<PAGE>
 
                                  EXHIBIT 13

                      1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
 
                               Table of Contents

            Message from the President & CEO .......................     2

            Our Commitment to Business .............................     5

            Board of Directors and Officers ........................     8

            Locations ..............................................    10

            Corporate Information ..................................    12

            Financial Highlights ...................................    13

            Management's Discussion and Analysis
              of Financial Condition and Results of Operations......    15

            Independent Auditors' Report ...........................    31

            Consolidated Financial Statements ......................    32

            Management's Assertions
              as to the Effectiveness of its Internal Control
              Structure over Financial Reporting and
              Compliance with Designated Laws and
              Regulations ..........................................    62

            Independent Accountants' Report ........................    63


                                       1
<PAGE>
 
Report to Shareholders


       I am pleased to report another year of satisfying results for Fidelity
Bankshares, Inc. and its operating subsidiary, Fidelity Federal Savings Bank of
Florida. Building on the foundation we laid in 1998, Fidelity Federal is well
positioned to continue diversifying into a broad range of commercial banking
activities and related financial services. Although expenses increased in the
latter part of 1998, these expenditures were within our expectations and
designed to support our long-term strategy of continued growth and expansion.


[PHOTO OF VINCE A. ELHILOW APPEARS HERE]

Vince A. Elhilow  President and Chief Executive Officer

       Coupled with this diversification is a significant refinement of our
corporate culture. We have outlined ambitious goals for broadening our loan
portfolio as we expand our commercial lending activities and establish a full
banking relationship with our business customers. We made major progress in this
regard in 1998, and succeeded in recruiting some of this area's most respected
and accomplished commercial banking talent, who will spearhead our growth in
this important arena. To further explain our position, we are including an
article entitled, "Our Commitment to Business," which follows this report. At
the same time, we continued our targeted geographical expansion in the most
desirable locations within our primary market.

       These long-term strategies were carried out in an environment of
continued careful management, which resulted in satisfactory earnings. Net
income for the year ending December 31, 1998, was $7,412,000, which equates to
basic earnings per share of common stock of $1.12. This represents an increase
of 15.48 percent over 1997's net income of $6,418,000 ($0.96 per share). Based
on this performance, the Company's Board of Directors declared quarterly
dividends totaling $0.95 per share during the course of the year. The Board
increased the dividend in September to $.25 per share, or $1.00 per annum,
continuing the company's uninterrupted record of quarterly dividends since our
conversion in 1994.

       The company also carried out its first stock repurchase program during
1998, an initiative that was completed in January 1999. Altogether the company
repurchased 340,000 shares, or five percent of the common stock held by persons
other than Fidelity Bankshares, MHC. We viewed the cost of the stock
repurchases, which totaled $7 million, as an excellent investment and an
opportunity to demonstrate our commitment to building long-term value for our
shareholders.

       In addition to strong operating and financial results, 1998 also saw
continued growth for the bank. Over the past 18 months, Fidelity Federal's
assets have grown by more than a half-billion dollars, making us the 
third-largest Florida-based thrift, and the ninth-largest of all Florida-based
banks.

--------------------------------------------------------------------------------
Fidelity Federal is now the third-largest Florida-based thrift, and the 
ninth-largest of all Florida-based banks.
--------------------------------------------------------------------------------

                                       2
<PAGE>
 
       As satisfying as these immediate results are, however, we believe the
long-term prospects ahead of us are even more promising. Fidelity Federal is
uniquely positioned among South Florida banks - large enough to offer our
customers the benefits of new technology and innovative new services, yet
distinctly focused on the local communities we serve. We are convinced that this
combination of attributes will serve us well in the years to come, as rapid
change continues to sweep through the financial services industry.

       Furthermore, we believe the high-profile mergers among mega-banks in
recent years has produced a unique opportunity for Fidelity Federal, as we
remain committed to our role as a local community bank. In these times of
increasingly impersonal service, Fidelity Federal is able to provide responsive,
locally focused financial services - even as we continue to expand our market
presence and diversify our products to encompass a broad range of commercial
banking activities.

       We have considered a variety of options for addressing expansion,
including acquisitions of other institutions. However, we were unable to
identify suitable candidates in our marketplace. Although we remain open to
additional acquisitions under the right circumstances, our study of the current
situation convinced us that an ambitious program of de novo branching would be
the most productive and cost-effective means of meeting our expansion goals.

[MAP APPEARS HERE]

       Although de novo branching incurs immediate start-up expenses, we believe
this course to be more prudent in the long run. Simply put, we are using our
current earnings to fund future growth and increase our franchise value. For
example, approximately 20 percent of the employees who will staff these new
offices were employed by the Bank during the fourth quarter of 1998 in order to
begin training. This naturally had an impact on operating expenses in 1998.

       During 1999 we will be opening 12 new branch offices in Palm Beach and
St. Lucie counties, beginning with our Palm Springs office which opened January
11, 1999. This ambitious expansion program reflects our concerted study and
understanding of our market, and our conviction that outstanding opportunities
exist for expanding our reach into key areas which are currently underserved.

       Nevertheless, based on the demographics of our marketplace and its rapid
growth, we expect all the new branches we open in 1999 will be accretive to
income within 18 to 24 months of their opening. This rapid return on investment
is made possible in large part by the experience of our management team in
developing a well-disciplined and predictable procedure for establishing new
branch locations.

       In addition to traditional branches, Fidelity Federal is launching
several innovative approaches to seek out business, and make our products and
services even more accessible to our customers. For example, our Devonshire
office is a new type of facility for Fidelity Federal, designed to meet the
specialized needs of residents in an exclusive adult living

                                       3
<PAGE>
 
facility. We are also opening three supermarket branches in local Winn Dixie
stores in Jupiter, Loxahatchee and Port St. Lucie, enabling us to economically
expand into new markets which are experiencing rapid population growth.

       In addition to physical expansion, we are equally committed to
diversifying Fidelity Federal's range of services. For example, in 1998 we
continued to expand our online banking capabilities. Our new "FidFed Online"
service provides customers with 24-hour-a-day access to their accounts. This
service provides for electronic bill payment, inquiries and fund transfers, as
well as downloading of account information for use with popular personal
financial management software.

       On an even broader scale, Fidelity Federal's website - "www.fidfed.com" -
has extended our reach greatly, linking us with a variety of other valuable
local resources and community-oriented sites. During 1998 the website's
capabilities were expanded dramatically, to the point where we can now offer
applications and customer access through this new medium.

       Another 1998 event with far-reaching potential was the successful
introduction of INVEST Financial Corporation. This affiliation gives our
customers access to a broad range of investment products and services by
appointment in their local branch. We continue to explore other opportunities to
broaden our services to include trust powers and the possibility of establishing
an insurance subsidiary. Such diversification will contribute significantly to
both immediate income and the long-term value of the organization.

--------------------------------------------------------------------------------
Whether we are establishing new branches or adding new services, our goal has
always been to develop stronger relationships with our customers.
--------------------------------------------------------------------------------

       Today, the giants of the financial services industry are moving rapidly
toward a more "transaction-oriented" corporate culture. By contrast, our
philosophy at Fidelity Federal is decidedly "relationship-oriented." Whether we
are establishing new branches in fast-growing markets or adding new, more
comprehensive services, our goal has always been to develop stronger
relationships with our customers.

       As more local banks disappear through mergers and acquisitions, our role
and responsibility in the community is enhanced even further. As the
second-oldest bank in Palm Beach County, Fidelity Federal is ideally positioned
to recognize the tremendous potential that exists in this market. In contrast to
the increasingly distant banking conglomerates, we are committed to making it
easier for customers to bank with us, and to expand the scope of both our
personal and business banking services. We believe that philosophy, coupled with
nearly 50 years of experience as a locally focused, community bank, positions us
well for the future.


                      /s/ Vince A. Elhilow

                      Vince A. Elhilow
                      President and Chief Executive Officer

                                       4
<PAGE>
 
Our Commitment to Business


        As one of Florida's leading banks, Fidelity Federal has long been
recognized as a preeminent source for both deposit and lending services to
individuals. Chartered in 1952, we have grown into a position of leadership in
Florida's financial services industry as well as in our community. Today, we are
continuing to move aggressively to broaden our portfolio to encompass the full
range of business lending and deposit accounts, including business cash
management, retirement planning, tax deposit and merchant services. In this
effort, we draw on nearly 50 years of involvement in the community, building on
long-standing business relationships, along with proactive networking activities
designed to further expand our customer base. We believe this increasingly
visible role as an active and supportive partner with local businesses is
consistent with our place in the community.

       In pursuing a commitment to business, Fidelity Federal is taking
advantage of the opportunities presented by today's wave of acquisitions and
mergers, as increasingly distant banks offer less personal contact and
involvement with their business customers. In this environment, the Bank is in a
unique position in the community, offering an alternative approach to large,
impersonal organizations by continuing a tradition of local management and
service. This situation opens important competitive and marketing opportunities,
as customers participate in our highly successful "Make the Switch" campaign,
and turn to the Bank for the responsive service only a locally focused community
bank can offer. Increasingly, business banking customers are coming to Fidelity
Federal for experience and understanding of local markets, the opportunity to
speak personally with the bank's decision-makers, and our ability to respond
quickly and personally to their needs.

                                                          [ARTWORK APPEARS HERE]


       In addition, the changing face of banking also presents us with
recruiting and team-building opportunities. In recent months the Bank has
succeeded in attracting some of the community's most respected business banking
executives. These key bankers will play a major role in our continued growth and
expansion in the business banking arena. They bring to the Bank proven expertise
in SBA lending, commercial real estate, asset-based loans, and a variety of
other business banking products and services.

       This experienced talent pool, coupled with our business development
staff, is illustrative of our serious commitment to meeting the needs of
businesses in our community. We are willing to go the extra
mile - literally - by coming to their place of business to work side-by-side
with them to meet their business banking needs. In addition, these proven
business banking experts help "put a face" on our efforts, enabling us to build
and expand on already strong relationships. As a result, we are receiving the
highest complement our business banking customers can give us - they are
recommending us to other businesses and to their employees.

                                       5
<PAGE>
 
[ARTWORK APPEARS HERE]

       The benefits we can achieve from our business banking initiative are
clear. This diversification of our asset base enables us to improve our return
on investments through prudent business lending while lowering the cost of our
liabilities through increasing business-related deposits. The opportunity for
success lies in underwriting with reasonable business risk. With that in mind,
we have set out ambitious goals. For example, after making an impressive $52.7
million in commercial real estate and business loans in 1998, we have now set
out to increase this to over $100 million in 1999. This lending, coupled with
the opportunity for substantial deposit accounts from local businesses in our
community, will improve the bank's bottom line.

       To accommodate the needs of our business customers, Fidelity Federal
offers a comprehensive array of services, reflecting our commitment to
developing a complete business banking culture. Our selection of products and
services is designed to meet the full range of needs of today's business banking
customers:

   .  Cash Management. Fidelity Federal offers a variety of innovative services
      to help local businesses improve their cash flow, including comprehensive
      lock box and payment processing services. These services streamline the
      business customer's accounting and data management, and enhance their
      auditing controls. Using these services, businesses arrange for their
      customer payments to be sent directly to a local processing center, which
      credits payments to their accounts on a daily basis. This enables
      customers to collect receivables without handling day-to-day processing,
      eliminating the need for daily deposits. It also improves funds
      availability, and allows the business to offer credit card and ACH options
      for payment.

   .  Business Checking and Business Reserve Accounts. Our business checking
      products are tailored to the needs of the specific customer, and are
      designed to help companies manage their cash most effectively, regardless
      of the size or activity level of their account. In this regard, Fidelity
      Federal today offers the same business banking services as the
      high-profile mega-banks, including account access through "FidFed Online,"
      the Bank's on-line banking program. Services include currency and merchant
      deposit services, night depository services, Mastercard and VISA merchant
      accounts, Easy Pay payroll servicing through ADP, ACH Origination service,
      federal tax and FICA deposit services, federal tax and loan electronic
      funds transfer, wire and telephone transfers, and direct payroll deposit
      and direct debit of recurring payments. Our Business Reserve Account is
      designed to help companies get the maximum benefit from their cash on
      hand, offering premium interest on cash reserves, compounded daily at
      special tiered rates. In addition, recognizing that a company's most
      valuable asset is its employees, we offer free checking to employees of
      our business checking customers.

   .  Investment and Retirement Planning Services. Fidelity Federal offers
      extensive experience in helping businesses and their employees to earn
      tax-sheltered interest while saving for retirement. We offer a full range
      of investment and retirement plans, including IRAs, SEP and SIMPLE
      programs that are specifically tailored to meet the needs of business
      customers.

                      

                                       6
<PAGE>
 
   .  Business Loans and Lines of Credit. At Fidelity Federal, we believe in
      working one-on-one with our customers to find the loan product and
      specifications that fit their situation precisely, rather than arbitrarily
      assigning them a pre-formatted loan. Our business lending products are
      designed to help businesses move quickly to take advantage of
      opportunities and meet working capital requirements.

   .  Commercial Real Estate Loans. Drawing on our unrivaled expertise and
      understanding of the local business area, we are ideally positioned to
      make commercial real estate loans with reasonable business risk, to help
      support the continued growth and expansion of local companies.

   .  SBA Loans. Our business lending experts have proven experience in helping
      local businesses take advantage of federally supported financing programs.

   .  "Business Manager." Our unique "Business Manager" program offers accounts
      receivable purchase, which speeds cash flow and enables businesses to
      concentrate their efforts in areas where they are most productive.

      Our role as a community business bank is also reflected in our Internet
presence, with our web site -www.fidfed.com - offering information on discounts
at over 600 merchants who are participating business partners in our highly
popular "Count On Us" checking account program. These partners are also listed
in a directory distributed to all "Count on Us" customers, and updated on a
semi-annual basis.

      Fidelity Federal's commitment to business banking is underscored by our
community involvement and willingness to participate actively in the communities
we serve. We have been a key player in the business community for nearly 50
years. By being a good public citizen, we have been able to develop positive
relationships with many facets of the business community. Our networking efforts
through local chambers of commerce, business development boards as well as civic
and service organizations gives us many opportunities to meet and work with
other community business leaders. Over the years we have become an integral part
of the communities we serve, and we are now capitalizing on this position to
create new opportunities while simultaneously improving our communities.

      These efforts, combined with the expertise of our staff, will allow us to
increase our business banking market share in the coming years. For personal and
business banking, we continue to tell the community they can "Count on Us."

[ILLUSTRATION FROM 1917 U.S. CURRENCY SILVER CERTIFICATE APPEARS HERE]

                                       7
<PAGE>
 
[LOGO OF FIDELITY BANKSHARES, INC. APPEARS HERE]

Board of Directors

<TABLE> 
<CAPTION> 
[PHOTOS OF JOSEPH B. SHEAROUSE, JR., VINCE A. ELHILOW AND KEITH D.BEATY APPEAR HERE]
<S>                              <C>                          <C>  
Joseph B. Shearouse, Jr.         Vince A. Elhilow                Keith D. Beaty
 Chairman of the Board               President                Chief Executive Officer
                               Chief Executive Officer       Implant Innovations, Inc.
<CAPTION> 
[PHOTOS OF F. TED BROWN, JR., DONALD E. WARREN, M.D. AND KARL H. WATSON APPEAR HERE]
<S>                               <C>                          <C> 
    F. Ted Brown, Jr.             Donald E. Warren, M.D.       Karl H. Watson
        President                   Retired Physician             President
Ted Brown Real Estate, Inc.                                    Quarries, Cement
                                                               and Construction
                                                                  CSR Rinker
</TABLE> 

Officers

<TABLE> 
      <S>                           <C>                          <C>                    <C>     
        Richard D. Aldred           Joseph C. Bova               Robert L. Fugate       Patricia C. Clager
            Executive                 Executive                     Executive               Corporate
          Vice President            Vice President                Vice President            Secretary
      Chief Financial Officer
</TABLE> 

                                       8
<PAGE>
 
Fidelity Federal Savings Bank of Florida

<TABLE> 
<CAPTION> 

Directors
     <S>                                <C>                                   <C> 
     Joseph. B. Shearouse, Jr.             Vince A. Elhilow                  Keith D. Beaty
       Chairman of the Board                   President
                                        Chief Executive Officer

          F. Ted Brown                  Donald E. Warren, M.D.                Karl H. Watson
<CAPTION> 
Directors Emeriti
        <S>                                   <C>                          <C>  
        Louis B. Bills, Sr.                   George B. Preston                Raymond C. Tylander
      Louis B. Bills Enterprises              Chairman Emeritus                     President
                                                                           Tylander Realty Corporation
<CAPTION> 
Officers
             EXECUTIVE VICE PRESIDENTS                            SENIOR VICE PRESIDENTS
<S>                                                          <C>  
                 Richard D. Aldred                                 David R. Hochstetler
               Chief Financial Officer                       Director of Marketing/CRA Officer

                 Joseph C. Bova                                    Brian C. Mahoney
             Lending Operations Manager                               Controller

               Christopher H. Cook                                 Janice R. Newlands
                 Corporate Counsel                             Director of Human Resources

                 Robert L. Fugate                                  Debra K. Schiavone
             Banking Operations Manager                        Mortgage Loan Administration

               J. Robert McDonald                                  Shellie R. Schmidt
   President, Fidelity Realty & Appraisal Services, Inc.          Banking Administration
<CAPTION> 
        VICE PRESIDENT/CORPORATE SECRETARY                       Joseph B. Shearouse, III
                                                                 Commercial Loan Manager
                Patricia C. Clager
        Administrative Assistant to the Chairman
                                                                 Kenneth B. Stone, Jr.
                                                                 Mortgage Loan Production
         VICE PRESIDENT/ASSISTANT SECRETARY

                   Arlene Metz                                        Daniel F. Turk
      Administrative Assistant to the President                 Property and Risk Management

<CAPTION> 

          Martin County Advisory Board
        <S>                                                      <C> 
        Richard Q. Pennick, M.D., Chairman                          Owen C. Schwaderer
               Retired Physician                                        President
                                                                 Jensen Beach Land Company
            J. David Girlinghouse, D.D.S.
                    Dentist                                         Francis X. Wilson
                                                                        President
               C. Norris Tilton, Esq.                                Wilson Builders
                      Attorney
</TABLE> 

                                                          [GRAPHIC APPEARS HERE]


                                       9
<PAGE>
 
Locations


[MAPS OF FLORIDA AND COUNTIES APPEARS HERE]

                                       10
<PAGE>
 
<TABLE> 
<S>                           <C>                             <C> 
[GRAPHIC Palm Beach County
 APPEARS  Downtown Office               Wellington
HERE] 218 Datura Street           12000 W. Forest Hill Blvd.  [GRAPHIC Future Branches
     West Palm Beach                                           APPEARS     Abacoa
                                    West Boynton Beach         HERE]   Donald Ross Road
       45th Street                     9875 Jog Road
      4520 Broadway                                                       Devonshire
     West Palm Beach                West Delray Beach                   Ryder Cup Blvd.
                                   5017 West Atlantic Ave.
      Bear Lakes                                                      Downtown Lake Worth
     701 Village Blvd.               West Forest Hill                   Lucerne Ave. &
     West Palm Beach                3989 Forest Hill Blvd.                M Street
                                      West Palm Beach
     Boynton Beach                                                      Frederick Small
 At I-95 & Woolbright Road           WestLake Worth                     Military Trail &
   1501 Corporate Drive             6535 Lake Worth Road               Frederick Small Rd.

    Century Corners                                                      Port St. Lucie
   4835 Okeechobee Blvd.       [GRAPHIC    Martin County             Port St. Lucie Blvd. &
     West Palm Beach          APPEARS HERE]                              Floresta Dr.
                                       
       Forest Hill                     Jensen Beach                      St. Lucie West
    399 Forest Hill Blvd.         1021 N.E. Jensen Bch. Blvd.            Bethany Dr. &   
     West Palm Beach                                                   St. Lucie W. Blvd.  
                                                                        
                                     Kanner/Monterey
                                   2401 South Kanner Hwy.
        Jupiter                         Stuart                          
  1240 W. Indiantown Rd.                                                 West Hypoluxo 
                                                                     Hypoluxo Rd. & Jog Rd.
                                      Martin Square
     Jupiter Farms                 2980 S. Federal Highway               West Linton
   10058 Indiantown Rd.                 Stuart                       Linton Blvd. & Jog Rd.
                                                                                            
                                                  
       Northlake           [GRAPHIC  Loan Production                    West Okeechobee
    950 Northlake Blvd.      APPEARS    Offices                         State Road 7 &
        Lake Park             HERE]                                     Okeechobee Blvd.
                                        Vero Beach           
     Palm Beach                      1701 A1A, Suite 216      
  245 Royal Poinciana Way                                   [GRAPHIC     Future
                                                             APPEARS     Winn-Dixie 
                                       Boca Raton            HERE]      Supermarket  
  Palm Beach Gardens                7400 N. Federal Hwy.                  Branches 
  Garden Square Shoppes               Colony Shoppes at                           
 10973 North Military Trail           Boca Bay, Suite C6              Admirals Crossings        
                                                                                                  
                           [GRAPHIC   Remote ATM                         Military Trail &      
                             APPEARS South Florida Fairgrounds          Frederick Small Rd.     
     Palm Springs             HERE]   West Palm Beach                                          
   3320 S. Congress Ave.                                                 Loxahatchee           
                                                                    Seminole Pratt Whitney Rd. 
                                                                                               
                                                                                               
    Royal Palm Beach                                                   Victoria Shoppes         
 100 Royal Palm Bch. Blvd.                                             St. Lucie West &                           
                                                                       Florida Turnpike         
     Singer Island                                                            
 1200 East Blue Heron Blvd.                                         
       Riviera Beach                                                
                                                                    
       Tequesta                                                     
    171 Tequesta Drive                                              
</TABLE> 
                       
                       

                                       11
<PAGE>
 
Corporate Information


STOCK PRICE INFORMATION 
Fidelity Bankshares, Inc.'s common stock is traded on the Nasdaq National Market
under the symbol "FFFL." Newspaper stock tables list the holding company as
"Fidelbksh." The common stock has been trading since January 7, 1994.

The Company's special purpose trust, Fidelity Capital Trust I, has outstanding
Trust Preferred Securities which are traded on the Nasdaq National Market under
the symbol "FFFLP."

INVESTOR RELATIONS
Vince A. Elhilow, President & CEO
Richard D. Aldred, Executive VP & CFO
Fidelity Federal Savings Bank of Florida
218 Datura Street
West Palm Beach, Florida 33401
(561) 659-9900

SHAREHOLDER SERVICES &
DIVIDEND REINVESTMENT PLAN
Fidelity Federal Savings Bank of Florida
David R. Hochstetler, Senior Vice President
Lucy A. Carr, Assistant Vice President
218 Datura Street
West Palm Beach, Florida 33401
(561) 659-9931

ANNUAL REPORT ON FORM 10-K 
A copy of the Company's report on Form 10-K, as filed with the Securities and
Exchange Commission, is available without charge by written request addressed as
set forth under Shareholder Services above.

DATE AND PLACE OF ANNUAL  MEETING
April 20, 1999, 10:00 a.m. (EDT)
Omni Hotel
1601 Belvedere Road
West Palm Beach, Florida  33401

GENERAL COUNSEL
Sned, Pruitt, D'Angio & Tucker, P.A.
218 Datura Street
West Palm Beach, Florida 33401

SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015

INDEPENDENT AUDITORS
Deloitte & Touche LLP
1645 Palm Beach Lakes Blvd., Suite 900
West Palm Beach, Florida 33401

STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449

ELECTRONIC COMMUNICATIONS 
News releases issued through PR Newswire are available through Company News On-
Call via fax (1-800-758-5804, ext. 281429) or Internet website
(http://www.prnewswire.com).

BANK WEBSITE
Located on the Internet at www.fidfed.com

STOCKHOLDER INFORMATION
---------------------------------------------------------------
                                   Quarter Ended
                                   -------------

                        3/31/98   6/30/98   9/30/98  12/31/98
  Stock Price
  -----------------------------------------------------------
  High                   $35.38    $31.63    $30.25    $24.00
  Low                    $29.75    $27.00    $21.75    $18.75
  Dividends
   declared             $  .225    $ .225    $  .25    $  .25
---------------------------------------------------------------

                                       12
<PAGE>
 
Financial Highlights


On January 7,1994, Fidelity Federal Savings Bank of Florida completed a
reorganization from a mutual savings bank, into a stock savings bank, with the
majority of its shares owned by a mutual holding company. On January 29,1997,
Fidelity Federal Savings Bank of Florida (the "Bank") consummated a tax-free
reorganization, by becoming a wholly-owned subsidiary of a Delaware chartered,
stock holding company known as Fidelity Bankshares, Inc. (the "Company"). Each
outstanding share of common stock in Fidelity Federal Savings Bank of Florida
was converted into a share of common stock in Fidelity Bankshares, Inc., in the
same proportionate ownership interest the stockholder held before the
reorganization. In addition, the reorganization was accounted for in the same
manner as a pooling of interests transaction. Consequently, the consolidated
financial statements required no accounting adjustments.

Fidelity Bankshares, Inc. common stock currently trades on the Nasdaq National
Market system under the symbol "FFFL."

<TABLE> 
<CAPTION> 
                                                               1994            1995            1996            1997            1998
FOR THE YEAR (In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>             <C>             <C>             <C>  
Interest income                                          $   43,420      $   53,261      $   60,240      $   72,272      $   98,320
Interest expense                                             17,776          28,095          32,131          41,606          64,992
Net interest income                                          25,644          25,166          28,109          30,666          33,328
Net income                                                    5,262           4,815           3,550           6,418           7,412

PER COMMON SHARE (1) 
------------------------------------------------------------------------------------------------------------------------------------
Net Income:
       Basic                                             $     0.81      $     0.74      $     0.54      $     0.96      $     1.12
       Diluted                                                 0.80            0.73            0.53            0.95            1.10
Book value                                                    11.35           12.31           12.12           12.86           12.49
Stock price:
       High                                                   13.64           17.00           18.50           33.00           35.38
       Low                                                     9.09           10.23           11.75           17.50           18.75
       Close                                                  10.00           16.25           17.75           32.50           22.75

AVERAGE FOR THE YEAR (In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Assets                                                   $  669,506      $  741,777      $  824,025      $  995,528      $1,424,178
Loans receivable, net                                       441,573         490,088         605,507         735,463         917,647
Mortgage-backed and corporate debt securities                83,550         145,405         135,973         163,250         357,448
Investments (2)                                             103,715          63,605          35,530          44,146          70,674
Deposits                                                    553,184         567,493         636,297         768,892         993,343
Borrowed funds                                               30,231          79,905          85,608         122,490         315,907
Stockholders' equity                                         72,546          77,356          81,339          84,217          88,974

SELECTED PERFORMANCE RATIOS
------------------------------------------------------------------------------------------------------------------------------------
Return on average assets                                        .79%            .65%            .43%            .64%            .52%
Return on average equity                                       7.25%           6.22%           4.36%           7.62%           8.33%
Interest rate spread on average assets                         3.85%           3.28%           3.30%           3.00%           2.35%

YEAR END (In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Total assets                                             $  712,643      $  779,620      $  873,562      $1,220,267      $1,566,927
Investments (2)                                              82,410          43,108          41,740          61,720          66,557
Cash and amounts due from depository institutions            19,275          14,989          15,293          22,136          27,951
Loans receivable, net                                       456,543         532,333         661,700         861,257         977,166
Mortgage-backed and corporate debt securities               126,807         159,761         123,599         234,132         433,751
Deposits                                                    538,235         595,180         694,718         872,340       1,120,746
Borrowed funds                                               88,319          86,549          83,621         242,871         338,871
Equity                                                       74,404          81,266          81,723          87,387          84,999
</TABLE> 

(1) All per share items retroactively adjusted to reflect 10% stock dividend
distributed November 30, 1995. 
(2) Includes Government and Agency securities, interest-bearing deposits and
Federal Home Loan Bank stock.

                                       13
<PAGE>
 
              [ILLUSRATION FROM SILVER CERTIFICATE APPEARS HERE]

                            Illustration taken from
                           1889  Silver Certificate,
                                 U.S. Currency

                                       14
<PAGE>
 
Management's Discussion and Analysis
of Financial Condition and Results of Operations

When used in this Annual Report the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, uncertainties
related to year 2000 that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.

The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any forward
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.

General

On January 29, 1997, Fidelity Federal Savings Bank of Florida (the "Bank")
consummated a tax-free reorganization, by becoming a wholly-owned subsidiary of
a Delaware chartered, stock holding company known as Fidelity Bankshares, Inc.
(the "Company"). Each outstanding share of common stock in Fidelity Federal
Savings Bank of Florida was converted into a share of common stock in Fidelity
Bankshares, Inc., in the same proportionate ownership interest the stockholder
held before the reorganization. In addition, the reorganization was accounted
for in the same manner as a pooling of interests transaction. Consequently, the
consolidated financial statements required no accounting adjustments.

On January 21, 1998 the Company issued $ 28.75 million of mandatorily
redeemable, Preferred Securities out of a grantor trust, Fidelity Capital Trust
I, a Delaware statutory trust, which was created by the Company for this sole
purpose. As its only asset, the trust owns $ 28.75 million of Guaranteed
Preferred Beneficial Interests in the Company's Debentures due January 31, 2028,
purchased with the proceeds of the preferred securities issuance. Interest from
the Company's debentures is payable quarterly at a rate of 8.375%, annually. The
interest will be used to fund distributions on the preferred securities. As a
result of the above, the Preferred Securities of the trust are considered fully
and unconditionally guaranteed by the Company.

Distributions on the preferred securities are cumulative and are payable at the
same rate as the Company's debentures described above. The Company's debentures
are redeemable in whole, in the event the Company's mutual holding company
parent converts to stock form beginning January 31, 2000 at 107% of principal
amount and in any event the debentures are redeemable at 100% of principal
amount in whole or in part, commencing January 31, 2003. The preferred
securities are subject to mandatory redemption, in whole or in part as
applicable, upon the repayment of the debentures. The proceeds from the
securities, to the extent invested in common stock of the Bank, are considered
to be Tier 1 capital for regulatory purposes. Of the net proceeds of $ 27.3
million from the sale of the preferred securities, the Company invested $ 25
million in common stock of the Bank. The preferred securities are traded on the
Nasdaq National Market system under the symbol "FFFLP."

The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the operations of the Bank,
which is primarily dependent on its net interest income, which is the difference
between interest income earned on its investments in mortgage loans and
mortgage-backed securities, other investment securities and loans, and its cost
of funds consisting of interest paid on 

                                       15
<PAGE>
 
deposits and borrowings. The Bank's net income also is affected by its provision
for loan losses, as well as by the amount of other income, including income from
fees and service charges, net gains and losses on sales of investments, and
operating expense such as employee compensation and benefits, deposit insurance
premiums, occupancy and equipment costs, and income taxes. Earnings of the Bank
also are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Bank. In
particular, the general level of market rates tends to be highly cyclical. In
periods of high interest rates, earnings of the Bank are likely to be depressed,
which in turn would be likely to have a detrimental effect on the market value
of any investment in the Company's common stock. In addition, legislative and
regulatory actions may result in diminishing the value of any investment in the
Company.

Business Strategy

The Bank's current business strategy is to operate as a well-capitalized,
profitable and independent community-oriented savings bank dedicated to
providing quality customer service. Generally, the Bank has sought to implement
this strategy by emphasizing retail deposits as its primary source of funds and
maintaining a substantial part of its assets in locally-originated residential
first mortgage loans, in mortgage-backed securities and in other liquid
investment securities. Specifically, the Bank's business strategy incorporates
the following elements: (1) operating as a community-oriented financial
institution, maintaining a strong core customer base by providing quality
service and offering customers the access to senior management and services that
a community-based institution can offer; (2) maintaining high levels of asset
quality by emphasizing investment in residential mortgage loans, mortgage-backed
securities and other securities issued or guaranteed by the United States
Government or agencies thereof; (3) managing interest rate risk exposure by
maintaining adequate levels of liquidity, while achieving desirable levels of
profitability; and (4) maintaining adequate capital levels and asset quality.

Highlights of the Bank's business strategy are as follows:

Community-Oriented Institution. The Bank is the largest savings institution
headquartered in Palm Beach County, which in recent years has experienced a
significant influx of commercial banks and offices of savings institutions
headquartered outside of Florida. The Bank is committed to meeting the financial
needs of the communities in which it operates. The Bank believes it is large
enough to provide a full range of personal and business financial services, and
yet is small enough to be able to provide such services on a personalized and
efficient basis. Management believes that the Bank can be more effective in
servicing its customers than many of its non-local competitors because of the
Bank's ability to quickly and effectively provide senior management responses to
customer needs and inquiries. The Bank's ability to provide these services is
enhanced by the stability of the Bank's senior management. The Bank intends to
maintain its operation as a community-oriented, independent savings institution.

On January 30, 1998, the Bank acquired an office building in downtown West Palm
Beach for $6.6 million from NationsBank/Bank America. While the seller has
leased back most of the building for a period of up to two years, it is the
intent of the Company to locate its corporate headquarters in this building.

Asset Quality and Emphasis on Residential Mortgage Lending. Since its inception,
the Bank has emphasized residential real estate financing as a portfolio lender,
and anticipates a continued commitment to financing the purchase or improvement
of residential real estate in its market area. To supplement local mortgage loan
originations, the Bank also invests in mortgage-backed securities that are
issued or guaranteed by the United States Government or agencies thereof. At
December 31, 1998, 83.2% of the Bank's total loan portfolio consisted of one-
to- four family residential mortgage loans, including residential construction
loans, and 26.0% of the Bank's total assets consisted of mortgage-backed
securities and investments that are issued or guaranteed by the United States
Government or agencies thereof.

                                       16
<PAGE>
 
Generally, the yield on mortgage loans originated by the Bank is greater than
that of mortgage-backed securities purchased by the Bank. However, due to the
highly competitive market in which the Bank operates, the Bank may, from time to
time, not be able to originate a sufficient number of new mortgage loans to
offset the amortization and prepayments of its existing loan portfolio. In
addition, new real estate development opportunities in the Bank's market area
may diminish, as well as the adoption of growth controls by local governments,
which could further diminish lending opportunities of the Bank in the future. As
a result of these factors, new loan originations could be reduced in the future,
which may require the Bank to increase its investment in mortgage-backed
securities.

The percentage of small commercial business loans and consumer loans in the
Bank's portfolio has been below the levels of its peers. As a result, the Bank's
yield on its loan portfolio has been below peer levels. The Bank has begun to
expand its offering of commercial business and consumer loan services, but
expects to continue to adhere to the Bank's relatively conservative loan
underwriting standards. At December 31, 1998, the Bank had $ 95.2 million in
commercial business and consumer loans, compared to $ 80.5 million at December
31, 1997.

Interest Rate Risk Management. Deposit accounts typically react more quickly to
changes in market interest rates than interest-earning assets such as mortgage
loans, because of the relatively shorter maturities of deposits. When interest
rates are rising, the repricing of a higher volume of interest-bearing
liabilities compared to interest-earning assets will result in interest expense
increasing more rapidly than interest income, while in a falling interest rate
environment net interest income will be benefited. The difference between
interest-earning assets and interest-bearing liabilities expressed as a
percentage of total assets, is a measure of interest rate risk and is referred
to as an institution's interest rate gap. A gap is considered negative if
interest-bearing liabilities maturing or repricing in a particular time period
exceed interest-earning assets maturing or repricing within the same time
period. Management seeks to manage the Bank's interest rate risk exposure by
monitoring the levels of interest rate sensitive assets and liabilities while
maintaining an acceptable interest rate spread. At December 31, 1998, total
interest-bearing liabilities maturing or repricing within one year exceeded
total interest-earning assets maturing or repricing in the same period by $ 31.4
million, representing a cumulative one-year gap ratio of a negative 2.0%.

To reduce the potential volatility of the Bank's earnings in a changing interest
rate environment, the Bank has sought to manage interest rate risk by investing
a substantial part of its assets in relatively short- and medium-term United
States Government and agency securities, and in ARM loans and mortgage-backed
securities with adjustable interest rates. Of the Bank's total investment of 
$1.5 billion in loans and mortgage-backed securities at December 31, 1998, 
$669.7 million, or 46.2%, had adjustable interest rates. Another part of the
Bank's interest rate risk management strategy has been to extend the maturity of
interest-bearing liabilities, including using FHLB advances as a source of
funds.

Corporate Debt Securities. During 1998, the Bank began to diversify its
investments in mortgage-backed securities by purchasing investment grade rated,
floating rate trust preferred securities of other financial institutions. In
doing so, the Bank was relying on regulations which permit an investment of a
portion of its assets in "commercial paper and corporate debt securities." In
November of 1998, the Office of Thrift Supervision ("OTS") issued TB-73, which
among other matters stated concerns over institutions' investment in trust
preferred securities, citing increased interest rate risks as a result of the
predominant fixed rate nature of such securities and that some of these
securities could have their maturities extended at the issuer's option. As a
result, the OTS adopted limitations on the investment of such securities to 15%
of a regulated institution's equity, but adopted a procedure by which an
institution could appeal the limitation.

At December 31, 1998, the Bank's investment in trust preferred securities was
2.8% of its assets and 42.7% of its (Tier 1 (CORE)) regulatory capital. Most
issues of trust preferred securities appear to be fixed rate and unrated as to
credit risk, including Fidelity Bankshares, Inc.'s issue of "Guaranteed
Preferred Beneficial Interests in Company's Debentures." However, the Bank's
investment policy specifically restricts its investment in such securities to
$50 million, investment grade and floating rate to improve its interest rate
risk. The Bank has 

                                       17
<PAGE>
 
appealed to the OTS to permit it to continue its investment at current levels
and noted in its appeal that its investments had floating interest rates and the
issuer's did not have the option to extend the maturities. Management of the
Bank is unable to predict the outcome of its appeal. The trust preferred
securities have been classified as available for sale, and are recorded at fair
value in the accompanying consolidated financial statements at December 31,
1998.

Strong Retail Deposit Base. The Bank has had a relatively strong retail deposit
base drawn from the 22 full-service offices in its market area. At December 31,
1998, 28.9% of its deposit base of $ 1.1 billion consisted of core deposits,
which included non-interest demand accounts, passbook accounts, NOW accounts,
and money market demand deposit accounts. Core deposits are considered to be a
more stable and lower cost source of funds than certificates of deposit or
outside borrowings. The Bank will continue to emphasize retail deposits by
maintaining and seeking to expand its network of full-service offices, providing
depositors with a full range of accounts. The Bank is in the process of
expanding its branch network through the opening of eleven new branch locations,
expected to open in 1999.

Capital Strength. While the Company's equity and ratio of equity to assets at
December 31, 1998 were $ 85.0 million and 5.4%, respectively, its wholly-owned
subsidiary, the Bank, had total equity at December 31, 1998, of $ 106.2 million.
As a result, the Bank's ratio of total equity to total assets was 6.8%. The Bank
intends to continue to leverage its capital through growth while maintaining
adequate capital ratios.

Results of Operations

The earnings of the Bank depend primarily on its level of net interest income,
which is the difference between interest earned on the Bank's interest-earning
assets, consisting primarily of mortgage loans, mortgage-backed securities and
other investment securities, and the interest paid on interest-bearing
liabilities, consisting primarily of deposits. Net interest income is a function
of the Bank's interest rate spread, which is the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets compared to interest-bearing liabilities. The Bank's
earnings also are affected by its level of operating expenses and service
charges as well as other expenses, including employee compensation and benefits,
occupancy and equipment costs, and deposit insurance premiums.

General. The Company had net income of $ 7.4 million, or basic earnings per
share of $ 1.12, for the year ended December 31, 1998. Net income totaled $ 6.4
million, or basic earnings per share of $ .96, and $ 3.6 million, or basic
earnings per share of $ .54, for fiscal 1997 and 1996, respectively.

Interest Income. Interest income increased by $ 26.0 million, or 36.0%, to $
98.3 million for the year ended December 31, 1998 from $ 72.3 million for the
year ended December 31, 1997. The increase in interest income was principally
attributable to an increase in the average balance of interest-earning assets of
$ 402.9 million, to $ 1.3 billion from $ 942.9 million. The increase in average
interest-earning assets was primarily the result of a $ 194.2 million increase
in the average balance of mortgage-backed securities and a $ 182.2 million
increase in the average balance of loans. Also contributing to this increase was
an increase in the average balance of other investments of $ 20.3 million. While
the average balance on mortgage-backed securities increased to $ 357.4 million
in 1998 from $ 163.3 million in 1997, income derived from these investments was
partially offset by a decrease in the average yield on these securities to 6.10%
at December 31, 1998 from 6.84% at December 31, 1997.

Interest income on mortgage loans increased by $ 11.6 million, or 22.0%, to $
64.1 million for the year ended December 31, 1998 from $ 52.6 million for the
year ended December 31, 1997, primarily because of an increase in the average
balance of mortgage loans to $ 834.1 million from $ 668.9 million in 1997. The
increase in average loan balances reflects, as of December 1997, the effect of
acquiring $ 50.9 million of loans in the BankBoynton acquisition. Interest
income from consumer and other loans increased by $ 2.1 million in 1998, as

                                       18
<PAGE>
 
compared to 1997. The principal reason for this increase in interest income was
a 25.6% increase in the average balance of such loans in 1998, as compared to
1997. Interest income on mortgage-backed securities increased by $ 10.6 million
to $ 21.8 million. The increase in interest income on mortgage-backed securities
was caused by an increase in the average balance of such securities by $ 194.2
million to $ 357.4 million which was partially offset by a decrease in the
average yield to 6.10% for the year ended December 31, 1998 from 6.84% for the
year ended December 31, 1997. Interest income on investment securities increased
by $ 290,000 as a result of an increase in the average balance of these
securities to $ 18.5 million in 1998 compared to $ 12.3 million in 1997. Income
from other investments, consisting of interest-earning deposits in other
financial institutions and FHLB Stock increased by $ 1.5 million to $ 3.5
million for the year ended December 31, 1998 compared to $ 2.0 million in 1997.
The increase in income from other investments is due to the average balances of
these investments increasing by $ 20.3 million or 63.9% in 1998, compared to
1997.

Interest income increased by $ 12.1 million, or 20.0%, to $ 72.3 million for the
year ended December 31, 1997 from $ 60.2 million for the year ended December 31,
1996. The increase in interest income was principally attributable to an
increase in the average balance of interest-earning assets of $ 165.8 million,
to $ 942.9 million from $ 777.0 million. The increase in average
interest-earning assets was primarily the result of a $ 108.7 million increase
in average mortgage loans and a $ 21.2 million increase in average consumer and
other loans. Also contributing to this increase was a $ 27.3 million increase in
the average balance of mortgage-backed securities. While the average balance on
mortgage-backed securities increased to $ 163.3 million in 1997 from $ 136.0
million in 1996, this was partially offset by a decrease in the average yield on
these securities to 6.84% at December 31, 1997 from 7.32% at December 31, 1996.

Interest income on mortgage loans increased by $ 8.7 million, or 19.7%, to $
52.6 million for the year ended December 31, 1997 from $ 43.9 million for the
year ended December 31, 1996, primarily because of an increase in the average
balance of mortgage loans to $ 668.9 million from $ 560.2 million in 1996. The
increase in average loan balances includes, for the month of December, 1997, the
effect of acquiring $ 50.9 million of loans in the BankBoynton acquisition.
Interest income on consumer and other loans increased by $ 1.7 million in 1997,
as compared to 1996. The principal reason for this increase in interest income
was a 46.9% increase in the average balance of such loans in 1997, as compared
to 1996. Interest income on mortgage-backed securities increased by $ 1.2
million to $ 11.2 million. The increase in interest income on mortgage-backed
securities was caused by an increase in the average balance of such securities
by $ 27.3 million to $ 163.3 million which was partially offset by a decrease in
the average yield to 6.84% for the year ended December 31, 1997 from 7.32% for
the year ended December 31, 1996. Interest income on investment securities
decreased by $ 46,000 as a result of a decrease in the average balance of these
securities to $ 12.3 million in 1997 compared to $ 12.4 million in 1996. Income
from other investments, consisting of interest-earning deposits in other
financial institutions and FHLB Stock increased by $ 479,000 to $ 2.0 million
for the year ended December 31, 1997 compared to $ 1.5 million in 1996. The
increase in income from other investments is due to the average balance of these
investments increasing by $ 8.7 million in 1997, or 37.5%, compared to 1996
which was partially offset by a decrease in the average yield to 6.19% for the
year ended December 31, 1997 compared to 6.44% for the year ended December 31,
1996.

Interest Expense. Interest expense increased by $ 23.4 million or 56.2%, to $
65.0 million for the year ended December 31, 1998 from $ 41.6 million for the
year ended December 31, 1997. The increase was attributable to an increase in
the average cost of the Bank's deposits to 4.54% from 4.40% and an increase in
the average balance of interest-bearing deposits of $ 224.5 million. This
increase in average deposit balances includes the effect of the acquisition of $
41.7 million of BankBoynton deposits for the month of December, 1997. The
average balance of FHLB advances and other borrowings increased by $ 193.4
million to $ 315.9 million in 1998 compared to $ 122.5 million in 1997. The Bank
increased its FHLB advances primarily to fund its increased investments in
mortgage-backed and corporate debt securities.

Interest expense increased by $ 9.5 million or 29.5%, to $ 41.6 million for the
year ended December 31, 1997 from $ 32.1 million for the year ended December 31,
1996. The increase was attributable to an increase in the 

                                       19
<PAGE>
 
average cost of the Bank's deposits to 4.40% from 4.12% and an increase in the
average balance of interest-bearing deposits of $ 132.6 million. The average
balance of FHLB advances and other borrowings increased by $ 36.9 million to $
122.5 million in 1997 compared to $ 85.6 million in 1996. The Bank increased its
FHLB advances primarily to fund its increased investments in mortgage-backed
securities.

Net Interest Income. Net interest income increased to $ 33.3 million for the
year ended December 31, 1998 from $ 30.7 million for the same period in 1997,
representing an increase of $ 2.7 million, or 8.7%. This increase in net
interest income resulted from an increase in loans receivable to $ 977.2 million
at December 31, 1998 from $ 861.3 million at December 31, 1997. This was
partially offset by a decrease in the Bank's average interest rate spread to
2.35% from 3.00% at December 31, 1998 and 1997, respectively.

Net interest income increased to $ 30.7 million for the year ended December 31,
1997 from $ 28.1 million for the same period in 1996, representing an increase
of $ 2.6 million, or 9.1%. This increase in net interest income resulted from an
increase in loans receivable to $ 861.3 million at December 31, 1997 from $
661.7 million at December 31, 1996. This was partially offset by a decrease in
the Bank's average interest rate spread to 3.00% from 3.30% at December 31, 1997
and 1996, respectively.

Provision for Loan Losses. The Bank's provision for loan losses decreased by $
93,000 to $ 77,000 for the year ended December 31, 1998 from $ 170,000 for the
year ended December 31, 1997, principally as the result of payoffs on loans for
which the Bank had previously provided specific loan loss allowances. The Bank's
total allowance for loan losses at December 31, 1998 of $ 3.2 million was deemed
adequate by management, in light of the risks inherent in the Bank's loan
portfolio. The Bank's ratio of non performing loans to total loans was .33% and
 .38% at December 31, 1998 and 1997, respectively.

The Bank's provision for loan losses increased slightly to $ 170,000 for the
year ended December 31, 1997 from $ 164,000 for the year ended December 31,
1996. The provision for loan losses in 1997 and 1996 reflect more normal
circumstances. The Bank's total allowance for loan losses at December 31, 1997
was $ 3.3 million.

The financial statements of the Company are prepared in accordance with
generally accepted accounting principles and, accordingly, allowances for loan
losses are based on management's estimate of the fair value of collateral, as
applicable, and the Bank's actual loss experience and standards applied by the
OTS and FDIC. The Bank provides both general valuation allowances (for
unspecified, potential losses) and specific valuation allowances (for known
losses) in its loan portfolio. General valuation allowances are added to the
Bank's capital for purposes of computing the Bank's regulatory risk-based
capital. The Bank regularly reviews its loan portfolio, including impaired
loans, to determine whether any loans require classification or the
establishment of appropriate valuation allowances. Since the Bank is beginning
to increase its production of commercial business loans and since such loans are
deemed to have more credit risk than mortgage loans, the Bank's provision for
loan losses is likely to increase in future periods.

Other Income. Other income for the year ended December 31, 1998 was $ 8.7
million, a $ 3.8 million increase when compared to 1997. This increase was
partially due to a $ 2.3 million increase in the gain on sale of loans,
mortgage-backed securities and investments to $ 2.5 million in 1998 from $
190,000 in 1997. The Company experienced an increase in the gain on sale of
loans of $ 950,000 and an increase in the gain on sale of mortgage-backed
securities of $ 1.4 million in 1998 compared to 1997. This increase in other
income also resulted from an increase in the Bank's servicing income and other
fees of $ 1.0 million and an increase in other miscellaneous income of $
476,000. The reasons for the increase in miscellaneous income included $ 615,000
of rental income received from NationsBank for leasing back most of the downtown
property acquired from them in January of 1998 and recognition of income from
the maturing of a $ 355,000 option on the sale of the Bank's downtown property,
which amounts were offset by non-recurring income of $ 702,000 in 1997.

Other income for the year ended December 31, 1997 was $ 4.9 million, a $ 34,000
increase when compared to 1996. The increase in other income resulted from an
increase in servicing income and other fees of $ 405,000 and 

                                       20
<PAGE>
 
an increase in other miscellaneous income of $ 654,000. The increase in
miscellaneous income was due to a gain of $ 702,000 on the sale of the Company's
interest in its data processing servicer. These increases were offset by
decreases in net gain on sale of loans, mortgage-backed securities and
investments of $ 1.0 million.

Operating Expense. Operating expense increased by $ 5.5 million or 22.5% to $
29.7 million for the year ended December 31, 1998 as compared to the year ended
December 31, 1997. Employee compensation and benefits represent $ 2.5 million of
this increase. The reasons for the increase in employee compensation and
benefits are additional personnel to staff two offices that were opened
subsequent to June, 1997, additional customer service personnel hired as a
result of the Bank's 28% increase in deposits during the year and the hiring of
additional commercial loan personnel, together with normal salary increases. In
addition, as discussed elsewhere, herein, the Bank hired and began to train 19%
of the personnel necessary to staff the eleven new branches it expects to open
in 1999. As a result, the Bank's full time equivalent personnel increased by 88
in 1998 from 305 to 393, a 29% increase. The Bank's occupancy and equipment
costs were $ 1.3 million more than in 1997. Contributing to this increase are
approximately $ 300,000 pertaining to operating and depreciation expenses of the
Bank's new office building acquired in January, 1998, $ 81,000 relating to rent
expenses on certain properties acquired in the BankBoynton acquisition and
approximately $ 122,000 in costs to operate new branch offices and new loan
production offices. In addition, the Bank incurred additional depreciation
expense of $ 247,000 principally as the result of the installation of new
computer equipment. Also contributing to the increase in operating expenses were
increases in marketing costs of $ 134,000, federal deposit insurance premium of
$ 92,000 and other operating expenses of $ 1.3 million, which includes $ 162,000
of amortization of goodwill related to the acquisition of BankBoynton.

Operating expense decreased by $ 2.5 million or 9.3% to $ 24.2 million for the
year ended December 31, 1997 as compared to the year ended December 31, 1996.
This decline is composed of a decrease in federal deposit insurance premium of $
4.5 million, resulting from the resolution of the SAIF issue through a one-time
special assessment charged in the third quarter of 1996, which was partially
offset by an increase in all other operating expenses of $ 2.0 million. Employee
compensation and benefits represent $ 1.1 million of this increase.
Hospitalization costs increased by $ 263,000 while ESOP costs have increased by
$ 303,000 due to an increase in the market value of the Company's common stock.
The remaining increase in employee compensation and benefits expense of $
558,000 is principally attributable to additional staffing in the Bank's offices
and loan production offices, together with normal salary increases. The Bank's
occupancy and equipment cost for the year ended December 31, 1997 increased by $
260,000 when compared to the same period in 1996. Marketing expense was $ 29,000
more than experienced in 1996. Of the $ 691,000 increase in other operating
expense, $ 273,000 was attributable to increased stock costs and legal fees
relating to the formation of the Company and the mid-tier reorganization. These
increases were only partially offset by an increase in gain on real estate owned
of $ 84,000 for the year ended December 31, 1997 compared to the 1996 period.

Income Taxes. Federal and state income tax expense increased by $ 89,000 to $
4.8 million for the year ended December 31, 1998 compared to 1997. This increase
was attributable to an increase of $ 1.1 million in income before provision for
income tax to $ 12.3 million in 1998 from $ 11.2 million in 1997 which was
partially offset by a decrease in the Company's effective income tax rate.

Federal and state income taxes increased by $ 2.2 million to $ 4.8 million for
the year ended December 31, 1997 compared to $ 2.6 million in 1996. This
increase was attributable to an increase of $ 5.1 million in income before
provision for income tax to $ 11.2 million in 1997 from $ 6.1 million in 1996.

                                       21
<PAGE>
 
<TABLE> 
<CAPTION> 

Average Balance Sheet
                                                                  For the Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                 1996                            1997                             1998
====================================================================================================================================
                                    Average                Average   Average                Average   Average                Average
                                    Balance    Interest    Yield/    Balance    Interest    Yield/    Balance    Interest    Yield/
                                                            Cost                             Cost                             Cost
====================================================================================================================================
                                                                       (Dollars in Thousands)
<S>                                <C>         <C>         <C>      <C>         <C>         <C>      <C>         <C>         <C> 
Interest-earning assets:
  Mortgage loans ..............    $560,233    $ 43,923     7.84%   $668,943    $ 52,589     7.87% $  834,065    $ 64,146     7.69%
  Consumer and other loans ....      45,274       4,074     9.00%     66,520       5,797     8.71%     83,582       7,850     9.39%
  Mortgage-backed
    securities (1) ............     135,973       9,949     7.32%    163,250      11,159     6.84%    357,448      21,794     6.10%
  Investment securities .......      12,391         804     6.49%     12,337         758     6.14%     18,527       1,048     5.66%
  Other investments (2) .......      23,139       1,490     6.44%     31,809       1,969     6.19%     52,147       3,482     6.68%
                                   --------    --------             --------    --------           ----------    -------- 
    Total interest-earning 
     assets ...................     777,010      60,240     7.75%    942,859      72,272     7.67%  1,345,769      98,320     7.31%
Non-interest-earning assets....      47,015                           52,669                           78,409
                                   --------                         --------                       ----------                 
      Total assets.............    $824,025                         $995,528                       $1,424,178
                                   ========                         ========                       ==========
Interest-bearing liabilities:
     Deposits..................    $636,297    $ 26,239     4.12%   $768,892     $33,856     4.40% $  993,343    $ 45,128     4.54%
     Borrowed funds............      85,608       5,892     6.88%    122,490       7,750     6.33%    315,907      19,864     6.29%
                                   --------    --------             --------     -------           ----------    -------- 
      Total interest-bearing     
          liabilities..........     721,905      32,131     4.45%    891,382      41,606     4.67%  1,309,250      64,992     4.96%
                                               --------                          -------                         --------
Non-interest-bearing 
 liabilities...................      20,781                           19,929                           25,954
                                   --------                         --------                       ----------                 
      Total liabilities........     742,686                          911,311                        1,335,204
Net worth......................      81,339                           84,217                           88,974
                                   --------                         --------                       ----------                 
      Total liabilities and net    
          worth................    $824,025                         $995,528                       $1,424,178 
                                   ========                         ========                       ==========
Net interest income............                $ 28,109                          $30,666                          $33,328
                                               ========                          =======                         ========
Net interest rate spread (3)...                             3.30%                            3.00%                            2.35%
                                                           =====                            =====                            =====
Net yield on interest-earning                                                                                  
  assets (4).....................                           3.62%                            3.26%                            2.48%
                                                           =====                            =====                            =====
Ratio of average 
   interest-earning assets to 
   average interest-bearing 
   liabilities..................                           107.6%                           105.7%                           102.8%
                                                           =====                            =====                            =====
</TABLE> 

(1)  Includes corporate debt securities.
(2)  Includes interest-bearing deposits in other financial institutions and FHLB
     stock.
(3)  Net interest-rate spread represents the difference between the average
     yield on interest-earning assets and the average cost of interest-bearing
     liabilities.
(4)  Net yield on interest-earning assets represents net interest income as a
     percentage of average interest-earning assets.

The following table shows the yields on interest earning assets and interest
bearing liabilities as of the dates indicated.

<TABLE> 
<CAPTION> 
                                              ------------------------------------------------------------------------
                                                          At December 31, 1997               At December 31, 1998
                                              ========================================================================
                                                      Actual                              Actual
                                                     Balance           Yield/Cost        Balance          Yield/Cost
                                              ========================================================================
                                                                          (Dollars in Thousands)
<S>                                                <C>                 <C>          <C>                    <C> 
 Interest-earning assets:
     Mortgage loans......................          $  779,683             7.85%       $  888,228             7.71%
     Consumer and other loans............              81,574             8.95%           88,938             8.63%
     Mortgage-backed securities (1)......             234,132             7.11%          433,751             6.11%
     Investment securities...............              16,077             6.16%           18,824             6.02%
     Other investments (2)...............              45,643             6.34%           47,733             5.75%
                                                   ----------                         ----------
       Total interest-earning assets.....           1,157,109             7.71%        1,477,474             7.21%
 Non-interest-earning assets.............              63,158                             89,453
                                                   ----------                         ----------
       Total assets......................          $1,220,267                         $1,566,927
                                                   ==========                         ==========
                                                                                      
 Interest-bearing liabilities:                                                        
     Deposits............................          $  872,340             4.50%       $1,120,746             4.42%
     Borrowed funds......................             242,871             6.42%          338,871             6.15%
                                                   ----------                         ----------
       Total interest-bearing liabilities           1,115,211             4.93%        1,459,617             4.82%
 Non-interest-bearing liabilities........              17,669                             22,311
                                                   ----------                         ----------
       Total liabilities.................           1,132,880                          1,481,928
 Net worth...............................              87,387                             84,999
                                                   ----------                         ----------
       Total liabilities and net worth...          $1,220,267                         $1,566,927
                                                   ==========                         ==========

 Net interest rate spread................                                 2.78%                              2.39%
                                                                        ======                             ======
</TABLE> 

(1)  Includes corporate debt securities. 
(2)  Includes interest-bearing deposits in other financial institutions and FHLB
     stock.

                                       22
<PAGE>
 
Average Balance Sheet

The previous tables set forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.
Average balances are derived from month-end balances.

Management does not believe that the use of month-end balances instead of daily
average balances has caused any material difference in the information
presented.

Rate Volume Analysis

The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rate (change
in rate multiplied by old average volume); and (iii) the net change.

<TABLE> 
<CAPTION> 
                                                                Years Ended December 31,
                                   -------------------------------------------------------------------------------------
                                                   1997 vs. 1996                             1998 vs. 1997
                                   -------------------------------------------------------------------------------------
                                         Increase/(Decrease)                       Increase/(Decrease)
                                                Due to                                    Due to                    
                                   ---------------------------------   Total  -------------------------------  Total
                                                           Rate/      Increase                        Rate/   Increase
                                       Volume     Rate     Volume    (Decrease)  Volume     Rate     Volume  (Decrease)
                                   -------------------------------------------------------------------------------------
                                                                         (In Thousands)
Interest  income:
<S>                                    <C>        <C>        <C>       <C>         <C>       <C>       <C>       <C> 
   Mortgage loans...............       $8,523    $   120     $   23    $8,666      $12,981   $(1,142)  $  (282) $11,557
   Consumer and other loans.....        1,912       (129)       (60)    1,723        1,487       451       115    2,053
   Mortgage-backed securities...        1,996       (655)      (131)    1,210       13,274    (1,205)   (1,434)  10,635
   Investment securities........           (4)       (42)         -       (46)         380       (60)      (30)     290
   Other investments............          559        (58)       (22)      479        1,259       155        99    1,513
                                       ------    -------     ------    ------      -------   -------   -------  -------

   Total interest-earning assets       12,986       (764)      (190)   12,032       29,381    (1,801)   (1,532)  26,048
                                       ------    -------     ------    ------      -------   -------   -------  ------- 

Interest expense:
   Deposits.....................        5,468      1,778        371     7,617        9,883     1,075       314   11,272
   Borrowed funds...............        2,539       (476)      (205)    1,858       12,238       (48)      (76)  12,114
                                       ------    -------     ------    ------      -------    ------   -------  -------

   Total interest-bearing               8,007      1,302        166     9,475       22,121     1,027       238   23,386
                                       ------    -------     ------    ------      -------   -------   -------  -------
liabilities.....................
Change in net interest income...       $4,979    $(2,066)    $ (356)   $2,557      $ 7,260   $(2,828)  $(1,770) $ 2,662
                                       ======    =======     ======    ======      =======   =======   =======  =======
</TABLE> 

Market Risk Analysis

As a holding company for a financial institution, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets, other than those which possess a short term to
maturity. Since the majority of the Company's interest-bearing liabilities and
nearly all of the Company's interest-earning assets are held by the Bank,
virtually all of the Company's interest rate risk exposure lies at the Bank
level. As a result, all significant interest rate risk management procedures are
performed by management of the Bank. Based upon the nature of the Bank's
operations, the Bank is not subject to foreign currency exchange or commodity
price risk. The Bank's loan portfolio is concentrated primarily in Palm Beach,
Martin and Broward Counties in Florida and is therefore subject to risks
associated with the local economy. As of December 31, 1998, the Company does not
own any trading assets, other than $ 443,000 of assets held by the SMPIAP Trust
which can be actively traded by and are held for the benefit of senior
management. Income in these accounts accrues to and losses are solely absorbed
by senior management. At December 31, 1998, the Company does not have any
hedging transactions in place such as interest rate swaps and caps.

                                      23
<PAGE>
 
Asset and Liability Management - Interest Rate Sensitivity Analysis

The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
and interest-bearing liabilities maturing or repricing within that time period.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. During a period of
rising interest rates, a negative gap would tend to adversely affect net
interest income while a positive gap would tend to positively affect net
interest income. Similarly, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income.

The Bank's policy in recent years has been to reduce its exposure to interest
rate risk generally by better matching the maturities of its interest rate
sensitive assets and liabilities and by originating ARM loans and other
adjustable rate or short-term loans, as well as by purchasing short-term
investments. However, particularly in a low interest rate environment borrowers,
typically prefer fixed rate loans to ARM loans. The Bank seeks to lengthen the
maturities of its deposits by promoting longer-term certificates. The Bank does
not solicit high-rate jumbo certificates or brokered funds.

At December 31, 1998, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $ 31.4 million, representing a cumulative one-year gap ratio
of a negative 2.0%. The Bank has an Asset-Liability Management Committee which
is responsible for reviewing the Bank's assets and liability policies. The
Committee meets weekly and reports monthly to the Board of Directors on interest
rate risks and trends, as well as liquidity and capital ratio requirements.

                                      24
<PAGE>
 
Gap Table

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
expected to reprice or mature, based upon certain assumptions, in each of the
future time periods shown. Except as stated below, the amounts of assets and
liabilities shown that reprice or mature during a particular period were
determined in accordance with the earlier of the term of repricing or the
contractual terms of the asset or liability. The Bank has assumed that its
passbook savings, NOW, and money market accounts, which totaled $ 323.8 million
at December 31, 1998, are withdrawn at the annual percentage rates set forth in
the table on the next page. For information regarding the contractual maturities
of the Bank's loans, investments, and deposits, see Notes to Consolidated
Financial Statements.

<TABLE> 
<CAPTION> 
                                                                  Amounts Maturing or Repricing
                                      ---------------------------------------------------------------------------------------
                                      Within 3              6 Months to                               Over 5
                                       Months   3-6 Months    1 Year       1-3 Years    3-5 Years     Years        Total
                                      ======== ============ ============= ============ ============ ============ ============
                                                                      (Dollars in Thousands)
<S>                                 <C>          <C>          <C>           <C>          <C>          <C>          <C> 
Interest -earning assets:
  Real estate loans:
    Residential one- to
four-family:
     Current market index ARMs..    $42,742      $36,361      $51,782       $80,132      $38,782      $19,822       $269,621
     Lagging market index ARMs..     26,190       20,146       25,104         1,556        1,118            -         74,114
     Fixed rate.................     55,129       25,176       37,780       114,767       79,506      152,473        464,831
    Commercial and multi-family:
     ARMs.......................     22,602        5,763       15,928         7,116        6,296           17         57,722
     Fixed rate.................      8,901          471          854         2,476        1,547        2,631         16,880
  Consumer and commercial            56,403        4,823        8,143        17,598        5,655        2,989         95,611
business........................
  Investment securities.........     32,075        2,000       10,890         4,980          445          358         50,748
  FHLB stock....................     15,658            -            -             -            -            -         15,658
  Mortgage-backed and corporate
    debt securities:
    Adjustable..................    274,608        8,250            -             -            -            -        282,858
    Fixed.......................      6,811        6,157       11,560        37,652       26,949       56,323        145,452
                                    -------      -------      -------       -------      -------      -------        -------
      Total interest-earning        
    assets (1)..................    541,119      109,147      162,041       266,277      160,298      234,613      1,473,495 
                                    -------      -------      -------       -------      -------      -------      ---------

Non interest-bearing
liabilities:
  Non interest-bearing deposits       5,163        5,163       10,326        21,570        8,770        6,010         57,002
                                    -------      -------      -------       -------      -------      -------        -------

Interest-bearing liabilities:
  Passbook accounts.............     75,478       17,082       34,162           214          155          403        127,494
  NOW accounts..................     14,095       12,591       25,182        14,586        9,636       18,758         94,848
  Money market accounts.........     19,172        4,815        9,628         6,630        2,585        1,651         44,481
  Certificate accounts..........    195,573      176,690      155,816       229,672       39,170            -        796,921
  Borrowed funds................      8,818       41,848       32,073        41,445      185,951       28,736        338,871
                                    -------      -------      -------       -------      -------      -------        -------
      Total interest-bearing  
liabilities.....................    313,136      253,026      256,861       292,547      237,497       49,548      1,402,615
                                    -------      -------      -------       -------      -------      -------      ---------

Interest sensitivity gap........    $222,820     $(149,042) $(105,146)      $(47,840)   $(85,969)    $179,055        $13,878
                                    ========     =========  =========       ========    ========     ========        =======
Cumulative interest-sensitive       
gap.............................    $222,820     $73,778     $(31,368)      $(79,208)   $(165,177)    $13,878        $13,878 
                                    ========     =======     ========       ========    =========     =======        =======

Cumulative interest sensitivity
gap to total assets.............       14.22%        4.71%      (2.00)%       (5.05)%     (10.54)%         .89%          .89%
                                    ========     ========     =======       =======      =======      ========      ========
                              
Cumulative ratio of interest-
  earning assets to interest-
  bearing liabilities...........      170.00%      112.80%       96.27%        93.22%       88.26%      100.94%       100.94% 
                                    ========     ========     ========      ========     ========     ========      ========
</TABLE> 

(1) The above table shows expected cash flows within the time periods presented.
    Accordingly, the balances do not reflect adjustments for premiums,
    discounts, and market value adjustments.

                                      25
<PAGE>
 
In preparing the table above, the Bank's prepayment rates for its loans are
based on the most recent assumptions used by the OTS as of December 31, 1998.
The OTS assumptions could vary substantially from the actual prepayment rates
experienced by the Bank. The assumptions are as follows:

                                                                Annual
                                                              Prepayment
                      Type                                       Rate
--------------------------------------------------------------------------

ARM loans--current market index                                 13%-24%
ARM loans--lagging market index                                 13%-24%
Fixed-rate one- to four-family loans with maturities                   
   equal to or greater than five years:                                
     Below 7% interest rate                                      9%-12%
      7.00% to 7.99%                                            12%-18%
      8.00% to 8.99%                                            17%-26%
      9.00% to 9.99%                                            23%-35%
     10.00% and over                                            26%-37%
Mortgage-backed and related securities with maturities                 
   equal to or greater than five years:                                
     Below 7% interest rate                                      9%-12%
      7.00% to 7.99%                                            12%-18%
      8.00% to 8.99%                                            17%-26%
      9.00% to 9.99%                                            23%-35%
     10.00% and over                                            26%-37%
Other residential and all non-residential loans                 12%-25%
                                                               
Decay rates indicate an assumed annual rate at which an interest-bearing
liability will be withdrawn in favor of an account with a more favorable
interest rate. Decay rates have been assumed for demand deposits, NOW accounts,
passbook and money market deposits. The following decay rates are based on the
most recent assumptions used by the OTS as of December 31, 1998.

<TABLE> 
<CAPTION> 
                                                     6 Months     1 Year      3 Years     5 Years
                                                     Through      Through     Through     Through     Over 10
                                        0-6 Months    1 Year      3 Years     5 Years     10 Years      Years
                                        ----------- ------------ ----------- ----------- ----------- -----------
     <S>                                <C>         <C>          <C>         <C>         <C>         <C> 
     NOW accounts                            54%         54%          19%         19%         19%         19%
     Passbook, club accounts                 95%         95%          15%         15%         15%         15%
     Money market deposit accounts           60%         60%          38%         38%         38%         38%
</TABLE> 

The above assumptions are annual percentages based on remaining balances and
should not be regarded as indicative of the actual prepayments and withdrawals
that may be experienced by the Bank in any given period. Moreover, certain
shortcomings are inherent in the analysis presented by the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, interest rates on certain types of assets and liabilities
may fluctuate in advance of or lag behind changes in market interest rates.
Additionally, certain assets, such as ARM loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the assets.
Moreover, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. For information regarding the contractual maturities of
the Bank's loans, investments, and deposits, see Notes to Consolidated Financial
Statements.

Under OTS risk-based capital regulations, savings associations are required to
calculate the market value of their portfolio equity (MVPE). These calculations
are based upon data concerning interest-earning assets, interest-bearing
liabilities and other rate sensitive assets and liabilities provided to the OTS
on schedule CMR of the quarterly Thrift Financial Report. Commencing March 31,
1994, for purposes of measuring interest rate risk, the OTS began using the MVPE
calculations which essentially discount the cash flows from an institution's
assets and liabilities to present value, using current market rates.

                                      26
<PAGE>
 
The amendments to the risk-based capital regulations require institutions to
hold additional risk-based capital in an amount equal to one-half the amount an
institution's interest rate risk exceeds the normal amount of interest rate
risk. Normal interest rate risk is defined as 2% of the MVPE at static interest
rates. If, after applying a rate shock of 200 basis points ("bp") (one basis
point equals .01%) of either a decline or increase in rates, the resultant
negative change in MVPE exceeds 2% of MVPE at static interest rates, an
institution is deemed to have excess interest rate risk. At December 31, 1998,
the Bank was not required to hold additional risk-based capital for interest
rate risk-purposes.

Liquidity and Capital Resources

The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio currently is 4.0%. The Bank's
liquidity ratio averaged 7.12% during the month of December 1998 and 5.91%
during the month of December 1997. Liquidity ratios averaged 5.71% and 7.05% for
the years ended December 31, 1998 and 1997, respectively. The Bank adjusts its
liquidity levels in order to meet funding needs of deposit outflows, payment of
real estate taxes on mortgage loans, repayment of borrowings and loan
commitments. The Bank also adjusts liquidity as appropriate to meet its asset
and liability management objectives.

The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities and
other short-term investments, and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions, and
competition. The Bank manages the pricing of its deposits to maintain a desired
deposit balance. In addition, the Bank invests excess funds in short-term
interest-earning and other assets, which provide liquidity to meet lending
requirements. Short-term interest-bearing deposits with the FHLB of Atlanta
amounted to $ 32.1 million and $ 32.4 million at December 31, 1998 and 1997,
respectively. Other assets qualifying for liquidity outstanding at December 31,
1998, and 1997, amounted to $ 33.5 million and $ 24.8 million, respectively. For
additional information about cash flows from the Bank's operating, financing,
and investing activities, see Consolidated Statements of Cash Flows included in
the Financial Statements.

A major portion of the Bank's liquidity consists of cash and cash equivalents,
which are a product of its operating, investing and financing activities. The
primary sources of cash were net income, principal repayments on loans and
mortgage-backed securities, and increases in deposit accounts along with
advances from the Federal Home Loan Bank.

Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At December 31, 1998, the Bank had $ 303.1 million in advances
from the FHLB. The Bank engages in borrowing from the FHLB in order to reduce
interest rate risk, and for liquidity purposes.

At December 31, 1998, the Bank had outstanding loan commitments of $ 38.6
million to originate and/or purchase mortgage loans. This amount does not
include the unfunded portion of loans in process. Certificates of deposit
scheduled to mature in less than one year at December 31, 1998, totaled $ 254.2
million. Based on prior experience, management believes that a significant
portion of such deposits will remain with the Bank, although there can be no
assurance that the deposits will remain with the Bank and their rates could
increase.

Changes in Financial Condition

During 1998, the Company's assets increased by $ 346.7 million. Investment in
mortgage-backed securities increased by $ 155.1 million, the Bank invested $
44.5 million in corporate debt securities and loans receivable increased in the
amount of $ 115.9 million. Cash and cash equivalents increased by $ 4.2 million.
In addition, the 

                                      27
<PAGE>
 
Bank increased its investment in Federal Home Loan Bank stock by $ 3.7 million,
increased its investment in office properties and equipment, primarily for new
office sites, by $ 16.3 million, while all other assets increased by $ 6.9
million. The Bank continued to experience deposit inflows during 1998 of $ 248.4
million, principally as a result of continued aggressive pricing of its
certificates of deposit. Together, with an increase in equity, net of the change
in accumulated other comprehensive income of $ 2.4 million, the issue of $ 28.8
million in trust preferred securities and additional borrowings from the Federal
Home Loan Bank of $ 64.0 million, provided the principal funds for the Company's
asset growth.

During 1997, the Company's assets increased by $ 346.7 million. Investment in
mortgage-backed securities increased by $ 110.5 million, while loans receivable
increased in the amount of $ 199.6 million. Cash and cash equivalents increased
by $ 13.4 million. In addition, the Bank increased its investment in Federal
Home Loan Bank stock by $ 5.8 million, increased its investment in office
properties and equipment, primarily for new office sites, by $ 3.3 million,
while all other assets increased by $ 14.1 million. The Bank continued to
experience deposit inflows during 1997 of $ 177.6 million, principally as a
result of continued aggressive pricing of its certificates of deposit, which
together with an increase in equity, net of the change in accumulated other
comprehensive income of $ 5.0 million and additional borrowings from the Federal
Home Loan Bank of $ 156.6 million, provided the principal funds for the
Company's asset growth.

Fidelity's 1999 Expansion Plans

During 1999, Fidelity Federal Savings Bank plans to relocate one full service
branch and open eleven de novo branches, assuming no delays in obtaining
building permits or construction. The new branches, eight full service and three
"supermarket" branches, are expected by management, based upon demographic
studies, to be accretive to income within eighteen to twenty four months of
their opening. These branches are expected to be opened periodically throughout
1999. Typical branches, of the type being constructed, within the Bank's current
branch system cost approximately $ 600,000, annually, per branch to operate,
which includes depreciation, personnel costs and other costs incident to their
operation. Accordingly, Management believes that the Bank will incur additional
operating expenses of approximately $ 3.3 million, while income earned on the
deposits in these new branches will be limited in 1999. Delays in opening the
branches or additional unanticipated costs could result in higher operating
costs.

Year 2000 Preparations

Like many financial institutions, the Bank relies upon computers for the daily
conduct of its business and for data processing generally. There is concern that
on January 1, 2000 computers will be unable to "read" the new year and as a
consequence, there may be widespread computer malfunctions. To address this
contingency the Bank formed a Year 2000 Committee in March 1997, comprised of
the Bank's Senior Management, which meets monthly to review the Bank's plan to
achieve compliance with the issues associated with the year 2000 and progress to
date and report such progress to the Board of Directors. The Bank's Year 2000
Project Plan includes five phases; assessment, evaluation, renovation,
validation and implementation. The Bank has substantially completed all of the
above phases for its internal applications and systems, except for final
installation of additional hardware and software, which is in progress.
Management of the Bank believes all "mission critical" applications have been
identified. The Bank has identified 270 potential information and non
information technology applications including, for example, electrical
utilities, phone service, alarm systems and elevators which might have problems
associated with the year 2000. Most of these applications are not mission
critical. Of these applications, 226 providers assert they are or will be year
2000 compliant. To the extent applications suppliers assert their applications
are year 2000 ready, whether they are information technology or non information
technology related, the Bank is currently testing and validating their claims,
while working toward solutions with others. However, legal recourse against the
Bank's third party vendors may be limited to having the third party vendor
correct any service deficiency that fails in the event the service is not year
2000 compliant. Management does not believe that it would be able to obtain any
material compensatory or punitive damages in the event a vendor is not year 2000
compliant. Management has concluded that the cost of modernizing the 

                                      28
<PAGE>
 
Bank's computer hardware and software, on an accelerated basis, will cost
approximately $ 2.3 million, including data processing upgrades not necessarily
associated with the year 2000 and other non-information technology costs, of
which approximately $ 1.5 million has already been incurred. These costs, which
will be funded through operating cash flow, are being capitalized and expensed
in conformity with generally accepted accounting principles. The Bank does not
separately track internal costs associated with the year 2000 plan, including
salaries and benefits for all employees working on the project and has not
included such costs in the above estimate.

The Bank contracts with a data processing service bureau, FiServ-Orlando to
provide all direct processing of the Bank's loan and deposit transactions,
together with calculations of interest income and expense thereon. Management of
the Bank is in regular contact with the service bureau and closely monitors the
service bureau's reports on it progress in becoming year 2000 ready. Based on
its most recent report, the service bureau asserts it has completed the
assessment and evaluation phases. With respect to the renovation phase, the
service bureau reports substantial progress on all mission critical
applications. The testing and implementation phases have begun in several
applications. The Bank is participating in the testing of these applications.
While the service bureau assures Management of the Bank that it will achieve
year 2000 readiness by the end of March 1999, Management is unable to predict
whether the service bureau will achieve year 2000 readiness on a timely basis or
the magnitude of the financial consequences to the Bank in the event of the
service bureau's failure to achieve such readiness. Consequently, the Bank has
contacted other providers of such data processing services, who assert they are
year 2000 ready, to determine the latest possible date the Bank could convert to
their systems.

Since the Bank's business relies on the ability of computers to track and credit
deposits and loan repayments, the failure of the Bank's computer systems would
materially and adversely affect the Bank's ability to conduct its business. The
Bank's loan portfolio primarily consists of loans secured by residential real
estate. Consequently, the Bank does not believe that its residential real estate
lending operations are dependent on borrowers' compliance with the year 2000
issue. With respect to outstanding loans made to commercial borrowers, the Bank
has reviewed all commercial loan files and assigned risk factors to each loan
relating to credit problems which might arise with respect to year 2000 issues.
In addition, the Bank's loan officers have asked their commercial borrowers to
advise the Bank of the exposure of the borrower's business to the year 2000
issue and how the borrower is addressing the year 2000 issue. In this regard,
the Bank has sent its commercial loan customers a letter asking them if they are
aware of the year 2000 issue, and of the potential exposure of the customer's
business to the year 2000 issue and asking the customer to advise the Bank of
the steps that have been taken to remediate any problems the customer's business
might have in becoming year 2000 compliant. Bank personnel follow-up the letter
by making a telephone call to its customers to discuss each customer's exposure
to the year 2000 and the customer's contingency plans to become year 2000
compliant. With respect to new commercial loans, all borrowers must describe how
dependent their business is on computer technology, the actions taken by the
borrower to ensure that their business or property will not be adversely
affected by the year 2000 issue, and the contingency planning the borrower is
undertaking to ensure their business is year 2000 compliant. As part of the loan
underwriting process, commercial borrowers must indicate in writing to the Bank
that they are aware of the year 2000 issue and are either year 2000 compliant,
or are taking steps to become year 2000 compliant. As a result of its actions,
the Bank believes that its commercial borrowers are aware of the year 2000 issue
and are taking actions to become year 2000 compliant.

The Bank has adopted and is testing contingency plans which address operational
policies and procedures in the event of data processing, electrical power supply
and/or phone service failures associated with the year 2000. In addition to
extensive training of its personnel, the Bank has organized a local financial
institutions "user group," comprised of financial institutions in Palm Beach,
Broward, Martin, St. Lucie and Indian River counties of Florida. The purpose of
the group is to meet and share ideas and solutions for solving issues associated
with the year 2000.

                                      29
<PAGE>
 
Impact of Inflation and Changing Prices

The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Bank's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Bank are monetary. As a result, interest rates have a
greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.

Impact of New Accounting Standards

In June, 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time
adopting SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and, accordingly, would apply to the
Company beginning on April 1, 2000. The Company plans to adopt the standard at
that time and does not presently intend to reclassify securities between
categories. The Company has not engaged in derivatives and hedging activities
covered by the new standard, and does not expect to do so in the foreseeable
future. Accordingly, SFAS No. 133 is not expected to have a material impact on
the Company's financial statements.

In October, 1998 the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." Statement No. 65, as amended by Statement No. 115
and Statement No. 125, required that after securitization of a mortgage loan
held for sale, a mortgage banking enterprise classify the resulting security as
a trading security. Statement No. 134 amends this section to require that after
the securitization of mortgage loans held for sale, the entity classify the
resulting mortgage-backed security or other retained interests based on its
ability and intent to sell or hold those investments. SFAS 134 is effective for
the first quarter beginning after December 15, 1998 and accordingly would apply
to the Company for the quarter ended March 31, 1999. The Company has not engaged
in retaining securities after the securitization of its mortgage loans held for
sale and does not expect to do so in the foreseeable future. Accordingly, SFAS
No. 134 is not expected to have a material impact on the Company's financial
statements.

                                      30
<PAGE>
 
Independent Auditors' Report




Board of Directors of
Fidelity Bankshares, Inc.:


We have audited the accompanying consolidated statements of financial position
of Fidelity Bankshares, Inc. (the "Company") and its wholly owned subsidiary,
Fidelity Federal Savings Bank of Florida, as of December 31, 1997 and 1998, and
the related consolidated statements of operations, comprehensive operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Fidelity Bankshares, Inc. and
subsidiary at December 31, 1997 and 1998 and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.

As discussed in Note 13 to the consolidated financial statements, the Company
changed its method of accounting for the Company's Senior Management Performance
Incentive Award Program to comply with the provisions of EITF 97-14.





Certified Public Accountants
West Palm Beach, FL
February 24, 1999
<PAGE>
 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AT DECEMBER 31, 1997 AND 1998
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                             1997                1998
                                                                                         ================================
ASSETS                                                                                            (In Thousands)
<S>                                                                                      <C>                  <C> 
CASH AND CASH EQUIVALENTS:
     Cash and amounts due from depository institutions........................           $    22,136          $    27,951
     Interest-bearing deposits................................................                33,688               32,075
                                                                                         -----------          -----------
         Total cash and cash equivalents (Notes 1, 21)........................                55,824               60,026
ASSETS AVAILABLE FOR SALE (At Fair Value):
     (Notes 1, 2, 3, 4, 21)
     Government and agency securities.........................................                16,077               18,824
     Mortgage-backed securities...............................................               234,132              389,263
     Corporate debt securities................................................                     -               44,488
                                                                                         -----------          -----------
         Total assets available for sale......................................               250,209              452,575
LOANS RECEIVABLE, Net of allowance for loan losses - 1997, $3,294;
     1998, $3,226 (Notes 1, 5, 21)............................................               861,257              977,166
OFFICE PROPERTIES AND EQUIPMENT, Net (Notes 1, 6).............................                21,440               37,708
FEDERAL HOME LOAN BANK STOCK, At cost.........................................                11,955               15,658
REAL ESTATE OWNED, Net (Notes 1, 7)...........................................                   967                  907
ACCRUED INTEREST RECEIVABLE (Note 8)..........................................                 6,404                7,549
DEFERRED INCOME TAX ASSET (Notes 1,12)........................................                     -                1,443
OTHER ASSETS (Notes 1, 12, 13)................................................                12,211               13,895
                                                                                         -----------          -----------
TOTAL ASSETS                                                                             $ 1,220,267          $ 1,566,927
                                                                                         ===========          ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS (Notes 9, 21)........................................................           $   872,340          $ 1,120,746
OTHER BORROWED FUNDS..........................................................                 3,780                6,981
ADVANCES FROM FEDERAL HOME LOAN BANK (Note 10)................................               239,091              303,140
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE.................................                 2,783                3,081
DRAFTS PAYABLE (Note 1).......................................................                 5,349                9,605
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
     DEBENTURES (Note 11).....................................................                     -               28,750
OTHER LIABILITIES (Notes 1, 12, 13)...........................................                 9,038                9,625
DEFERRED INCOME TAXES (Notes 1, 12)...........................................                   499                    -
                                                                                         -----------          -----------
     TOTAL LIABILITIES........................................................             1,132,880            1,481,928
                                                                                         -----------          -----------

COMMITMENTS AND CONTINGENCIES (Notes 1, 17, 21)

STOCKHOLDERS' EQUITY (Notes 1, 12, 13, 14, 15):
PREFERRED STOCK, 2,000,000 shares authorized, none issued.....................                     -                    -
COMMON STOCK ($.10 par value) 8,200,000 authorized shares:
     outstanding 6,784,958 and 6,803,042 at December 31, 1997 and 1998,                          
     respectively.............................................................                   678                  680 
ADDITIONAL PAID IN CAPITAL....................................................                38,347               40,535
RETAINED EARNINGS - substantially restricted..................................                47,943               52,018
TREASURY STOCK - at cost (487,029 shares at December 31, 1998)................                     -               (7,258)
COMMON STOCK PURCHASED BY:
     Employee stock ownership plan............................................                  (986)                (658)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
     (Net of applicable income taxes) (Notes 1, 2, 3, 21).....................                 1,405                 (318)
                                                                                         -----------          -----------
     TOTAL STOCKHOLDERS' EQUITY...............................................                87,387               84,999
                                                                                         -----------          -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................           $ 1,220,267          $ 1,566,927
                                                                                         ===========          ===========
</TABLE> 

See Notes to Consolidated Financial Statements.

                                       32
<PAGE>
 
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                    1996             1997              1998
                                                                             ===============================================
                                                                                              (In Thousands)
<S>                                                                           <C>              <C>               <C> 
Interest income:
     Loans.............................................................       $   47,997       $   58,386        $   71,996
     Investment securities.............................................              804              758             1,048
     Other investments.................................................            1,490            1,969             3,482
     Mortgage-backed and corporate debt securities.....................            9,949           11,159            21,794
                                                                              ----------       ----------        ----------
         Total interest income.........................................           60,240           72,272            98,320
                                                                              ----------       ----------        ----------
Interest expense:
     Deposits (Note 9) ................................................           26,239           33,856            45,128
     Advances from Federal Home Loan Bank and
         other borrowings (Notes 10 and 11)............................            5,892            7,750            19,864
                                                                              ----------       ----------        ----------
         Total interest expense........................................           32,131           41,606            64,992
                                                                              ----------       ----------        ----------

Net interest income....................................................           28,109           30,666            33,328

Provision for loan losses (Note 5) ....................................              164              170                77
                                                                              ----------       ----------        ----------

Net interest income after provision for loan losses....................           27,945           30,496            33,251
                                                                              ----------       ----------        ----------
Other income:
     Servicing income and other fees...................................            3,201            3,606             4,598
     Net gain on sale of loans, mortgage-backed securities and                     
         investments...................................................            1,215              190             2,502 
     Miscellaneous.....................................................              460            1,114             1,590
                                                                              ----------       ----------        ----------
         Total other income............................................            4,876            4,910             8,690
                                                                              ----------       ----------        ----------
Operating expense:
     Employee compensation and benefits................................           12,776           13,900            16,422
     Occupancy and equipment...........................................            4,648            4,908             6,231
     Loss (gain) on real estate owned..................................              (69)            (153)              (72)
     Marketing.........................................................              604              633               767
     Federal deposit insurance premium.................................            4,958              464               556
     Miscellaneous.....................................................            3,792            4,483             5,783
                                                                              ----------       ----------        ----------
         Total operating expense.......................................           26,709           24,235            29,687
                                                                              ----------       ----------        ----------

Income before provision for income taxes...............................            6,112           11,171            12,254
                                                                              ----------       ----------        ----------
Provision (benefit) for income taxes: (Note 12)
     Current...........................................................            3,417            5,573             5,579
     Deferred..........................................................             (855)            (820)             (737)
                                                                              ----------       ----------        ----------
         Total provision for income taxes..............................            2,562            4,753             4,842
                                                                              ----------       ----------        ----------

              Net income...............................................       $    3,550       $    6,418        $    7,412
                                                                              ==========       ==========        ==========

Earnings per share: (Note 19)
     Basic.............................................................       $      .54       $      .96        $     1.12
                                                                              ==========       ==========        ==========
     Diluted...........................................................       $      .53       $      .95        $     1.10
                                                                              ==========       ==========        ==========
</TABLE> 

See Notes to Consolidated Financial Statements.

                                       33
<PAGE>
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                1996             1997                1998
                                                                           ================================================
                                                                                            (In Thousands)
<S>                                                                          <C>             <C>                <C> 
Net Income................................................................   $   3,550       $     6,418        $     7,412
Other comprehensive income, net of tax:
     Unrealized gains (losses) on assets available for sale:
         Unrealized holding gains (losses) arising during period..........      (1,277)              623               (910)
         Less: reclassification adjustment for gains realized in  net 
                 income...................................................        (525)                -               (813)
                                                                           -----------       -----------        -----------

Comprehensive income (Note 20)............................................   $   1,748       $     7,041        $     5,689
                                                                           ===========       ===========        ===========
</TABLE> 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                                              Accumulated
                                                                                                   Recogni-      Other
                                                                 Retained              Employee     tion      Comprehen-    
                                                   Additional    Earnings-               Stock       and         sive 
                                         Common    Paid In     Substantially Treasury  Ownership  Retention     Income      
                                          Stock    Capital      Restricted     Stock      Plan       Plan       (Loss)      Total
                                        =========  =========   ===========   ========  =========   ========   ==========   ========
                                                                               (In Thousands)
<S>                                     <C>        <C>         <C>           <C>       <C>         <C>        <C>          <C> 
Balance - December 31, 1995 ........... $   672    $ 37,170    $ 42,764      $    -    $ (1,644)   $   (280)   $  2,584    $ 81,266

Net Income for the year ended
     December 31, 1996 ................       -           -       3,550           -           -           -           -       3,550
Stock Options exercised (Note 14) .....       5         387           -           -           -           -           -         392
Common Stock retired ..................      (2)       (285)          -           -           -           -           -        (287)

Recognition of unrealized decrease in
     fair value of assets available for
     sale, net of income taxes ........       -           -           -           -           -           -      (1,802)     (1,802)

Amortization of deferred compensation -
     Employee Stock Ownership Plan and        
     Recognition and Retention Plan ...       -         125           -           -         329         280           -         734 

Cash dividends declared ...............       -           -      (2,130)          -           -           -           -      (2,130)

                                        --------------------------------------------------------------------------------------------


Balance - December 31, 1996 ...........     675      37,397      44,184           -      (1,315)          -         782      81,723

Net Income for the year ended
     December 31, 1997 ................       -           -       6,418           -           -           -           -       6,418
Stock Options exercised (Note 14) .....       4         525           -           -           -           -           -         529
Common Stock retired ..................      (1)       (142)          -           -           -           -           -        (143)

Recognition of unrealized increase in
     fair value of assets available for
     sale, net of income taxes ........       -           -           -           -           -           -         623         623
Amortization of deferred compensation -
     Employee Stock Ownership Plan ....       -         567           -           -         329           -           -         896
Cash dividends declared ...............       -           -      (2,659)          -           -           -           -      (2,659)

                                        --------------------------------------------------------------------------------------------


Balance - December 31, 1997 ...........     678      38,347      47,943           -        (986)          -       1,405      87,387

Net Income for the year ended
     December 31, 1998 ................       -           -       7,412           -           -           -           -       7,412
Stock Options exercised (Note 14) .....       2         323           -           -           -           -           -         325
Common Stock retired ..................       -        (115)          -           -           -           -           -        (115)

Purchase of treasury stock ............       -           -           -      (5,752)          -           -           -      (5,752)

Reclassification of common stock held
     by SMPIAP and related obligation
     (Note 13) ........................       -       1,506           -      (1,506)          -           -           -           -
Recognition of unrealized decrease in
     fair value of assets available for       
     sale, net of income taxes ........       -           -           -           -           -           -      (1,723)     (1,723)

Amortization of deferred compensation -
     Employee Stock Ownership Plan ....       -         474           -           -         328           -           -         802
Cash dividends declared ...............       -           -      (3,337)          -           -           -           -      (3,337)

                                        --------------------------------------------------------------------------------------------


Balance - December 31, 1998 ........... $   680    $ 40,535    $ 52,018    $ (7,258)   $   (658)     $    -    $   (318)   $ 84,999
                                        ============================================================================================

</TABLE> 

See Notes to Consolidated Financial Statements.

                                       34
<PAGE>
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                       1996              1997             1998
                                                                                   ============================================
                                                                                                  (In Thousands)
<S>                                                                                <C>               <C>              <C> 
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net Income.............................................................            $  3,550          $  6,418         $  7,412
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
   Depreciation........................................................               1,238             1,258            1,796
   ESOP and Recognition and Retention Plan compensation expense........                 734               765              803
   Accretion of discounts, amortization of premiums and goodwill, and                  
    other deferred yield items.........................................                (820)             (414)           1,405 
   Provision for loan losses...........................................                 164               170               77
   Provisions for losses and net (gains) losses on sales of real estate                
    owned..............................................................                (110)             (189)             (48) 
   Net (gain) loss on sale of:
         Loans.........................................................                (340)             (190)          (1,147)
         Corporate debt securities.....................................                   -                 -             (109)
         Mortgage-backed securities....................................                (875)                -           (1,246)
         Office properties and equipment...............................                   -                 -               43
         Other assets..................................................                   -              (702)               -
(Increase) decrease in accrued interest receivable.....................                  13            (1,507)          (1,145)
(Increase) decrease in other assets....................................                 165            (3,409)          (1,654)
Increase (decrease) in drafts payable..................................                (706)            2,392            4,256
Increase (decrease) in deferred income taxes...........................              (1,974)             (387)             673
Increase (decrease) in other liabilities...............................                (321)              661              566
                                                                                   --------          --------         --------
         Net cash from operating activities............................                 718             4,866           11,682
                                                                                   --------          --------         --------
CASH FLOW FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans......................            (124,601)         (125,911)        (125,997)
Principal payments received on mortgage-backed securities..............              23,608            22,325          125,105
Purchases of:
   Loans...............................................................             (21,153)          (35,647)         (45,157)
   Mortgage-backed securities..........................................              (9,962)         (131,956)        (310,581)
   Corporate debt securities...........................................                   -                 -          (55,343)
   Government and agency securities....................................             (10,029)          (13,566)          (5,347)
   Federal Home Loan Bank stock........................................                   -            (5,283)          (4,974)
   Office properties and equipment.....................................              (3,985)           (4,724)         (18,277)
Proceeds from sales of:
   Loans...............................................................              17,357            11,824           54,850
   Federal Home Loan Bank stock........................................                   -                 -            1,271
   Corporate debt securities...........................................                   -                 -            9,843
   Real estate acquired in settlement of loans and held for investment.               1,195             1,647            1,470
   Mortgage-backed securities available for sale.......................              20,516                 -           27,290
   Other Assets........................................................                   -               798                -
Proceeds from maturities of investment securities......................              28,490             7,000            2,660
Cash used to purchase BankBoynton, a Federal Savings Bank
         net of cash received relating to purchase.....................                   -            (4,367)               -
Other..................................................................                 845             2,004            1,465
                                                                                   --------          --------         --------
         Net cash used for investing activities........................             (77,719)          (275,856)       (341,722)
                                                                                   --------          ---------        --------
CASH FLOW FROM (FOR) FINANCING ACTIVITIES:
Common stock options exercised.........................................                 105               308               79
Purchase of treasury stock.............................................                   -                 -           (5,752)
Sale of subordinated debentures, net...................................                   -                 -           27,277
Cash dividends paid....................................................              (1,971)           (2,566)          (3,316)
Net increase (decrease) in:
   NOW accounts, demand deposits and savings accounts..................               8,046            27,858           58,568
   Certificates of deposit.............................................              91,492           108,033          189,838
   Advances from Federal Home Loan Bank................................              (2,652)          147,874           64,049
   Other borrowed funds................................................                   -             3,780            3,201
   ESOP Loan...........................................................                (276)           (1,104)               -
   Advances by borrowers for taxes and insurance.......................                (286)              211              298
                                                                                   --------          --------         --------
         Net cash from financing activities............................              94,458           284,394          334,242
                                                                                   --------          --------         --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................              17,457            13,404            4,202
CASH AND CASH EQUIVALENTS, Beginning of year...........................              24,963            42,420           55,824
                                                                                   --------          --------         --------
CASH AND CASH EQUIVALENTS, End of year.................................            $ 42,420          $ 55,824         $ 60,026
                                                                                   ========          ========         ========
</TABLE> 

See Notes to Consolidated Financial Statements.

                                       35
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
--------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fidelity Bankshares, Inc. ("the Company") became the parent of Fidelity Federal
Savings Bank of Florida ("the Bank") on January 29, 1997, as a result of a
tax-free reorganization, accounted for in the same manner as a pooling of
interests merger. Consequently, the Bank is now a wholly-owned subsidiary of the
Company.

The accounting and reporting policies of the Company and its subsidiary conform,
in all material respects, to generally accepted accounting principles. The
following summarizes the more significant of these policies:

Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, the Bank and the Bank's wholly-owned subsidiary,
Fidelity Realty and Appraisal Services, Inc. ("FRAS"). All significant
intercompany balances and transactions have been eliminated. Neither the Bank
nor its subsidiary are or have been involved in any joint ventures during any
periods presented.

FRAS, principally, performs appraisals for and sells real estate owned by the
Bank.

Use of Estimates in the Preparation of Financial Statements - 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 date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Cash Equivalents - For presentation purposes in both the consolidated statements
of financial position and the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.

Assets Available for Sale - Securities available for sale are carried at fair
value, based upon market quotations. Deferred income taxes are provided on any
unrealized appreciation or decline in value. Such appreciation or decline in
value, net of deferred taxes is reflected as an adjustment of equity. Gain or
loss on sale of such securities is based on the specific identification method.
Debt securities are classified as either available for sale or held for
investment based on management's intent.

Interest Rate Risk - The Bank is engaged principally in providing first mortgage
loans (both adjustable rate and fixed rate mortgage loans) to individuals (See
Note 5 for the composition of the mortgage loan portfolio at December 31, 1997
and 1998). Mortgage loans and investment securities are funded primarily with
short-term liabilities which have interest rates that vary with market rates
over time. Net interest income and the market value of net interest-earning
assets will fluctuate based on changes in interest rates and changes in the
levels of interest-sensitive assets and liabilities. The actual duration of
interest-earning assets and interest-bearing liabilities may differ
significantly from the stated duration as a result of prepayment, early
withdrawals, and similar factors.

Provisions for Loan Losses - Provisions for loan losses, which increase the
allowance for loan losses, are established by charges to income. Such allowance
represents the amounts which, in management's judgment, are adequate to absorb
charge-offs of existing loans which may become uncollectible. The adequacy of
the allowance is determined by management's continuing evaluation of the loan
portfolio in light of past loss experience, present economic conditions, and
other factors considered relevant by management at the financial statement date.
Anticipated changes in economic factors which may influence the level of the
allowance are considered in the evaluation by management when the likelihood of
the changes can be reasonably determined. In estimating the allowance for
possible losses, consideration is given to asset performance, the financial

                                       36
<PAGE>
 
condition of borrowers or guarantors, additional collateral provided, current
and anticipated economic conditions, appraisals, cost of disposal, and holding
costs. While management uses the best information available to make such
evaluations, future adjustments to the allowance may be necessary, which may be
material, if economic conditions differ substantially from the assumptions used
in the evaluation. If additions to the original estimate of the allowance for
loan losses are deemed necessary, they will be reported in earnings in the
period in which they become reasonably estimable.

The Bank complies with Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Recognition and Disclosures," an amendment of SFAS No. 114. These
standards address the accounting for impairment of certain loans when it is
probable that all amounts due pursuant to the contractual terms of the loan will
not be collected. Adoption of these standards included the identification of
commercial, business and commercial real estate loans which are considered
impaired under provisions of SFAS No. 114. Groups of smaller-balance homogeneous
loans (generally residential mortgage and consumer installment and other loans)
are collectively evaluated for impairment. Adoption of these statements did not
have a material impact on the Bank's financial position or results of
operations.

Under the provisions of these standards a loan is impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Individually identified impaired loans are measured based on the
present value of payments expected to be received, using the historical
effective loan rates as the discount rate. Alternatively, measurement may also
be based on observable market prices, or for loans that are solely dependent on
the collateral for repayment, measurement may be based on the fair value of the
collateral. Loans that are to be foreclosed are measured based on the fair value
of the collateral. If the recorded investment in the impaired loan exceeds the
measure of fair value, a valuation is required as a component of the allowance
for loan losses. Changes to the valuation allowance are recorded as a component
of the provision for loan losses.

Uncollected Interest - The Bank reverses all accrued interest against interest
income when a loan is more than 90 days delinquent and ceases accruing interest
thereafter. Such interest ultimately collected is credited to income in the
period of recovery.

Real Estate Owned - Properties acquired through foreclosure, or a deed in lieu
of foreclosure are carried at the lower of fair value less estimated costs to
sell, or cost. If the fair value less the estimated cost to sell an individual
property declines below the cost of such property, a provision for losses is
charged to operations.

Subsequent costs relating to the improvement of property are capitalized in
amounts not to exceed the property's fair value. Costs relating to holding the
property are charged to expense when incurred.

The amounts the Bank could ultimately recover from property acquired by
foreclosure or deed in lieu of foreclosure, could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the Bank's control or changes in the Bank's
strategy for recovering its investment.

Office Properties and Equipment - Office properties and equipment are carried at
cost less accumulated depreciation. Land is carried at cost. Depreciation is
computed on the straight-line method over the estimated useful lives of the
assets, which range from three to fifty years for buildings and improvements and
three to ten years for furniture and equipment.

Goodwill - Goodwill resulting from the acquisition of deposits from the
Resolution Trust Corporation ("RTC") is being amortized on a straight-line basis
over five years. Goodwill resulting from the acquisition of BankBoynton, a
federal savings bank, is being amortized on a straight-line basis over fifteen
years. The balance

                                       37
<PAGE>
 
of goodwill, included in other assets at December 31, 1997 and 1998 was 
$ 2,796,000 and $ 2,394,000, respectively.

Drafts Payable - Drafts payable represent checks drawn by the Bank on a third
party payer, for savings account withdrawals and payment of the Bank's expenses.
Under the agreement between the Bank and its third party payer, the Bank funds
the checks written on the day following their issuance.

Loan Origination Fees and Costs - Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
of the related loan. Deferred loan fees and costs are amortized to income over
the estimated life of the loans using the interest method.

Unearned discounts on consumer loans are amortized to income using the interest
method.

Commitment Fees - Non-refundable fees received for commitments to make or
purchase loans in the future, net of direct costs of underwriting the
commitments, are deferred and, if the commitment is exercised, recognized over
the life of the loan as an adjustment of yield. If the commitment expires
unexercised, income is recognized upon expiration of the commitment. Direct loan
origination costs incurred to make a commitment to originate a loan are offset
against any related commitment fee and the net amount recognized.

Pension and Retirement Plans - Benefits are accounted for in accordance with
Statement of Financial Accounting Standards No. 87, entitled "Employers'
Accounting for Pensions" ("SFAS No. 87"). Net periodic pension costs (income)
are actuarially determined.

Income Taxes - The Company and its subsidiary file consolidated federal and
state income tax returns. Income taxes are allocated to the Company and its
subsidiary as though separate tax returns are being filed (See Note 12).

Deferred income taxes are provided on items recognized for financial reporting
purposes in periods different than such items are recognized for income tax
purposes in accordance with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").

Earnings Per Common Share - Basic earnings per common share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period after giving retroactive effect
to the stock dividend in 1995, less the weighted average unallocated ESOP shares
of common stock.

The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued.

Impact of New Accounting Issues - In June 1997, the FASB issued SFAS No. 130
"Reporting Comprehensive Income," which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from non-owner sources; and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. The Company has adopted SFAS No. 130, which has resulted
in a change in the financial statement presentation but did not have an impact
on the Company's consolidated financial position, results of operations or cash
flows. All prior years were reclassified to comply with SFAS No. 130. Management
has evaluated SFAS No. 131 and has determined the Company does not operate
reportable segments as defined by SFAS No. 131.

                                       38
<PAGE>
 
In June, 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and for hedging activities. The Statement
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time
adopting SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and, accordingly, would apply to the Company
beginning on April 1, 2000. The Company plans to adopt the standard at that time
and does not presently intend to reclassify securities between categories. The
Company has not engaged in derivatives and hedging activities covered by the new
standard, and does not expect to do so in the foreseeable future. Accordingly,
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.

In October, 1998 the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." Statement No. 65, as amended by Statement No. 115
and Statement No. 125, required that after securitization of a mortgage loan
held for sale, a mortgage banking enterprise classify the resulting security as
a trading security. Statement No. 134 amends this section to require that after
the securitization of mortgage loans held for sale, the entity classify the
resulting mortgage-backed security or other retained interests based on its
ability and intent to sell or hold those investments. SFAS No. 134 is effective
for the first quarter beginning after December 15, 1998 and accordingly would
apply to the Company for the quarter ended March 31, 1999. The Company has not
engaged in retaining securities after the securitization of its mortgage loans
held for sale and does not expect to do so in the foreseeable future.
Accordingly, SFAS No. 134 is not expected to have a material impact on the
Company's financial statements.

Reclassifications - Certain amounts in the 1996 and 1997 consolidated financial
statements have been reclassified to conform to the 1998 presentation.

                                       39
<PAGE>
 
2. GOVERNMENT AND AGENCY SECURITIES AVAILABLE FOR SALE

Securities available for sale are summarized as follows:


<TABLE> 
<CAPTION> 

                                                             -------------------------------------------------------------
                                                                                Gross            Gross         Estimated
                                                             Amortized        Unrealized      Unrealized          Fair
                                                                Cost            Gains           Losses           Value
                                                             =============================================================
                                                                                 (Dollars in Thousands)
<S>                                                           <C>               <C>             <C>             <C> 
December 31, 1997:
     Municipal Bonds.................................         $  2,202          $     14        $       -       $   2,216
     United States Government and agency securities..           13,798                63                -          13,861
                                                              --------          --------        ---------       ---------
     Total...........................................         $ 16,000          $     77        $       -       $  16,077
                                                              ========          ========        =========       =========
     Weighted average interest rate..................             5.90%
                                                              ========


December 31, 1998:

     Municipal Bonds.................................         $  2,883          $     25        $       8       $   2,900
     United States Government and agency securities..           15,795               129                -          15,924
                                                              --------          --------        ---------       ---------
     Total...........................................         $ 18,678          $    154        $       8       $  18,824
                                                              ========          ========        =========       =========
     Weighted average interest rate..................             5.08%
                                                              ======== 
</TABLE> 
The following table sets forth the contractual maturity of the Bank's securities
available for sale at December 31, 1997 and 1998.

<TABLE> 
<CAPTION> 
                                                                 December 31, 1997                  December 31, 1998
                                                             -------------------------------------------------------------
                                                              Amortized       Estimated          Amortized      Estimated
                                                                Cost         Fair Value            Cost        Fair Value
                                                             =============================================================
                                                                                      (In Thousands)
<S>                                                           <C>              <C>              <C>             <C> 
Due in one year or less.............................          $    660         $   661          $ 12,897        $ 13,006
Due after one year, through two years...............            15,340          15,416             5,781           5,818
                                                              --------         -------          --------        --------
     Total..........................................          $ 16,000         $16,077          $ 18,678        $ 18,824
                                                              ========         =======          ========        ========
</TABLE> 
The Bank had total Government and Agency securities available for sale pledged
at December 31, 1997 and 1998 of $ 12,175,000 and $ 15,394,000, respectively. Of
the $ 15,394,000 of securities pledged at December 31, 1998, $ 700,000 was
pledged for customer accounts that exceeded $ 100,000, $ 2,000,000 was pledged
as collateral for "Treasury Tax and Loan" (TT&L) accounts held for the benefit
of the federal government, and the remaining $ 12,694,000 was pledged as
collateral for customer repurchase agreements.

There were no sales of government and agency securities during the years ended
December 31, 1996, 1997 and 1998.

                                       40
<PAGE>
 
3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

Mortgage-backed securities available for sale at December 31, 1997 and 1998 are
summarized as follows:

<TABLE> 
<CAPTION> 

                                       --------------------------------------------------------------------------------
                                                                  Gross                Gross               Estimated
                                         Amortized             Unrealized            Unrealized               Fair
                                            Cost                  Gains                Losses                Value
                                       ================================================================================
                                                                        (In Thousands)
<S>                                      <C>                    <C>                    <C>                  <C> 
December 31, 1997: 
   FHLMC-fixed rate.................     $  77,304              $   1,273              $    332             $  78,245
   FNMA-fixed rate..................        26,429                    150                    82                26,497
   GNMA-fixed rate..................        29,840                    653                    64                30,429
   FHLMC CMO-fixed rate.............         5,087                      -                     6                 5,081
   FHLMC-adjustable rate............        20,303                    284                     2                20,585
   FNMA-adjustable rate.............        24,880                    268                    29                25,119
   GNMA-adjustable rate.............         1,553                     33                     -                 1,586
   FNMA CMO-adjustable rate.........        18,558                    148                     -                18,706
   FHLMC CMO-adjustable rate........        27,874                     38                    28                27,884
                                         ---------              ---------              --------             ---------
      Total.........................     $ 231,828              $   2,847              $    543             $ 234,132
                                         =========              =========              ========             =========


December 31, 1998:
   FHLMC-fixed rate.................     $  64,255              $     378              $    412             $  64,221
   FNMA-fixed rate..................        64,115                    577                   141                64,551
   GNMA-fixed rate..................        20,311                    112                    29                20,394
   FHLMC CMO-fixed rate.............        58,243                     29                    29                58,243
   FHLMC-adjustable rate............        11,213                    151                    57                11,307
   FNMA-adjustable rate.............        11,485                    157                    13                11,629
   GNMA-adjustable rate.............           996                      -                     1                   995
   FNMA CMO-adjustable rate.........        44,867                    246                   253                44,860
   FHLMC CMO-adjustable rate........        91,630                    387                   569                91,448
   FHLMC CMO-fixed rate.............        21,642                     38                    65                21,615
                                         ---------              ---------              --------             ---------
      Total.........................     $ 388,757              $   2,075              $  1,569             $ 389,263
                                         =========              =========              ========             =========
</TABLE> 

There were $ 19.6 million in sales of mortgage-backed securities classified as
available for sale during the year ending December 31, 1996 resulting in
proceeds of $ 20.5 million, gross realized gains of $ 875,000 and no gross
realized losses. There were no sales of mortgage-backed securities classified as
available for sale during 1997. There were $ 26.0 million in sales of
mortgage-backed securities classified as available for sale during the year
ended December 31, 1998 resulting in proceeds of $ 27.3 million, gross realized
gains of $ 1.2 million and no gross realized losses.

At December 31, 1998 the Bank had $ 106.7 million of mortgage-backed securities
pledged to the State of Florida as collateral for certificates of deposit.

4. CORPORATE DEBT SECURITIES AVAILABLE FOR SALE

Investment grade, adjustable rate and trust preferred securities of other
financial institutions are summarized as follows:

<TABLE> 
<CAPTION> 
   
                                                             -------------------------------------------------------------
                                                                                Gross            Gross         Estimated
                                                             Amortized        Unrealized      Unrealized          Fair
                                                                Cost            Gains           Losses           Value
                                                             =============================================================
                                                                                 (Dollars in Thousands)
<S>                                                           <C>               <C>             <C>             <C> 
December 31, 1998
     Total..........................................          $ 45,653          $      -        $   1,165       $  44,488
                                                              ========          ========        =========       =========
     Weighted average interest rate.................              6.34%                                      
                                                              ========
</TABLE> 

                                       41
<PAGE>
 
All of the Corporate debt securities available for sale contractually mature in
the years 2027 or 2028.

During 1998 there were $ 9.7 million in sales of corporate debt securities
classified as available for sale resulting in gross proceeds of $ 9.8 million,
gross realized gains of $ 109,000 and no gross realized losses.

During 1998, the Bank began to diversify its investments in mortgage-backed
securities by purchasing investment grade rated, floating rate trust preferred
securities of other financial institutions. In doing so, the Bank was relying on
regulations which permit an investment of up to 35% of its assets in "commercial
paper and corporate debt securities." In November of 1998, the Office of Thrift
Supervision ("OTS") issued TB-73, which among other matters stated concerns over
institutions' investment in trust preferred securities, citing increased
interest rate risks as a result of the predominant fixed rate nature of such
securities and that some of these securities could have their maturities
extended at the issuer's option. As a result, the OTS adopted limitations on the
investment of such securities to 15% of a regulated institution's equity, but
adopted a method by which an institution could appeal the limitation.

At December 31, 1998, the Bank's investment in trust preferred securities was
2.8% of its assets and 42.7% of its regulatory capital. Most issues of trust
preferred securities appear to be fixed rate and unrated as to credit risk
including Fidelity Bankshares, Inc.'s issue of "Guaranteed Preferred Beneficial
Interests in Company's Debentures." However, the Bank's investment policy
specifically restricts its investment in such securities to $ 50 million,
investment grade and floating rate to improve its interest rate risk. The Bank
has appealed to the OTS to permit it to continue its investment at current
levels and noted in its appeal that its investments had floating interest rates
and the issuer's did not have the option to extend the maturities. Management of
the Bank is unable to predict the outcome of its appeal.

5. LOANS RECEIVABLE

Loans receivable at December 31, 1997 and 1998 consist of the following:

<TABLE> 
<CAPTION> 
                                                                                    1997             1998
                                                                            ================================
                                                                                     (In Thousands)
<S>                                                                           <C>              <C> 
One-to-four single family, residential real estate mortgages.........         $  717,610       $  826,680
Commercial and multi-family real estate mortgages....................             64,525           74,671
Real estate construction-primarily residential.......................             38,577           53,515
Participations-primarily residential.................................              3,172            2,249
Land loans-primarily residential.....................................             12,116            8,583
                                                                              ----------       ----------
Total first mortgage loans...........................................            836,000          965,698
Consumer Loans.......................................................             47,758           48,270
Commercial business loans............................................             32,710           46,958
                                                                              ----------       ----------
Total gross loans....................................................            916,468        1,060,926
Less:
     Undisbursed portion of loans in process.........................             54,471           84,155
     Unearned discounts, premiums and deferred loan fees (costs), net             (2,554)          (3,621)
     Allowance for loan losses.......................................              3,294            3,226
                                                                              ----------       ----------

Loans receivable-net.................................................         $  861,257       $  977,166
                                                                              ==========       ==========
</TABLE> 

The amount of loans on which the Bank has ceased accruing interest or does not
charge interest aggregated approximately $ 2,995,000 and $ 3,845.000, net of
specific valuation allowances of $ 235,000 and $ 162,000, at December 31, 1997
and 1998, respectively. The amount of interest not accrued relating to these
loans was approximately $ 168,000 and $ 203,000 at December 31, 1997 and 1998,
respectively. Management believes the allowance for possible loan losses is
adequate.

                                       42
<PAGE>
 
An analysis of the changes in the allowance for loan losses for the years ended
December 31, 1996, 1997 and 1998 is as follows. There were no recoveries during
the years presented.

<TABLE> 
<CAPTION> 
                                                                         1996                1997               1998
                                                                 ===================================================
                                                                                    (In Thousands)
<S>                                                               <C>                 <C>                <C> 
Balance at beginning of period..............................      $     2,265         $     2,263        $     3,294        
Increase in allowance due to purchase of BankBoynton........                -               1,167                  -
Current provision...........................................              164                 170                 77               
Charge-offs.................................................             (166)               (306)              (145)
                                                                  -----------         -----------        -----------

Ending balance..............................................      $     2,263         $     3,294        $     3,226        
                                                                  ===========         ===========        ===========
</TABLE> 
                                                                
The Bank originates both adjustable and fixed rate mortgage loans. Included in
the loans receivable at December 31, 1998 are $5.5 million of loans held for
sale. These loans are recorded at the lower of cost or market. Loans held for
sale at December 31, 1997 amounted to $3.0 million.

A loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. An analysis of the recorded investment
in impaired loans owned by the Bank at December 31, 1996, 1997 and 1998 and the
related allowance for those loans is as follows:

<TABLE> 
<CAPTION> 
                                                           1996                    1997                     1998
                                                  =======================================================================
                                                                              (In Thousands)

                                                     Loan      Related       Loan       Related       Loan      Related
                                                   Balance    Allowance     Balance    Allowance    Balance    Allowance
<S>                                                <C>        <C>          <C>         <C>          <C>        <C> 
Impaired loan balances and related allowances:
Loans with related allowance for loan losses...... $     646   $     256   $     500    $     235   $     324   $     162
Loans without related allowance for loan losses...     2,725           -       2,730            -       3,685           -
                                                   ---------   ---------   ---------    ---------   ---------   ---------
                                                   $   3,371   $     256   $   3,230    $     235   $   4,009   $     162
                                                   =========   =========   =========    =========   =========   =========

Average balance of impaired loans................. $   3,777               $   3,301                $   3,620
                                                   =========               =========                =========
</TABLE> 

No interest income was recorded on impaired loans during the impairment periods
shown.

The Bank's policy on interest income on impaired loans is to reverse all accrued
interest against interest income if a loan becomes more than 90 days delinquent
and cease accruing interest thereafter. Any interest ultimately collected is
credited to income in the period of recovery.

At December 31, 1998, the composition and maturity or repricing of the loan
portfolio is presented below:

<TABLE> 
<CAPTION> 
 ..........................Fixed Rate..........................      ......................Adjustable Rate..................
Term of Maturity                                    Book Value      Term to Rate Adjustment                      Book Value
                                                (In Thousands)                                               (In Thousands)
<S>                                             <C>                 <C>                                      <C> 
1 year or less                                     $    93,963      1 year or less                               $  282,768
1 year-3 years                                          12,712      1 year-3 years                                   81,398
3 years-5 years                                         10,914      3 years-5 years                                  77,956
5 years-10 years                                        50,056      5 years-10 years                                 64,499
10 years-20 years                                      171,256      10 years-20 years                                 1,973
Over 20 years                                          212,523      Over 20 years                                       908
                                                   -----------                                                   ----------

Total                                              $   551,424      Total                                        $  509,502
                                                   ===========                                                   ==========
</TABLE> 

                                       43
<PAGE>
 
Adjustable rate mortgage loans originated prior to December 31, 1993 have
interest rate adjustment limitations and are generally indexed to the monthly
weighted-average cost of funds for Savings Association Insurance Fund ("SAIF")
insured institutions headquartered in the Fourth Federal Home Loan Bank ("FHLB")
District. Adjustable rate mortgage loans originated subsequent to December 31,
1993 are indexed to comparable term U.S. Treasury securities. Future market
factors may affect the correlation of the interest rate adjustment with the
rates the Bank pays on the short-term deposits which have been primarily
utilized to fund those loans.

The Bank makes fixed rate loan commitments for periods generally not exceeding
sixty days. At December 31, 1997 and 1998 the Bank had commitments outstanding
to originate fixed rate mortgage loans as follows:

                                                   1997         1998
                                                 =====================
                                                     (In Thousands)
   15 Years to Maturity
        6.00 - 6.25.....................         $      -      $   234
        6.26 - 6.50.....................                -        1,788
        6.51 - 6.75.....................              175          506
        6.76 - 7.00.....................              349          416
        7.01 - 7.25.....................              472            -
        7.26 - 7.50.....................              667          137
        7.51 - 7.75.....................              120           35
        7.76 - 8.00.....................              135            -
        8.01 - 8.25.....................              199          811
        8.26 - 8.50.....................              480            -
        8.51 - 8.75.....................                -            -
        8.76 - 9.00.....................               30            -
        9.01 - 9.25.....................                -            -
   16 - 30 Years to Maturity
        6.26 - 6.50.....................               80           81
        6.51 - 6.75.....................                -          294
        6.76 - 7.00.....................               60          347
        7.01 - 7.25.....................              285        1,348
        7.26 - 7.50.....................            3,668          526
        7.51 - 7.75.....................            1,282          731
        7.76 - 8.00.....................            1,187          399
        8.01 - 8.25.....................              312            -
        8.26 - 8.50.....................              651            -
        8.51 - 8.75.....................              150            -
        8.76 - 9.00.....................                -            -
        Over 9.00.......................                -            -
                                                 --------      -------
                                                       
   Total................................         $ 10,302      $ 7,653
                                                 ========      =======

Because the above commitments generally are funded within sixty days, management
of the Bank feels that related interest rate risk of the commitments is minimal.

The Bank's lending markets are primarily concentrated in Palm Beach, Martin and
St. Lucie counties in Southeast Florida.

                                       44
<PAGE>
 
Commercial Real Estate Lending - The Bank originates and purchases commercial
real estate loans, which totaled $ 64,525,000 and $ 74,671,000 at December 31,
1997 and 1998, respectively. These loans are considered by management to be of
somewhat greater risk of uncollectibility due to the dependency on income
production or future development of the real estate. Accordingly, Bank
management establishes greater provisions for probable but not yet identified
losses on these loans than on less risky residential mortgage loans. The
composition of commercial real estate loans and its primary collateral at
December 31, 1997 and 1998 are approximately as follows:

<TABLE> 
<CAPTION> 
                                                            1997            1998
                                                         ==========================
                                                               (In Thousands)
    <S>                                                  <C>             <C> 
    Office buildings...............................      $    9,247      $    8,756
    Retail buildings...............................           9,661           8,749
    Warehouses.....................................           9,975          10,043
    Multi family...................................          13,199          15,653
    Hotels and motels..............................              54             404
    Land...........................................          12,910          16,261
    Other property improvements....................           9,479          14,805
                                                         ----------      ----------

    Total..........................................      $   64,525      $   74,671
                                                         ==========      ==========
</TABLE> 

Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a federally chartered savings and loan association's aggregate
commercial real estate loans may not exceed 400% of its capital as determined
under the capital standards provisions of FIRREA. The Bank is federally
chartered and subject to this limitation. FIRREA does not require divestiture of
any loan that was lawful when it was originated. At December 31, 1998, the Bank
estimates that, while complying with this limitation, it could originate an
additional $ 350.3 million of commercial real estate loans, though the Bank's
current business plan indicates no intentions to do so.

Loans to One Borrower Limitation - The Bank may not make real estate loans to
one borrower in excess of 15% of its unimpaired capital and surplus except for
loans not to exceed $ 500,000. This 15% limitation results in a dollar
limitation of approximately $ 15.9 million at December 31, 1998. At December 31,
1998, the Bank met the loans to one borrower limitation under currently existing
regulations.

Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial position. The unpaid balances of these
loans at December 31, 1997 and 1998 were $ 60.0 million and $ 72.1 million,
respectively. Custodial escrow balances maintained in connection with the
foregoing loan servicing were $ 228,781 and $ 339,849 at December 31, 1997 and
1998, respectively.

The Bank offers loans to its employees, including Directors and Senior
Management at prevailing market interest rates. These loans are made in the
ordinary course of business and on substantially the same terms and collateral
requirements as those of comparable transactions prevailing at the time.

The loans to Directors, Executive Officers, and associates of such persons
amounted to $ 1,185,000 and $ 2,525,000 at December 31, 1997 and 1998,
respectively, which did not exceed 5% of retained earnings.

Collateral for Advances from the Federal Home Loan Bank - The terms of a new
security agreement with the FHLB entered into in 1998 include a blanket floating
lien that requires the Bank to maintain qualifying first mortgage loans as
pledged collateral in an amount equal to the advances, when discounted at 75% of
the unpaid principal balances (See Note 10).

                                       45
<PAGE>
 
6. OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment at December 31, 1997 and 1998 are summarized as
follows:

                                                         1997             1998
                                                      ==========================
                                                            (In Thousands)

Land..........................................        $   5,681        $   8,534
Buildings and improvements....................           17,194           29,386
Furniture and equipment.......................            8,868           10,963
                                                      ---------        ---------
Total.........................................           31,743           48,883
Less accumulated depreciation.................           10,303           11,175
                                                      ---------        ---------
Office properties and equipment - net.........        $  21,440        $  37,708
                                                      =========        =========

7. REAL ESTATE OWNED

Real estate owned at December 31, 1997 and 1998 consists of the following:

                                                          1997            1998
                                                       =========================
                                                             (In Thousands)

Real estate owned................................      $      967      $     907
Valuation allowance..............................               -              -
                                                       ----------      ---------
Real estate owned - net..........................      $      967      $     907
                                                       ==========      =========

8. ACCRUED INTEREST RECEIVABLE

Accrued interest receivable at December 31, 1997 and 1998 consists of the
following:


                                                        1997            1998
                                                     ==========================
                                                           (In Thousands)

  Loans..........................................    $     4,421    $     4,649
  Investments....................................            453            584
  Mortgage-backed securities.....................          1,530          2,316
                                                     -----------    -----------
  Accrued interest receivable....................    $     6,404    $     7,549
                                                     ===========    ===========

                                       46
<PAGE>
 
9. DEPOSITS

The weighted-average interest rates on deposits at December 31, 1997 and 1998
were 4.50% and 4.42%, respectively. Deposit accounts, by type and range of rates
at December 31, 1997 and 1998 consist of the following:

<TABLE> 
<CAPTION> 
                        Account Type and Rate                       1997          1998
                                                                  ======================
                                                                      (In Thousands)
<S>                                                               <C>           <C> 
Non-interest-bearing NOW accounts..........................       $ 35,888      $ 57,002
NOW, Super NOW and funds transfer accounts
     1997 and 1998, 1.05% and 1.07%, respectively..........         82,152        94,848
Passbook and statement accounts
     1997 and 1998, 2.58% and 2.75%, respectively..........        105,082       127,494
Variable-rate money market accounts
     1997 and 1998, 2.83% and 3.09%, respectively..........         42,135        44,481
                                                                  --------      --------

Total non-certificate accounts.............................        265,257       323,825
                                                                  --------      --------

Certificates:
     1.01% - 2.00%.........................................            895         1,018
     2.01% - 3.00%.........................................            301             -
     3.01% - 4.00%.........................................              6             6
     4.01% - 5.00%.........................................         11,225       125,019
     5.01% - 6.00%.........................................        441,810       564,002
     6.01% - 7.00%.........................................        152,453       106,719
     7.01% - 8.00%.........................................            353           157
     8.01% - 9.00%.........................................             40             -
                                                                  --------      --------

Total certificates.........................................        607,083       796,921
                                                                  --------      --------

Total......................................................       $872,340    $1,120,746
                                                                  ========    ==========
</TABLE> 

Individual deposits greater than $ 100,000 at December 31, 1997 and 1998
aggregated approximately $ 96,648,000 and $ 237,274,000, respectively.

Interest on deposit accounts, presented in the consolidated statements of
operations, is net of interest forfeited by depositors on early withdrawal of
certificate accounts of approximately $ 106,000, $ 128,000 and $ 160,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.

Scheduled maturities of certificate accounts are as follows:

<TABLE> 
<CAPTION> 
                                                                   December 31,
                                               -----------------------------------------------------
                                                 1997                                         1998
                                          -------------------                          -------------------
                                    Amount                   Percent             Amount                   Percent
                                   ==============================================================================
         Maturity                                               (Dollars in Thousands)
<S>                                <C>                       <C>                <C>                       <C> 
Less than 1 year .............     $387,511                   63.83%            $254,281                   31.91%
1 year-2 years ...............      112,307                   18.50              257,954                   32.37
2 years-3 years ..............       56,921                    9.38              175,171                   21.98
3 years-4 years ..............       22,103                    3.64               18,207                    2.28
4 years-5 years ..............       26,060                    4.29               90,120                   11.31
Thereafter ...................        2,181                     .36                1,188                     .15
                                   --------                  ------             --------                  ------
Total ........................     $607,083                  100.00%            $796,921                  100.00%
                                   ========                  ======             ========                  ======
</TABLE> 

Under FIRREA, any insured depository institution that does not meet its
applicable minimum capital requirements may not accept brokered deposits after
December 7, 1992. This prohibition includes renewals and rollovers of existing
brokered deposits and deposit solicitations at higher than prevailing interest
rates paid by 

                                       47
<PAGE>
 
institutions in the Bank's normal market area. Even though the Bank meets all of
the applicable minimum capital requirements at December 31, 1998, the Bank had
no brokered deposits.

Interest expense on deposits consists of the following during the years ended
December 31, 1996, 1997 and 1998:

<TABLE> 
<CAPTION> 
                                              1996              1997              1998
                                           =============================================
                                                           (In Thousands)
<S>                                        <C>               <C>               <C> 
Passbook accounts................          $   1,723         $   1,892         $   2,184
NOW accounts.....................                937               730             3,194
Money market accounts............              1,075               901               877
Certificate accounts.............             22,504            30,333            38,873
                                           ---------         ---------         ---------

Total............................          $  26,239         $  33,856         $  45,128
                                           =========         =========         =========
</TABLE> 

10. ADVANCES FROM FEDERAL HOME LOAN BANK

The Bank had outstanding advances from the FHLB of $ 239,091,000 with interest
rates ranging from 5.21% to 8.21% and $ 303,140,000 with interest rates ranging
from 4.78% to 8.21% at December 31, 1997 and 1998, respectively. The advances at
December 31, 1998 are repayable as follows:

                    Years Ending
                    December 31,                    Amount
                 ===========================================
                                             (In Thousands)

                        1999                  $      28,349
                        2000                         25,024
                        2001                          4,354
                        2002                        122,500
                        2003                          6,586
                     Thereafter                     116,327
                                              -------------

                        Total                 $     303,140
                                              =============

During 1997, the Bank entered into a collateral agreement with the FHLB which
includes a blanket floating lien that requires the bank to maintain qualifying
first mortgage loans as pledged collateral in an amount equal to, when
discounted at 75% of the unpaid principal balances, the advances. (See Notes 3
and 5).

11. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY DEBENTURES

On January 21, 1998 the Company issued $ 28.75 million of mandatorily
redeemable, Preferred Securities out of a grantor trust, Fidelity Capital Trust
I, a Delaware statutory trust, which was created by the Company for this sole
purpose. As its only asset, the trust owns $ 28.75 million of Guaranteed
Preferred Beneficial Interests in the Company's Debentures due January 31, 2028,
purchased with the proceeds of the preferred securities issuance. Interest from
the Company's debentures is payable quarterly at a rate of 8.375%, annually. The
interest will be used to fund distributions on the preferred securities. As a
result of the above, the Preferred Securities of the trust are considered fully
and unconditionally guaranteed by the Company.

Distributions on the preferred securities are cumulative and are payable at the
same rate as the Company's debentures described above. The Company's debentures
are redeemable in whole, in the event the Company's mutual holding company
parent converts to stock form beginning January 31, 2000 at 107% of principal
amount and in any event the debentures are redeemable at 100% of principal
amount in whole or in part, commencing 

                                       48
<PAGE>
 
January 31, 2003. The preferred securities are subject to mandatory redemption,
in whole or in part as applicable, upon the repayment of the debentures. The
proceeds from the securities, to the extent invested in common stock of the
Bank, are considered to be Tier 1 capital for regulatory purposes. Of the net
proceeds of $ 27.3 million from the sale of the preferred securities, the
Company invested $ 25 million in common stock of the Bank. The preferred
securities are traded on the Nasdaq National Market system under the symbol
"FFFLP."

12. INCOME TAXES

In accordance with SFAS No. 109, deferred income tax assets and liabilities are
computed annually for differences between financial statement and tax basis of
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable for
the period adjusted for the change during the period in deferred tax assets and
liabilities.

The components of the provisions for income taxes for the years ended December
31, 1996, 1997 and 1998 are as follows:

<TABLE> 
<CAPTION> 
                                                              1996              1997            1998
                                                            ==========================================
                                                                           (In Thousands)

<S>                                                         <C>               <C>              <C> 
Current - federal...................................        $  2,993          $ 4,872          $ 4,902
Current - state.....................................             424              701              677
                                                            --------          -------          -------
Total current.......................................           3,417            5,573            5,579

Deferred - federal and state........................            (855)            (820)            (737)
                                                            --------          -------          -------
Total...............................................        $  2,562          $ 4,753          $ 4,842
                                                            ========          =======          =======
</TABLE> 

The Company's provision for income taxes differs from the amounts determined by
applying the statutory federal income tax rate to income before income taxes for
the following reasons:

<TABLE> 
<CAPTION> 
                                                                      Years Ended December 31,
                                                       1996                    1997                      1998
                                              ----------------------   ----------------------    ---------------------
                                               Amount            %       Amount            %       Amount           %
                                           ============================================================================
                                                                  (Dollars in Thousands)
<S>                                           <C>            <C>         <C>            <C>        <C>            <C> 
Tax at federal tax rate.................      $  2,139        35.0%     $   3,910       35.0%     $   4,289       35.0%
State income taxes, net of federal
     income tax benefits................           220         3.6            375        3.3            350        2.9
Benefit of graduated rates..............           (61)       (1.0)          (101)      (0.9)           (92)      (0.8)
Employee stock ownership plan...........             -           -            190        1.7            184        1.5
Other...................................           264         4.3            379        3.4            111         .9
                                              ---------    -------      ---------    -------      ---------    -------

Total provision and effective tax rate..      $   2,562       41.9%     $   4,753       42.5%     $   4,842       39.5%
                                              =========    =======      =========    =======      =========    =======
</TABLE> 

                                      49
<PAGE>
 
The tax effect of temporary differences which give rise to deferred tax assets
and deferred tax liabilities are presented below:

<TABLE> 
<CAPTION> 
                                                                                       December 31,
                                                                                -------------------------
                                                                                   1997            1998
                                                                                =========================
                                                                                       (In Thousands)
Deferred tax liabilities:
<S>                                                                             <C>              <C> 
Depreciation........................................................            $    847         $    878
Loan fee income.....................................................               1,938            1,515
FHLB stock dividends................................................               1,115            1,160
Unrealized appreciation in securities...............................                 976                -
Excess of tax bad debt reserve over book reserve....................                 174              227
Deferred state taxes................................................                   -               62
Deferred compensation...............................................                  25                -
                                                                                --------         --------
Gross deferred tax liabilities......................................               5,075            3,842
                                                                                --------         --------

Deferred tax assets:
Executive death benefit.............................................                 409              461
Amortization........................................................                 287              368
Retirement plan.....................................................               2,849            3,131
Deferred compensation...............................................                 853              939
Unrealized depreciation in securities...............................                   -              195
Other...............................................................                 178              191
                                                                                --------         --------
Gross deferred tax assets...........................................               4,576            5,285
Less valuation allowances for deferred tax assets...................                   -                -
                                                                                --------         --------

Gross deferred tax assets...........................................               4,576            5,285
                                                                                --------         --------
Net deferred tax liabilities (assets)...............................            $    499         $ (1,443)
                                                                                ========         ========
</TABLE> 

During 1996, a law was enacted that repealling Section 593 of the Internal
Revenue Code for taxable years beginning after December 31, 1995. Section 593
allowed thrift institutions, including the Bank, to use the
percentage-of-taxable income bad debt accounting method, if more favorable than
the specific charge-off method, for Federal income tax purposes. The excess
reserves (deduction based on the percentage-of-taxable income less the deduction
based on the specific charge-off method) accumulated post-1987 are required to
be recaptured ratably over a six year period beginning in 1996. The recapture
has no effect on the Company's statement of operations as taxes were provided
for in prior years in accordance with SFAS No. 109, "Accounting for Income
Taxes." The timing of this recapture may be delayed for a one or two year period
to the extent that the Bank originates more residential loans than the average
originations in the past six years. The Bank met the origination requirement for
1996 and 1997 and, therefore, delayed the recapture until the six year period
beginning in 1998. The recapture amount of $ 3.7 million will result in payments
to the IRS totaling $ 1.4 million which has been previously accrued. The same
legislation forgave the tax liability on pre-1987 accumulated bad debt reserves
which would have penalized any thrift choosing to adopt a bank charter because
the tax would have become due and payable. The unrecorded potential liability
that was forgiven approximated $ 2.9 million.

13. PENSION AND EMPLOYEE BENEFIT PLANS

Pension Plan - The Bank's employees participate in the Bank's, qualified defined
benefit pension plan covering substantially all employees. The plan calls for
benefits to be paid to eligible employees at retirement based primarily upon
years of service with the Bank and compensation rates during those years.
Currently, the Bank's policy is to fund the qualified retirement plan in an
amount that falls between the minimum contribution required by the Employee
Retirement Income Security Act and the maximum tax deductible contribution. Plan
assets consist primarily of common stock, U.S. Government obligations and
certificates of deposit.

                                      50
<PAGE>
 
PENSION AND EMPLOYEE BENEFIT PLANS (continued)

Components of the Bank's Pension Plan are as follows:

                                                         1997            1998
                                                       ========================
                                                           (In Thousands)
CHANGE IN BENEFIT OBLIGATIONS
     Benefit obligation, beginning of period ......    $  7,190       $  7,967
     Service cost .................................         498            552
     Interest cost ................................         575            582
     Actuarial (gain) loss ........................        (258)         1,132
     Benefit paid .................................         (38)           (93)
                                                       --------       --------
     Benefit obligation, end of period ............    $  7,967       $ 10,140
                                                       ========       ========

CHANGE IN PLAN ASSETS
     Fair value of plan assets, 
       beginning of period.........................    $  6,284       $  7,804
     Actual return on plan assets .................       1,154            978
     Employer's contribution ......................         404            983
     Benefits paid ................................         (38)           (93)
                                                       --------       --------
     Fair value of plan assets, end of period .....    $  7,804       $  9,672
                                                       ========       ========

FUNDED STATUS
     Funded status ................................    $   (163)      $   (468)
     Unrecognized net actuarial (gain) loss .......         (50)           737
     Unrecognized prior service cost ..............        (214)          (184)
                                                       --------       --------
     Net amount recognized ........................    $   (427)      $     85
                                                       ========       ========

Components of net periodic benefit cost are as follows:

                                          For the Years Ended December 31,
                                        ------------------------------------
                                          1996          1997          1998
                                        ====================================
                                                   (In Thousands)

Service cost .......................    $   410       $   498       $   552
Interest cost ......................        535           575           582
Return on assets ...................       (816)       (1,154)         (978)
Amortization of prior service cost..        (30)          (30)          (30)
Recognition of net actuarial loss...        463           681           345
                                        -------       -------       -------

Net periodic benefit cost ........      $   562       $   570       $   471
                                        =======       =======       =======

For the years ended December 31, 1996, 1997 and 1998, pension expense amounts
were based upon actuarial computations.

The assumptions used in computing the present value of the projected benefit
obligation and the net periodic pension expense are as follows:

                                                        1996     1997     1998
                                                      ==========================


Discount rate in determining benefit obligation ..      7.75%    7.25%    6.75%

Rate of increase in future compensation levels for
    determining benefit obligations ..............      5.00%    5.00%    4.50%

Expected return on plan assets ...................      8.00%    8.00%    8.00%

In accordance with the actuarially determined computation under SFAS No. 87, the
Bank funded $ 983,000 as required for the 1998 plan year.

                                      51
<PAGE>
 
Savings Plan - Effective January 1, 1988, the Board of Directors approved a
401(k) deferred savings plan for all Bank employees who are 21 years of age with
one or more years of service. The 401(k) deferred savings plan allows qualified
employees to save from 1% to 15% of their income. Presently, one-half of an
employee's contribution is matched by the Bank, up to 3% of the employee's
salary. The Bank's matching percentage will be determined annually by the Board
of Directors after taking into consideration such factors as profit performance
and ability to meet capital requirements. The Bank's contribution to the plan
totaled $ 170,000, $ 183,000 and $ 210,000 for the years ended December 31,
1996, 1997 and 1998, respectively.

Retirement Plans - During 1989, the Bank established non-qualified defined
benefit plans for certain officers and directors. The director's plan became
effective on January 1, 1991. For the years ended December 31, 1996, 1997 and
1998, the net periodic pension expense for the Supplemental Executive Retirement
Plan for Officers totaled $ 964,000, $ 951,000 and $ 1,090,000, respectively.
The projected benefit obligation as of December 31, 1996, 1997 and 1998, was
estimated at $ 5,217,000, $ 6,049,000 and $ 6,560,000, respectively. For 1996,
1997 and 1998, respectively, the discount rates used to measure the projected
benefit obligation were 7.75%, 7.25% and 6.75%. The rate of increase in future
compensation levels in 1996 and 1997 was 5.00% and 1998 was 4.50%. For the years
ended December 31, 1996, 1997 and 1998, the net periodic pension expense for the
Retirement Plan for the Director's totaled $ 273,000, $ 227,000 and $ 171,000,
respectively. The projected benefit obligation for the Retirement Plan for
Directors as of December 31, 1996, 1997 and 1998 was estimated at $ 1,514,000,
$ 1,475,000 and $ 1,503,000, respectively. For 1996, 1997 and 1998, the discount
rates used to measure that projected benefit obligation were 7.75%, 7.25% and
6.75%, respectively. The rate of increase in future compensation levels for the
Retirement Plan for Directors was 5.00% in all years. The provisions of SFAS No.
87 require recognition in the statement of financial position of the additional
minimum liability and related intangible asset for a retirement plan with
accumulated benefits in excess of plan assets. This resulted in the recognition
at December 31, 1997 and 1998, of an additional liability and an intangible
asset of $ 291,000 and $ 25,000, respectively. There was no material effect on
earnings or cash requirements to fund the retirement plans. These additional
liability and intangible asset amounts as of December 31, 1997 and 1998 are
recorded in the account balances captioned other liabilities and other assets,
respectively, in the accompanying consolidated statements of financial position.

Incentive Program - The Bank also has a Senior Management Performance Incentive
Award Program, "SMPIAP," to provide the opportunity for those executives to be
rewarded in future earnings growth. A designated percentage of income at
December 31 of each year is used to determine the award fund contribution. This
percentage will be determined annually by the Board of Directors after taking
into consideration such factors as profit performance and ability to meet
capital requirements. Awards amounting to $ 120,000, $ 229,000 and $ 252,000,
were made during the calendar years 1996, 1997 and 1998, respectively, for
distribution in subsequent years. The assets of the SMPIAP are held in a Rabbi
trust for the benefit of senior management. The SMPIAP participants may elect to
invest their awards in either Company stock or other third party investment
options. Pursuant to the provisions of Emerging Issues Task Force Issue No.
97-14 ("EITF 97-14") which became effective during 1998, the assets of the Rabbi
trust are included in the accompanying financial statements and are accounted as
follows: (1) Assets, other than Company stock, (primarily trading securities)
are included in other assets at fair value ($ 443,000 at December 31, 1998) with
the corresponding obligation to the employees of a like amount included in other
liabilities. Changes in the fair value of the assets and changes in the amount
of the liability are included in earnings; and (2) Company stock (147,029 shares
at December 31, 1998) is carried at cost ($ 1.5 million at December 31, 1998)
and included in treasury stock with the corresponding obligation to the
employees (which can only be settled through delivery of the shares) of a like
amount included in additional paid-in capital. Prior to the adoption of EITF
97-14, the assets of the Rabbi trust and the corresponding obligations were
carried at cost and included in other assets and other liabilities,
respectively. The changes in accounting as a result of the adoption of EITF
97-14 had no effect on net income or earnings per share.

                                      52
<PAGE>
 
Employee Stock Ownership Plan - On January 7, 1994, in connection with the
Bank's Plan of Reorganization into a Mutual Holding Company, the Bank adopted a
tax qualified Employee Stock Ownership Plan ("ESOP") for all eligible employees.
The ESOP purchased 193,200 shares of the Bank's stock at the date of the
Reorganization. The funds used to purchase the shares were borrowed from a third
party lender. Effective June 30, 1997, the loan was purchased and is now held by
Fidelity Bankshares, Inc. and therefore has been eliminated in consolidation at
December 31, 1997 and 1998. The Bank will contribute to the ESOP sufficient
funds to pay the principal and interest on this loan over seven years. Benefits
generally become 100% vested after five years of credited service. However,
contributions to the ESOP and shares allocated among participants proportional
to repayment of the seven year ESOP loan will be allocated among participants on
the basis of compensation in the year of allocation, subject to regulatory
maximum limitations. The Bank recognized $ 462,000, $ 765,000 and $ 802,000, by
a charge against income in 1996, 1997 and 1998, respectively, under this plan.

Bank Recognition and Retention Plans - On January 7, 1994, in connection with
the Bank's Plan of Reorganization into a Mutual Holding Company, the Bank
adopted two Recognition and Retention Plans to encourage key employees and
Directors to remain with the Bank. Both plans, consisting of a total of 121,440
shares of restricted stock after the 10% stock dividend, were awarded and were
allocated to the affected employees and Directors. These shares vested ratably
over the three years ended December 31, 1996. The Bank recognized $ 280,000 by a
charge against income in 1996. There were no such charges against income in 1997
and 1998.

14. Stock Option Plan

The Bank has adopted stock option plans which granted options with an exercise
price equal to the market value of the stock at the date of grant, to Directors
and officers. The Directors may exercise their options at any time up to ten
years, while officer's options are exercisable at a rate of twenty percent per
year, not to exceed ten years. Under these plans, after retroactively adjusting
for the 10% stock dividend distributed in November 1995, the Bank reserved
303,600 shares of authorized but unissued common stock for future issuance. The
following table shows a summary of transactions.

                                                Options Price
                               -------------------------------------------------
                                                   Average
                                    Number of      Exercise
                                     Options       Price Per       Aggregate
                                   Outstanding       Share           Price
                               =================================================
Options Outstanding
-------------------
Balance - December 31, 1995..        265,650       $   9.09       $ 2,414,758 
                                 -----------       --------       ----------- 
     Granted ................             --             --                -- 
     Exercised ..............        (43,117)          9.09          (391,934)
     Canceled ...............             --             --                -- 
                                 -----------       --------       ----------- 
                                                                              
Balance - December 31, 1996..        222,533           9.09         2,022,824 
                                 -----------       --------       ----------- 
     Granted ................             --             --                -- 
     Exercised ..............        (47,101)          9.09          (428,148)
     Canceled ...............         (1,595)          9.09           (14,499)
                                 -----------       --------       ----------- 
                                                                              
Balance - December 31, 1997..        173,837           9.09         1,580,177 
                                 -----------       --------       ----------- 
     Granted ................             --             --                -- 
     Exercised ..............        (21,414)          9.09          (194,653)
     Canceled ...............           (440)          9.09            (4,000)
                                 -----------       --------       ----------- 
Balance - December 31, 1998..        151,983       $   9.09       $ 1,381,524 
                                 ===========       ========       =========== 


                                      53
<PAGE>
 
15. REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory and possible discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk-weighting
and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Tangible capital of
not less than 1.5% of adjusted total assets, Total capital to risk-weighted
assets of not less than 8%, Tier I capital of not less than 3.0% of adjusted
total assets, and Tier I capital to risk-weighted assets of 4.0% (as defined in
the regulations). As of December 31, 1998, the Bank meets all capital adequacy
requirements to which it is subject.

As of December 31, 1998, the most recent notification from the OTS categorized
the Bank as "Well Capitalized" under the framework for prompt corrective action.
To be considered well capitalized under Prompt Corrective Action Provisions, the
Bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the Bank's
categorization.

In 1998, the Company invested $ 25 million of the proceeds from its issuance of
the Guaranteed Preferred Beneficial Interests in Company's Debentures in common
stock of the Bank. In the table which follows, Stockholders' Equity includes
such additional investment. Management believes this investment qualifies as
core capital and Tier 1 capital. In the event regulatory authorities adopt,
retroactively, a different standard for determining core capital and Tier 1
capital, amounts presented at December 31, 1998 as $ 104.115 million could be
reduced by $ 25 million and ratios presented could be adjusted accordingly.

                                      54
<PAGE>
 
The Bank's actual capital amounts and ratios are presented in the following
table:

<TABLE> 
<CAPTION> 
                                                                                                               To be Considered
                                                                                    Minimum for                Well Capitalized
                                                                                  Capital Adequacy           for Prompt Corrective
                                                        Actual                        Purposes                 Action Provisions
                                          -----------------------------------------------------------------------------------------
                                                   Ratio      Amount              Ratio      Amount           Ratio       Amount
                                          -----------------------------------------------------------------------------------------
                                                                               (Dollars in Thousands)

<S>                                             <C>         <C>              <C>           <C>             <C>          <C> 
As of December 31, 1997 Stockholders'
     Equity and ratio to total assets               7.0%    $    85,559
                                            ===========

Unrealized increase in market value
     of assets available for sale
     (net of applicable income taxes)                            (1,405)
Goodwill ............................                            (3,083)
Disallowed servicing assets .........                               (30)
                                                            -----------
Tangible capital and ratio to
     adjusted total assets ..........               6.6%    $    81,041            1.5%    $    18,228
                                            ===========     ===========     ==========     ===========
Tier I (core) capital and ratio to
     adjusted total assets ..........               6.7%    $    81,041            3.0%    $    36,457          5.0%    $    60,761
                                            ===========     ===========     ==========     ===========   ==========     ===========
Tier I (core) capital and ratio to
     risk-weighted total assets .....              13.6%    $    81,041            4.0%    $    23,751          6.0%    $    35,626
                                            ===========                     ==========     ===========   ==========     ===========

Allowable Tier 2 capital:
General loan valuation allowances ...                             2,242
Equity investments ..................                                (1)
                                                            -----------
Total risk-based capital and ratio to
     risk-weighted total assets .....              14.0%    $    83,282            8.0%    $    47,501         10.0%    $    59,377
                                            ===========     ===========     ==========     ===========   ==========     ===========

Total assets ........................                       $ 1,219,735
                                                            ===========

Adjusted total assets ...............                       $ 1,215,217
                                                            ===========

Risk-weighted assets ................                       $   593,768
                                                            ===========

As of December 31, 1998 Stockholders'
     Equity and ratio to total assets               6.8%    $   106,244
                                            ===========

Unrealized decrease in market value
     of assets available for sale
     (net of applicable income taxes)                               318
Goodwill ............................                            (2,394)
Disallowed servicing assets .........                               (53)
                                                            -----------
Tangible capital and ratio to
     adjusted total assets ..........               6.6%    $   104,115            1.5%    $    23,472
                                            ===========                     ==========     ===========
Tier I (core) capital and ratio to
     adjusted total assets ..........               6.7%    $   104,115            3.0%    $    46,943          5.0%    $    78,239
                                            ===========     ===========     ==========     ===========   ==========     ===========
Tier I (core) capital and ratio to
     risk-weighted total assets .....              12.0%    $   104,115            4.0%    $    34,814          6.0%    $    52,221
                                            ===========     ===========     ==========     ===========   ==========     ===========

Allowable Tier 2 capital:
General loan valuation allowances ...                             2,352
Equity investments ..................                                 -
                                                            -----------
Total risk-based capital and ratio to
     risk-weighted total assets .....              12.2%    $   106,467            8.0%    $    69,628         10.0%    $    87,036
                                            ===========     ===========     ==========     ===========   ==========     ===========

Total assets ........................                       $ 1,566,900
                                                            ===========

Adjusted total assets ...............                       $ 1,564,771
                                                            ===========

Risk-weighted assets ................                       $   870,355
                                                            ===========
</TABLE> 

                                      55
<PAGE>
 
At periodic intervals, both the OTS and the FDIC routinely examine the Company's
and the Bank's financial statements as part of their legally proscribed
oversight of the savings and loan industry. Based on these examinations, the
regulators can direct that the financial statements be adjusted in accordance
with their findings.

During the year ended December 31, 1998, an OTS examination resulted in no
significant adjustments to the consolidated financial statements.

16. ACQUISITION OF BANKBOYNTON

On December 5, 1997, the Bank acquired, for cash, all the outstanding stock of
BankBoynton, a thrift institution located in Boynton Beach, Florida. The
acquisition has been accounted for under the purchase method of accounting and
the results of operation of BankBoynton are included in the Consolidated
Statements of Operations from the date of acquisition. The excess of cost over
net assets acquired amounted to approximately $ 2.3 million and will be charged
against operations over a period of fifteen years, using the straight-line
method of amortization.

The following unaudited pro-forma information shows the condensed consolidated
results of operation as though the above acquisition, including the related
purchase accounting adjustments, had been made at the beginning of the year:

                                                   1996         1997   
                                                 ======================
                                                     (In Thousands,    
                                                   except per share    
                                                         data)         
                                                                       
     Net interest income..................       $ 29,883      $ 32,752
     Net income...........................       $  3,337      $  5,861
     Basic earnings per share.............       $    .51      $    .88
     Diluted earnings per share...........       $    .50      $    .87 

The unaudited pro-forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the acquisition
been made at the beginning of the respective periods, or of results which may
occur in the future.

17. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank makes commitments to extend credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. The interest
rates on both fixed and variable rate mortgage loans are generally based on the
market rates in effect on the date the loan application is taken. Commitments
generally have fixed expiration dates of no longer than 60 days and other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained by the Bank upon extension of credit is based on
management's credit evaluation of the customer. Collateral held varies but may
include single-family homes, marketable securities and income-producing
residential and commercial properties. Credit losses may occur when one of the
parties fails to perform in accordance with the terms of the contract. The
Bank's exposure to credit risk is represented by the contractual amount of the
commitments to extend credit. At December 31, 1998, the Bank had commitments to
extend credit for or purchase mortgage loans of $ 38,611,000 ($ 7,653,000 in
fixed rate commitments, see Note 5, and the balance of commitments in either
variable rate or for which rates had not yet been set). The Bank also has a
pre-approval program which commits dollar amounts to potential loan customers
based on their credit history. This program, however, does not commit to locked
in rates. No fees are received in connection with such commitments.

                                       56
<PAGE>
 
The Bank leases various property for original periods ranging from one to
seventy-two years. Rent expense for the years ended December 31, 1996, 1997 and
1998, was approximately $ 682,000, $ 638,000 and $ 658,000, respectively. At
December 31, 1998, future minimum lease payments under these operating leases
are as follows:


         Years Ending December 31,                               Amount
        ----------------------------------------------------------------
                                                         (In Thousands)

                    1999                                    $   726,735
                    2000                                        741,901
                    2001                                        674,893
                    2002                                        631,833
                    2003                                        645,869
                 Thereafter                                   2,827,570
                                                            -----------
                    Total                                   $ 6,248,801
                                                            ===========

The Bank has entered into a three year employment agreement with its Chief
Executive Officer. This agreement, among other matters, would provide for
severance payments of up to three years salary in the event of termination for
reasons other than cause. In addition, the Bank has entered into severance
agreements with four of its executive officers. The severance agreements would
provide for payments of up to three years salary for these executives, but only
in the event of change of control of the Bank.

18. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS

<TABLE> 
<CAPTION> 
                                                               For the Years Ended December 31,
                                                              ---------------------------------
                                                                1996         1997        1998
                                                              =================================
                                                                       (In Thousands)
<S>                                                           <C>          <C>          <C> 
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes .............................      $ 2,810      $ 5,016      $ 5,916
                                                              =======      =======      =======
Cash paid for interest on deposits and other borrowings       $31,879      $41,782      $63,196
                                                              =======      =======      =======

Supplemental Schedule of Noncash Investing and Financing
Activities:
Real estate acquired in settlement of loans ............      $   593      $ 2,403      $ 1,542
                                                              =======      =======      =======
</TABLE> 

19. EARNINGS PER SHARE

The weighted-average number of shares used to calculate basic and diluted
earnings per share, including the adjustments for the Bank's leveraged Employee
Stock Ownership Plan (ESOP), Management Recognition Plan (MRP) and stock options
for the years ended December 31, 1996, 1997 and 1998, are as follows:

<TABLE> 
<CAPTION> 

                              For the Year Ended December         For the Year Ended December       For the Year Ended December
                                       31, 1996                             31, 1997                          31, 1998
                            --------------------------------------------------------------------------------------------------------

                             Income     Shares    Per-Share      Income      Shares   Per-Share     Income      Shares    Per-Share
                               (1)        (2)      Amount         (1)          (2)      Amount        (1)         (2)      Amount
                            ========================================================================================================

                                                             (In Thousands, except per share data)
<S>                        <C>          <C>       <C>          <C>          <C>       <C>          <C>          <C>       <C> 
Net income ..............  $3,550,000                          $6,418,000                          $7,412,000
Basic EPS:
Mortgage loans
Income available to
  common stockholders ..   $3,550,000   6,583,118   $   0.54   $6,418,000   6,661,401   $   0.96   $7,412,000   6,644,096   $   1.12

                                                    ========                            ========                            ========

Effect of diluted shares:
  Common stock options ..                  84,380                             104,760                              91,881
                                        ---------                           ---------                           ---------
Diluted EPS:
Income available to
  common stockholders ...  $3,550,000   6,667,498   $   0.53   $6,418,000   6,766,161   $   0.95   $7,412,000   6,735,977   $   1.10
                           ==========   =========   ========   ==========   =========   ========   ==========   =========   ========

</TABLE> 
(1) Numerator
(2) Denominator

                                       57
<PAGE>
 
Weighted average shares outstanding for the year ended December 31, 1998 were
reduced for treasury shares held by the Bank's SMPIAP and increased for the
corresponding liability for settlement to the Bank's employees. (See Note 13).

Pursuant to Statement of Position 93-6, entitled "Employers' Accounting for
Employee Stock Ownership Plans," issued by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants, ESOP shares
that have not been committed to be released are not considered to be
outstanding.

20. OTHER COMPREHENSIVE INCOME

An analysis of the changes in Accumulated Other Comprehensive Income for the
years ended December 31, 1996, 1997 and 1998 is as follows:

                                              December 31,
                                 1996             1997            1998
                               -----------------------------------------
                                              Unrealized
                                            Gains (Losses)
                                            on Securities
                               =========================================
                                            (In Thousands)
Beginning Balance ...........  $ 2,584          $   782         $ 1,405
Current-period change .......   (1,802)             623          (1,723)
                               -------          -------         -------
Ending balance ..............  $   782          $ 1,405         $  (318)
                               =======          =======         =======

An analysis of the related tax effects allocated to Other Comprehensive Income
is as follows:

<TABLE> 
<CAPTION> 
                                  December 31, 1996                   December 31, 1997                   December 31, 1998
                            -------------------------------    --------------------------------    --------------------------------
                           
                                         Tax                                 Tax                                 Tax
                            Before-tax (Expense) Net-of-Tax    Before-tax (Expense)  Net-of-Tax    Before-tax (Expense)  Net-of-Tax
                             Amount    Benefit    Amount        Amount     Benefit    Amount        Amount     Benefit    Amount
                            =======================================================================================================
                                                                        (In Thousands)
<S>                         <C>        <C>        <C>           <C>        <C>       <C>          <C>        <C>         <C> 
Unrealized gain (loss) on  
assets available for sale: 
 Unrealized holding gains  
     (losses) arising .....  $(2,149)    $   872    $(1,277)    $ 1,055    $  (432)    $   623    $(1,539)    $   629    $  (910)
     during period         
 Less: reclassification    
     adjustment for gains .     (875)        350       (525)         --         --          --     (1,355)        542       (813)
                             -------     -------    -------     -------    -------     -------    -------     -------    -------
     realized in net income
Other comprehensive income   $(3,024)    $ 1,222    $(1,802)    $ 1,055    $  (432)    $   623    $(2,894)    $ 1,171    $(1,723)
                             =======     =======    =======     =======    =======     =======    =======     =======    =======
</TABLE> 

21. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107 ("SFAS No. 107"), "Disclosure About Fair Value of Financial
Instruments," as amended by SFAS No. 119, requires additional disclosures of
fair values of financial instruments in the notes to the consolidated financial
statements. Fair values of financial instruments that are not actively traded
are based on market prices of similar instruments and/or valuation techniques
using market assumptions. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique.

                                       58
<PAGE>
 
Therefore, the fair value estimates presented herein are not necessarily
indicative of the amounts which the Bank could realize in a current transaction.

<TABLE> 
<CAPTION> 
                                                                  December 31, 1997                December 31, 1998
                                                            --------------------------------------------------------------
                                                              Carrying           Fair          Carrying           Fair
                                                               Amount           Value           Amount           Value
                                                            ==============================================================
                                                                                    (In Thousands)
<S>                                                         <C>               <C>              <C>               <C> 
Assets:
  Cash and amounts due from depository institutions.        $  22,136         $ 22,136         $  27,951       $   27,951
  Interest-bearing deposits.........................           33,688           33,688            32,075           32,075
  Assets available for sale.........................          250,209          250,209           452,575          452,575
  Loans receivable (net)............................          861,257          870,162           977,166        1,152,248
Liabilities:
  Deposits..........................................          872,340          873,741         1,120,746        1,130,266
  Other borrowed funds..............................            3,780            3,780             6,981            6,977
  Advances from the Federal Home Loan Bank..........          239,091          239,963           303,140          306,989
  Guaranteed Preferred Beneficial Interests
     in Company's Debentures........................               --               --            28,750           31,268
</TABLE> 

The following methods and assumptions were used to estimate fair value of each
major class of financial instrument at December 31, 1997 and 1998.

Cash and Amounts due from Depository Institutions and Interest-Bearing Deposits
- The carrying amount of these assets is a reasonable estimate of their fair
value.

Assets Available for Sale - The fair value of these securities are based on
quoted market prices.

Loans Receivable - The fair value of loans is estimated by discounting the
future cash flows of the loans using the current rates at which similar loans
would be made to borrowers with similar credit rating for the same remaining
maturities.

Deposits - The fair value of demand deposits, savings accounts and money market
accounts are equal to the amount payable on demand at the reporting date. The
fair values of fixed maturity certificate accounts are estimated by discounting
the future cash flows of the certificates using the current rates for advances
from the Federal Home Loan Bank with similar maturities.

Other Borrowed Funds - Fair value is estimated using rates currently offered for
advances from the Federal Home Loan Bank with similar maturities.

Advances from the Federal Home Loan Bank - The fair value of these advances is
estimated by discounting the future cash flows of these advances using the
current rates at which similar term advances could be obtained.

Guaranteed Preferred Beneficial Interests in Company's Debentures - The fair
value is estimated by discounting the future cash flows of these debentures
using the yield for 30 year Treasury Bond plus 250 basis points.

Commitments to Extend Credit and Standby Letters of Credit - The fair value of
these commitments is insignificant.

22. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

The following condensed statements of financial position as of December 31,
1997, and 1998 and the condensed statement of operations and statement of cash
flows for the three years then ended should be read in conjunction with the
Consolidated Financial Statements and related notes. Since the organization of
the parent company was 

                                       59
<PAGE>
 
accounted for in a manner similar to a pooling of interests, these statements
have been presented as if the parent company was in existence for all periods
covered by the Consolidated Financial Statements.


                                                     December 31,
                                                ----------------------
                                                  1997          1998
                                                ======================
                                                    (In Thousands)
STATEMENT OF FINANCIAL CONDITION
   Assets:
     Cash and cash equivalents .............     $   411      $  6,122
     ESOP loan receivable ..................         828           509
     Investment in and advances to Bank ....      86,710       106,482
     Other assets ..........................         217         1,437
                                                --------      --------
Total assets ...............................     $88,166      $114,550
                                                ========      ========

Liabilities ................................     $   779      $ 29,551
Stockholders' Equity .......................      87,387        84,999
                                                --------      --------
Total liabilities and stockholders' equity..     $88,166      $114,550
                                                ========      ========
<TABLE> 
<CAPTION> 
                                                                                          Years Ended December 31,
                                                                          ----------------------------------------------------
                                                                                 1996               1997               1998
                                                                          ====================================================
                                                                                               (In Thousands)
<S>                                                                            <C>                <C>                <C> 
STATEMENT OF OPERATIONS
   Income:
      Income ........................................................           $     -           $     42           $    173
      Expenses ......................................................                 -                541              2,753
                                                                               --------           --------           --------
      Income before income taxes and equity in earnings of Bank .....                 -               (499)            (2,580)

      Income tax benefit ............................................                 -                204                983
                                                                               --------           --------           --------
      Income before equity in earnings of Bank ......................                 -               (295)            (1,597)
      Equity in earnings of Bank ....................................             3,550              6,713              9,009
                                                                               --------           --------           --------
      Net income ....................................................           $ 3,550           $  6,418           $  7,412
                                                                               ========           ========           ========

STATEMENT OF CASH FLOWS
   Cash flow from (for) operating activities:
   Net income .......................................................           $ 3,500            $ 6,418           $  7,412
   Adjustments to reconcile net income to
      net cash used for operating activities
         Equity in earnings of Bank .................................            (3,550)            (6,713)            (9,009)
   Other ............................................................                 -               (148)             1,024
                                                                               --------           --------           --------
   Net cash used for operating activities ...........................                 -               (443)              (573)
                                                                               --------           --------           --------

   Cash flow from (for) investing activities:
   Dividends received from Bank .....................................             1,971              3,554             11,600
   Purchase of ESOP loan ............................................                 -               (966)                 -
   Principal payments on ESOP loan ..................................                 -                138                319
   Investment in subsidiary .........................................                 -                  -            (25,000)
   Other ............................................................                 -                386              1,077
                                                                               --------           --------           --------
   Net cash from investing activities ...............................             1,971              3,112            (12,004)
                                                                               --------           --------           --------

   Cash flow from (for) financing activities:
   Proceeds from the sale of stock ..................................                 -                308                 79
   Purchase of treasury stock .......................................                 -                  -             (5,752)
   Sale of Guaranteed Preferred Beneficial
      Interests in Company's Debentures (net) .......................                 -                  -             27,277
   Cash dividends paid ..............................................            (1,971)            (2,566)            (3,316)
                                                                               --------           --------           --------
   Net cash used for financing activities ...........................            (1,971)            (2,258)            18,288
                                                                               --------           --------           --------

   Net increase in cash and cash equivalents ........................                 -                411              5,711
   Cash and cash equivalents, Beginning of year .....................                 -                  -                411
                                                                               --------           --------           --------
   Cash and cash equivalents, End of year ...........................           $     -            $   411           $  6,122
                                                                               ========           ========           ========
</TABLE> 

                                       60
<PAGE>
 
Payment of dividends to Fidelity Bankshares, Inc. by the Bank is subject to
various limitations by bank regulatory agencies. Undistributed earnings of the
Bank available for distribution as dividends under these limitations were $ 22.0
million and $ 18.4 million as of December 31, 1997 and 1998, respectively.


22.      Quarterly Financial Data (Unaudited)

<TABLE> 
<CAPTION> 
                                                           First                Second                Third               Fourth
                                                          Quarter               Quarter              Quarter              Quarter
                                                        ===========================================================================
                                                                                       (In Thousands)
<S>                                                       <C>                   <C>                  <C>                  <C>  
Year ended December 31, 1997:
  Interest income ...............................         $ 16,297              $ 17,417             $ 18,684             $ 19,874
  Interest expense ..............................            8,967                 9,899               10,850               11,890
                                                          --------              --------             --------             --------
    Net interest income .......................              7,330                 7,518                7,834                7,984
                                                          --------              --------             --------             --------

  Provision for loan losses .....................               51                    21                   57                   41
  Non-interest income ...........................              902                 1,003                1,790                1,215
  Non-interest expenses .........................            6,041                 5,967                6,073                6,154
  Income taxes ..................................              906                 1,068                1,484                1,295
                                                          --------              --------             --------             --------
    Net Income ..................................         $  1,234              $  1,465             $  2,010             $  1,709
                                                          ========              ========             ========             ========
<CAPTION> 
                                                           First                Second                Third               Fourth
                                                          Quarter               Quarter              Quarter              Quarter
                                                        ===========================================================================
                                                                                       (In Thousands)
<S>                                                       <C>                   <C>                  <C>                  <C>  
Year ended December 31, 1998:
  Interest income ...............................         $ 22,820              $ 24,461             $ 25,502             $ 25,537
  Interest expense ..............................           14,280                16,110               17,055               17,547
                                                          --------              --------             --------             --------
    Net interest income .........................            8,540                 8,351                8,447                7,990
                                                          --------              --------             --------             --------

  Provision for loan losses .....................              (69)                   20                    6                  120
  Non-interest income ...........................            1,914                 2,287                2,426                2,063
  Non-interest expenses .........................            7,013                 7,333                7,369                7,972
  Income taxes ..................................            1,417                 1,292                1,358                  775
                                                          --------              --------             --------             --------
         Net Income .............................         $  2,093              $  1,993             $  2,140             $  1,186
                                                          ========              ========             ========             ========
</TABLE> 

                                       61
<PAGE>
 
Management's Assertions
as to the Effectiveness of its Internal Control Structure Over Financial 
Reporting and Compliance with Designated Laws and Regulations

To the Stockholders:

Financial Statements

Management of Fidelity Bankshares, Inc. (the "Company") and its subsidiary,
Fidelity Federal Savings Bank of Florida (the "Bank"), is responsible for the
preparation, integrity and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on judgments and
estimates made by management. 

The financial statements have been audited by the independent accounting firm,
Deloitte & Touche LLP, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders, the
Board of Directors and committees of the board. Management believes that all
representations made to the independent auditors during their audit were valid
and appropriate. The independent auditors report accompanies the Company's
audited financial statements.

Internal Control

Management is responsible for and does maintain a structure of internal control
over financial reporting, which is designed to provide reasonable assurance to
the Company's management and Board of Directors regarding the preparation of
reliable published financial statements, including the Bank's reports to the
Office of Thrift Supervision which are based on both generally accepted
accounting principles and instructions for Thrift Financial Reports (TFR
instructions). The structure includes a documented organizational structure and
division of responsibility, established policies and procedures including a code
of conduct to foster a strong ethical climate, which are communicated throughout
the Bank, and the careful selection, training and development of our people.
Internal auditors monitor the operation of the internal control system and
report findings and recommendations to management and the Board of Directors,
and corrective actions are taken to address control deficiencies and other
opportunities for improving the system as they are identified. The Board,
operating through its audit committee, which is composed entirely of directors
who are not officers or employees of the Company nor the Bank, provides
oversight to the financial reporting process. 

There are inherent limitations in the effectiveness of any structure of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Furthermore, the effectiveness of an internal control
structure can change with circumstances.

Management assessed its internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
TFR instructions as of December 31, 1998 in relation to criteria for effective
internal control over financial reporting described in "Internal Control--
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management believes the Company and the Bank maintained an
effective internal control structure over financial reporting, presented in
conformity with generally accepted accounting principles and TFR instructions,
as of December 31, 1998.

Compliance with Designated Laws and Regulations 

Management is also responsible for compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness laws and regulations.

Management assessed its compliance with the designated safety and soundness laws
and regulations and has maintained records of its determinations and assessments
as required by the FDIC. Based on this assessment, management believes that the
Company and the Bank has complied, in all material respects, with the designated
safety and soundness laws and regulations for the year ended December 31, 1998.

by: /s/ Vince Elhilow                    by: /s/ Richard Aldred
   -----------------------------------      ------------------------------------
President and Chief Executive Officer    Executive Vice President-Chief 
                                         Financial Officer
February 22, 1999

                                       62
<PAGE>
 
Independent Accountants' Report


To the Audit Committee
Fidelity Federal Savings Bank of Florida
West Palm Beach, Florida


We have examined management's assertion that, as of December 31, 1998, Fidelity
Bankshares, Inc. and its subsidiary, Fidelity Federal Savings Bank of Florida,
maintained an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
the Office of Thrift Supervision Instructions for Thrift Financial Reports for
Schedules SC, SO, and the Reconciliation of Equity Capital included on Schedule
SI included in the accompanying Report on Management's Assertions as to the
Effectiveness of its Internal Control Structure over Financial Reporting and
Compliance with Designated Laws and Regulations, dated February 22, 1999.

Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of the
internal control structure over financial reporting, and such other procedures
as we considered necessary in the circumstances. We believe that our examination
provides a reasonable basis for our opinion.

Because of inherent limitations in any internal control structure, misstatements
due to error or fraud may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies may deteriorate.

In our opinion, management's assertion that, as of December 31, 1998, Fidelity
Bankshares, Inc. and its subsidiary, Fidelity Federal Savings Bank of Florida,
maintained an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
the Office of Thrift Supervision Instructions for Thrift Financial Reports for
Schedules SC, SO, and the Reconciliation of Equity Capital included on Schedule
SI is fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.




Certified Public Accountants
West Palm Beach, FL

February 24, 1999

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