ITEM 1 - BUSINESS
General. Fidelity BancShares (N.C.), Inc. ("BancShares"), headquartered in Fuquay-Varina, North Carolina, was organized under the laws of Delaware on November 13, 1987 as a registered bank holding company for The Fidelity Bank (the "Bank"). BancShares operates through the Bank, which provides a variety of retail and commercial banking products and services to individuals and small- to medium-sized businesses in the communities it serves. BancShares currently is engaged in an expansion program, which involves acquisitions of other financial institutions, or offices and/or deposits of other institutions, and the opening of de novo branches. Certain statistical information with respect to BancShares' business required by Guide 3 is contained in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" which appears elsewhere in this filing.
BancShares also is the parent company of FIDBANK Capital Trust I ("FIDBANK"), a Delaware business trust that was organized for the sole purpose of issuing and selling $23.0 aggregate liquidation amount of 8.50% capital securities (the "Capital Securities"). The net proceeds from that sale, together with the proceeds from FIDBANK's issuance of its common securities to BancShares, were invested in a like aggregate face amount of BancShares' 8.50% junior deferrable interest subordinated debentures which mature during 2029. The capital securities and the junior subordinated debentures are subject to optional redemption at any time on or after June 30, 2004. BancShares has entered into a guaranty agreement which, when taken together with its obligations under the trust agreement under which FIDBANK exists, the junior subordinated debentures, and the indenture under which the debentures were issued, provides a full and unconditional guarantee on a subordinated basis by BancShares of FIDBANK's payment of distributions and other payments on the Capital Securities.
Members of the Holding family, including Lewis R. Holding, have been actively involved in the management of BancShares. As a result, BancShares has been managed from a long-term perspective with primary emphasis being placed on balance sheet liquidity, loan quality, and earnings stability. Consistent with its management philosophy, BancShares has emphasized a low-risk loan portfolio derived from its local markets. (See "Item 12. Security Ownership of Certain Beneficial Owners and Management" and "Item 13. Certain Relationships and Related Transactions.")
All significant activities of BancShares and its subsidiaries are banking related so that BancShares operates within one industry. Neither BancShares nor its subsidiary has any foreign operations.
The Bank is a state-chartered commercial bank. Its predecessor bank, Bank of Fuquay, was organized during 1909 and merged with Bank of Biscoe during 1970, at which time the continuing bank's name was changed to The Fidelity Bank. The Bank currently operates 62 banking offices in 44 separate central North Carolina communities, 20 of which have been opened or acquired from other institutions within the past five fiscal years. Most recently, during 1998 the Bank purchased an aggregate of $35.7 million in assets and assumed an aggregate of $75.1 million in deposit liabilities, associated with five branch offices of a related financial institution, First-Citizens Bank & Trust Company, Raleigh, North Carolina ("FCB"), and during 1999, it purchased an aggregate of $29.1 million in assets and assumed an aggregate of $99.6 million in deposit liabilities, associated with seven additional branch offices of FCB. (See "Item 13. Certain Relationships and Related Transactions" and note 15 to BancShares' consolidated financial statements.) Additionally, during 1998, 1999, and 2000, the Bank opened 15 de novo branch offices.
The Bank has two wholly-owned subsidiaries, Fidelity Properties, Inc. and TFB Financial Services. TFB Financial Services, Inc. ("TFB Financial Services"), formerly Servco Service Corporation, was acquired on September 1, 1996 in the acquisition of Perpetual State Bank and provides non-deposit investment products, including mutual funds, annuities, stocks, and bonds. Fidelity Properties currently is inactive.
BancShares' principal executive offices are located at 100 South Main Street, Fuquay-Varina, North Carolina 27526 and its telephone number is (919) 552-2242.
Description of Business. The Bank is a community-oriented bank which is engaged in a general commercial and consumer banking business. Its operations are primarily retail oriented and directed towards individuals and small- to medium- sized businesses in its market area. While the Bank provides most traditional commercial and consumer banking services, its principal activities are the taking of demand and time deposits and the making of secured and unsecured loans. The Bank's deposits are insured by the FDIC to the maximum amount permitted by law.
The Bank is focused on community-oriented banking via (i) localized lending, (ii) core deposit funding, (iii) conservative balance sheet management, and (iv) stable growth. The Bank's franchise is well diversified, serving both large cities and small rural towns in North Carolina. By outsourcing its core data processing requirements to FCB (see "Item 13. Certain Relationships and Related Transactions"), the Bank can offer a complete array of financial services while maintaining its community banking orientation. The Bank's focus on diverse markets and its emphasis on customer service provide it with a stable source of core funding.
The Bank's primary source of revenue is interest income from its lending activities. Since it commenced business, the Bank has pursued a strategy of growth through internal expansion by establishing branch offices in communities in its geographic market and by acquiring smaller institutions or offices of other institutions in its existing markets or in new markets.
Competition. Commercial banking in North Carolina is highly competitive. In its market areas, the Bank competes directly with a number of local, regional and superregional banking organizations. Competition among financial institutions for loans and deposits is based, to a large extent, on interest rates charged or paid. Fees and charges for other services, office location, the quality of customer services, community reputation and continuity of personnel, and, in the case of loans to large commercial borrowers, relative lending limits, also are important competitive factors. Many of the Bank's competitors have greater resources, broader geographic markets and higher lending limits and offer more services than the Bank, and they can better afford and make more effective use of media advertising, support services and electronic technology than can the Bank. The Bank depends on its reputation in its local community, direct customer contact, its ability to make credit and other business decisions locally, and personalized service to counter these competitive disadvantages.
In recent years, federal and state legislation has heightened the competitive environment in which all financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly. Additionally, with the elimination of restrictions on interstate banking, a North Carolina commercial bank may be required to compete not only with other North Carolina financial institutions, but also with out-of- state financial institutions which may acquire North Carolina institutions and are able to provide certain financial services across state lines, thereby adding to the competitive atmosphere of the industry in general.
Employees. At December 31, 2000, the Bank employed 371 full-time employees and 29 part-time employees. The Bank is not a party to any collective bargaining agreements and considers relations with its employees to be good. BancShares does not have any separate employees.
Supervision and Regulation. BancShares is subject to the jurisdiction of the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Under the BHC Act, BancShares is subject to supervision and examination by, and the regulations and reporting requirements of, the FRB, and its activities are limited to those permitted to bank holding companies. BancShares is required to obtain the prior approval of the FRB before it may acquire direct or indirect control of more than 5% of the outstanding voting stock, or substantially all of the assets of, any other bank or bank holding company. Additionally, the BHC Act prohibits BancShares from acquiring ownership or control of more than 5% of the outstanding voting stock of any company engaged in an activity that is not permitted for bank holding companies.
Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required, subject to certain limits, to guarantee compliance by those subsidiaries with capital restoration plans filed with their regulators.
The federal Gramm-Leach-Bliley Act enacted in 1999 (the "GLB Act") dramatically changed various federal laws governing the banking, securities, and insurance industries. The economic effects of the GLB Act on the banking industry, and competitive conditions in the financial services industry generally, may be profound. The GLB Act may expand opportunities for BancShares and the Bank to provide other services and obtain other revenues in the future, and also may present new competitive challenges.
The internal affairs of BancShares, including the rights of its shareholders, are governed by Delaware law and by its Articles of Incorporation and Bylaws. BancShares files periodic reports under the Securities Exchange Act of 1934 and is subject to the jurisdiction of the Securities and Exchange Commission.
As an insured, state-chartered bank that is not a member of the Federal Reserve System, the Bank is subject to supervision and examination by, and the regulations and reporting requirements of, the North Carolina Commissioner of Banks (the "Commissioner") and the Federal Deposit Insurance Corporation. Absent approval of the FDIC, the Bank is prohibited from engaging as principal in activities that are not permitted for national banks, and it is prohibited from acquiring or retaining any equity investment of a types not permitted for national banks.
As a subsidiary of BancShares, the Bank is subject to restrictions under federal law on the amount of, and its ability to enter into, transactions with, or investments in the securities of, BancShares and certain other affiliated entities. Though it is not a member of the Federal Reserve System, the Bank is subject to the FRB's reserve requirements applicable to all banks, and its business is significantly influenced by the fiscal policies of the FRB. The actions and policy directives of the FRB determine to a significant degree the Bank's cost and the availability of funds and the rates of interest charged on its loans and paid on its deposits.
The FDIC, Commissioner and FRB have broad powers to enforce laws and regulations applicable to BancShares and the Bank, and to require corrective action of conditions affecting the safety and soundness of the Bank. Among others, these powers include cease and desist orders, the imposition of civil penalties and the removal of officers and directors.
ITEM 2
ITEM 2 - PROPERTIES
At December 31, 2000 the Bank maintained 62 banking offices in 44 central North Carolina communities. BancShares owns the majority of the buildings and leases other facilities from third parties. Statistical information with respect to BancShares' property and equipment is contained in this filing under "Item 8. Financial Statements and Supplementary Data."
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Bank is a party to various legal proceedings in the ordinary course of its business. However, based on information presently available, and after consultation with legal counsel, BancShares' management believes that the ultimate outcome in such proceedings, in the aggregate, will not have any material adverse effect on BancShares' financial condition.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5
ITEM 5 - MARKET FOR BANCSHARES' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
BancShares' common stock is not traded in an established public trading market. On March 15, 2001, there were 122 record holders of BancShares' common stock.
The per share cash dividends paid by BancShares during each quarterly period during 2000 and 1999 are set forth in Table XI, under Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report. A cash dividend of $8.00 per share was declared by the Board of Directors on January 29, 2001, payable March 30, 2001, to holders of record as of March 1, 2001. BancShares' sole source of funds for the payment of dividends to its shareholders is dividends it receives from the Bank. Payments of dividends by BancShares and the Bank are made at the discretion of their Boards of Directors and are contingent upon satisfactory earnings as well as projected future capital needs. Subject to the foregoing, it is currently management's expectation that comparable cash dividends will continue to be paid in the future.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial information for BancShares as of and for the years ended December 31, 2000, 1999, 1998, 1997, and 1996. The data has been derived from BancShares' audited consolidated financial statements. The consolidated financial statements as of December 31, 2000 and 1999 and for each of the years in the three year period ended December 31, 2000, and the independent auditors' report thereon, are included elsewhere in this filing. The following should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
__________
(1) For each indicated period, total common dividends declared divided by net income. (2) See "Supervision and Regulation - Capital Adequacy" for a more detailed description of these ratios. (3) For each indicated period, net income divided by the average number of common shares outstanding. BancShares has no potentially dilutive securities. (4) At the end of each indicated period, shareholders' equity divided by the number of common shares outstanding.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of Fidelity BancShares (N.C.), Inc. and Subsidiaries ("BancShares"), for the years 2000, 1999 and 1998. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and related notes presented under "Item 8. Financial Statements and Supplementary Data." BancShares is a bank holding company with two wholly-owned subsidiaries - The Fidelity Bank (the "Bank"), a North Carolina-chartered bank, and FIDBANK Capital Trust I (the "Trust") - a statutory business trust created under the laws of the State of Delaware.
Acquisitions.
2000 Acquisitions. BancShares made no acquisitions during 2000.
1999 Acquisitions. In August 1999, BancShares acquired the deposits of seven North Carolina branches of First-Citizens Bank & Trust Company ("FCB") (see notes 2 and 15 to BancShares' consolidated financial statements). These acquisitions were accounted for as a purchase and, therefore, the results of operations prior to the purchase are not included in BancShares' consolidated financial statements. These acquisitions were as follows:
Transaction Loans Deposits Date Acquired Acquired ---- -------- -------- (Dollars in thousands)
Gibsonville branch .................. Aug-99 $ 4,496 $ 11,465 Kings Mountain branch ............... Aug-99 6,021 22,910 Polkville branch .................... Aug-99 1,811 8,749 Shelby branch ....................... Aug-99 7,094 20,649 Stokesdale branch ................... Aug-99 2,467 6,040 Stoneville branch ................... Aug-99 2,366 19,475 Wentworth branch .................... Aug-99 3,783 10,285 ------- -------- 1999 acquisition totals......... $28,038 $ 99,573 ======= ========
1998 Acquisitions. In October 1998, BancShares acquired the deposits of five North Carolina branches of FCB. These acquisitions were accounted for as a purchase and, therefore, the results of operations prior to the purchase are not included in BancShares' consolidated financial statements. These acquisitions were as follows:
Transaction Loans Deposits Date Acquired Acquired ---- -------- -------- (Dollars in thousands)
Siler City branch ................... Oct-98 $ 6,754 $ 14,202 Salisbury branch .................... Oct-98 11,754 20,310 Gastonia Main branch ................ Oct-98 5,933 33,544 Gastonia Union Road branch .......... Oct-98 3,419 3,518 Gastonia Cox Road branch ............ Oct-98 5,834 3,519 ------- -------- 1998 acquisition totals......... $33,694 $ 75,093 ======= ========
Results of Operations.
Net Income. For 2000, net income of $8.1 million represented a 6.1% increase from 1999 net income of $7.6 million. BancShares experienced a strong increase in net interest income as well as noninterest income during 2000, slightly offset by an increase in the provision for loan losses due to strong loan growth and industry conditions.
1999 net income of $7.6 million represented a 0.17% decrease from 1998 net income of $7.6 million. While BancShares' experienced a strong increase in net interest income during 1999, this growth was hampered by an increase in provision for loan losses due to strong loan growth and an increase in operating expenses due to the acquisition of seven branches during the third quarter. BancShares also experienced a decrease in noninterest income during 1999 due to a one time gain recorded in 1998 on the sale of rights to service mortgage loans which was not present in 1999.
Net income per share for 2000 was $287.97 compared to $270.05 for 1999; the increase is attributable to increased earnings and decreased shares outstanding due to the repurchase by BancShares of 100 shares of common stock.
1999 net income per share was $0.80 more than the $269.25 recognized for 1998. The increase in net income per share during 1999 was attributable to a decrease in shares outstanding with BancShares' repurchase of 240 shares of common stock during the second quarter of 1999.
Net Interest Income. The greatest portion of BancShares' earnings is from net interest income, which is the difference between interest income on earning assets and interest paid on deposits and other interest bearing liabilities. The primary factors affecting net interest income are changes in the volume and yields/rates on earning assets and interest bearing liabilities and the ability to respond to changes in interest rates through asset/liability management. Table I sets forth the average balances on interest earning assets and interest bearing liabilities, as well as the average yields earned and average rates paid for 2000, 1999 and 1998. The average prime rate, as set by the Federal Reserve, was 9.23%, 8.00%, and 8.35% for the years ended December 31, 2000, 1999, and 1998, respectively.
In 2000, net interest income was $36.6 million compared to $32.2 million in 1999, an increase of $4.4 million or 13.7%. 1999 net interest income was $5.5 million (20.57%) greater than 1998 net interest income of $26.7 million. The increase in net interest income in 2000 and 1999 was attributable to increased interest income from loans that occurred due to increased loan balances in both years. Interest income grew $11.7 million or 21.1% during 2000 and $8.8 million or 18.92% in 1999 compared to the respective previous year. Interest income totaled $67.0 million in 2000, $55.4 million in 1999, and
$46.6 million in 1998. Interest expense increased $7.3 million, or 31.3%, in 2000 and $3.3 million, or 16.70%, in 1999 compared to previous year. Interest expense was $30.5 million in 2000, $23.2 million in 1999, and $19.9 million in 1998. The increase in 2000 was due to higher volumes of interest bearing liabilities and the increasing interest rate environment; in 1999 the increase was attributable to higher volumes of interest bearings liabilities. The rates paid on interest bearing liabilities were 4.59%, 3.97%, and 4.27% in 2000, 1999, and 1998, respectively.
Loans produced the largest component of interest income, amounting to $56.4 million in 2000, $45.3 million in 1999, and $37.6 million in 1998. This represented an increase of $11.2 million or 24.7% in 2000 and $7.6 million or 20.34% in 1999. During 2000 and 1999, average loans outstanding increased $94.4 million or 19.2% and $102.9 million or 26.36%, respectively. In both years, loan growth within the existing branches and de novo branch openings contributed to the increases. In addition, in 1999, the overall growth was partially attributable to the acquisition of seven branches, in which $28.0 million of loans were acquired. Average yields on loans during 2000, 1999 and 1998 were 9.63%, 9.20%, and 9.66%, respectively. The increase in the 2000 average yield was due to the increase in average prime rate during 2000 compared to 1999. Likewise, the decline in the 1999 average yield on loans was due to the decline in the average prime rate during 1999 compared to 1998.
Earnings from investments and federal funds sold provided the remainder of interest income, contributing $10.6 million in 2000, $10.1 million in 1999, and $9.0 million in 1998. Average balances and yields on these securities are shown in Table I. Included in 1999's $10.1 million earned on investments and federal funds sold is $1.0 million earned on interest bearing cash balances attributable to the deposit of proceeds from the $23.0 million Capital Trust Securities issuance during 1999 (see note 8 to BancShares' consolidated financial statements). Average interest bearing cash balances during 2000 and 1999 were $13.7 million and $17.0 million, which earned an average rate of 6.20% and 5.22%, respectively. There were no interest bearing cash balances during 1998.
As noted above, total 2000 interest expense increased 31.3% above that of 1999, which increased 16.7% compared to 1998. The principal component of BancShares' interest expense is interest paid on deposits, which totaled $27.5 million in 2000, $21.5 million in 1999, and $19.5 million in 1998. Average interest bearing deposit balances for 2000, 1999, and 1998 were $618.6 million, $553.9 million, and $456.1 million, respectively. This represents an increase of 11.7% in 2000 and 21.4% in 1999 over the prior years due to de novo branch openings and growth within the existing branch network. Additionally, the growth during 1999 was partially attributable to the acquisition of branches. Included in the $23.2 of million interest expense in 1999, is interest expense of $1.1 million resulting from the $23.0 million Capital Trust Securities issued by the Trust during 1999 (see note 8 to BancShares' consolidated financial statements). These long-term obligations, which qualify as Tier 1 Capital for BancShares, bear interest at 8.50%, are callable in 2004, and mature in 2029. The average balance on the long-term obligations during 2000 and 1999 was $23 million and $12.6 million, respectively; the average rate paid on the obligations was 8.50% in 2000 and 8.44% in 1999. There were no long-term obligations outstanding in 1998. See Table I and Table II.
BancShares' interest rate spread was 4.09%, 4.11%, and 4.08% on a tax equivalent basis in 2000, 1999, and 1998, respectively. BancShares' ability to maintain a favorable spread between interest income and interest expense is a major factor in generating earnings. Therefore, it is necessary for BancShares to effectively manage earning assets and interest bearing liabilities.
Provision for Loan Losses. BancShares' provision for loan losses charged against earnings was $2,625,000, $1,200,000, and $630,000 in 2000, 1999, and 1998, respectively. The provision for loan losses increased primarily due to increased loan balances, de novo branch openings and growth within the existing branch network. As noted above, average loans grew $94.4 million or 19.2% in 2000 compared to $102.9 million or 26.34% in 1999. BancShares' also experienced an increase in net charge-offs during 2000 and 1999 compared to previous years, as discussed herein under `Asset Quality', which influenced the provision for loan losses in those years. BancShares' provision for loan losses was also impacted in 2000 by a slight softening of the economy during the year.
Noninterest Income. Noninterest income, which consists primarily of service charges, commissions and fees, increased $1,983,000 in 2000 over 1999 and decreased $293,000 in 1999 compared to 1998. Total noninterest income was $7.2 million in 2000, $5.2 million in 1999, and $5.5 million in 1998. The increase in 2000 in noninterest income is attributable to growth in fee-earning transaction accounts, increase in fees charged, and improved fee collection on accounts. The primary increase is due to increased deposit accounts, a new overdraft checking product, and increased NSF fees. The 1999 decrease in noninterest income compared to 1998 is primarily attributable to the sale of the Bank's rights to service $51 million in mortgage loans to Southern Bank and Trust Company for $522,000, resulting in a gain of $507,456 in 1998 (see notes 4 and 15 to BancShares' consolidated financial statements). Also affecting the 1999 decrease in noninterest income was BancShares' contribution of one of the Bank's banking facilities to the North Carolina Community Foundation in 1998. BancShares recorded the market value of the land and building, $448,000, as a contribution expense and, after writing off the value of the land of $40,000, recognized a gain of $408,000 in 1998. The remaining components of other income, service
charges on deposit accounts and other service charges and fees, increased during 1999 by $441,000 and $233,000, respectively, over 1998. These increases in 1999 and 1998 were attributable to acquired branches, de novo branch openings and deposit growth within the existing branch network.
Noninterest Expense. Noninterest expense includes expenses attributable to personnel, occupancy, furniture and equipment, data processing, FDIC assessments, printing, supplies, legal and professional fees, postage, amortization of intangibles, and other miscellaneous operating expenses. Noninterest expense was $28.4 million in 2000, $24.0 million in 1999, and $19.4 million in 1998. Control of noninterest expense is an important aspect in managing net income. Acquisition of branches during 1999 and 1998 should enhance future operating results of BancShares; however, for the following fifteen years, earnings will be reduced as BancShares amortizes intangibles resulting from the acquisitions.
The most significant element of BancShares' noninterest expense is personnel costs. Salaries and benefits represented 53.7%, 52.22%, and 48.78% of total noninterest expense during 2000, 1999, and 1998, respectively. Salaries and benefits increased by $2.7 million or 21.4% in 2000 and $3.1 million or 32.57% in 1999. The primary causes of these increases are the acquisition of seven branches in 1999 (for which costs have been incurred for an entire year during 2000) and the opening of three de novo branches in 2000 and six in 1999.
Occupancy and equipment expenses increased from $3.7 million in 1998 to $4.4 million in 1999 to $4.8 million in 2000. These increases of $362,000 in 2000 and $706,000 in 1999 were attributable to acquired branches and de novo branch openings noted above.
Data processing costs represent charges by vendors that perform data processing services for the Bank. Data processing fees are primarily based upon per item or per account charges. Data processing costs were $2.5 million, $1.9 million, and $1.4 million in 2000, 1999, and 1998, respectively. These increases were due to the addition of acquired and de novo branches as well as growth in the loan and deposit base in the existing branch network, as noted above.
Amortization of intangibles during 2000 increased $197,000 to $1,121,000 compared to $924,000 for 1999. Amortization of intangibles was $599,000 in 1998. The increase in amortization of intangibles during 2000 and 1999 was attributable to the acquisition of seven branches in the third quarter of 1999. Intangibles from these acquisitions amounted to $4.1 million (see note 2 and 15 to BancShares' consolidated financial statements). Also impacting intangibles amortization in 2000 and 1999 was the effect of a full year of amortization on intangible assets arising from the 1998 acquisitions. These intangibles are amortized over 15 years (see note 1 to BancShares' consolidated financial statements).
Other miscellaneous operating expenses were $4.7 million, $4.2 million, and $4.2 million in 2000, 1999, and 1998, respectively. Other miscellaneous operating expense during 1998 included BancShares' contribution expense of a building at fair market value to a non-profit agency and the recognition of $448,000 in contribution expense on this donation. Without the contribution expense in 1998, 1999 other miscellaneous operating expenses increased $452,000 over 1998. These increases, as well as the $481,000 current year increase, were the result of increases in costs across all categories of other operating expenses due to the increased customer base and account activity resulting from acquired branches, de novo branch openings and growth within the existing branch network.
Income Taxes. In 2000, 1999, and 1998, BancShares had taxable income for book purposes that resulted in income tax expense of $4.6 million, $4.5 million, and $4.5 million, respectively. The resulting effective income tax rates for the years ended December 31, 2000, 1999, and 1998 were 36.30%, 36.91%, and 36.82%, respectively.
Financial Condition.
Earning and Noninterest Earning Assets. Earning assets consist of loans, investment securities, and short-term investments that earn interest. Average earning assets during 2000 were $774.4 million, an increase of $87.9 million or 12.8% over 1999's interest earning assets of $686.6 million. During 1999, average interest earning assets increased $127.2 million or 22.74% from the 1998 average of $559.3 million. Increases during both years resulted from de novo branch openings and growth within the existing branch network. Further, in 1999, growth was partially attributable to the acquisition of branches noted above. Cash received from the $23.0 million Capital Trust Securities issuance and acquisition of branches in 1999 was invested in loans and short-term investments, including federal funds and interest bearing cash deposits.
Average noninterest earning assets during 2000 were $78.9 million compared to $66.7 million in 1999, an increase of 18.2%. During 1999, an increase of $15.8 million or 30.95% occurred compared to the 1998 average of $51.0 million. The 2000 and 1999 increases were primarily due to increases in cash, fixed assets and intangible assets resulting from the acquired branches or de novo branch openings. The average balances of noninterest earning assets are shown in Table I.
Return on average total assets for 2000 was 0.95%, compared to 1.01% and 1.25% in 1999 and 1998, respectively. The decline for 2000 was the result of increased total average assets, primarily attributable to de novo branch openings in 2000 and a full year's impact of branches that opened in 1999, that was proportionately greater than the increase in earnings. The decline in return on average total assets for 1999 was caused by increases in average total assets primarily attributable to the acquired branches and de novo branch openings during 1999. Changes in the composition of average balances are shown in Table I and Table II.
Return on average equity for 2000 was 11.01%, compared to 11.43% and 12.36% in 1999 and 1998, respectively. In 2000, the decline was due to increased average equity due to earnings and unrealized gains on securities available for sale. The decline in the 1999 return on average equity was due to a slight decline in net income and an increase in average equity driven by earnings.
Interest Bearing and Noninterest Bearing Liabilities. Interest bearing liabilities consist of deposits, short-term borrowed funds and long-term borrowed funds. Average interest bearing liabilities during 2000 were $664.2 million, an increase of 13.6% from the 1999 average of $584.7 million, which was 25.47% higher than that of 1998, $466.0 million. BancShares' principal interest bearing liabilities are interest bearing deposits. Interest bearing deposits represented $618.6 million, $553.9 million, and $456.1 million of average interest bearing liabilities in 2000, 1999, and 1998, respectively. Short-term borrowings and long-term borrowings represent the remaining balances. The 1999 increase in long-term borrowings is due to the $23.0 million Capital Trust Securities issuance (see note 8 to BancShares' consolidated financial statements). The cost of total interest bearing liabilities was 4.59%, 3.97%, and 4.27% in 2000, 1999, and 1998, respectively.
Average noninterest bearing liabilities during 2000 were $115.5 million, an increase of $13.7 million or 13.5% over 1999's average, $101.8 million. During 1999, the average noninterest bearing liabilities increased $19.4 million or 23.50% over the 1998 average of $82.4 million. Noninterest bearing demand deposits are the principal noninterest bearing liability. Increases in noninterest bearing demand deposit balances are attributable to acquired branches, de novo branch openings and expansion within the existing branch network. See Table I.
Loans. As of December 31, 2000, loans, net of the allowance for loan losses, totaled $607.5 million compared to $546.0 million and $434.6 million at year-end 1999 and 1998, respectively. The increase was attributable to normal loan growth, from the existing branch network and de novo branch openings in 2000 and 1999. Also in 1999, growth was due to acquired loans of $28.0 million from the acquisition of seven branches in third quarter 1999. The composition of the loan portfolio for each of the years in the five year period ended December 31, 2000 is listed in Table IV. During 2000, BancShares experienced strong growth in construction and land development loans and commercial and industrial loans. This growth was generally consistent with the prior year.
Rate sensitivity and liquidity in the loan portfolio are achieved by making loans with adjustable interest rates and shorter maturities. This allows the Bank to adjust its pricing structure with changes in interest rates. At the end of 2000, 38.0% of the loan portfolio was due to mature or would be available for interest rate repricing in 2001. See Table IV.
Investments. Management's asset/liability strategies include maintaining an investment securities portfolio with appropriate maturities to preclude the necessity of selling investment securities for purposes of liquidity. Traditionally, BancShares has maintained a larger investment portfolio than its peers.
BancShares accounts for investment securities under the provisions of Statement of Financial Accounting Standards No. 115 ("Statement 115"), "Accounting for Certain Investments in Debt and Equity Securities," which requires that investments in debt and equity securities be classified in three categories and accounted for as follows: debt securities that BancShares has the positive intent and ability to hold to maturity are classified as held-to- maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. Securities available for sale consist of securities which may be sold in response to changes in interest rates, prepayment risk, regulatory capital requirements and liquidity needs.
At December 31, 2000, the fair value of available for sale securities exceeded the carrying value by $6.2 million, deferred taxes related to these available for sale securities were $2.5 million, and shareholders' equity included $3.7 million for the net unrealized gain related to these available for sale securities. At December 31, 1999, the fair value of available for sale securities exceeded the carrying value by $5.1 million, deferred taxes related to these available for sale securities were $2.1 million, and shareholders' equity included $3.0 million for the net unrealized gain related to these available for sale securities. BancShares does not maintain a trading account.
Asset Quality.
Provision and Allowance for Loan Losses. Because BancShares' loan portfolio represents its largest earning asset, BancShares continually monitors the quality of its loan portfolio. The Bank operates in a diversified economic environment and, in the opinion of management, is not unduly exposed to any one particular industry. In 2000, BancShares charged-off loans net of recoveries of $469,000. This represents a decrease of $470,000 from 1999 net charge-offs of $939,000. This decrease is primarily the result of increased recoveries in 2000. The 1999 net charge-offs of $939,000 were an increase of $765,000 from 1998 net charge-offs of $174,000. This increase is primarily the result of reduced recoveries in 1999. The percentage of charge-offs (net of recoveries) to average outstanding loans was 0.08% in 2000, 0.19% in 1999, and 0.04% in 1998. See Table V.
The ratio of total non-performing assets to total loans plus other real estate was 0.01% and 0.02% at December 31, 2000 and 1999, respectively. Assets classified as other real estate were $75,000 and $117,000 at December 31, 2000 and 1999, respectively.
Accrual of interest is discontinued on a loan when management believes the borrower's financial condition is such that the collection of principal or interest is doubtful. Loans are returned to accrual status when the factors indicating doubtful collectibility cease to exist.
Management considers a loan to be impaired when, based on current information or events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Impaired loans are valued using either the discounted expected cash flow method or the value of the collateral.
While a loan (including an impaired loan) is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding. When the future collectibility of the recorded loan balance is not in doubt, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge- offs have been fully recovered.
At December 31, 2000 and 1999, the Bank did not have any nonaccrual loans, nor did the Bank have any restructured or impaired loans. At December 31, 2000 and 1999, the Bank did not have any accruing loans 90 days or more past due.
The allowance for loan losses represented 1.19% and 0.93% of loans outstanding at year-end 2000 and 1999, respectively. The Bank's provision for loan losses charged against earnings was $2,625,000, $1,200,000, and $630,000, in 2000, 1999, and 1998, respectively. The increase in the provision for loan losses in 2000 and 1999 was primarily attributable to loan growth from de novo branch openings and expansion in the existing branch network in both years, as well the addition of loans from acquired branched during 1999 discussed above. BancShare's also experienced an increase in net charge-offs during 2000 and 1999 compared to previous years, which influenced the provision for loan losses in those years. BancShares' provision for loan losses was also impacted in 2000 by a slight softening in the economy during the year.
Management considers the December 31, 2000 allowance for loan losses adequate to cover probable losses inherent in the loan portfolio. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's experience, the estimated value of any underlying collateral, current economic conditions, analysis of peer bank trends, and other risk factors. Management believes it has established the allowance in accordance with generally accepted accounting principles and in consideration of the current economic environment. While management uses the best information available to make evaluations, future adjustments may be necessary if economic or other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and losses on other real estate owned. Such agencies may require the Bank to recognize adjustments to the allowances based on the examiners' judgements about information available to them at the time of their examinations.
Liquidity, Market Risk and Interest Sensitivity.
Liquidity. Liquidity refers to the ability of BancShares to generate sufficient funds to meet its financial obligations and commitments at a reasonable cost. Maintaining liquidity ensures that funds will be available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of other deposits and liabilities. Past experience
helps management anticipate cyclical demands and amounts of cash required. These obligations can be met by existing cash reserves or funds from maturing loans and investments, but in the normal course of business are met by deposit growth.
In assessing liquidity, many relevant factors are considered, including stability of deposits, quality of assets, economy of the markets served, business concentration, competition and BancShares' overall financial condition. BancShares' liquid assets include all investment securities, federal funds sold, and cash and due from banks. These assets represented 31.51% of deposits at December 31, 2000, a decrease from 33.19% at December 31, 1999.
BancShares' liquidity ratio, which is defined as cash plus short-term and marketable securities divided by deposits and short-term liabilities, was 30.22% at December 31, 2000, compared to 31.95% at December 31, 1999. In addition, the Bank has a $108 million line of credit with the Federal Home Loan Bank to meet liquidity needs.
BancShares has traditionally maintained a high level of liquidity, characteristic of the high ratio of investment securities to total assets that it maintains. Although loans have increased in each of the recent fiscal periods, BancShares' ability to manage its liquidity is enhanced by the mortgage loan department's ability to sell mortgage loans originated for liquidity or other asset/liability management requirements.
Funds received from any maturing investments that are not immediately necessary to sustain BancShares' liquidity are invested in similar instruments or used to fund any increased loan demand. Investments scheduled to mature within the one year time frame, without consideration of marketable equity securities, represented 84.32% and 23.70% of the total investment securities portfolio at December 31, 2000 and 1999, respectively.
In addition, BancShares held marketable equity securities with fair values of $8.8 million and $7.7 million at December 31, 2000 and 1999, respectively. These investments are classified as available for sale and could be sold at management's discretion.
BancShares' consolidated statements of cash flows disclose the principal sources and uses of cash from operating, investing, and financing activities for 2000, 1999, and 1998. In 2000, BancShares' operating activities provided cash flows of $14.3 million. Net income of $8.1 million, adjusted for non-cash operating activities, provided the majority of cash generated from operations. Investing activities, including lending, used $76.5 million of BancShares' cash flow. Loans originated, net, of principal collected, used $64.3 million. Securities purchases, net of maturities, used $7.7 million, and expenditures for premises and equipment utilized $4.4 million of BancShares' cash flow. Net additional cash inflows of $59.0 million resulted from financing activities, principally from deposit inflows of $56.5 million.
In 1999, BancShares' operating activities provided cash flows of $9.8 million. Net income of $7.6 million, adjusted for non-cash operating activities, provided the majority of cash generated from operations. Investing activities, including lending, used $72.9 million of BancShares' cash flow. Loans originated, net, of principal collected, used $84.8 million. Cash received in connection with the acquisition of branches provided $66.3 million of BancShares cash flow. Securities maturities, net of purchases, used $45.0 million, and expenditures for premises and equipment utilized $9.1 million of BancShares' cash flow. Net additional cash inflows of $39.8 million resulted from financing activities, principally from short-term and long-term borrowing inflows of $11.3 million and $23.0 million, respectively.
In 1998, BancShares' operating activities provided cash flows of $12.6 million. Net income of $7.6 million, adjusted for non-cash operating activities, provided the majority of cash generated from operations. Investing activities, including lending, provided $26.2 million of BancShares' cash flow. Loans originated, net, of principal collected, used $47.4 million. Cash received in connection with the acquisition of branches provided $35.4 million of BancShares cash flow. Securities maturities, net of purchases, provided $42.0 million, and expenditures for premises and equipment utilized $4.1 million of BancShares' cash flow. Net additional cash inflows of $28.9 million resulted from financing activities, principally from deposit inflows of $29.3 million.
The Bank has no brokered funds. Jumbo certificates of deposit ("CD's") are considered to include all CD's of $100,000 or more. The Bank does not and has never aggressively bid on these deposits, and it does not seek nor does it accept deposits from outside of its general trade area. Almost all of the Bank's jumbo CD customers have other relationships with the Bank, including savings, demand and other time deposits and, in some cases, loans. At December 31, 2000 and 1999, jumbo CD's represented 10.47% and 9.26% of total deposits, respectively.
In the opinion of management, BancShares has the ability to generate sufficient amounts of cash to cover normal funding requirements and any additional needs which may arise, within realistic limitations, during the next twelve months, and management is not aware of any known demands, commitments or uncertainties that will affect liquidity in a material way.
Market Risk. Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. The risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods.
BancShares' market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management seeks to manage this risk through the use of shorter term maturities. The composition and size of the investment portfolio is managed so as to reduce the interest rate risk in the deposit and loan portfolios while at the same time maximizing the yield generated by the portfolio.
The table below presents in tabular form the contractual balances and the estimated fair value of financial instruments at their expected maturity dates as of December 31, 2000. The expected maturity categories take into consideration historical prepayment experience as well as management's expectations based on the interest rate environment as of December 31, 2000. For core deposits without contractual maturity (i.e., interest bearing checking, savings and money market accounts), the table presents principal cash flows as maturing in 2000 since they are subject to immediate repricing.
_________
(1) Marketable equity securities with a book value of approximately $2,645,000 and a fair value of approximately $8,799,000 have been excluded from this table.
Interest Sensitivity. Deregulation of interest rates and short-term, interest earning deposits which are more volatile, has created a need for shorter maturities of interest earning assets. As a result, an increasing percentage of commercial, installment, and mortgage loans are being made with variable rates or shorter maturities to increase liquidity and interest rate sensitivity.
The difference between interest sensitive asset and interest sensitive liability repricing within time periods is referred to as the interest rate sensitivity gap. Gaps are identified as either positive (interest sensitive assets in excess of interest sensitive liabilities) or negative (interest sensitive liabilities in excess of interest sensitive assets).
As of December 31, 2000, BancShares had a positive one year cumulative gap position of 12.49% and a positive total cumulative gap position of 13.72%. BancShares has interest earning assets of $511.1 million maturing or repricing within one year and interest bearing liabilities of $408.0 million repricing within one year. BancShares experienced growth in loans and investments with maturities of one year or less which were outpaced by the growth in deposits and short-term borrowings which also had maturities of one year or less. A positive gap position implies that interest earning assets (loans and investments) will reprice at a faster rate than interest bearing liabilities (deposits). In a falling rate environment, this position will generally have a negative effect on earnings, while in a rising rate environment this position will generally have a positive effect on earnings.
Inflation. The effect of inflation on financial institutions differs from the impact on other types of businesses. Since assets and liabilities of banks are primarily monetary in nature, they are more affected by changes in interest rates than by the rate of inflation.
Inflation generates increased credit demands and fluctuations in interest rates. Although credit demand and interest rates are not directly tied to inflation, each can significantly impact net interest income. As in any business and industry, expenses such as salaries, equipment, occupancy, and other operating expenses are also subject to upward pressures created by inflation.
Since the rate of inflation has been relatively stable during the last several years, the impact of inflation of the earnings presented in this report is insignificant.
Capital Resources. Shareholders' Equity and Capital Adequacy. Sufficient levels of capital are necessary to sustain growth and absorb losses. To this end, the Federal Reserve, which regulates BancShares, and the FDIC, which regulates the Bank, have established risk based capital ("RBC") adequacy guidelines.
As of December 31, 2000, BancShares' Leverage Capital Ratio (as defined herein) was 9.72%, as compared to 9.12% and 7.65%, respectively, at year-end 1999 and 1998. Within RBC calculations, BancShares' assets, including commitments to lend and other off-balance sheet items, are weighted according to Federal regulatory guidelines for the risk considered inherent in the assets. BancShares' Tier 1 Capital Ratio (as defined herein) as of December 31, 2000 was 11.87% compared to ratios of 12.06% and 10.30% for 1999 and 1998, respectively. The increase in the Tier 1 Capital ratio in 1999 is attributed to the issuance of the $23.0 million of Capital Trust Securities which qualify as Tier 1 Capital. The calculation of Total Capital Ratio (as defined herein) allows, in BancShares' circumstances, the inclusion of BancShares' allowance for loan losses in capital, but only to a maximum of 1.25% of risk weighted assets. As of December 31, 2000, BancShares' Total Capital Ratio was 13.29%. The Total Capital Ratios for 1999 and 1998 were 13.34% and 11.87%, respectively. The increase in the Total Capital ratio in 1999 compared to 1998 is attributable to the issuance of the $23.0 million of Capital Trust Securities.
As of December 31, 2000, the Bank's Leverage Capital Ratio (as defined above) was 9.17%, which, along with 8.67% and 7.29% as of December 31, 1999 and 1998, respectively, represents a well-capitalized institution under FDIC standards (one whose ratio exceeds 5%). The Bank's Tier 1 Capital ratio (as defined above) as of December 31, 2000 was 11.26%, which, along with 12.28% and 9.86% as of December 31, 1999 and 1998, respectively, represents a well- capitalized institution under FDIC standards (one whose ratio exceeds 6%). As of December 31, 2000, the Bank's Total Capital Ratio (as defined above) was 12.31%. The Total Capital ratios for 1999 and 1998 were 13.17% and 10.81%, respectively. Total Capital Ratio in all three years represented well-capitalized institutions under FDIC standards (the ratio exceeds 10%).
These ratios will improve if BancShares' capital increases at a rate proportionately faster than liabilities. Management is aware that growth must be controlled. BancShares' recent expansion plans discussed elsewhere herein may appear to be contrary to this policy but management is also aware that the process of expanding market share by normal business processes can be very difficult and expensive. Management believes that improvement in its overall market share
within an existing trade area is valuable in the long run and should be pursued by BancShares, when it can be done prudently.
BancShares' primary source of new capital is earnings. In 2000, equity capital increased through retention of earnings by $7.2 million, compared to $6.7 million in 1999 and 1998. BancShares' internal capital generation rate was 11.01% in 2000, 10.08% in 1999, and 10.89% in 1998. At December 31, 2000, shareholders' equity totaled $77.5 million, compared to $69.9 million in 1999. Shareholders' equity for 2000 and 1999 included, as discussed above, $3.7 million and $3.0 million, respectively, of net unrealized securities gains on available for sale securities.
The ratio of average shareholders' equity to average total assets was 8.62% in 2000, 8.87% in 1999, and 10.14% in 1998.
Retention of sufficient earnings to maintain an adequate capital position that provides BancShares with expansion capabilities is an important factor in determining dividends. During 2000, BancShares paid $900,000 in dividends, versus $905,000 and $909,000 in 1999 and 1998. As a percentage of net income, dividends were 11.11% in 2000, 11.85% in 1999, and 11.88% in 1998. The decrease in dividends paid in 2000 compared to 1999 and 1999 compared to 1998 is attributable to a decrease in the number of shares outstanding each year.
Accounting and Other Matters. In June, 1998, the Financial Accounting Standard Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. BancShares adopted the provisions of SFAS No. 133 on January 1, 2001, but since BancShares does not utilize derivatives, adoption of this pronouncement did not have an effect on BancShares' consolidated financial statements.
The FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"), which replaced SFAS No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and classification of collateral and disclosures relating to securitization transactions and collateral for fiscal years beginning after December 15, 2000. This statement is not expected to materially impact BancShares.
Management is not aware of any other trends, events, uncertainties, or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on BancShares' liquidity, capital resources or other operations.
Statistical Information.
The following tables contain certain additional information regarding BancShares' business operations.
Table I.
Average Balance Sheet Items and Net Interest Differential Average Balances and Average Rates Earned and Paid
- ---------- (1) Average balances include non-accrual loans. (2) The average rate on nontaxable loans and investment securities has been adjusted to a tax equivalent yield using a 36.5% tax rate for 2000 and 34% tax rate for 1999 and 1998. (3) See Table X. (4) Interest rate spread is the difference between earning asset yield and interest bearing liability rate. (5) Net interest margin is net interest income divided by average earning assets.
Table II. Average Balance Sheet Items and Net Interest Differential Analysis of Changes in Interest Differential
____________
Average loan balances include nonaccrual loans. BancShares earns tax- exempt interest on certain loans and investment securities due to the borrower or issuer being either a governmental agency or a quasi-governmental agency. Yields related to loans and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only, are stated on a taxable equivalent basis assuming a blended statutory income tax rate of 36.5% for 2000 and 34% for 1999 and 1998. The taxable equivalent adjustment was approximately $145,000, $151,000, and $131,000 for the years 2000, 1999 and 1998, respectively. The variance due to rate and volume is allocated equally between the changes in volume and rate.
Table III. Investment Portfolio
The following table sets forth the carrying amount of investment securities:
The following table sets forth the maturities of investment securities at December 31, 2000 and the weighted average yields of such securities. (Note that nontaxable investment securities have not been adjusted to a tax equivalent basis and unrealized gain (loss) on available for sale securities is not included.)
(1) Mortgage-backed securities are included in the obligations of U.S. Government agencies and spread within the columns according to their anticipated repayment schedules. (2) The "Within One Year" column of the "Other" category includes marketable equity securities held by BancShares. Accordingly, the yield on these securities represents anticipated dividend income rather than interest income.
Table IV. Loan Portfolio
Analysis of Loans by Type and Maturity
The table below classifies loans by major category:
The following table identifies the maturities of all loans as of December 31, 2000, and addresses the sensitivity of these loans to changes in interest rates.
Loan Sensitivity
Nonperforming Assets
The following analysis identifies other real estate owned and loans that were either non-accruing, past-due or restructured:
Table V. Summary of Loan Loss Experience
Analysis of the Allowance for Loan Losses
The table presented below summarizes activity in the allowance for loan losses for each of the years in the five year period ended December 31, 2000:
Allocation of the Allowance for Loan Losses
The composition of the allowance by loan category shown in the table below is based upon management's evaluation of the loan portfolio, past history, and prevailing economic conditions:
Table VI. Deposits
The average monthly volume of deposits and the average rates paid on such deposits are presented below:
Maturities of time certificates of deposit of $100,000 or more at December 31, 2000 are summarized as follows (dollars in thousands):
Maturity category:
Table VII. Return on Equity and Assets
The following table presents certain ratios of BancShares:
Table VIII. Capital Adequacy
The following table presents certain calculations of BancShares' capital and related ratios:
_____________ (1) Bank holding companies operating at the 3% minimum are expected to have well diversified risk profiles, including no undue interest rate risk, excellent asset quality, high liquidity and strong earnings. Bank holding companies not meeting these requirements are expected to maintain a leverage ratio somewhat higher than the 3% minimum applicable to the highest rated companies. (2) The minimum ratio of qualifying total capital to risk weighted assets is 8%, of which 4% must be Tier 1 capital, which is common equity, retained earnings, and a limited amount of perpetual preferred stock, capital trust certificates, less certain intangibles.
Table IX. Interest Rate Sensitivity Analysis
Assets and liabilities with maturities of one year or less and those that may be adjusted within this period are considered interest-sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared.
Table X. Short-Term Borrowings
Table XI. Selected Quarterly Data
Forward-Looking Statements
This discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of the qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgements of BancShares and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of BancShares' customers, actions of government regulators, the level of market interest rates, and general economic conditions.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is included in Item 7 in the text of BancShares' Management's Discussion and Analysis of Financial Condition and Results of Operations (under the caption "Liquidity, Market Risk and Interest Sensitivity") and is incorporated herein by reference.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors Fidelity BancShares (N.C.), Inc.:
We have audited the accompanying consolidated balance sheets of Fidelity BancShares (N.C.), Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fidelity BancShares (N.C.), Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP February 16, 2001
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
See accompanying notes to consolidated financial statements.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES Consolidated Statements of Income
Years ended December 31, 2000, 1999 and 1998
See accompanying notes to consolidated financial statements.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 2000, 1999 and 1998
See accompanying notes to consolidated financial statements.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
See accompanying notes to consolidated financial statements.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting and Reporting Policies
(a) Nature of Operations
Fidelity BancShares (N.C.), Inc. (the "Company") is a bank holding company incorporated under the General Corporation Law of the State of Delaware. The principal activity of the Company is ownership of The Fidelity Bank (the "Bank"), which operates sixty-two offices primarily in central North Carolina, and FIDBANK Capital Trust I (the "Trust"), a statutory business trust created under the laws of the State of Delaware that issued $23.0 million of 8.50% Capital Securities (the "Capital Securities") in June 1999 maturing in 2029.
The Bank's primary source of revenue is derived from interest income on loans to customers and from its investment securities portfolio. The loan portfolio is comprised mainly of real estate, commercial, consumer, and equity line of credit loans. These loans are primarily collateralized by residential and commercial properties, commercial equipment, and personal property.
(b) Consolidation
The accompanying consolidated financial statements of the Company include the accounts of the Bank and the Trust, the Company's wholly- owned subsidiaries. The Bank also has two wholly-owned subsidiaries, Fidelity Properties, Inc. and TFB Financial Services. There have been no transactions by Fidelity Properties, Inc. other than the initial capitalization. TFB Financial Services, Inc., provides depositors alternative non-deposit investment products. All significant intercompany transactions have been eliminated in consolidation.
(c) Basis of Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(e) Investment Securities
The Company accounts for investment securities under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified into three categories and accounted for as follows: (1) debt securities that the entity has the positive intent and the ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; (2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and (3) debt and equity securities not classified as either securities held to maturity or trading securities are classified as available for sale and consist of securities which may be sold in response to changes in interest rates, prepayment risk, regulatory capital requirements and liquidity needs. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. The classification of securities is determined by management at the date of purchase. The Company does not hold any trading securities.
Amortization of premiums and accretion of discounts are recognized as adjustments to interest income using the interest method. Gains and losses on sales of securities, computed based on specific identification of the amortized cost of each security, are included in other income at the time of the sale.
(f) Loans
Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on loans is recorded as earned on an accrual basis.
Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are current or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
While a loan (including an impaired loan) is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding. When the future collectibility of the recorded loan balance is not in doubt, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
(g) Allowance and Provision for Loan Losses
The Company provides for loan losses on the allowance method. Additions to the allowance for loan losses are provided by charges to operations based on various factors which, in management's judgment, deserve current recognition in estimating probable losses inherent in the loan portfolio. Such factors considered by management include the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, delinquency trends, and economic conditions.
Allowances for loan losses related to loans that are identified as impaired are based on discounted cash flows using the loan's initial interest rate or the fair value of the collateral if the loan is collateral dependent. Larger groups of smaller balance homogeneous loans that are collectively evaluated for impairment (such as credit card, residential mortgage and consumer installment loans) are excluded from this impairment evaluation and their allowance for loan losses is calculated in accordance with the allowance for loan losses policy discussed above.
Management evaluates the carrying value of loans periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(h) Assets Acquired in Settlement of Loans
Assets acquired in settlement of loans consist primarily of property acquired through a foreclosure proceeding or acceptance of a deed-in- lieu of foreclosure. Assets acquired in settlement of loans are recorded initially at the lower of the loan balance plus unpaid accrued interest or estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings, if the estimated fair value of the property, less estimated selling costs, declines below the initial recorded value. Costs related to the improvement of the property are capitalized, whereas those related to holding the property are expensed.
(i) Membership/Investment in Federal Home Loan Bank of Atlanta Stock
The Company is a member of the Federal Home Loan Bank of Atlanta ("FHLB"). Membership provides the Company with the ability to draw $108 million of advances from the FHLB, subject to a signed blanket collateral agreement. No advances were drawn by the Company in 2000 or 1999.
As a requirement for membership, the Company invests in stock of the FHLB in the amount of 1% of its outstanding residential loans or 5% of its outstanding advances from the FHLB, whichever is greater. Such stock is pledged as collateral for any FHLB advances drawn by the Company. At December 31, 2000 and 1999, the Company owned 21,697 and 20,593 shares of the FHLB's $100 par value capital stock, respectively. No ready market exists for such stock, which is carried at cost.
(j) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using an accelerated method based on the estimated useful lives of assets. Useful lives range from 10 to 31.5 years for premises and from 5 to 10 years for equipment and fixtures. Expenditures for repairs and maintenance are charged to expense as incurred. Upon retirement or other disposition of the assets, the cost and the related accumulated depreciation are removed from the accounts and any gains or losses are included in income.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(k) Intangible Assets
Intangible assets are composed primarily of goodwill and core deposit premiums. Amortization of goodwill and core deposit premiums is computed using the straight-line method based on the estimated useful lives of the assets (current useful lives range from 8 - 15 years). The lives of the assets are estimated by management at the time the assets are acquired using information available at that time and are subject to re-evaluation as new information becomes available.
(l) Income Taxes
Income tax expense is based on consolidated net income and generally differs from income taxes paid due to deferred income taxes and benefits arising from income and expenses being recognized in different periods for financial and income tax reporting. The Company uses the asset and liability method to account for deferred income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of the Company's assets and liabilities at enacted rates expected to be in effect when such amounts are recovered or settled. The Bank and its subsidiaries are included in the consolidated federal return filed by the Company. Each subsidiary pays its allocation of federal income taxes or receives a payment to the extent that tax benefits are realized. The Company and its subsidiaries each file separate state income tax returns.
(m) Net Income Per Share
Net income per share is computed based on the weighted average number of common shares outstanding during the year. The Company currently has no potentially dilutive securities.
(n) Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company adopted this statement in 1998. The Company's only component of accumulated other comprehensive income is unrealized gain/loss on securities available for sale.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(o) Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires that public business enterprises report certain information about operating segments in a complete set of financial statements issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate and their major customers. Adoption of this statement by the Company in 1998 had no effect on the Company's consolidated financial statements as the Company's only operating segment is commercial banking.
(p) Reclassifications
Certain amounts in the 1999 and 1998 consolidated financial statements of the Company have been reclassified to conform with the 2000 presentation.
(2) Acquisitions of Branches
On August 22, 1999, the Company purchased seven branches from First- Citizens Bank & Trust Company ("FCB"), a related party (see note 15). Loans and deposits acquired were $28,038,000 and $99,573,000, respectively. An intangible asset of approximately $4,147,000 resulted from this purchase.
On October 23, 1998, the Company purchased five branches from FCB (see note 15). Loans and deposits acquired were approximately $33,694,000 and $75,093,000, respectively. An intangible asset of approximately $4,090,000 resulted from this purchase.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(3) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at December 31, 2000 and 1999 are as follows:
The amortized cost and estimated fair value of debt securities at December 31, 2000 by contractual maturities are as follows:
There were no sales of investment securities during 2000, 1999 or 1998.
Investment securities with an amortized cost of approximately $85,281,000 and $120,950,000 were pledged to secure public deposits at December 31, 2000 and 1999, respectively.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans as of December 31, 2000 and 1999 are summarized as follows:
There were no loans designated as held for sale at December 31, 2000 and 1999.
The Company offers loans to its officers, directors, and employees for the financing of their personal residences and for other personal purposes. These loans are made in the ordinary course of business and are made on substantially the same terms prevailing at the time as comparable transactions with other persons. Management does not believe these loans involve more than the normal risk of collectibility or present other unfavorable features.
The following is a reconciliation of aggregate loans outstanding to executive officers, directors, and their immediate families for the years ended December 31, 2000 and 1999:
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
A summary of the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 is as follows:
At December 31, 2000 and 1999, the Company had no nonaccrual loans and no accruing loans ninety days or more past due. In addition, at and during the years ended December 31, 2000 and 1999, the Company had no impaired loans. As of December 31, 2000 and 1999, the balance of other real estate acquired through foreclosure was $75,000 and $117,000, respectively.
In January 1998, the Company sold rights to service $51 million in mortgage loans to Southern Bank and Trust Company ("SBT"), Mount Olive, North Carolina, for $522,000 (including accrued interest), resulting in a gain of $507,456. The two significant shareholders of the Company also are significant shareholders of Southern BancShares (N.C.), Inc., the parent holding company for SBT (see note 15). The Company no longer services loans for others.
(5) Premises and Equipment
Premises and equipment at December 31, 2000 and 1999 are as follows:
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(6) Deposits
At December 31, 2000 and 1999, time deposits of $100,000 or more amounted to approximately $80,919,000 and $66,297,000, respectively. For the years ended December 31, 2000, 1999 and 1998, interest expense on time deposits of $100,000 or more amounted to approximately $4,491,000, $3,401,000 and $2,750,000, respectively.
Time deposit accounts as of December 31, 2000, mature in the following years and approximate amounts: 2001 - $275,845,000; 2002 - $57,664,000; 2003 -$26,718,000; and thereafter - $13,726,000.
(7) Short-Term Borrowings
Short-term borrowings at December 31, 2000 and 1999 consist of the following:
Information concerning securities sold under agreements to repurchase is summarized as follows:
These borrowings have maturities of less than 90 days. Securities sold under agreements to repurchase represent transactions whereby the Bank sells investment securities to certain of its commercial customers on an overnight basis and repurchases such securities the next day. At December 31, 2000, $28,489,130 of investment securities were pledged for repurchase agreements. The securities collateralizing the repurchase agreements have been delivered to a third party custodian for safekeeping.
(8) Long-Term Borrowings
The $23.0 million long-term obligations at December 31, 2000 are Capital Trust Securities of the Trust which were issued during 1999. These long- term obligations, which qualify as Tier 1 Capital for BancShares, bear interest at 8.50% and mature in 2029. BancShares may redeem the long-term obligations in whole or in part on or after June 30, 2004. The sole asset of the Trust is $23.0 million of 8.50% Junior Subordinated Debentures of BancShares due 2029. Considered together, the undertakings constitute a full and unconditional guarantee by BancShares of the Trust's obligations under the Capital Securities.
FIDELITY BANCSHARES (N.C), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(9) Income Taxes
The components of income taxes for the years ended December 31, 2000, 1999 and 1998 are as follows:
The reconciliation of expected income tax expense at the statutory federal rate with income tax expense for the years ended December 31, 2000, 1999 and 1998 is as follows:
The deferred tax components at December 31, 2000 and 1999 are as follows:
FIDELITY BANCSHARES (N.C), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
No valuation allowance for deferred tax assets was required at December 31, 2000 or 1999 as management has determined that it is more likely than not that the net deferred tax asset can be realized.
(10) Employee Benefit Plans
Capital Accumulation Plan
The Company has a profit sharing 401(k) plan (the "Plan") for all full time employees with at least one year of service, which covers substantially all employees. Under the Plan, employees may contribute up to an annual maximum as determined under the Internal Revenue Code, not to exceed 16% of the participant's compensation. The Company matches 100% of such contributions for the first three percent of the participant's contributions and 50% of the next three percent. Further, the Company may make additional contributions on a discretionary basis. The Plan provides that employees' contributions are 100% vested at all times and the Company's contributions are 100% vested after five years of service. The Company incurred $327,201, $282,848 and $245,166 of expense related to the Plan for the years ended December 31, 2000, 1999 and 1998, respectively. The majority of the Plan's assets are held by a related party as trustee. See note 15 for additional information.
Pension Plan
The Company has a noncontributory, defined benefit pension plan ("Retirement Plan") which covers substantially all full-time employees. The Company's funding policy is based on actuarially calculated amounts to fund normal pension cost and any unfunded accrued liability. The Retirement Plan utilizes the projected unit credit actuarial cost method.
The following table reconciles the beginning and ending balance of the Retirement Plan's benefit obligation, as computed by the Company's independent actuarial consultants as of December 31, 2000, 1999 and 1998:
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The following table reconciles the beginning of the Retirement Plan's plan assets as of December 31, 2000, 1999 and 1998:
The following table presents information regarding the funded status of the Retirement Plan as of December 31, 2000 and 1999:
The following table presents the components of net periodic benefit cost for the years ended December 31, 2000, 1999 and 1998:
Actuarial assumptions used to determine the Retirement Plan's funded status were as follows:
The Retirement Plan's investment portfolio consists of approximately 50% equity securities, and 50% fixed income and other investments at December 31, 2000. The majority of the Retirement Plan's assets are held by a related party who serves as trustee. See note 15 for additional information.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Employee Death Benefit and Post-Retirement Non-Competition and Consultation Agreements
The Company has in place Employee Death Benefit and Post-Retirement Non- Competition and Consultation Agreements (the "Agreements") covering two of its executive officers. The Agreements provide for certain benefits to be paid to the executive officers upon either their retirement (as defined in the Agreements) or their death. The Company's accrual (included in other liabilities) for these future benefits was approximately $970,000 and $930,000 at December 31, 2000 and 1999, respectively.
(11) Regulatory Restrictions
The Company is regulated by the Board of Governors of the Federal Reserve System ("FRB"). The Bank is regulated by the Federal Deposit Insurance Corporation ("FDIC") and the State of North Carolina Office of the Commissioner of Banks.
Subject to applicable law, the Boards of Directors of the Company and the Bank may each provide for the payment of dividends. Future declarations of cash dividends, if any, by the Company may depend upon dividend payments by the Bank to the Company. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the bank.
Under regulations of the Federal Reserve, banking affiliates are required to maintain certain average reserve balances which include both cash on hand and deposits with the Federal Reserve. These deposits are included in cash and cash equivalents in the accompanying balance sheets. At December 31, 2000 and 1999 the Bank was required to maintain such balances at $12,039,000 and $12,896,000, respectively.
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2000, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2000, the Bank was considered to be "well capitalized" under FDIC standards. To be categorized as well capitalized the Bank must maintain minimum amounts and ratios, as set forth in the tables below. There are no conditions or events since December 31, 2000 that management believes have changed the category of the Bank.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The actual capital amounts and ratios for the Company are presented in the table below (dollars in thousands):
The actual capital amounts and ratios for the Bank are presented in the table below (dollars in thousands):
(12) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying consolidated financial statements.
* means greater than or equal to
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Company's risk of loss in the event of nonperformance by the other party to the commitment to extend credit, line of credit or standby letter of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies on the borrower in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, real estate and time deposits with financial institutions. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
As of December 31, 2000 and 1999, outstanding financial instruments whose contract amounts represent credit risk were as follows:
The Company's lending is concentrated primarily in central North Carolina and the surrounding communities in which it operates. Credit has been extended to certain of the Company's customers through multiple lending transactions; however, there is no concentration to any single customer or industry.
(13) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS No. 107), requires the disclosure of estimated fair values for financial instruments. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instruments' values and should not be considered an indication of the fair value of the Company taken as a whole. The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Due From Banks, Interest Bearing Deposits in Other Banks, and Federal Funds Sold
The carrying amounts of cash and due from banks, interest bearing deposits in other banks and federal funds sold are equal to the fair value due to the liquid nature of these financial instruments.
FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Investment Securities
Fair values of investment securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar investment securities.
Loans Receivable
For variable-rate loans that reprice frequently and with no significant credit risk, fair values are based on carrying values. The fair values of fixed rate loans are estimated by discounting the future cash flows using the current rates at which loans with similar terms would be made to borrowers with similar credit ratings and for the same remaining maturities. The Company has assigned no fair value to off-balance sheet financial instruments since they are short term in nature and subject to immediate repricing.
Deposits
The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at year end. Fair value of certificates of deposit is estimated by discounting the future cash flows using the current rate offered for similar deposits with the same maturities.
Short-Term Borrowings
The carrying amounts of short-term borrowings approximate fair values due to the fact these borrowings mature within 90 days.
Long-Term Borrowings
The fair value of long-term borrowings is the fair value at the last trade date of the respective years.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest approximates fair value due to its short-term nature.
FIDELITY BANCSHARES (N.C), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The following table presents information for financial assets and liabilities as of December 31, 2000 and 1999 (in thousands):
(14) Parent Company Financial Data
The Company's principal assets are its investments in the Bank and the Trust. Condensed financial statements for the parent company as of December 31, 2000 and 1999 are as follows (in thousands):
FIDELITY BANCSHARES (N.C), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
FIDELITY BANCSHARES (N.C), INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(15) Related Parties
The Company has entered into various service contracts with another bank holding company and its subsidiary (the "Corporation"). The Corporation has two significant shareholders, who are also significant shareholders of the Company. At December 31, 2000, the first significant shareholder beneficially owned 11,155 shares, or 39.74 percent, of the Company's outstanding common stock. At the same date, the second significant shareholder beneficially owned 3,123 shares, or 11.13 percent, of the Company's outstanding common stock.
These two significant shareholders are directors and executive officers of the Corporation and at December 31, 2000, beneficially owned 2,524,468 shares, or 28.64 percent, and 1,477,495 shares, or 16.76 percent, respectively, of the Corporation's outstanding Class A common stock, and 649,188 shares, or 37.86 percent, and 199,052 shares, or 11.61 percent, respectively, of the Corporation's outstanding Class B common stock. The above totals include 487,557 Class A common shares, or 5.43 percent, and 104,644 Class B common shares, or 6.10 percent, that are considered to be beneficially owned by both of the shareholders and, therefore, are included in each of their totals. A subsidiary of the Corporation is FCB.
The following are expenses paid by the Company to the Corporation:
The Company also has a correspondent relationship with the Corporation. Correspondent account balances with the Corporation included in cash and due from banks and federal funds sold totaled $50,450,392 and $35,777,835 at December 31, 2000 and 1999, respectively.
During January 1998, the Bank sold rights to service mortgage loans to SBT. See note 4.
During October 1998 and August 1999, the Company purchased five and seven branches, respectively, from FCB. See note 2.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The following table lists BancShares' current directors.
- ---------- (1) Each individual currently serves as a director of both BancShares and the Bank. "First elected" indicates the year in which each individual first became a director of BancShares or, if before Fidelity's organization in 1987, a director of the Bank.
The following table lists BancShares' current executive officers.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Officer Compensation. The following table shows the cash and certain other compensation paid to or deferred by certain executive officers of BancShares for the years indicated. BancShares' executive officers also serve, and are compensated, as officers of the Bank, and they receive no salaries or other separate or additional compensation from BancShares for their services as executive officers of BancShares.
SUMMARY COMPENSATION TABLE --------------------------
- ----------
(1) Includes amounts deferred at the election of each named officer pursuant to the Bank's Section 401(k) plan. (2) In addition to compensation paid in cash, BancShares' executive officers receive certain personal benefits from the Bank. The value of non-cash benefits received each year by each named officer did not exceed 10% of his cash compensation for that year. (3) For 2000, consists of the Bank's contribution to the Section 401(k) plan for the account of each named officer ($8,028 for Mr. Woodard and $7,950 for Mr. Lane) and fees received for services as directors of the Bank ($2,400 for Mr. Woodard and $2,400 for Mr. Lane).
Post-Retirement Noncompetition and Consultation Agreements. During 1986, the Bank entered into Post-Retirement Noncompetition and Consultation Agreements with Billy T. Woodard and Haywood A. Lane, Jr. Each Agreement, as amended on January 1, 1999, provides that upon the officer's retirement from full time employment with the Bank, he will serve as a consultant to the Bank and will receive monthly payments ($8,738 for Mr. Woodard and $7,125 for Mr. Lane) for a period of ten years. In the event of the officer's death prior to the expiration of the ten-year period, any remaining monthly payments will be paid to the officer's designated beneficiary or estate. If the officer dies prior to retirement, his designated beneficiary or estate will receive those payments for a period of ten years following his death.
Pension Plan. The following table shows, for various numbers of years of service and levels of compensation, the estimated benefits payable to a participant at normal retirement age under the Bank's qualified defined benefit pension plan (the "Pension Plan") based on federal tax laws in effect on January 1, 2000.
Benefits shown in the table are computed as straight life annuities beginning at age 65 and are not subject to a deduction for Social Security benefits or any other offset amounts. A participant's compensation covered by the pension plan includes base salary, bonuses, overtime pay, and earnings deferred by the participant's own contribution pursuant to the Bank's Section 401(k) plan (but excluding any special bonuses, any directors' fees, the Bank's matching contributions to the Section 401(k) plan, or any other incidental compensation). Benefits are calculated based on each participant's "final average compensation," which is defined as the participant's average earnings during the five highest consecutive earning years of the last ten complete calendar years as a participant. However, under current tax laws, $170,000 is the maximum amount of annual compensation for 2000 that can be included for purposes of calculating a participant's final average compensation, and the maximum annual benefit that may be paid to a retiring participant is $135,000. The maximum years of credited service which may be counted in calculating benefits under the Pension Plan is 40 years. The estimated years of service and the estimated final average compensation, respectively, as of December 31, 2000, for each of the executive officers named in the Summary Compensation Table above are as follows: Billy T. Woodard -- 40 years and $160,000; and Haywood A. Lane, Jr. -- 38 years and $156,095.
Compensation of Directors. Each director of BancShares and the Bank (including directors who also are employees) currently receives a fee of $600 for attendance at each meeting of BancShares' or the Bank's Board of Directors, and members of the Executive Committee of the Board of Directors (with the exception of Billy T. Woodard and Haywood A. Lane, Jr.) receive a fee of $500 for attendance at each meeting of the Committee. No fees are paid to any directors for attendance at any other committee meetings.
Directors are reimbursed for expenses of travel to and from all meetings. Only one fee is paid for joint meetings of the Boards of BancShares and the Bank and for any committee meetings held on the same day as a meeting of one of the Boards.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders. As of March 15, 2001, persons known to BancShares to own beneficially or of record more than 5% of BancShares' voting securities were as follows:
- ----------
(1) Except as otherwise noted, each named individual exercises sole voting and investment power with respect to all shares.
(2) Includes 3,978 shares held by Mr. F. Holding's adult children and with respect to which shares he disclaims beneficial ownership.
(3) Includes an aggregate of 1,696 shares held by or in trust for Mr. L. Holding's adult daughter and with respect to which shares he disclaims beneficial ownership. Of the listed shares, an aggregate of 1,645 shares also are shown as beneficially owned by North State Trustees.
(4) Consists of shares held by two irrevocable grantor trusts (the "1976 Trust," the "1979 Trust," and the "1990 Trust") with respect to which Carmen P. Holding Ames currently is the sole beneficiary. Ms. Ames has sole power to direct the voting, and shared power (with the six trustees) to direct the disposition, of 345 shares held by the 1976 Trust and 1,000shares held by the 1979 Trust. The written agreement pertaining to the 1990 Trust provides that, in connection with their voting of 6,735 shares held by the trust, the trustees will consult with the then current beneficiaries who are at least 40 years of age, but that the trustees will not be bound by the voting preference of any such beneficiary. Of the listed shares, an aggregate of 1,345 shares also are shown as beneficially owned by Mr. L. Holding.
Management Ownership. The beneficial ownership of BancShares' voting securities as of March 15, 2001, by its current directors individually, and by all current directors and executive officers as a group, was as follows:
- ----------
(1) Except as otherwise noted, each named individual, and individuals included in the group, exercise sole voting and investment power with respect to all shares. (2) Includes 40 shares held by Mr. Allen jointly with his spouse, and 40 shares held by a corporation of which he may be deemed to be a control person, and with respect to which shares Mr. Allen exercises shared voting and investment power. (3) Includes 22 shares held by Mr. Riddle jointly with his spouse and with respect to which shares he exercises shared voting and investment power. (4) Includes 391 shares held by Mr. Woodard's spouse and adult children and with respect to which shares he may be deemed to exercise shared voting and investment power.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with certain of the directors, executive officers, principal shareholders of BancShares and the Bank, and their associates. Loans included in those transactions during 2000 were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and such loans did not involve more than the normal risk of collectibility or present other unfavorable features. See note 4 of notes to consolidated financial statements included in Item 8.
The Bank is party to a contract with FCB, pursuant to which FCB provides to the Bank and BancShares various data and item processing services, securities portfolio management services, management consulting services and trustee services for the Bank's pension plan and Section 401(k) plan. The Bank also purchases business forms, equipment and supplies, together with certain other services, through FCB. Aggregate fees paid by the Bank to FCB for all such services during 2000 totaled approximately $3.0 million. The following are fees paid by the Company to FCB:
The Company also has a correspondent relationship with the FCB. Correspondent account balances with FCB included in cash and due from banks and federal funds sold totaled $50,450,392 and $35,777,835 at December 31, 2000 and 1999, respectively.
The Bank's relationship with FCB under the agreement will continue during 2001. Frank B. Holding and Lewis R. Holding, principal shareholders of BancShares, are directors, executive officers and principal shareholders of First Citizens BancShares, Inc., the bank holding company for FCB.
The Bank's contract with FCB was negotiated at arms-length and was approved by BancShares' Board of Directors. Based on its comparison in previous years of the terms of the contract with terms available to it from other providers of the services being obtained from FCB, management of the Bank believes the terms of its contract with FCB, including prices, are no less favorable to the Bank than could be obtained from an unrelated provider.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K (a) 1. The following consolidated financial statements of Fidelity BancShares (N.C.), Inc. and subsidiaries, and Independent Auditors' Report thereon, are included in Item 8 of this Report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Income for each of the years
in the three year period ended December 31, 2000 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three year period ended December 31, 2000 Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 2000 Notes to Consolidated Financial Statements
2. Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is contained in the consolidated financial statements or related notes thereto which are included in Item 8 of this Report.
3. Exhibits
The following exhibits are filed or incorporated herewith as part of this report on Form 10-K:
3.1 BancShares' Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) 3.2 BancShares' By-laws (incorporated herein by reference to Exhibit 3.2 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) 4.1 Initial Trust Agreement of FIDBANK Capital Trust I, as amended (incorporated herein by reference to Exhibit 4.1 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) 4.2 Certificate of Trust of FIDBANK Capital Trust I (incorporated herein by reference to Exhibit 4.2 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) 4.3 Form of Amended and Restated Trust Agreement of FIDBANK Capital Trust I (incorporated herein by reference to Exhibit 4.3 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) 4.4 Form of Capital Security Certificate for FIDBANK Capital Trust I (incorporated herein by reference to Exhibit 4.4 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) 4.5 Form of Guarantee Agreement (incorporated herein by reference to Exhibit 4.5 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) 4.6 Form of Junior Subordinated Indenture between BancShares and Bankers Trust Company, as Debenture Trustee (incorporated herein by reference to Exhibit 4.6 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) 4.7 Form of Junior Subordinated Debenture (incorporated herein by reference to Exhibit 4.7 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) *10.1 Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Billy T. Woodard and The Fidelity Bank (incorporated by reference to Exhibit 10.1 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) *10.2 First Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Billy T. Woodard and The Fidelity Bank (incorporated by reference to Exhibit 10.2 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) *10.3 Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity Bank (incorporated by reference to Exhibit 10.3 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) *10.4 First Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity Bank (incorporated by reference to Exhibit 10.4 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) *10.6 Second Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Billy T. Woodard and The Fidelity Bank (incorporated by reference to Exhibit 10.6 of BancShares' Amendment No. 2 to Registration Statement No. 333-62225 filed with the SEC on April 23, 1999) *10.7 Second Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation
Agreement between Haywood A. Lane, Jr., and The Fidelity Bank (incorporated by reference to Exhibit 10.7 of BancShares' Amendment No. 2 to Registration Statement No. 333-62225 filed with the SEC on April 23, 1999) 21.1 List of subsidiaries (incorporated herein by reference to Exhibit 21.1 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998)
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* Denotes a management contract or compensatory contract or arrangement.
(b) Reports on Form 8-K. During the fourth quarter of 2000 BancShares filed no Form 8-K Current Reports.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant' has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIDELITY BANCSHARES (N.C.), INC.
Dated: March 29, 2001 By: __________________________________ Billy T. Woodard Chairman and Chief Executive Officer
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
3.1 BancShares' Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) 3.2 BancShares' By-laws (incorporated herein by reference to Exhibit 3.2 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) 4.1 Initial Trust Agreement of FIDBANK Capital Trust I, as amended (incorporated herein by reference to Exhibit 4.1 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) 4.2 Certificate of Trust of FIDBANK Capital Trust I (incorporated herein by reference to Exhibit 4.2 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) 4.3 Form of Amended and Restated Trust Agreement of FIDBANK Capital Trust I (incorporated herein by reference to Exhibit 4.3 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) 4.4 Form of Capital Security Certificate for FIDBANK Capital Trust I (incorporated herein by reference to Exhibit 4.4 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) 4.5 Form of Guarantee Agreement (incorporated herein by reference to Exhibit 4.5 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) 4.6 Form of Junior Subordinated Indenture between BancShares and Bankers Trust Company, as Debenture Trustee (incorporated herein by reference to Exhibit 4.6 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) 4.7 Form of Junior Subordinated Debenture (incorporated herein by reference to Exhibit 4.7 of BancShares' Amendment No. 3 to Registration Statement No. 333-62225 filed with the SEC on May 25, 1999) *10.1 Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Billy T. Woodard and The Fidelity Bank (incorporated by reference to Exhibit 10.1 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) *10.2 First Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Billy T. Woodard and The Fidelity Bank (incorporated by reference to Exhibit 10.2 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) *10.3 Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity Bank (incorporated by reference to Exhibit 10.3 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) *10.4 First Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity Bank (incorporated by reference to Exhibit 10.4 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998) *10.6 Second Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Billy T. Woodard and The Fidelity Bank (incorporated by reference to Exhibit 10.6 of BancShares' Amendment No. 2 to Registration Statement No. 333-62225 filed with the SEC on April 23, 1999) *10.7 Second Amendment to Employee Death Benefit and Post-Retirement Noncompetition and Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity Bank (incorporated by reference to Exhibit 10.7 of BancShares' Amendment No. 2 to Registration Statement No. 333-62225 filed with the SEC on April 23, 1999) 21.1 List of subsidiaries (incorporated herein by reference to Exhibit 21.1 of BancShares' Registration Statement No. 333-62225 filed with the SEC on August 26, 1998)
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* Denotes a management contract or compensatory contract or arrangement.
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