Fidelity Bankshares, Inc.

Transcription

1 Savings & Loans October 19, 2005 Gary P. Tenner, CFA Ö~êó íéååéê]êüåçkåçã= Lauren M. Johnson ä~ìêéå àçüåëçå]êüåçkåçã= ==== Summary Fidelity Bankshares, Inc. Rating: Neutral Estimate Bias: Up Price Target: NA Risk Rank: Moderate FFFL: Additional 3Q05 Earnings Detail; Maintain Neutral Rating Estimate Change FFFL reported 3Q05 diluted EPS of $0.33, in line with STRH estimate but $0.02 below the Street mean. While balance sheet growth continues excellent, non-interest expenses increased substantially this quarter on a sequential basis (up 32% link quarter annualized). NIM compressed seven basis points to 3.74%, which was considerably better than our 3.68% estimate; however the period-end NIM was 3.59%. Therefore we are now expecting further compression in 4Q05 although the period-end NIM will have increased on October 1 via the repricing of FFFL s HELOC portfolio that reprices the 1 st of the month following a change in the prime rate. All lending categories contributed to period-end loan growth of 29% LQA: residential mortgage (26%), CRE (33%), consumer (16%), and C&I (56%). Period-end deposit growth of 15% was driven by core deposit (non-cd) growth of 18%. CDs only grew 6% LQA. Fee income growth continues to be strong (up 20% LQA), with increases in each line item. Over the last two quarters, service charges have substantially surpassed 2004 levels after their steep sequential quarter drop in 1Q. Non-interest expenses increased 32%. Personnel experienced the largest sequential quarter increase from $14.22 million to $15.07 million, which we attribute to personnel additions for the two new branches scheduled to open in late 4Q05. A third branch is expected to open in early 1Q06. Asset quality remained excellent with net charge-offs of only $168,000, or 0.02% of average loans. NPAs declined two basis points this quarter to 0.14% of loans + OREO. Reserve levels declined three basis points to 0.54% of loans, but coverage remains stout at nearly four times NPAs. Maintain our Neutral rating and slightly reducing both our 2005 and 2006 EPS estimates on lower NIM assumptions. Fundamentals FYE - Dec E 2006E Price (Oct 19, 2005) $28.23 EPS Actual Old New Old New 52-Week Range $33.07-$ Q $0.25A $0.28A $0.28A NA $0.35E Mkt. Cap. (mil.) $ Q $0.25A $0.35A $0.35A NA $0.38E Shares Out. (mil.) Q $0.27A $0.33A $0.33A NA $0.39E Float (mil.) Q $0.23A $0.35E $0.33E NA $0.42E Avg. Daily Trading Vol. (000) 88 Year $1.01A $1.30E $1.28E $1.57E $1.54E Book Value/Share $11.07 P/E 28.0x 22.1x 18.3x Dividend/Yield $0.32/1.1% EV/EBITDA NA NA NA ROE (12/04A) 11.5% Revenue (mil.) $130.0 $155.6 $157.8 $178.2 $180.5 Cash & Equiv (mil.) NA Operating Margin NA NA NA NA NA Debt/Cap. NA Mean EPS $1.01 $1.31 $1.31 $1.53 $1.53 Est. 5-Year EPS Growth 10% Short Interest (000) Estimate Changes Convertible No 9/ /19/05 $1.30 $1.57 Major Index Membership Russell / /19/05 $1.26 $1.48 7/ /21/05 $1.28 $1.50 6/ /03/05 $1.26 PLEASE SEE IMPORTANT DISCLOSURES STARTING ON PAGE 3

2 Comments Results. FFFL reported 3Q05 diluted EPS of $0.33, in line with STRH estimate but $0.02 below the Street mean. While balance sheet growth continues to be excellent, non-interest expenses increased substantially this quarter on a sequential basis (up 32% link quarter annualized). Rating and Estimates. We are lowering our 2005 EPS estimate from $1.30 to $1.28 due to our expectation of additional margin contraction in 4Q05 (see below for further detail). Additionally, we are lowering our 2006 EPS estimate from $1.57 to $1.54 on slightly lower margin assumptions. Finally, we are introducing a 2007 EPS estimate of $1.82. We are maintaining our Neutral rating on valuation, as FFFL continues to trade well above our STRH-covered thrift and small-cap average (14.9x) at 18.4x our new 2006 EPS estimate of $1.54. Details. NIM compressed seven basis points to 3.74%, which was considerably better than our 3.68% estimate; however the period-end NIM was 3.59% as all of FFFL s home equity loans do not reprice until the first day of the first month following a change in the prime rate (certain C&I and CRE loans tied to prime reprice the day following a prime rate change). Therefore period-end NIM for quarters during which there is an increase in the prime rate will typically be lower than that quarter s average NIM. We are expecting additional margin compression in 4Q05 to 3.68% given expectations of continued Fed rate hikes, and therefore prime rate increases, during the fourth quarter. Average earning asset and loan growth were excellent, at 22% and 30%, respectively. All lending categories contributed to period-end loan growth of 29% LQA: residential mortgage (26%), CRE (33%), consumer (16%), and C&I (56%). Period-end deposit growth of 15% was driven by core deposit (non-cd) growth of 18%. Period-end CD deposits only grew 6% LQA. Recall at the beginning of 2Q, FFFL prepaid approximately $100 million in FHLB advances with a cost of nearly 7%, which it expected to replace with core deposits. However, in order to fund the higher than expected loan growth late in the quarter, FFFL sold 6-10 month CDs with a rate of 3.5%-4% during the last month of 2Q to replace these borrowings. Fee income growth continues to be strong (up 20% LQA), with increases in each line item. Over the last two quarters, service charges ($2.97 million) have substantially surpassed 2004 levels after their steep sequential quarter drop in 1Q to $2.50 million. Non-interest expenses increased 32%. Personnel experienced the largest sequential quarter increase from $14.22 million to $15.07 million, which we attribute to personnel additions for the two new branches scheduled to open in late 4Q05. A third branch is expected to open in early 1Q06. The annual operating expense load for each of the new branches is approximately $600,000. Asset quality remained excellent with net charge-offs of only $168,000, or 0.02% of average loans. NPAs declined two basis points this quarter to 0.14% of loans + OREO. Reserve levels declined three basis points to 0.54% of loans, but coverage remains stout at nearly four times NPAs. Company Description Fidelity Bankshares, Inc., through its subsidiary Fidelity Federal Bank & Trust, has assets of $3.8 billion and deposits of $3.2 billion. The bank operates in Florida through 47 offices and four loan production offices in Palm Beach, Martin, and St. Lucie counties. The First Community Bancorp acquisition added an additional five branches. FFFL is the third largest thrift based in Florida and the sixth largest institution in the state. Analyst Certification I, Gary P. Tenner, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. 2

3 Important Disclosures An affiliate of SunTrust Capital Markets, Inc. has received compensation for products or services other than investment banking services from the following companies within the last 12 months: Fidelity Bankshares, Inc. SunTrust Capital Markets, Inc. makes a market in the following companies at the time of this report: Fidelity Bankshares, Inc. Analyst compensation is based upon stock price performance, quality of analysis, communication skills, and the overall revenue and profitability of the firm, including investment banking revenue. As a matter of policy and practice, the firm prohibits the offering of favorable research or a specific research rating as consideration or inducement for the receipt of business or compensation. In addition, analysts and associated persons preparing research reports are prohibited from owning securities in the subject companies. Fidelity Bankshares Inc. Oct 11, Oct 13, 2005 U.S. Dollar 10/17/02 11/18/02 12/2/02 4/15/ Data Source: Prices / ExshareSource: FactSet Research Systems Rating And Price Target History (FFFL) Date Rating Target Closing 11/18/2002 Neutral $13.00 $ /02/2002 Reduce NA $ /15/2004 Neutral NA $21.99 On February 27, 2004, STRH changed its rating system to what is defined in our disclosures; on that date, we also reinstated the use of price targets. On December 3, 2002, STRH changed its ratings to a three tier relative system (Overweight, Equal Weight, Underweight); on that date, we also discontinued the use of price targets. Rating changes described in the above chart(s) and table(s) reflect equivalent ratings. 3

4 Definition of Ratings SunTrust Robinson Humphrey assigns one of three ratings to stocks covered by our Research Department: Buy, Neutral, Reduce. In addition, we assign a risk rank to each stock based on a combination of fundamental and stock volatility factors: Low = Low stock price volatility reflected by high predictability of financial results. Moderate = Moderate stock price volatility reflected by medium predictability of financial results. High = High stock price volatility reflected by inconsistent predictability of financial results. Speculative = Greatest stock price volatility reflected by low predictability of financial results. Venture = Recommended only for maximum risk oriented and well-diversified portfolios. Our ratings are a function of the risk ranking (higher return expectations for higher risk) and the absolute expected total return (price appreciation plus dividends) that result in our estimated 12-month price target. Please refer to the grid below for additional detail. Performance Definition Scale qçí~ä=êéíìêå=eå~éáí~ä=ö~áåläçëë=h=çáîáçéåçëf=éñééåíéç=çîéê=íüé=åéñí=no=ãçåíüë= Rating Low Risk Moderate Risk High Risk Speculative Buy Over 10% Over 15% Over 20% Over 25% Neutral -5% to 10% -5% to 15% -5% to 20% -5% to 25% Reduce -5% or Worse -5% or Worse -10% or Worse -10% or Worse Deviations from expected price ranges/targets due to price movement and/or volatility will be reviewed by the analyst and research management on a timely basis. Action taken by an investor should be based upon their personal investment objectives and risk tolerance compared to a stock s expected performance and risk ranking. Estimate Bias: While current annual estimates are our best judgment at this time, we assign an "Up", "Neutral" or "Down" bias based on our expectation for fundamental changes over the next 12 months. SunTrust Robinson Humphrey ratings distribution as of 10/19/2005: Coverage Universe Investment Banking Clients Past 12 months Rating Count Percent Rating Count Percent* Buy % Buy 33 19% Neutral % Neutral 20 13% Sell/Reduce 8 2% Sell/Reduce 2 25% *Percentage of Investment Banking clients in Coverage Universe by rating Other Disclosures Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved. This report is not to be construed as an offer to sell or a solicitation of an offer to buy any security. SunTrust Capital Markets, Inc. and/or its officers or employees may have positions in any securities, options, rights or warrants. The firm and/or associated persons may sell to or buy from customers on a principal basis. Investors may be prohibited in certain states from purchasing some over-the-counter securities mentioned herein. Opinions expressed are subject to change without notice. The information herein is for persons residing in the United States only and is not intended for any person in any other jurisdiction. SunTrust Capital Markets, Inc. is a registered broker-dealer. It is owned by SunTrust Banks, Inc. ( SunTrust ) and affiliated with SunTrust Investment Securities, Inc. SunTrust Robinson Humphrey is a service mark of SunTrust Capital Markets, Inc. Despite this affiliation, securities recommended, offered, sold by, or held at SunTrust Capital Markets, Inc. and at SunTrust Investment Securities, Inc. (i) are not insured by the Federal Deposit Insurance Corporation; (ii) are not deposits or other obligations of any insured depository institution (including SunTrust); and (iii) are subject to investment risks, including the possible loss of the principal amount invested. SunTrust may have a lending relationship with companies mentioned herein. SunTrust Capital Markets, Inc All rights reserved. Reproduction or quotation in whole or part without permission is forbidden. 4

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