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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________to___________________
Commission File Number 0-29040 ____________________________________
Fidelity Bankshares, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 Datura Street, West Palm Beach, Florida 33401
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code.)
(561) 803-9900
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark 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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| 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 15,130,146 shares
of the Registrant's common stock par value $.10 per share outstanding as of
August 6, 2004.
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................1
Unaudited Condensed Consolidated Statements of Financial
Condition as of December 31, 2003 and June 30, 2004....2
Unaudited Condensed Consolidated Statements of Operations
for the three and the six months ended June 30, 2003
and 2004..............................................3
Unaudited Condensed Consolidated Statements of Comprehensive
Operations for the three and the six months ended
June 30, 2003 and 2004.................................4
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2003 and 2004........5
Notes to Unaudited Condensed 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.17
Item 4. Controls and Procedures...................................23
PART II. OTHER INFORMATION....................................................24
Item 1. Legal Proceedings.........................................24
Item 2. Changes in Securities.....................................25
Item 3. Default Upon Senior Securities............................25
Item 4. Submission of matters to a Vote of Security...............25
Item 5. Other Information.........................................25
Item 6. Exhibits and Reports on Form 8-K.........................25
EXHIBITS
Section 302 Certification
Section 906 Certification
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
December 31, June 30,
2003 2004
================ ======================
ASSETS (In thousands, except share and per share
data)
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 76,090 $ 94,256
Interest-earning deposits................................................ 33,797 23,039
----------- ----------
Total cash and cash equivalents...................................... 109,887 117,295
----------- ----------
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 122,731 169,239
Mortgage-backed securities............................................... 471,228 503,254
----------- ----------
Total assets available for sale...................................... 593,959 672,493
LOANS RECEIVABLE, Net......................................................... 2,191,696 2,448,022
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 73,553 76,204
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 13,322 19,905
REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS................................
- 7
ACCRUED INTEREST RECEIVABLE................................................... 11,127 12,125
DEFERRED INCOME TAX ASSET..................................................... 7,598 10,460
OTHER ASSETS 47,080 46,108
----------- ----------
TOTAL ASSETS $ 3,048,222 $ 3,402,619
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 2,460,101 $ 2,676,004
OTHER BORROWED FUNDS.......................................................... 42,089 34,651
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 264,561 387,679
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 2,816 16,370
DRAFTS PAYABLE................................................................ 202 2,386
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................... 52,320 52,320
OTHER LIABILITIES............................................................. 41,624 44,096
----------- ----------
TOTAL LIABILITIES........................................................ 2,863,713 3,213,506
----------- ----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
15,024,648 shares issued at December 31, 2003 and 15,130,026 shares issued
at June 30, 2004..................................................... 1,502 1,513
ADDITIONAL PAID IN CAPITAL.................................................... 106,392 107,009
RETAINED EARNINGS - substantially restricted.................................. 89,793 98,231
TREASURY STOCK - at cost, 314,694 shares at December 31, 2003 and
295,071 shares at June 30, 2004.......................................... (1,794) (1,737)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan............................................ (4,257) (4,083)
Recognition and retention plan........................................... (4,410) (3,675)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (2,717) (8,145)
----------- ----------
TOTAL STOCKHOLDERS'EQUITY............................................... 184,509 189,113
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 3,048,222 $ 3,402,619
=========== ==========
See Notes to Unaudited Condensed Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2003 2004 2004 2003
====================================================
(In Thousands, except per share data)
Interest income:
Loans............................................................. $ 31,855 $ 33,921 $ 63,736 $ 66,680
Investment securities............................................. 226 927 623 1,495
Other investments................................................. 467 356 991 642
Mortgage-backed and corporate debt securities..................... 3,788 3,887 5,817 8,336
--------- -------- ---------- --------
Total interest income......................................... 36,336 39,091 71,167 77,153
--------- -------- ---------- --------
Interest expense:
Deposits.......................................................... 9,997 9,591 19,425 18,964
Advances from Federal Home Loan Bank and other borrowings......... 4,653 4,915 9,271 9,691
--------- -------- ---------- --------
Total interest expense........................................ 14,650 14,506 28,696 28,655
--------- -------- ---------- --------
Net interest income.................................................... 21,686 24,585 42,471 48,498
Provision for loan losses.............................................. 693 794 1,483 1,391
--------- -------- ---------- --------
Net interest income after provision for loan losses.................... 20,993 23,791 40,988 47,107
Other income:
Service charges on deposit accounts............................... 2,202 2,795 4,104 5,634
Fees for other banking services................................... 2,563 2,997 4,857 5,669
Net gain on sale of loans......................................... 1,054 151 3,613 257
Net gain on sale of Investments................................... - 467 - 1,053
Miscellaneous..................................................... 201 747 1007 457
--------- -------- ---------- --------
Total other income............................................ 6,020 7,157 13,031 13,620
--------- -------- ---------- --------
Operating expense:
Employee compensation and benefits................................ 11,304 12,521 22,400 24,466
Occupancy and equipment.......................................... 3,415 3,943 6,831 7,953
(Gain)/loss on real estate owned and other repossessed assets.... (29) (2) 34 (10)
Marketing......................................................... 503 520 1,000 1,108
Federal deposit insurance premium................................. 77 93 154 183
Miscellaneous..................................................... 3,616 4,472 7,127 8,313
--------- -------- ---------- --------
Total operating expense....................................... 18,886 21,547 37,546 42,013
--------- -------- ---------- --------
Income before provision for income taxes............................... 8,127 9,401 16,473 18,714
--------- -------- ---------- --------
Provision for income taxes:
Current........................................................... 2,933 3,407 5,893 6,731
Deferred.......................................................... 263 306 532 608
--------- -------- ---------- --------
Total provision for income taxes.............................. 3,196 3,713 6,425 7,339
--------- -------- ---------- --------
Net income............................................... $ 4,931 $5,688 $10,048 $ 11,375
========= ======== ========== =========
Earnings per share:
Basic............................................................. $ 0.34 $ 0.39 $ 0.70 $ 0.78
========= ======== ========== =========
Diluted........................................................... $ 0.34 $ 0.38 $ 0.69 $ 0.75
========= ======== ========== =========
See Notes to Unaudited Condensed Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- -------------------------------------------------------------------------------
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2003 2004 2003 2004
=====================================================
(In Thousands)
Net Income........................................................... $ 4,931 $ 5,688 $ 10,048 $ 11,375
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period..... 549 (8,140) (102) (5,428)
-------- -------- --------- ----------
Comprehensive income................................................. $ 5,480 $(2,452) $ 9,946 $ 5,947
See Notes to Unaudited Condensed Consolidated Financial Statements.
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
2003 2004
=========================
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 10,048 $ 11,375
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 1,968 2,893
ESOP and recognition and retention plan compensation expense........ 1,186 1,359
Accretion of discounts, amortization of premiums and goodwill, and (965) (1,370)
other deferred yield items.........................................
Provision for loan losses........................................... 1,483 1,391
Provisions for losses and net (gains) losses on sales of real estate (22) (10)
owned
Net (gain) loss on sale of:
Loans......................................................... (3,613) (257)
Mortgage Backed Securities.................................... - (1,053)
Office properties and equipment............................... 58 (429)
Decrease (increase) in accrued interest receivable.................. (1,041) (998)
Increase in other assets............................................ (2,418) 900
Decrease in drafts payable.......................................... (6,158) 2,184
Decrease in deferred income taxes................................... 534 608
Increase in other liabilities....................................... 4,251 2,457
-------- --------
Net cash provided by operating activities..................... 5,311 19,050
-------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (210,862) (250,237)
Principal payments received on mortgage-backed securities.............. 71,361 119,280
Purchases of:
Loans............................................................... (23,453) (21,558)
Mortgage-backed securities.......................................... (379,266) (282,822)
Federal Home Loan Bank stock........................................ (955) (12,373)
Investment securities............................................... (40,000) (49,647)
Office properties and equipment..................................... (4,472) (6,552)
Proceeds from sales of:
Loans............................................................... 131,025 16,728
Mortgage backed securities.......................................... - 125,865
Federal Home Loan Bank stock........................................ 229 5,790
Repossessed assets acquired in settlement of loans.................. 630 59
Office properties and equipment..................................... 550 502
Proceeds from maturities of municipal bonds and government and agency 94,000 -
securities
Other.................................................................. (360) 974
-------- --------
Net cash used for investing activities........................ (361,573) (353,991)
-------- --------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options, 299 133
net of issuance costs..................................................
Purchase of treasury stock............................................. (10) -
Cash dividends paid.................................................... (2,882) (2,922)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 405,211 256,343
Certificates of deposit............................................. (39,587) (40,440)
Advances from Federal Home Loan Bank................................ 17,827 123,118
Other borrowed funds................................................ (12,859) (7,437)
Advances by borrowers for taxes and insurance....................... 12,337 13,554
-------- --------
Net cash provided by financing activities..................... 380,336 342,349
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 24,074 7,408
CASH AND CASH EQUIVALENTS, Beginning of period......................... 129,666 153,740
-------- --------
CASH AND CASH EQUIVALENTS, End of period............................... $153,740 $117,295
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements.
NOTES TO UNAUDITED CONDENSED 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
with accounting principles generally accepted in the United States of America
and with predominant practices within the thrift industry. The Company has not
changed its accounting and reporting policies from those disclosed in its 2003
Annual Report on Form 10-K.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" which addresses consolidation of variable interest entities ("VIEs")
certain of which are also referred to as special purpose entities ("SPEs"). The
FASB revised FIN 46 in December 2003. VIEs are 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. Under the
provisions of FIN 46, a company is to consolidate a VIE if the company has a
variable interest (or combination of variable interests) that will absorb a
majority of the VIE's expected losses if they occur, receive a majority of the
VIE's expected residual returns if they occur, or both. The implementation of
FIN 46 is required for public entities at the end of the first interim period
ending after March 15, 2004 if the VIE was created before February 1, 2003, with
early adoption allowed, and immediately for entities created after February 1,
2003. The Company early adopted FIN 46 and has deconsolidated the Fidelity
Capital Trust I at December 31, 2003. The deconsolidation of Fidelity Capital
Trust I did not have a material impact on the Company's consolidated financial
position or results of operations.
In November 2003, the EITF reached a consensus on the disclosure provisions of
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." EITF No. 03-1 requires that certain
quantitative and qualitative disclosures be made for certain debt securities
classified as available-for-sale under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. Debt securities within the scope of EITF Issue No. 99-20, are not
subject to these disclosure provisions. The disclosures are required for fiscal
years ending after December 15, 2003, and accordingly the Company has adopted
the disclosure provisions of EITF No. 03-1 for the year ended December 31, 2003.
Certain amounts in the financial statements have been reclassified to conform
with the June 30, 2004 presentation.
2. STOCK OPTION PLANS
At June 30, 2004, the Company has one stock-based compensation plan. At June 30,
2003, the Company had three stock-based compensation plans, of which two expired
on January 7, 2004. The Company accounts for these plans using the intrinsic
value method. 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,
2003 2004 2003 2004
======================== ========================
(In Thousands) (In Thousands)
Net Income, as reported............................................... $ 4,931 $ 5,688 $ 10,048 $ 11,375
Add: Total stock-based employee compensation expense included
in reported net earnings, net of related tax effects............ 240 218 500 448
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects...................... (365) (390) (750) (870)
Pro forma net income.................................................. $ 4,806 $ 5,516 $ 9,798 $ 10,953
Basic - as reported............................................... 0.34 0.39 0.70 0.78
Basic - pro forma................................................. 0.33 0.38 0.68 0.75
Diluted - as reported............................................. 0.34 0.38 0.69 0.75
Diluted - pro forma............................................... 0.33 0.36 0.68 0.72
3. LOANS RECEIVABLE
Loans receivable at December 31, 2003 and June 30, 2004, consist of the
following:
December 31, June 30,
2003 2004
==============================
(In Thousands)
One-to-four single family, residential real estate mortgages......... $1,002,573 $1,077,390
Commercial and multi-family real estate mortgages.................... 753,890 877,048
Real estate construction-primarily residential....................... 470,016 536,113
Land loans-primarily residential..................................... 36,660 46,417
Total first mortgage loans........................................... 2,263,139 2,536,968
Consumer loans....................................................... 185,450 201,270
Commercial business loans............................................ 131,292 128,705
Total gross loans.................................................... 2,579,881 2,866,943
Add/(deduct):
Undisbursed portion of loans in process......................... (374,974) (403,442)
Unearned discounts, premiums and deferred loan fees (costs), net (2,092) (3,043)
Allowance for loan losses....................................... (11,119) (12,436)
Loans receivable-net................................................. $2,191,696 $2,448,022
During the quarter ended June 30, 2004, the Company sold $8.0 million in loans,
which resulted in net gains of approximately $151,000. At June 30, 2004, the
Company held $781,000 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, 2003 the three and six month periods ended June 30, 2003 and 2004,
is as follows:
For the Year For the Three Months For the Six Months
Ended Ended Ended
December 31, June 30, June 30,
2003 2003 2004 2003 2004
=============== ====================== =========================
(In Thousands) (In Thousands) (In Thousands)
Balance at beginning of period...... $ 8,318 $ 9,037 $ 11,119 $ 8,318 $ 11,119
Current provision................... 3,122 693 794 1,483 1,391
Charge-offs......................... (322) - (32) (71) (99)
Recoveries.......................... 1 - - - 25
---------- -------- --------- -------- --------
Ending balance...................... $ 11,119 $ 9,730 $ 12,436 $ 9,730 $ 12,436
========== ======== ========= ======= ========
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, 2003 June 30, 2004
======================================================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------- ------------- ------------- -------------
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loan losses................ $ 3,508 $ 598 $ 3,407 $ 596
Loans without related allowance for loan losses............. 9,162 - 9,368 -
Total.............................................. $ 12,670 $ 598 $ 12,775 $ 596
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, 2003 and June
30, 2004 were 1.51% and 1.44%, respectively. Deposit accounts, by type at
December 31, 2003 and June 30, 2004 consist of the following:
December 31, June 30,
Account Type and Rate 2003 2004
======================
(In Thousands)
Non-interest-bearing checking accounts..................... $294,358 $406,060
Interest-bearing checking and funds transfer accounts...... 566,028 597,094
Passbook and statement accounts............................ 615,972 691,061
Variable-rate money market accounts........................ 297,864 336,350
Certificates of deposit.................................... 685,879 645,439
Total...................................................... $2,460,101 $2,676,004
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, 2003 Stockholders'
Equity and ratio to total assets 7.2% $220,528
====
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 1,060
Goodwill............................. (5,615)
Disallowed servicing assets.......... (124)
Tangible capital and ratio to -----
adjusted total assets........... 7.1% $215,849 1.5% $ 45,630
Tier I (core) capital and ratio to ==== ======== === =========
adjusted total assets........... 7.1% $215,849 3.0% $ 91,259 5.0% $ 152,099
Tier I (core) capital and ratio to ==== ======== === ========= === =========
risk-weighted total assets...... 10.3% $215,849 4.0% $ 83,790 6.0% $ 125,685
==== ======== === ========= === =========
Allowable Tier 2 capital:
General loan valuation allowances ... 10,149
Total risk-based capital and ratio to --------
risk-weighted total assets...... 10.8% $225,998 8.0% $ 167,580 10.0% $ 209,475
==== ======== === ========= === =========
Total assets......................... $3,045,981
==========
Adjusted total assets................ $3,041,980
==========
Risk-weighted assets................. $2,094,753
==========
As of June 30, 2004 Stockholders'
Equity and ratio to total assets 6.7% $227,810
===
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 6,488
Goodwill............................. (2,708)
Disallowed servicing assets.......... (123)
Tangible capital and ratio to
adjusted total assets........... 6.8% $231,467 1.5% $ 51,112
Tier I (core) capital and ratio to ==== ======== === =========
adjusted total assets........... 6.8% $231,467 3.0% $ 102,224 5.0% $ 170,374
Tier I (core) capital and ratio to ==== ======== === ========= === =========
risk-weighted total assets...... 9.8% $231,467 4.0% $ 94,857 6.0% $ 142,286
==== ======== === ========= === =========
Allowable Tier 2 capital:
General loan valuation allowances ... 11,379
Total risk-based capital and ratio to --------
risk-weighted total assets...... 10.2% $242,846 8.0% $ 189,715 10.0% $ 237,143
==== ======== === ========= === =========
Total assets......................... $ 3,399,671
===========
Adjusted total assets................ $3,407,476
===========
Risk-weighted assets................. $2,371,434
===========
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, 2003 and 2004, are as follows:
For the Three Months For the Three Months Ended
Ended June 30, 2004
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................. $4,931,000 $5,688,000
Basic EPS: ========== ==========
Mortgage loans.............
Income available to
common stockholders... $4,931,000 14,483,994 $0.34 $5,688,000 14,663,949 $ 0.39
Effect of diluted shares: ========== ===== ========== =====
Common stock options and 92,097 479,295
grants ------ -------
Diluted EPS:
Income available to
common stockholders... $4,931,000 14,576,091 $0.34 $5,688,000 15,143,244 $ 0.38
========== ========== ===== ========== ========== ======
For the Six Months For the Six Months Ended
Ended June 30, 2004
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................. $10,048,000 $11,375,000
=========== ===========
Basic EPS:
Mortgage loans.............
Income available to
common stockholders... $10,048,000 14,436,535 $0.70 $11,375,000 14,638,748 $0.78
Effect of diluted shares: =========== ===== ========== =====
Common stock options and grants 38,884 494,188
Diluted EPS: ---------- ---------
Income available to
common stockholders... $10,048,000 14,475,419 $0.69 $11,375,000 15,132,936 $0.75
=========== ========== ===== =========== ========== ======
ESOP shares that have not been committed to be released are not considered to be
outstanding.
8. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended June 30, 2003 and 2004, is as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2003 2004 2003 2004
----------------------------- --------------------------
Unrealized Unrealized
Losses Losses
On Securities On Securities
=================================== ===== ==========================
(In Thousands)
Beginning Balance............... $(4,186) $ (5) $ (3,535) $(2,717)
Current-period change........... 549 (8,140) (102) (5,428)
Ending balance.................. $(3,637) $(8,145) $ (3,637) $(8,145)
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, 2003 June 30, 2004
------------------------------------ -----------------------------------
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
arising during period.................. $ 900 $ (351) $ 549 $(13,344) $ 5,204 $(8,140)
For the Six Months Ended For the Six Months Ended
June 30, 2003 June 30, 2004
------------------------------------ -----------------------------------
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 $ (167) $ 65 $ (102) $(8,898) $ 3,470 $(5,428)
period
9. CONTINGENCIES
The Company is subject to various claims, legal actions and complaints arising
in the ordinary course of business. In the Company's opinion, the disposition of
these matters will not have a material adverse effect on our financial
condition, results of operations or cash flows.
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.
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, 2004 and 2003 is the change in the unrealized gain
or loss on assets available for sale.
Other comprehensive loss for the six months ended June 30, 2004 was $5.4 million
compared to other comprehensive loss of $102,000 for the six months ended June
30, 2003. During the six months ended June 30, 2004, the market value of the
Company's assets available for sale decreased by $8.9 million, which net of
income tax benefit of $3.5 million resulted in other comprehensive loss of $5.4
million. 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.
Other comprehensive loss for the quarter ended June 30, 2004 was $8.1 million
compared to other comprehensive income of $549,000 for the quarter ended June
30, 2003. During the quarter ended June 30, 2004, the market value of the
Company's assets available for sale decreased by $13.3 million, which net of
income tax benefit of $5.2 million resulted in other comprehensive loss of $8.1
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.
Changes in Financial Condition.
The Company's assets increased by $354.4 million to $3.4 billion at June 30,
2004 from $3.0 billion at December 31, 2003. Cash and assets available for sale
increased by $85.9 million, while net loans receivable increased by $256.3
million. All other assets increased by $12.2 million. Funds were provided for
these increases in assets by an increase in deposits of $215.9 million, an
increase in advances from the FHLB of $123.1 million, an increase in all other
liabilities of $10.8 million and an increase in equity of $4.6 million. The
increase in equity is primarily due to net income of $11.4 million, net of
dividends declared, and a decrease in the market value of assets available for
sale.
Results of Operations.
Net income for the six months ended June 30, 2004 was $11.4 million, a $1.4
million increase compared to $10.0 million for the same 2003 period. This
increase was attributable to an increase in net interest income of $6.0 million
along with an increase in other income of $589,000. The increase in net interest
income consisted of an increase in interest income of $6.0 million along with a
decrease in interest expense of $41,000. The increase in other income included a
gain on the sale of securities of $1.1 million for the six months ended June 30,
2004. Partially offsetting these increases were increases in operating expenses
of $4.5 million and increases in the provision for income taxes of $914,000 for
the six months ended June 30, 2004 compared to the six months ended June 30,
2003.
Net income for the quarter ended June 30, 2004 was $5.7 million, a $757,000
increase compared to $4.9 million for the same 2003 quarter. This increase was
attributable to an increase of $2.9 million in net interest income along with an
increase in other income of $1.1 million. The increase in net interest income
consisted of a decrease in interest expense of $144,000 along with an increase
in interest income of $2.8 million. The increase in other income included a gain
on the sale of securities of $467,000 for the quarter ended June 30, 2004.
Partially offsetting these increases were an increase in operating expenses of
$2.7 million and an increase in the provision for income taxes of $517,000 for
the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003.
Interest Income.
Interest income for the six months ended June 30, 2004, totaled $77.2 million,
representing an increase of $6.0 million or 8.4% compared to the same period in
2003. Interest income from loans increased by $2.9 million, primarily as a
result of a 16.4% increase in the average balance of loans to $2.3 billion from
$2.0 billion for the six months ended June 30, 2004 and 2003, respectively. The
increase in the average balance of loans was offset by a decrease in the average
yield on loans to 5.81% for the six months ended June 30, 2004 from 6.46% for
the same period in 2003. Interest income from mortgage-backed securities
increased to $8.3 million for the six months ended June 30, 2004 from $5.8
million for the 2003 period. This increase was due to an increase in the average
balance of such securities of $137.0 million. The average yield on
mortgage-backed securities for the six months ended June 30, 2004 and 2003
remained constant at 3.68%. There was an increase in interest income from
investment securities of $872,000 principally resulting from an increase in the
average balance of such securities to $142.7 million for the six months ended
June 30, 2004 from $56.6 million for the six months ended June 30, 2003. The
increase in the average balance of investment securities was slightly offset by
a decrease in the average yield on these securities to 2.09% for the six months
ended June 30, 2004 from 2.20% for the same period in 2003. Interest income on
other investments decreased by $349,000 due mainly to a decrease in the average
balance on these investments to $95.7 million from $111.4 million and a decline
in the average yield to 1.34% from 1.78% for the periods ended June 30, 2004 and
2003, respectively.
Interest income for the quarter ended June 30, 2004, totaled $39.1 million,
representing an increase of $2.8 million or 7.6% compared to the same quarter in
2003. Interest income from loans increased by $2.1 million, primarily as a
result of a 18.8% increase in the average balance of loans to $2.4 billion from
$2.0 billion for the quarters ended June 30, 2004 and 2003, respectively. This
increase in average balance of loans was offset by a decrease in the average
yield on loans to 5.74% for the quarter ended June 30, 2004 from 6.40% for the
same period ended June 30, 2003. Interest income from mortgage-backed securities
increased to $3.9 million for the quarter ended June 30, 2004 from $3.8 million
for the 2003 quarter. This increase resulted from an increase in the average
balance of such securities to $439.3 million from $419.9 million offset by a
slight decrease in the average yield to 3.54% from 3.61% There was an increase
in interest income from investment securities of $701,000 resulting from an
increase in the average balance of such securities to $162.6 million from $44.9
million, along with an increase in the average yield of these securities to
2.28% for the quarter ended June 30, 2004 from 2.01% for the quarter ended June
30, 2003. Interest income on other investments decreased by $111,000 due mainly
to a decrease in the average balance on these investments to $105.9 million from
$114.8 million for the quarters ended June 30, 2004 and 2003, respectively.
Interest Expense.
Interest expense for the six months ended June 30, 2004, totaled $28.7 million,
a decrease of $41,000 from the same period in 2003. The reason for this decline
was a decrease in interest expense on deposits of $461,000. While the average
balance of deposits increased to $2.6 billion for the six months ended June 30,
2004 compared to $2.1 billion for the six months ended June 30, 2003, the cost
of those deposits declined to 1.47% compared to 1.85% 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 increased as a
percentage of total deposits to 75.9% at June 30, 2004 from 67.8% at June 30,
2003, and (b) the majority of the Bank's maturing certificates of deposit
repriced in a lower rate environment. The decrease in interest expense on
deposits is offset by a $420,000 increase in interest expense on advances from
the Federal Home Loan Bank and other borrowings. This increase on borrowings is
caused primarily by an increase in the average balance of such funds to $376.2
million from $337.4 million offset by a decrease in the average cost of borrowed
funds to 5.15% for the six months ended June 30, 2004 from 5.50% for the
comparable 2003 period.
Interest expense for the quarter ended June 30, 2004, totaled $14.5 million, a
decrease of $144,000 from the same quarter in 2003. The reason for this decline
was a decrease in interest expense on deposits of $406,000. While the average
balance of deposits increased to $2.7 billion for the quarter ended June 30,
2004 compared to $2.2 billion for the quarter ended June 30, 2003, the cost of
those deposits declined to 1.45% compared to 1.82% 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 increased as a
percentage of total deposits from 67.8% at June 30, 2003 to 75.9% at June 30,
2004, and (b) the majority of the Bank's maturing certificates of deposit
repriced in a lower rate environment. The decrease in interest expense on
deposits is offset by a $262,000 increase in interest expense on advances from
the Federal Home Loan Bank and other borrowings. This increase on borrowings is
caused primarily by an increase in the average balance of such funds to $395.4
million from $334.5 million, offset by a decrease in the average cost of
borrowed funds to 4.97% for the quarter ended June 30, 2004 from 5.56% for the
comparable 2003 quarter.
Net Interest Income.
During the six months ended June 30, 2004, the Company's interest income
increased by $6.0 million compared to the same period in 2003, while interest
expense decreased by $41,000, resulting in net interest income of $48.5 million
for the six months ended June 30, 2004, a $6.0 million or 14.2% increase from
the six months ended June 30, 2003.
During the quarter ended June 30, 2004, the Company's interest income increased
by $2.8 million compared to the same quarter in 2003, while interest expense
decreased by $144,000, resulting in net interest income of $24.6 million for the
quarter ended June 30, 2004, a $2.9 million or, 13.4% increase from the quarter
ended June 30, 2003.
Provision for Loan Losses.
The provision for loan losses was $1.4 million for the six months ended June 30,
2004, compared to $1.5 million for the six months ended June 30, 2003. The
provision for the six months ended June 30, 2004 is deemed adequate by
management , considering the risks known and inherent in the Bank's loan
portfolio.
The provision for loan losses was $794,000 for the quarter ended June 30, 2004,
compared to $693,000 for the quarter ended June 30, 2003. The provision for the
quarter ended June 30, 2003 is deemed adequate by management, reflecting 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, 2004 was $13.6 million,
representing an increase of $589,000 compared to the same period in 2003. This
increase is due to an increase in fees for other banking services of $812,000 to
$5.7 million from $4.9 million and an increase in service charges on deposit
accounts of $1.5 million to $5.6 million from $4.1 million for the six months
ended June 30, 2004 and 2003, respectively. The increase in service charges on
deposit accounts was caused primarily by the increase in the number of core
deposit accounts at June 30, 2004 from June 30, 2003. Offsetting this increase
is a decrease in net gain on sale of loans of $3.4 million. These 2003 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 in 2003 of $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. The Company has principally sold certain of its 30 year, fixed
rate, residential mortgage production. During 2004, our customers have opted to
finance principally with 3 to 7 year hybrid adjustable rate loans. As a result,
the Company has had fewer loans available for sale in 2004, as compared to 2003.
Other income for the quarter ended June 30, 2004 was $7.2 million, representing
an increase of $1.2 million compared to the same quarter in 2003. The increase
is principally attributable to increases in service charges on deposit accounts
and fees for other banking services. Fees for other banking services increased
by $434,000 to $3.0 million from $2.6 million and service charges on deposit
accounts increased by $593,000 to $2.8 million from $2.2 million for the
quarters ended June 30, 2004 and 2003, respectively. The increase in service
charges on deposit accounts was due primarily to an increase in the number of
core deposit accounts at June 30, 2004 compared to 2003. Other increases include
a $467,000 gain on the sale of securities and $500,000 from the gain on sale of
surplus property adjacent to one of the Company's branches. The Company has been
selling most of its 30 year, fixed rate, residential mortgage production. As
previously mentioned, our customers have been increasingly using hybrid
adjustable loans to finance their homes. As a result, we have had fewer loans
available for sale in 2004. Net gains on the sale of loans for the quarter ended
June 30, 2004 were $151,000, a decrease of $903,000 compared to 2003.
Operating Expense.
Operating expense increased by $4.5 million to $42.0 million for the six months
ended June 30, 2004 when compared to the same six month period in 2003. Of this
increase, $2.1 million is attributable to employee compensation and benefits
expense. 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 $1.1 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, although $279,000 of the costs
are attributable to increased costs from customer check fraud.
Compared to the quarter ending June 30, 2003, operating expense for the quarter
ending June 30, 2004 increased by $2.7 million to $21.5 million. Of this
increase, $1.2 million is attributable to employee compensation and benefits.
Increases in employee compensation and benefits expense were primarily
attributable to an increase in 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 costs
increased by $528,000 and $856,000, respectively, which mainly reflects the
operation of new customer service facilities. Of the increase in miscellaneous
operating costs, $316,000 is attributable to increased costs from customer check
fraud.
Income Taxes.
The income tax provision was $7.3 million for the six months ended June 30, 2004
compared to $6.4 million for the six months ended June 30, 2003. 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 $3.7 million for the quarter ended June 30, 2004
compared to $3.2 million for the quarter ended June 30, 2003. 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, 2004, the
Company does not own any trading assets other than $1.3 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, 2004, 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 our assets and liabilities are monetary in nature, which
subjects us to significant interest rate risk. As stated above, the majority of
our interest-bearing liabilities and nearly all of our interest-earning assets
are held by Fidelity Federal Bank & Trust and, therefore, nearly all of our
interest rate risk is at the Fidelity Federal Bank & Trust level.
We monitor interest rate risk by various methods, including "gap" analysis. Gap
analysis attempts to measure the difference between the amount of interest
earning assets expected to mature or reprice within a specific period of time
compared to the amount of interest-bearing liabilities maturing or repricing
within a specified period of time. An interest rate sensitive gap is considered
positive when the amount of interest-earning assets exceeds the amount of
interest-bearing liabilities maturing or repricing within a specified period of
time. An interest rate sensitive gap is considered negative when the amount of
interest-bearing liabilities exceeds the amount of interest-earning assets
maturing or repricing within a specified period of time. Companies with a
positive gap can expect net interest income to increase during periods of rising
interest rates and decline in periods of falling interest rates.
In preparing the gap analysis table below, the Company makes various assumptions
including loan prepayment rates and deposit decay rates. 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. Certain
shortcomings are inherent in any methodology used in interest rate risk
measurements. 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. Therefore, 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.
Accordingly, while the 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 net interest
income, as actual results may vary.
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.
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. As shown in the following
table, the Company's cumulative one-year interest rate sensitivity gap at June
30, 2004 was a positive 24.8%.
Time to Maturity
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--------------- ---------------- ------------ ------------- ----------------
Within Three Four to Twelve More Than More Than Over Five
One Year Three Years
to Three to Five
Months Months Years Years Years
(Dollars in Thousands)
Interest-earning assets (1):
Residential mortgage loans: (2)
Fixed rate........................ $ 47,431 $ 125,876 $240,039 $ 143,891 $ 194,262
Adjustable rate................... 112,324 195,351 146,879 177,434 -
Commercial mortgage loans: (2)
Fixed rate........................ 6,656 15,912 28,857 16,113 19,065
Adjustable rate................... 186,223 470,197 3,528 4,073 -
Other loans (2)
Fixed rate 16,835 24,703 29,803 9,730 2,582
Adjustable rate................... 226,833 18,811 - - -
Mortgage-backed securities
Fixed rate........................ 20,280 53,506 100,402 58,699 68,871
Adjustable rate................... 209,226 - - - -
Municipal bonds and government and
agency securities - fixed rate...... - 50,659 71,362 44,685 4,973
Other interest earning assets - adjustable 43,036 - - - -
Total $ 868,844 $ 955,015 $620,870 $454,625 $ 289,753
Interest-bearing liabilities
Deposits: (3)
Checking and funds transfer accounts $ 20,851 $ 62,554 $ 82,121 $ 61,618 $ 762,242
Passbook accounts................. 19,764 59,293 118,482 83,715 409,807
Money market accounts............. 13,110 39,331 55,450 34,883 208,242
Certificate accounts (4).......... 134,401 305,013 164,254 41,772 -
Borrowings: (4)..................... 190,693 135,034 52,113 67,036 29,773
Total $ 378,819 $ 601,225 $472,420 $289,024 $1,410,064
Excess (deficiency) of interest-earning
assets $ $
over interest-bearing liabilities..... $ 490,025 $ 353,790 148,450 165,601 $(1,120,311)
Cumulative excess of interest-earning
assets
over interest-bearing liabilities..... $ 490,025 $ 843,815 $992,265 $1,157,866 $ 37,555
Cumulative excess of interest-earning
assets
over interest-bearing liabilities as a
percent
of total assets 14.40% 24.80% 29.16% 34.03% 1.10%
_______________________
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due. Fixed rate assets are included in the periods in which
they are scheduled to be repaid based on scheduled amortization. In both
cases, amounts are adjusted to reflect estimated prepayments. For this
table, all loans and mortgage-backed securities were assigned a 20%
prepayment rate.
(2) Balances are shown net of loans in process and are not adjusted for
premiums, discounts, reserves and unearned fees.
(3) All of the Company's non-certificate deposits are generally subject to
immediate withdrawal. However, management considers a significant portion
of these accounts to be core deposits having longer effective maturities
based on the Company's actual
retention of such deposit accounts in various interest rate environments
(4) Certificate accounts and Borrowings are assumed to have no prepayments and
are shown in the period in which they contractually mature.
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 12.29% during the
month of June 30, 2004. Liquidity ratios averaged 12.31% for the quarter ended
June 30, 2004. 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 $23.0 million at
June 30, 2004. Other assets qualifying for liquidity at June 30, 2004, including
unpledged mortgage-backed securities guaranteed by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, were $289.9 million.
For additional information about cash flows from the Company's operating,
financing and investing activities, see the 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, 2004, the Bank had $387.7 million in advances from
the FHLB. At June 30, 2004, the Bank had commitments outstanding to originate or
purchase loans of $328.0 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, 2004 totaled $439.2 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Bank.
Contractual Obligations and Commercial Commitments
Our long-term debt, which in the aggregate totals $440.0 million, consists of
obligations to the FHLB totaling $387.7 million and $52.3 million in obligations
resulting from the issuance of trust preferred securities from Fidelity Capital
Trust I in January 1998 as well as Fidelity Capital Trust II in December 2003.
The obligations arising from the issuance of trust preferred securities,
presented as Guaranteed Preferred Beneficial Interests in Company Debentures in
our balance sheet at June 30, 2004 are due in the amount of $29.6 million in
January, 2028 and $22.7 million in January 2034. In addition, we have leasehold
obligations for the next 49 years totaling $16.3 million.
The tables below summarize the Company's contractual obligations, commercial and
other commitments at June 30 2004.
Payments Due by Period
-----------------------------------------------------------------------------
------------- Less Than After 5
Total 1 year 1-3 Years 3-5 Years Years
-----------------------------------------------------------------------------
(In Thousands)
Long-term Debt(1)................ $440,198 $268,748 $ 52,430 $ 66,304 $ 52,716
Capital Lease Obligations........ - - - - -
Operating Lease Obligations...... 16,303 1,724 3,181 2,939 8,459
Total Contractual Cash Obligations $ 456,501 $ 270,472 $ 55,611 $ 69,243 $ 61,175
(1) Includes advances from the Federal Home Loan Bank and Guaranteed Preferred
Beneficial Interests in Debentures.
Commercial and Other Commitments
Amount of Commitment Expirations per Period
------------------------------------------------------------------------------
-------------- Less Than After 5
Total 1 year 1-3 Years 3-5 Years Years
------------------------------------------------------------------------------
(In Thousands)
Lines of Credit(1)............... $206,396 $ 5,909 $ 9,419 $ 31,428 $159,640
Standby Letters of Credit........ 9,446 8,976 465 - -
Other Commercial Commitments..... 179,116 179,116 - - -
Other Commitments................ 129,546 129,546 - - -
Total Contractual Cash Obligations $ 524,504 $ 323,547 $ 9,884 $ 31,428 $159,645
(1) Includes $186.1 million in undisbursed lines of credit.
New Accounting Pronouncements
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" which addresses consolidation of variable interest entities ("VIEs")
certain of which are also referred to as special purpose entities ("SPEs"). The
FASB revised FIN 46 in December 2003. VIEs are 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. Under the
provisions of FIN 46, a company is to consolidate a VIE if the company has a
variable interest (or combination of variable interests) that will absorb a
majority of the VIE's expected losses if they occur, receive a majority of the
VIE's expected residual returns if they occur, or both. The implementation of
FIN 46 is required for public entities at the end of the first interim period
ending after March 15, 2004 if the VIE was created before February 1, 2003, with
early adoption allowed, and immediately for entities created after February 1,
2003. The Company early adopted FIN 46 and has deconsolidated the Fidelity
Capital Trust I at December 31, 2003. The deconsolidation of Fidelity Capital
Trust I did not have a material impact on the Company's consolidated financial
position or results of operations.
In November 2003, the EITF reached a consensus on the disclosure provisions of
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." EITF No. 03-1 requires that certain
quantitative and qualitative disclosures be made for certain debt securities
classified as available-for-sale under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. Debt securities within the scope of EITF Issue No. 99-20, are not
subject to these disclosure provisions. The disclosures are required for fiscal
years ending after December 15, 2003, and accordingly the Company has adopted
the disclosure provisions of EITF No. 03-1 for the year ended December 31, 2003.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the fiscal year (the "Evaluation Date"). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, except as set forth below as of the Evaluation Date, our disclosure
controls and procedures were effective in timely alerting them to the material
information relating to us (or our consolidated subsidiaries) required to be
included in our periodic SEC filings.
Based upon an evaluation of the Bank's check imaging project which was
implemented in November 2003, the Chief Financial Officer has concluded that the
procedures for the reconciliation and resolution of out of balance conditions is
inadequate. The Bank is currently in the process of improving its procedures in
this area. The deficiency in procedures is not expected to have a material
effect on the Bank's financial condition and results of operations.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
There are various claims and lawsuits in which Fidelity Federal Bank & Trust is
periodically involved incident to our business. Other than as set forth below,
we believe these legal proceedings, in the aggregate, are not material to our
financial condition or results of operations.
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 Fidelity Federal violated the Driver Privacy
Protection Act by obtaining driver registration information from the State of
Florida for use in its marketing efforts. Kehoe sought as damages a statutory
minimum of $2,500.00 per violation on behalf of the class of plaintiffs. On June
14, 2004, the Court granted Fidelity Federal's Motion for Summary Judgment and
entered a Final Judgment in favor of the bank against Mr. Kehoe. A Notice of
Appeal was filed by Mr. Kehoe's lawyers on June 28, 2004. Fidelity Federal, in
consultation with counsel, has concluded that the lawsuit is without merit and
intends to defend against the Plaintiff's Appeal of the Court's Final Judgment
in the bank's favor.
On December 31, 2003, Fidelity Federal Bank & Trust was named as defendant in
two lawsuits, Kenneth A. Welt, as Chapter 7 Trustee vs. Fidelity Federal Bank &
Trust. The two lawsuits have been brought by the same plaintiff in the Circuit
Court in the Fifteenth Judicial Circuit in and for Palm Beach County and also in
the United States Bankruptcy Court Southern District of Florida, West Palm Beach
Division. The plaintiff has alleged that the Bank knew or should have known that
the bankrupt Thomas Abrams through various corporate plaintiff's, including The
Phoenix Financial Group, Phoenix Administrative Services, Inc., and Swiss
Capital Management Ltd., was operating a "Ponzi Scheme". Fidelity Federal has
filed answers to the complaints and a Motion to Dismiss is set for hearing on
July 30, 2004, in the State Court case. The plaintiff seeks (i) an accounting of
all fees, commissions and other income received by the Bank as a result of
Thomas Abrams' actions, and damages for such amounts, plus interest and costs in
United States Bankruptcy Court, (ii) and seeks relief of unspecified
compensatory damages, plus interest and costs in the Circuit Court. Fidelity
Federal, in consultation with counsel, has concluded that the claims made by the
plaintiff on behalf of the bankrupt corporation are without merit and the Bank
intends to vigorously defend itself in the two suits.
On February 18, 2004, Fidelity Federal Bank & Trust was named as defendant in a
lawsuit William Adams et al., vs. Thomson Financial, Inc., Fidelity Federal Bank
& Trust, N.A., Fidelity Investments Services, L.L.C., d/b/a Fidelity
Investments, National Financial Services, L.L.C., f/k/a National Financial
Services Corporation, Zoe Marrero, filed in the Fifteenth Judicial Circuit in
and for Palm Beach County, Florida. The plaintiffs in this case have alleged
various causes of action against numerous defendants which arise from
plaintiff's investments in various Abrams entities. The factual allegations are
almost identical to those set forth in Kenneth A. Welt as Chapter 7 Trustee vs.
Fidelity Federal Bank & Trust. Fidelity Federal is a named defendant in one
count of the complaint alleging aiding and abetting breaches of fiduciary duty.
The allegations are based upon Fidelity Federal allowing Abrams to set up
accounts with Fidelity Federal, deposit monies in them, issue bank checks based
upon the deposits and generally offer banking services to the Abrams entities.
Additionally, there are allegations that Fidelity Federal solicited clients for
the Abrams entities and pressured clients to place deposits with the Abrams
entities and Fidelity Federal. There is no specific request for damages, other
than the jurisdictional amount of in excess of $15,000.00. The losses incurred
by the plaintiff are as of yet undetermined. Fidelity has moved to dismiss the
complaint and in consultation with counsel, has concluded that the claims made
by the plaintiffs on behalf of the bankruptcy corporation are without merit and
the Bank intends to vigorously defend itself in the suit.
Item 2 Changes in Securities and Stock Repurchases
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
Ballot No. 1
The election of Paul C. Bremer and Karl H. Watson to serve as
directors for a term of three years, and F. Ted Brown to serve as
a director for a term of one year, or until their successors have
been elected and qualified.
For Withheld
---- --------
Paul C. Bremer 10,865,406 306,097
Karl H. Watson 10,865,306 306,197
F. Ted Brown 11,064,970 106,533
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
31.1 302 Certification
31.2 302 Certification
32.1 906 Certification
On April 20, 2004 the Company filed a Form 8-K to report its March 31, 2004
quarterly earnings.
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 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officers 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 registrant's board of
directors (or persons performing the equivalent functions):
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;
August 6, 2004 /s/ Vince A. Elhilow
- -------------- --------------------------
Date Vince A. Elhilow
President and Chief Executive Officer
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Richard D. Aldred, Executive Vice President, Chief Financial Officer and
Treasurer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Fidelity Bankshares,
Inc.;
2. Based on my knowledge, this 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officers 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 registrant's board of
directors (or persons performing the equivalent functions):
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;
August 6, 2004 /s/ Richard D. Aldred
- ------------------- ------------------------
Date Richard D. Aldred
Executive Vice President,
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Vince A. Elhilow, President and Chief Executive Officer and Richard D. Aldred,
Executive Vice President, Chief Financial Officer and Treasurer of Fidelity
Bankshares, Inc. (the "Company") each certify in his capacity as an officer of
the Company that he has reviewed the annual report of the Company on Form 10-Q
for the fiscal ended June 30, 2004 and that to the best of his knowledge:
(1) the report fully complies with the requirements of Sections 13(a) of the
Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
August 6, 2004 /s/ Vince A. Elhilow
- ---------------- ----------------------------------------
Date President and Chief Executive Officer
August 6, 2004 /s/ Richard D. Aldred
- ---------------- ----------------------------------------
Date Executive Vice President,
Chief FinancialOfficer and Treasurer
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 6, 2004 By: /s/ Vince A. Elhilow
------------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: August 6, 2004 /s/ Richard D. Aldred
Richard D. Aldred
-----------------------------------
Executive Vice President
Chief Financial Officer