779 $153,740
======== ========
See Notes to Unaudited Consolidated Financial Statements.
4
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 2002 Annual
Report on Form 10-K.
The Company conducts no significant 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, 2003 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 December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123" to provide 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. The
provisions of Statement 148 became effective for interim periods beginning after
December 15, 2002. See note 2 - Stock Options, in the unaudited consolidated
financial statements.
In November 2002, the FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. This interpretation requires
elaborating on the disclosures that must be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure requirements of
this Interpretation became effective for statements issued after December 15,
2002 and its recognition requirements are applicable for guarantees issued or
modified after December 31, 2002. The adoption of this statement did not have a
material impact on the Company's financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." This interpretation clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of this Interpretation are effective
immediately for variable interest companies created after January 31, 2003, and
variable interest after that date. The provisions of this Interpretation are
effective in the first fiscal year or interim period beginning after June 15,
2003, for variable interest companies in which an enterprise holds a variable
interest that it acquired before February 1, 2003. This statement is not
expected to have a material effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 30, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. We do not expect the implementation of
SFAS No. 150 to have a material impact on our consolidated financial statements.
Certain amounts in the financial statements have been reclassified to
conform with the June 30, 2003 presentation.
5
2. STOCK OPTION PLANS
At June 30, 2003, the Company has three stock-based compensation plans. The
Company accounts for these plans using the intrinsic value method prescribed by
APB Opinion No. 25 "Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, no stock option-based employee compensation cost
is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation.
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2002 2003 2002 2003
========= =========== =========== =============
(In Thousands) (In Thousands)
Net Income, as reported............................................... $ 4,101 $ 4,931 $ 8,109 $ 10,048
Add: Total stock-based employee compensation expense
included
in reported net earnings, net of related tax effects............ 111 240 111 500
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects...................... (161) (365) (161) (750)
----- ------- ------------ -----------
Pro forma net income.................................................. $ 4,051 $ 4,806 $ 8,059 $ 9,798
===== ======= =========== ==========
Basic - as reported................................................ 0.27 0.34 0.53 0.70
Basic - pro forma.................................................. 0.27 0.33 0.53 0.68
Diluted - as reported.............................................. 0.27 0.34 0.53 0.69
Diluted - pro forma................................................ 0.26 0.33 0.52 0.68
The Company has reserved 550,237 shares of common stock under the 1994
Incentive Stock Option Plan. The plan provides for the granting of options to
key employees until it expires on January 6, 2004. All options were granted at
the closing price on the date of grant and were exercisable at a rate of twenty
percent per year, not to exceed ten years. At June 30, 2002 and 2003 there were
82,447 and 8,585 options outstanding and exercisable. Unexercised options expire
on January 6, 2004.
The Company has reserved 183,410 shares of common stock under the 1994
Stock Option Plan for Outside Directors. The plan provides for the granting of
options to directors until it expires on January 6, 2004. All options were
granted at the closing price on the date of grant and are exercisable at any
time up to ten years. At June 30, 2002 and 2003 there were 97,519 and 29,332
options outstanding and exercisable. Unexercised options expire on January 6,
2004.
On May 21, 2002, the Company adopted and stockholders approved the 2002
Incentive Stock Benefit Plan. Under the 2002 plan, the Company has reserved
869,594 shares of common stock, of which options to purchase 829,950 shares were
granted to key employees and outside directors. The term of the stock option
awards is ten years from the date of grant. Of the 829,950 options granted,
703,900 options, which were granted to outside directors and certain executive
officers will vest commencing with the first 16 2/3% vested on the date of grant
and the remaining shares vesting at 16 2/3% per year over a 5 year period. The
remaining 126,050 options granted to other key employees vest at a rate of 20%
each year and will be fully vested five years after the date of grant. At June
30, 2003, 39,644 options remained available for grant.
6
3. LOANS RECEIVABLE Loans receivable at December 31, 2002 and June 30,
2003, consist of the following:
December 31, June 30,
2002 2003
============== ==============
(In Thousands)
One-to-four single family, residential real estate mortgages......... $1,062,956 $1,018,197
Commercial and multi-family real estate mortgages.................... 459,054 617,735
Real estate construction-primarily residential....................... 364,346 382,399
Land loans-primarily residential..................................... 29,181 31,194
---------- ----------
Total first mortgage loans........................................... 1,915,537 2,049,525
Consumer loans....................................................... 141,343 160,907
Commercial business loans............................................ 146,205 125,425
---------- ----------
Total gross loans.................................................... 2,203,085 2,335,857
Less:
Undisbursed portion of loans in process......................... 260,380 282,970
Unearned discounts, premiums and deferred loan fees (costs), net (1,612) 630
Allowance for loan losses....................................... 8,318 9,730
---------- ----------
Loans receivable-net................................................. $1,935,999 $2,042,527
========== ==========
During the quarter ended June 30, 2003, the Company sold $43.6 million in
loans, which resulted in net gains of approximately $1.0 million. The Company
has initiated a loan sales program to provide additional non interest income,
reduce interest rate risk and as a capital management tool. At June 30, 2003,
the Company held $5.4 million in loans available for sale.
4. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year
ended December 31, 2002 the three and six month periods ended June 30, 2002 and
2003, is as follows:
For the Year For the Three Months For the Six Months
Ended Ended Ended
December 31, June 30, June 30,
2002 2002 2003 2002 2003
================ ========== ========= ========= =========
(In Thousands) (In Thousands) (In Thousands)
Balance at beginning of period...... $ 6,847 $ 7,338 $ 9,037 $ 6,847 $ 8,318
Current provision................... 1,986 316 693 817 1,483
Charge-offs......................... (575) (223) - (239) (71)
Recoveries.......................... 60 10 - 16 -
--------- -------- ---------- -------- ---------
Ending balance...................... $ 8,318 $ 7,441 $ 9,730 $ 7,441 $ 9,730
========== ======== ========== ======== =========
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, 2002 June 30, 2003
=========================== ============================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------- ------------- -------------- -------------
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loan losses................ $ 1,145 $ 546 $ 1,062 $ 527
Loans without related allowance for loan losses............. 7,248 - 8,882 -
-------- -------- -------- --------
Total.............................................. $ 8,393 $ 546 $ 9,944 $ 527
======== ======== ======== ========
7
The Bank's policy for 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. DEPOSITS
The weighted-average interest rates on deposits at December 31, 2002 and
June 30, 2003 were 1.93% and 1.69%, respectively. Deposit accounts, by type at
December 31, 2002 and June 30, 2003 consist of the following:
December 31, June 30,
Account Type and Rate 2002 2003
========= ==============
(In Thousands)
Non-interest-bearing checking accounts..................... $209,695 $199,162
Interest-bearing checking and funds transfer accounts...... 388,179 523,562
Passbook and statement accounts............................ 340,709 556,746
Variable-rate money market accounts........................ 192,003 256,327
Certificates of deposit.................................... 767,755 728,168
-------- --------
Total...................................................... $1,898,341 $2,263,965
========== ==========
8
6. 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, 2002 Stockholders'
Equity and ratio to total assets 7.7% $187,501
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,084
Goodwill............................. (2,175)
Disallowed servicing assets.......... (8)
--------
Tangible capital and ratio to
adjusted total assets........... 7.7% $187,402 1.5% $ 38,613
======== ======== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.7% $187,402 3.0% $ 73,227 5.0% $ 122,044
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.6% $187,402 4.0% $ 70,861 6.0% $ 106,291
======== ======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 7,679
--------
Total risk-based capital and ratio to
risk-weighted total assets...... 11.0% $195,081 8.0% $ 141,721 10.0% $ 177,152
======== ======== ====== ========= ====== =========
Total assets......................... $2,439,654
==========
Adjusted total assets................ $2,440,887
==========
Risk-weighted assets................. $1,771,518
==========
As of June 30, 2003 Stockholders'
Equity and ratio to total assets 6.9% $195,734
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,186
Goodwill............................. (2,175)
Disallowed servicing assets.......... (75)
--------
Tangible capital and ratio to
adjusted total assets........... 6.9% $195,670 1.5% $ 42,501
======== ======== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 6.9% $195,670 3.0% $ 85,003 5.0% $ 141,672
======== ======== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.1% $195,670 4.0% $ 77,780 6.0% $ 116,670
======== ======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 9,029
--------
Total risk-based capital and ratio to
risk-weighted total assets...... 10.5% $204,699 8.0% $ 155,560 10.0% $ 194,451
======== ======== ====== ========= ====== =========
Total assets......................... $2,832,097
==========
Adjusted total assets................ $2,833,431
==========
Risk-weighted assets................. $1,944,505
==========
9
7. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the stock options, for the
three and the six month periods ended June 30, 2002 and 2003, are as follows:
For the Three Months
Ended For the Three Months Ended
June 30, 2002 June 30, 2003
----------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
(Dollars In Thousands, except per share data)
Net income................. $ 4,101,000 $4,931,000
Basic EPS:
Income available to
common stockholders... $ 4,101,000 15,254,992 $0.27 $4,931,000 14,483,994 $ 0.34
===== =======
Effect of diluted shares:
Common stock options.. 146,464 92,097
---------- ----------
Diluted EPS:
Income available to
common stockholders... $ 4,101,000 15,401,046 $0.27 $4,931,000 14,576,091 $ 0.34
========== =========== ===== =========== ============ =======
For the Six Months For the Six Months Ended
Ended June 30, 2003
June 30, 2002
----------------------------------- ---------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
(Dollars In Thousands, except per share data)
Net income................. $ 8,109,000 $10,048,000
Basic EPS:
Income available to
common stockholders... $ 8,109,000 15,270,880 $ 0.53 $10,048,000 14,436,535 $ 0.70
====== ======
Effect of diluted shares:
Common stock options.. 144,022 38,884
---------- ----------
Diluted EPS:
Income available to
common stockholders... $ 8,109,000 15,414,902 $ 0.53 $10,048,000 14,475,419 $ 0.69
========== ============ ====== =========== ========== ======
ESOP shares that have not been committed to be released are not considered to be
outstanding.
10
8. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended June 30, 2002 and 2003, is as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2003 2002 2003
--------------------------- ---------------------------
Unrealized Unrealized
Losses Losses
On Securities On Securities
(In Thousands)
Beginning Balance............... $ (2,347) $ (4,186) $ (2,004 $ (3,535)
Current-period change........... 1,497 1,154 (102)
---------- ----------- ---------- ---------
549
Ending balance.................. $ (850) $ (3,637) $ (850) $ (3,637)
========== ========== ========== =========
An analysis of the related tax effects allocated to Other Comprehensive
Income (Loss) is as follows:
For the Three Months Ended For the Three Months Ended
June 30, 2002 June 30, 2003
------------------------------------ -----------------------------------
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.........................$.2,454.. $ (957) $ 1,497 $ 900 $ (351) $ 549
= ===== ======== ======= ======= ======== =======
For the Six Months Ended For the Six Months Ended
June 30, 2002 June 30, 2003
------------------------------------ -----------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
=========== ============ =========== == =========== =========== ===========
(In Thousands)
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains
(losses) arising during period............. $ 1,892 $ (738) $ 1,154 $ (167) $ 65 $ (102)
======= ======== ======= ======== ======= ========
9. CONTINGENCIES
On July 1, 2003, Fidelity Federal Bank & Trust was named as defendant in
the lawsuit, James Kehoe v. Fidelity Federal Bank & Trust, filed in the United
States District Court for the Southern District of Florida. In this action,
James Kehoe ("Kehoe"), on behalf of himself and other similarly situated
persons, has alleged that the Bank violated the Driver Privacy Protection Act by
obtaining driver registration information from the State of Florida for use in
its marketing efforts. Kehoe seeks as damages the statutory minimum of $2,500
per violation. As a result of Kehoe's suing on behalf of a class of plaintiffs,
the potential award, should Kehoe prevail, would be material. At this time,
however, the size of the class has not been asserted by Kehoe. The Bank is
currently in the process of drafting a response to the complaint and discovery
has not yet commenced. The Bank, in consultation with counsel, has concluded
that the lawsuit is without merit and the Bank intends to vigorously defend
against Kehoe's claim. Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
11
Item 2. 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.
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 Operations.
The Company's only component of Other Comprehensive Operations for the
three and the six months ended June 30, 2003 and 2002 is the change in the
unrealized gain or loss on assets available for sale.
Other comprehensive loss for the six months ended June 30, 2003 was
$102,000 compared to other comprehensive income of $1.2 million for the six
months ended June 30, 2002. During the six months ended June 30, 2003, the
market value of the Company's assets available for sale decreased by $167,000,
which net of income tax benefit of $65,000 resulted in other comprehensive loss
of $102,000. During the six months ended June 30, 2002, the value of the
Company's assets available for sale increased by $1.9 million, which net of
$738,000 in income tax expense resulted in other comprehensive income of $1.2
million.
Other comprehensive income for the quarter ended June 30, 2003 was $549,000
compared to other comprehensive income of $1.5 million for the quarter ended
June 30, 2002. During the quarter ended June 30, 2003, the market value of the
Company's assets available for sale increased by $900,000, which net of income
tax expense of $351,000 resulted in other comprehensive income of $549,000.
During the quarter ended June 30, 2002, the value of the Company's assets
available for sale increased by $2.5 million which net of $957,000 in income tax
expense resulted in other comprehensive income of $1.5 million.
12
Changes in Financial Condition.
The Company's assets increased by $389.3 million to $2.8 billion at June
30, 2003 from $2.4 billion at December 31, 2002. Net loans receivable increased
by $106.5 million, while cash and assets available for sale increased by $276.9
million. The increase in net loans receivable reflects a shift in the
composition of the Bank's loan portfolio since December 31, 2002. Due in part to
the Company's commencement of loans sales into the secondary markets, the
balance of 1 to 4 family and residential land loans decreased from December 31,
2002 to June 30, 2003 by approximately $20.6 million. Offsetting this decrease
in residential loans was an increase in consumer loans of $19.2 million and an
increase in commercial real estate and business loans of $107.9 million. The
increase in cash and assets available for sale reflects management's decision to
maintain a higher level of assets in liquid investments during a period of low
interest rates. In addition, the Company increased its investment in office
properties and equipment, primarily for new office sites, by $1.8 million, while
all other assets increased by $8.6 million. Funds for the increase in assets
were provided primarily as a result of an increase in deposits of $365.6
million, together with increases in all other liabilities in the amount of $15.4
million, of which advances from Federal Home Loan Bank were $17.8 million. In
addition to these increases in liabilities, equity increased by $8.3 million to
$177.4 million at June 30, 2003 from $169.1 million at December 31, 2002
resulting mainly from net income for the six months of $10.0 million which was
offset by dividends declared of $2.9 million.
Results of Operations.
Net income for the six months ended June 30, 2003 was $10.0 million, an
$1.9 million increase compared to $8.1 million for the same 2002 period. This
increase was attributable to an increase in net interest income of $6.2 million
along with an increase in other income of $5.2 million. The increase in net
interest income consisted of an increase in interest income of $3.2 million
along with a decrease in interest expense of $3.0 million. The increase in other
income included a gain on the sale of loans of $3.6 million for the six months
ended June 30, 2003. Partially offsetting these increases were increases in
operating expenses of $7.5 million and increases in the provision for income
taxes of $1.2 million for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002.
Net income for the quarter ended June 30, 2003 was $4.9 million, an
$830,000 increase compared to $4.1 million for the same 2002 quarter. This
increase was attributable to an increase of $3.2 million in net interest income
along with an increase in other income of $1.9 million. The increase in net
interest income consisted of a decrease in interest expense of $1.2 million
along with an increase in interest income of $2.0 million. The increase in other
income included a gain on the sale of loans of $1.0 million for the quarter
ended June 30, 2003. Partially offsetting these increases were an increase in
operating expenses of $3.3 million and an increase in the provision for income
taxes of $541,000 for the quarter ended June 30, 2003 compared to the quarter
ended June 30, 2002.
Interest Income.
Interest income for the six months ended June 30, 2003, totaled $71.2
million, representing an increase of $3.2 million or 4.7% compared to the same
period in 2002. Interest income from loans increased by $3.9 million, primarily
as a result of a 19.1% increase in the average balance of loans to $2.0 billion
from $1.7 billion for the six months ended June 30, 2003 and 2002, respectively.
Interest income from mortgage-backed and corporate debt securities increased to
$5.8 million for the six months ended June 30, 2003 from $4.5 million for the
2002 period. This increase was due to an increase in the average balance of such
securities of $99.8 million, partially offset by a decrease in the average yield
of these securities to 3.68% in 2003 from 4.20% in 2002. There was a decline in
interest income from investment securities of $1.4 million principally resulting
from a decrease in the average yield of these securities to 2.20% from 3.60%, as
well as a decrease in the average balance of such securities to $56.6 million
for the six months ended June 30, 2003 from $111.8 million for the six months
ended June 30, 2002. Interest income on other investments also decreased by
$584,000 due mainly to a decrease in the average balance on these investments to
$125.2 million from $148.1 million and a decline in the average yield to 1.58%
from 2.13% for the periods ended June 30, 2003 and 2002, respectively.
13
Interest income for the quarter ended June 30, 2003, totaled $36.3 million,
representing an increase of $2.0 million or 5.9% compared to the same quarter in
2002. Interest income from loans increased by $1.6 million, primarily as a
result of a 17.2% increase in the average balance of loans to $2.0 billion from
$1.7 billion for the quarters ended June 30, 2003 and 2002, respectively.
Interest income from mortgage-backed and corporate debt securities increased to
$3.8 million for the quarter ended June 30, 2003 from $2.2 million for the 2002
quarter. This increase resulted from an increase in the average balance of such
securities to $419.9 million from $205.7 million, counteracted by a decrease in
the average yield of these securities to 3.61% for the quarter ended June 30,
2003 from 4.27% for the quarter ended June 30, 2002. There was a decline in
interest income from investment securities of $808,000 resulting from a decrease
in the average balance of such securities to $44.9 million from $122.2 million,
along with a decrease in the average yield of these securities to 2.01% for the
quarter ended June 30, 2003 from 3.39% for the quarter ended June 30, 2002.
Interest income on other investments also decreased by $340,000 due mainly to a
decrease in the average balance on these investments to $114.8 million from
$150.1 million for the quarters ended June 30, 2003 and 2002, respectively.
Interest Expense.
Interest expense for the six months ended June 30, 2003, totaled $28.7
million, a decrease of $3.0 million or 9.3% from the same period in 2002. The
principal cause for this decline was a decrease in interest expense on deposits
of $1.4 million. While the average balance of deposits increased to $2.1 billion
for the six months ended June 30, 2003 compared to $1.7 billion for the six
months ended June 30, 2002, the cost of those deposits declined to 1.85%
compared to 2.46% for the comparative period. The decline in the cost of
deposits had two principal causes: (a) the Bank's core deposits, which consist
of interest-bearing and non interest-bearing transaction accounts, money market
accounts and passbook accounts increasing as a percentage of total deposits to
67.8% at June 30, 2003 from 53.9% at June 30, 2002, and (b) the majority of the
Bank's maturing certificates of deposit repricing in a lower rate environment.
Interest expense on borrowed funds decreased by $1.6 million caused primarily
due to a decrease in the average balance of such funds to $337.4 million from
$376.5 million and a decrease in the average cost of borrowed funds to 5.50% for
the six months ended June 30, 2003 from 5.76% for the comparable 2002 period.
Interest expense for the quarter ended June 30, 2003, totaled $14.7
million, a decrease of $1.2 million or 7.2% from the same quarter in 2002. The
principal cause for this decline was a decrease in interest expense on deposits
of $336,000. While the average balance of deposits increased to $2.2 billion for
the quarter ended June 30, 2003 compared to $1.7 billion for the quarter ended
June 30, 2002, the cost of those deposits declined to 1.82% compared to 2.39%
for the comparative quarter. The decline in the cost of deposits had two
principal causes: (a) the Bank's core deposits, which consist of
interest-bearing and non interest-bearing transaction accounts, money market
accounts and passbook accounts increasing as a percentage of total deposits from
53.9% at June 30, 2002 to 67.8% at June 30, 2003, and (b) the majority of the
Bank's maturing certificates of deposit repricing in a lower rate environment.
Interest expense on borrowed funds also decreased by $798,000 caused primarily
by a decrease in the average balance of such funds to $334.5 million from $378.0
million and a decrease in the average cost of borrowed funds to 5.56% for the
quarter ended June 30, 2003 from 5.77% for the comparable 2002 quarter.
Net Interest Income.
During the six months ended June 30, 2003, the Company's interest income
increased by $3.2 million compared to the same period in 2002, while interest
expense decreased by $3.0 million, resulting in net interest income of $42.5
million for the six months ended June 30, 2003, a $6.2 million or, 16.9%
increase from the six months ended June 30, 2002.
During the quarter ended June 30, 2003, the Company's interest income
increased by $2.0 million compared to the same quarter in 2002, while interest
expense decreased by $1.2 million, resulting in net interest income of $21.7
million for the quarter ended June 30, 2003, a $3.2 million or, 17.1% increase
from the quarter ended June 30, 2002.
14
Provision for Loan Losses.
The provision for loan losses was $1.5 million for the six months ended
June 30, 2003, compared to $817,000 for the six months ended June 30, 2002. The
provision for the six months ended June 30, 2003 is deemed adequate by
management in light of the risks known and inherent in the Bank's loan
portfolio.
The provision for loan losses was $693,000 for the quarter ended June 30,
2003, compared to $316,000 for the quarter ended June 30, 2002. The provision
for the quarter ended June 30, 2003 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, 2003 was $13.0 million,
representing an increase of $5.2 million compared to the same period in 2002.
This increase is principally due to an increase in net gain on sale of loans of
$3.6 million, resulting directly from the sale of $127.6 million in loans in the
six months ended June 30, 2003. These sales included a gain of $1.5 million on
the sale of approximately $50.0 million of loans from the existing portfolio,
which occurred during the first quarter of 2003. The balance of loan sales of
totally $77.6 million generated $2.1 million in net gain, representing the
Company's commencement of loan sales into the secondary markets. The Company has
initiated the loan sales program to provide additional non interest income,
reduce interest rate risk and as a capital management tool. Also contributing to
the increase in other income were an increase in fees for other banking services
of $877,000 to $4.9 million from $4.0 million and an increase in service charges
on deposit accounts of $759,000 to $4.1 million from $3.3 million for the six
months ended June 30, 2003 and 2002, respectively.
Other income for the quarter ended June 30, 2003 was $6.0 million,
representing an increase of $1.9 million compared to the same quarter in 2002.
This increase is principally due to an increase in net gain on sale of loans of
$1.0 million, resulting directly from the sale of $43.6 million in loans in the
quarter ended June 30, 2003. Also contributing to the increase in other income
were increases in fees for other banking services of $414,000 to $2.6 million
from $2.1 million and increases in service charges on deposit accounts of
$475,000 to $2.2 million from $1.7 million for the quarters ended June 30, 2003
and 2002, respectively.
Operating Expense.
Operating expense increased by $7.5 million to $37.5 million for the six
months ended June 30, 2003 when compared to the same six month period in 2002.
Of this increase, $4.8 million is attributable to employee compensation and
benefits expense. Increases in employee compensation and benefits expense were
primarily attributable to an $860,000 increase in medical benefits costs, a
$584,000 increase in the Company's defined benefit retirement plan costs, and a
$638,000 increase in stockholder approved stock based compensation. The
remainder of the increase in compensation costs are principally due to
additional personnel to staff new offices, compensation for expansion of the
company's lending and other income production activities, increased incentive
compensation due to increased profitability, together with normal salary
increases. The increase of $1.3 million in occupancy and equipment costs
reflects the company's continued expansion of offices and investment in
technology to better serve its customers. Miscellaneous operating costs
increased by $1.2 million due mainly to operating the new customer service
facilities.
15
Compared to the quarter ending June 30, 2002, operating expense for the
quarter ending June 30, 2003 increased by $3.3 million to $18.9 million. Of this
increase, $2.2 million is attributable to employee compensation and benefits.
Increases in employee compensation and benefits expense were primarily
attributable to an $408,000 increase in medical benefits costs, a $355,000
increase in the Company's defined benefit retirement plan costs, and a $213,000
increase in stockholder approved stock based compensation. The remainder of the
increase in compensation costs is due to incentive compensation as a result of
increased profitability, additional personnel to serve deposit and loan
customers, as well as production of increased fee based income, together with
normal salary increases. Occupancy and equipment costs and miscellaneous
operating Market Value costs increased by $575,000 and of Portfolio $392,000,
respectively Equity reflecting the operation of new customer service facilities.
When compared to the quarter ended March 31, 2003, the Company's operating
expense for the quarter ending June 30, 2003 increased by $226,000.
Income Taxes.
The income tax provision was $6.4 million for the six months ended June 30,
2003 compared to $5.3 million for the six months ended June 30, 2002. The
provision reflects the current rates paid for Federal and State income taxes
applied to the Company's pre-tax income.
The income tax provision was $3.2 million for the quarter ended June 30,
2003 compared to $2.7 million for the quarter ended June 30, 2002. The provision
reflects the current rates paid for Federal and State income taxes applied to
the Company's pre-tax income.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
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, 2003, the
Company does not own any trading assets other than $1.1 million 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, 2003, 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.
16
The following table sets forth the Bank's estimated internal calculations
of MVPE as of June 30, 2003.
Changes in Rates
(Rate Shock) $ Amount $ Change % Change
============ ========== ============= ================
(Dollars in Thousands)
+200bp $ 315,923 $ 5,055 1.6%
+100bp 326,689 15,821 5.1%
-0- 310,868 0 0.0%
-100bp 238,750 (72,118) (23.2)%
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 September 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.
17
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 12.35%
during the month of June 2003. Liquidity ratios averaged 8.97% for the quarter
ended June 30, 2003. 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 $87.2 million at June 30, 2003. Other assets qualifying for
liquidity at June 30, 2003, including unpledged mortgage-backed securities
guaranteed by the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation, were $212.9 million. For additional information about
cash flows from the Company's operating, financing and investing activities, see
Unaudited Consolidated Statements of Cash Flows included in the Unaudited
Consolidated 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, 2003, the Bank had $271.2 million in advances from
the FHLB. At June 30, 2003, the Bank had commitments outstanding to originate or
purchase loans of $219.3 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, 2003, totaled $462.1 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123" to provide 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. The
provisions of Statement 148 became effective for interim periods beginning after
December 15, 2002. See note 2 - Stock Options, in the unaudited consolidated
financial statements.
In November 2002, the FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. This interpretation requires
elaborating on the disclosures that must be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure requirements of
this Interpretation became effective for statements issued after December 15,
2002 and its recognition requirements are applicable for guarantees issued or
modified after December 31, 2002. The adoption of this statement did not have a
material impact on the Company's financial statements.
18
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." This interpretation clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of this Interpretation are effective
immediately for variable interest companies created after January 31, 2003, and
variable interest after that date. The provisions of this Interpretation are
effective in the first fiscal year or interim period beginning after June 15,
2003, for variable interest companies in which an enterprise holds a variable
interest that it acquired before February 1, 2003. This statement is not
expected to have a material effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 30, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. We do not expect the implementation of
SFAS No. 150 to have a material impact on our consolidated financial statements.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the period covered by this quarterly report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this quarterly
report, the Companys disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act 0f 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internat control over financial reporting.
19
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor is
the Company aware of any pending litigation, other than legal proceedings
incident to the business of the Company, such as foreclosure actions filed on
behalf of the Company. Management, therefore, believes the results of any
current litigation, other than as described below, would be immaterial to the
consolidated financial condition or results of operation of the Company.
On July 1, 2003, Fidelity Federal Bank & Trust was named as defendant in
the lawsuit, James Kehoe v. Fidelity Federal Bank & Trust, filed in the United
States District Court for the Southern District of Florida. In this action,
James Kehoe ("Kehoe"), on behalf of himself and other similarly situated
persons, has alleged that the Bank violated the Driver Privacy Protection Act by
obtaining driver registration information from the State of Florida for use in
its marketing efforts. Kehoe seeks as damages the statutory minimum of $2,500
per violation. As a result of Kehoe's suing on behalf of a class of plaintiffs,
the potential award, should Kehoe prevail, would be material. At this time,
however, the size of the class has not been asserted by Kehoe. The Bank is
currently in the process of drafting a response to the complaint and discovery
has not yet commenced. The Bank, in consultation with counsel, has concluded
that the lawsuit is without merit and the Bank intends to vigorously defend
against Kehoe's claim.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
20
Item 4 Submission of Matters to a Vote of Security Holders
Ballot No. 1
The election of Vince A. Elhilow and Donald E. Warren to serve as
directors for a term of three years or until their successors has been
elected and qualified.
For Withheld
Vince A. Elhilow 10,916,179 363,491
Donald E. Warren 10,984,822 294,848
Ballot No. 2
The ratification of the appointment of Deloitte & Touche LLP, as
auditors for the Company for the fiscal year ended December 31, 2003.
For Against Abstain
Number of Votes 11,092,485 166,099 21,084
Item 5 Other Information
None.
21
Item 6 Exhibits 31.1, 31.2 and 32.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Vince A. Elhilow, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fidelity Bankshares,
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2003 /S/Vince A. Elhilow
--------------------------------
Vince A. Elhilow, President and
Chief Executive Officer
22
Certification of Chief Financial
Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
I, Richard D. Aldred, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fidelity Bankshares,
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2003 /S/Richard D. Aldred
----------------------------------
Richard D. Aldred
Chief Financial Officer
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FIDELITY BANKSHARES, INC.
Date: August 12, 2003 By: /S/Vince A. Elhilow
-----------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: August 12, 2003 By: /S/Richard D. Aldred
-----------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer