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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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Securities Exchange Act Number 0-29040
FIDELITY BANKSHARES, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0717085
- ----------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
Number)
205 Datura Street, West Palm Beach, Florida 33401
-------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (561) 659-9900
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check |X| whether the Registrant has filed all reports required
to be filed by Sections 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [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 15,855,529 shares
of the Registrant's common stock par value $ .10 per share outstanding as of
November 1, 2002.
FIDELITY BANKSHARES, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...............................................1
Unaudited Consolidated Statements of Financial Condition as of
December 31, 2001 and September 30, 2002..........................2
Unaudited Consolidated Statements of Operations for the three
and the nine months ended September 30, 2001 and 2002.............3
Unaudited Consolidated Statements of Comprehensive Operations
for the three and the nine months ended
September 30, 2001 and 2002......................................4
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2002.................................5
Notes to Unaudited Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................12
Item 3. Quantitative and Qualitative Disclosure About Market Risk.........17
Item 4. Controls and Procedures...........................................20
PART II. OTHER INFORMATION...................................................21
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
1
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, September 30,
2001 2002
============== ===============
ASSETS (In Thousands)
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions........................ $ 52,944 $ 59,798
Interest-bearing deposits................................................ 43,347 117,752
----------- -----------
Total cash and cash equivalents...................................... 96,291 177,550
----------- -----------
ASSETS AVAILABLE FOR SALE (At Fair Value):
Municipal bonds and government and agency securities..................... 94,522 120,171
Mortgage-backed securities............................................... 201,533 128,778
Corporate debt securities................................................ 36,138 35,973
----------- -----------
Total assets available for sale...................................... 332,193 284,922
LOANS RECEIVABLE, Net......................................................... 1,583,425 1,849,450
OFFICE PROPERTIES AND EQUIPMENT, Net.......................................... 59,235 65,476
FEDERAL HOME LOAN BANK STOCK, At cost, which approximates market.............. 14,577 15,763
REAL ESTATE OWNED, Net........................................................ 219 -
ACCRUED INTEREST RECEIVABLE................................................... 10,745 10,000
DEFERRED INCOME TAX ASSET..................................................... 5,253 4,056
OTHER ASSETS 34,997 38,703
----------- -----------
TOTAL ASSETS $ 2,136,935 $ 2,445,920
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS ..................................................................... $ 1,559,436 $ 1,833,532
OTHER BORROWED FUNDS.......................................................... 36,326 40,944
ADVANCES FROM FEDERAL HOME LOAN BANK.......................................... 290,266 305,943
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE................................. 3,207 20,450
DRAFTS PAYABLE................................................................ 12,136 5,652
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATED DEBENTURES........................................... 28,750 28,750
OTHER LIABILITIES............................................................. 29,202 36,399
----------- -----------
TOTAL LIABILITIES........................................................ 1,959,323 2,271,670
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, 2,000,000 shares authorized, none issued..................... - -
COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
15,781,244 shares at December 31, 2001 and 15,850,506 shares at September 30, 1,578 1,585
2002
ADDITIONAL PAID IN CAPITAL.................................................... 117,889 125,485
RETAINED EARNINGS - substantially restricted.................................. 66,839 74,632
TREASURY STOCK - at cost, 338,332 shares at December 31, 2001 and
1,012,509 shares at September 30, 2002................................... (1,721) (15,139)
COMMON STOCK ALLOCATED TO:
Employee stock ownership plan............................................ (4,969) (4,696)
Retirement and retention plan............................................ - (6,457)
ACCUMULATED OTHER COMPREHENSIVE LOSS.......................................... (2,004) (1,160)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................................... 177,612 174,250
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 2,136,935 $ 2,445,920
=========== ===========
See Notes to Unaudited Consolidated Financial Statements.
2
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
=========== ========== ========= =========
(In Thousands, except share data)
Interest income:
Loans............................................................. $ 28,671 $ 31,441 $ 84,025 $ 91,293
Investment securities............................................. 1,540 775 3,954 2,789
Other investments................................................. 573 782 2,521 2,357
Mortgage-backed and corporate debt securities..................... 3,910 1,954 13,746 6,493
---------- ---------- --------- --------
Total interest income......................................... 34,694 34,952 104,246 102,932
---------- ---------- --------- --------
Interest expense:
Deposits.......................................................... 14,625 10,157 49,014 30,964
Advances from Federal Home Loan Bank and other borrowings......... 5,108 5,470 15,569 16,312
---------- ---------- --------- --------
Total interest expense........................................ 19,733 15,627 64,583 47,276
---------- ---------- --------- --------
Net interest income.................................................... 14,961 19,325 39,663 55,656
Provision for loan losses.............................................. 483 459 1,389 1,276
---------- ---------- --------- --------
Net interest income after provision for loan losses.................... 14,478 18,866 38,274 54,380
---------- ---------- --------- --------
Other income:
Service charges on deposit accounts............................... 1,347 1,884 3,736 5,229
Fees for other banking services................................... 1,653 2,194 4,093 6,175
Net gain on sale of loans, mortgage-backed
securities and investments..................................... 163 88 525 131
Miscellaneous..................................................... 166 271 697 777
---------- ---------- --------- --------
Total other income............................................ 3,329 4,437 9,051 12,312
---------- ---------- --------- --------
Operating expense:
Employee compensation and benefits................................ 8,140 9,875 23,047 27,483
Occupancy and equipment........................................... 2,696 2,954 7,779 8,500
Gain on real estate owned......................................... (17) 1 (73) (120)
Marketing......................................................... 444 531 1,345 1,420
Federal deposit insurance premium................................. 72 75 211 216
Miscellaneous..................................................... 2,648 3,023 8,113 8,990
---------- ---------- --------- --------
Total operating expense....................................... 13,983 16,459 40,422 46,489
---------- ---------- --------- --------
Income before provision for income taxes............................... 3,824 6,844 6,903 20,203
---------- ---------- --------- --------
Provision for income taxes:
Current........................................................... 1,388 2,430 2,479 7,242
Deferred.......................................................... 123 220 252 658
---------- ---------- --------- --------
Total provision for income taxes.............................. 1,511 2,650 2,731 7,900
---------- ---------- --------- --------
Net income............................................... $ 2,313 $ 4,194 $ 4,172 $ 12,303
========== ========== ========= ========
Earnings per share:
Basic............................................................. $ 0.15 $ 0.28 $ 0.27 $ 0.81
========== ========== ========= ========
Diluted........................................................... $ 0.15 $ 0.28 $ 0.27 $ 0.81
========== ========== ========= ========
See Notes to Unaudited Consolidated Financial Statements.
3
FIDELITY BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
- --------------------------------------------------------------------------------
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
============ =========== =========== ===========
(In Thousands) (In Thousands)
Net Income.........................................................$ 2,313 $ 4,194 $ 4,172 $ 12,303
Other comprehensive income, net of tax:
Unrealized gain (loss) on assets available for sale:
Unrealized holding gains(losses) arising during period.... 1,639 (310) 3,848 844
--------- ------------ ---------- -----------
Comprehensive income...............................................$ 3,952 $ 3,884 $ 8,020 $ 13,147
========== =========== ========== ===========
See Notes to Unaudited Consolidated Financial Statements.
4
FIDELITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Nine Months Ended
September 30,
2001 2002
============ ============
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income............................................................. $ 4,172 $ 12,303
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 2,536 2,715
Share based compensation expense.................................... 204 1,117
Accretion of discounts, amortization of premiums and goodwill, and (1,158) (2,128)
other deferred yield items.........................................
Provision for loan losses........................................... 1,389 1,276
Provisions for losses and net (gains) losses on sales of real estate (63) (123)
owned
Net (gain) loss on sale of:
Loans......................................................... (268) (67)
Mortgage-backed securities.................................... (156) (64)
Office properties and equipment............................... 91 (1)
Other assets.................................................. (99) -
(Increase) decrease in accrued interest receivable.................. (639) 745
Decrease (increase) in other assets................................. 565 (3,644)
Increase (decrease) in drafts payable............................... 1,691 (6,484)
Increase in deferred income taxes................................... 251 658
(Decrease) increase in other liabilities............................ (1,578) 7,844
--------- --------
Net cash provided by operating activities..................... 6,938 14,147
-------- --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans...................... (164,460) (234,247)
Principal payments received on mortgage-backed securities.............. 47,566 86,167
Purchases of:
Loans............................................................... (21,691) (35,202)
Mortgage-backed securities.......................................... - (16,952)
Federal Home Loan Bank stock........................................ - (1,186)
Investment securities............................................... (136,995) (195,000)
Office properties and equipment..................................... (9,397) (9,126)
Proceeds from sales of:
Loans............................................................... 35,871 4,615
Federal Home Loan Bank stock........................................ 676 -
Real estate acquired in settlement of loans......................... 353 991
Mortgage-backed securities available for sale....................... 10,310 4,456
Other assets........................................................ 100 -
Proceeds from maturities of municipal bonds and government and agency 66,655 169,445
securities
Other.................................................................. 1,386 (210)
-------- ---------
Net cash used for investing activities........................ (169,626) (226,249)
-------- ---------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Proceeds from the sale of common stock and exercise of stock options, 79,580 100
net of issuance costs..................................................
Purchase of treasury stock............................................. (13,805)
Cash dividends paid.................................................... (3,011) (4,568)
Net increase (decrease) in:
NOW accounts, demand deposits and savings accounts.................. 70,864 323,378
Certificates of deposit............................................. (6,419) (49,282)
Advances from Federal Home Loan Bank................................ (17,401) 15,677
Other borrowed funds................................................ 30,451 4,618
Advances by borrowers for taxes and insurance....................... 15,275 17,243
-------- --------
Net cash provided by financing activities..................... 169,339 293,361
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 6,651 81,259
CASH AND CASH EQUIVALENTS, Beginning of period......................... 100,309 96,291
-------- --------
CASH AND CASH EQUIVALENTS, End of period............................... $106,960 $177,550
======== ========
See Notes to Unaudited Consolidated Financial Statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL
The accounting and reporting policies of Fidelity Bankshares, Inc. (the
"Company") and its subsidiary Fidelity Federal Bank & Trust (the "Bank") conform
to accounting principles generally accepted in the United States of America and
to predominant practices within the thrift industry. The Company has not changed
its accounting and reporting policies from those disclosed in its 2001 Annual
Report on Form 10-K.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank.
In the opinion of the Company's management, all adjustments necessary to fairly
present the consolidated financial position of the Company at September 30, 2002
and the results of its consolidated operations and cash flows for the period
then ended, all of which are of a normal and recurring nature, have been
included.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 discontinues the practice of amortizing goodwill and
intangible assets with indefinite lives and initiates an annual review for
impairment of these assets. The Company has adopted this accounting principle
beginning January 1, 2002 and did not identify any impairment in the carrying
value of goodwill arising from previous acquisitions. Amortization of goodwill
included in the Company's income statement for the three and nine months ended
September 30 2001 was $63,000 and $188,000, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement applies to legal obligations associated
with the retirement of a tangible long-lived asset that results from the
acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lessee obligations. The statement requires
these obligations be recorded at fair value as of the date of retirement and is
effective for fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of this accounting principle will have a significant
effect on it's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement establishes a
single accounting model for long-lived assets to be disposed of by sale, and
requires that long-lived assets to be abandoned, exchanged for similar
productive assets, or distributed to owners in a spinoff be considered held and
used until disposed. The Company has adopted this standard beginning January 1,
2002. The adoption did not have an effect on the Company's consolidated
financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." In addition, the statement amends FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. The provisions of this statement are
effective as of October 1, 2002. The Company does not believe that the adoption
of this accounting principle will have a significant effect on its financial
statements.
Certain amounts in the financial statements have been reclassified to
conform with the September 30, 2002 presentation.
6
2. REORGANIZATION AND SECOND STEP CONVERSION
The Company completed the mutual-to-stock conversion of its mutual holding
company parent on May 15, 2001 and the related common stock offering resulted in
the Company selling 8,695,943 shares of common stock for $10.00 per share to
certain customers of Fidelity Federal Bank & Trust, its benefit plans, including
the employee stock ownership plan, and to existing public stockholders of
Fidelity Bankshares, Inc. In addition, 7,048,207 shares were issued to the
existing stockholders based on an exchange rate of 2.4165 new shares of common
stock for each existing share. At the completion of the conversion, the Company
had 15,744,150 shares outstanding The conversion was accounted for as a change
in corporate form with no subsequent change in the historical basis of the
Company's assets, liabilities and equity. All references in the consolidated
financial statements and notes thereto to share data (including number of shares
and per-share amounts) have been restated giving retroactive recognition to the
exchange rate.
3. LOANS RECEIVABLE
Loans receivable at December 31, 2001 and September 30, 2002, consist of
the following:
December 31, September 30,
2001 2002
============= ==============
(In Thousands)
One-to-four single family, residential real estate mortgages......... $ 944,046 $1,024,763
Commercial and multi-family real estate mortgages.................... 233,157 431,696
Real estate construction-primarily residential....................... 284,495 341,050
Land loans-primarily residential..................................... 25,627 29,756
---------- ----------
Total first mortgage loans........................................... 1,487,325 1,827,265
Consumer loans....................................................... 105,077 133,689
Commercial business loans............................................ 188,045 143,030
---------- ----------
Total gross loans.................................................... 1,780,447 2,103,984
Less:
Undisbursed portion of loans in process......................... 192,464 248,550
Unearned discounts, premiums and deferred loan fees (costs), net (2,289) (1,876)
Allowance for loan losses....................................... 6,847 7,860
---------- ----------
Loans receivable-net................................................. $1,583,425 $1,849,450
========== ==========
7
4. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the year
ended December 31, 2001 and the three and nine months ended September 30, 2001
and 2002, is as follows:
For the Year For the Three Months For the Nine Months
Ended Ended Ended
December 31, September 30, September 30,
2001 2001 2002 2001 2002
============== ========= ========= ======== =========
(In Thousands) (In Thousands) (In Thousands)
Balance at beginning of period............ $ 4,950 $ 5,732 $ 7,441 $ 4,905 $ 6,847
Current provision......................... 2,054 483 459 1,389 1,276
Charge-offs............................... (117) (21) (68) (104) (307)
Recoveries................................ 5 1 28 5 44
--------- --------- -------- -------- ---------
Ending balance............................ $ 6,847 $ 7,860 $ 6,195 $ 6,195 $ 7,860
========= ========= ======== ======== ========
An analysis of the recorded investment in impaired loans owned by the
Company at the end of each period and the related specific valuation allowance
for those loans is as follows:
December 31, 2001 September 30, 2002
=========================== ============================
Loan Related Loan Related
Balance Allowance Balance Allowance
------------- ------------- -------------- -------------
(In Thousands)
Impaired loan balances and related allowances:
Loans with related allowance for loan losses................ $ 1,242 $ 1,093 $ 1,319 $ 768
Loans without related allowance for loan losses............. 5,680 - 6,710 -
-------- -------- -------- --------
Total.............................................. $ 6,922 $ 1,093 $ 8,029 $ 768
======== ======== ======== ========
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.
8
5. REGULATORY CAPITAL
The Company's subsidiary, Fidelity Federal Bank & Trust, is a regulated
financial institution. Its regulatory capital amounts and ratios are presented
in the following table:
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provisions
---------- ------------ -------------- ------------- ------------- --------------
Ratio Amount Ratio Amount Ratio Amount
---------- ------------ -------------- ------------- ------------- --------------
(Dollars in Thousands)
As of December 31, 2001 Stockholders'
Equity and ratio to total assets 8.0% $ 170,463
========
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 2,004
Goodwill............................. (2,175)
Disallowed servicing assets.......... (22)
-----------
Tangible capital and ratio to
adjusted total assets........... 8.0% $ 170,270 1.5% $ 32,064
======== =========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 8.0% $ 170,270 3.0% $ 64,129 5.0% $ 106,881
======== =========== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 12.0% $ 170,270 4.0% $ 56,524 6.0% $ 84,785
======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 5,633
-----------
Total risk-based capital and ratio to
risk-weighted total assets...... 12.4% $ 175,903 8.0% $ 113,047 10.0% $ 141,309
======== =========== ====== ========= ====== =========
Total assets......................... $ 2,136,529
===========
Adjusted total assets................ $ 2,137,617
===========
Risk-weighted assets................. $ 1,413,088
===========
As of September 30, 2002
Stockholders' Equity and ratio 7.5% $ 184,931
========
to total assets.................
Unrealized decrease in market value
of assets available for sale
(net of applicable income taxes) 1,159
Goodwill............................. (2,175)
Disallowed servicing assets.......... (11)
---------
Tangible capital and ratio to
adjusted total assets........... 7.5% $ 183,904 1.5% $ 36,667
======== ========== ====== =========
Tier I (core) capital and ratio to
adjusted total assets........... 7.5% $ 183,904 3.0% $ 73,334 5.0% $ 122,224
======== ========== ====== ========= ====== =========
Tier I (core) capital and ratio to
risk-weighted total assets...... 10.9% $ 183,904 4.0% $ 67,403 6.0% $ 101,105
======== ====== ========= ====== =========
Allowable Tier 2 capital:
General loan valuation allowances ... 6,992
----------
Total risk-based capital and ratio to
risk-weighted total assets...... 11.3% $ 190,896 8.0% $ 134,807 10.0% $ 168,508
======== ========== ====== ========= ====== =========
Total assets......................... $2,444,766
==========
Adjusted total assets................ $2,444,480
==========
Risk-weighted assets................. $1,685,082
==========
9
6. EARNINGS PER SHARE
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP) and stock options for the three months ended
September 30, 2001 and 2002, are as follows:
For the Three Months For the Three Months
Ended September Ended
30, 2001 September 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................. $2,313,000 $4,194,000
Basic EPS:
Income available to
common stockholders... $2,313,000 15,254,071 $ 0.15 $4,194,000 14,797,646 $ 0.28
====== =======
Effect of diluted shares:
Common stock options.. 156,317 128,231
---------- ----------
Diluted EPS:
Income available to
common stockholders... $2,313,000 15,410,388 $ 0.15 $4,194,000 14,925,877 $ 0.28
========== ========== ======== ========== ========== =======
The weighted-average number of shares used to calculate basic and diluted
earning per share, including the adjustments for the Bank's stock options for
the nine months ended September 30, 2001 and 2002, are as follows:
For the Nine Months For the Nine Months
Ended Ended
September 30, 2001 September 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................. $4,172,000 $12,303,000
Basic EPS:
Income available to
common stockholders... $4,172,000 15,410,886 $ 0.27 $12,303,000 15,111,306 $ 0.81
====== =====
Effect of diluted shares:
Common stock options.. 149,020 126,892
---------- ---------
Diluted EPS:
Income available to
common stockholders... $4,172,000 15,559,906 $ 0.27 $12,303,000 15,238,198 $ 0.81
========== ========== ======= =========== ========== =====
ESOP shares that have not been committed to be released are not considered to be
outstanding.
10
7. OTHER COMPREHENSIVE INCOME (LOSS)
An analysis of the changes in Accumulated Other Comprehensive Loss for the
periods ended September 30, 2001 and 2002, is as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
--------------------------- ----------------------------
Unrealized Unrealized
Losses Losses
On Securities On Securities
=========================== ==== ===== =============================
(In Thousands)
Beginning Balance............... $ (1,810) $ (850) $ (4,019) $ (2,004)
Current-period change........... 1,639 (310) 3,848 844
--------- -------- --------- ----------
Ending balance.................. $ (171) $ (1,160) $ (171) $ (1,160)
========= ======== ========= =========
An analysis of the related tax effects allocated to Other Comprehensive
Loss is as follows:
For the Three Months Ended For the Three Months Ended
September 30, 2001 September 30, 2002
------------------------------------ -----------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
=========== ============ =========== == =========== =========== ===========
(In Thousands)
Unrealized gain on assets available for sale:
Unrealized holding gains
arising during period................... $ 2,686 $(1,047) $ 1,639 $ (508) $ 198 $ (310)
======== ======== ======= ======== ======= ========
For the Nine Months Ended For the Nine Months Ended
September 30, 2001 September 30, 2002
------------------------------------ -----------------------------------
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount Benefit Amount Amount Benefit Amount
=========== ============ =========== == =========== =========== ===========
(In Thousands)
Unrealized gain on assets available for sale:
Unrealized holding gains
arising during period................. $ 6,308 $(2,460) $ 3,848 $ 1,384 $ (540) $ 844
======== ======== ======== ======== ========= ========
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General.
Fidelity Bankshares, Inc. (the "Company") is the parent company of Fidelity
Federal Bank & Trust ("Fidelity Federal" or the "Bank"). The Company conducts no
business other than holding the common stock of the Bank. Consequently, the
Company's net income is primarily derived from the Bank. The Bank's net income
is primarily dependent on its net interest income, which is the difference
between interest income earned on its investments in mortgage loans and
mortgage-backed securities, other investment securities and loans, and its cost
of funds consisting of interest paid on deposits and borrowings. The Bank's net
income also is affected by its provision for loan losses, as well as by the
amount of other income, including income from fees and service charges, net
gains and losses on sales of investments, and operating expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, and income taxes. Earnings of the Bank also are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Bank. In particular, the general level of
market interest rates tends to be highly cyclical.
The Company completed the mutual-to-stock conversion of its mutual holding
company parent on May 15, 2001 and the related common stock offering resulted in
the Company selling 8,695,943 shares of common stock for $10.00 per share to
certain customers of Fidelity Federal Bank & Trust, its benefit plans, including
the employee stock ownership plan, and to existing public stockholders of
Fidelity Bankshares, Inc., which net of expenses raised $79.6 million in cash
for the Company. In addition, 7,048,207 shares were issued to the existing
stockholders based on an exchange rate of 2.4165 new shares of common stock for
each existing share. At the completion of the conversion, the Company had
15,744,150 shares outstanding. At September 30, 2002 there were 15,850,506
shares of common stock outstanding. This increase in outstanding shares since
May 15, 2001 reflects option exercises.
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 nine months ended September 30, 2002 and 2001 is the change in the
unrealized gain or loss on assets available for sale.
Other comprehensive income for the nine months ended September 30, 2002 was
$844,000 compared to $3.8 million for the nine months ended September 30, 2001.
During the nine months ended September 30, 2002, the market value of the
Company's assets available for sale increased by $1.4 million, which net of
income tax of $540,000 resulted in other comprehensive income of $844,000.
During the nine months ended September 30, 2001, the value of the Company's
assets available for sale increased by $6.3 million which net of $2.5 million in
income tax resulted in other comprehensive income of $3.8 million.
12
Other comprehensive loss for the quarter ended September 30, 2002 was
$310,000 compared to other comprehensive income of $1.6 million gain for the
quarter ended September 30, 2001. During the quarter ended September 30, 2002,
the market value of the Company's assets available for sale decreased by
$508,000, which net of income tax benefit of $198,000 resulted in other
comprehensive loss of $310,000. During the quarter ended September 30, 2001, the
value of the Company's assets available for sale increased by $2.7 million which
net of $1.0 million in income tax resulted in other comprehensive income of $1.6
million.
Changes in Financial Condition.
The Company's assets increased by $309.0 million to $2.4 billion at
September 30, 2002 from $2.1 billion at December 31, 2001. Net loans receivable
increased by $266.0 million, while cash and assets available for sale increased
by $34.0 million. In addition, the Company increased its investment in office
properties and equipment, primarily for new office sites, by $6.2 million, while
all other assets increased by $2.8 million. Funds for the increase in assets
were provided primarily as a result of an increase in deposits of $274.1
million, together with increases in all other liabilities in the amount of $38.8
million, of which advances from Federal Home Loan Bank were $15.7 million. The
Company's equity at September 30, 2002 increased by $2.7 million from December
31, 2001. Equity increased as a result of net income for the nine months of
$12.3 million and other comprehensive income of $844,000. Partially offsetting
these increases in equity were dividends declared of $4.6 million and the
purchase of 681,934 shares of the Company's common stock held in treasury for
$13.8 million during the nine months.
Results of Operations.
Net income for the nine months ended September 30, 2002 was $12.3 million,
representing an increase of $8.1 million compared to $4.2 million for the same
period in 2001. The primary reasons for this increase, which are more fully
described below, were an increase in net interest income of $16.0 million along
with an increase in other income of $3.3 million. The increase in net interest
income was caused by a decrease in interest expense on deposits of $18.1
million, which was partially offset by a decrease in interest income of $1.3
million. Operating expenses increased by $6.1 million and income tax provision
increased by $5.2 million.
Net income for the quarter ended September 30, 2002 was $4.2 million, a
$1.9 million increase compared to $2.3 million for the same 2001 quarter. The
principal causes for this increase, which are more fully described below, were
an increase in net interest income of $4.4 million 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 $4.1 million along with an increase in interest
income of $258,000. The increase in net interest income was partially offset by
an increase in operating expenses of $2.5 million and an increase in the
provision for income taxes of $1.1 million for the quarter ended September 30,
2002 compared to September 30, 2001.
13
Interest Income.
Interest income for the nine months ended September 30, 2002 was $102.9
million, a decrease of $1.3 million or 1.3% compared to the nine months ended
September 30, 2001. The reason for this decrease was the overall reduction in
the yields on interest earning assets and loan prepayments. The overall yield on
the Company's average interest earning assets decreased to 6.39% during the nine
months ended September 30, 2002 from 7.09% for the nine months ended September
30, 2001. The decrease due to the reduction in overall market rates was only
partially offset by an increase in the balance of average interest earning
assets to $2.1 billion for the nine months ended September 30, 2002 from $2.0
billion for the same period in 2001. Individual components contributing to the
decrease in interest income include a decrease in interest income from
mortgage-backed and corporate debt securities of $7.3 million. This decline was
due to a decrease in the average balance of these securities to $205.3 million
from $281.3 million as well as a decrease in the average yield to 4.22% compared
to 6.52% for the nine months ended September 30, 2002 and 2001, respectively.
Interest income from investment securities also decreased by $1.2 million as a
result of a decrease in the average yield to 3.45% from 6.13% for the nine
months ended September 30, 2002 and 2001, respectively. Partially offsetting
these decreases was an increase in interest income from loans to $91.3 million
for the nine months ended September 30, 2002 from $84.0 million for the same
period in 2001. Interest income for the quarter ended September 30, 2002,
totaled $35.0 million, representing an increase of $258,000 or 0.7% compared to
the same quarter in 2001. Interest income from loans increased by $2.8 million,
primarily as a result of a 10.7% increase in the average balance of loans to
$1.8 billion from $1.6 billion for the quarter ended September 30, 2002 and
2001, respectively. Interest income from mortgage-backed and corporate debt
securities decreased to $2.0 million for the quarter ended September 30, 2002
from $3.9 million for the 2001 quarter. This decrease was due to a decrease in
the average balance of such securities of $112.8 million, as well as a decrease
in the average yield of these securities to 4.31% in 2002 from 5.32% in 2001.
There was a decline in interest income from investment securities of $765,000
principally resulting from a decrease in the average yield of these securities
to 3.10% for the quarter ended September 30, 2002 from 5.94% for the quarter
ended September 30, 2001. Slightly offsetting these decreases was an increase in
interest income on other investments of $209,000 due mainly to a increase in the
average balance on these investments to $131.2 million from $32.8 million for
the quarters ended September 30, 2002 and 2001, respectively.
Interest Expense.
Interest expense for the nine months ended September 30, 2002 was $47.3
million, a decrease of $17.3 million or 26.8% from the comparable 2001 period.
The principal cause for this decrease was a decrease in interest expense on
deposits of $18.1 million caused primarily by a decrease in the average cost of
deposits to 2.37% in 2002 from 4.24% in 2001 due to a lower rate environment.
The average balance of deposits increased to $1.7 billion for the nine months
ended September 30, 2002 compared to $1.5 billion for the nine months ended
September 30, 2001. The Bank's interest expense on borrowed funds increased by
$743,000 as a result of an increase in the average balance of these funds to
$376.6 million from $327.7 million. This increase was partially offset by a
decrease in the average cost of borrowed funds to 5.77% for the nine months
ended September 30, 2002 compared to 6.33% for the 2001 period.
Interest expense for the quarter ended September 30, 2002, totaled $15.6
million, a decrease of $4.1 million or 20.8% from the same quarter in 2001. The
principal cause for this decline was a decrease in interest expense on deposits
of $4.5 million. The average balance of deposits increased to $1.8 billion for
the quarter ended September 30, 2002 compared to $1.6 billion for the quarter
ended September 30, 2001, but the cost of those deposits declined to 2.27%
compared to 3.73% for the comparative quarters. 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
42.4% at September 30, 2001 to 56.3% at September 30, 2002, and (b) the majority
of the Bank's certificates of deposit repriced in a lower rate environment.
Interest expense on borrowed funds increased by $362,000 caused primarily by an
increase in the average balance of such funds to $376.9 million from $325.4
million. Partially offsetting this increase was a decrease in the average cost
of borrowed funds to 5.81% for the quarter ended September 30, 2002 from 6.28%
for the comparable 2001 quarter.
Net Interest Income.
While the Company's interest income decreased by $1.3 million for the nine
months ended September 30, 2002, compared to the same period in 2001, interest
expense decreased by $17.3 million, resulting in net interest income of $55.7
million for the nine months ended September 30, 2002. This represents a $16.0
million or 40.3% increase in net interest income when compared to the same
period in 2001.
During the quarter ended September 30, 2002, the Company's interest income
increased by $258,000 compared to the same quarter in 2001, while interest
expense decreased by $4.1 million, resulting in net interest income of $19.3
million for the quarter ended September 30, 2002, $4.4 million or, 29.2%
increase from the quarter ended September 30, 2001.
14
Provision for Loan Losses.
Our provision for loan losses decreased by $113,000 to $1.3 million for the
nine months ended September 30, 2002 from $1.4 million for the nine months ended
September 30, 2001. However, during the nine months ended September 30, 2001 the
Bank had a specific loan loss provision in the amount of $280,000. Net of this
specific provision, our provision for the period would have increased by
$167,000 compared to last year which management considers reasonable in light of
the Bank's continued increased originations of consumer, commercial business and
commercial real estate loans. The Bank's total allowance for loan losses at
September 30, 2002 of $7.9 million is maintained at a level that represents
management's best estimate of losses in the loan portfolio at the balance sheet
date that were both probable and reasonably estimable. The Bank's ratio of
non-performing loans to total loans was 0.31% and 0.32% at September 30, 2002
and 2001, respectively.
The provision for loan losses was $459,000 for the quarter ended September
30, 2002, compared to $483,000 for the quarter ended September 30, 2001. The
provision for the quarter ended September 30, 2002 is deemed adequate by
management in light of the risks inherent in the Bank's loan portfolio.
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and, accordingly,
allowances for loan losses are based on management's estimate of the losses
inherent in the loan portfolio. We provide both general valuation allowances
(for unspecified, probable losses) and specific valuation allowances (for known
losses) in our loan portfolio. General valuation allowances are added to the
Bank's capital for purposes of computing the Bank's regulatory risk-based
capital. We regularly review our loan portfolio, including impaired loans, to
determine whether any loans require classification or the establishment of
appropriate valuation allowances. Since we are increasing our origination of
commercial business loans and commercial real estate mortgages and since such
loans are deemed to have more credit risk than residential mortgage loans, our
provision for loan losses is likely to increase in future periods.
Other Income.
Other income for the nine months ended September 30, 2002 was $12.3
million, an increase of $3.3 million compared to the nine months ended September
30, 2001. This increase is due in part to an increase in fees for other banking
services, which includes income from insurance sales and trust services, of $2.1
million in 2002 compared to 2001. Service charges on deposit accounts increased
by $1.5 million, resulting principally from an increase in business and personal
checking accounts. Also contributing to this increase was an increase in other
miscellaneous income of $80,000. These increases were partially offset by a
decrease of $394,000 in net gain on sale of loans, mortgage-backed securities
and investments for the nine months ended September 30, 2002 to the comparable
2001 period.
15
Other income for the quarter ended September 30, 2002 was $4.4 million,
representing an increase of $1.1 million compared to the same quarter in 2001.
This increase is principally due to increases in fees for other banking services
of $541,000 and service charges on deposit accounts of $537,000. Also
contributing to this increase was an increase in other miscellaneous income of
$105,000. Partially offsetting these increases was a decrease in net gain on
sale of loans, mortgage-backed securities and investments of $75,000 to $88,000
from $163,000 for the quarters ended September 30, 2002 and 2001, respectively.
Operating Expense.
Operating expenses increased by $6.1 million to $46.5 million for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001. Employee compensation and benefits increased by $4.4 million. The
increase in employee compensation reflects an increase in the number of full
time equivalent employees to 659 at September 30, 2002 from 618 at September 30,
2001 and also includes increases in commission based pay caused by growth in the
Company's loans, deposits and insurance sales. Also contributing to this
increase are increases in pension costs of $872,000, an increase in medical
expenses of $270,000, an increase in cost due to the Bank's Employee Stock
Ownership Plan (ESOP) of $323,000 and expense of $590,000 related to the
Company's Recognition and Retention Plan (RRP), established on May 21, 2002.
With respect to the increase in ESOP expense, the period ending September 30,
2001 reflects expense for four and one half months while the same period in 2002
includes nine months of such expense. Occupancy and equipment costs increased by
$721,000 due in part to additional depreciation expenses relating to new
computer equipment and new branch facilities. Partially offsetting these
increases was a slight increase in gain on real estate owned of $47,000. While
other operating expense increased by $877,000 for the nine months ended
September 30, 2002 and 2001, this included a $1.1 million charge relating to the
termination of a data processing service contract during the nine months ended
September 30, 2001. Had this charge not occurred, other operating expenses for
the nine months increased by approximately $2.0 million. This increase in other
operating expense is due mainly to the growth in the Bank's loans and deposits
and includes increases in telephone, office supplies, general insurance costs,
armored car services and other miscellaneous expenses.
During the quarter ended September 30, 2002, operating expense increased by
$2.5 million to $16.5 million from $14.0 million for the quarter ended September
30, 2001. Employee compensation and benefits increased by $1.7 million. The
increase in employee compensation is due largely to the increase in the number
of full time equivalent employees and includes increases in commission based pay
caused by growth in the Bank's loans, deposits and insurance sales. Also
contributing to the increase are increases in pension costs of $323,000 and an
increase in cost due to the RRP of $408,000 and ESOP of $24,000. Occupancy and
equipment costs increased by $258,000 due in part, as explained above, to
additional depreciation expenses relating to new computer equipment and new
branch facilities. Also contributing to this increase were increases in
marketing costs of $87,000 and other operating expense of $375,000 for the
quarter ended September 30, 2002 compared to 2001. The increase in other
operating expense is due mainly to the growth in the Bank's loans and deposits
and includes increases in telephone, office supplies, general insurance costs,
Market Value armored car services, temporary of Portfolio help and other
miscellaneous Equity expenses.
16
Income Taxes.
Provision for income taxes was $7.9 million for the nine months ended
September 30, 2002 compared to $2.7 million for the nine months ended September
30, 2001. This increase was attributable to an increase in income before
provision for income taxes of $13.3 million to $20.2 million in 2002 from $6.9
million in 2001. These expenses approximate the rates paid by the Company for
Federal and state income taxes applied to the Company's pre-tax income.
The income tax provision was $2.7 million for the quarter ended September
30, 2002 compared to $1.5 million for the quarter ended September 30, 2001.
These expenses approximate the 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 September 30, 2002,
the Company does not own any trading assets, other than $910,000 of assets held
by the SMPIAP Trust which can be actively traded by and are held for the benefit
of senior management. Income in these accounts accrues to and losses are solely
absorbed by senior management. At September 30, 2002, the Company does not have
any hedging transactions in place such as interest rate swaps and caps.
During the nine months ended September 30, 2002, the Bank experienced
substantially higher prepayment rates in its loan portfolio, as a result of the
low interest rate environment. The Bank's production of new loans during this
period exceeded the levels of prepayments experienced and the Bank was able to
control deposit costs by the expansion of its core deposits. As a result the
Bank's net interest margin has not declined. However, no assurances can be made
that market conditions will permit the Bank to avoid future margin compression.
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.
17
The following table sets forth the Bank's estimated internal calculations
of MVPE as of September 30, 2002.
Changes in Rates
(Rate Shock) $ Amount $ Change % Change
================ ========= ========== ==========
(Dollars in Thousands)
+200bp $ 385,443 $ 72,179 23.0%
+100bp 351,963 38,699 12.4%
-0- 313,264 0 0.0%
-100bp 272,545 (40,719) (13.0)%
-200bp 227,369 (85,895) (27.4)%
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.
18
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 10.58%
during the month of September 2002. Liquidity ratios averaged 11.51% for the
quarter ended September 30, 2002. The Bank adjusts its liquidity levels in order
to meet funding needs of loan originations, deposit outflows, payment of real
estate taxes on mortgage loans, and repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its asset
and liability management objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities and other short-term
investments, as well as earnings and funds provided from operations. While
scheduled principal repayments on loans and mortgage-backed securities are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Bank manages the pricing of its deposits to maintain a desired
deposit balance. In addition, the Bank invests excess funds in short-term
interest-earning and other assets, which provide liquidity to meet lending
requirements. Short-term interest-bearing deposits with the FHLB of Atlanta
amounted to $117.8 million at September 30, 2002. Other assets qualifying for
liquidity at September 30, 2002, including unpledged mortgage-backed securities
guaranteed by the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation, were $119.4 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 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 September 30, 2002, the Bank had $305.9 million in advances
from the FHLB. At September 30, 2002, the Bank had commitments outstanding to
originate or purchase loans of $215.9 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 September 30, 2002, totaled $530.8 million.
Based on prior experience, management believes that a significant portion of
such deposits will remain with the Bank.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 discontinues the practice of amortizing goodwill and
intangible assets with indefinite lives and initiates an annual review for
impairment of these assets. The Company has adopted this accounting principle
beginning January 1, 2002 and did not identify any impairment in the carrying
value of goodwill arising from previous acquisitions. Amortization of goodwill
included in the Company's income statement for the quarter and nine months ended
September 30 2001 was $63,000 and $188,000, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The statement applies to legal obligations associated
with the retirement of a tangible long-lived asset that results from the
acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lessee obligations. The statement requires
these obligations be recorded at fair value as of the date of retirement and is
effective for fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of this accounting principle will have a significant
effect on it's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement establishes a
single accounting model for long-lived assets to be disposed of by sale, and
requires that long-lived assets to be abandoned, exchanged for similar
productive assets, or distributed to owners in a spinoff be considered held and
used until disposed. The Company has adopted this standard beginning January 1,
2002. The adoption did not have an effect on the Company's financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." In addition, the statement amends FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", to include in
its scope long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. The provisions of this statement are
effective as of October 1, 2002. The Company does not believe that the adoption
of this accounting principle will have a significant effect on its financial
statements.
19
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-14(c) under the Exchange
Act) as of a date (the "Evaluation Date") within 90 days
prior to the filing date of this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, 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.
(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.
20
FIDELITY BANKSHARES, INC.
AND SUBSIDIARY
Part II - Other Information
Item 1 Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor is
the Company aware of any pending litigation, other than legal proceedings
incident to the business of the Company, such as foreclosure actions filed on
behalf of the Company. Management, therefore, believes the results of any
current litigation would be immaterial to the consolidated financial condition
or results of operation of the Company.
Item 2 Changes in Securities
None.
Item 3 Default Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None.
Item 6 Exhibits and Reports on Form 8-K
(a) All required exhibits are included in Part I under Consolidated Financial
Statements (pages 2 through 5), Notes to Unaudited Consolidated Financial
Statements (pages 6 through 11) and Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 12 through 20), and
are incorporated by reference, herein.
21
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: November 8, 2002 By: /S/Vince A. Elhilow
--------------------------------
Vince A. Elhilow
President and Chief Executive Officer
Date: November 8, 2002 By: /S/Richard D. Aldred
---------------------------------
Richard D. Aldred
Executive Vice President
Chief Financial Officer
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 September 30,
2002;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of and for the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 8, 2002 /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 and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of September 30,
2002;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of and for the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 8, 2002 /S/Richard D. Aldred
- ---------------- -----------------------------
Date Richard D. Aldred
Executive Vice President and
Chief Financial Officer
Exhibit 99.1
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Vince A. Elhilow, President and Chief Executive Officer, and Richard D.
Aldred, Executive Vice President and Chief Financial Officer of Fidelity
Bankshares, Inc. (the "Company"), each certify in his/her capacity as an officer
of the Company that he/she has reviewed the Quarterly Report of the Company on
Form 10-Q for the quarter ended September 30, 2002 and that to the best of
his/her 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 of the Company.
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.
November 8, 2002 /S/Vince A. Elhilow
- ---------------- --------------------------------------
Date Vince A. Elhilow
President and Chief Executive Officer
November 8, 2002 /S/Richard D. Aldred
- ---------------- ---------------------------------------
Date Ricahrd D. Aldred
Executive Vice President and
Chief Financial Officer