Fidelity Bankshares, Inc.

and Subsidiaries

Consolidated Financial Statements



Table of Contents



|                                                                                                                                                               |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                               | 
|Independent Auditors Report                                                                                                                                   |  | F-2 
|                                                                                                                                                               | 
|Consolidated Statements of Financial Position at December 31, 2002 and 2003                                                                                    |  | F-3 
|                                                                                                                                                               | 
|Consolidated Statements of Operations for the years ended December 31, 2001, 2002 and 2003                                                                     |  | F-4 
|                                                                                                                                                               | 
|Consolidated Statements of Comprehensive Operations for the years ended December 31, 2001, 2002 and 2003                                                       |  | F-5 
|                                                                                                                                                               | 
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2001, 2002 and 2003                                                |  | F-5 
|                                                                                                                                                               | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003                                                                     |  | F-6 
|                                                                                                                                                               | 
|Notes to Consolidated Financial Statements                                                                                                                     |  | F-7 
|                                                                                                                                                               | 
|Managements Assertions as to the Effectiveness of its Internal Control Structure Over Financial Reporting and Compliance with Designated Laws and Regulations |  | F-36
|                                                                                                                                                               | 
|Independent Accountants Report                                                                                                                                |  | F-37



F-1



---

Independent Auditors Report



Board of Directors and Stockholders of

Fidelity Bankshares, Inc.

West Palm Beach, Florida



We have audited the
accompanying consolidated statements of financial position of Fidelity Bankshares, Inc. and subsidiaries (the Company) as of December 31, 2002 and 2003, 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, 2003. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.



We conducted our audits in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2003,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.



/s/    Deloitte & Touche LLP

Deloitte & Touche LLP

Certified Public Accountants



West Palm Beach, Florida

March 9, 2004



F-2



---

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AT DECEMBER 31, 2002 AND 2003

---



|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                              |  | 2002                              |           |   | 2003 |  
|                                                                                                                                              |  | (In Thousands, except share data) |          
|ASSETS                                                                                                                                        |  |                                   |           |  
|CASH AND CASH EQUIVALENTS:                                                                                                                    |  |                                   |           |   |      |   |           |  
|Cash and amounts due from depository institutions                                                                                             |  | $                                 | 66,178    |   |      | $ | 76,090    |  
|Interest-earning deposits                                                                                                                     |  |                                   | 63,488    |   |      |   | 33,797    |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|Total cash and cash equivalents                                                                                                               |  |                                   | 129,666   |   |      |   | 109,887   |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|ASSETS AVAILABLE FOR SALE (At fair value):                                                                                                    |  |                                   |           |   |      |   |           |  
|Municipal bonds and government and agency securities                                                                                          |  |                                   | 89,879    |   |      |   | 122,731   |  
|Mortgage-backed securities                                                                                                                    |  |                                   | 109,755   |   |      |   | 471,228   |  
|Corporate debt securities                                                                                                                     |  |                                   | 35,384    |   |      |   |          |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|Total assets available for sale                                                                                                               |  |                                   | 235,018   |   |      |   | 593,959   |  
|LOANS RECEIVABLE, Net of allowance for loan losses$8,318 and $11,119 at December 31, 2002 and 2003, respectively                             |  |                                   | 1,935,999 |   |      |   | 2,191,696 |  
|OFFICE PROPERTIES AND EQUIPMENT, Net                                                                                                          |  |                                   | 67,784    |   |      |   | 70,663    |  
|FEDERAL HOME LOAN BANK STOCK, (At cost)                                                                                                       |  |                                   | 12,919    |   |      |   | 13,322    |  
|ACCRUED INTEREST RECEIVABLE                                                                                                                   |  |                                   | 9,698     |   |      |   | 11,127    |  
|DEFERRED INCOME TAX ASSET                                                                                                                     |  |                                   | 6,785     |   |      |   | 7,598     |  
|OTHER ASSETS                                                                                                                                  |  |                                   | 41,528    |   |      |   | 49,970    |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|TOTAL ASSETS                                                                                                                                  |  | $                                 | 2,439,397 |   |      | $ | 3,048,222 |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                          |  |                                   |           |   |      |   |           |  
|LIABILITIES                                                                                                                                   |  |                                   |           |   |      |   |           |  
|DEPOSITS                                                                                                                                      |  | $                                 | 1,898,341 |   |      | $ | 2,460,101 |  
|OTHER BORROWED FUNDS                                                                                                                          |  |                                   | 44,416    |   |      |   | 42,089    |  
|ADVANCES FROM FEDERAL HOME LOAN BANK                                                                                                          |  |                                   | 253,371   |   |      |   | 264,561   |  
|ADVANCES BY BORROWERS FOR TAXES AND INSURANCE                                                                                                 |  |                                   | 3,185     |   |      |   | 2,816     |  
|DRAFTS PAYABLE                                                                                                                                |  |                                   | 6,181     |   |      |   | 202       |  
|GUARANTEED PREFERRED BENEFICIAL INTERESTS IN DEBENTURES                                                                                       |  |                                   | 28,750    |   |      |   | 52,320    |  
|OTHER LIABILITIES                                                                                                                             |  |                                   | 36,066    |   |      |   | 41,624    |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|TOTAL LIABILITIES                                                                                                                             |  |                                   | 2,270,310 |   |      |   | 2,863,713 |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|COMMITMENTS AND CONTINGENCIES (Note 16)                                                                                                       |  |                                   |           |   |      |   |           |  
|STOCKHOLDERS EQUITY                                                                                                                          |  |                                   |           |   |      |   |           |  
|PREFERRED STOCK, 2,000,000 shares authorized, none issued                                                                                     |  |                                   |          |   |      |   |          |  
|COMMON STOCK ($.10 par value) 30,000,000 authorized shares: outstanding 15,869,787 and 15,024,648 at December 31, 2002 and 2003,
respectively |  |                                   | 1,587     |   |      |   | 1,502     |  
|ADDITIONAL PAID IN CAPITAL                                                                                                                    |  |                                   | 125,648   |   |      |   | 106,392   |  
|RETAINED EARNINGSsubstantially restricted                                                                                                    |  |                                   | 77,687    |   |      |   | 89,793    |  
|TREASURY STOCKat cost                                                                                                                        |  |                                   |           |   |      |   |           |  
|1,340,420 and 314,694 shares at December 31, 2002 and 2003, respectively                                                                      |  |                                   | (21,705   | ) |      |   | (1,794    | )
|COMMON STOCK ALLOCATED TO:                                                                                                                    |  |                                   |           |   |      |   |           |  
|Employee stock ownership plan                                                                                                                 |  |                                   | (4,609    | ) |      |   | (4,257    | )
|Recognition and retention plan                                                                                                                |  |                                   | (5,986    | ) |      |   | (4,410    | )
|ACCUMULATED OTHER COMPREHENSIVE LOSS                                                                                                          |  |                                   |           |   |      |   |           |  
|(Net of applicable income taxes)                                                                                                              |  |                                   | (3,535    | ) |      |   | (2,717    | )
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                    |  |                                   | 169,087   |   |      |   | 184,509   |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                    |  | $                                 | 2,439,397 |   |      | $ | 3,048,222 |  
|                                                                                                                                              |  |                                   |           |   |      |   |           |  



See Notes to
Consolidated Financial Statements.



F-3



---

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

---



|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                          |  | 2001                              |         |   | 2002 |   |         | 2003 | 
|                                                          |  | (In Thousands, except share data) |        
|Interest income:                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Loans                                                     |  | $                                 | 113,490 |   |      | $ | 123,492 |      |  | $ | 128,230 |  
|Investment securities                                     |  |                                   | 5,072   |   |      |   | 3,474   |      |  |   | 1,236   |  
|Other investments                                         |  |                                   | 3,133   |   |      |   | 2,895   |      |  |   | 1,632   |  
|Mortgage-backed and corporate debt securities             |  |                                   | 16,785  |   |      |   | 8,006   |      |  |   | 12,585  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Total interest income                                     |  |                                   | 138,480 |   |      |   | 137,867 |      |  |   | 143,683 |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Interest expense:                                         |  |                                   |         |   |      |   |         |      |  |   |         |  
|Deposits                                                  |  |                                   | 60,791  |   |      |   | 40,353  |      |  |   | 38,605  |  
|Advances from Federal Home Loan Bank and other borrowings |  |                                   | 20,631  |   |      |   | 21,415  |      |  |   | 18,559  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Total interest expense                                    |  |                                   | 81,422  |   |      |   | 61,768  |      |  |   | 57,164  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Net interest income                                       |  |                                   | 57,058  |   |      |   | 76,099  |      |  |   | 86,519  |  
|Provision for loan losses                                 |  |                                   | 2,054   |   |      |   | 1,986   |      |  |   | 3,122   |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Net interest income after provision for loan losses       |  |                                   | 55,004  |   |      |   | 74,113  |      |  |   | 83,397  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Other income:                                             |  |                                   |         |   |      |   |         |      |  |   |         |  
|Service charges on deposit accounts                       |  |                                   | 5,610   |   |      |   | 7,285   |      |  |   | 10,082  |  
|Fees for other banking services                           |  |                                   | 6,284   |   |      |   | 8,487   |      |  |   | 9,788   |  
|Net gain on sale of loans                                 |  |                                   | 296     |   |      |   | 74      |      |  |   | 4,159   |  
|Net gain (loss) on sale of investments                    |  |                                   | 279     |   |      |   | 64      |      |  |   | (2,364  | )
|Miscellaneous                                             |  |                                   | 1,295   |   |      |   | 1,081   |      |  |   | 851     |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Total other income                                        |  |                                   | 13,764  |   |      |   | 16,991  |      |  |   | 22,516  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Operating expense:                                        |  |                                   |         |   |      |   |         |      |  |   |         |  
|Employee compensation and benefits                        |  |                                   | 31,654  |   |      |   | 37,173  |      |  |   | 44,802  |  
|Occupancy and equipment                                   |  |                                   | 10,558  |   |      |   | 11,649  |      |  |   | 14,476  |  
|(Gain) loss on real estate owned                          |  |                                   | (90     | ) |      |   | (119    | )    |  |   | 21      |  
|Marketing                                                 |  |                                   | 1,752   |   |      |   | 1,970   |      |  |   | 2,130   |  
|Federal deposit insurance premium                         |  |                                   | 282     |   |      |   | 290     |      |  |   | 322     |  
|Miscellaneous                                             |  |                                   | 11,566  |   |      |   | 12,606  |      |  |   | 14,762  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Total operating expense                                   |  |                                   | 55,722  |   |      |   | 63,569  |      |  |   | 76,513  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Income before provision for income taxes                  |  |                                   | 13,046  |   |      |   | 27,535  |      |  |   | 29,400  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Provision (benefit) for income taxes:                     |  |                                   |         |   |      |   |         |      |  |   |         |  
|Current                                                   |  |                                   | 6,254   |   |      |   | 11,290  |      |  |   | 12,813  |  
|Deferred                                                  |  |                                   | (1,088  | ) |      |   | (553    | )    |  |   | (1,334  | )
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Total provision for income taxes                          |  |                                   | 5,166   |   |      |   | 10,737  |      |  |   | 11,479  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Net income                                                |  | $                                 | 7,880   |   |      | $ | 16,798  |      |  | $ | 17,921  |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Earnings per share:                                       |  |                                   |         |   |      |   |         |      |  |   |         |  
|Basic                                                     |  | $                                 | 0.52    |   |      | $ | 1.12    |      |  | $ | 1.24    |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  
|Diluted                                                   |  | $                                 | 0.51    |   |      | $ | 1.11    |      |  | $ | 1.22    |  
|                                                          |  |                                   |         |   |      |   |         |      |  |   |         |  



See Notes to
Consolidated Financial Statements.



F-4



---

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

---



|                                                                      |  |                |       |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------- |  | -------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                      |  | 2001           |       |   | 2002 |   |        | 2003 | 
|                                                                      |  | (In Thousands) |      
|Net Income                                                            |  | $              | 7,880 |   |      | $ | 16,798 |      |  | $ | 17,921 |  
|Other comprehensive income (loss), net of tax:                        |  |                |       |   |      |   |        |      |  |   |        |  
|Unrealized gains (losses) on assets available for sale:               |  |                |       |   |      |   |        |      |  |   |        |  
|Unrealized holding gains (losses) arising during period               |  |                | 2,124 |   |      |   | (41    | )    |  |   | (418   | )
|Reclassification adjustment for (gains) losses realized in net income |  |                | (109  | ) |      |   | (39    | )    |  |   | 1,442  |  
|Minimum pension liability adjustment                                  |  |                |      |   |      |   | (1,451 | )    |  |   | (206   | )
|                                                                      |  |                |       |   |      |   |        |      |  |   |        |  
|Subtotal                                                              |  |                | 2,015 |   |      |   | (1,531 | )    |  |   | 818    |  
|                                                                      |  |                |       |   |      |   |        |      |  |   |        |  
|Comprehensive income                                                  |  | $              | 9,895 |   |      | $ | 15,267 |      |  | $ | 18,739 |  
|                                                                      |  |                |       |   |      |   |        |      |  |   |        |  



CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

---



|                                                                                                  |  |                |       |   |                          |   |         |                                          |  |   |                |   |  |                               |         |   |                                |   |        |                                            |  |   |        |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | -------------- | ----- | - | ------------------------ | - | ------- | ---------------------------------------- |  | - | -------------- | - |  | ----------------------------- | ------- | - | ------------------------------ | - | ------ | ------------------------------------------ |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                  |  | CommonStock    |       |   | AdditionalPaid InCapital |   |         | RetainedEarnings-SubstantiallyRestricted |  |   | Treasury Stock |   |  | Employee Stock Ownership Plan |         |   | Recognition and Retention Plan |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total  |  
|                                                                                                  |  | (In Thousands) |      
|BalanceDecember 31, 2000                                                                         |  | $              | 685   |   |                          | $ | 41,101  |                                          |  | $ | 62,925         |   |  | $                             | (9,041  | ) |                                | $ |       |                                            |  | $ |       |   |  | $ | (4,019 | ) |  | $ | 91,651  |  
|Net income for the year ended December 31, 2001                                                   |  |                |      |   |                          |   |        |                                          |  |   | 7,880          |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 7,880   |  
|Stock options exercised                                                                           |  |                | 1     |   |                          |   | 38      |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 39      |  
|Merger of Mutual Holding Company pursuant to reorganization                                       |  |                |      |   |                          |   |        |                                          |  |   | 1,352          |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 1,352   |  
|Exchange of common stock due to reorganization                                                    |  |                | (686  | ) |                          |   | (41,139 | )                                        |  |   |               |   |  |                               | 9,041   |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | (32,784 | )
|Issuance of common stock pursuant to reorganization, net of issuance costs of $2,276,588          |  |                | 1,574 |   |                          |   | 117,301 |                                          |  |   |               |   |  |                               | (1,382  | ) |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 117,493 |  
|Reclassification of common stock held by SMPIAP and related obligation                            |  |                |      |   |                          |   | 339     |                                          |  |   |               |   |  |                               | (339    | ) |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   |        |  
|Stock options exercised-after reorganization                                                      |  |                | 4     |   |                          |   | 135     |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 139     |  
|Purchase of common stock by Employee Stock Ownership Plan                                         |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               |        |   |                                |   | (5,218 | )                                          |  |   |       |   |  |   |       |   |  |   | (5,218  | )
|Recognition of unrealized increase in fair value of assets available for sale net of income taxes |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   | 2,015  |   |  |   | 2,015   |  
|Amortization of deferred compensation Employee Stock Ownership Plan                              |  |                |      |   |                          |   | 114     |                                          |  |   |               |   |  |                               |        |   |                                |   | 249    |                                            |  |   |       |   |  |   |       |   |  |   | 363     |  
|Cash dividends declared ($ 0.40 per share)                                                        |  |                |      |   |                          |   |        |                                          |  |   | (5,318         | ) |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | (5,318  | )
|                                                                                                  |  |                |       |   |                          |   |         |                                          |  |   |                |   |  |                               |         |   |                                |   |        |                                            |  |   |        |   |  |   |        |   |  |   |         |  
|BalanceDecember 31, 2001                                                                         |  |                | 1,578 |   |                          |   | 117,889 |                                          |  |   | 66,839         |   |  |                               | (1,721  | ) |                                |   | (4,969 | )                                          |  |   |       |   |  |   | (2,004 | ) |  |   | 177,612 |  
|Net income for the year ended December 31, 2002                                                   |  |                |      |   |                          |   |        |                                          |  |   | 16,798         |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 16,798  |  
|Stock options exercised                                                                           |  |                | 7     |   |                          |   | 401     |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 408     |  
|Purchase of treasury stock                                                                        |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               | (19,957 | ) |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | (19,957 | )
|Common stock retired                                                                              |  |                |      |   |                          |   | (37     | )                                        |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | (37     | )
|Reclassification of common stock held by SMPIAP and related obligation                            |  |                |      |   |                          |   | 27      |                                          |  |   |               |   |  |                               | (27     | ) |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   |        |  
|Recognition of unrealized decrease in fair value of assets available for sale net of income taxes |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   | (80    | ) |  |   | (80     | )
|Minimum pension liability adjustment                                                              |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   | (1,451 | ) |  |   | (1,451  | )
|Allocation and issuance of common stock for Recognition and Retention Plan                        |  |                | 2     |   |                          |   | 7,045   |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   | (7,047 | ) |  |   |       |   |  |   |        |  
|Amortization of deferred compensation Employee Stock Ownership Plan                              |  |                |      |   |                          |   | 323     |                                          |  |   |               |   |  |                               |        |   |                                |   | 360    |                                            |  |   |       |   |  |   |       |   |  |   | 683     |  
|Recognition and Retention Plan                                                                    |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   | 1,061  |   |  |   |       |   |  |   | 1,061   |  
|Cash dividends declared ($ 0.40 per share)                                                        |  |                |      |   |                          |   |        |                                          |  |   | (5,950         | ) |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | (5,950  | )
|                                                                                                  |  |                |       |   |                          |   |         |                                          |  |   |                |   |  |                               |         |   |                                |   |        |                                            |  |   |        |   |  |   |        |   |  |   |         |  
|BalanceDecember 31, 2002                                                                         |  |                | 1,587 |   |                          |   | 125,648 |                                          |  |   | 77,687         |   |  |                               | (21,705 | ) |                                |   | (4,609 | )                                          |  |   | (5,986 | ) |  |   | (3,535 | ) |  |   | 169,087 |  
|Net income for the year ended December 31, 2002                                                   |  |                |      |   |                          |   |        |                                          |  |   | 17,921         |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 17,921  |  
|Stock options exercised                                                                           |  |                | 11    |   |                          |   | 525     |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | 536     |  
|Purchase of treasury stock                                                                        |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               | (176    | ) |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | (176    | )
|Common stock retired                                                                              |  |                | (103  | ) |                          |   | (20,339 | )                                        |  |   |               |   |  |                               | 20,133  |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | (309    | )
|Reclassification of common stock held by SMPIAP and related obligation                            |  |                |      |   |                          |   | 46      |                                          |  |   |               |   |  |                               | (46     | ) |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   |        |  
|Recognition of unrealized decrease in fair value of assets available for sale net of income taxes |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   | 1,024  |   |  |   | 1,024   |  
|Minimum pension liability adjustment                                                              |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   | (206   | ) |  |   | (206    | )
|Allocation and issuance of common stock for Recognition and Retention Plan                        |  |                | 7     |   |                          |   | (7      | )                                        |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   |        |  
|Amortization of deferred compensation Employee Stock Ownership Plan                              |  |                |      |   |                          |   | 519     |                                          |  |   |               |   |  |                               |        |   |                                |   | 352    |                                            |  |   |       |   |  |   |       |   |  |   | 871     |  
|Recognition and Retention Plan                                                                    |  |                |      |   |                          |   |        |                                          |  |   |               |   |  |                               |        |   |                                |   |       |                                            |  |   | 1,576  |   |  |   |       |   |  |   | 1,576   |  
|Cash dividends declared ($ 0.40 per share)                                                        |  |                |      |   |                          |   |        |                                          |  |   | (5,815         | ) |  |                               |        |   |                                |   |       |                                            |  |   |       |   |  |   |       |   |  |   | (5,815  | )
|                                                                                                  |  |                |       |   |                          |   |         |                                          |  |   |                |   |  |                               |         |   |                                |   |        |                                            |  |   |        |   |  |   |        |   |  |   |         |  
|BalanceDecember 31, 2003                                                                         |  | $              | 1,502 |   |                          | $ | 106,392 |                                          |  | $ | 89,793         |   |  | $                             | (1,794  | ) |                                | $ | (4,257 | )                                          |  | $ | (4,410 | ) |  | $ | (2,717 | ) |  | $ | 184,509 |  
|                                                                                                  |  |                |       |   |                          |   |         |                                          |  |   |                |   |  |                               |         |   |                                |   |        |                                            |  |   |        |   |  |   |        |   |  |   |         |  



See Notes to
Consolidated Financial Statements.



F-5



---

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

---



|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                              |  | 2001           |          |   | 2002 |   |          | 2003 | 
|                                                                                              |  | (In Thousands) |         
|CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:                                                   |  |                |          |   |      |   |          |      |  |   |          |  
|Net Income                                                                                    |  | $              | 7,880    |   |      | $ | 16,798   |      |  | $ | 17,921   |  
|Adjustments to reconcile net income to net cash provided by operating activities:             |  |                |          |   |      |   |          |      |  |   |          |  
|Depreciation                                                                                  |  |                | 3,461    |   |      |   | 3,661    |      |  |   | 4,203    |  
|ESOP compensation expense                                                                     |  |                | 363      |   |      |   | 1,744    |      |  |   | 2,447    |  
|Accretion of discounts, amortization of premiums and goodwill, and other deferred yield items |  |                | (1,424   | ) |      |   | (3,138   | )    |  |   | (1,027   | )
|Provision for loan losses                                                                     |  |                | 2,054    |   |      |   | 1,986    |      |  |   | 3,122    |  
|Provisions for losses and net (gains) losses on sales of real estate owned                    |  |                | (90      | ) |      |   | (125     | )    |  |   | (33      | )
|Net (gain) loss on sale of:                                                                   |  |                |          |   |      |   |          |      |  |   |          |  
|Loans                                                                                         |  |                | (296     | ) |      |   | (74      | )    |  |   | (4,159   | )
|Corporate debt securities                                                                     |  |                |         |   |      |   |         |      |  |   | 2,474    |  
|Mortgage-backed securities                                                                    |  |                | (179     | ) |      |   | (64      | )    |  |   | (110     | )
|Office properties and equipment                                                               |  |                | 180      |   |      |   | 33       |      |  |   | 177      |  
|Other assets                                                                                  |  |                | (99      | ) |      |   |         |      |  |   |         |  
|(Increase) decrease in accrued interest receivable                                            |  |                | (501     | ) |      |   | 1,047    |      |  |   | (1,429   | )
|Increase in other assets                                                                      |  |                | (6,078   | ) |      |   | (3,899   | )    |  |   | (5,278   | )
|Increase (decrease) in drafts payable                                                         |  |                | 7,801    |   |      |   | (5,955   | )    |  |   | (5,979   | )
|Increase in deferred income taxes                                                             |  |                | (1,088   | ) |      |   | (553     | )    |  |   | (1,334   | )
|Increase in other liabilities                                                                 |  |                | 3,286    |   |      |   | 4,387    |      |  |   | 5,203    |  
|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                     |  |                | 15,270   |   |      |   | 15,848   |      |  |   | 16,198   |  
|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  
|CASH FLOW FROM (FOR) INVESTING ACTIVITIES:                                                    |  |                |          |   |      |   |          |      |  |   |          |  
|Loan originations, net of principal payments on loans                                         |  |                | (220,217 | ) |      |   | (310,902 | )    |  |   | (409,276 | )
|Principal payments received on mortgage-backed securities                                     |  |                | 72,682   |   |      |   | 124,275  |      |  |   | 281,571  |  
|Purchases of:                                                                                 |  |                |          |   |      |   |          |      |  |   |          |  
|Loans                                                                                         |  |                | (35,063  | ) |      |   | (47,167  | )    |  |   | (40,854  | )
|Mortgage-backed securities                                                                    |  |                |         |   |      |   | (37,054  | )    |  |   | (693,042 | )
|Federal Home Loan Bank stock                                                                  |  |                | (534     | ) |      |   | (1,186   | )    |  |   | (1,390   | )
|Municipal bonds and government and agency securities                                          |  |                | (166,995 | ) |      |   | (270,000 | )    |  |   | (162,516 | )
|Office properties and equipment                                                               |  |                | (10,969  | ) |      |   | (12,853  | )    |  |   | (8,617   | )
|Proceeds from sales of:                                                                       |  |                |          |   |      |   |          |      |  |   |          |  
|Other assets                                                                                  |  |                | 100      |   |      |   |         |      |  |   |         |  
|Loans                                                                                         |  |                | 35,899   |   |      |   | 5,146    |      |  |   | 199,472  |  
|Federal Home Loan Bank stock                                                                  |  |                | 676      |   |      |   | 2,844    |      |  |   | 987      |  
|Corporate debt securities                                                                     |  |                |         |   |      |   |         |      |  |   | 38,264   |  
|Real estate acquired in settlement of loans                                                   |  |                | 423      |   |      |   | 1,023    |      |  |   | 895      |  
|Mortgage-backed securities available for sale                                                 |  |                | 13,932   |   |      |   | 4,456    |      |  |   | 43,483   |  
|Office properties and equipment                                                               |  |                | 777      |   |      |   | 75       |      |  |   | 550      |  
|Proceeds from dissolution of Fidelity Bankshares, MHC                                         |  |                | 1,352    |   |      |   |         |      |  |   |         |  
|Proceeds from maturities of municipal bonds and government and agency securities              |  |                | 106,895  |   |      |   | 274,695  |      |  |   | 129,140  |  
|Other                                                                                         |  |                | (141     | ) |      |   | (34      | )    |  |   | (689     | )
|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  
|Net cash used for investing activities                                                        |  |                | (201,183 | ) |      |   | (266,682 | )    |  |   | (622,022 | )
|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  
|CASH FLOW FROM (FOR) FINANCING ACTIVITIES:                                                    |  |                |          |   |      |   |          |      |  |   |          |  
|Proceeds from the sale of common stock, net of issuance costs                                 |  |                | 79,659   |   |      |   | 124      |      |  |   | 309      |  
|Purchase of treasury stock                                                                    |  |                |         |   |      |   | (19,957  | )    |  |   | (176     | )
|Issuance of subordinated debentures (Net of issuance costs)                                   |  |                |         |   |      |   |         |      |  |   | 21,450   |  
|Cash dividends paid                                                                           |  |                | (4,536   | ) |      |   | (6,036   | )    |  |   | (5,792   | )
|Net increase (decrease) in:                                                                   |  |                |          |   |      |   |          |      |  |   |          |  
|NOW accounts, demand deposits and savings accounts                                            |  |                | 118,694  |   |      |   | 420,985  |      |  |   | 643,636  |  
|Certificates of deposit                                                                       |  |                | (57,076  | ) |      |   | (82,080  | )    |  |   | (81,876  | )
|Advances from Federal Home Loan Bank                                                          |  |                | 15,901   |   |      |   | (36,895  | )    |  |   | 11,190   |  
|Other borrowed funds                                                                          |  |                | 29,436   |   |      |   | 8,090    |      |  |   | (2,327   | )
|Advances by borrowers for taxes and insurance                                                 |  |                | (286     | ) |      |   | (22      | )    |  |   | (369     | )
|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                     |  |                | 181,792  |   |      |   | 284,209  |      |  |   | 586,045  |  
|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          |  |                | (4,121   | ) |      |   | 33,375   |      |  |   | (19,779  | )
|CASH AND CASH EQUIVALENTS, Beginning of year                                                  |  |                | 100,412  |   |      |   | 96,291   |      |  |   | 129,666  |  
|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  
|CASH AND CASH EQUIVALENTS, End of year                                                        |  | $              | 96,291   |   |      | $ | 129,666  |      |  | $ | 109,887  |  
|                                                                                              |  |                |          |   |      |   |          |      |  |   |          |  



See Notes to
Consolidated Financial Statements.



F-6



---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---



|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



Fidelity Bankshares, Inc. (the Company) is the parent of Fidelity Federal Bank & Trust (the Bank), a wholly-owned subsidiary of the Company.



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



The accounting and
reporting policies of the Company and its subsidiaries conform, in all material respects, to accounting principles generally accepted in the United States of America (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, Fidelity Capital Trust I, the Bank and the Banks wholly-owned subsidiaries, Fidelity Realty and Appraisal Services, Inc. (FRAS) and
Florida Consolidated Agency, Inc. (Fidelity Insurance). All significant intercompany balances and transactions have been eliminated. Neither the Bank nor its subsidiaries 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. Fidelity Insurance, an insurance agency, sells a full line of insurance products.



Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.



SecuritiesDebt securities
that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily
determinable fair values, are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive operations.



Purchase premiums and discounts are recognized in interest income using the interest method
over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale
of securities are recorded on the trade date and are determined using the specific identification method.



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 6 for the composition of the mortgage loan
portfolio). 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.



Allowance
for Loan LossesThe Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable estimated losses



F-7



---

inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is charged against
current period operating results and decreased by the amount of charge-offs, net of recoveries. The Companys methodology for assessing the appropriateness of the allowance consists of several key elements, which include a formula allowance and
specific allowances.



The formula allowance is calculated by applying loss
factors to outstanding loans based on an internal risk grade of such loans or pools of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based primarily on the
Companys historical loss experience and may be adjusted for other significant factors that, in managements judgement, affect the collectibility of the portfolio as of the evaluation date.



Pooled loan loss factors (not individually graded loans) are derived from a model that tracks
five years of historical loss experience. Pooled loans are loans that are homogeneous in nature, such as consumer installment and residential mortgage loans.



Specific allowances are established in cases where management has identified significant conditions or circumstances related to a loan that management believes indicate
the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance.



The allowance also incorporates the results of measuring impaired loans. A loan is considered impaired when management determines that it is probable that the Company
will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impairment is measured by the difference between the recorded investment in the loan (including accrued interest, net deferred loan fees or
costs and unamortized premium or discount) and the estimated present value of total expected future cash flows, discounted at the loans effective rate, or the fair value of the collateral, if the loan is collateral dependent. Impairment is
recognized by establishing a specific loan loss allowance for the impaired loan.



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 forty years for buildings and improvements and three to ten
years for furniture and equipment.



GoodwillGoodwill resulting
from the acquisition of BankBoynton in 1997 was amortized on a straight-line basis over fifteen years, while goodwill arising for the acquisition of Dunn & Noel in 1999, which became Fidelity Insurance, was being amortized on a straight-line
basis over ten years. Beginning January 1, 2002 amortization of goodwill was discontinued as goodwill is subject to annual impairment testing. Based on



F-8



---

current year analysis, no impairment in the carrying value of goodwill was noted. The balance of goodwill included in
other assets at December 31, 2002 and 2003 was $ 2,171,000.



Long-Lived
AssetsLong-lived assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and
used, the Company bases its evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors
that may be present. If impairment indicators are present or other factors exist that indicate the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash
flows analysis of assets at the lowest level for which identifiable cash flows exist. If impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset. The fair value
of the asset is measured using quoted market prices or, in the absence of quoted fair market prices, fair value is based on the estimate of discounted cash flow analysis.



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 contractual life of the loans using the interest method.



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



CommitmentFees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.



Pension and Retirement
PlansThe Companys policy is to fund pension and retirement plan costs as they accrue based on normal cost.



Income TaxesThe Company and its subsidiaries file consolidated federal and state income tax returns (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.



F-9



---

Stock Option PlansAt December 31, 2003, the Company has three stock-based compensation plans, which
are described more fully in Note 14. The Company accounts for those plans using the intrinsic value. Accordingly, no stock-based employee compensation cost relative to stock options is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition method
to stock-based employee compensation.



|                                                                                                                   |  |                          |       |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ----- | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                   |  | Years Ended December 31, |      
|                                                                                                                   |  | 2001                     |       | 2002 |   |        | 2003 | 
|Net Income, as reported                                                                                            |  | $                        | 7,880 |      | $ | 16,798 |      |  | $ | 17,921 |  
|Add: Total stock-based employee compensation expense included in reported net earnings, net of related tax effects |  |                          |      |      |   | 648    |      |  |   | 961    |  
|Deduct: Total stock-based employee compensation for all awards, net of related tax effects                         |  |                          |      |      |   | (1,147 | )    |  |   | (1,482 | )
|                                                                                                                   |  |                          |       |      |   |        |      |  |   |        |  
|Pro forma net income                                                                                               |  | $                        | 7,880 |      | $ | 16,299 |      |  | $ | 17,400 |  
|                                                                                                                   |  |                          |       |      |   |        |      |  |   |        |  
|Earnings per share:                                                                                                |  |                          |       |      |   |        |      |  |   |        |  
|Basicas reported                                                                                                  |  |                          | 0.52  |      |   | 1.12   |      |  |   | 1.24   |  
|Basicpro forma                                                                                                    |  |                          | 0.52  |      |   | 1.09   |      |  |   | 1.20   |  
|                                                                                                                   |  |                          |      
|Dilutedas reported                                                                                                |  |                          | 0.51  |      |   | 1.11   |      |  |   | 1.22   |  
|Dilutedpro forma                                                                                                  |  |                          | 0.51  |      |   | 1.08   |      |  |   | 1.18   |  



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 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.



Recent Accounting Pronouncements Affecting the CompanyIn June 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 discontinues the practice of amortizing goodwill
and intangible assets with indefinite lives and initiates an annual review for impairment of these assets. As this promulgation relates to the Company, it is effective on January 1, 2002. The Company did not have any impairment in the carrying value
of goodwill arising from previous acquisitions. Amortization of goodwill included in the Companys consolidated statements of operations for the year ended December 31, 2001 was $ 245,000.



In November 2002, the FASB Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others was issued. This interpretation requires elaborating on the disclosures that must be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this Interpretation are effective for statements issued after December 15, 2002 and its recognition requirements are applicable for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 effective as of the first quarter of 2003 did not have a material effect on the Companys results of operations or financial position.



F-10



---

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure,
an amendment of FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions
of Statement 148 are effective for interim periods beginning after December 15, 2002, with early application encouraged. The adoption of the disclosure provisions of SFAS No. 148 did not have a material effect on the Companys results of
operations or financial position. The disclosures pursuant to SFAS No. 148 may be found in Notes 1 and 14.



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities which addresses consolidation of variable interest entities (VIEs) certain of which are also referred to as
special purpose entities (SPEs). The FASB revised FIN 46 in December 2003. VIEs are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support from other parties. Under the provisions of FIN 46, a company is to consolidate a VIE if the company has a variable interest (or combination of variable interests)
that will absorb a majority of the VIEs expected losses if they occur, received a majority of the VIEs expected residual returns if they occur, or both. The implementation of FIN 46 is required for public entities at the end of the first
interim period ending after March 15, 2004 if the VIE was created before February 1, 2003, with early adoption allowed, and immediately for entities created after February 1, 2003. The Company early adopted FIN 46 and has deconsolidated the Fidelity
Capital Trust I at December 31, 2003 (See Note 11). The deconsolidation of Fidelity Capital Trust I did not have a material impact on the Companys consolidated financial position or results of operations.



On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 was effective May 31, 2003 for all new and modified financial instruments and otherwise was effective at the beginning of the first interim period beginning after
June 15, 2003. SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could be accounted for as equity. SFAS No. 150 requires that those instruments be classified as liabilities or in some
circumstances assets. The adoption of this statement did not have a material impact on the Companys results of operations or financial condition.



In November 2003, the EITF reached a consensus on the disclosure provisions of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments. EITF No. 03-1 requires that certain quantitative and qualitative disclosures be made for certain debt securities classified as available-for-sale under SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. Debt securities within the scope of EITF Issue No. 99-20, are not subject to these disclosure
provisions. The disclosures are required for fiscal years ending after December 15, 2003, and accordingly the Company adopted the disclosure provisions of EITF No. 03-1 for the year ended December 31, 2003.



In December 2003, the FASB Issued Statement of Financial Accounting Standards No. 132
(revised 2003), Employees Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, to address the increasing significance of corporate pension plans to company financial statements
and the call for greater transparency in financial reports. The statement requires additional disclosures, regarding plan assets, investment strategy, measurement date, plan obligations, cash flows and components of net periodic benefit cost of
defined benefit pension plans and other postretirement benefit plans. However, it does not change the measurement or recognition of those plans required by SFAS No. 87, SFAS No. 88 and SFAS No. 106. The Company adopted the disclosure provisions of
EITF No. 03-1 for the year ended December 31, 2003.



F-11



---

ReclassificationsCertain amounts in the consolidated financial statements have been reclassified to be
consistent with the current years presentation.



|2. | REORGANIZATION AND SECOND STEP CONVERSION
|-- | -----------------------------------------



The Company completed the second step of the mutual-to-stock conversion of its mutual holding company parent on May 15, 2001 and the related common stock offering
resulted in the Company selling 8,695,943 shares of common stock for $10.00 per share to certain customers of Fidelity Federal Bank & Trust, its benefit plans, including the employee stock ownership plan, and to existing public stockholders of
Fidelity Bankshares, Inc. In addition, 7,048,207 shares were issued to the existing stockholders based on an exchange rate of 2.4165 new shares of common stock for each existing share. At the completion of the conversion, the Company had 15,744,150
shares outstanding.



The conversion was accounted for as a change in corporate
form with no subsequent change in the historical basis of the Companys assets, liabilities and equity. All references in the consolidated financial statements and notes thereto to share data (including number of shares and per-share amounts)
have been restated giving retroactive recognition to the exchange rate.



F-12



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3.    MUNICIPAL BONDS AND GOVERNMENT AND AGENCY SECURITIES AVAILABLE FOR SALE



Securities available for sale are summarized as follows:



|                                               |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        
|---------------------------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ----------------------- |  | - | -------------------- | - |  | - | -------
|                                               |  | Amortized Cost         |         |   | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Estimated Fair Value
|                                               |  | (Dollars in Thousands)
|December 31, 2002:                             |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        
|Municipal Bonds                                |  | $                      | 641     |   |                        | $ | 28                      |  | $ |                     |   |  | $ | 669    
|United States Government and agency securities |  |                        | 88,996  |   |                        |   | 214                     |  |   |                     |   |  |   | 89,210 
|                                               |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        
|Total                                          |  | $                      | 89,637  |   |                        | $ | 242                     |  | $ |                     |   |  | $ | 89,879 
|                                               |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        
|Weighted average interest rate                 |  |                        | 2.55    | % |                        |   |                         |  |   |                      |   |  |   |        
|                                               |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        
|December 31, 2003:                             |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        
|Municipal Bonds                                |  | $                      | 501     |   |                        | $ | 21                      |  | $ |                     |   |  | $ | 522    
|United States Government and agency securities |  |                        | 122,208 |   |                        |   | 180                     |  |   | (179                 | ) |  |   | 122,209
|                                               |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        
|Total                                          |  | $                      | 122,709 |   |                        | $ | 201                     |  | $ | (179                 | ) |  | $ | 122,731
|                                               |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        
|Weighted average interest rate                 |  |                        | 3.03    | % |                        |   |                         |  |   |                      |   |  |   |        
|                                               |  |                        |         |   |                        |   |                         |  |   |                      |   |  |   |        



As of December 31, 2003, the Bank held
no municipal bonds and government and agency securities available for sale that were in a continuous unrealized loss position for twelve months or more.



The following table sets forth the contractual maturity of the Banks municipal bonds and agency securities available for sale at December 31, 2002 and 2003.



|                              |  |                   |        |                     |   |               |  |                      |         |  |   |        
|----------------------------- |  | ----------------- | ------ | ------------------- | - | ------------- |  | -------------------- | ------- |  | - | -------
|                              |  | December 31, 2002 |        | December 31, 2003  
|                              |  | Amortized Cost    |        | Estimated FairValue |   | AmortizedCost |  | Estimated Fair Value
|                              |  | (In Thousands)   
|Due in one year or less       |  | $                 | 10,136 |                     | $ | 10,296        |  | $                    | 145     |  | $ | 149    
|Due in one year to five years |  |                   | 79,501 |                     |   | 79,583        |  |                      | 122,564 |  |   | 122,582
|                              |  |                   |        |                     |   |               |  |                      |         |  |   |        
|Total                         |  | $                 | 89,637 |                     | $ | 89,879        |  | $                    | 122,709 |  | $ | 122,731
|                              |  |                   |        |                     |   |               |  |                      |         |  |   |        



The Bank had total Government and
Agency securities available for sale pledged at December 31, 2002 and 2003 of $ 78.9 million and $ 120.0 million, respectively. Of the $ 120.0 million of securities pledged at December 31, 2003, $ 115.0 million was pledged to the State of Florida as
collateral for certificates of deposit, $ 2.9 million was pledged as collateral for Treasury Tax and Loan (TT&L) accounts held for the benefit of the federal government and $ 2.1 million was pledged as collateral for trust accounts.



There were no sales of municipal bonds or government and agency securities
during the years ended December 31, 2001, 2002 and 2003.



F-13



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4.    MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE



Mortgage-backed securities available for sale at December 31, 2002 and 2003 are summarized
as follows:



|                          |  |                |         |                        |   |                         |  |                      |       |  |   |        
|------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | -------------------- | ----- |  | - | -------
|                          |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Fair Value
|                          |  | (In Thousands)
|December 31, 2002:        |  |                |         |                        |   |                         |  |                      |       |  |   |        
|FHLMC-fixed rate          |  | $              | 13,257  |                        | $ | 659                     |  | $                    |      |  | $ | 13,916 
|FNMA-fixed rate           |  |                | 24,797  |                        |   | 1,107                   |  |                      |      |  |   | 25,904 
|GNMA-fixed rate           |  |                | 2,860   |                        |   | 139                     |  |                      |      |  |   | 2,999  
|FHLMC CMO-fixed rate      |  |                | 13,499  |                        |   | 153                     |  |                      |      |  |   | 13,652 
|FNMA CMO-fixed rate       |  |                | 16,030  |                        |   | 6                       |  |                      | 300   |  |   | 15,736 
|FNMA-adjustable rate      |  |                | 68      |                        |   | 1                       |  |                      |      |  |   | 69     
|GNMA-adjustable rate      |  |                | 5,009   |                        |   |                        |  |                      |      |  |   | 5,009  
|FHLMC CMO-adjustable rate |  |                | 28,097  |                        |   | 5                       |  |                      | 90    |  |   | 28,012 
|FNMA CMO-adjustable rate  |  |                | 4,440   |                        |   | 18                      |  |                      |      |  |   | 4,458  
|                          |  |                |         |                        |   |                         |  |                      |       |  |   |        
|Total                     |  | $              | 108,057 |                        | $ | 2,088                   |  | $                    | 390   |  | $ | 109,755
|                          |  |                |         |                        |   |                         |  |                      |       |  |   |        
|December 31, 2003:        |  |                |         |                        |   |                         |  |                      |       |  |   |        
|FHLMC-fixed rate          |  | $              | 6,358   |                        | $ | 350                     |  | $                    |      |  | $ | 6,708  
|FNMA-fixed rate           |  |                | 21,982  |                        |   | 572                     |  |                      | 15    |  |   | 22,539 
|GNMA-fixed rate           |  |                | 1,487   |                        |   | 78                      |  |                      |      |  |   | 1,565  
|FHLMC CMO-fixed rate      |  |                | 115,693 |                        |   | 61                      |  |                      | 2,145 |  |   | 113,609
|FNMA CMO-fixed rate       |  |                | 134,695 |                        |   | 1,162                   |  |                      | 683   |  |   | 135,174
|FNMA-adjustable rate      |  |                | 39,071  |                        |   |                        |  |                      | 1     |  |   | 39,070 
|GNMA-adjustable rate      |  |                | 61,118  |                        |   |                        |  |                      | 660   |  |   | 60,458 
|FHLMC CMO-adjustable rate |  |                | 15,566  |                        |   | 125                     |  |                      |      |  |   | 15,691 
|FNMA CMO-adjustable rate  |  |                | 77,018  |                        |   |                        |  |                      | 604   |  |   | 76,414 
|                          |  |                |         |                        |   |                         |  |                      |       |  |   |        
|Total                     |  | $              | 472,988 |                        | $ | 2,348                   |  | $                    | 4,108 |  | $ | 471,228
|                          |  |                |         |                        |   |                         |  |                      |       |  |   |        



There were $ 13.8 million in sales of
mortgage-backed securities classified as available for sale during the year ended December 31, 2001, resulting in proceeds of $ 13.9 million, gross realized gains of $ 179,000 and no gross realized losses. There were $ 4.4 million in sales of
mortgage-backed securities classified as available for sale during the year ended December 31, 2002, resulting in proceeds of $ 4.5 million, gross realized gains of $ 64,000 and no gross realized losses. There were $ 43.4 million in sales of
mortgage-backed securities classified as available for sale during the year ended December 31, 2003, resulting in proceeds of $ 43.5 million, gross realized gains of $ 110,000 and no gross realized losses. As of December 31, 2003, mortgage-backed
securities available for sale that were in a continuous unrealized loss position for twelve months or more were not significant.



The Bank had total mortgage-backed securities available for sale pledged at December 31, 2002 and 2003 of $94.8 million and $ 190.1 million, respectively. Of the $ 190.1
million of securities pledged at December 31, 2003, $ 86.6 million was pledged for customer accounts that exceeded $ 100,000 and $ 103.5 million was pledged as collateral for other borrowed funds.



F-14



---

5.    CORPORATE DEBT AVAILABLE FOR SALE



Investment grade, adjustable rate trust preferred securities of other financial institutions
at December 31, 2002 are summarized as follows:



|                               |  |                        |        |   |                        |   |                         |  |                      |       |  |   |       
|------------------------------ |  | ---------------------- | ------ | - | ---------------------- | - | ----------------------- |  | -------------------- | ----- |  | - | ------
|                               |  | Amortized Cost         |        |   | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Fair Value
|                               |  | (Dollars in Thousands)
|December 31, 2002              |  |                        |        |   |                        |   |                         |  |                      |       |  |   |       
|Total                          |  | $                      | 40,740 |   |                        | $ |                        |  | $                    | 5,356 |  | $ | 35,384
|                               |  |                        |        |   |                        |   |                         |  |                      |       |  |   |       
|Weighted average interest rate |  |                        | 2.23   | % |                        |   |                         |  |                      |       |  |   |       
|                               |  |                        |        |   |                        |   |                         |  |                      |       |  |   |       



The Bank held no investment in
corporate debt securities at December 31, 2003.



During 2001 and 2002, there
were no sales of corporate debt securities.



During 2003, the Bank sold its
entire portfolio of corporate debt securities for $ 38.3 million in gross proceeds resulting in gross realized losses of $ 2.5 million and no gross realized gains.



6.     LOANS RECEIVABLE



Loans receivable at December 31, 2002 and 2003 consist of the following:



|                                                                 |  |                |           |   |      |   |          
|---------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | ---------
|                                                                 |  | 2002           |           |   | 2003
|                                                                 |  | (In Thousands)
|One-to-four single family, residential real estate mortgages     |  | $              | 1,062,956 |   |      | $ | 1,002,573
|Commercial and multi-family real estate mortgages                |  |                | 459,054   |   |      |   | 753,890  
|Real estate construction-primarily residential                   |  |                | 364,346   |   |      |   | 470,016  
|Land loans-primarily residential                                 |  |                | 29,181    |   |      |   | 36,660   
|                                                                 |  |                |           |   |      |   |          
|Total first mortgage loans                                       |  |                | 1,915,537 |   |      |   | 2,263,139
|Consumer loans                                                   |  |                | 141,343   |   |      |   | 185,450  
|Commercial business loans                                        |  |                | 146,205   |   |      |   | 131,292  
|                                                                 |  |                |           |   |      |   |          
|Total gross loans                                                |  |                | 2,203,085 |   |      |   | 2,579,881
|Less:                                                            |  |                |           |   |      |   |          
|Undisbursed portion of loans in process                          |  |                | 260,380   |   |      |   | 374,974  
|Unearned discounts, premiums and deferred loan fees (costs), net |  |                | (1,612    | ) |      |   | 2,092    
|Allowance for loan losses                                        |  |                | 8,318     |   |      |   | 11,119   
|                                                                 |  |                |           |   |      |   |          
|Loans receivable-net                                             |  | $              | 1,935,999 |   |      | $ | 2,191,696
|                                                                 |  |                |           |   |      |   |          



The amount of loans on which the Bank
has ceased accruing interest or does not charge interest aggregated to approximately $ 6,225,000 and $ 10,940,000, net of specific valuation allowances of $ 365,000 and $ 278,000, at December 31, 2002 and 2003, respectively. The amount of interest
not accrued relating to non accrual loans was approximately $ 242,000, $ 513,000 and $ 352,000 at December 31, 2001, 2002 and 2003, respectively. The allowance for loan losses is maintained at a level that represents managements best estimate
of losses in the loan portfolio at the balance sheet date that were both probable and reasonably estimable.



F-15



---

An analysis of the changes in the allowance for loan losses is as follows:



|                               |  |                |       |   |      |   |       |      |  |   |        |  
|------------------------------ |  | -------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                               |  | 2001           |       |   | 2002 |   |       | 2003 | 
|                               |  | (In Thousands) |      
|Balance at beginning of period |  | $              | 4,905 |   |      | $ | 6,847 |      |  | $ | 8,318  |  
|Current provision              |  |                | 2,054 |   |      |   | 1,986 |      |  |   | 3,122  |  
|Charge-offs                    |  |                | (117  | ) |      |   | (575  | )    |  |   | (322   | )
|Recoveries                     |  |                | 5     |   |      |   | 60    |      |  |   | 1      |  
|                               |  |                |       |   |      |   |       |      |  |   |        |  
|Ending balance                 |  | $              | 6,847 |   |      | $ | 8,318 |      |  | $ | 11,119 |  
|                               |  |                |       |   |      |   |       |      |  |   |        |  



The Bank originates both adjustable
and fixed rate mortgage loans. At December 31, 2003, the Bank had $958,000 loans held for sale. The Bank had no loans held for sale at December 31, 2002.



A loan is considered impaired when, based on current information and events, it is probable that the Bank 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, 2001, 2002 and 2003 and the related allowance for those loans is as follows:



|                                                |  |                |       |                   |   |              |  |                   |       |              |   |                   |  |   |        |  |   |    
|----------------------------------------------- |  | -------------- | ----- | ----------------- | - | ------------ |  | ----------------- | ----- | ------------ | - | ----------------- |  | - | ------ |  | - | ---
|                                                |  | 2001           |       | 2002              |   | 2003        
|                                                |  | (In Thousands)
|                                                |  | Loan Balance   |       | Related Allowance |   | Loan Balance |  | Related Allowance |       | Loan Balance |   | Related Allowance
|Impaired loan balances and related allowances:  |  |                |       |                   |   |              |  |                   |       |              |   |                   |  |   |        |  |   |    
|Loans with related allowance for loan losses    |  | $              | 1,242 |                   | $ | 1,093        |  | $                 | 1,145 |              | $ | 546               |  | $ | 3,508  |  | $ | 598
|Loans without related allowance for loan losses |  |                | 5,680 |                   |   |             |  |                   | 7,248 |              |   |                  |  |   | 9,162  |  |   |   
|                                                |  |                |       |                   |   |              |  |                   |       |              |   |                   |  |   |        |  |   |    
|                                                |  | $              | 6,922 |                   | $ | 1,093        |  | $                 | 8,393 |              | $ | 546               |  | $ | 12,670 |  | $ | 598
|                                                |  |                |       |                   |   |              |  |                   |       |              |   |                   |  |   |        |  |   |    
|Average balance of impaired loans               |  | $              | 5,987 |                   |   |              |  | $                 | 7,658 |              |   |                   |  | $ | 10,532 |  |   |    
|                                                |  |                |       |                   |   |              |  |                   |       |              |   |                   |  |   |        |  |   |    



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, 2003, the composition and maturity or repricing
of the loan portfolio, net of the undisbursed portion of loans in process is presented below:



|                  |  |                           |  |                         |  |                          
|----------------- |  | ------------------------- |  | ----------------------- |  | -------------------------
|Fixed Rate        |  | Adjustable Rate          
|Term of Maturity  |  | Book Value (In Thousands) |  | Term to Rate Adjustment |  | Book Value (In Thousands)
|1 year or less    |  | $24,274                   |  | 1 year or less          |  | $977,880                 
|1 year-3 years    |  | 30,850                    |  | 1 year-3 years          |  | 66,435                   
|3 years-5 years   |  | 32,374                    |  | 3 years-5 years         |  | 266,843                  
|5 years-10 years  |  | 70,794                    |  | 5 years-10 years        |  |                         
|10 years-20 years |  | 409,831                   |  | 10 years-20 years       |  |                         
|Over 20 years     |  | 325,626                   |  | Over 20 years           |  |                         
|                  |  |                           |  |                         |  |                          
|Total             |  | $893,749                  |  | Total                   |  | $1,311,158               
|                  |  |                           |  |                         |  |                          



16



---

Commercial Real Estate LendingThe Bank originates and purchases commercial real estate loans, which 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 are approximately as follows:



|                            |  |                |         |      |   |        
|--------------------------- |  | -------------- | ------- | ---- | - | -------
|                            |  | 2002           |         | 2003
|                            |  | (In Thousands)
|Office buildings            |  | $              | 124,488 |      | $ | 208,999
|Retail buildings            |  |                | 33,099  |      |   | 62,652 
|Warehouses                  |  |                | 32,003  |      |   | 40,013 
|Multi family                |  |                | 45,279  |      |   | 106,042
|Hotels and motels           |  |                | 3,368   |      |   | 2,995  
|Land                        |  |                | 150,946 |      |   | 163,618
|Other property improvements |  |                | 69,871  |      |   | 169,571
|                            |  |                |         |      |   |        
|Total                       |  | $              | 459,054 |      | $ | 753,890
|                            |  |                |         |      |   |        



Under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (FIRREA), a federally chartered savings and loan associations aggregate non-residential 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, 2003 the Bank estimates that, while complying with this
limitation, it could originate an additional $ 315.4 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. This 15% limitation results in a dollar limitation of approximately $ 33.3 million at December 31, 2003. At December 31, 2003, the Bank was in compliance with 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, 2002 and 2003 were $ 34.4 million and $ 147.3 million, respectively. Custodial escrow balances maintained in connection with the foregoing
loan servicing were $ 118,000 and $ 434,000 at December 31, 2002 and 2003, respectively. The balance of deferred servicing assets relating to serviced loans were $ 80,000 and $ 1,235,000 at December 31, 2002 and 2003, 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 $
2,840,000 and $ 3,193,000 at December 31, 2002 and 2003, respectively, which did not exceed 5% of stockholders equity.



Collateral for Advances from the Federal Home Loan BankThe terms of a security agreement with the FHLB 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).



F-17



---

7.    OFFICE PROPERTIES AND EQUIPMENT



Office properties and equipment at December 31, 2002 and 2003 are summarized as follows:



|                                    |  |                |        |      |   |       
|----------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                    |  | 2002           |        | 2003
|                                    |  | (In Thousands)
|Land                                |  | $              | 16,481 |      | $ | 17,378
|Buildings and improvements          |  |                | 52,113 |      |   | 53,755
|Furniture and equipment             |  |                | 19,759 |      |   | 23,801
|                                    |  |                |        |      |   |       
|Total                               |  |                | 88,353 |      |   | 94,934
|Less accumulated depreciation       |  |                | 20,569 |      |   | 24,271
|                                    |  |                |        |      |   |       
|Office properties and equipmentnet |  | $              | 67,784 |      | $ | 70,663
|                                    |  |                |        |      |   |       



8.    ACCRUED
INTEREST RECEIVABLE



Accrued interest receivable at December 31, 2002 and
2003 consists of the following:



|                                              |  |                |       |      |   |       
|--------------------------------------------- |  | -------------- | ----- | ---- | - | ------
|                                              |  | 2002           |       | 2003
|                                              |  | (In Thousands)
|Loans                                         |  | $              | 8,575 |      | $ | 8,663 
|Investments                                   |  |                | 573   |      |   | 959   
|Mortgage-backed and corporate debt securities |  |                | 550   |      |   | 1,505 
|                                              |  |                |       |      |   |       
|Accrued interest receivable                   |  | $              | 9,698 |      | $ | 11,127
|                                              |  |                |       |      |   |       



F-18



---

|9. | DEPOSITS
|-- | --------



The weighted-average interest rates on deposits at December 31, 2002 and 2003 were 1.95% and 1.51%, respectively. Deposit accounts, by type and range of rates at December 31, 2002 and 2003 consist of the following:



|                                                                                                    |  |                |           |      |   |          
|--------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ---- | - | ---------
|Account Type and Rate                                                                               |  | 2002           |           | 2003
|                                                                                                    |  | (In Thousands)
|Non-interest-bearing checking accounts                                                              |  | $              | 209,695   |      | $ | 294,358  
|Interest-bearing checking and funds transfer accounts 2002 and 2003, 1.35 % and 1.03%, respectively |  |                | 388,179   |      |   | 566,028  
|Passbook and statement accounts 2002 and 2003, 1.67 % and 1.61%, respectively                       |  |                | 340,709   |      |   | 615,972  
|Variable-rate money market accounts 2002 and 2003, 1.63 % and 1.52%, respectively                   |  |                | 192,003   |      |   | 297,864  
|                                                                                                    |  |                |           |      |   |          
|                                                                                                    |  |               
|Total non-certificate accounts                                                                      |  |                | 1,130,586 |      |   | 1,774,222
|                                                                                                    |  |                |           |      |   |          
|                                                                                                    |  |               
|Certificates:                                                                                       |  |                |           |      |   |          
|0.00%  1.00%                                                                                       |  |                | 21,078    |      |   | 78,324   
|1.01%  2.00%                                                                                       |  |                | 126,774   |      |   | 209,013  
|2.01%  3.00%                                                                                       |  |                | 310,644   |      |   | 193,797  
|3.01%  4.00%                                                                                       |  |                | 97,826    |      |   | 60,962   
|4.01%  5.00%                                                                                       |  |                | 173,915   |      |   | 135,450  
|5.01%  6.00%                                                                                       |  |                | 19,406    |      |   | 5,684    
|6.01%  7.00%                                                                                       |  |                | 15,789    |      |   | 2,637    
|7.01%  8.00%                                                                                       |  |                | 2,323     |      |   | 12       
|                                                                                                    |  |                |           |      |   |          
|                                                                                                    |  |               
|Total certificates                                                                                  |  |                | 767,755   |      |   | 685,879  
|                                                                                                    |  |                |           |      |   |          
|                                                                                                    |  |               
|Total                                                                                               |  | $              | 1,898,341 |      | $ | 2,460,101
|                                                                                                    |  |                |           |      |   |          



Individual deposits greater than $
100,000 at December 31, 2002 and 2003 aggregated approximately $ 709.0 million and $ 1.3 billion, respectively. Deposit balances up to $ 100,000 are FDIC insured.



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 $ 156,000, $ 139,000 and $ 112,000 for the years ended December 31, 2001, 2002 and 2003, respectively.



Scheduled maturities of certificate accounts are as follows:



|                 |  |                        |         |         |        |   |        |   |         |  |        |  
|---------------- |  | ---------------------- | ------- | ------- | ------ | - | ------ | - | ------- |  | ------ | -
|                 |  | December 31,           |        
|                 |  | 2002                   |         |         | 2003   |  
|Maturity         |  | Amount                 |         | Percent |        |   | Amount |   | Percent | 
|                 |  | (Dollars in Thousands) |        
|Less than 1 year |  | $                      | 505,058 |         | 65.78  | % |        | $ | 453,839 |  | 66.17  | %
|1 year-2 years   |  |                        | 147,576 |         | 19.22  | % |        |   | 122,966 |  | 17.93  | %
|2 years-3 years  |  |                        | 58,941  |         | 7.68   | % |        |   | 60,885  |  | 8.88   | %
|3 years-4 years  |  |                        | 25,797  |         | 3.36   | % |        |   | 31,047  |  | 4.52   | %
|4 years-5 years  |  |                        | 30,180  |         | 3.93   | % |        |   | 17,142  |  | 2.50   | %
|Thereafter       |  |                        | 203     |         | 03     | % |        |   |        |  |       | %
|                 |  |                        |         |         |        |   |        |   |         |  |        |  
|Total            |  | $                      | 767,755 |         | 100.00 | % |        | $ | 685,879 |  | 100.00 | %
|                 |  |                        |         |         |        |   |        |   |         |  |        |  



F-19



---

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 institutions in the Banks normal market
area. Even though the Bank meets all of the applicable minimum capital requirements at December 31, 2003, the Bank had no brokered deposits.



Interest expense on deposits consists of the following during the years ended December 31, 2001, 2002 and 2003:



|                                   |  |                |        |      |   |        |  |   |       
|---------------------------------- |  | -------------- | ------ | ---- | - | ------ |  | - | ------
|                                   |  | 2001           |        | 2002 |   | 2003  
|                                   |  | (In Thousands)
|Passbook accounts                  |  | $              | 2,936  |      | $ | 4,337  |  | $ | 9,643 
|Interest-bearing checking accounts |  |                | 1,006  |      |   | 4,026  |  |   | 5,553 
|Money market accounts              |  |                | 6,529  |      |   | 3,186  |  |   | 4,006 
|Certificate accounts               |  |                | 50,320 |      |   | 28,804 |  |   | 19,403
|                                   |  |                |        |      |   |        |  |   |       
|Total                              |  | $              | 60,791 |      | $ | 40,353 |  | $ | 38,605
|                                   |  |                |        |      |   |        |  |   |       



|10. | ADVANCES FROM FEDERAL HOME LOAN BANK
|--- | ------------------------------------



The Bank had outstanding advances from the FHLB of $ 253.4 million with interest rates ranging from 4.51% to 7.01% and $ 264.6 million with interest rates ranging from
1.00% to 7.01% at December 31, 2002 and 2003 respectively. The advances at the dates specified are repayable as follows:



|                          |  |                      |         |                      |   |        
|------------------------- |  | -------------------- | ------- | -------------------- | - | -------
|Years Ending December 31, |  | At December 31, 2002 |         | At December 31, 2003
|                          |  | (In Thousands)      
|2003                      |  | $                    | 9,473   |                      | $ |       
|2004                      |  |                      | 8,720   |                      |   | 13,697 
|2005                      |  |                      | 158,571 |                      |   | 163,571
|2006                      |  |                      | 8,571   |                      |   | 13,571 
|2007                      |  |                      | 8,571   |                      |   | 13,571 
|Thereafter                |  |                      | 59,465  |                      |   | 60,151 
|                          |  |                      |         |                      |   |        
|Total                     |  | $                    | 253,371 |                      | $ | 264,561
|                          |  |                      |         |                      |   |        



|11. | GUARANTEED PREFERRED BENEFICIAL INTERESTS IN DEBENTURES
|--- | -------------------------------------------------------



In January, 1998 the Company issued $ 28.8 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 $ 29.6 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. Interest expense is recorded as advances from Federal Home Loan Bank and other borrowings on the consolidated statement of
operations. 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.



In December 2003 the Company issued $ 22.7 million of mandatorily redeemable, Preferred
Securities as part of a pooled trust preferred stock offering out of a grantor trust, Fidelity Capital Trust II, a Delaware statutory



F-20



---

business trust, which was created by the Company for this sole purpose. As its only asset, the trust owns $ 22.7 million
of Guaranteed Preferred Beneficial Interests in the Companys Debentures due January 23, 2034, purchased with the proceeds of the preferred securities issuance. These securities will pay interest at a floating rate of 285 basis points above the
three month LIBOR rate. The subordinated debentures are scheduled to mature on January 23, 2034, at which time the trust preferred securities will be redeemed. 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 of both Trusts are cumulative and are payable at the same rate as the Companys debentures described above. The Companys debentures, due January 31, 2028, are redeemable in whole or in part at the Companys discretion at
100% of principal amount commencing January 31, 2003. The Companys debentures, due January 23, 2034, are redeemable in whole or in part at the Companys discretion at 100% of principal amount commencing January 23, 2009. The preferred
securities issued by both trusts 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. The Company has invested a combined total of $ 45 million in the common stock of the Bank from the funds raised from both issuances.



12.    INCOME TAXES



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, 2001, 2002 and 2003 are as follows:



|                           |  |                |        |   |      |   |        |      |  |   |        |  
|-------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                           |  | 2001           |        |   | 2002 |   |        | 2003 | 
|                           |  | (In Thousands) |       
|Currentfederal            |  | $              | 5,393  |   |      | $ | 9,712  |      |  | $ | 11,006 |  
|Currentstate              |  |                | 861    |   |      |   | 1,578  |      |  |   | 1,807  |  
|                           |  |                |        |   |      |   |        |      |  |   |        |  
|Total current              |  |                | 6,254  |   |      |   | 11,290 |      |  |   | 12,813 |  
|Deferredfederal and state |  |                | (1,088 | ) |      |   | (553   | )    |  |   | (1,334 | )
|                           |  |                |        |   |      |   |        |      |  |   |        |  
|Total                      |  | $              | 5,166  |   |      | $ | 10,737 |      |  | $ | 11,479 |  
|                           |  |                |        |   |      |   |        |      |  |   |        |  



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:



|                                                       |  |                          |       |   |      |      |   |        |   |        |  |      |        |  |   |        |   |  |      |  
|------------------------------------------------------ |  | ------------------------ | ----- | - | ---- | ---- | - | ------ | - | ------ |  | ---- | ------ |  | - | ------ | - |  | ---- | -
|                                                       |  | Years Ended December 31, |      
|                                                       |  | 2001                     |       |   | 2002 |      |   | 2003   |  
|                                                       |  | Amount                   |       |   | %    |      |   | Amount |   | %      |  |      | Amount |  |   | %      |  
|                                                       |  | (Dollars in Thousands)   |      
|Tax at federal tax rate                                |  | $                        | 4,566 |   |      | 35.0 | % |        | $ | 9,637  |  | 35.0 | %      |  | $ | 10,290 |   |  | 35.0 | %
|State income taxes, net of federal income tax benefits |  |                          | 463   |   |      | 3.5  |   |        |   | 974    |  | 3.6  |        |  |   | 1,050  |   |  | 3.6  |  
|Benefit of graduated rates                             |  |                          | (82   | ) |      | (0.6 | ) |        |   |       |  |     |        |  |   |       |   |  |     |  
|Employee stock ownership plan                          |  |                          | 20    |   |      | 0.2  |   |        |   | 117    |  | 0.4  |        |  |   | 183    |   |  | 0.6  |  
|Other                                                  |  |                          | 199   |   |      | 1.5  |   |        |   | 9      |  |     |        |  |   | (44    | ) |  | (0.2 | )
|                                                       |  |                          |       |   |      |      |   |        |   |        |  |      |        |  |   |        |   |  |      |  
|Total provision and effective tax rate                 |  | $                        | 5,166 |   |      | 39.6 | % |        | $ | 10,737 |  | 39.0 | %      |  | $ | 11,479 |   |  | 39.0 | %
|                                                       |  |                          |       |   |      |      |   |        |   |        |  |      |        |  |   |        |   |  |      |  



F-21



---

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



|                                                  |  |                |        |      |   |       
|------------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                                  |  | December 31,  
|                                                  |  | 2002           |        | 2003
|                                                  |  | (In Thousands)
|Deferred tax liabilities:                         |  |                |        |      |   |       
|Depreciation                                      |  | $              | 1,256  |      | $ | 1,476 
|Loan fee income                                   |  |                | 3,576  |      |   | 4,264 
|FHLB stock dividends                              |  |                | 596    |      |   | 529   
|Deferred state taxes                              |  |                | 224    |      |   | 291   
|                                                  |  |                |        |      |   |       
|Gross deferred tax liabilities                    |  |                | 5,652  |      |   | 6,560 
|                                                  |  |                |        |      |   |       
|Deferred tax assets:                              |  |                |        |      |   |       
|Excess of tax bad debt reserve over book reserve  |  |                | 3,064  |      |   | 4,503 
|Executive death benefit                           |  |                | 200    |      |   | 187   
|Amortization                                      |  |                | 261    |      |   | 220   
|Retirement plan                                   |  |                | 4,283  |      |   | 5,011 
|Deferred compensation                             |  |                | 1,708  |      |   | 1,781 
|Unrealized depreciation in securities             |  |                | 1,332  |      |   | 678   
|Minimum pension liability adjustment              |  |                | 927    |      |   | 1,060 
|Other                                             |  |                | 662    |      |   | 718   
|                                                  |  |                |        |      |   |       
|Gross deferred tax assets                         |  |                | 12,437 |      |   | 14,158
|Less valuation allowances for deferred tax assets |  |                |       |      |   |      
|                                                  |  |                |        |      |   |       
|Gross deferred tax assets                         |  |                | 12,437 |      |   | 14,158
|                                                  |  |                |        |      |   |       
|Net deferred tax assets                           |  | $              | 6,785  |      | $ | 7,598 
|                                                  |  |                |        |      |   |       



During 1996, a law was enacted that
repealed 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 consolidated statement of operations as taxes were provided for in prior years. 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. As of December 31, 2003, the Company had zero recapture remaining. 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
|--- | ----------------------------------



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 25% of their income. Presently, one-half of an employees contribution is matched by the Bank, up to 6% 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 $
358,000, $ 542,000 and $ 632,000 for the years ended December 31, 2001, 2002 and 2003, respectively.



F-22



---

Pension PlanThe Banks employees hired prior to January 1, 2001 participate in the Banks
qualified defined benefit pension plan covering substantially all of these 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. 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.



The Banks employees hired after December 31, 2000 participate in a qualified defined contribution plan in addition to the Banks Savings Plan 401(k). The Bank provides these employees with an additional Pension Account within the
401(k) plan. To be eligible for participation, an employee must be 21 years of age. Fidelity Federal will contribute 3% of the employees base salary to the pension account for each year that the employee works 1,000 hours. If the employee has
completed at least seven years of service, the contribution percentage will increase to 4% annually and after 14 years of service the percentage will increase to 5% annually.



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



|                                                    |  |                |        |   |      |   |        |  
|--------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | 2002           |        |   | 2003 |  
|                                                    |  | (In Thousands) |       
|CHANGE IN BENEFIT OBLIGATIONS                       |  |                |        |   |      |   |        |  
|Benefit obligation, beginning of period             |  | $              | 15,847 |   |      | $ | 18,605 |  
|Service cost                                        |  |                | 1,561  |   |      |   | 1,859  |  
|Interest cost                                       |  |                | 1,141  |   |      |   | 1,375  |  
|Amendments                                          |  |                |       |   |      |   |       |  
|Actuarial loss                                      |  |                | 136    |   |      |   | 6,330  |  
|Benefit paid                                        |  |                | (80    | ) |      |   | (1,164 | )
|                                                    |  |                |        |   |      |   |        |  
|Benefit obligation, end of period                   |  | $              | 18,605 |   |      | $ | 27,005 |  
|                                                    |  |                |        |   |      |   |        |  
|CHANGE IN PLAN ASSETS                               |  |                |        |   |      |   |        |  
|Fair value of plan assets, beginning of period      |  | $              | 12,473 |   |      | $ | 12,720 |  
|Actual return on plan assets                        |  |                | (1,668 | ) |      |   | 3,096  |  
|Employers contribution                             |  |                | 1,995  |   |      |   | 2,581  |  
|Benefits paid                                       |  |                | (80    | ) |      |   | (1,164 | )
|                                                    |  |                |        |   |      |   |        |  
|Fair value of plan assets, end of period            |  | $              | 12,720 |   |      | $ | 17,233 |  
|                                                    |  |                |        |   |      |   |        |  
|ASSET CATEGORY                                      |  |                |        |   |      |   |        |  
|Equity securities                                   |  |                | 76     | % |      |   | 12     | %
|Debt securities                                     |  |                | 24     |   |      |   |       |  
|Cash and cash equivalents                           |  |                |       |   |      |   | 88     |  
|                                                    |  |                |        |   |      |   |        |  
|Total                                               |  |                | 100    | % |      |   | 100    | %
|                                                    |  |                |        |   |      |   |        |  
|FUNDED STATUS                                       |  |                |        |   |      |   |        |  
|Funded status                                       |  | $              | (5,885 | ) |      | $ | (9,772 | )
|Unrecognized net actuarial loss                     |  |                | 7,371  |   |      |   | 10,921 |  
|Unrecognized prior service cost                     |  |                | 188    |   |      |   | 183    |  
|                                                    |  |                |        |   |      |   |        |  
|Net amount recognized-prepaid pension cost          |  | $              | 1,674  |   |      | $ | 1,332  |  
|                                                    |  |                |        |   |      |   |        |  
|Adjustment required to recognize minimum liability: |  |                |        |   |      |   |        |  
|Additional minimum liability                        |  | $              | 2,566  |   |      | $ | 2,900  |  
|Intangible asset                                    |  |                | 188    |   |      |   | 183    |  
|                                                    |  |                |        |   |      |   |        |  
|Accumulated other comprehensive income              |  |                | 2,378  |   |      |   | 2,717  |  
|                                                    |  |                |        |   |      |   |        |  
|Net amount recognized-prepaid pension cost          |  | $              | 1,674  |   |      | $ | (1,385 | )
|                                                    |  |                |        |   |      |   |        |  





F-23



---

Components of net periodic benefit cost are as follows:



|                                         |  |                                  |        |   |      |   |        |      |  |   |        |  
|---------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                         |  | For the Years Ended December 31, |       
|                                         |  | 2001                             |        |   | 2002 |   |        | 2003 | 
|                                         |  | (In Thousands)                   |       
|Service cost                             |  | $                                | 1,305  |   |      | $ | 1,561  |      |  | $ | 1,859  |  
|Interest cost                            |  |                                  | 1,050  |   |      |   | 1,141  |      |  |   | 1,375  |  
|Return on assets                         |  |                                  | 761    |   |      |   | 1,668  |      |  |   | (1,206 | )
|Amortization of prior service cost       |  |                                  | (30    | ) |      |   | 5      |      |  |   | 5      |  
|Recognition of net actuarial (gain) loss |  |                                  | (1,766 | ) |      |   | (2,499 | )    |  |   | 890    |  
|                                         |  |                                  |        |   |      |   |        |      |  |   |        |  
|Net periodic benefit cost                |  | $                                | 1,320  |   |      | $ | 1,876  |      |  | $ | 2,923  |  
|                                         |  |                                  |        |   |      |   |        |      |  |   |        |  



For the years ended December 31, 2001,
2002 and 2003, pension expense amounts were based upon actuarial computations.



The Bank funded $ 1,534,000, $ 1,995,000 and $ 2,581,000 as required for the 2001, 2002 and 2003 plan years.



The Company, in cooperation with its actuaries and asset managers, determines the discount rate to be used which includes reviewing the rates used on high quality
fixed-income investments such as Moodys Aa long-bond index. The annual increase in future compensation levels is a composite rate which reflects anticipated inflation, merit increases and promotions for the group of covered participants. The
long term rate of return used is a composite rate which is derived as the sum of the estimated percentages invested in each principal asset class included in the portfolio multiplied by their expected rates of return.



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



|                                                                                   |  |      |   |  |      |   |  |      |  
|---------------------------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                   |  | 2001 |   |  | 2002 |   |  | 2003 |  
|Discount rate in determining benefit obligation                                    |  | 7.25 | % |  | 6.50 | % |  | 6.00 | %
|Rate of increase in future compensation levels for determining benefit obligations |  | 5.00 | % |  | 4.25 | % |  | 4.25 | %
|Expected return on plan assets                                                     |  | 9.00 | % |  | 9.00 | % |  | 9.00 | %



At December 31, 2002 and 2003, the
Bank had a minimum pension liability of $2.6 million and $2.9 million, respectively. A minimum pension liability is prescribed when the accumulated benefit obligation in the plan exceeds the fair value of the underlying pension plan assets and
accrued pension liabilities. The adjustment is reflected in other comprehensive income and other long-term liabilities, as appropriate.



The Company has a pension committee whose responsibility is to monitor the managing of plan assets in accordance with the plans established investment policy. The
purpose of the investment policy is to provide guidelines for asset allocation, set policies for selection of appropriate investment funds and to guide the committee in its fiduciary duties. The overall objective of the investment policy is to
ensure the plan has the ability to pay all benefit and expense obligations when due, to maximize return on assets within reasonable and prudent levels of risk and to control the costs of administering the plan and managing plan assets. The
plans targeted asset allocation is to maintain approximately 70% of its assets in equity securities with the remaining 30% in fixed income or debt securities. At the end of 2003, the Companys pension committee decided to change asset
managers for the defined benefit plan from Security Trust Company, N.A. to Charles Schwab Trust Company. As a result, at December 31, 2003, of the $17.2 million in plan assets, $15.1 million or 88% was in cash and cash equivalents awaiting transfer
to Charles Schwab Trust Company while the remaining $2.1 million



F-24



---

or 12% was in a debt securities mutual fund which transferred to Charles Schwab Trust Company in kind. After the transfer
of assets was completed, the assets were invested based on the plans targeted allocation of approximately 70% equity securities and 30% debt securities. At December 31, 2003 the plan had no investment in the common stock of the Company.



Retirement Plans for Officers and Directors-Non-Qualified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, 2001, 2002 and 2003, the net periodic pension expense for the
Supplemental Executive Retirement Plan for Officers totaled $ 1,482,000, $ 1,439,000 and $ 1,572,000, respectively. The projected benefit obligation as of December 31, 2002 and 2003, was estimated at $ 12,817,000 and $ 15,763,000 respectively. For
2001, 2002 and 2003, respectively, the discount rates used to measure the projected benefit obligation were 7.25%, 6.50% and 6.00%. The rate of increase in future compensation levels in 2001 was 5.00%, in 2002 was 4.25% and 2003 was 4.25%.



For the years ended December 31, 2001, 2002 and 2003, the net periodic pension
expense for the Retirement Plan for the Directors totaled $ 45,000, $ 87,000 and $ 90,000, respectively. The projected benefit obligation for the Retirement Plan for Directors as of December 31, 2002 and 2003 was estimated at $ 1,460,000 and $
1,599,000, respectively. For 2001, 2002 and 2003, the discount rates used to measure that projected benefit obligation were 7.25%, 6.50% and 6.00%, respectively. For the years ended December 31, 2001, 2002 and 2003, the rate of increase in future
compensation levels for the Retirement Plan for Directors was 0.00%.



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 $ 424,000, $ 1,022,000 and $ 1,230,000 were made during the years 2001, 2002 and 2003, 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. 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 ($ 1,283,000 at December 31, 2003) 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 (314,694 shares at December 31, 2003) is carried at cost ($ 1.8 million at December 31, 2003) 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.



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 was held by Fidelity Bankshares, Inc. As of December 31, 2000, the loan had been paid in full and
all of the 193,200 shares had been allocated to employees individual ESOP accounts.



F-25



---

In connection with the Banks second step mutual-to-stock conversion of its Mutual Holding Company parent on May 15,
2001, the ESOP purchased an additional 521,758 shares of the Banks stock. The funds used to purchase the shares were borrowed from Fidelity Bankshares, Inc. and therefore have been eliminated in consolidation. Beginning March 31, 2002, the
Bank began contributing to the ESOP sufficient funds to pay the principal and interest on the loan over 15 years.



Under the ESOP, 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 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 $ 363,000, $ 682,000 and $ 871,000 by a charge
against income in 2001, 2002 and 2003, respectively, under this plan.



Bank
Recognition and Retention PlanOn May 21, 2002, the Company adopted and the stockholders approved the 2002 Recognition and Retention Plan to encourage key employees and Directors to remain with the Bank. Under the 2002 plan, the Company
reserved and granted 347,838 shares of common stock to key employees and outside directors. These granted shares will vest and be allocated to the affected employees and directors ratably over five years, subject to various conditions requiring
their acceleration. The Bank recognized expense of $1,062,000 and $1,576,000 in 2002 and 2003 respectively under the plan.



|14. | STOCK OPTION PLANS
|--- | ------------------



The Company reserved 550,237 shares of common stock under its 1994 Incentive Stock Option Plan, which was approved by stockholders on January 7, 1994. The plan provided
for the granting of options to key employees until its expiration on January 6, 2004. All options were granted at the closing price on the date of grant and were exercisable at a rate of twenty percent per year, not to exceed ten years. At December
31, 2001, 2002 and 2003 there were 103,409, 54,526 and 4,956 options outstanding and exercisable. All of these options were exercised or expired on January 6, 2004.



The Company reserved 183,410 shares of common stock under its 1994 Stock Option Plan for Outside Directors, which was approved by
stockholders on January 7, 1994. The plan provides for the granting of options to directors until its expiration on January 6, 2004. All options were granted at the closing price on the date of grant and are exercisable at any time up to ten years.
At December 31, 2001 and 2002 there were 97,519 and 81,837 options outstanding and exercisable, respectively. At December 31, 2003 there were 24,332 options outstanding and exercisable. All of The December 31, 2003 options were exercised or expired
on January 6, 2004.



On May 21, 2002, the Company adopted and stockholders
approved the 2002 Incentive Stock Benefit Plan. Under the 2002 plan, the Company has reserved 869,594 shares of common stock, of which options to purchase 829,950 shares were granted to key employees and outside directors during 2002. The term of
the stock option awards is ten years from the date of grant. The 703,900 option awards granted to outside directors and certain executive officers will vest commencing with the first 16 2/3% vested on the date of grant and the remaining shares
vesting at 16 2/3% per year over a 5 year period. The remaining 126,050 options granted to other key employees vest at a rate of 20% each year and will be fully vested five years after the date of grant. At December 31, 2002 and 2003 there were
829,950 and 826,724 options outstanding. At December 31, 2003, 41,444 options remained available for grant.



F-26



---

The following table summarizes the status of all Company stock option plans for the three years ended December 31, 2000,
2002 and 2003.



|                          |  |                               |   |  |                                  |       |                 |   |            |  
|------------------------- |  | ----------------------------- | - |  | -------------------------------- | ----- | --------------- | - | ---------- | -
|                          |  | Options Price                 |  
|                          |  | Number of Options Outstanding |   |  | Average Exercise Price Per Share |       | Aggregate Price |  
|Options Outstanding       |  |                               |   |  |                                  |       |                 |  
|BalanceDecember 31, 2000 |  | 248,382                       |   |  |                                  | 3.76  |                 |   | 933,917    |  
|Granted                   |  |                              |   |  |                                  |      |                 |   |           |  
|Exercised                 |  | (47,454                       | ) |  |                                  | 3.76  |                 |   | (178,427   | )
|Canceled                  |  |                              |   |  |                                  |      |                 |   |           |  
|                          |  |                               |   |  |                                  |       |                 |   |            |  
|BalanceDecember 31, 2001 |  | 200,928                       |   |  |                                  | 3.76  |                 |   | 755,490    |  
|Granted                   |  | 829,950                       |   |  |                                  | 20.26 |                 |   | 16,814,787 |  
|Exercised                 |  | (64,565                       | ) |  |                                  | 3.76  |                 |   | (242,764   | )
|Canceled                  |  |                              |   |  |                                  |      |                 |   |           |  
|                          |  |                               |   |  |                                  |       |                 |   |            |  
|BalanceDecember 31, 2002 |  | 966,313                       |   |  |                                  | 17.93 |                 |   | 17,327,513 |  
|Granted                   |  | 5,184                         |   |  |                                  | 25.40 |                 |   | 131,674    |  
|Exercised                 |  | (113,685                      | ) |  |                                  | 4.72  |                 |   | (536,521   | )
|Canceled                  |  | (1,800                        | ) |  |                                  | 20.26 |                 |   | (36,468    | )
|                          |  |                               |   |  |                                  |       |                 |   |            |  
|BalanceDecember 31, 2003 |  | 856,012                       |   |  | $                                | 19.73 |                 | $ | 16,886,198 |  
|                          |  |                               |   |  |                                  |       |                 |   |            |  



The range of exercise prices for
options outstanding at December 31, 2003 was $ 3.76 to $ 25.40. The range of exercise prices for options is due to changes in the price of the Companys stock over the period of the grants.



The following summarizes information about options outstanding at December 31, 2003.



|                          |  |                     |  |                                              |  |                                  |      
|------------------------- |  | ------------------- |  | -------------------------------------------- |  | -------------------------------- | -----
|                          |  | Outstanding Options
|                          |  | Number of Shares    |  | Weighted- Average Remaining Contractual Life |  | Weighted- Average Exercise Price
|Range of exercise prices: |  |                     |  |                                              |  |                                  |      
|$  3.76                   |  | 29,288              |  | 0.1                                          |  | $                                | 3.76 
|$20.26                    |  | 821,540             |  | 8.4                                          |  |                                  | 20.26
|$25.40                    |  | 5,184               |  | 8.4                                          |  |                                  | 25.40
|                          |  |                     |  |                                              |  |                                  |      
|                          |  | 856,012             |  | 8.4                                          |  | $                                | 19.73
|                          |  |                     |  |                                              |  |                                  |      



|                          |  |                                     |  |                                  |      
|------------------------- |  | ----------------------------------- |  | -------------------------------- | -----
|                          |  | Exercisable Options                
|                          |  | Exercisable As of December 31, 2003 |  | Weighted- Average Exercise Price
|Range of exercise prices: |  |                                     |  |                                  |      
|$  3.76                   |  | 29,288                              |  | $                                | 3.76 
|$20.26                    |  | 270,645                             |  |                                  | 20.26
|$25.40                    |  | 5,184                               |  |                                  | 25.40
|                          |  |                                     |  |                                  |      
|                          |  | 305,117                             |  | $                                | 18.76
|                          |  |                                     |  |                                  |      



F-27



---

These options will expire if not exercised at specific dates ranging from January 2004 to May 2013. The prices for the
options exercisable at December 31, 2003 ranged from $ 3.76 to $ 25.40.



As
discussed in Note 1, the Company discloses the pro forma effect on net income and earnings per share had the options granted been accounted for at fair value. The fair value of the options granted in fiscal 2002 and 2003 have been estimated at the
date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation
models require the use of subjective assumptions and changes in these assumptions can materially impact the fair value of the options and the Companys options do not have the characteristics of traded options, the option valuation models do
not necessarily provide a reliable measure of the fair value of its options.



The pro forma disclosures amortize to expense the estimated compensation costs for the Companys stock options granted in the years 2002 and 2003 over the options vesting period. The Companys year 2002 and 2003 pro forma weighted
average fair value of options granted, with related assumptions, are reflected below:



|                                                         |  |      |       |   |      |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                         |  | 2002 |       |   | 2003 |  
|Pro forma weighted average fair value of options granted |  | $    | 4.93  |   |      | $ | 6.73  |  
|Risk-free interest rate                                  |  |      | 2.78  | % |      |   | 3.46  | %
|Expected life (years)                                    |  |      | 5.00  |   |      |   | 5.00  |  
|Expected volatility                                      |  |      | 28.93 |   |      |   | 28.61 |  
|Annual dividend yield                                    |  |      | 1.97  | % |      |   | 1.57  | %



|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). At December 31, 2002 and 2003, the Bank met all capital adequacy requirements to which it was subject.



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.



F-28



---

The Banks actual capital amounts and ratios are presented in the following table:



|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|------------------------------------------------------------------------------------------------- |  | ---------------------- | - |  | ------------------------------------- | --------- | ------------------------------------------------------------------------- | ----- | --- | - | ------ | - | ------- |  | ---- | ------ |  | - | -------
|                                                                                                  |  | Actual                 |   |  | Minimum for Capital Adequacy Purposes |           | To be Considered Well Capitalized for Prompt Corrective Action Provisions
|                                                                                                  |  | Ratio                  |   |  | Amount                                |           |                                                                           | Ratio |     |   | Amount |   | Ratio   |  |      | Amount
|                                                                                                  |  | (Dollars in Thousands)
|As of December 31, 2002 Stockholders Equity and ratio to total assets                            |  | 7.7                    | % |  | $                                     | 187,501   |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Unrealized decrease in market value of assets available for sale (net of applicable income taxes) |  |                        |   |  |                                       | 2,084     |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Goodwill                                                                                          |  |                        |   |  |                                       | (2,175    | )                                                                         |       |     |   |        |   |         |  |      |        |  |   |        
|Disallowed servicing assets                                                                       |  |                        |   |  |                                       | (8        | )                                                                         |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Tangible capital and ratio to adjusted total assets                                               |  | 7.7                    | % |  | $                                     | 187,402   |                                                                           |       | 1.5 | % |        | $ | 36,613  |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Tier I (core) capital and ratio to adjusted total assets                                          |  | 7.7                    | % |  | $                                     | 187,402   |                                                                           |       | 3.0 | % |        | $ | 73,227  |  | 5.0  | %      |  | $ | 122,044
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Tier I (core) capital and ratio to risk-weighted total assets                                     |  | 10.6                   | % |  | $                                     | 187,402   |                                                                           |       | 4.0 | % |        | $ | 70,861  |  | 6.0  | %      |  | $ | 106,291
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Allowable Tier 2 capital:                                                                         |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|General loan valuation allowances                                                                 |  |                        |   |  |                                       | 7,679     |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Total risk-based capital and ratio to risk-weighted total assets                                  |  | 11.0                   | % |  | $                                     | 195,081   |                                                                           |       | 8.0 | % |        | $ | 141,721 |  | 10.0 | %      |  | $ | 177,152
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Total assets                                                                                      |  |                        |   |  | $                                     | 2,439,654 |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Adjusted total assets                                                                             |  |                        |   |  | $                                     | 2,440,887 |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Risk-weighted assets                                                                              |  |                        |   |  | $                                     | 1,771,518 |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |          
|As of December 31, 2003 Stockholders Equity and ratio to total assets                            |  | 7.2                    | % |  | $                                     | 220,528   |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Unrealized decrease in market value of assets available for sale (net of applicable income taxes) |  |                        |   |  |                                       | 1,060     |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Goodwill                                                                                          |  |                        |   |  |                                       | (5,615    | )                                                                         |       |     |   |        |   |         |  |      |        |  |   |        
|Disallowed servicing assets                                                                       |  |                        |   |  |                                       | (124      | )                                                                         |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Tangible capital and ratio to adjusted total assets                                               |  | 7.1                    | % |  | $                                     | 215,849   |                                                                           |       | 1.5 | % |        | $ | 45,630  |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Tier I (core) capital and ratio to adjusted total assets                                          |  | 7.1                    | % |  | $                                     | 215,849   |                                                                           |       | 3.0 | % |        | $ | 91,259  |  | 5.0  | %      |  | $ | 152,099
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Tier I (core) capital and ratio to risk-weighted total assets                                     |  | 10.3                   | % |  | $                                     | 215,849   |                                                                           |       | 4.0 | % |        | $ | 83,790  |  | 6.0  | %      |  | $ | 125,685
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Allowable Tier 2 capital:                                                                         |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|General loan valuation allowances                                                                 |  |                        |   |  |                                       | 10,149    |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Total risk-based capital and ratio to risk-weighted total assets                                  |  | 10.8                   | % |  | $                                     | 225,998   |                                                                           |       | 8.0 | % |        | $ | 167,580 |  | 10.0 | %      |  | $ | 209,475
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Total assets                                                                                      |  |                        |   |  | $                                     | 3,045,981 |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Adjusted total assets                                                                             |  |                        |   |  | $                                     | 3,041,980 |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|Risk-weighted assets                                                                              |  |                        |   |  | $                                     | 2,094,753 |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        
|                                                                                                  |  |                        |   |  |                                       |           |                                                                           |       |     |   |        |   |         |  |      |        |  |   |        



F-29



---

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, 2003, an OTS examination resulted in no significant
adjustments to the consolidated financial statements.



|16. | 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. Allowances for incurred losses on commitments to extend credit are based on managements best estimate of probable
losses that have been incurred as of the consolidated statement of financial position date. If an allowance is deemed necessary, management would record such in other liabilities. At December 31, 2002 and 2003, the Bank provided no such allowances
for losses on commitments to extend credit. At December 31, 2003, the Bank had commitments to extend credit for or purchase loans of $ 202.4 million ($ 60.5 million in fixed rate commitments with interest rates ranging from 3.00% to 7.88%, and the
balance of commitments in either variable rate or for which rates had not yet been set). At December 31, 2003, 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. The Bank also issues standby letters of credit which are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit is essentiality the same as that involved in extending loan facilities to customers. At December 31, 2002 and 2003, standby letters of credit amounted to $5,743,000 and
$7,282,000, respectively.



The Bank leases various property for original
periods ranging from one to fifty-one years. Rent expense for the years ended December 31, 2001, 2002 and 2003, was approximately $ 1,057,000, $ 1,024,000 and $ 1,525,000, respectively. At December 31, 2003, future minimum lease payments under these
operating leases are as follows:



|                          |  |                |       
|------------------------- |  | -------------- | ------
|Years Ending December 31, |  | Amount        
|                          |  | (In Thousands)
|2004                      |  | $              | 1,691 
|2005                      |  |                | 1,550 
|2006                      |  |                | 1,455 
|2007                      |  |                | 1,412 
|2008                      |  |                | 1,431 
|Thereafter                |  |                | 8,293 
|                          |  |                |       
|Total                     |  | $              | 15,832
|                          |  |                |       



F-30



---

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.



In December 2002, the Board of Directors of the Company adopted a plan for certain executives, under which the Company has agreed to reimburse them for any excise taxes
which may be imposed on them under the federal tax code in connection with payments made following a change in control.



The Company is subject to various claims, legal actions and complaints arising in the ordinary course of business. In the Companys opinion, the disposition of these
matters will not have a material adverse effect on our financial condition, results of operations or cash flows.



|17. | SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
|--- | -------------------------------------



|                                                                     |  |                                  |        |      |   |        |  |   |       
|-------------------------------------------------------------------- |  | -------------------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                     |  | For the Years Ended December 31,
|                                                                     |  | 2001                             |        | 2002 |   | 2003  
|                                                                     |  | (In Thousands)                  
|Supplemental Disclosure of Cash Flow Information:                    |  |                                  |        |      |   |        |  |   |       
|Cash paid for income taxes                                           |  | $                                | 6,199  |      | $ | 12,607 |  | $ | 13,748
|                                                                     |  |                                  |        |      |   |        |  |   |       
|Cash paid for interest on deposits and other borrowings              |  | $                                | 82,720 |      | $ | 61,864 |  | $ | 56,961
|                                                                     |  |                                  |        |      |   |        |  |   |       
|Supplemental Schedule of Noncash Investing and Financing Activities: |  |                                  |        |      |   |        |  |   |       
|Real estate acquired in settlement of loans                          |  | $                                | 575    |      | $ | 680    |  | $ | 870   
|                                                                     |  |                                  |        |      |   |        |  |   |       



|18. | 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 ESOP and stock options for the years ended December 31, 2001, 2002 and 2003,
retroactively adjusted to reflect the 2001 stock offering, are as follows:



|                                        |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     
|--------------------------------------- |  | ------------------------------------ | --------- | ------------------------------------ | ---------- | ------------------------------------ | - | ---------- |  | ---------- | ---------- | ---------------- | ---------- | ---------- | - | ---------- |  | ---------------- | ---------- |  | ---------- |  | - | ----
|                                        |  | For the Year Ended December 31, 2001 |           | For the Year Ended December 31, 2002 |            | For the Year Ended December 31, 2003
|                                        |  | Income (1)                           |           | Shares (2)                           |            | Per-Share Amount                     |   | Income (1) |  | Shares (2) |            | Per-Share Amount |            | Income (1) |   | Shares (2) |  | Per-Share Amount
|Net income                              |  | $                                    | 7,880,000 |                                      |            |                                      |   |            |  | $          | 16,798,000 |                  |            |            |   |            |  | $                | 17,921,000 |  |            |  |   |     
|Basic EPS:                              |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     
|Income available to common stockholders |  | $                                    | 7,880,000 |                                      | 15,240,644 |                                      | $ | 0.52       |  | $          | 16,798,000 |                  | 14,957,640 |            | $ | 1.12       |  | $                | 17,921,000 |  | 14,498,587 |  | $ | 1.24
|                                        |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     
|Effect of diluted shares:               |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     
|Common stock options                    |  |                                      |           |                                      | 142,490    |                                      |   |            |  |            |            |                  | 135,092    |            |   |            |  |                  |            |  | 210,294    |  |   |     
|                                        |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     
|Diluted EPS:                            |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     
|Income available to common stockholders |  | $                                    | 7,880,000 |                                      | 15,383,134 |                                      | $ | 0.51       |  | $          | 16,798,000 |                  | 15,092,732 |            | $ | 1.11       |  | $                | 17,921,000 |  | 14,708,881 |  | $ | 1.22
|                                        |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     
|                                        |  |                                      |           |                                      |            |                                      |   |            | 
|(1) Numerator                           |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     
|(2) Denominator                         |  |                                      |           |                                      |            |                                      |   |            |  |            |            |                  |            |            |   |            |  |                  |            |  |            |  |   |     



Weighted average shares outstanding
for the years ended December 31, 2002 and 2003 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).



F-31



---

|19. | ACCUMULATED OTHER COMPREHENSIVE LOSS
|--- | ------------------------------------



An analysis of the changes in Accumulated Other Comprehensive Loss for the years ended December 31, 2001, 2002 and 2003 is as follows:



|                      |  |                |        |   |      |   |        |      |  |   |        |  
|--------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                      |  | December 31,   |       
|                      |  | 2001           |        |   | 2002 |   |        | 2003 | 
|                      |  | (In Thousands) |       
|Beginning Balance     |  | $              | (4,019 | ) |      | $ | (2,004 | )    |  | $ | (3,535 | )
|Current-period change |  |                | 2,015  |   |      |   | (1,531 | )    |  |   | 818    |  
|                      |  |                |        |   |      |   |        |      |  |   |        |  
|Ending balance        |  | $              | (2,004 | ) |      | $ | (3,535 | )    |  | $ | (2,717 | )
|                      |  |                |        |   |      |   |        |      |  |   |        |  



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



|                                                                      |  |                   |       |   |                       |   |        |                   |  |   |                   |   |  |                       |        |                   |  |   |                   |  |   |                       |   |  |                   |       |   |  |   |      |   |  |   |       |  
|--------------------------------------------------------------------- |  | ----------------- | ----- | - | --------------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | --------------------- | ------ | ----------------- |  | - | ----------------- |  | - | --------------------- | - |  | ----------------- | ----- | - |  | - | ---- | - |  | - | ----- | -
|                                                                      |  | December 31, 2001 |       |   | December 31, 2002     |   |        | December 31, 2003 | 
|                                                                      |  | Before-tax Amount |       |   | Tax (Expense) Benefit |   |        | Net-of-Tax Amount |  |   | Before-tax Amount |   |  | Tax (Expense) Benefit |        | Net-of-Tax Amount |  |   | Before-tax Amount |  |   | Tax (Expense) Benefit |   |  | Net-of-Tax Amount |      
|                                                                      |  | (In Thousands)    |      
|Unrealized gain (loss) on assets available for sale:                  |  |                   |       |   |                       |   |        |                   |  |   |                   |   |  |                       |        |                   |  |   |                   |  |   |                       |   |  |                   |       |   |  |   |      |   |  |   |       |  
|Unrealized holding gains (losses) arising during period               |  | $                 | 3,482 |   |                       | $ | (1,358 | )                 |  | $ | 2,124             |   |  | $                     | (67    | )                 |  | $ | 26                |  | $ | (41                   | ) |  | $                 | (685  | ) |  | $ | 267  |   |  | $ | (418  | )
|Reclassification adjustment for (gains) losses realized in net income |  |                   | (179  | ) |                       |   | 70     |                   |  |   | (109              | ) |  |                       | (64    | )                 |  |   | 25                |  |   | (39                   | ) |  |                   | 2,364 |   |  |   | (922 | ) |  |   | 1,442 |  
|Minimum pension liability adjustment                                  |  |                   |      |   |                       |   |       |                   |  |   |                  |   |  |                       | (2,378 | )                 |  |   | 927               |  |   | (1,451                | ) |  |                   | (339  | ) |  |   | 133  |   |  |   | (206  | )
|                                                                      |  |                   |       |   |                       |   |        |                   |  |   |                   |   |  |                       |        |                   |  |   |                   |  |   |                       |   |  |                   |       |   |  |   |      |   |  |   |       |  
|Other comprehensive income (loss)                                     |  | $                 | 3,303 |   |                       | $ | (1,288 | )                 |  | $ | 2,015             |   |  | $                     | (2,509 | )                 |  | $ | 978               |  | $ | (1,531                | ) |  | $                 | 1,340 |   |  | $ | (522 | ) |  | $ | 818   |  
|                                                                      |  |                   |       |   |                       |   |        |                   |  |   |                   |   |  |                       |        |                   |  |   |                   |  |   |                       |   |  |                   |       |   |  |   |      |   |  |   |       |  



F-32



---

|20. | DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- | ---------------------------------------------------------



Fair Value of Financial InstrumentsThe fair value of the Companys financial instruments at December 31, 2002 and 2003 is as follows:



|                                                        |  |                   |           |                   |   |                 |  |            |           |  |   |          
|------------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | --------------- |  | ---------- | --------- |  | - | ---------
|                                                        |  | December 31, 2002 |           | December 31, 2003
|                                                        |  | Carrying Amount   |           | Fair Value        |   | Carrying Amount |  | Fair Value
|                                                        |  | (In Thousands)   
|Assets:                                                 |  |                   |           |                   |   |                 |  |            |           |  |   |          
|Cash and amounts due from depository institutions       |  | $                 | 66,178    |                   | $ | 66,178          |  | $          | 76,090    |  | $ | 76,090   
|Interest-bearing deposits                               |  |                   | 63,488    |                   |   | 63,488          |  |            | 33,797    |  |   | 33,797   
|Assets available for sale                               |  |                   | 235,018   |                   |   | 235,018         |  |            | 593,959   |  |   | 593,959  
|Loans receivable (net)                                  |  |                   | 1,935,999 |                   |   | 1,981,246       |  |            | 2,191,696 |  |   | 2,238,436
|Liabilities:                                            |  |                   |           |                   |   |                 |  |            |           |  |   |          
|Deposits                                                |  |                   | 1,898,341 |                   |   | 1,908,935       |  |            | 2,460,101 |  |   | 2,474,382
|Other borrowed funds                                    |  |                   | 44,416    |                   |   | 44,416          |  |            | 42,089    |  |   | 42,080   
|Advances from the Federal Home Loan Bank                |  |                   | 253,371   |                   |   | 277,202         |  |            | 264,561   |  |   | 282,385  
|Guaranteed Preferred Beneficial Interests in Debentures |  |                   | 28,750    |                   |   | 29,037          |  |            | 52,320    |  |   | 51,511   



The following methods and assumptions
were used to estimate fair value of each major class of financial instrument at December 31, 2002 and 2003.



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 fixed and
variable rate 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 DebenturesThe fair value of these securities is based on quoted market price.



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



Although management uses its best judgment in estimating the fair value of these financial
instruments, there are inherent limitations in any estimation technique. Therefore, the fair value estimates presented herein are not necessarily indicative of the amounts which the Bank could realize in a current transaction.



F-33



---

|21. | CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
|--- | --------------------------------------------------



The following condensed statements of financial position as of December 31, 2002, and 2003 and the condensed statements of operations and statements of cash flows for the
periods then ended should be read in conjunction with the consolidated financial statements and related notes.



|                                           |  |                |         |      |   |        
|------------------------------------------ |  | -------------- | ------- | ---- | - | -------
|                                           |  | December 31,  
|                                           |  | 2002           |         | 2003
|                                           |  | (In Thousands)
|STATEMENTS OF FINANCIAL CONDITION          |  |                |         |      |   |        
|Assets:                                    |  |                |         |      |   |        
|Cash and cash equivalents                  |  | $              | 4,732   |      | $ | 9,051  
|ESOP loan receivable                       |  |                | 4,870   |      |   | 4,522  
|Investment in and advances to subsidiaries |  |                | 187,501 |      |   | 222,097
|Other assets                               |  |                | 2,262   |      |   | 2,888  
|                                           |  |                |         |      |   |        
|Total assets                               |  | $              | 199,365 |      | $ | 238,558
|                                           |  |                |         |      |   |        
|Liabilities                                |  | $              | 30,278  |      | $ | 54,049 
|Stockholders equity                       |  |                | 169,087 |      |   | 184,509
|                                           |  |                |         |      |   |        
|Total liabilities and stockholders equity |  | $              | 199,365 |      | $ | 238,558
|                                           |  |                |         |      |   |        



|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                 |  | Years Ended December 31, |        
|                                                                                                                 |  | 2001                     |         |   | 2002 |   |         | 2003 | 
|                                                                                                                 |  | (In Thousands)           |        
|STATEMENTS OF OPERATIONS                                                                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Income                                                                                                           |  | $                        | 876     |   |      | $ | 594     |      |  | $ | 243     |  
|Expenses                                                                                                         |  |                          | 3,130   |   |      |   | 3,496   |      |  |   | 3,584   |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Loss before income taxes and equity in earnings of Bank                                                          |  |                          | (2,254  | ) |      |   | (2,902  | )    |  |   | (3,341  | )
|Income tax benefit                                                                                               |  |                          | 879     |   |      |   | 1,132   |      |  |   | 1,303   |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Loss before equity in earnings of subsidiaries                                                                   |  |                          | (1,375  | ) |      |   | (1,770  | )    |  |   | (2,038  | )
|Equity in earnings of subsidiaries                                                                               |  |                          | 9,255   |   |      |   | 18,568  |      |  |   | 19,959  |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                                       |  | $                        | 7,880   |   |      | $ | 16,798  |      |  | $ | 17,921  |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|STATEMENTS OF CASH FLOWS                                                                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flow from (for) operating activities:                                                                       |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                                       |  | $                        | 7,880   |   |      | $ | 16,798  |      |  | $ | 17,921  |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Adjustments to reconcile net income to net cash used for operating activitiesEquity in earnings of subsidiaries |  |                          | (9,255  | ) |      |   | (18,568 | )    |  |   | (19,959 | )
|Other                                                                                                            |  |                          | (1,530  | ) |      |   | (272    | )    |  |   | 123     |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash (used for) provided by operating activities                                                             |  |                          | (2,905  | ) |      |   | (2,042  | )    |  |   | (1,915  | )
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flow from (for) investing activities:                                                                       |  |                          |         |   |      |   |         |      |  |   |         |  
|Dividends received from subsidiaries                                                                             |  |                          | 2,000   |   |      |   |        |      |  |   | 7,750   |  
|Issuance of ESOP loan                                                                                            |  |                          | (5,218  | ) |      |   |        |      |  |   |        |  
|Principal payments on ESOP loan                                                                                  |  |                          |        |   |      |   | 348     |      |  |   | 348     |  
|Investment in subsidiaries                                                                                       |  |                          | (40,871 | ) |      |   |        |      |  |   | (20,000 | )
|Other                                                                                                            |  |                          | 1,373   |   |      |   | 1,987   |      |  |   | 2,345   |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash (used for) provided by investing activities                                                             |  |                          | (42,716 | ) |      |   | 2,335   |      |  |   | (9,557  | )
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flow from (for) financing activities:                                                                       |  |                          |         |   |      |   |         |      |  |   |         |  
|Proceeds from the sale of stock                                                                                  |  |                          | 79,659  |   |      |   | 124     |      |  |   | 309     |  
|Purchase of treasury stock                                                                                       |  |                          |        |   |      |   | (19,957 | )    |  |   | (176    | )
|Proceeds from the issuance of trust preferred securities, net                                                    |  |                          |        |   |      |   |        |      |  |   | 21,450  |  
|Cash dividends paid                                                                                              |  |                          | (4,536  | ) |      |   | (6,036  | )    |  |   | (5,792  | )
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used for) financing activities                                                             |  |                          | 75,123  |   |      |   | (25,869 | )    |  |   | 15,791  |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                             |  |                          | 29,502  |   |      |   | (25,576 | )    |  |   | 4,319   |  
|Cash and cash equivalents, Beginning of year                                                                     |  |                          | 806     |   |      |   | 30,308  |      |  |   | 4,732   |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, End of year                                                                           |  | $                        | 30,308  |   |      | $ | 4,732   |      |  | $ | 9,051   |  
|                                                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  



F-34



---

|22. | QUARTERLY FINANCIAL DATA (UNAUDITED)
|--- | ------------------------------------



|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|----------------------------- |  | --------------------------------- | ------ | -------------- | - | ------------- |  | -------------- | ------ |  | - | ------
|                              |  | First Quarter                     |        | Second Quarter |   | Third Quarter |  | Fourth Quarter
|                              |  | (In Thousands, except share data)
|Year ended December 31, 2002: |  |                                   |        |                |   |               |  |                |        |  |   |       
|Interest income               |  | $                                 | 33,677 |                | $ | 34,303        |  | $              | 34,952 |  | $ | 34,935
|Interest expense              |  |                                   | 15,865 |                |   | 15,784        |  |                | 15,627 |  |   | 14,492
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Net interest income           |  |                                   | 17,812 |                |   | 18,519        |  |                | 19,325 |  |   | 20,443
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Provision for loan losses     |  |                                   | 501    |                |   | 316           |  |                | 459    |  |   | 710   
|Non-interest income           |  |                                   | 3,722  |                |   | 4,153         |  |                | 4,437  |  |   | 4,679 
|Non-interest expenses         |  |                                   | 14,430 |                |   | 15,600        |  |                | 16,459 |  |   | 17,080
|Income taxes                  |  |                                   | 2,595  |                |   | 2,655         |  |                | 2,650  |  |   | 2,837 
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Net Income                    |  | $                                 | 4,008  |                | $ | 4,101         |  | $              | 4,194  |  | $ | 4,495 
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Earnings per share            |  |                                   |        |                |   |               |  |                |        |  |   |       
|Basic                         |  | $                                 | 0.26   |                | $ | 0.27          |  | $              | 0.28   |  | $ | 0.31  
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Diluted                       |  | $                                 | 0.26   |                | $ | 0.27          |  | $              | 0.28   |  | $ | 0.31  
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       



|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|----------------------------- |  | --------------------------------- | ------ | -------------- | - | ------------- |  | -------------- | ------ |  | - | ------
|                              |  | First Quarter                     |        | Second Quarter |   | Third Quarter |  | Fourth Quarter
|                              |  | (In Thousands, except share data)
|Year ended December 31, 2003: |  |                                   |        |                |   |               |  |                |        |  |   |       
|Interest income               |  | $                                 | 34,831 |                | $ | 36,336        |  | $              | 35,428 |  | $ | 37,088
|Interest expense              |  |                                   | 14,046 |                |   | 14,650        |  |                | 14,371 |  |   | 14,097
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Net interest income           |  |                                   | 20,785 |                |   | 21,686        |  |                | 21,057 |  |   | 22,991
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|                              |  |                                   |        |               
|Provision for loan losses     |  |                                   | 790    |                |   | 693           |  |                | 558    |  |   | 1,081 
|Non-interest income           |  |                                   | 7,011  |                |   | 6,020         |  |                | 5,869  |  |   | 3,616 
|Non-interest expenses         |  |                                   | 18,659 |                |   | 18,886        |  |                | 19,145 |  |   | 19,823
|Income taxes                  |  |                                   | 3,229  |                |   | 3,196         |  |                | 2,838  |  |   | 2,216 
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Net Income                    |  | $                                 | 5,118  |                | $ | 4,931         |  | $              | 4,385  |  | $ | 3,487 
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Earnings per share            |  |                                   |        |                |   |               |  |                |        |  |   |       
|Basic                         |  | $                                 | 0.36   |                | $ | 0.34          |  | $              | 0.30   |  | $ | 0.24  
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       
|Diluted                       |  | $                                 | 0.35   |                | $ | 0.34          |  | $              | 0.30   |  | $ | 0.23  
|                              |  |                                   |        |                |   |               |  |                |        |  |   |       





F-35



---

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



The management of
Fidelity Bankshares, Inc. and subsidiaries (the Company) 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 accounting principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and estimates made by management.



Internal Control



Management is responsible for establishing and maintaining effective internal control over financial reporting, including safeguarding of
assets, for financial presentations in conformity with both accounting principles generally accepted in the United States of America and the Office of Thrift Supervision Instructions for Schedules SC, SO, and Reconciliation of Equity Capital
included on Schedule SI of the Thrift Financial Reports (TFR instructions). The internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified.



There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary
over time.



Management assessed the institutions internal control over
financial reporting, including safeguarding of assets, for financial presentations in conformity with both accounting principles generally accepted in the United States of America and TFR Instructions for Schedules SC, SO, and Reconciliation of
Equity Capital included on Schedule SI as of December 31, 2003. This assessment was based on criteria for effective internal control over financial reporting, including safeguarding of assets, described in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting, including safeguarding of assets,
presented in conformity with both accounting principles generally accepted in the United States of America and TFR Instructions for Schedules SC, SO, and Reconciliation of Equity Capital included on Schedule SI, as of December 31, 2003.



The Audit Committee of the Board of Directors is comprised entirely of outside directors
who are independent of the Companys management. The Audit Committee is responsible for recommending to the Board of Directors the selection of independent auditors. It meets periodically with management, the independent auditors, and the
internal auditors to ensure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in
addition to reviewing the Companys financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of internal control
over financial reporting and any other matters which they believe should be brought to the attention of the Committee.



Compliance with Designated Laws and Regulations



Management is also responsible for ensuring 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 Federal Deposit Insurance Corporation (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 has complied, in all material respects, with the designated safety and soundness laws and regulations for the year ended December 31, 2003.



|    |  |                                       |  |  |  |     |  |                                                 
|--- |  | ------------------------------------- |  |  |  | --- |  | ------------------------------------------------
|    |  |                                       |  | 
|By: |  | /s/    Vince A. Elhilow               |  |  |  | By: |  | /s/    Richard D. Aldred                        
|    |  |                                       |  |  |  |     |  |                                                 
|    |  | President and Chief Executive Officer |  |  |  |     |  | Executive Vice PresidentChief Financial Officer



March
9, 2004





F-36



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Independent Accountants Report



To the Audit Committee

Fidelity Bankshares, Inc.

West Palm Beach, Florida



We have examined
managements assertion, 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, that Fidelity
Bankshares, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting, including safeguarding of assets, presented in conformity with both accounting principles generally accepted in the United
States of America 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 as of December 31, 2003 based on the criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO report). Management is responsible for maintaining effective internal control over financial
reporting. Our responsibility is to express an opinion on managements assertion based on our examination.



Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of internal control over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control, and performing 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, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of internal control over financial reporting to future periods are subject to
the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assertion that the Company maintained effective internal control over financial reporting, including
safeguarding of assets, presented in conformity with both accounting principles generally accepted in the United States of America 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 as of December 31, 2003, is fairly stated, in all material respects, based on the criteria established in the COSO report.



/s/ Deloitte & Touche LLP

Deloitte & Touche LLP

Certified Public Accountants



West Palm Beach, Florida

March 9, 2004



F-37