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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



| | For the Fiscal Year Ended December 31, 2003
| | -------------------------------------------



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



| | For the transition period from  to
| | ----------------------------------



Commission File Number: 0-29040



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FIDELITY BANKSHARES, INC.

(Exact Name of Registrant as Specified in its Charter)



|                                                                                     |  |                                                   
|------------------------------------------------------------------------------------ |  | --------------------------------------------------
|Delaware (State or Other Jurisdiction of Incorporation or Organization)              |  | 65-0717085 (I.R.S. Employer Identification Number)
|                                                                                     |  |                                                   
|                                                                                     | 
|205 Datura Street, West Palm Beach, Florida (Address of Principal Executive Offices) |  | 33401 (Zip Code)                                  



(561) 803-9900

(Registrants Telephone Number including area code)



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Securities Registered Pursuant to Section 12(b) of the Act:



None



Securities Registered Pursuant to Section 12(g) of the Act:



Common Stock, par value $.10 per share

(Title of Class)



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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days.   YES  x  NO ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.x



Indicate by check
mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  YES  x  NO ̈





As of June 30, 2003, there were issued and outstanding 15,015,197 shares of the Registrants Common Stock. The aggregate value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of the Common Stock as of June 30, 2003 ($22.25) was $266,388,000.



DOCUMENTS INCORPORATED BY REFERENCE



1. Sections of Annual Report to Stockholders for the fiscal year ended December 31, 2003 (Parts II and IV).

2. Proxy Statement for the 2004 Annual Meeting of Stockholders (Parts I and III).



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PART I



|ITEM 1. |  | BUSINESS
|------- |  | --------



Fidelity Bankshares, Inc.



Fidelity Bankshares, Inc. is a Delaware corporation which, on May 15, 2001, became the holding company parent of Fidelity Federal Bank & Trust, following the completion of the second step mutual-to-stock conversion of
Fidelity Bankshares, MHC. Prior to completion of the second step conversion, Fidelity Federal Bank & Trusts mid-tier stock holding company parent was also called Fidelity Bankshares, Inc. References to Fidelity Bankshares, Inc.
includes references before and after the second step conversion. As a result of the second step conversion, we raised $79.5 million in net proceeds, of which $40.9 million was infused into Fidelity Federal Bank & Trust
and $38.6 million was retained by us. At December 31, 2003, the only significant asset of Fidelity Bankshares, Inc. was its ownership of all of the outstanding stock of Fidelity Federal Bank & Trust. Our corporate office is located at 205 Datura
Street, West Palm beach, Florida 33401. Our telephone number is (561) 803-9900.



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.



In 1998, we sold $29.6 million of cumulative trust preferred securities through Fidelity Capital Trust I, a special purpose
subsidiary of Fidelity Bankshares, Inc. The cumulative trust preferred securities have a yield of 8.375% and are scheduled to mature on January 31, 2028. The cumulative trust preferred securities may be redeemed in whole or in part after January 31,
2003, in which case, holders of the cumulative trust preferred securities will receive the accrued but unpaid interest to the date fixed for redemption plus 100% of the principal amount.



In 2003, we sold an additional $22.7 million of cumulative trust preferred securities through Fidelity Capital Trust II, a
special purpose subsidiary of Fidelity Bankshares, Inc. The cumulative trust preferred securities have a floating yield of 285 basis points above the three month LIBOR rate and are scheduled to mature on January 23, 2034. The cumulative trust
preferred securities may be redeemed in whole, or in part, after January 23, 2009, in which case, holders of the cumulative trust preferred securities will receive the accrued but unpaid interest to the date fixed for redemption plus 100% of the
principal amount.



The additional capital raised through the
cumulative trust preferred stock issuances provided additional capital to support our asset growth.



At December 31, 2003, the Company had consolidated assets and consolidated stockholders equity of $3.0 billion and $184.5 million, respectively.
Through the Bank, the Company has deposits totaling $2.5 billion.



Fidelity
Federal Bank & Trust



Fidelity Federal Bank &
Trust was originally chartered as a federal mutual savings and loan association in 1952. In January 1994, the Bank reorganized from a mutual savings bank to the stock form of ownership as part of its mutual holding company reorganization. In July
1999, we began offering insurance and investment products through our wholly owned subsidiary  Florida Consolidated Agency, Inc. In February 2000, we began offering trust services, and at December 31, 2003, we had $63.7 million of trust assets
under administration, including $47.3 million under trust management.



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We are primarily engaged in the business of attracting deposits from the general public in our market
area, and investing such deposits, together with other sources of funds, in loans secured by one- to four-family residential real estate. In recent years, we have increased our commercial real estate lending, and our consumer and commercial business
lending activities. Our goal over the next several years is to continue to increase the origination of these loans, consistent with our standards of safety and soundness. To a lesser extent, we also originate multi-family loans, construction loans
and land loans for single-family properties, and we invest in mortgage-backed securities issued or guaranteed by the United States Government or agencies thereof. In addition, we invest a portion of our assets in securities issued by the United
States Government, cash and cash equivalents, including deposits in other financial institutions, corporate securities and Federal Home Loan Bank stock. Our principal sources of funds are deposits and principal and interest payments on loans.
Principal sources of income are interest received from loans and investment securities. Our principal expense is interest paid on deposits and employee compensation and benefits.



Since 1998, we have expanded our branch network throughout our market area. From December 1998 through December 31, 2003 we
have opened 19 new branches.



Market Area



We are headquartered in West Palm Beach, Florida, and conduct our business
primarily in Palm Beach, Martin, and St. Lucie Counties in Florida. To a lesser extent, we conduct business in Indian River and Broward Counties. At December 31, 2003, we had 41 offices in our market area, of which 36 were located in Palm Beach
County, three were located in Martin County and two were located in St. Lucie County. Palm Beach, Martin and St. Lucie Counties are located in southeastern Florida, an area that has experienced considerable growth and development since the 1960s.
This three-county area had a total population of 1.5 million as of December 31, 2003.



Our market area includes a mix of rural and urban areas. The strength of the southeast Florida economy depends significantly upon government, foreign trade, tourism, and its attraction as a retirement area. Major
employers in our market area include Tenet Health Care, Florida Power and Light, BellSouth and the Palm Beach County School Board.



Competition



Our market area in southeast Florida has a large number of financial institutions. All of these financial institutions compete with us to varying degrees,
and many of them are significantly larger and have greater financial resources than we have. As a result, we encounter strong competition both in attracting deposits and in originating real estate and other loans. Our most direct competition for
deposits historically has come from commercial banks, securities brokerage firms, other savings associations, and credit unions, and we expect continued strong competition from these financial institutions in the foreseeable future. Our market area
includes branches of several commercial banks that are substantially larger than Fidelity Federal Bank & Trust in terms of state-wide deposits. We compete for deposits by offering customers a high level of personal service and expertise, and a
wide range of financial services.



The competition for real
estate and other loans comes principally from commercial banks, mortgage banking companies, credit unions and other savings associations. This competition for loans has increased substantially in recent years as a result of the number of
institutions competing in our market area, as well as the increased efforts by commercial banks to expand mortgage loan originations.



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We compete for loans primarily through the interest rates and loan fees we charge, and the efficiency and
quality of services we provide to borrowers, real estate brokers, and builders. Factors that also affect competition include general and local economic conditions, current interest rate levels, and volatility of the mortgage markets.



Fidelity Bankshares, Inc. is the sixth largest financial institution holding
company headquartered in Florida, and the largest headquartered in Palm Beach, Martin and St. Lucie counties based on total assets. Fidelity Federal Bank & Trusts share of deposits in Palm Beach County increased from 3.1% in 1995 to 8.1%
at June 30, 2003. Our 7.5% share of deposits in Palm Beach, Martin and St. Lucie counties ranked us fourth among financial institutions in the three county area at June 30, 2003, the most recent date for which market share data are available.



Lending Activities



General. Historically, our principal lending activity
has been the origination of fixed rate and adjustable rate mortgage loans collateralized by one- to four-family residential properties located in our market area. We currently originate both fixed rate mortgage loans and adjustable rate mortgage
(ARM) loans for retention in our loan portfolio. The majority of our mortgage loans are eligible for sale in the secondary mortgage market. We also originate loans secured by commercial real estate and multi-family residential real
estate, construction loans, commercial business loans and consumer loans. In recent years, we have increased our commercial real estate, commercial business and consumer lending.



In an effort to manage interest rate risk, we make our interest-earning assets more interest-rate sensitive by originating
adjustable rate loans, such as ARM loans and short- and medium-term consumer loans, including home equity loans. We also purchase both fixed rate and adjustable rate mortgage-backed securities. At December 31, 2003, approximately $1.3 billion, or
59.5%, of our total loan portfolio, and $131.2 million, or 27.8%, of our mortgage-backed securities portfolio, consisted of loans or securities with adjustable interest rates. We originate fixed rate mortgage loans generally with 15- to 30-year
terms to maturity, collateralized by one- to four-family residential properties. One- to four-family fixed rate and adjustable rate residential mortgage loans generally are originated and underwritten according to standards that allow us to resell
such loans in the secondary mortgage market for the purpose of managing interest rate risk and liquidity. We periodically sell both, on a servicing released and servicing retained basis and without recourse to us, a portion of our residential loans
which have terms to maturity of fifteen years and greater. Generally, we retain in our portfolio all consumer, commercial real estate and multi-family residential real estate loans.



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Composition of Loan Portfolio. Set forth below are selected data relating to the
composition of our loan portfolio by type of loan as of the dates indicated. Also set forth below is the aggregate amount of our investment in mortgage-backed securities at the dates indicated.



|                                                                                |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ------- | ----- | - | ------ | - | --------- | ------- |  | ----- | ------ |  | - | --------- | - |  | ------ | - |  | ------- | --------- | - | ------ | ----- | ------- |  | - | --------- |  | ----- | -
|                                                                                |  | At December 31,        |          
|                                                                                |  | 1999                   |           |   | 2000    |       |   | 2001   |   |           | 2002    |  |       | 2003   | 
|                                                                                |  | Amount                 |           |   | Percent |       |   | Amount |   |           | Percent |  |       | Amount |  |   | Percent   |   |  | Amount |   |  | Percent |           |   | Amount |       | Percent | 
|                                                                                |  | (Dollars in thousands) |          
|Real Estate Loans:                                                              |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|One-to four-family                                                              |  | $                      | 925,384   |   |         | 79.5  | % |        | $ | 918,142   |         |  | 67.4  | %      |  | $ | 944,046   |   |  | 59.7   | % |  | $       | 1,062,956 |   |        | 54.9  | %       |  | $ | 1,002,573 |  | 45.7  | %
|Construction loans                                                              |  |                        | 63,589    |   |         | 5.5   |   |        |   | 177,062   |         |  | 13.1  |        |  |   | 284,495   |   |  | 18.0   |   |  |         | 364,346   |   |        | 18.8  |         |  |   | 470,016   |  | 21.5  |  
|Land loans                                                                      |  |                        | 9,763     |   |         | 0.8   |   |        |   | 14,421    |         |  | 1.0   |        |  |   | 25,627    |   |  | 1.6    |   |  |         | 29,181    |   |        | 1.5   |         |  |   | 36,660    |  | 1.7   |  
|Commercial                                                                      |  |                        | 94,490    |   |         | 8.1   |   |        |   | 122,733   |         |  | 9.0   |        |  |   | 244,620   |   |  | 15.5   |   |  |         | 413,775   |   |        | 21.4  |         |  |   | 647,848   |  | 29.6  |  
|Multi-family                                                                    |  |                        | 23,772    |   |         | 2.0   |   |        |   | 21,254    |         |  | 1.6   |        |  |   | 43,701    |   |  | 2.8    |   |  |         | 45,279    |   |        | 2.3   |         |  |   | 106,042   |  | 4.8   |  
|                                                                                |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|                                                                                |  |                        |           |   |         |       |   |        |   |          
|Total real estate loans                                                         |  |                        | 1,116,998 |   |         | 95.9  |   |        |   | 1,253,615 |         |  | 92.1  |        |  |   | 1,542,489 |   |  | 97.6   |   |  |         | 1,915,537 |   |        | 98.9  |         |  |   | 2,263,139 |  | 103.3 |  
|                                                                                |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|                                                                                |  |                        |           |   |         |       |   |        |   |          
|Other Loans:                                                                    |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|Consumer (1)                                                                    |  |                        | 60,281    |   |         | 5.2   |   |        |   | 85,407    |         |  | 6.3   |        |  |   | 105,077   |   |  | 6.6    |   |  |         | 141,343   |   |        | 7.3   |         |  |   | 185,450   |  | 8.4   |  
|Commercial business                                                             |  |                        | 94,157    |   |         | 8.1   |   |        |   | 152,524   |         |  | 11.2  |        |  |   | 132,881   |   |  | 8.4    |   |  |         | 146,205   |   |        | 7.6   |         |  |   | 131,292   |  | 6.0   |  
|                                                                                |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|Total other loans                                                               |  |                        | 154,438   |   |         | 13.3  |   |        |   | 237,931   |         |  | 17.5  |        |  |   | 237,958   |   |  | 15.0   |   |  |         | 287,548   |   |        | 14.9  |         |  |   | 316,742   |  | 14.4  |  
|                                                                                |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|Total loans receivable                                                          |  |                        | 1,271,436 |   |         | 109.2 |   |        |   | 1,491,546 |         |  | 109.6 |        |  |   | 1,780,447 |   |  | 112.6  |   |  |         | 2,203,085 |   |        | 113.8 |         |  |   | 2,579,881 |  | 117.7 |  
|                                                                                |  |                        |           |   |         |       |   |        |   |          
|Less:                                                                           |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|Undisbursed loan proceeds principally residential and residential construction |  |                        | 106,232   |   |         | 9.1   |   |        |   | 128,116   |         |  | 9.4   |        |  |   | 194,662   |   |  | 12.3   |   |  |         | 260,380   |   |        | 13.5  |         |  |   | 374,974   |  | 17.1  |  
|Unearned discount and net deferred fees (costs)                                 |  |                        | (2,826    | ) |         | (0.2  | ) |        |   | (2,707    | )       |  | (0.2  | )      |  |   | (2,289    | ) |  | (0.1   | ) |  |         | (1,612    | ) |        | (0.1  | )       |  |   | 2,092     |  | 0.1   |  
|Allowance for loan losses                                                       |  |                        | 3,609     |   |         | 0.3   |   |        |   | 4,905     |         |  | 0.4   |        |  |   | 6,847     |   |  | 0.4    |   |  |         | 8,318     |   |        | 0.4   |         |  |   | 11,119    |  | 0.5   |  
|                                                                                |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|Total loans receivable-net                                                      |  | $                      | 1,164,421 |   |         | 100.0 | % |        | $ | 1,361,232 |         |  | 100.0 | %      |  | $ | 1,581,227 |   |  | 100.0  | % |  | $       | 1,935,999 |   |        | 100.0 | %       |  | $ | 2,191,696 |  | 100.0 | %
|                                                                                |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  
|Mortgage-backed securities                                                      |  | $                      | 336,212   |   |         |       |   |        | $ | 283,993   |         |  |       |        |  | $ | 201,533   |   |  |        |   |  | $       | 109,755   |   |        |       |         |  | $ | 471,228   |  |       |  
|                                                                                |  |                        |           |   |         |       |   |        |   |           |         |  |       |        |  |   |           |   |  |        |   |  |         |           |   |        |       |         |  |   |           |  |       |  

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|(1) | Includes primarily home equity lines of credit, second mortgages and automobile loans. At December 31, 2001, 2002 and 2003, the disbursed portion of equity lines of
credit totaled $40.2 million, $83.5 million and $136.1 million, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Loan and Mortgage-Backed Securities Contractual Terms to Maturity. The following table sets
forth certain information as of December 31, 2003, regarding the dollar amount of loans and mortgage-backed securities maturing in our portfolio based on their contractual terms to maturity. The amounts shown represent outstanding principal
balances, less loans in process, and are not adjusted for premiums, discounts, reserves, and unearned fees. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
Adjustable and floating rate loans and mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust rather than in which they contractually mature, and fixed rate loans and mortgage-backed securities are
included in the period in which the final contractual repayment is due. Fixed rate mortgage-backed securities are assumed to mature in the period in which the final contractual payment is due on the underlying mortgage.



|                                          |  |                |           |                        |   |                         |  |                         |         |                           |   |                 |  |       |         |  |   |         |  |   |          
|----------------------------------------- |  | -------------- | --------- | ---------------------- | - | ----------------------- |  | ----------------------- | ------- | ------------------------- | - | --------------- |  | ----- | ------- |  | - | ------- |  | - | ---------
|                                          |  | Within 1 Years |           | Over 1 Year to 3 Years |   | Over 3 Years to 5 Years |  | Over 5Years to 10 Years |         | Over 10 Years to 20 Years |   | Beyond 20 Years |  | Total
|Real estate loans:                        |  |                |           |                        |   |                         |  |                         |         |                           |   |                 |  |       |         |  |   |         |  |   |          
|One- to four-family residential(1)        |  | $              | 181,420   |                        | $ | 65,666                  |  | $                       | 265,303 |                           | $ | 45,212          |  | $     | 341,749 |  | $ | 325,626 |  | $ | 1,224,976
|Commercial, multi-family and land         |  |                | 585,315   |                        |   | 9,904                   |  |                         | 9,143   |                           |   | 6,500           |  |       | 56,397  |  |   |        |  |   |          
|Consumer and commercial business loans(2) |  |                | 235,419   |                        |   | 21,715                  |  |                         | 24,771  |                           |   | 19,082          |  |       | 11,685  |  |   |        |  |   | 312,672  
|                                          |  |                |           |                        |   |                         |  |                         |         |                           |   |                 |  |       |         |  |   |         |  |   |          
|Total loans receivable(3)                 |  | $              | 1,002,154 |                        | $ | 97,285                  |  | $                       | 299,217 |                           | $ | 70,794          |  | $     | 409,831 |  | $ | 325,626 |  | $ | 2,204,907
|                                          |  |                |           |                        |   |                         |  |                         |         |                           |   |                 |  |       |         |  |   |         |  |   |          
|Mortgage-backed securities                |  | $              | 153,741   |                        | $ |                        |  | $                       |        |                           | $ | 48,188          |  | $     | 236,171 |  | $ | 34,888  |  | $ | 472,988  
|                                          |  |                |           |                        |   |                         |  |                         |         |                           |   |                 |  |       |         |  |   |         |  |   |          



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|(1) | Includes construction loans.
|--- | ----------------------------

|(2) | Includes commercial business loans of $131.3 million.
|--- | -----------------------------------------------------

|(3) | Excludes unearned discount and net deferred fees and allowance for loan losses and is shown net of undisbursed loan proceeds.
|--- | -----------------------------------------------------------------------------------------------------------------------------



The following table sets forth at December 31, 2003, the dollar amount of all
fixed rate and adjustable rate loans and mortgage-backed securities due or repricing after December 31, 2004.



|                                          |  |                |         |            |   |         |  |   |          
|----------------------------------------- |  | -------------- | ------- | ---------- | - | ------- |  | - | ---------
|                                          |  | Fixed          |         | Adjustable |   | Total  
|                                          |  | (In Thousands)
|Real estate loans:                        |  |                |         |            |   |         |  |   |          
|One- to four-family residential           |  | $              | 719,704 |            | $ | 323,852 |  | $ | 1,043,556
|Commercial, multi-family and land         |  |                | 72,518  |            |   | 9,426   |  |   | 81,944   
|Consumer and commercial business loans(1) |  |                | 77,253  |            |   |        |  |   | 77,253   
|                                          |  |                |         |            |   |         |  |   |          
|Total                                     |  | $              | 869,475 |            | $ | 333,278 |  | $ | 1,202,753
|                                          |  |                |         |            |   |         |  |   |          
|Mortgage-backed securities                |  | $              | 280,216 |            | $ | 39,031  |  | $ | 319,247  
|                                          |  |                |         |            |   |         |  |   |          



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|(1) | Includes commercial business loans of $29.6 million.
|--- | ----------------------------------------------------



One- to Four-Family Residential Real Estate Loans. Our primary lending activity consists of originating one- to four-family, owner-occupied,
residential mortgage loans secured by properties located in our market area. We also originate one- to four-family residential loans secured by properties outside of our market area. These loans, which are originated through a network of brokers
throughout Florida, are subject to our customary underwriting standards. At December 31, 2003, $1.0 billion, or 45.7%, of our total loans receivable consisted of one- to four-family residential mortgage loans. Of this amount, $361.2 million are
secured by properties located outside of our market area, all of which are located in Florida.



We currently offer one- to four-family residential mortgage loans with terms typically ranging from 15 to 30 years, and with adjustable or fixed interest
rates. Originations of fixed rate mortgage loans versus ARM loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, customer preference, and loan products offered by our competitors. Therefore,
even if managements strategy is to emphasize originating ARM loans, market conditions may be such that there is greater demand for fixed rate mortgage loans. ARM loans originated and purchased totaled $163.2 million and $271.5 million during
the years ended December 31, 2002 and 2003, respectively.



Our
fixed rate loans and adjustable rate loans are generally originated and underwritten according to standards that permit their sale in the secondary mortgage market. Whether we can or will sell loans into the secondary market, however, depends on a
number of factors, including the yield and the term of the loan, market conditions, and our current interest rate sensitivity. Our fixed rate mortgage loans amortize on a monthly basis with principal and interest due each month. One- to four-family
residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans.



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We currently offer ARM loans with initial interest rate adjustment periods of one, three, five, seven and
ten years, based on changes in a designated market index. After the initial interest rate adjustment period, our one-, three-, five-, seven- and ten-year ARM loans give the borrower the option of converting the ARM loan to a fixed rate mortgage for
the remaining term of the loan at the prevailing interest rate for comparable fixed rate mortgages at the time of the conversion. The interest rate on one year ARM loans and on the three-, five-, seven and ten-year ARM loans that are not converted
to fixed rate mortgage loans, adjusts annually with an annual interest rate adjustment limit of 200 basis points and with a maximum lifetime interest rate adjustment limit of 600 basis points above the initial interest rate. The interest rate on all
owner-occupied one- to four-family ARM loans is 275 to 325 basis points above the appropriate United States Treasury security rates used as the index for ARM originations. We originate ARM loans with initially discounted rates, which vary depending
upon whether the initial interest rate adjustment period is one, three, five, seven or ten years. We determine whether a borrower qualifies for an ARM loan based on the fully indexed rate of the ARM loan at the time the loan is originated. The
outstanding principal balance of one- to four-family residential ARM loans, including construction ARM loans, totaled $494.0 million, or 22.5%, of our total loan portfolio at December 31, 2003.



The primary purpose of offering ARM loans is to make our loan portfolio more
sensitive to changes in market interest rates. However, as the interest income earned on ARM loans varies with prevailing market interest rates, these loans may not offer cash flows that are as predictable as cash flows in our long-term, fixed rate
mortgage loan portfolio. ARM loans also carry the increased credit risk associated with potentially higher monthly payments for borrowers as market interest rates increase. It is possible, therefore, that during periods of rising interest rates, the
risk of default on ARM loans may increase due to the upward adjustment of interest costs to borrowers.



Our one- to four-family residential first mortgage loans customarily include due-on-sale clauses, which are provisions giving us the right to declare a
loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are an important means of making our fixed rate
mortgage loan portfolio more interest rate sensitive, and we have generally exercised our rights under these clauses.



Regulations limit the amount that a savings association may lend relative to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Appraisals are generally performed by our service corporation subsidiary. Such regulations permit a maximum loan-to-value ratio of 97% for residential property and 85% for all other real estate loans. Our
lending policies generally limit the maximum loan-to-value ratio on both fixed rate mortgage loans and ARM loans without private mortgage insurance, to 80% of the lesser of the appraised value or the purchase price of the property that is collateral
for the loan. For one- to four-family real estate loans with loan-to-value ratios of between 80% and 90%, we generally require the borrower to obtain private mortgage insurance. We require that the borrower obtain private mortgage insurance for any
mortgage loan with a loan-to-value ratio of more than 90%. We require fire and casualty insurance, including windstorm insurance, as well as a title guaranty regarding good title, on all properties securing real estate loans.



Construction and Land Loans. At December 31, 2003,
$470.0 million, or 21.5% of our total loans receivable consisted of residential construction loans, of which $221.2 million had been disbursed. We currently offer fixed rate and adjustable rate residential construction loans primarily for the
construction of owner-occupied, single-family residences. These loans generally are offered to builders who have a contract for sale of the property, and to owners who have a contract for construction of the property. In addition, we make
construction loans to builders where the home is not under contract for sale to a buyer at the time the loan is closed. The gross amount of loans to these builders totaled $157.3



7



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million, of which $94.3 million had been disbursed at December 31, 2003. Construction loans are generally structured to
become permanent mortgage loans once the construction is completed, and are originated with terms of up to 30 years with an allowance of up to one year for construction. Construction loans require the payment of interest only during the construction
period. Funds are disbursed as construction is completed. Substantially all of our construction loans are secured by properties located in our market area.



In addition, we originate land loans that are secured by unimproved or improved lots. At December 31, 2003, $36.7 million, or 1.7% of our total loans
receivable, consisted of land loans. Land loans are currently offered with one-year adjustable rates for terms of up to 15 years. The maximum loan-to-value ratio for our land loans is 85%. We currently use the applicable United States Treasury
securities rate as our index on newly originated land loans. Initial interest rates may be below the fully indexed rate. Substantially all of our land loans are secured by properties located in our market area.



Construction loans and land loans generally involve a greater degree of
credit risk than one- to four-family residential mortgage loans. The repayment of the construction loan often depends upon the successful completion of the construction project. Construction delays or the inability of the borrower to sell the
property once construction is completed may impair the borrowers ability to repay the loan.



Multi-Family Residential Real Estate Loans. At December 31, 2003, $106.0, million, or 4.8% of our total loans receivable, consisted
of multi-family residential real estate loans. At December 31, 2003, we had 69 loans secured by multi-family properties, and substantially all of our multi-family residential real estate loans are secured by properties located within our market
area.At December 31, 2003, our multi-family residential real estate loans had an average principal balance of $1.5 million and the largest multi-family residential real estate loan had a principal balance of $21.0 million and is located in
Palm Beach County, Florida. At December 31, 2003, this loan was performing in accordance with its terms. Multi-family residential real estate loans currently are offered with adjustable interest rates, although in the past we originated fixed rate
multi-family real estate loans. The terms of each multi-family residential real estate loan are negotiated on a case-by-case basis. These loans typically have adjustable interest rates tied to a market index with a 600 basis point lifetime interest
rate cap, and an interest rate floor equal to the initial rate. Multi-family residential real estate loans generally amortize over 15 to 25 years. We may offer initial discount rates depending on market conditions, but generally the initial interest
rate on multi-family residential real estate loans is tied to an applicable United States Treasury bill rate.



In underwriting our multi-family residential real estate loans, we generally lend up to 80% of the appraised value of the property securing the loan. The
appraised value is determined by independent appraisers that we designate. We generally obtain either an environmental assessment from an independent engineering firm of any environmental risks that may be associated with the property, or we obtain
an insurance policy that covers potential environmental risks. When deciding whether to make a multi-family residential real estate loan we examine the history of the property to generate cash flow and the experience of the borrower in managing
multi-family residential real estate properties. We also review the operating costs of comparable properties in the market area. Generally, we require a cash flow to debt service ratio of 125%. In addition, generally a personal guarantee of the loan
is required from the borrower. We require title insurance, fire and casualty insurance, and flood insurance, if appropriate.



Loans secured by multi-family residential real estate generally have more credit risk than one- to four-family residential mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of the local economy on the borrowers ability to repay the loan, and the
increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured



8



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by multi-family properties is typically dependent upon the successful operation of the real property securing the loan.
If the cash flow from the multi-family property is reduced, the borrowers ability to repay the loan may be impaired.



Commercial Real Estate Loans. The outstanding principal balance of loans secured by commercial real estate was approximately $647.8 million,
or 29.6% of our total loans receivable, at December 31, 2003. Our commercial real estate loans are secured by land or improved property such as offices, small business facilities, strip shopping centers, warehouses and other non-residential
buildings. At December 31, 2003, substantially all of our commercial real estate loans were secured by properties located within our market area. At December 31, 2003, our commercial real estate loans had an average principal balance of $1.1
million. At that date, our largest commercial real estate loan outstanding had a principal balance of $22.2 million and was secured by commercial property located in Palm Beach County, Florida. At December 31, 2003, this loan was performing in
accordance with its terms. Commercial real estate loans are currently offered with adjustable rates. The terms of each commercial real estate loan are negotiated on a case-by-case basis. Generally, these loans have adjustable interest rates tied to
a market index. We may choose to offer initial discount rates depending on market conditions. We use the applicable United States Treasury bill rate as our index on newly originated loans. Our commercial real estate loans generally have terms of 15
to 25 years.



In underwriting our commercial real estate loans,
we generally lend up to 80% of the appraised value of the property securing the loan. The appraised value is determined by independent appraisers that we designate. We generally obtain either an environmental assessment from an independent
engineering firm of any environmental risks that may be associated with the property, or we obtain an insurance policy that covers potential environmental risks. When deciding whether to make a commercial real estate loan we examine the history of
the property to generate cash flow and the experience of the borrower in managing commercial real estate properties. We also review the operating costs of comparable properties in the market area. Generally, we require a cash flow to debt service
ratio of 125%. In addition, generally a personal guarantee of the loan is required from the borrower. We require title insurance, fire and casualty insurance, and flood insurance, if appropriate.



Loans secured by commercial real estate generally involve a greater degree of
risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of
general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the
successful operation of the property securing the loan. If the cash flow from the property is reduced, the borrowers ability to repay the loan may be impaired. However, loans secured by commercial real estate generally have higher interest
rates than loans secured by one-to four-family residential real estate.



Consumer Loans. As of December 31, 2003, consumer loans totaled $185.5 million, or 8.5% of our total loans receivable. The principal types of consumer loans that we offer are home equity lines of credit, adjustable and fixed
rate second mortgage loans and automobile loans. We also offer boat loans and loans secured by deposit accounts and, to a much lesser extent, unsecured loans. We do not offer credit card loans. Consumer loans are offered on a fixed rate and
adjustable rate basis with maturities generally of less than fifteen years. Our home equity lines of credit and second mortgages are secured by the borrowers principal residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans, of 90%. Such loans are offered on an adjustable-rate or fixed rate basis with terms of up to twenty years. At December 31, 2003, the disbursed portion of home equity lines of credit totaled
$136.1 million, or 73.4% of consumer loans.



9



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Our underwriting standards for consumer loans include a review of the borrowers credit history and
an assessment of the borrowers ability to meet existing obligations and payments on the proposed loan. The stability of the borrowers monthly income may be determined by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the borrower is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount, and
in the case of home equity lines of credit and second mortgage loans, we obtain a title guarantee or an opinion as to the validity of title.



Consumer loans generally have shorter terms and higher interest rates than one-to four-family residential loans. However, consumer loans have more credit
risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and recreational vehicles. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles. We add a general provision on a regular basis to our consumer loan loss
allowance, based on general economic conditions and prior loss experience. See Delinquent Loans and Classified AssetsNonPerforming Assets for information regarding our loan loss experience and reserve policy.



Commercial Business Loans. We also offer commercial business
loans to businesses in our market area. Historically, we have offered commercial business loans as a customer service to business account holders. However, our strategy is to substantially increase our loans and services to commercial business
enterprises. To support this strategy, we have hired additional lenders with commercial business lending expertise. Our largest commercial business loan at December 31, 2003 totaled $7.0 million, and was secured by business assets and accounts
receivable located in Palm Beach County, Florida. At December 31, 2003, we had 735 commercial business loans outstanding with an aggregate balance of $131.3 million, or 6.0% of our total loans receivable. The average commercial business loan balance
was approximately $179,000. Commercial business loans are generally offered with adjustable interest rates only, which are tied to The Wall Street Journal prime interest rate, plus up to 300 basis points. The loans are offered with prevailing
terms of five years, but may range up to 15 years. In addition, we offer Small Business Administration loans.



Our underwriting standards for commercial business loans include a review of the borrowers credit history and an assessment of the borrowers
ability to meet existing obligations and payments on the proposed loan based on cash flows generated by the applicants business. The financial strength of each applicant also is assessed through a review of financial statements provided by the
applicant.



Commercial business loans generally bear higher
interest rates and shorter terms than one-to four-family residential loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment is generally dependent on the
successful operation of the borrowers business. We generally obtain personal guarantees from the borrower or a third party as a condition to the origination of commercial business loans. We generally obtain the personal guarantee of all
persons with an equity interest in the business that is obtaining a commercial business loan. Furthermore, in order to reduce the risks associated with the origination of commercial business loans, a substantial portion of our commercial business
loans are also secured by real estate and business assets owned by the borrower.



Loan Originations, Purchases, Sales, Processing, and Commitments. Our new loan originations come from a number of sources including real estate broker referrals, existing customers,



10



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borrowers, builders, attorneys, and walk-in customers. Upon receiving a loan application, we obtain a credit
report and employment verification to verify specific information relating to the applicants employment, income, and credit standing. In the case of a real estate loan, we obtain an appraisal of the real estate intended to secure the proposed
loan. We check the loan application file for accuracy and completeness, and we verify the information provided. All loans of up to $333,700 may be approved by any one of our senior loan underwriters; loans between $333,701 and $750,000 must be
approved by one of our designated senior lending officers; loans between $750,000 and $1.5 million must be approved by at least two of our designated senior lending officers; and loans in excess of $1.5 million must be approved by at least three
members of the Board of Directors acting as a loan committee. These limits are reduced for unsecured loans. The loan committee meets as needed to review and verify that loan approvals by management are within the scope of managements
authority. After the loan is approved, a loan commitment letter is promptly issued to the borrower. At December 31, 2003, we had commitments to originate and purchase $202.4 million of loans.



If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan, including the amount of the loan, interest rate, amortization term, a brief description of the required collateral, and required insurance coverage. We also require the borrower to provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as collateral, which insurance must be maintained during the full term of the loan. Title insurance or an opinion of title, based on a title search of the property, is required on
all loans secured by real property.



Borrowers who refinance an
existing loan must satisfy our underwriting criteria at the time they apply to refinance their loan, and must have been current in their loan payments for a minimum of one year. Approximately 24.0% of our loan originations during the year ended
December 31, 2003, represented the refinancing of loans that we hold. Refinancings have resulted in a decrease in our interest rate spread.



The Bank also allows borrowers to apply for a modification of their existing loan rate for a fee. These borrowers must satisfy our underwriting criteria
at the time of application and modification. Modifications do not allow for an increase in the outstanding principal balance of the loan. The new rate on these loans is normally 1/8 percent higher than the current rate for a new loan. During the
year ended December 31, 2003, we modified approximately $237.8 million in existing loans. Modifications decreased the yield on our loan portfolio which in turn decreased our interest rate spread.



In connection with local mortgage brokers, we have established a mortgage
loan broker solicitation program to supplement our internal originations of one- to four-family residential mortgage loans. Under this program, which is limited to the origination of one- to four-family residential mortgage loans, prospective
borrowers complete loan applications which are provided by mortgage brokers. All loans obtained in this manner are reviewed by our underwriting department in accordance with our customary underwriting standards. Total originations from all sources
under the mortgage loan broker solicitation program during 2002 and 2003 were $87.9 million and $101.9 million, respectively.



We have a correspondent relationship with the wholly owned mortgage subsidiary of a major South Florida builder-developer, who has substantial operations
in our local service area, whereby the mortgage company originates, processes and closes home mortgages resulting from the sale of the developers inventory of homes. The mortgage files are sent to our underwriting department and reviewed in
accordance with our customary underwriting standards and, if we approve the loans, we will issue a commitment to purchase the loan from the mortgage company. We are not obligated to purchase any loans that are presented for our review. Purchases are
accomplished by assignment of the mortgage from the mortgage company to Fidelity Federal Bank & Trust. We purchased $53.0 million and $40.9 million, respectively, of loans from this provider during the years ended 2002 and 2003.



11



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We also originate one- to four-family residential real estate loans secured by properties located outside
of our market area. These loans, which are originated through a network of brokers throughout Florida, are subject to our customary underwriting standards. At December 31, 2003, $1.5 billion, or 67.2%, of our total loans receivable consisted of
loans, including residential construction loans, that were secured by one- to four-family residential real estate loans. Of this amount, $361.2 million were secured by properties located outside of our market area.



We also purchase mortgage loans which are collateralized by residential real
estate located primarily in Florida, although we have in the past purchased loans collateralized by properties located outside of Florida. Generally, we only purchase residential loans that are underwritten to Freddie Mac or Fannie Mae guidelines.
Commercial real estate loans that we may purchase must satisfy the underwriting standards of commercial real estate loans we originate. At December 31, 2003, $118.4 million, or 5.4% of all loans in our total loan portfolio, consisted of purchased
loans and participations. Of this amount, $28.5 million represented our interest in purchased loan participations. Our largest loan participation was a $10.9 million interest in a loan secured by residential real estate in Palm Beach County,
Florida.



Prior to 2003 we generally did not originate loans
for sale. On occasion, we sold loans where the borrower was located outside of our market area. Commencing in 2003, we began regular sales of fixed rate mortgage loans into the secondary markets. Generally, these sales are on a servicing released
basis for loans on properties outside our market area. The servicing is generally retained on sold loans where the property is within our market area.



Originations, Purchases and Sales of Loans. The table below shows our loan origination, purchase and sales activity for the periods
indicated. This table is presented on a gross loan receivable basis.



|                                                                     |  |                         |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                     |  | Year Ended December 31, |          
|                                                                     |  | 2001                    |           |   | 2002 |   |           | 2003 | 
|                                                                     |  | (In Thousands)          |          
|Loan receivable-gross, beginning of period                           |  | $                       | 1,491,546 |   |      | $ | 1,780,447 |      |  | $ | 2,203,085 |  
|                                                                     |  |                         |           |   |      |   |           |      |  |   |           |  
|Originations:                                                        |  |                         |           |   |      |   |           |      |  |   |           |  
|Real estate:                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|One-to four-family residential(1)                                    |  |                         | 373,218   |   |      |   | 535,360   |      |  |   | 639,249   |  
|Land loans                                                           |  |                         | 43,363    |   |      |   | 52,727    |      |  |   | 67,670    |  
|Commercial                                                           |  |                         | 76,301    |   |      |   | 179,333   |      |  |   | 198,187   |  
|Multi-family                                                         |  |                         | 10,048    |   |      |   | 19,538    |      |  |   | 78,615    |  
|Other loans:                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Consumer                                                             |  |                         | 73,496    |   |      |   | 118,777   |      |  |   | 144,760   |  
|Commercial business                                                  |  |                         | 222,224   |   |      |   | 158,299   |      |  |   | 137,805   |  
|                                                                     |  |                         |           |   |      |   |           |      |  |   |           |  
|Total originations                                                   |  |                         | 798,650   |   |      |   | 1,064,034 |      |  |   | 1,266,286 |  
|Transfer of loans to foreclosed real estate and repossessed property |  |                         | (575      | ) |      |   | (680      | )    |  |   | (870      | )
|Loan purchases                                                       |  |                         | 35,063    |   |      |   | 47,167    |      |  |   | 40,854    |  
|Repayments                                                           |  |                         | (508,634  | ) |      |   | (682,811  | )    |  |   | (734,162  | )
|Loan sales                                                           |  |                         | (35,603   | ) |      |   | (5,072    | )    |  |   | (195,312  | )
|                                                                     |  |                         |           |   |      |   |           |      |  |   |           |  
|Net loan activity                                                    |  |                         | 288,901   |   |      |   | 422,638   |      |  |   | 376,796   |  
|                                                                     |  |                         |           |   |      |   |           |      |  |   |           |  
|Total loans receivable-gross, end of period                          |  | $                       | 1,780,447 |   |      | $ | 2,203,085 |      |  |   | 2,579,881 |  
|                                                                     |  |                         |           |   |      |   |           |      |  |   |           |  

---

|(1) | Includes loans to finance the construction of one- to four-family residential properties, and loans originated for sale in the secondary market.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



Loan Origination Fees and Costs and Other
Income. In addition to interest earned on loans, we may also charge a fee, often expressed as a percentage of the principal amount of the loan, at the time the loan is originated. To the extent that loans are originated or acquired for our
portfolio, Statement of Financial Accounting Standards (SFAS) 91 Accounting for Nonrefundable Fees and Costs Associated



12



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with Originating or Acquiring loans and Initial Direct Costs of Leases requires that we defer loan origination fees
and costs and amortize such fees and accrete such costs as an adjustment of yield over the life of the loan by use of the level yield method. Fees and costs deferred under SFAS 91 are recognized into income immediately upon prepayment or the sale of
the related loan. At December 31, 2003, we had $10.3 million of deferred loan origination fees, and $8.2 million of deferred loan origination costs. Such fees vary with the volume and type of loans originated and commitments and competitive
conditions in the mortgage markets.



We also receive other fees
and, service charges that consist primarily of deposit transaction account service charges, late payment charges, credit card fees, fees from the sale of insurance and annuity products and income from real estate owned operations. We recognized fees
and service charges of $11.9 million, $15.7 million and $19.9 million for the years ended December 31, 2001, 2002 and 2003.



Loans-to-One Borrower. Federal savings banks are subject to the same loans-to-one borrower limits as those applicable to national banks,
which under current regulations restrict loans-to-one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the
loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate). At December 31, 2003, our largest outstanding loan relationship with one borrower totaled $26.2 million. These loans are secured by
various residential and commercial properties in northern Palm Beach County, Florida. At that date, our second largest lending relationship totaled $24.5 million and is secured by various residential real properties under development in Palm Beach
and Broward County, Florida. Our third largest lending relationship totaled $22.2 million, and is secured by commercial real property under development in Palm Beach County, Florida. Our fourth largest lending relationship totaled $20.8 million and
is secured by various commercial and retail properties in Palm Beach County, Florida. Our fifth largest lending relationship totaled $20.6 million and is secured by commercial real property in Palm Beach County, Florida and land in Orange County,
Florida. All of the loans comprising these lending relationships are performing in accordance with their terms. Our regulatory limit on the maximum total loans to a single or related group of borrowers was $33.1 million at December 31, 2003.



Mortgage-Backed Securities



We also invest in mortgage-backed securities issued or guaranteed by the
United States Government or agencies thereof. These securities consist primarily of fixed rate mortgage-backed securities issued or guaranteed by Fannie Mae or Freddie Mac. At December 31, 2003 our mortgage-backed securities had a market value of
$471.2 million. Our objective in investing in mortgage-backed securities varies from time to time depending upon market interest rates, local mortgage loan demand, and our level of liquidity. Mortgage-backed securities are more liquid than whole
loans and can be readily sold in response to market conditions and changing interest rates. Mortgage-backed securities purchased by us also have lower credit risk than mortgage loans because principal and interest are either insured or guaranteed by
the United States Government or agencies thereof.



13



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The following table shows our purchases and sales of mortgage-backed securities for the periods
indicated.



|                                                                                            |  |                         |         |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                            |  | Year Ended December 31, |        
|                                                                                            |  | 2001                    |         |   | 2002 |   |          | 2003 | 
|                                                                                            |  | (In Thousands)          |        
|Mortgage-backed securities at beginning of period                                           |  | $                       | 283,993 |   |      | $ | 201,533  |      |  | $ | 109,755  |  
|Purchases                                                                                   |  |                         |        |   |      |   | 37,054   |      |  |   | 693,042  |  
|Sales                                                                                       |  |                         | (13,753 | ) |      |   | (4,392   | )    |  |   | (43,373  | )
|Repayments                                                                                  |  |                         | (72,682 | ) |      |   | (124,275 | )    |  |   | (281,571 | )
|Discount (premium) amortization                                                             |  |                         | (1,115  | ) |      |   | (739     | )    |  |   | (3,166   | )
|Increase (decrease) in market value of securities held for sale in accordance with SFAS 115 |  |                         | 5,090   |   |      |   | 574      |      |  |   | (3,459   | )
|                                                                                            |  |                         |         |   |      |   |          |      |  |   |          |  
|Mortgage-backed securities at end of period                                                 |  | $                       | 201,533 |   |      | $ | 109,755  |      |  |   | 471,228  |  
|                                                                                            |  |                         |         |   |      |   |          |      |  |   |          |  



The following table
sets forth the allocation of fixed and adjustable rate mortgage-backed securities for the periods indicated.



|                                      |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|------------------------------------- |  | ---------------------- | ------- | - | ------ | - | - | ---- | ------- |  | ------ | - |  | - | ------- |  | ------ | -
|                                      |  | At December 31,        |        
|                                      |  | 2001                   |         |   | 2002   |   |   | 2003 |        
|                                      |  | $                      |         | % |        |   | $ |      | %       |  |        | $ |  | % |        
|                                      |  | (Dollars In Thousands) |        
|Mortgage-backed securities, net:      |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|Adjustable:                           |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|FreddieMac                            |  | $                      | 54,938  |   | 27.15  | % |   | $    | 28,012  |  | 25.42  | % |  | $ | 15,691  |  | 3.32   | %
|FannieMae                             |  |                        | 21,050  |   | 10.40  |   |   |      | 4,527   |  | 4.11   |   |  |   | 115,484 |  | 24.43  |  
|GinnieMae                             |  |                        |        |   |       |   |   |      | 5,009   |  | 4.55   |   |  |   | 60,458  |  | 12.79  |  
|                                      |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|Total adjustable                      |  |                        | 75,988  |   | 37.55  |   |   |      | 37,548  |  | 34.08  |   |  |   | 191,633 |  | 40.54  |  
|                                      |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|Fixed:                                |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|FreddieMac                            |  |                        | 67,025  |   | 33.12  |   |   |      | 27,568  |  | 25.02  |   |  |   | 120,317 |  | 25.45  |  
|FannieMae                             |  |                        | 49,990  |   | 24.71  |   |   |      | 41,640  |  | 37.79  |   |  |   | 157,713 |  | 33.36  |  
|GinnieMae                             |  |                        | 8,530   |   | 4.22   |   |   |      | 2,999   |  | 2.72   |   |  |   | 1,565   |  | 0.32   |  
|                                      |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|Total fixed                           |  |                        | 125,545 |   | 62.05  |   |   |      | 72,207  |  | 65.53  |   |  |   | 279,595 |  | 59.14  |  
|                                      |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|Accrued interest                      |  |                        | 807     |   | 0.40   |   |   |      | 428     |  | 0.39   |   |  |   | 1,505   |  | 0.32   |  
|                                      |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  
|Total mortgage-backed securities, net |  | $                      | 202,340 |   | 100.00 | % |   | $    | 110,183 |  | 100.00 | % |  | $ | 472,733 |  | 100.00 | %
|                                      |  |                        |         |   |        |   |   |      |         |  |        |   |  |   |         |  |        |  



Delinquent Loans and Classified
Assets



Delinquencies. Our collection
procedures provide that when a loan is 15 days past due, a computer generated late charge notice is sent to the borrower requesting payment, plus a late charge. If the delinquency continues for 30 days, a delinquent notice is sent and personal
contact efforts are attempted, either in person or by telephone, to strengthen the collection process and obtain reasons for the delinquency. Also, plans to arrange a repayment plan are made. If a loan becomes 60 days past due, a collection letter
is sent, personal contact is attempted, and the loan becomes subject to possible legal action if suitable arrangements to repay have not been made. In addition, the borrower is given information which provides access to consumer counseling services,
to the extent required by regulations of the Department of Housing and Urban Development. When a loan continues in a delinquent status for 90 days or more, and a repayment schedule has not been made or kept by the borrower, generally a notice of
intent to foreclose is sent to the borrower, giving 30 days to cure the delinquency. If not cured, foreclosure proceedings are initiated.



Impaired Loans. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement.



14



---

Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest is doubtful. Loans are placed on non - accrual status when either principal or interest is 90 days or more past due. Interest accrued and unpaid at the time a loan is
placed on a non-accrual status is charged against interest income.



Real estate that we acquire as a result of foreclosure or by the deed in lieu of foreclosure is classified as real estate owned (REO) until such time as it is sold. When real estate is acquired through foreclosure or by deed in
lieu of foreclosure, it is recorded at its fair value, less estimated costs of disposal. If the value of the property is less than the loan, less any related specific loan loss provisions, the difference is charged against our earnings. Any
subsequent write-down of REO is also charged against earnings. At December 31, 2003, we had no property that was acquired as the result of foreclosure and classified as REO. At December 31, 2003, we had nonperforming assets of $11.2 million, and a
ratio of nonperforming assets to total assets of 0.37%.



The
following table sets forth information regarding our non-accrual mortgage loans delinquent 90 days or more, non-accrual consumer and commercial business loans delinquent 60 days or more, and real estate acquired or deemed acquired by foreclosure at
the dates indicated. When a loan is delinquent 90 days or more, we fully reserve all accrued interest thereon and cease to accrue interest thereafter. For all the dates indicated, we did not have any material restructured loans within the meaning of
SFAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings.



|                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|---------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ------ | -
|                                                     |  | At December 31,        |      
|                                                     |  | 1999                   |       |   | 2000 |   |       | 2001 |  |   | 2002  |   |  | 2003 |      
|                                                     |  | (Dollars in Thousands) |      
|Delinquent Loans:                                    |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|One-to four-family residential                       |  | $                      | 4,080 |   |      | $ | 3,222 |      |  | $ | 2,534 |   |  | $    | 4,508 |   |  | $ | 8,133  |  
|Commercial and multi-family real estate              |  |                        |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |       |  
|Consumer and commercial business loans(1)            |  |                        | 264   |   |      |   | 1,762 |      |  |   | 2,476 |   |  |      | 2,082 |   |  |   | 3,085  |  
|                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|Total delinquent loans                               |  |                        | 4,344 |   |      |   | 4,984 |      |  |   | 5,010 |   |  |      | 6,590 |   |  |   | 11,218 |  
|Total REO                                            |  |                        | 775   |   |      |   | 27    |      |  |   | 219   |   |  |      |      |   |  |   |       |  
|                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|Total nonperforming assets                           |  | $                      | 5,119 |   |      | $ | 5,011 |      |  | $ | 5,229 |   |  | $    | 6,590 |   |  | $ | 11,218 |  
|                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|Total nonperforming loans to net loans receivable(1) |  |                        | 0.37  | % |      |   | 0.37  | %    |  |   | 0.32  | % |  |      | 0.34  | % |  |   | 0.51   | %
|Total nonperforming loans to total assets(1)         |  |                        | 0.25  | % |      |   | 0.26  | %    |  |   | 0.23  | % |  |      | 0.27  | % |  |   | 0.37   | %
|Total nonperforming loans and REO to total assets    |  |                        | 0.30  | % |      |   | 0.26  | %    |  |   | 0.24  | % |  |      | 0.27  | % |  |   | 0.37   | %

---

|(1) | Includes consumer and commercial business loans delinquent 60 days or more.
|--- | ---------------------------------------------------------------------------



During the year ended December 31, 2003, gross interest income of approximately $358,000 would have been recorded on loans
accounted for on a non-accrual basis if the loans had been current throughout the periods. No interest income on non-accrual loans was included in income during 2003.



The following table sets forth information with respect to loans past due 60-89 days in our portfolio at the dates
indicated.



|                                       |  |                 |       |      |   |       |  |      |       |      |   |       |  |   |      
|-------------------------------------- |  | --------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                       |  | At December 31,
|                                       |  | 1999            |       | 2000 |   | 2001  |  | 2002 |       | 2003
|                                       |  | (In Thousands) 
|Loans past due 60-89 days:             |  |                 |       |      |   |       |  |      |       |      |   |       |  |   |      
|One-to four-family residential         |  | $               | 2,538 |      | $ | 4,711 |  | $    | 5,086 |      | $ | 4,997 |  | $ | 2,444
|Consumer and commercial business loans |  |                 | 123   |      |   | 84    |  |      | 1,696 |      |   | 286   |  |   | 1,317
|Land loans                             |  |                 |      |      |   |      |  |      | 16    |      |   |      |  |   |     
|                                       |  |                 |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total past due 60-89 days              |  | $               | 2,661 |      | $ | 4,795 |  | $    | 6,798 |      | $ | 5,283 |  |   | 3,761
|                                       |  |                 |       |      |   |       |  |      |       |      |   |       |  |   |      





15



---

Classification of Assets.Federal regulations provide that loans and other assets,
such as debt and equity securities, that are of lesser quality, must be classified as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the savings institution will sustain some
loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that these weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little
value that their continuation as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant classification in one of the aforementioned categories,
but which possess some weaknesses, are designated special mention by management.



When we classify problem assets as either substandard or doubtful, we are required to establish allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances that
have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When we classify problem assets as loss, we are
required either to establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or to charge off such amount. Our determination of which assets are classified, and the amount of the valuation allowances that we
establish as a result of asset classification is subject to review by the Office of Thrift Supervision, which can direct us to increase our general or specific loss allowances. We regularly review the problem loans in our portfolio to determine
whether any loans require classification in accordance with applicable regulations.



The following table sets forth the aggregate amount of our classified assets at the dates indicated. We had no assets classified as doubtful at the dates indicated.



|                        |  |                 |       |      |   |       |  |   |       
|----------------------- |  | --------------- | ----- | ---- | - | ----- |  | - | ------
|                        |  | At December 31,
|                        |  | 2001            |       | 2002 |   | 2003 
|                        |  | (In Thousands) 
|Substandard assets(1)   |  | $               | 6,570 |      | $ | 8,150 |  | $ | 12,605
|Loss assets             |  |                 | 493   |      |   | 171   |  |   | 65    
|                        |  |                 |       |      |   |       |  |   |       
|Total classified assets |  | $               | 7,063 |      | $ | 8,321 |  |   | 12,670
|                        |  |                 |       |      |   |       |  |   |       

---

|(1) | Includes real estate owned.
|--- | ---------------------------



The following table sets forth information regarding our delinquent loans and real estate owned, net of specific valuation allowances at December 31,
2003.



|                                               |  |                        |        |        |   
|---------------------------------------------- |  | ---------------------- | ------ | ------ | --
|                                               |  | Balance                |        | Number
|                                               |  | (Dollars In Thousands)
|Residential real estate loans:                 |  |                        |        |        |   
|Loans 60 to 89 days delinquent                 |  | $                      | 2,444  |        | 32
|Loans more than 89 days delinquent             |  |                        | 8,119  |        | 29
|Commercial and multi-family real estate loans: |  |                        |        |        |   
|Loans 60 to 89 days delinquent                 |  |                        |       |        |  
|Loans more than 89 days delinquent             |  |                        |       |        |  
|Land loans:                                    |  |                        |        |        |   
|Loans 60 to 89 days delinquent                 |  |                        |       |        |  
|Loans more than 89 days delinquent             |  |                        |       |        |  
|Consumer and commercial business loans:        |  |                        |        |        |   
|60 days or more delinquent                     |  |                        | 2,821  |        | 36
|Real estate owned                              |  |                        |       |        |  
|                                               |  |                        |        |        |   
|Total                                          |  | $                      | 13,384 |        | 97
|                                               |  |                        |        |        |   



16



---

Allowance for Loan Losses. We maintain 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 inherent in the loan portfolio, and to a lesser extent, unused commitments to provide financing. Our methodology for assessing
the appropriateness of the allowance consists of several key elements, which include a formula allowance and specific allowances for identified problem loans and portfolio segments.



The formula allowance is calculated by applying loss factors to outstanding loans based on an internal risk grading 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 our historical loss experience and may be adjusted for other significant
conditions that, in managements judgment, affect the collectibility of the portfolio as of the evaluation date. During the past five years we have not made any changes to our methodology for calculating of the allowance for loan losses.



The conditions that we evaluate in connection with
establishing the allowance for loan losses include the following:



| |  | general economic and business conditions affecting our key lending areas;
| | - | -------------------------------------------------------------------------



| |  | credit quality trends (including trends in nonperforming loans expected to result from existing conditions);
| | - | ------------------------------------------------------------------------------------------------------------



| |  | collateral values;
| | - | ------------------



| |  | loan volumes and concentrations;
| | - | --------------------------------



| |  | seasoning of the loan portfolio;
| | - | --------------------------------



| |  | specific industry conditions within portfolio segments;
| | - | -------------------------------------------------------



| |  | recent loss experience in particular segments of the loan portfolio;
| | - | --------------------------------------------------------------------



| |  | duration of the current business cycle; and
| | - | -------------------------------------------



| |  | bank regulatory examination results.
| | - | ------------------------------------



Where any of these conditions is not evidenced by a specifically identifiable problem loan or portfolio segment as of the evaluation date,
managements evaluation of the probable loss related to such condition is reflected in the allowance.



The allowance for loan losses is based upon estimates of probable losses inherent in the loan portfolio. The amount actually reserved for losses can vary
significantly from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. The historical loss experience model that is used to establish the loan loss factors
for problem graded loans is designed to be self-correcting by taking into account our recent loss experience. Similarly, by reviewing our historical loss experience, the methodology is designed to take our recent loss experience into account. Pooled
loan loss factors are adjusted, if necessary, quarterly based upon the level of net charge-offs expected by management. Furthermore, our methodology permits adjustments to any loss factor used in the computation of the formula allowance in the event
that, in managements judgment, significant conditions which affect the collectibility of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the probable estimated losses inherent in the loan portfolio
on a monthly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that becomes available.



The allowance also incorporates the results of measuring impaired loans as provided in SFAS No. 114, Accounting by Creditors for Impairment of a
Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. These accounting standards prescribe the measurement methods, income recognition and disclosure related to impaired loans.
A loan is considered impaired when we determine that it is probable that we will be unable to collect all amounts



17



---

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 the collateral, if the loan is collateral dependent. Impairment is recognized by
adjusting an allocation of the existing allowance for loan losses.



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



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.



Management will continue to review the entire
loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary. 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. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses that may in fact be realized in the future or that
additional provisions for loan losses will not be required. Further, as we expand our portfolio of commercial real estate and loans that are not secured by real estate, which have a higher risk of loss than single family mortgage loans, we expect to
provide greater allowances for loan losses than we have considered necessary in the past.



18



---

Analysis of the Allowance For Loan Losses.The following table sets forth the
analysis of the allowance for loan losses for the periods indicated.



|
|



|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                                                                     |  | At December 31,        |          
|                                                                                                                     |  | 1999                   |           |   | 2000 |   |           | 2001 |  |   | 2002      |   |  | 2003 |          
|                                                                                                                     |  | (Dollars in Thousands) |          
|Total net loans receivable outstanding                                                                               |  | $                      | 1,164,421 |   |      | $ | 1,361,232 |      |  | $ | 1,581,227 |   |  | $    | 1,935,999 |   |  | $ | 2,191,696 |  
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Average net loans receivable outstanding                                                                             |  | $                      | 1,067,107 |   |      | $ | 1,272,362 |      |  | $ | 1,561,569 |   |  | $    | 1,745,639 |   |  | $ | 2,037,993 |  
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance balance (at beginning of period)                                                                           |  | $                      | 3,226     |   |      | $ | 3,609     |      |  | $ | 4,905     |   |  | $    | 6,847     |   |  | $ | 8,318     |  
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Provision for losses:                                                                                                |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential real estate                                                                                              |  |                        | (734      | ) |      |   | (126      | )    |  |   | 823       |   |  |      | 491       |   |  |   | 506       |  
|Commercial and multi-family residential real estate                                                                  |  |                        | (16       | ) |      |   | 138       |      |  |   | 521       |   |  |      | 1,379     |   |  |   | 1,335     |  
|Land loans                                                                                                           |  |                        | (42       | ) |      |   | (146      | )    |  |   | 114       |   |  |      |          |   |  |   | 126       |  
|Consumer and commercial business                                                                                     |  |                        | 1,255     |   |      |   | 1,462     |      |  |   | 596       |   |  |      | 116       |   |  |   | 1,155     |  
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total provisions for losses                                                                                          |  |                        | 463       |   |      |   | 1,328     |      |  |   | 2,054     |   |  |      | 1,986     |   |  |   | 3,122     |  
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Charge-offs:                                                                                                         |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential real estate                                                                                              |  |                        | (59       | ) |      |   | (90       | )    |  |   | (43       | ) |  |      | (176      | ) |  |   | (51       | )
|Commercial and multi-family residential real estate                                                                  |  |                        | (21       | ) |      |   |          |      |  |   |          |   |  |      |          |   |  |   | (7        | )
|Land loans                                                                                                           |  |                        | (16       | ) |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Consumer and commercial business                                                                                     |  |                        | (11       | ) |      |   | (52       | )    |  |   | (74       | ) |  |      | (399      | ) |  |   | (264      | )
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total charge-offs                                                                                                    |  |                        | (107      | ) |      |   | (142      | )    |  |   | (117      | ) |  |      | (575      | ) |  |   | (322      | )
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                                                                                                     |  |                        |           |   |     
|Recoveries:                                                                                                          |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Residential real estate                                                                                              |  |                        | 27        |   |      |   | 7         |      |  |   | 3         |   |  |      | 28        |   |  |   |          |  
|Commercial and multi-family residential real estate                                                                  |  |                        |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Land loans                                                                                                           |  |                        |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Consumer and commercial business                                                                                     |  |                        |          |   |      |   | 103       |      |  |   | 2         |   |  |      | 32        |   |  |   | 1         |  
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total recoveries                                                                                                     |  |                        | 27        |   |      |   | 110       |      |  |   | 5         |   |  |      | 60        |   |  |   | 1         |  
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance balance (at end of period)                                                                                 |  | $                      | 3,609     |   |      | $ | 4,905     |      |  | $ | 6,847     |   |  | $    | 8,318     |   |  | $ | 11,119    |  
|                                                                                                                     |  |                        |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Allowance for loan losses as a percent of net loans receivable at end of period                                      |  |                        | 0.31      | % |      |   | 0.36      | %    |  |   | 0.43      | % |  |      | 0.43      | % |  |   | 0.51      | %
|Net loans charged-off as a percent of average loans outstanding                                                      |  |                        | 0.01      | % |      |   | 0.01      | %    |  |   | 0.01      | % |  |      | 0.03      | % |  |   | 0.02      | %
|Ratio of allowance for loan losses to total non-performing loans at end of period                                    |  |                        | 83.08     | % |      |   | 98.41     | %    |  |   | 136.67    | % |  |      | 126.21    | % |  |   | 99.12     | %
|Ratio of allowance for loan losses to total non-performing loans, REO and in-substance foreclosures at end of period |  |                        | 70.50     | % |      |   | 97.88     | %    |  |   | 130.94    | % |  |      | 126.21    | % |  |   | 99.12     | %



19



---

Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of allowance for loan losses by loan category for the periods indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance by category is not necessarily
indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.



|
|

|                                        |  |                        |       |                                       |        |   |        |      |                                       |  |        |        |  |                                       |       |  |        |   |                                       |   |       |        |        |                                       |  |   |        |  |        |  
|--------------------------------------- |  | ---------------------- | ----- | ------------------------------------- | ------ | - | ------ | ---- | ------------------------------------- |  | ------ | ------ |  | ------------------------------------- | ----- |  | ------ | - | ------------------------------------- | - | ----- | ------ | ------ | ------------------------------------- |  | - | ------ |  | ------ | -
|                                        |  | At December 31,        |      
|                                        |  | 1999                   |       |                                       | 2000   |   |        | 2001 |                                       |  | 2002   |        |  | 2003                                  |      
|                                        |  | Amount                 |       | % ofLoans inEachCategoryto totalLoans |        |   | Amount |      | % ofLoans inEachCategoryto totalLoans |  |        | Amount |  | % ofLoans inEachCategoryto totalLoans |       |  | Amount |   | % ofLoans inEachCategoryto totalLoans |   |       | Amount |        | % ofLoans inEachCategoryto totalLoans | 
|                                        |  | (Dollars in thousands) |      
|Balance at end of period applicable to: |  |                        |       |                                       |        |   |        |      |                                       |  |        |        |  |                                       |       |  |        |   |                                       |   |       |        |        |                                       |  |   |        |  |        |  
|One-to four-family residential mortgage |  | $                      | 1,075 |                                       | 72.78  | % |        | $    | 722                                   |  | 67.60  | %      |  | $                                     | 1,241 |  | 53.02  | % |                                       | $ | 836   |        | 48.24  | %                                     |  | $ | 809    |  | 38.86  | %
|Construction                            |  |                        | 287   |                                       | 5.00   |   |        |      | 432                                   |  | 5.83   |        |  |                                       | 696   |  | 15.98  |   |                                       |   | 977   |        | 16.54  |                                       |  |   | 1,680  |  | 18.22  |  
|Commercial real estate                  |  |                        | 607   |                                       | 7.43   |   |        |      | 749                                   |  | 8.23   |        |  |                                       | 1,226 |  | 11.41  |   |                                       |   | 2,628 |        | 18.78  |                                       |  |   | 3,652  |  | 25.11  |  
|Multi-family residential                |  |                        | 110   |                                       | 1.87   |   |        |      | 106                                   |  | 1.42   |        |  |                                       | 149   |  | 1.96   |   |                                       |   | 97    |        | 2.06   |                                       |  |   | 180    |  | 4.11   |  
|Land loans                              |  |                        | 146   |                                       | 0.77   |   |        |      |                                      |  | 0.96   |        |  |                                       | 114   |  | 1.44   |   |                                       |   | 114   |        | 1.32   |                                       |  |   | 240    |  | 1.42   |  
|Consumer                                |  |                        | 473   |                                       | 4.74   |   |        |      | 700                                   |  | 5.73   |        |  |                                       | 821   |  | 5.90   |   |                                       |   | 980   |        | 6.42   |                                       |  |   | 3,332  |  | 7.19   |  
|Commercial business                     |  |                        | 911   |                                       | 7.41   |   |        |      | 2,196                                 |  | 10.23  |        |  |                                       | 2,600 |  | 10.56  |   |                                       |   | 2,686 |        | 6.64   |                                       |  |   | 1,226  |  | 5.09   |  
|                                        |  |                        |       |                                       |        |   |        |      |                                       |  |        |        |  |                                       |       |  |        |   |                                       |   |       |        |        |                                       |  |   |        |  |        |  
|Total allowance for loan losses         |  | $                      | 3,609 |                                       | 100.00 | % |        | $    | 4,905                                 |  | 100.00 | %      |  | $                                     | 6,847 |  | 100.00 | % |                                       | $ | 8,318 |        | 100.00 | %                                     |  | $ | 11,119 |  | 100.00 | %
|                                        |  |                        |       |                                       |        |   |        |      |                                       |  |        |        |  |                                       |       |  |        |   |                                       |   |       |        |        |                                       |  |   |        |  |        |  



Investment Activities



Under federal regulations, we must maintain a minimum
amount of liquid assets that may be invested in specified short term securities and certain other investments. See RegulationFederal Regulation of Savings InstitutionsLiquidity below and Managements Discussion and
Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. We generally maintain a portfolio of liquid assets that exceeds regulatory requirements. Our liquidity levels may increase or decrease depending
upon the yields available on alternative investments and upon managements judgment as to the attractiveness of those yields relative to other opportunities, its expectation of whether more attractive yields will be available in the future, and
its projections of the short term demand for funds to be used for our loan originations and other activities.



In recent years, we increased the percentage of our assets held as investments, rather than as loans, as part of our strategy of maintaining higher levels
of liquidity and improving our interest rate risk position. Our investment portfolio consists of United States Government and agency securities, municipal bonds, Federal Home Loan Bank stock and interest earning deposits. The carrying value of our
investment securities totaled $122.7 million at December 31, 2003. Our interest-earning deposits due from other financial institutions with original maturities of three months or less totaled $33.8 million at December 31, 2003.



20



---

Investment Portfolio.The following tables set forth the carrying value of our
investments at the dates indicated. At December 31, 2003, the market value of our investments was approximately $169.9 million. As allowed by SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, we classified our
investment in United States Government and agency obligations as available for sale. As a result, such securities are now presented at fair value, as determined by market quotations. The market value of investments includes interest-earning deposits
and Federal Home Loan Bank stock at book value, which approximates market value.



|                                         |  |                 |         |      |   |         |  |   |        
|---------------------------------------- |  | --------------- | ------- | ---- | - | ------- |  | - | -------
|                                         |  | At December 31,
|                                         |  | 2001            |         | 2002 |   | 2003   
|                                         |  | (In Thousands) 
|U.S. Government and agency obligations   |  | $               | 93,171  |      | $ | 89,210  |  | $ | 122,209
|Investment in trust preferred securities |  |                 | 36,138  |      |   | 35,384  |  |   |       
|Municipal bonds                          |  |                 | 1,351   |      |   | 669     |  |   | 522    
|Interest-earning deposits                |  |                 | 43,347  |      |   | 63,488  |  |   | 33,797 
|Federal Home Loan Bank stock             |  |                 | 14,577  |      |   | 12,919  |  |   | 13,322 
|                                         |  |                 |         |      |   |         |  |   |        
|Total investments                        |  | $               | 188,584 |      | $ | 201,670 |  | $ | 169,850
|                                         |  |                 |         |      |   |         |  |   |        



21



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Investment Portfolio Maturities. The following table sets forth the scheduled maturities,
amortized cost, market values and average yields of our investment securities at December 31, 2003.



|                                      |  |                        |        |                                |                    |   |               |                     |                                |  |                 |               |  |                                |   |  |               |   |                                |   |   |               |   |             |  |                         |         |                                |   |         |  |      |  |      |  
|------------------------------------- |  | ---------------------- | ------ | ------------------------------ | ------------------ | - | ------------- | ------------------- | ------------------------------ |  | --------------- | ------------- |  | ------------------------------ | - |  | ------------- | - | ------------------------------ | - | - | ------------- | - | ----------- |  | ----------------------- | ------- | ------------------------------ | - | ------- |  | ---- |  | ---- | -
|                                      |  | At December 31, 2003   |       
|                                      |  | One Year or Less       |        |                                | One to Three Years |   |               | Three to Five Years |                                |  | Over Five Years |               |  | Total                          |  
|                                      |  | AmortizedCost          |        | AnnualizedWeightedAverageYield |                    |   | AmortizedCost |                     | AnnualizedWeightedAverageYield |  |                 | AmortizedCost |  | AnnualizedWeightedAverageYield |   |  | AmortizedCost |   | AnnualizedWeightedAverageYield |   |   | AmortizedCost |   | MarketValue |  | AverageLife inYears (1) |         | AnnualizedWeightedAverageYield |  
|                                      |  | (Dollars in thousands) |       
|Investment securities:                |  |                        |        |                                |                    |   |               |                     |                                |  |                 |               |  |                                |   |  |               |   |                                |   |   |               |   |             |  |                         |         |                                |   |         |  |      |  |      |  
|U.S. Government and agency securities |  | $                      |       |                                |                   | % |               | $                   | 122,208                        |  | 3.05            | %             |  | $                              |  |  |              | % |                                | $ |  |               |  | %           |  | $                       | 122,208 |                                | $ | 122,209 |  | 1.73 |  | 3.05 | %
|Municipal bonds                       |  |                        | 145    |                                | 3.90               |   |               |                     | 356                            |  | 3.80            |               |  |                                |  |  |              |   |                                |   |  |               |  |             |  |                         | 501     |                                |   | 522     |  | 2.04 |  | 3.83 |  
|Federal Home Loan Bank stock (2)      |  |                        | 13,322 |                                | 3.50               |   |               |                     |                               |  |                |               |  |                                |  |  |              |   |                                |   |  |               |  |             |  |                         | 13,322  |                                |   | 13,322  |  |     |  | 3.50 |  
|Interest-earning deposits             |  |                        | 33,797 |                                | 0.87               |   |               |                     |                               |  |                |               |  |                                |  |  |              |   |                                |   |  |               |  |             |  |                         | 33,797  |                                |   | 33,797  |  |     |  | 0.87 |  
|                                      |  |                        |        |                                |                    |   |               |                     |                                |  |                 |               |  |                                |   |  |               |   |                                |   |   |               |   |             |  |                         |         |                                |   |         |  |      |  |      |  
|Total                                 |  | $                      | 47,264 |                                | 1.62               | % |               |                     | 122,564                        |  | 3.05            | %             |  | $                              |  |  |              | % |                                | $ |  |               |  | %           |  | $                       | 169,828 |                                | $ | 169,850 |  | 1.73 |  | 2.65 | %
|                                      |  |                        |        |                                |                    |   |               |                     |                                |  |                 |               |  |                                |   |  |               |   |                                |   |   |               |   |             |  |                         |         |                                |   |         |  |      |  |      |  

---

|(1) | Total weighted average life in years is calculated only on United States Government agency securities, investment in trust preferred securities and municipal bonds.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Federal Home Loan Bank stock has no stated maturity, and the interest rate is adjustable.
|--- | -----------------------------------------------------------------------------------------





22



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Sources of Funds



General. Deposits are the major source of our funds for lending and other investment purposes. In addition to deposits, other sources of
funds are the amortization, prepayment and sale of loans and mortgage-backed securities, the maturity of investment securities, our net income from operations and, if needed, advances from the Federal Home Loan Bank. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by market interest rates and other economic conditions. Borrowings may be used on a short-term basis to meet
liquidity needs or on a longer-term basis for general business purposes.



Deposits. We attract consumer and commercial deposits primarily within our market area by offering a broad selection of deposit instruments, including non-interest bearing demand accounts, NOW accounts,
passbook savings, money market accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary according to, among other factors, the minimum balance required, the period of time during which the funds must remain on
deposit and the interest rate. We regularly evaluate our internal cost of funds, survey rates offered by competing financial institutions, review our cash flow requirements for lending and liquidity, and implement interest rate changes when
considered appropriate. We do not obtain deposits through brokers. As a part of our strategy of increasing our business customer base, we have expanded our commercial deposit products and services, particularly variable rate money market accounts,
sweep accounts, and other transaction accounts.



Our deposit
growth has benefited from the expansion of our branch network to 41 branches at December 31, 2003. During this time, the growth in our checking accounts and savings accounts exceeded the growth in our certificates of deposit. Certificates of
deposits generally are higher cost, and more interest rate sensitive deposits than checking and savings accounts. At December 31, 2003, certificate of deposit accounts comprised 27.9% of our total deposits.



Deposit Portfolio. The following table sets forth information
regarding interest rates, terms, minimum amounts and balances of our deposit portfolio as of December 31, 2003.



|                             |  |              |  |                                    |  |               |       |                |   |                            |  |        |  
|---------------------------- |  | ------------ |  | ---------------------------------- |  | ------------- | ----- | -------------- | - | -------------------------- |  | ------ | -
|Weight Average Interest Rate |  | Minimum Term |  | Checking and Savings Deposits      |  | MinimumAmount |       | Balances       |   | Percentageof TotalDeposits | 
|                             |  |              |  |                                    |  |               |       | (In Thousands) |   |                            | 
|0.00%                        |  | None         |  | Non-interest bearing demand        |  | $             |      |                | $ | 294,358                    |  | 11.96  | %
|1.03                         |  | None         |  | Interest bearing checking accounts |  |               | 100   |                |   | 566,028                    |  | 23.01  |  
|1.61                         |  | None         |  | Passbooks and statement savings    |  |               | 100   |                |   | 615,972                    |  | 25.04  |  
|1.52                         |  | None         |  | Money market accounts              |  |               | 2,500 |                |   | 297,864                    |  | 12.11  |  
|                             |  |              |  |                                    | 
|                             |  |              |  | Certificates of Deposit            |  |               |       |                |   |                            | 
|                             |  |              |  |                                    | 
|0.25                         |  | 0-3 months   |  | Fixed term, fixed rate             |  |               | 1,000 |                |   | 4,458                      |  | 0.18   |  
|0.77                         |  | 3-6 months   |  | Fixed term, fixed rate             |  |               | 1,000 |                |   | 31,973                     |  | 1.30   |  
|1.44                         |  | 6-12 months  |  | Fixed term, fixed rate             |  |               | 1,000 |                |   | 242,765                    |  | 9.87   |  
|2.95                         |  | 12-36 months |  | Fixed term, fixed rate             |  |               | 1,000 |                |   | 326,286                    |  | 13.26  |  
|4.19                         |  | 36-60 months |  | Fixed term, fixed rate             |  |               | 1,000 |                |   | 80,397                     |  | 3.27   |  
|                             |  |              |  |                                    |  |               |       |                |   |                            |  |        |  
|                             |  | Total        |  |                                    |  |               |       |                |   | 2,460,101                  |  | 100.00 | %
|                             |  |              |  |                                    |  |               |       |                |   |                            |  |        |  



23



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Set forth below is information regarding the average balance, cost and weighted average interest rate on our deposits for
the periods indicated.



|                                   |  |                          |           |                 |      |                             |  |      |                 |  |                 |           |                             |   |        |                 |      |                 |  |                             |           |  |   |        |  |      |  
|---------------------------------- |  | ------------------------ | --------- | --------------- | ---- | --------------------------- |  | ---- | --------------- |  | --------------- | --------- | --------------------------- | - | ------ | --------------- | ---- | --------------- |  | --------------------------- | --------- |  | - | ------ |  | ---- | -
|                                   |  | Years Ended December 31, |          
|                                   |  | 2001                     |           |                 | 2002 |                             |  | 2003 |                
|DEPOSIT TYPE                       |  | AverageBalances          |           | InterestExpense |      | WeightedAverageInterestRate |  |      | AverageBalances |  | InterestExpense |           | WeightedAverageInterestRate |   |        | AverageBalances |      | InterestExpense |  | WeightedAverageInterestRate |          
|                                   |  | (Dollars in Thousands)   |          
|Non-interest bearing demand        |  | $                        | 116,655   |                 | $    |                            |  |     | %               |  | $               | 188,606   |                             | $ |       |                 |     | %               |  | $                           | 246,853   |  | $ |       |  |     | %
|Interest bearing checking accounts |  |                          | 161,648   |                 |      | 1,006                       |  | 0.62 |                 |  |                 | 299,223   |                             |   | 4,036  |                 | 1.35 |                 |  |                             | 477,055   |  |   | 5,553  |  | 1.16 |  
|Passbooks                          |  |                          | 176,783   |                 |      | 2,936                       |  | 1.66 |                 |  |                 | 270,999   |                             |   | 4,337  |                 | 1.60 |                 |  |                             | 526,512   |  |   | 9,643  |  | 1.83 |  
|Money market accounts              |  |                          | 185,313   |                 |      | 6,529                       |  | 3.52 |                 |  |                 | 182,585   |                             |   | 3,176  |                 | 1.74 |                 |  |                             | 251,965   |  |   | 4,006  |  | 1.59 |  
|Certificates of deposit            |  |                          | 893,715   |                 |      | 50,320                      |  | 5.63 |                 |  |                 | 810,903   |                             |   | 28,804 |                 | 3.55 |                 |  |                             | 732,822   |  |   | 19,403 |  | 2.65 |  
|                                   |  |                          |           |                 |      |                             |  |      |                 |  |                 |           |                             |   |        |                 |      |                 |  |                             |           |  |   |        |  |      |  
|Total                              |  | $                        | 1,534,114 |                 | $    | 60,791                      |  | 3.96 | %               |  | $               | 1,752,316 |                             | $ | 40,353 |                 | 2.30 | %               |  | $                           | 2,235,207 |  | $ | 38,605 |  | 1.73 | %
|                                   |  |                          |           |                 |      |                             |  |      |                 |  |                 |           |                             |   |        |                 |      |                 |  |                             |           |  |   |        |  |      |  





24



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The following table sets forth our certificates of deposit classified by rates as of the dates indicated.



|             |  |                 |         |      |   |         |  |   |        
|------------ |  | --------------- | ------- | ---- | - | ------- |  | - | -------
|             |  | At December 31,
|Rate         |  | 2001            |         | 2002 |   | 2003   
|             |  | (In Thousands) 
|0.00  1.00% |  | $               | 8,158   |      | $ | 21,078  |  | $ | 78,324 
|1.01  2.00% |  |                 | 819     |      |   | 126,774 |  |   | 209,013
|2.01  3.00% |  |                 | 189,044 |      |   | 310,644 |  |   | 193,797
|3.01  4.00% |  |                 | 190,052 |      |   | 97,826  |  |   | 60,962 
|4.01  5.00% |  |                 | 283,787 |      |   | 173,915 |  |   | 135,450
|5.01  6.00% |  |                 | 64,150  |      |   | 19,406  |  |   | 5,684  
|6.01  7.00% |  |                 | 113,468 |      |   | 15,789  |  |   | 2,637  
|7.01  8.00% |  |                 | 357     |      |   | 2,323   |  |   | 12     
|             |  |                 |         |      |   |         |  |   |        
|             |  | $               | 849,835 |      | $ | 767,755 |  | $ | 685,879
|             |  |                 |         |      |   |         |  |   |        



The following table
sets forth the amount and maturities of certificates of deposit at December 31, 2003.



|             |  |                   |         |           |   |          |  |          |        |          |   |              |  |       |        |  |   |   |  |   |        
|------------ |  | ----------------- | ------- | --------- | - | -------- |  | -------- | ------ | -------- | - | ------------ |  | ----- | ------ |  | - | - |  | - | -------
|             |  | Amount Due       
|Rate         |  | Less ThanOne Year |         | 1-2 Years |   | 2-3Years |  | 3-4Years |        | 4-5Years |   | After 5Years |  | Total
|             |  | (In Thousands)   
|0.00  1.00% |  | $                 | 78,187  |           | $ | 121      |  | $        | 13     |          | $ | 3            |  | $     |       |  | $ |  |  | $ | 78,324 
|1.01  2.00% |  |                   | 188,813 |           |   | 17,815   |  |          | 2,336  |          |   | 43           |  |       | 6      |  |   |  |  |   | 209,013
|2.01  3.00% |  |                   | 93,788  |           |   | 59,354   |  |          | 32,580 |          |   | 1,260        |  |       | 6,815  |  |   |  |  |   | 193,797
|3.01  4.00% |  |                   | 28,618  |           |   | 11,168   |  |          | 2,709  |          |   | 8,146        |  |       | 10,321 |  |   |  |  |   | 60,962 
|4.01  5.00% |  |                   | 60,689  |           |   | 31,268   |  |          | 21,898 |          |   | 21,595       |  |       |       |  |   |  |  |   | 135,450
|5.01  6.00% |  |                   | 3,450   |           |   | 892      |  |          | 1,342  |          |   |             |  |       |       |  |   |  |  |   | 5,684  
|6.01  7.00% |  |                   | 282     |           |   | 2,348    |  |          | 7      |          |   |             |  |       |       |  |   |  |  |   | 2,637  
|7.01  8.00% |  |                   | 12      |           |   |         |  |          |       |          |   |             |  |       |       |  |   |  |  |   | 12     
|             |  |                   |         |           |   |          |  |          |        |          |   |              |  |       |        |  |   |   |  |   |        
|             |  | $                 | 453,839 |           | $ | 122,966  |  | $        | 60,885 |          | $ | 31,047       |  | $     | 17,142 |  | $ |  |  | $ | 685,879
|             |  |                   |         |           |   |          |  |          |        |          |   |              |  |       |        |  |   |   |  |   |        



The following table
indicates the amount of our certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2003. These deposits represented 10.0% of our total deposits at December 31, 2003.



|                          |  |                |        
|------------------------- |  | -------------- | -------
|Remaining Maturity        |  | Amount        
|                          |  | (In Thousands)
|Three months or less      |  | $              | 39,451 
|Three through six months  |  |                | 22,925 
|Six through twelve months |  |                | 71,217 
|Over twelve months        |  |                | 112,757
|                          |  |                |        
|Total                     |  | $              | 246,350
|                          |  |                |        



Deposit flow details
components of the increase in total deposits. The following table sets forth the net changes in our deposits for the periods indicated.



|                                      |  |                         |            |      |   |            |  |   |           
|------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                                      |  | Year Ended December 31,
|                                      |  | 2001                    |            | 2002 |   | 2003      
|                                      |  | (In Thousands)         
|Deposits                              |  | $                       | 10,211,384 |      | $ | 11,214,770 |  | $ | 13,070,245
|Withdrawals                           |  |                         | 10,174,444 |      |   | 10,909,963 |  |   | 12,473,767
|                                      |  |                         |            |      |   |            |  |   |           
|Net increase before interest credited |  |                         | 36,940     |      |   | 304,807    |  |   | 596,478   
|Interest credited                     |  |                         | 54,565     |      |   | 34,098     |  |   | 34,718    
|                                      |  |                         |            |      |   |            |  |   |           
|Net increase in deposits              |  | $                       | 91,505     |      | $ | 338,905    |  | $ | 561,760   
|                                      |  |                         |            |      |   |            |  |   |           



25



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Borrowings



Deposits are the primary source of funds for our lending and investment activities and for general business purposes. If the need arises, we may borrow
from the Federal Home Loan Bank of Atlanta and from the Federal Reserve Bank discount window to supplement our supply of lendable funds and to meet deposit withdrawal requirements. Loans from the Federal Home Loan Bank are typically collateralized
by our Federal Home Loan Bank stock and a portion of our first mortgage loans. At December 31, 2003, we had $264.6 million of Federal Home Loan Bank advances outstanding. Our borrowings also include $52.3 million of junior subordinated debentures.
The debentures were issued in connection with the issuance of $29.6 million of 8.375% fixed rate Cumulative Trust Preferred Securities by Fidelity Capital Trust I and $22.7 million of Cumulative Trust Preferred Securities which pay interest at a
floating rate of 285 basis points above the three month LIBOR rate issued by Fidelity Capital Trust II.



The Federal Home Loan Bank functions as a central reserve bank providing credit to us as well as other member financial institutions. As a member, we are
required to own capital stock in the Federal Home Loan Bank and are authorized to apply for loans on the security of such stock and certain of our residential mortgages and other assets (principally, securities that are obligations of, or guaranteed
by, the United States), provided certain standards related to creditworthiness are met. The Federal Home Loan Bank offers several different loan programs and each loan program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed percentage of a member institutions net worth or on the Federal Home Loan Banks assessment of the institutions creditworthiness. All Federal Home Loan Bank
advances have fixed interest rates and mature between three months and 10 years.



|                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                   |  | Year Ended December 31, |        
|                                   |  | 2001                    |         |   | 2002 |   |         | 2003 | 
|                                   |  | (Dollars in thousands)  |        
|Federal Home Loan Bank advances:   |  |                         |         |   |      |   |         |      |  |   |         |  
|Maximum month-end balance          |  | $                       | 290,266 |   |      | $ | 315,031 |      |  | $ | 277,244 |  
|Balance at end of period           |  |                         | 290,266 |   |      |   | 253,371 |      |  |   | 264,561 |  
|Average balance                    |  |                         | 265,459 |   |      |   | 303,016 |      |  |   | 269,718 |  
|Weighted average interest rate on: |  |                         |         |   |      |   |         |      |  |   |         |  
|Balance at end of period           |  |                         | 6.13    | % |      |   | 6.01    | %    |  |   | 5.81    | %
|Average balance for period         |  |                         | 6.38    | % |      |   | 6.08    | %    |  |   | 5.85    | %



Subsidiary Activities



Fidelity Federal Bank & Trust has two wholly owned
subsidiaries. Fidelity Realty and Appraisal Service, Inc., a Florida corporation, is primarily engaged in providing appraisal services for Fidelity Federal Bank & Trust and selling our real estate owned. At December 31, 2003, Fidelity Realty and
Appraisal Service, Inc. had total equity capital of $689,000, including retained earnings of $214,000. Fidelity Realty and Appraisal Service, Inc. had a net income of $133,000 for the year ended December 31, 2002 and a net income of $149,000 for the
year ended December 31, 2003.



Our other subsidiary, Florida
Consolidated Agency, Inc., a Florida corporation doing business as Fidelity Insurance, was established in 1999. On July 16, 1999, Fidelity Insurance acquired Dunn and Noel, Inc., a full-service insurance agency based in Juno Beach, Florida. Dunn
& Noel was founded in 1947, originally as Burns & Company. Fidelity Insurance operates as an independent insurance agency and licensed agents make insurance products available through Fidelity Federal Bank & Trusts branch offices.
Licensed representatives also sell a variety of investment products. Fidelity Insurance had net income of $237,000 and $336,000 for the years ended December 31, 2002 and 2003, respectively.



26



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SAIF-insured federal savings banks are required to provide 30 days advance notice to the Office of Thrift
Supervision and the FDIC before establishing or acquiring a subsidiary or conducting a new activity in a subsidiary. The insured savings bank must also provide the FDIC and the Office of Thrift Supervision such information as may be required by
applicable regulations and must conduct the activity in accordance with the rules and orders of the Office of Thrift Supervision. In addition to other enforcement, and supervision powers, the Office of Thrift Supervision may determine after notice
and opportunity for a hearing that the continuation of a savings banks ownership of or relation to a subsidiary (i) constitutes a serious risk to the safety, soundness or stability of the savings bank, or (ii) is inconsistent with law and
regulation. Upon the making of such a determination, the Office of Thrift Supervision may order the savings bank to divest the subsidiary or take other actions.



Personnel



As of December 31, 2003, we had 685 full-time and 76 part-time employees. None of our employees is represented by a collective bargaining group. We
believe our relationship with our employees is good.



REGULATION



Fidelity Federal Bank & Trust
is examined and supervised extensively by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. This regulation and supervision limits the activities in which Fidelity Federal Bank & Trust may engage. Under this system
of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates.
Fidelity Federal Bank & Trust also is a member of, and owns stock in, the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. Fidelity Federal Bank & Trust also is regulated to a
lesser extent by the Board of Governors of the Federal Reserve System, governing reserves to be maintained against deposits and other matters. Fidelity Federal Bank & Trusts relationship with its depositors and borrowers is regulated by
both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of Fidelity Federal Bank & Trusts mortgage documents. Any change in this regulation, whether by the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, or the United States Congress, could have a material adverse impact on the results of the operations of Fidelity Bankshares, Inc. and Fidelity Federal Bank & Trust.



Federal Regulation of Savings Institutions



Business Activities.The activities of federal savings
banks are subject to extensive regulation, including restrictions or requirements with respect to loans-to-one borrower, the percentage of non-mortgage loans or investments to total assets, capital distributions, permissible investments and lending
activities, liquidity, transactions with affiliates and community reinvestment. In particular, many types of loans, such as commercial real estate, commercial business and consumer loans, are limited to a specific percentage of our capital or
assets. The description of statutory provisions and regulations applicable to federal savings banks set forth herein does not purport to be a complete description of these statutes and regulations and their effect on Fidelity Federal Bank &
Trust.



Capital Requirements. The Office of
Thrift Supervision capital regulations require federal savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio; a 4% leverage ratio (3% for institutions receiving the highest rating on the supervisory rating system); and
an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect,



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a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest supervisory
rating), and together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. Institutions must generally deduct from regulatory capital investments in and loans to subsidiaries engaged in activities as principal that
are not permissible for a national bank.



The risk-based
capital standards for federal savings banks require the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weighted factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in
the type of asset. Core (Tier 1) capital is defined as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries, less intangible assets other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of unrealized gains on available-for-sale equity securities with
readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital may not exceed 100% of core capital.



The capital regulations also incorporate an interest rate risk component. Savings institutions with above normal interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. For the present time, the Office of Thrift Supervision has deferred implementation of the interest rate risk capital charge. At December
31, 2003, Fidelity Federal Bank & Trust met each of its capital requirements.



Loans-to-One-Borrower. Federal savings associations generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An
additional 10% of unimpaired capital and surplus may be loaned (for a total of 25% of unpaid capital surplus), if the loan is secured by readily marketable collateral, which is defined to include certain marketable securities, but generally not real
estate. As of December 31, 2003, Fidelity Federal Bank & Trust was in compliance with its loans-to-one-borrower limitations.



Qualified Thrift Lender Test. As a federal savings association, Fidelity Federal Bank & Trust is required to satisfy a qualified
thrift lender test whereby it must maintain at least 65% of its portfolio assets in qualified thrift investments, which consist primarily of residential mortgages and related investments, including mortgage-backed and related
securities. Portfolio assets generally means total assets less specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used to conduct business. A savings association that fails
the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions. As of December 31, 2003, Fidelity Federal Bank & Trust maintained 76.2% of its portfolio assets in qualified thrift investments and,
therefore, met the qualified thrift lender test.



Capital
Distributions. Office of Thrift Supervision regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution. A
savings institution must file an application for Office of Thrift Supervision approval of a capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institutions net income for
that year to date plus the institutions retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not eligible for expedited treatment of its



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filings. If an application is not required to be filed, a savings institution which is a subsidiary of a holding company,
as well as certain other institutions, must still file a notice with the Office of Thrift Supervision at least 30 days before the board of directors declares a dividend or approves a capital distribution.



Any additional capital distributions would require prior Office of Thrift
Supervision approval. If Fidelity Federal Bank & Trusts capital falls below its required levels or the Office of Thrift Supervision notifies it that it is in need of more than normal supervision, Fidelity Federal Bank & Trusts
ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision may prohibit a proposed capital distribution by any institution, which would otherwise be permitted by regulation, if the Office of Thrift
Supervision determines that the distribution would constitute an unsafe or unsound practice.



Liquidity. Fidelity Federal Bank & Trust is required to maintain liquid assets at levels considered safe and sound by the Office of Thrift Supervision. Fidelity Federal Bank & Trusts
average liquidity ratio for the quarter ended December 31, 2003 was 13.2%.



Community Reinvestment Act and Fair Lending Laws. Federal savings banks have a responsibility under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to
help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institutions failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Equal
Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the Department of Justice. Fidelity Federal Bank & Trust received a
satisfactory Community Reinvestment Act rating under the current Community Reinvestment Act regulations in its most recent federal examination by the Office of Thrift Supervision.



Transactions with Related Parties. Fidelity Federal Bank & Trusts authority to engage in
transactions with related parties or affiliates or to make loans secured by the securities of any affiliate is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing federal regulations. The term
affiliates for these purposes generally means any company that controls or is under common control with an institution, including Fidelity Bankshares, Inc. and its non-savings institution subsidiaries. Section 23A limits the aggregate
amount of certain covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of covered transactions with all affiliates to 20% of the savings
institutions capital and surplus. Covered transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is prohibited. Section
23B provides that covered transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no
savings institution may purchase the securities of any affiliate other than a subsidiary.



Fidelity Federal Bank & Trusts authority to extend credit to executive officers, directors and 10% or more stockholders, as well as entities controlled by these persons, is currently governed by Sections
22(g) and 22(h) of the Federal Reserve Act, and its implementing federal regulations. Among other things, these regulations generally require these loans to be made on terms substantially the same as those offered to unaffiliated individuals and
that do involve more than the normal risk of repayment. Federal regulation also places individual and aggregate limits on the amount of loans Fidelity Federal



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Bank & Trust may make to these persons based, in part, on Fidelity Federal Bank & Trusts capital position,
and requires approval procedures to be followed. At December 31, 2003, Fidelity Federal Bank & Trust was in compliance with these regulations.



Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over savings institutions and has
the authority to bring enforcement action against all institution-related parties, including

stockholders, and attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order
to removal of officers and/or directors of the institutions, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of
reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action be
taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under specified circumstances.



Standards for Safety and Soundness. Federal law requires
each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the
safety and soundness standards required under the federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital
becomes impaired. The guidelines address internal controls and information systems; internal audit systems; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an
institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.



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Prompt Corrective Regulatory Action



Under the Office of Thrift Supervision Prompt Corrective Action regulations, the Office of Thrift Supervision is required to
take supervisory actions against undercapitalized institutions, the severity of which depends upon the institutions level of capital. Generally, a savings institution that has total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 core capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has total risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be significantly undercapitalized, and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be critically undercapitalized. Generally, the
applicable banking regulator is required to appoint a receiver or conservator for an institution that is critically undercapitalized. The regulation also provides that a capital restoration plan must be filed with the Office of Thrift
Supervision within 45 days of the date an institution receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. In addition, numerous mandatory supervisory actions
become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The Office of Thrift Supervision could also take any one of a number
of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.



Insurance of Deposit Accounts



The Federal Deposit Insurance Corporation has adopted a risk-based deposit insurance assessment system. The Federal Deposit Insurance Corporation assigns
an institution to one of three capital categories, based on the institutions financial information, as of the reporting period ending seven months before the assessment period, and one of three supervisory subcategories within each capital
group. The three capital categories are well capitalized, adequately capitalized and undercapitalized. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the Federal Deposit Insurance
Corporation by the institutions primary federal regulator and information which the Federal Deposit Insurance Corporation determines to be relevant to the institutions financial condition and the risk posed to the deposit insurance
funds. An institutions assessment rate depends on the capital category and supervisory category to which it is assigned. The Federal Deposit Insurance Corporation is authorized to raise the assessment rates. The Federal Deposit Insurance
Corporation has exercised this authority several times in the past and may raise insurance premiums in the future. If this type of action is taken by the Federal Deposit Insurance Corporation, it could have an adverse effect on the earnings of
Fidelity Federal Bank & Trust.



Federal Home Loan Bank System



The Federal Home Loan Bank System provides a central
credit facility primarily for member institutions. Fidelity Federal Bank & Trust, as a member of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of December 31, 2003,
Fidelity Federal Bank & Trust was in compliance with this requirement. The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members.



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Federal Reserve System



The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At December 31, 2003, Fidelity Federal Bank & Trust was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed by the Office of Thrift Supervision.



Holding Company Regulation



Fidelity Bankshares, Inc. is a non-diversified unitary savings and loan holding company, subject to regulation and supervision by the Office of Thrift
Supervision. A non-diversified unitary savings and loan holding company is a savings and loan holding company which controls only one subsidiary savings association which, together with all related activities, represents more than 50% of the holding
companys consolidated net worth. The Office of Thrift Supervision has enforcement authority over Fidelity Bankshares, Inc. and its non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift
Supervision to restrict or prohibit activities that are determined to be a risk to the subsidiary savings institution.



Under prior law, a unitary savings and loan holding company was not generally restricted as to the types of business activities in which it may engage,
provided that its subsidiary savings bank continued to be a qualified thrift lender. See Qualified Thrift Lender Test. The Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings and loan holding companies not
existing or applied for before May 4, 1999 to activities permissible for financial holding companies under the law or for multiple savings and loan holding companies. Fidelity Bankshares, Inc. does not qualify to be grandfathered. Accordingly, it is
limited to the activities permissible for financial holding companies or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or
complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Office of Thrift Supervision, and certain additional activities authorized by Office of Thrift Supervision regulation.



Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the Office of Thrift Supervision. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial
and managerial resources of the acquiror, the future prospects of the acquiror and the institution to be acquired, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community, competitive factors, and
the associations compliance with applicable anti-money laundering regulations.



The USA PATRIOT Act



In response to the events
of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October 26, 2001. The USA PATRIOT Act gives the
federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Financial institutions, such as
Fidelity Federal Bank & Trust, have been required by federal law for years to have an effective anti-money laundering program. As such, the requirements of the USA PATRIOT Act should not have material impact on its operations.



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Sarbanes-Oxley Act of 2002



On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which
implemented legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board that will enforce auditing, quality control and independence standards and will be funded by
fees from all publicly traded companies, Sarbanes-Oxley places certain restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit services being provided to a public company
audit client will require preapproval by the companys audit committee. In addition, Sarbanes-Oxley makes certain changes to the requirements for audit partner rotation after a period of time. Sarbanes-Oxley requires chief executive officers
and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification
requirement. The Companys Chief Executive Officer and Chief Financial Officer have signed certifications to this Form 10-K as required by Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel will be required to report evidence of a
material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or
other similar committee of the board of directors or the board itself.



Under Sarbanes-Oxley, longer prison terms will apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a company or its officers is extended; and bonuses
issued to top executives prior to restatement of a companys financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from trading the companys securities
during retirement plan blackout periods, and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. In addition, a provision directs that civil penalties levied
by the Securities and Exchange Commission as a result of any judicial or administrative action under Sarbanes-Oxley be deposited to a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition
or operations. Directors and executive officers must also provide information for most changes in ownership in a companys securities within two business days of the change.



Sarbanes-Oxley also increases the oversight of, and codifies certain requirements relating to audit committees of public
companies and how they interact with the companys registered public accounting firm. Audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the
issuer. In addition, companies must disclose whether at least one member of the committee is a financial expert (as such term is defined by the Securities and Exchange Commission) and if not, why not. Under Sarbanes-Oxley, a
companys registered public accounting firm is prohibited from performing statutorily mandated audit services for a company if such companys chief executive officer, chief financial officer, comptroller, chief accounting officer or any
person serving in equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. Sarbanes-Oxley also prohibits any officer or director of a company or
any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent accountant engaged in the audit of the companys financial statements for the purpose of rendering the
financial statements materially misleading. Sarbanes-Oxley also requires the Securities and Exchange Commission to prescribe rules requiring inclusion of any internal control report and assessment by management in the



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annual report to shareholders. Sarbanes-Oxley requires the companys registered public accounting firm that issues
the audit report to attest to and report on managements assessment of the companys internal controls.



Compliance with the provisions of the Sarbanes-Oxley Act have not had a material impact on our results of operations or financial condition.



TAXATION



Federal Taxation



For federal income tax purposes, Fidelity Bankshares, Inc. and its subsidiaries file a consolidated federal income tax
return on a calendar year basis, using the accrual method of accounting.



As a result of the enactment of the Small Business Job Protection Act of 1996, all savings banks and savings associations may convert to a commercial bank charter, diversify their lending, or be merged into a
commercial bank without having to recapture any of their pre-1988 tax bad debt reserve accumulations. However, transactions that would require recapture of the pre-1988 tax bad debt reserve include redemption of Fidelity Federal Bank &
Trusts stock, payment of dividends or distributions in excess of earnings and profits, or failure by the institution to qualify as a bank for federal income tax purposes. At December 31, 2003, Fidelity Federal Bank & Trust had a balance of
approximately $7.4 million of pre-1988 bad debt reserves. A deferred tax liability has not been provided on this amount as management does not intend to make distributions, redeem stock or fail certain bank tests that would result in recapture of
the reserve.



Deferred income taxes arise from the recognition
of items of income and expense for tax purposes in years different from those in which they are recognized in the consolidated financial statements. Fidelity Bankshares, Inc. accounts for deferred income taxes by the asset and liability method,
applying the enacted statutory rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. The resulting deferred-tax liabilities and assets are adjusted to reflect changes in the tax
laws.



Fidelity Bankshares, Inc. is subject to the corporate
alternative minimum tax to the extent it exceeds Fidelity Bankshares, Inc.s regular income tax for the year. The alternative minimum tax will be imposed at the rate of 20% of a specially computed tax base. Included in this base are a number of
preference items, including interest on certain tax-exempt bonds issued after August 7, 1986, and an adjusted current earnings computation which is similar to a tax earnings and profits computation. In addition, for purposes of the
alternative minimum tax, the amount of alternative minimum taxable income that may be offset by net operating losses may be limited to 90% of alternative minimum taxable income.



State Taxation



Florida Taxation. Foreign corporations, like Fidelity Bankshares, Inc., pay a 51⁄2% tax on the portion of their net taxable income which
is allocable to the State of Florida.



Delaware
Taxation. As a Delaware holding company not earning income in Delaware, Fidelity Bankshares, Inc. is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State
of Delaware.



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Fidelity Bankshares, Inc. has not been audited by the Internal Revenue Service, the State of Delaware or
the State of Florida within the past five years. See Notes 1 and 12 to the Financial Statements.



AVAILABILITY OF ANNUAL REPORT



Our Annual Report on Form 10-K, Code of Ethics required pursuant to the Sarbanes-Oxley Act and our Nominating and Corporate Governance Committee Charter may be obtained by accessing our website at
www.fidelityfederal.com.





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ITEM 2.    PROPERTIES



Property



At December 31, 2003, we conducted our business through our administrative office located in West Palm Beach, Florida, and 41 full service branch offices
located in Palm Beach, Martin and St. Lucie Counties and 4 loan production offices located in Palm Beach, Broward, St. Lucie and Indian River Counties. The aggregate net book value of our premises and equipment was $70.7 million at December 31,
2003.



ITEM 3.    LEGAL PROCEEDINGS



There are various claims and lawsuits in which Fidelity
Federal Bank & Trust is periodically involved incident to our business. Other than as set forth below, we believe these legal proceedings, in the aggregate, are not material to our financial condition or results of operations.



On July 1, 2003, Fidelity Federal Bank & Trust was named as defendant in
the lawsuit, James Kehoe v. Fidelity Federal Bank & Trust, filed in the United States District Court for the Southern District of Florida. In this action, James Kehoe (Kehoe), on behalf of himself and other similarly situated
persons, has alleged that Fidelity Federal violated the Driver Privacy Protection Act by obtaining driver registration information from the State of Florida for use in its marketing efforts. Kehoe seeks as damages the statutory minimum of $2,500 per
violation. As a result of Kehoes suing on behalf of a class of plaintiffs, the potential award, should Kehoe prevail, would be material. At this time, however, the size of the class has not been asserted by Kehoe. Fidelity Federal is currently
in the process of drafting a response to the complaint and discovery has not yet commenced. Fidelity Federal, in consultation with counsel, has concluded that the lawsuit is without merit and Fidelity Federal intends to vigorously defend against
Kehoes claim.



On December 31, 2003, Fidelity Federal
Bank & Trust was named as defendant in two lawsuits, Kenneth A. Welt, as Chapter 7 Trustee vs. Fidelity Federal Bank & Trust. The two lawsuits have been brought by the same plaintiff in the Circuit Court in the Fifteenth Judicial
Circuit in and for Palm Beach County and also in the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division. The plaintiff has alleged that the Bank knew or should have known that the bankrupt Thomas Abrams through
various corporate plaintiffs, including The Phoenix Financial Group, Phoenix, Administrative Services, Inc. and Swiss Capital Management Ltd., was operating a Ponzi Scheme. Fidelity Federal is seeking to consolidate the two lawsuits in
the United States Bankruptcy Court. Fidelity Federal has not yet filed an answer to the complaints. The plaintiff seeks (i) an accounting of all fees, commissions and other income received by the Bank as a result of Thomas Abrams actions, and
damages for such amounts, plus interest and costs in United States Bankruptcy Court, (ii) and seeks relief of unspecified compensatory damages, plus interest and costs in the Circuit Court. Fidelity Federal, in consultation with counsel, has
concluded that the claims made by the plaintiff on behalf of the bankrupt corporation are without merit and the Bank intends to vigorously defend itself in the two suits.



On February 18, 2004, Fidelity Federal Bank & Trust was named as defendant in a lawsuit William Adams et al.,
vs. Thomson Financial, Inc., Fidelity Federal Bank & Trust, N.A., Fidelity Investments Services, L.L.C., d/b/a Fidelity Investments, National Financial Services, L.L.C., f/k/a National Financial Services Corporation, Zoe Marrero, filed in
the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. The plaintiffs in this case have alleged against the various defendants causes of action which arise from their investing in various Abrams entities, based upon the same factual
allegations set forth in Kenneth A. Welt, as Chapter 7 Trustee vs. Fidelity Federal Bank & Trust. Fidelity Federal is named in one cause of action alleging aiding and abetting breaches of fiduciary duty. The



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various allegations are based upon Fidelity Federal allowing Abrams to set up accounts with Fidelity Federal, deposit
monies in them, issue bank checks based upon the deposits and generally offer banking services to the Abrams entities. Additionally, there are allegations that Fidelity Federal solicited clients for the Abrams entities and pressured clients to place
deposits with the Abrams entities and Fidelity Federal. There is no specific request for damages, other than the jurisdictional amount of in excess of $15,000.00.



Fidelity Federal has not yet answered the complaint, but intends to vigorously defend itself. Fidelity Federal, in
consultation with counsel, has concluded that the claims made by the plaintiffs are without merit.



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matters were submitted during the fourth quarter of the year ended December 31, 2003 to a vote of security holders.



PART II



ITEM 5.    MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS



Fidelity Bankshares, Inc. common stock, is currently listed on the Nasdaq
National Market under the symbol FFFL, and there is an established market for such common stock. At December 31, 2003, Fidelity Bankshares, Inc. had 19 market makers.



The following table sets forth the high and low bid quotations for Fidelity Bankshares, Inc. common stock and cash dividends
per share declared for the periods indicated. These quotations represent prices between dealers and do not include retail markups, markdowns, or commissions and do not reflect actual transactions. This information has been obtained from monthly
statistical summaries provided by the Nasdaq Stock Market. As of December 31, 2003, there were 15,024,648 shares of Fidelity Bankshares, Inc. common stock issued and outstanding, net of shares held in treasury. At December 31, 2003, Fidelity
Bankshares, Inc. had approximately 3,403 stockholders of record.



|                                 |  |          |        |         |   |                        |  |   |     
|-------------------------------- |  | -------- | ------ | ------- | - | ---------------------- |  | - | ----
|Fiscal 2003                      |  | High Bid |        | Low Bid |   | Cash Dividend Declared
|Quarter Ended December 31, 2003  |  | $        | 32.470 |         | $ | 26.310                 |  | $ | 0.10
|Quarter Ended September 30, 2003 |  | $        | 27.620 |         | $ | 21.570                 |  | $ | 0.10
|Quarter Ended June 30, 2003      |  | $        | 23.570 |         | $ | 18.010                 |  | $ | 0.10
|Quarter Ended March 31, 2003     |  | $        | 19.750 |         | $ | 17.200                 |  | $ | 0.10
|                                 |  |          |        |         |   |                        |  |   |     
|Fiscal 2002                      |  | High Bid |        | Low Bid |   | Cash Dividend Declared
|Quarter Ended December 31, 2002  |  | $        | 19.350 |         | $ | 17.200                 |  | $ | 0.10
|Quarter Ended September 30, 2002 |  | $        | 22.100 |         | $ | 16.600                 |  | $ | 0.10
|Quarter Ended June 30, 2002      |  | $        | 22.470 |         | $ | 17.700                 |  | $ | 0.10
|Quarter Ended March 31, 2002     |  | $        | 18.420 |         | $ | 15.600                 |  | $ | 0.10



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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA



SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

OF FIDELITY BANKSHARES, INC. AND SUBSIDIARY



The following tables set forth selected consolidated historical financial and other data of Fidelity Bankshares, Inc. for the periods and at the dates
indicated. The information is derived in part from, and should be read together with, the audited Consolidated Financial Statements and Notes thereto of Fidelity Bankshares, Inc.



|                                                         |  |                                          |           |      |   |           |  |      |           |      |   |           |  |   |          
|-------------------------------------------------------- |  | ---------------------------------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                         |  | At December 31,                         
|                                                         |  | 1999                                     |           | 2000 |   | 2001      |  | 2002 |           | 2003
|                                                         |  | (In thousands, except per share amounts)
|Selected Financial Condition Data:                       |  |                                          |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total assets                                             |  | $                                        | 1,718,933 |      | $ | 1,932,434 |  | $    | 2,136,935 |      | $ | 2,439,397 |  | $ | 3,048,222
|Loans receivable, net                                    |  |                                          | 1,164,421 |      |   | 1,361,232 |  |      | 1,581,227 |      |   | 1,935,999 |  |   | 2,191,696
|Mortgage-backed securities and corporate debt securities |  |                                          | 375,171   |      |   | 322,223   |  |      | 237,671   |      |   | 145,139   |  |   | 471,228  
|Investment securities(1)                                 |  |                                          | 61,478    |      |   | 105,163   |  |      | 152,446   |      |   | 166,286   |  |   | 169,850  
|Deposits                                                 |  |                                          | 1,321,510 |      |   | 1,497,818 |  |      | 1,559,436 |      |   | 1,898,341 |  |   | 2,460,101
|Total borrowings(2)                                      |  |                                          | 290,479   |      |   | 310,005   |  |      | 355,342   |      |   | 326,537   |  |   | 358,970  
|Stockholders equity                                     |  |                                          | 83,304    |      |   | 91,651    |  |      | 177,612   |      |   | 169,087   |  |   | 184,509  
|Book value per common share                              |  | $                                        | 5.43      |      | $ | 5.95      |  | $    | 11.50     |      | $ | 11.64     |  | $ | 12.54    
|Tangible book value per common share                     |  | $                                        | 5.25      |      | $ | 5.79      |  | $    | 11.36     |      | $ | 11.49     |  | $ | 12.16    

---

|(1) | Includes interest-bearing deposits, government and agency securities and Federal Home Loan
Bank stock.
|--- | ------------------------------------------------------------------------------------------------------

|(2) | Includes $29.6 million of junior subordinated debentures issued in connection with the
issuance of 8.375% Cumulative Trust Preferred Securities by Fidelity Capital Trust I and $22.7 million in connection with the issuance of Trust Preferred Securities by Fidelity Capital Trust II with interest at a floating rate of 285 basis points
above the three month LIBOR rate.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|--------------------------------------------------- |  | ---------------------------------------- | ------- | --- | ---- | - | ------- | ---- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                    |  | For the Years Ended December 31,        
|                                                    |  | 1999                                     |         |     | 2000 |   |         | 2001 |  | 2002 |         | 2003
|                                                    |  | (In thousands, except per share amounts)
|Selected Operating Data:                            |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Interest income                                     |  | $                                        | 110,925 |     |      | $ | 132,580 |      |  | $    | 138,480 |      | $ | 137,867 |  | $ | 143,683
|Interest expense                                    |  |                                          | 72,255  |     |      |   | 85,671  |      |  |      | 81,422  |      |   | 61,768  |  |   | 57,164 
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Net interest income                                 |  |                                          | 38,670  |     |      |   | 46,909  |      |  |      | 57,058  |      |   | 76,099  |  |   | 86,519 
|Provision for loan losses                           |  |                                          | 463     |     |      |   | 1,328   |      |  |      | 2,054   |      |   | 1,986   |  |   | 3,122  
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Net interest income after provision for loan losses |  |                                          | 38,207  |     |      |   | 45,581  |      |  |      | 55,004  |      |   | 74,113  |  |   | 83,397 
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Other income                                        |  |                                          | 12,927  | (1) |      |   | 13,406  | (2)  |  |      | 13,764  |      |   | 16,991  |  |   | 22,516 
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Non-interest expense                                |  |                                          | 36,354  |     |      |   | 45,403  |      |  |      | 55,722  |      |   | 63,569  |  |   | 76,513 
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Income before taxes                                 |  |                                          | 14,780  |     |      |   | 13,584  |      |  |      | 13,046  |      |   | 27,535  |  |   | 29,400 
|Income tax expense                                  |  |                                          | 5,666   |     |      |   | 5,063   |      |  |      | 5,166   |      |   | 10,737  |  |   | 11,479 
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Net income                                          |  | $                                        | 9,114   |     |      | $ | 8,521   |      |  | $    | 7,880   |      | $ | 16,798  |  | $ | 17,921 
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Income per common share:                            |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Basic(3)                                            |  | $                                        | 0.59    |     |      | $ | 0.54    |      |  | $    | 0.52    |      | $ | 1.12    |  | $ | 1.24   
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        
|Diluted(3)                                          |  | $                                        | 0.58    |     |      | $ | 0.54    |      |  | $    | 0.51    |      | $ | 1.11    |  | $ | 1.22   
|                                                    |  |                                          |         |     |      |   |         |      |  |      |         |      |   |         |  |   |        

---

|(1) | Includes $5.1 million from the sale of property owned by Fidelity Federal Bank & Trust.
|--- | ---------------------------------------------------------------------------------------

|(2) | Includes $3.7 million from the receipt and sale of 147,232 shares of John Hancock Financial common stock provided to policy holders pursuant to John Hancock
Financials conversion from a mutual (or policy owned insurance company) to a stock insurance company.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Per share data has been adjusted to reflect the second step conversion of Fidelity Bankshares, MHC.
|--- | ---------------------------------------------------------------------------------------------------



38



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|                                                                                             |  |                                         |      |  |         |      |  |         |   |  |         |   |  |         |  
|-------------------------------------------------------------------------------------------- |  | --------------------------------------- | ---- |  | ------- | ---- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                                             |  | At and for the Years ended December 31, |     
|                                                                                             |  | 1999                                    |      |  | 2000    |      |  | 2001    |   |  | 2002    |   |  | 2003    |  
|Selected Financial Ratios and Other Data:                                                    |  |                                         |      |  |         |      |  |         |   |  |         |   |  |         |  
|Return on average assets (ratio of net income to average total assets)                       |  | 0.55                                    | %(1) |  | 0.46    | %(1) |  | 0.38    | % |  | 0.71    | % |  | 0.64    | %
|Return on average stockholders equity (ratio of net income to average stockholders equity) |  | 11.04                                   | %(1) |  | 9.97    | %(1) |  | 5.46    | % |  | 9.49    | % |  | 10.15   | %
|Non-interest income to average assets                                                        |  | 0.78                                    | %    |  | 0.70    | %    |  | 0.67    | % |  | 0.72    | % |  | 0.80    | %
|Non-interest expense to average assets                                                       |  | 2.19                                    | %    |  | 2.43    | %    |  | 2.71    | % |  | 2.71    | % |  | 2.73    | %
|Net interest rate spread during the period                                                   |  | 2.45                                    | %    |  | 2.77    | %    |  | 2.55    | % |  | 3.45    | % |  | 3.29    | %
|Net interest margin (net interest income to average interest earning assets)                 |  | 2.47                                    | %    |  | 2.72    | %    |  | 2.85    | % |  | 3.51    | % |  | 3.31    | %
|Ratio of average interest-earning assets to average interest-bearing liabilities             |  | 100.51                                  | %    |  | 99.21   | %    |  | 107.37  | % |  | 102.09  | % |  | 101.62  | %
|Efficiency ratio(2)                                                                          |  | 70.46                                   | %    |  | 75.07   | %    |  | 78.68   | % |  | 68.29   | % |  | 70.17   | %
|Dividend payout ratio                                                                        |  | 70.42                                   | %    |  | 76.34   | %    |  | 76.92   | % |  | 35.71   | % |  | 32.25   | %
|Asset Quality Ratios:                                                                        |  |                                         |      |  |         |      |  |         |   |  |         |   |  |         |  
|Nonperforming loans to total loans at end of period                                          |  | 0.37                                    | %    |  | 0.37    | %    |  | 0.32    | % |  | 0.34    | % |  | 0.51    | %
|Allowance for loan losses to nonperforming loans at end of period                            |  | 83.08                                   | %    |  | 98.41   | %    |  | 136.67  | % |  | 126.21  | % |  | 99.12   | %
|Allowance for loan losses to total loans at end of period                                    |  | 0.31                                    | %    |  | 0.36    | %    |  | 0.43    | % |  | 0.43    | % |  | 0.51    | %
|Non-performing assets to total assets at end of period                                       |  | 0.30                                    | %    |  | 0.26    | %    |  | 0.24    | % |  | 0.27    | % |  | 0.37    | %
|Ratio of net charge-offs during the period to average loans outstanding during the period    |  | 0.01                                    | %    |  | 0.00    | %    |  | 0.00    | % |  | 0.03    | % |  | 0.02    | %
|Capital Ratios:                                                                              |  |                                         |      |  |         |      |  |         |   |  |         |   |  |         |  
|Stockholders equity to total assets at end of period                                        |  | 4.85                                    | %    |  | 4.77    | %    |  | 8.31    | % |  | 6.93    | % |  | 6.05    | %
|Average stockholders equity to average total assets                                         |  | 4.96                                    | %    |  | 4.62    | %    |  | 7.02    | % |  | 7.53    | % |  | 6.31    | %
|Tangible capital to tangible assets at end of period(3)                                      |  | 6.63                                    | %    |  | 6.32    | %    |  | 7.97    | % |  | 7.68    | % |  | 7.10    | %
|Core capital to adjusted tangible assets at end of period(3)                                 |  | 6.63                                    | %    |  | 6.32    | %    |  | 7.97    | % |  | 7.68    | % |  | 7.10    | %
|Risk-based capital to risk-weighted assets at end of period(3)                               |  | 12.19                                   | %    |  | 11.03   | %    |  | 12.45   | % |  | 11.01   | % |  | 10.79   | %
|Other Data:                                                                                  |  |                                         |      |  |         |      |  |         |   |  |         |   |  |         |  
|Number of branch offices at end of period                                                    |  | 32                                      |      |  | 35      |      |  | 38      |   |  | 40      |   |  | 41      |  
|Number of deposit accounts at end of period                                                  |  | 109,342                                 |      |  | 127,467 |      |  | 133,650 |   |  | 142,683 |   |  | 148,023 |  

---

|(1) | The years 1999 and 2000 include amounts of non-recurring income/expense described in the
footnotes under Selected Operating Data. Exclusive of these items, return on average assets and return on average stockholders equity for 1999 and 2000, respectively, were: return on average assets: 0.36% and 0.34%; return on
average equity: 7.21% and 7.27%.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The efficiency ratio represents non-interest expense divided by the sum of net interest
income before provision for loan losses and non-interest income.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents regulatory capital ratios for Fidelity Federal Bank & Trust only.
|--- | ----------------------------------------------------------------------------



39



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ITEM 7.    MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION ANDRESULTS OF OPERATIONS



This discussion and analysis reflects Fidelity Bankshares, Inc.s consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations.
You should read the information in this section in conjunction with Fidelity Bankshares, Inc.s consolidated financial statements and their notes beginning on page F-1, and the other statistical data provided in this report. This report
contains certain forward-looking statements which may be identified by the use of such words as believe, expect, intend, anticipate, should, planned, 
estimated and potential. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could
cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions; changes in interest rates, deposit
flows, demand for mortgage and other loans, real estate values, and competition; changes in accounting principles policies, or guidelines; changes in legislation or regulations; and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and services.



We conduct no business other than holding the common stock of Fidelity Federal Bank & Trust. Consequently, our net income depends on the net income of Fidelity Federal Bank & Trust. The net income of Fidelity
Federal Bank & Trust is derived primarily from its net interest income, which is the difference between the interest income we receive on loans, mortgage-backed securities and investments and our cost of funds, consisting of interest paid on
deposits and borrowings. Fidelity Federal Bank & Trusts net income also is affected by its provision for loan losses, as well as by the amount of other income, including income from fees and service charges, net gains and losses on sales
of investments, and operating expenses such as employee compensation and benefits, deposit insurance premiums, occupancy and equipment costs, and income taxes. In addition, earnings are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities, which events are beyond our control. In particular, the general level of market interest rates tends to be highly cyclical.



Critical Accounting Policies



The Accounting and reporting policies of Fidelity Bankshares, Inc. and its
subsidiaries conform with accounting principles generally accepted in the United States of America and general practices within the financial services industry. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary
of our significant accounting policies is contained in Note 1 to the consolidated financial statements. One of our more critical accounting policies relates to establishing an allowance for loan losses.



Allowance for Loan Losses.The allowance for loan losses represents
managements best estimate of inherent losses in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The provision for
loan losses is determined based on managements assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current and anticipated economic conditions and the related impact
on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.



40



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A periodic review of selected credits (based on loan size and type) is conducted to identify loans with
heightened risk or inherent losses and to assign risk grades. The primary responsibility for this review rests with the management personnel who are responsible for overseeing the credit relationship. This review is supplemented with periodic
reviews by our credit review function, as well as periodic examination of both selected credits and the credit review process by the applicable regulatory agencies. The information from these reviews assists management in the timely identification
of problems and potential problems, and provides a basis for deciding whether the credit represents a probable loss or risk that should be recognized.



Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the conditions of the various
markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.



Changes in Financial Position



Comparison of Financial Position at December 31, 2002 and December 31, 2003



Our assets increased by $608.8 million from $2.4 billion at December 31, 2002 to $3.0 billion at December 31, 2003. Cash and cash equivalents declined by
$19.8 million, as a result of a decline of $29.7 million in interest earning deposits. Assets available for sale (consisting of municipal bonds and government agency securities, mortgage-backed securities and corporate debt securities) increased by
$358.9 million. Loans receivable increased by $255.7 million. While our new loan production reached record levels, growth of loans receivable was limited by high levels of loan prepayments, as borrowers refinanced their loans in order to take
advantage of the current low interest rate environment. As a result, surplus cash was invested in mortgage-backed securities, as well as government and agency securities, causing the increase in assets available for sale. All other assets increased
by $14.0 million.



Funds for asset growth were provided by an
increase in deposits of $561.8 million and an increase in borrowings of $32.4 million. $23.6 million of the increase in borrowings resulted from our issuance of floating rate junior subordinated debt securities pursuant to our participation in a
pooled trust preferred securities offering. All other liabilities declined by $790,000. Net income of $17.9 million, offset by dividends paid to stockholders, provided the remaining funds for asset growth.



Stockholders equity totaled $184.5 million at December 31, 2003 as
compared to $169.1 million at December 31, 2002.



41



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Results of Operations



Results of operations for the years ended December 31, 2002 and 2003



General. Our net income for the year ended December 31, 2003 was $17.9 million. or $1.24 basic and $1.22 diluted
earnings per share. By comparison, our net income for the year ended December 31, 2002 was $16.8 million, or $1.12 basic and $1.11 diluted earnings per share. A number of factors contributed to the $1.1 million increase in net income for the year
ended December 31, 2003. Interest income increased from $137.9 million for the year ended December 31, 2002 to $143.7 million for the year ended December 31, 2003 and was accompanied by a $4.6 million decrease in interest expense from $61.8 million
in 2002 to $57.2 million in 2003. This resulted in an increase of net interest income before loan losses of $10.4 million, or 13.7%, from $76.1 million in 2002 to $86.5 million in 2003. The provision for loan losses increased for the year ended
December 31, 2003 by $1.1 million from $2.0 million in 2002 to $3.1 million in 2003. Our portfolio of commercial mortgage loans, consumer loans and commercial business loans increased as a percentage of our total loan portfolio. Other income
increased by $5.5 million, or 32.5%, from $17.0 million for the year ended December 31, 2002 to $22.5 million for the year ended December 31, 2003. Our operating expenses for the year ended December 31, 2003 increased by $12.9 million, or 20.4%,
from $63.6 million for the year ended December 31, 2002 to $76.5 million.



Interest income.Interest income increased by $5.8 million, or 4.2%, from $137.9 million for the year ended December 31, 2002 to $143.7 million for the year ended December 31, 2003. While average interest
earning assets increased by $425.6 million, or 19.5%, the yield on our assets declined to 5.50% during 2003, compared to 6.30% during 2002. The decline in yield resulted from originating loans during the years low interest rate environment,
borrower prepayment of higher interest bearing loans and our increased investment in mortgage backed securities bearing lower interest rates.



Interest income from mortgage loans increased by 5.4%, or $5.7 million, from $105.1 million for the year ended December 31, 2002 to $110.8 million for the
year ended December 31, 2003. Although the average balance of mortgage loans increased by $266.2 million, or 17.8%, it was accompanied by a decline in average yield on these assets from 7.04% in 2002 to 6.30% in 2003. The average balance of consumer
and commercial business loans increased by $24.1 million, or 9.4%, but was offset by a decline in average yield from 7.26% in 2002 to 6.25% in 2003. As a result, interest income from consumer and commercial business loans declined by $949,000, or
5.2%, from $18.4 million for the year ended December 31, 2002 to $17.5 million for the year ended December 31, 2003. Our average investment in mortgage-backed securities increased by 106.7%, as a result of funds provided by our strong deposit
growth, from $193.5 million for the year ended December 31, 2002 to $399.9 million for the year ended December 31, 2003. Because the average yield on these investments declined from 4.14% during 2002 to 3.15% during 2003, income from mortgage-backed
securities increased by only $4.6 million, or 57.2%, from $8.0 million for the year ended December 31, 2002 to $12.6 million for the year ended December 31, 2003. The average balance of our investment securities declined by $47.4 million, or 44.6%,
from $106.3 million during 2002 to $58.9 million during 2003, and the average yield on these investments declined from 3.27% during 2002 to 2.10% during 2003. Accordingly, our interest income from investment securities declined by $2.2 million, or
64.4%, from $3.5 million for the year ended December 31, 2002 to $1.2 million for the year ended December 31, 2003. Our average balance of other investments declined by $23.7 million, or 17.0%, from $123.4 million during the year ended December 31,
2002 to $116.0 million during the year ended December 31, 2003, and the average yield on these investments declined from 2.35% during 2002 to 1.41% during 2003. This resulted in a decline in interest income from other investments of $1.3 million, or
43.6%, from $2.9 million for the year ended December 31, 2002 to $1.6 million for the year ended December 31, 2003.



42



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Interest expense.Interest expense declined by $4.6 million, or 7.5%, from $61.8 million for the
year ended December 31, 2002 to $57.2 million for the year ended December 31, 2003. Interest expense on deposits decreased by $1.7 million, or 4.3%, from $40.4 million for the year ended December 31, 2002 to $38.6 million for the year ended December
31, 2003. While average deposits increased by $482.9 million, or 27.6%, from $1.8 billion to $2.2 billion, the composition of average deposit balances included a higher percentage of lower cost transaction and savings accounts, as well as a decrease
of $81.9 million in higher cost certificates of deposit. Consequently, the average cost of our deposits declined from 2.30% during 2002 to 1.73% during 2003. The average balance of our borrowings declined by $36.2 million, or 9.7%, from $372.0
million during the year ended December 31, 2002 to $335.8 million during the year ended December 31, 2003, and the average cost of these borrowings declined from 5.76% during 2002 to 5.53% during 2003. As a result, interest expense on our borrowings
was $18.6 million for the year ended December 31, 2003, or $2.9 million and 13.3% lower than our interest expense on borrowings of $21.4 million during the year ended December 31, 2002.



Net interest income.Our net interest income increased by $10.4 million, or 13.7%, from $76.1 million for 2002 to
$86.5 million for 2003. While our net interest rate spread declined from 3.40% for the year ended December 31, 2002 to 3.28% for the year ended December 31, 2003, the average balance of our interest earning assets increased by $425.6 million or
19.5%, resulting in the increase in net interest income.



Provision for loan losses. Our provision for loan losses increased by $1.1 million from $2.0 million for the year ended December 31, 2002 to $3.1 million for the year ended December 31, 2003. During 2003, the percentage of our
portfolio comprised of non-residential loans, which are deemed to have a greater risk of loss than one-to four-family loans, increased from 34.5% at December 31, 2002 to 42.6% of total loans. Our total allowance for loan losses as of December 31,
2003 was $11.1 million, and is maintained at a level that represents our best estimate of losses in our loan portfolio at the balance sheet date which were both probable and reasonably estimable. At December 31, 2003 our ratio of non-performing
loans to total loans was 0.32%.



Our financial statements are
prepared in accordance with accounting principles generally accepted in the United States of America. Accordingly, allowances for loan losses are based on managements estimate of losses inherent in the loan portfolio. We provide both general
valuation allowances (for unspecified, probable losses) and specific valuation allowances (for known losses) in our portfolio. General valuation allowances are added to our capital for purposes of calculating our regulatory risk-based capital. We
conduct a monthly review of our loan portfolio, including impaired loans, to determine whether any loans require classification or the establishment of appropriate valuation allowances. As we continue to increase our origination of commercial
business loans, consumer loans and commercial real estate loans, and such loans traditionally have a higher risk of loss than residential mortgage loans, our provision for loan losses is likely to increase in future periods.



Other Income. Other income increased by 32.5%, or $5.5 million, from
$17.0 million for the year ended December 31, 2002 to $22.5 million for the year ended December 31, 2003 . Income from fees on deposit accounts increased by $2.8 million, largely as a result of our increase in transaction deposit accounts. Fees for
other banking services, which is comprised of insurance and annuity sales, trust fee income and appraisal income increased by $1.3 million. Gains on the sale of loans, which included a one-time gain of $1.5 million on the sale of a $50 million group
of loans, increased by $4.1 million, as we began selling loans in the secondary market during 2003. Offsetting these increases in other income was a $2.4 million loss on the sale of securities as a result of restructuring our investment portfolio
and a decline in miscellaneous other income of $230,000.



43



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Operating expense. Operating expense increased by $12.9 million, or 20.4%, from $63.6 million for
the year ended December 31, 2002 to $76.5 million for the year ended December 31, 2003. Of this increase, $7.6 million is attributable to employee compensation and benefits. Employee health care costs increased by $957,000, pension costs increased
by $1.2 million and stock based compensation increased by $702,000. The remainder of the increase, $4.8 million, was primarily attributable increased commissions paid to loan personnel due to increased loan production, increased commissions on
increased insurance sales, normal salary increases and compensation paid to new employees. During the year we hired 48 new employees, bringing the total to 723 full-time equivalent employees at December 31, 2003. Most of these employees are loan
officers and related support personnel and customer service employees needed for our expanding branch network. Occupancy and equipment expense increased by $2.8 million as we continue to expand the number of our branches and improve our technology.
Miscellaneous expense increased by $2.2 million. Included in this increase are additional costs of $224,000 for legal expense, $218,000 for communications expense, $294,000 in uncollected deposit overdrafts and fees, and $779,000 of additional loan
closing costs absorbed to increase loan production.



Income
taxes.Our provision for income taxes for the year ended December 31, 2003 was $11.5 million, an increase of $742,000 from $10.7 million for the year ended December 31, 2002. Our provision reflects our current rate applied to income before
taxes.



Results of operations for the years ended
December 31, 2001 and 2002



General. We had net
income of $16.8 million, or basic earnings per share of $1.12 for the year ended December 31, 2002. This compares to net income of $7.9 million, or basic earnings per share of $0.52, for the year ended December 31, 2001. The increase in net income
of $8.9 million for the year ended December 31, 2002, as compared to 2001, is due to a number of factors. While interest income decreased from $138.5 million in 2001 to $137.9 million in 2002, interest expense also declined in 2002 from $81.4
million in 2001 to $61.8 million, resulting in a 33.4% increase in net interest income, before provision for loan losses, from $57.1 million in 2001 to $76.1 million for the year ended December 31, 2002. Our provision for loan losses decreased from
$2.1 million in 2001 to $2.0 million in 2002. Other income for the year ended December 31, 2002 improved to $17.0 million from $13.8 million in 2001. Our operating expenses for the year ended December 31, 2002 increased by $7.9 million, or 14.1%,
from $55.7 million to $63.6 million. Included in operating expenses for 2001 was a one-time charge of $1.1 million relating to our computer system conversion.



Interest income.Interest income decreased by $613,000, or 0.4%, from $138.5 million for the year ended December 31, 2001 to $137.9 million for
the year ended December 31, 2002. Although the average balance of interest earning assets increased by $168.6 million, or 8.4%, in 2002, this was offset by a decline in the average yield of these assets from 6.92% in 2001 to 6.36% in 2002. The
decline in average yield on our interest earning assets resulted primarily from the rapidly declining interest rate environment we experienced in 2001 and 2002.



Interest income from mortgage loans increased by $9.9 million, or 10.4%, from $95.2 million for the year ended December 31, 2001 to $105.1 million for
the year ended December 31, 2002. This increase is attributable to an increase in the average balance of mortgage loans from $1.3 billion to $1.5 billion, which was offset by a modest decline in the average yield on these assets from 7.11% to 7.04%.
Interest income on consumer and commercial business loans increased slightly by $128,000, or 0.7% from $18.3 million for the year ended December 31, 2001 to $18.4 million for the year ended December 31, 2002. The average balance of consumer and
commercial business loans increased by $30.0 million, or 13.4%, from $223.4 million to $253.4 million; this was offset by a significant decline in average yield on these assets from 8.18% in 2001 to 7.26% in 2002. Our average balance of
mortgage-backed securities declined from $298.6 million in 2001 to $193.5 million in 2002 as we continue to allocate



44



---

repayments on these assets to higher yielding loans. As a result of this decline and a decline in the average yield on
mortgage-backed securities from 5.62% in 2001 to 4.14% in 2002, income from mortgage-backed securities declined $8.8 million from $16.8 million for the year ended December 31, 2001 to $8.0 million for the year ended December 31, 2002. Interest
income on securities decreased by $1.6 million from $5.1 million in 2001 to $3.5 million in 2002. While the average balance of these assets increased $18.9 million, or 21.6%, from $87.4 million for the year ended December 31, 2001 to $106.3 million
for the year ended December 31, 2002, we incurred a significant decline in the average yield on these assets from 5.80% for 2001 to 3.27% for 2002 resulting in a decrease in interest income from these securities. Interest income on other
investments, which consists of income from our investment in FHLB stock and from interest-earning deposits, declined by $238,000 from $3.1 million in 2001 to $2.9 million in 2002. Although the average balance of these assets increased by $70.7
million, or 134.5%, the average yield declined from 5.96% in 2001 to 2.35% in 2002.



Interest expense. Interest expense decreased by $19.6 million, or 24.1%, from $81.4 million for the year ended December 31, 2001 to $61.8 million for the year ended December 31, 2002. The decrease in expense is
attributable to a decline in the average cost of our deposits from 3.96% in 2001 to 2.30% in 2002. The average balance of our deposits increased by $218.2 million during 2002 from $1.5 billion for the year ended December 31, 2001 to $1.8 billion for
the year ended December 31, 2002, reflecting an increase in savings and checking accounts, offset by a decline in higher cost certificate of deposit balances of $82.1 million. The increase in interest expense on borrowed funds of $784,000 resulted
from an increase in the average balance of borrowed funds from $328.8 million in 2001 to $372.0 million in 2002, however this impact was partially offset by a decline in the average cost of these borrowings from 6.27% to 5.76%.



Net interest income.Our net interest income increased by $19.0
million from $57.1 million for 2001 to $76.1 million in 2002. The increase reflects an increase in our net interest spread from 2.55% in 2001 to 3.45% in 2002. The ratio of our average interest earning assets to interest bearing liabilities
decreased from 107.37% in 2001 to 102.09% in 2002.



Provision for loan losses. Our provision for loan losses decreased by $68,000 from $2.1 million in 2001 to $2.0 million in 2002. Our total allowance for loan losses as of December 31, 2002 was $8.3 million, and is maintained at a
level that represents managements best estimate of losses in the loan portfolio at the balance sheet date which were both probable and reasonably estimable. At December 31, 2002, our ratio of non-performing loans to total loans was 0.34%.



Our financial statements are prepared in accordance with
generally accepted accounting principles. Accordingly, allowances for loan losses are based on managements estimate of losses inherent in the loan portfolio. We provide both general valuation allowances (for unspecified, probable losses) and
specific valuation allowances (for known losses) in our loan portfolio. General valuation allowances are added to our capital for purposes of computing our regulatory risk-based capital. We conduct a monthly review of our loan portfolio, including
impaired loans, to determine whether any loans require classification or the establishment of appropriate valuation allowances. As we are increasing our origination of commercial business loans, consumer loans and commercial real estate loans, and
such loans traditionally have a higher risk of loss than residential mortgage loans, our provision for loan losses is likely to increase in future periods.



Other income.Other income increased by $3.2 million, or 23.4%, from $13.8 million in 2001 to $17.0 million in 2002. $1.7 million of this increase
was from service charges on deposit accounts, which resulted from the growth of core deposits (consisting of all deposits except for certificates of deposit) from 45.5% of total deposits at December 31, 2001 to 59.6% of total deposits at December
31, 2002. Fees from other banking services, which include insurance annuity sales, trust income and appraisal



45



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services, increased by $2.2 million. These amounts were slightly offset by declines in gains on loan and securities sales
of $437,000 and miscellaneous income of $214.000.



Operating
expense.Operating expense for the year ended December 31, 2002 increased by $7.9 million from $55.7 million for the year ended December 31, 2001 to $63.6 million. Of this increase, $5.5 million related to compensation and benefits, $1.1 million
related to occupancy and equipment, and other expense increased by $1.3 million. With respect to the increase in compensation and benefit costs, $1.4 million resulted from stock based compensation, including the management recognition program
approved by stockholders in May 2002. Employee benefits increased by $1.4 million, primarily for health and pension costs. The remaining increase of $2.7 million included normal, annual compensation increases and compensation costs relating to the
increase in full time equivalent employees, principally in the areas of customer service and lending, from 611 at December 31, 2001 to 675 at December 31, 2002. The increase in occupancy and equipment expense resulted principally from increased
depreciation, maintenance and taxes related to our ongoing branch expansion activities as well as the computer system upgrade, which occurred in November 2001. Of the remaining increase in operating expense of $1.3 million, $573,000 of the increase
was for telecommunications and postage expense and $460,000 was passed through to our appraisal subsidiary. Both of these cost increases related to increased loan production and increases in other income.



Income taxes.Our provision for income taxes for the year ended
December 31, 2002 of $10.7 million, an increase of$5.5 million from $5.2 million for the year ended December 31, 2001, reflected our current rate applied to significantly higher income before taxes.



46



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Average Balances, Net Interest Income and Yields Earned and Rates Paid



The following table presents for the periods indicated the total dollar
amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollar and rates, and the net interest margin. No tax-equivalent adjustments
have been made and all average balances are daily average balances. Non-accruing loans have been included in the yield calculations in this table and dividends received are included as interest income.



|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|-------------------------------------------------------------------------------- |  | -------------------------------- | --------- | -------- | ---- | ----------------- |  | ------ | -------------- |  | -------- | --------- | ----------------- | - | ------- | -------------- | ------ | -------- |  | ----------------- | --------- |  | - | ------- |  | ------ | -
|                                                                                 |  | For the Years Ended December 31, |          
|                                                                                 |  | 2001                             |           |          | 2002 |                   |  | 2003   |               
|                                                                                 |  | AverageBalance                   |           | Interest |      | AverageYield/Cost |  |        | AverageBalance |  | Interest |           | AverageYield/Cost |   |         | AverageBalance |        | Interest |  | AverageYield/Cost |          
|                                                                                 |  | (Dollars in Thousands)           |          
|Interest-earning assets:                                                         |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Mortgage loans                                                                   |  | $                                | 1,338,187 |          | $    | 95,210            |  | 7.11   | %              |  | $        | 1,492,219 |                   | $ | 105,084 |                | 7.04   | %        |  | $                 | 1,758,459 |  | $ | 110,771 |  | 6.30   | %
|Consumer and commercial business loans                                           |  |                                  | 223,382   |          |      | 18,280            |  | 8.18   |                |  |          | 253,420   |                   |   | 18,408  |                | 7.26   |          |  |                   | 279,534   |  |   | 17,459  |  | 6.25   |  
|Mortgage-backed securities (1)                                                   |  |                                  | 298,550   |          |      | 16,785            |  | 5.62   |                |  |          | 193,510   |                   |   | 8,006   |                | 4.14   |          |  |                   | 399,898   |  |   | 12,585  |  | 3.15   |  
|Investment securities                                                            |  |                                  | 87,444    |          |      | 5,072             |  | 5.80   |                |  |          | 106,318   |                   |   | 3,474   |                | 3.27   |          |  |                   | 58,919    |  |   | 1,236   |  | 2.10   |  
|Other investments (2)                                                            |  |                                  | 52,609    |          |      | 3,133             |  | 5.96   |                |  |          | 123,342   |                   |   | 2,895   |                | 2.35   |          |  |                   | 115,977   |  |   | 1,632   |  | 1.41   |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Total interest-earning assets                                                    |  |                                  | 2,000,172 |          |      | 138,480           |  | 6.92   |                |  |          | 2,168,809 |                   |   | 137,867 |                | 6.36   |          |  |                   | 2,612,787 |  |   | 143,683 |  | 5.50   |  
|Non-interest-earning assets                                                      |  |                                  | 56,973    |          |      |                   |  |        |                |  |          | 180,715   |                   |   |         |                |        |          |  |                   | 185,591   |  |   |         |  |        |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Total assets                                                                     |  | $                                | 2,057,145 |          |      |                   |  |        |                |  | $        | 2,349,524 |                   |   |         |                |        |          |  | $                 | 2,798,378 |  |   |         |  |        |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Interest-bearing liabilities:                                                    |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Deposits                                                                         |  | $                                | 1,534,114 |          | $    | 60,791            |  | 3.96   | %              |  | $        | 1,752,316 |                   | $ | 40,353  |                | 2.30   | %        |  | $                 | 2,235,207 |  | $ | 38,605  |  | 1.73   | %
|Borrowed funds                                                                   |  |                                  | 328,840   |          |      | 20,631            |  | 6.27   |                |  |          | 372,000   |                   |   | 21,415  |                | 5.76   |          |  |                   | 335,832   |  |   | 18,559  |  | 5.53   |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Non-interest bearing liabilities                                                 |  |                                  | 49,869    |          |      |                   |  |        |                |  |          | 48,199    |                   |   |         |                |        |          |  |                   | 50,862    |  |   |         |  |        |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Total liabilities                                                                |  |                                  | 1,912,821 |          |      |                   |  |        |                |  |          | 2,172,515 |                   |   |         |                |        |          |  |                   | 2,621,901 |  |   |         |  |        |  
|Stockholders equity                                                             |  |                                  | 144,324   |          |      |                   |  |        |                |  |          | 177,009   |                   |   |         |                |        |          |  |                   | 176,477   |  |   |         |  |        |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Total liabilities and stockholders equity                                       |  | $                                | 2,057,145 |          |      |                   |  |        |                |  | $        | 2,349,524 |                   |   |         |                |        |          |  | $                 | 2,798,378 |  |   |         |  |        |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |               
|Net interest income                                                              |  |                                  |           |          | $    | 57,058            |  |        |                |  |          |           |                   | $ | 76,099  |                |        |          |  |                   |           |  | $ | 86,519  |  |        |  
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Net interest rate spread (3)                                                     |  |                                  |           |          |      |                   |  | 2.55   | %              |  |          |           |                   |   |         |                | 3.45   | %        |  |                   |           |  |   |         |  | 3.28   | %
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Net interest margin (4)                                                          |  |                                  |           |          |      |                   |  | 2.85   | %              |  |          |           |                   |   |         |                | 3.51   | %        |  |                   |           |  |   |         |  | 3.31   | %
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                  |           |          |      |                   |  | 107.37 | %              |  |          |           |                   |   |         |                | 102.09 | %        |  |                   |           |  |   |         |  | 101.62 | %
|                                                                                 |  |                                  |           |          |      |                   |  |        |                |  |          |           |                   |   |         |                |        |          |  |                   |           |  |   |         |  |        |  



|                                                                 |  |                        |           |            |        |  
|---------------------------------------------------------------- |  | ---------------------- | --------- | ---------- | ------ | -
|                                                                 |  | At December 31, 2003   |          
|                                                                 |  | ActualBalance          |           | Yield/Cost |       
|                                                                 |  | (Dollars in Thousands) |          
|Interest-earning assets:                                         |  |                        |           |            |        |  
|Mortgage loans                                                   |  | $                      | 1,881,377 |            | 5.88   | %
|Consumer and commercial business loans                           |  |                        | 310,319   |            | 6.00   | %
|Mortgage-backed securities (1)                                   |  |                        | 471,228   |            | 4.01   | %
|Investment securities                                            |  |                        | 122,731   |            | 1.85   | %
|Other investments (2)                                            |  |                        | 47,119    |            | 1.53   | %
|                                                                 |  |                        |           |            |        |  
|Total interest-earning assets                                    |  |                        | 2,832,774 |            | 5.34   | %
|Non-interest-earning assets                                      |  |                        | 215,448   |            |        |  
|                                                                 |  |                        |           |            |        |  
|Total assets                                                     |  | $                      | 3,048,222 |            |        |  
|                                                                 |  |                        |           |            |        |  
|Interest-bearing liabilities:                                    |  |                        |           |            |        |  
|Deposits                                                         |  | $                      | 2,460,101 |            | 1.49   | %
|Borrowed funds                                                   |  |                        | 358,970   |            | 5.89   | %
|                                                                 |  |                        |           |            |        |  
|Total interest-bearing liabilities                               |  |                        | 2,819,071 |            | 2.05   | %
|Non-interest bearing liabilities                                 |  |                        | 44,436    |            |        |  
|                                                                 |  |                        |           |            |        |  
|Total liabilities                                                |  |                        | 2,863,507 |            |        |  
|Stockholders equity                                             |  |                        | 184,715   |            |        |  
|                                                                 |  |                        |           |            |        |  
|Total liabilities and stockholders equity                       |  | $                      | 3,048,222 |            |        |  
|                                                                 |  |                        |           |            |        |  
|                                                                 |  |                       
|Net interest rate spread (3)                                     |  |                        |           |            | 3.29   | %
|                                                                 |  |                        |           |            |        |  
|Net interest margin (4)                                          |  |                        |           |            | 3.30   | %
|                                                                 |  |                        |           |            |        |  
|Ratio of interest-earning assets to interest-bearing liabilities |  |                        |           |            | 100.49 | %
|                                                                 |  |                        |           |            |        |  

---

|(1) | Includes corporate debt securities.
|--- | -----------------------------------

|(2) | Includes interest-bearing deposits in other financial institutions and Federal Home Loan Bank
stock.
|--- | ----------------------------------------------------------------------------------------------------

|(3) | Net interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Net interest margin represents net interest income as a percentage of interest-earning
assets.
|--- | ----------------------------------------------------------------------------------------------



47



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Rate/Volume Analysis



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



|                                       |  |                            |        |   |       |   |         |                            |  |   |            |   |  |        |        |   |      |   |        |        |  |   |            |   |  |   |        |   |  |   |         |  
|-------------------------------------- |  | -------------------------- | ------ | - | ----- | - | ------- | -------------------------- |  | - | ---------- | - |  | ------ | ------ | - | ---- | - | ------ | ------ |  | - | ---------- | - |  | - | ------ | - |  | - | ------- | -
|                                       |  | Years Ended December 31,   |       
|                                       |  | 2003 vs. 2002              |        |   |       |   |         | 2002 vs. 2001              |  |   |            |  
|                                       |  | Increase/(Decrease) Due to |        |   | Total |   |         | Increase/(Decrease) Due to |  |   | Total      |  
|                                       |  |                            |        |   |       |   |         | Rate/                      |  |   | Increase   |   |  |        |        |   |      |   |        | Rate/  |  |   | Increase   |  
|                                       |  | Volume                     |        |   | Rate  |   |         | Volume                     |  |   | (Decrease) |   |  | Volume |        |   | Rate |   |        | Volume |  |   | (Decrease) |  
|                                       |  | (In Thousands)             |       
|Interest income:                       |  |                            |        |   |       |   |         |                            |  |   |            |   |  |        |        |   |      |   |        |        |  |   |            |   |  |   |        |   |  |   |         |  
|Mortgage loans                         |  | $                          | 18,749 |   |       | $ | (11,084 | )                          |  | $ | (1,978     | ) |  | $      | 5,687  |   |      | $ | 10,959 |        |  | $ | (973       | ) |  | $ | (112   | ) |  | $ | 9,874   |  
|Consumer and commercial business loans |  |                            | 1,737  |   |       |   | (2,455  | )                          |  |   | (231       | ) |  |        | (949   | ) |      |   | 2,458  |        |  |   | (2,055     | ) |  |   | (275   | ) |  |   | 128     |  
|Mortgage-backed securities             |  |                            | 8,539  |   |       |   | (1,916  | )                          |  |   | (2,044     | ) |  |        | 4,579  |   |      |   | (5,906 | )      |  |   | (4,433     | ) |  |   | 1,560  |   |  |   | (8,779  | )
|Investment securities                  |  |                            | (1,549 | ) |       |   | (1,244  | )                          |  |   | 555        |   |  |        | (2,238 | ) |      |   | 1,095  |        |  |   | (2,215     | ) |  |   | (478   | ) |  |   | 1,598   |  
|Other investments                      |  |                            | (491   | ) |       |   | (929    | )                          |  |   | 157        |   |  |        | (1,263 | ) |      |   | 4,212  |        |  |   | (1,898     | ) |  |   | (2,552 | ) |  |   | (238    | )
|                                       |  |                            |        |   |       |   |         |                            |  |   |            |   |  |        |        |   |      |   |        |        |  |   |            |   |  |   |        |   |  |   |         |  
|                                       |  |                            |        |   |       |   |         |                           
|Total interest-earning assets          |  |                            | 26,985 |   |       |   | (17,628 | )                          |  |   | (3,541     | ) |  |        | 5,816  |   |      |   | 12,818 |        |  |   | (11,574    | ) |  |   | (1,857 | ) |  |   | (613    | )
|                                       |  |                            |        |   |       |   |         |                            |  |   |            |   |  |        |        |   |      |   |        |        |  |   |            |   |  |   |        |   |  |   |         |  
|                                       |  |                            |        |   |       |   |         |                           
|Interest expense:                      |  |                            |        |   |       |   |         |                            |  |   |            |   |  |        |        |   |      |   |        |        |  |   |            |   |  |   |        |   |  |   |         |  
|Deposits                               |  |                            | 11,120 |   |       |   | (10,088 | )                          |  |   | (2,780     | ) |  |        | (1,748 | ) |      |   | 8,647  |        |  |   | (25,463    | ) |  |   | (3,622 | ) |  |   | (20,438 | )
|Borrowed funds                         |  |                            | (2,082 | ) |       |   | (857    | )                          |  |   | 83         |   |  |        | (2,856 | ) |      |   | 2,708  |        |  |   | (1,701     | ) |  |   | (223   | ) |  |   | 784     |  
|                                       |  |                            |        |   |       |   |         |                            |  |   |            |   |  |        |        |   |      |   |        |        |  |   |            |   |  |   |        |   |  |   |         |  
|                                       |  |                            |        |   |       |   |         |                           
|Total interest-bearing liabilities     |  |                            | 9,038  |   |       |   | (10,945 | )                          |  |   | (2,697     | ) |  |        | (4,604 | ) |      |   | 11,355 |        |  |   | (27,164    | ) |  |   | (3,845 | ) |  |   | (19,654 | )
|                                       |  |                            |        |   |       |   |         |                            |  |   |            |   |  |        |        |   |      |   |        |        |  |   |            |   |  |   |        |   |  |   |         |  
|Change in net interest income          |  | $                          | 17,947 |   |       | $ | (6,683  | )                          |  | $ | (844       | ) |  | $      | 10,420 |   |      | $ | 1,463  |        |  | $ | 15,590     |   |  | $ | 1,988  |   |  | $ | 19,041  |  
|                                       |  |                            |        |   |       |   |         |                            |  |   |            |   |  |        |        |   |      |   |        |        |  |   |            |   |  |   |        |   |  |   |         |  



Asset and Liability
ManagementInterest Rate Sensitivity Analysis



The
majority of our assets and liabilities are monetary in nature, which subjects us to significant interest rate risk. As stated above, the majority of our interest-bearing liabilities and nearly all of our interest-earning assets are held by Fidelity
Federal Bank & Trust and, therefore, nearly all of our interest rate risk is at the Fidelity Federal Bank & Trust level.



We monitor interest rate risk by various methods, including gap analysis and analyzing changes in the net present value of our assets,
liabilities and off-balance sheet items (our net portfolio value or NPV) which analysis, is reviewed with the Board of Directors on a quarterly basis. We use an internal model that generates estimates of our NPV over a range of interest
rate scenarios. The model calculates NPV essentially by discounting the cash flows from our assets and liabilities to present value using current market rates, and adjusting those discount rates accordingly for various interest rate scenarios.



48



---

The following table sets forth our estimated internal calculations of NPV as of December 31, 2003, for
instantaneous and parallel shifts in the yield curve in 100 basis point increments up and down. Due to the low interest rate environment that existed at December 31, 2003, an analysis of a 200 basis point downward shift in interest rates is not
shown.



|                 |  |          |  |                        |  |         
|---------------- |  | -------- |  | ---------------------- |  | --------
|Changes in Rates |  |          |  | Net Portfolio Value   
|(Basis Points)   |  | Amount   |  | $ Change               |  | % Change
|                 |  |          |  | (Dollars in Thousands)
|+200bp           |  | $221,470 |  | $  (6,613)             |  | (2.90)% 
|+100bp           |  | $232,401 |  | $    4,813             |  | 1.89 %  
|-0-              |  | $228,083 |  | $                     |  |     %  
|-100bp           |  | $158,726 |  | $(69,357)              |  | 30.41 % 



Fidelity Federal Bank
& Trusts internal calculation of NPV at December 31, 2003 shows the negative effects of rate caps and floors in certain interest earning assets and particularly interest bearing liabilities in both rising and falling interest rate
scenarios. As shown in the previous table, NPV was negatively affected in both rising and falling rate scenarios as a result of these interest rate caps and floors. In preparing the NPV table above, we have estimated prepayment rates for our loans
ranging from 8% to 30%, depending on the interest rate scenario and loan type. These rates are managements best estimate based on prior repayment experience.



Decay rates for liabilities indicate an assumed annual rate at which an interest-bearing liability will be withdrawn in
favor of an account with a more favorable interest rate. Decay rates have been assumed for interest bearing checking accounts, passbook and money market deposits. The purpose of this analysis was to obtain an estimate of the actual deposit balance
trends over various interest rate scenarios during the previous five years and to use that data to provide a forecast of future balance trends over various interest rate scenarios. The following decay rates were used for this analysis and the
gap analysis which follows.



|                                   |  |                 |   |  |                         |   |  |                        |   |  |                         |   |  |                          |   |  |               |  
|---------------------------------- |  | --------------- | - |  | ----------------------- | - |  | ---------------------- | - |  | ----------------------- | - |  | ------------------------ | - |  | ------------- | -
|                                   |  | Within 6 Months |   |  | 6 Months Through 1 Year |   |  | 1 Year Through 3 Years |   |  | 3 Years Through 5 Years |   |  | 5 Years Through 10 Years |   |  | Over 10 Years |  
|Interest bearing checking accounts |  | 0.88            | % |  | 0.88                    | % |  | 0.68                   | % |  | 0.67                    | % |  | 1.69                     | % |  | 100.00        | %
|Passbook, club accounts            |  | 0.00            | % |  | 0.00                    | % |  | 0.27                   | % |  | 0.77                    | % |  | 10.29                    | % |  | 100.00        | %
|Money market deposit accounts      |  | 1.56            | % |  | 1.56                    | % |  | 0.00                   | % |  | 0.00                    | % |  | 36.55                    | % |  | 100.00        | %



The above assumptions
are estimates of annual percentages based on remaining balances. Although management believes these deposit decay rates are a reasonable estimate of future deposit trends based on past performance, they should not be regarded as indicative of the
actual prepayments and withdrawals that may be experienced by us in any given period. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV requires the making of certain
assumptions that may or may not reflect how actual yields and costs respond to changes in market rates. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes
in market interest rates. Also, the changes in the contractual interest rates of our assets and liabilities may not occur at the same time as changes in market interest rates. Additionally, certain assets, such as adjustable rate (ARM)
loans, have features that restrict changes in interest rates on a short-term basis and over the life of the assets. Moreover, in the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the above table. Management also has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no quoted market for many of the assets



49



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and liabilities, there can be no assurance that the fair values presented would be indicative of the value negotiated in
an actual sale.



While the above table provides an estimate of
our interest rate risk exposure at a particular point in time, it is not intended to provide a precise forecast of the effect of market changes on our NPV, as actual results may vary. At December 31, 2003, we were not required by the Office of
Thrift Supervision to hold additional risk-based capital for interest rate risk-purposes.



The Company also monitors the matching of its assets and liabilities through gap analysis. Gap analysis attempts to measure the difference
between the amount of interest earning assets expected to mature or reprice within a specific time period compared to the amount of interest-bearing liabilities expected to mature or reprice within that period. An interest rate sensitive gap is
considered positive when the amount of interest-earning assets exceeds the amount of interest-bearing liabilities maturing or repricing within a specified period of time. An interest rate sensitive gap is considered negative when the amount of
interest-bearing liabilities exceeds the amount of interest-earnings assets maturing or repricing within a specified period of time. Gap analysis involves the use of numerous assumptions, as does NPV. Generally, Companys with a positive gap
can expect net interest income to increase during periods of rising interest rates and decline in periods of falling interest rates.



50



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The table below provides information about the Companys financial instruments that are sensitive to
changes in interest rates. As shown in the following table, the Companys cumulative one-year interest rate sensitivity gap at December 31, 2003 was a positive 16.07%.



|                                                                                                            |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | -------------------- | - | ------- | ------------------------------- |  | - | --------------------------------- | - |  | --------------- | ------- | - |  | - | -------- | -
|                                                                                                            |  | WithinThree Months     |         |   | Four toTwelve Months |   |         | More ThanOne Year toThree Years |  |   | More ThanThree Yearsto Five Years |   |  | Over Five Years |        
|                                                                                                            |  | (Dollars in Thousands) |        
|Interest-earning assets (1):                                                                                |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Residential mortgage loans: (2)                                                                             |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Fixed rate                                                                                                  |  | $                      | 50,835  |   |                      | $ | 125,346 |                                 |  | $ | 228,621                           |   |  | $               | 137,388 |   |  | $ | 185,517  |  
|Adjustable rate                                                                                             |  |                        | 85,142  |   |                      |   | 186,177 |                                 |  |   | 126,567                           |   |  |                 | 132,734 |   |  |   |         |  
|Commercial mortgage loans: (2)                                                                              |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Fixed rate                                                                                                  |  |                        | 8,650   |   |                      |   | 16,550  |                                 |  |   | 23,637                            |   |  |                 | 12,559  |   |  |   | 14,818   |  
|Adjustable rate                                                                                             |  |                        | 185,257 |   |                      |   | 361,797 |                                 |  |   | 3,432                             |   |  |                 | 3,899   |   |  |   |         |  
|Other loans (2)                                                                                             |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Fixed rate                                                                                                  |  |                        | 5,886   |   |                      |   | 13,719  |                                 |  |   | 20,175                            |   |  |                 | 6,368   |   |  |   | 3,164    |  
|Adjustable rate                                                                                             |  |                        | 136,140 |   |                      |   |        |                                 |  |   |                                  |   |  |                 |        |   |  |   |         |  
|Mortgage-backed securities                                                                                  |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Fixed rate                                                                                                  |  |                        | 18,097  |   |                      |   | 47,915  |                                 |  |   | 90,833                            |   |  |                 | 54,083  |   |  |   | 69,288   |  
|Adjustable rate                                                                                             |  |                        | 156,020 |   |                      |   | 6,084   |                                 |  |   | 11,799                            |   |  |                 | 7,318   |   |  |   | 11,551   |  
|Municipal bonds and government and agency securitiesfixed rate                                             |  |                        | 47,119  |   |                      |   | 145     |                                 |  |   | 122,564                           |   |  |                 |        |   |  |   |         |  
|Other interest earning assetsadjustable                                                                    |  |                        |        |   |                      |   |        |                                 |  |   |                                  |   |  |                 |        |   |  |   |         |  
|                                                                                                            |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Total                                                                                                       |  | $                      | 693,146 |   |                      | $ | 757,733 |                                 |  | $ | 627,628                           |   |  | $               | 354,349 |   |  | $ | 284,338  |  
|                                                                                                            |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Interest-bearing liabilities                                                                                |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Deposits: (3)                                                                                               |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Checking and funds transfer accounts                                                                        |  | $                      | 45,495  |   |                      | $ | 141,331 |                                 |  | $ | 205,244                           |   |  | $               | 103,416 |   |  | $ | 356,102  |  
|Passbook accounts                                                                                           |  |                        | 29,205  |   |                      |   | 101,003 |                                 |  |   | 168,409                           |   |  |                 | 88,857  |   |  |   | 228,498  |  
|Money market accounts                                                                                       |  |                        | 26,432  |   |                      |   | 85,175  |                                 |  |   | 101,586                           |   |  |                 | 38,694  |   |  |   | 61,079   |  
|Certificate accounts (4)                                                                                    |  |                        | 149,765 |   |                      |   | 304,575 |                                 |  |   | 183,621                           |   |  |                 | 47,918  |   |  |   |         |  
|Borrowings: (4)                                                                                             |  |                        | 68,083  |   |                      |   | 9,927   |                                 |  |   | 177,033                           |   |  |                 | 73,225  |   |  |   | 1,063    |  
|                                                                                                            |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Total                                                                                                       |  | $                      | 318,980 |   |                      | $ | 642,011 |                                 |  | $ | 835,893                           |   |  | $               | 352,110 |   |  | $ | 646,742  |  
|                                                                                                            |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Excess (deficiency) of interest-earning assets over interest-bearing liabilities                            |  | $                      | 374,166 |   |                      | $ | 115,722 |                                 |  | $ | (208,265                          | ) |  | $               | 2,239   |   |  | $ | (362,404 | )
|                                                                                                            |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Cumulative excess of interest-earning assets over interest-bearing liabilities                              |  | $                      | 374,166 |   |                      | $ | 489,888 |                                 |  | $ | 281,623                           |   |  | $               | 283,862 |   |  | $ | (78,542  | )
|                                                                                                            |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  
|Cumulative excess of interest-earning assets over interest-bearing liabilities as a percent of total assets |  |                        | 12.27   | % |                      |   | 16.07   | %                               |  |   | 9.24                              | % |  |                 | 9.31    | % |  |   | 2.58     | %
|                                                                                                            |  |                        |         |   |                      |   |         |                                 |  |   |                                   |   |  |                 |         |   |  |   |          |  

---

|(1) | Adjustable and floating rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed rate
assets are included in the periods in which they are scheduled to be repaid based on scheduled amortization. In both cases, amounts are adjusted to reflect estimated prepayments. For this table, all loans and mortgage-backed securities were assigned
a 20% prepayment rate.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Balances are shown net of loans in process and are not adjusted for premiums, discounts, reserves and unearned fees.
|--- | --------------------------------------------------------------------------------------------------------------------

|(3) | All of the Companys non-certificate deposits are generally subject to immediate withdrawal. However, management considers a significant portion of these accounts to be core
deposits having longer effective maturities based on the Companys actual retention of such deposit accounts in various interest rate environments. In the year 2001, we contracted with a third-party consultant to perform an analysis of the core
deposit accounts to obtain an estimate of the actual deposit balance trends over various interest rates scenarios over the previous five years. We then used the information obtained to provide a forecast of future balance trends. We then used the
information obtained to provide a forecast of future balance trends. Management does not feel that the deposit trends have changed materially since 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Certificate accounts and Borrowings are assumed to have no prepayments and are shown in the period in which they contractually mature.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



Certain shortcomings are inherent in any methodology used to calculate
interest rate sensitivity. The asset prepayment speed and deposit decay rate assumptions are based on past experience and should not be regarded as indicative of the actual prepayments and withdrawals that may be experienced in any given period. In
the event of changes in interest rates, prepayment and early withdrawal would possibly



51



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deviate significantly from those assumed in calculating the above table. Also, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react differently to changes in market interest rates. Certain assets such as adjustable rate mortgage loans have features that restrict changes in interest rates on a short term basis
and over the life of the asset.



In recent years our policy has
been to reduce our exposure to interest rate risk generally by better matching the maturities of our interest rate sensitive assets and liabilities, and by originating ARM loans and other adjustable rate or short-term loans, as well as by purchasing
short-term investments. However, particularly in a low-interest-rate environment, borrowers typically prefer fixed-rate loans to ARM loans. We do not solicit high-rate jumbo certificates or brokered funds.



Liquidity and Capital Resources



Fidelity Federal Bank & Trust is required to maintain liquid assets at
levels considered safe and sound by the Office of Thrift Supervision. Our liquidity ratio averaged 14.1%, 6.5% and 11.5% during the months ended December 31, 2001, 2002 and 2003, respectively. Our liquidity ratio averaged 18.5%, 11.7% and 11.5% for
the years ended December 31, 2001, 2002 and 2003, respectively. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings and loan to fund commitments. We also adjust liquidity as
appropriate to meet asset and liability management objectives.



Our primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While
scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. We set
the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements. Short-term interest-bearing
deposits with the Federal Home Loan Bank of Atlanta amounted to $43.3 million, $63.5 million and $33.8 million at December 31, 2001, 2002 and 2003, respectively. Other assets qualifying for liquidity purposes at December 31, 2001, 2002 and 2003,
totaled $208.9 million, $67.6 million and $261.9 million, respectively. For additional information about cash flows from our operating, financing, and investing activities, see Consolidated Statements of Cash Flows included in the consolidated
financial statements.



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



Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of
Atlanta which provides an additional source of funds. At December 31, 2003, we had $264.6 million in advances from the Federal Home Loan Bank of Atlanta. We borrow from the Federal Home Loan Bank of Atlanta in order to reduce interest rate risk, and
for liquidity purposes.



At December 31, 2003, we had
outstanding loan commitments of $202.4 million to originate and/or purchase mortgage loans. This amount does not include the unfunded portion of loans in process. At December 31, 2003, certificates of deposit scheduled to mature in less than one
year, totaled $453.8 million. Based on prior experience, management believes that a significant portion of such deposits will



52



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remain with Fidelity Federal Bank & Trust, although there can be no assurance that this will be the case or that the
cost of such deposits could be significantly higher.



Contractual
Obligations and Commercial Commitments



Our long-term
debt, which in the aggregate totals $316.9 million, consists of obligations to the FHLB totaling $264.6 million and $52.3 million in obligations resulting from the issuance of trust preferred securities from Fidelity Capital Trust I in January, 1998
as well as Fidelity Capital Trust II in December 2003. The obligations arising from the issuance of trust preferred securities, presented as Guaranteed Preferred Beneficial Interests in Company Debentures in our balance sheet at December 31, 2003
are due in the amount of $29.6 million in January, 2028 and $22.7 million in January 2034. In addition, we have leasehold obligations totaling $15.8 million. These contractual obligations are set forth in the table below as of December 31,
2003.



The tables below summarize the Companys
contractual obligations, commercial and other commitments at December 31 2003.



|                                   |  |                |         |                  |   |           |  |           |         |               |   |        |  |   |       
|---------------------------------- |  | -------------- | ------- | ---------------- | - | --------- |  | --------- | ------- | ------------- | - | ------ |  | - | ------
|                                   |  | Total          |         | Less Than 1 year |   | 1-3 Years |  | 3-5 Years |         | After 5 Years
|                                   |  | (In Thousands)
|Long-term Debt(1)                  |  | $              | 316,881 |                  | $ | 13,697    |  | $         | 177,142 |               | $ | 72,559 |  | $ | 53,483
|Capital Lease Obligations          |  |                |        |                  |   |          |  |           |        |               |   |       |  |   |      
|Operating Lease Obligations        |  |                | 15,832  |                  |   | 1,691     |  |           | 3,005   |               |   | 2,843  |  |   | 8,293 
|                                   |  |                |         |                  |   |           |  |           |         |               |   |        |  |   |       
|Total Contractual Cash Obligations |  | $              | 332,713 |                  | $ | 15,388    |  | $         | 180,147 |               | $ | 75,402 |  | $ | 61,776
|                                   |  |                |         |                  |   |           |  |           |         |               |   |        |  |   |       



|(1) | Includes advances from the Federal Home Loan Bank and Guaranteed Preferred Beneficial Interests in Debentures.
|--- | --------------------------------------------------------------------------------------------------------------



Commercial and Other Commitments



|                                   |  |                |         |                  |   |           |  |           |       |               |   |        |  |   |        
|---------------------------------- |  | -------------- | ------- | ---------------- | - | --------- |  | --------- | ----- | ------------- | - | ------ |  | - | -------
|                                   |  | Total          |         | Less Than 1 year |   | 1-3 Years |  | 3-5 Years |       | After 5 Years
|                                   |  | (In Thousands)
|Lines of Credit(1)                 |  | $              | 158,394 |                  | $ | 5,895     |  | $         | 8,270 |               | $ | 15,239 |  | $ | 128,990
|Standby Letters of Credit          |  |                | 7,282   |                  |   | 6,696     |  |           | 581   |               |   |       |  |   | 5      
|Other Commercial Commitments       |  |                | 96,063  |                  |   | 96,063    |  |           |      |               |   |       |  |   |       
|Other Commitments                  |  |                | 93,213  |                  |   | 93,213    |  |           |      |               |   |       |  |   |       
|                                   |  |                |         |                  |   |           |  |           |       |               |   |        |  |   |        
|Total Contractual Cash Obligations |  | $              | 354,952 |                  | $ | 201,867   |  | $         | 8,851 |               | $ | 15,239 |  | $ | 128,995
|                                   |  |                |         |                  |   |           |  |           |       |               |   |        |  |   |        



(1)Includes $145.3 million in undisbursed lines of credit.



Pension Plans. We maintain a qualified defined benefit plan (the Qualified Plan), which covers
substantially all employees who were hired prior to January 1, 2001 and a supplemental retirement plan to provide additional benefits to executives selected for the plan that are in excess of amounts permitted to be paid under the provisions of tax
law to participants in the Qualified Plan. We also sponsor a non-qualified defined benefit plan for its directors.



Our pension costs for all pension plans, excluding our 401(k) deferred savings plan, approximated $4.6 million and $3.5 million for 2003 and 2002
respectively, and is calculated based on a number of actuarial assumptions, including an expected long-term rate of return on our Qualified Plan assets of 9%. In developing our expected long-term rate of return assumption, we evaluated input from
our actuaries and our investment advisors, including their review of asset class return expectations from respected sources and authorities. We also evaluated the long-term rate of expected inflation. Projected returns by these sources are based on
broad equity and bond indices. We also considered our historical returns in comparison to various market indices. Our expected long-term rate of return is based on a target asset allocation of 70% in equities and 30% in fixed income. We adopted this
change in target allocation in early 2003. Previously, our target allocation was 75% equities and 25% in fixed income investments.



53



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At the end of 2003, our pension committee decided to change asset managers for the defined benefit plan from Security
Trust Company, N.A. to Charles Schwab Trust Company. At December 31, 2003, of the $17.2 million in plan assets, $15.1 million were in cash and cash equivalents awaiting transfer to Charles Schwab Trust Company while the remaining $2.1 million was in
a debt securities mutual fund which transferred to Charles Schwab in kind. After the transfer of assets was completed, the assets were invested in an allocation of approximately 70% equity securities and 30% debt securities. We periodically
rebalance the actual asset allocation to match the target asset allocation. We expect a long-term rate of return on equities of 10% and a long-term rate of return on fixed income investments of 6%. We believe this is a reasonable long-term rate of
return for our Qualified Plan assets. We will continue to evaluate our actuarial assumptions, including our expected rate of return, at least annually, and will adjust as necessary.



We base our determination of pension cost on the market value of assets without adjustments or smoothing to reduce
year-to-year volatility. Actuarial gains and losses are recognized into pension cost, to the extent they exceed the amount allowed in accordance with SFAS No. 87, Employers Accounting for Pensions, that can be excluded in
determining the amount to be amortized (the corridor). The amount of gain and loss in excess of the corridor is amortized over the remaining average expected working lifetime of plan participants, which was 8.9 years for 2002. As of
December 31, 2003, we had cumulative actuarial losses of $10.9 million that had not yet been recognized into pension cost.



The discount rate we utilize for determining future pension obligations is based on a review of long term bond yields. We use Moodys AA bond index
and Merrill Lynchs Corporate 10+ years High Quality bond index as of our measurement date in determining our discount rate each year. The discount rate determined on this basis has decreased from 6.50% as of December 31, 2002 to 6.0% as of
December 31, 2003.



Lowering the expected long-term rate of
return on our Qualified Plan assets by 0.5% (from 9.0% to 8.5%) would have increased our fiscal 2003 pension cost by $67,000. Lowering the discount rate and salary increase assumptions by 0.5% would have increased our fiscal 2003 pension cost by
$187,000.



The value of our Qualified Plan assets
increased from $12.7 million at December 31, 2002 to $17.2 million at December 31, 2003. The investment performance returns and declining discount rates have increased the under funding in our Qualified Plan, net of accumulated benefit obligations
from $892,000 at December 31, 2002 to an underfunding of $1.6 million at December 31, 2003. As a result of this decline in funded status of our Qualified Plan, we expect that based on our actuarial assumptions that we will continue to make cash
contributions to the Qualified Plan in the range of $3.0 million for at least the next three years.



Impact of Inflation and Changing Prices



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



54



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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.



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 our 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, 2003 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 our 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



55



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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 SFAS 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 SFAS No. 132 for the year ended December 31, 2003.



|ITEM 7A. |  | QUALITATIVE AND QUANTITATIVE ANALYSIS OF MARKET RISK
|-------- |  | ----------------------------------------------------



For information regarding market risk see Item 7- Managements Discussion and Analysis of Financial Conditions and Results of Operation.



|ITEM 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- |  | -------------------------------------------



The financial statements identified in Item 15(a)(1) hereof are included as Exhibit 13 and are incorporated hereunder.



|ITEM 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE
|------- |  | -----------------------------------------------------------------------------------



There were no changes in or disagreements with accountants in the Companys accounting and financial disclosure during
2003.



|ITEM 9A. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



(a) Evaluation of disclosure controls and procedures.



Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal year (the Evaluation Date). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our



56



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disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or
our consolidated subsidiaries) required to be included in our periodic SEC filings.



(b) Changes in internal controls.



There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.



See the Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.



PART III



ITEM 10.    DIRECTORS AND OFFICERS OF THE REGISTRANT



The Company has adopted a Code of Ethics that applies to
the Companys principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics may be accessed on the Companys website at
www.fidelityfederal.com.



Directors



The Board of Directors of Fidelity Bankshares, Inc. is divided into three
classes and is elected by stockholders of Fidelity Bankshares, Inc. for staggered three-year terms, or until their successors are elected and qualified. The following table sets forth certain information regarding the composition of the Board of
Directors as of December 31, 2003, including their terms of office:



|                       |  |     |  |                                                              |  |                    |  |                      
|---------------------- |  | --- |  | ------------------------------------------------------------ |  | ------------------ |  | ---------------------
|Name                   |  | Age |  | Position Held at Fidelity Bankshares, Inc.                   |  | Director Since (1) |  | Current Termto Expire
|Vince A. Elhilow       |  | 64  |  | Chairman of the Board, President and Chief Executive Officer |  | 1984               |  | 2006                 
|Keith D. Beaty         |  | 53  |  | Director                                                     |  | 1992               |  | 2005                 
|Paul C. Bremer         |  | 60  |  | Director                                                     |  | 2000               |  | 2004                 
|F. Ted Brown, Jr.      |  | 74  |  | Director                                                     |  | 1990               |  | 2004                 
|Donald E. Warren, M.D. |  | 76  |  | Director                                                     |  | 1979               |  | 2006                 
|Karl H. Watson         |  | 62  |  | Director                                                     |  | 1999               |  | 2004                 

---

|(1) | Reflects initial appointment to Fidelity Bankshares, Inc.s predecessor, Fidelity Federal Savings Bank of Florida.
|--- | ------------------------------------------------------------------------------------------------------------------



The principal occupations of each director and executive officer of Fidelity
Bankshares, Inc. during at least the past five years is set forth below.



Directors



Vince A. Elhilow has
been President of Fidelity Federal Bank & Trust since 1987 and Chief Executive Officer of Fidelity Federal Bank & Trust since 1992. In May 2002, Mr. Elhilow was appointed Chairman of the Board of Directors. Prior to his appointment as
President of Fidelity Federal Bank & Trust, Mr. Elhilow was manager of the Loan Department from 1973 to 1992 and Executive Vice



57



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President and Chief Operating Officer from 1981 to 1987. Mr. Elhilow joined Fidelity Federal Bank & Trust in January
1963 and has been a Director since 1984.



Keith D. Beaty
is the Chief Executive Officer of Implant Innovations, Inc. a distributor of dental implants, located in Palm Beach Gardens. Mr. Beaty has been a director of Fidelity Federal Bank & Trust since 1992.



Paul C. Bremer is a retired certified public accountant. From 1979
until his retirement in 2000, Mr. Bremer was a partner with the accounting firm of Ernst & Young LLP. Mr. Bremer was appointed to the Board of Directors in August 2000.



F. Ted Brown, Jr. is the President of Ted Brown Real Estate, Inc., located in North Palm Beach. Mr. Brown has been a
director of Fidelity Federal Bank & Trust since 1990.



Donald E. Warren, M.D. is a retired physician who practiced in West Palm Beach for over 36 years. He was associated with Intracoastal Health Systems until his retirement in November 1996. Dr. Warren has been a director of Fidelity
Federal Bank & Trust since 1979.



Karl H.
Watson is President and Chief Operating Officer of the Construction Materials Division of Rinker Materials, a concrete and building materials company based in West Palm Beach. Mr. Watson has been with Rinker Materials for over 35 years. Mr.
Watson was appointed to the Board of Directors on January 19, 1999.



Executive Officers who are not Directors



Richard D. Aldred serves as Executive Vice President, Chief Financial Officer and Treasurer. Mr. Aldred has been employed by Fidelity Federal Bank & Trust for 19 years.



Joseph C. Bova serves as Executive Vice President and Lending
Operations Manager. Mr. Bova has been employed by Fidelity Federal Bank & Trust for 32 years.



Robert L. Fugateserves as Executive Vice President and Banking Operations Manager. Mr. Fugate has been employed by Fidelity Federal Bank &
Trust for 31 years.



Christopher H. Cook became
Executive Vice President and Corporate Counsel in 1996. Prior to that time, Mr. Cook was a partner with the law firm of Brackett, Cook, Sned, Welch, DAngio, Tucker & Farach, P.A.



ITEM 11.    EXECUTIVE COMPENSATION



Information required by Item 11 is incorporated by reference to the
Companys Proxy Statement for the 2004 Annual Meeting of Stockholders.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Information required by Item 12 is incorporated by reference to the Companys Proxy Statement for the 2004 Annual Meeting of Stockholders.



58



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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



None.



ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



Information required by Item 14 is incorporated by reference to the
Companys Proxy Statement for the 2004 Annual Meeting of Stockholders.



PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:



|       |  |                                                                                                                                                                        |  |                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------
|       | 
|(a)(1) |  | Financial Statements                                                                                                                                                  
|       | 
|      |  | Independent Auditors Report                                                                                                                                          
|      |  | Consolidated Statements of Financial Position, December 31, 2002 and 2003                                                                                             
|      |  | Consolidated Statements of Operations, Years Ended December 31, 2001, 2002 and 2003                                                                                   
|      |  | Consolidated Statements of Comprehensive Operations, Years Ended December 31, 2001, 2002and
2003                                                                      
|      |  | Consolidated Statements of Changes in Stockholders equity, Years Ended December 31, 2001, 2002and
2003                                                               
|      |  | Consolidated Statements of Cash Flows, Years Ended December 31, 2001, 2002 and 2003                                                                                   
|      |  | Notes to Consolidated Financial Statements.                                                                                                                           
|       | 
|(a)(2) |  | Financial Statement Schedules                                                                                                                                         
|       | 
|       |  | No financial statement schedules are filed because the required information is not applicable or isincluded in the consolidated financial statements or related
notes.
|       | 
|(a)(3) |  | Exhibits                                                                                                                                                              
|       |  |                                                                                                                                                                       
|       |  | 3.1                                                                                                                                                                    |  | Certificate of Incorporation of Fidelity Bankshares, Inc.***                                                 
|       |  |                                                                                                                                                                       
|       |  | 3.2                                                                                                                                                                    |  | Bylaws of Fidelity Bankshares, Inc.***                                                                       
|       |  |                                                                                                                                                                       
|       |  | 4.1                                                                                                                                                                    |  | Form of Indenture with respect to Fidelity Bankshares, Inc.s 8.375% Junior Subordinated Deferrable Interest*
|       |  |                                                                                                                                                                       
|       |  | 4.2                                                                                                                                                                    |  | Form of Indenture with respect to Floating Rate Junior Subordinated Debt Securities due 2034                 
|       |  |                                                                                                                                                                       
|       |  | 10.1(a)                                                                                                                                                                |  | Employment Agreement between Fidelity Bankshares, Inc. and Vince A. Elhilow                                  



59



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|        |  |                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------
|        | 
|10.1(b) |  | Employment Agreement between Fidelity Federal Bank & Trust and Vince A. Elhilow                                               
|        | 
|10.2(a) |  | Change of Control Agreement between Fidelity Bankshares, Inc. and Richard D. Aldred                                           
|        | 
|10.2(b) |  | Change of Control Agreement between Fidelity Federal Bank & Trust and Richard D. Aldred                                       
|        | 
|10.3(a) |  | Change of Control Agreement between Fidelity Bankshares, Inc. and Robert Fugate                                               
|        | 
|10.3(b) |  | Change of Control Agreement between Fidelity Federal Bank & Trust and Robert Fugate                                           
|        | 
|10.4(a) |  | Change of Control Agreement between Fidelity Bankshares, Inc. and Joseph Bova                                                 
|        | 
|10.4(b) |  | Change of Control Agreement between Fidelity Federal Bank & Trust and Joseph Bova                                             
|        | 
|10.5(a) |  | Change of Control Agreement between Fidelity Bankshares, Inc. and Christopher H. Cook                                         
|        | 
|10.5(b) |  | Change of Control Agreement between Fidelity Federal Bank & Trust and Christopher H. Cook                                     
|        | 
|10.6    |  | Recognition and Retention Plan for Employees**                                                                                
|        | 
|10.7    |  | Recognition Plan for Outside Directors**                                                                                      
|        | 
|13      |  | Consolidated Financial Statements                                                                                             
|        | 
|14      |  | Code of Ethics                                                                                                                
|        | 
|21      |  | Subsidiaries of the Registrant                                                                                                
|        | 
|23      |  | Accountants Consent to incorporate financial statements in Form S-8                                                          
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|        | 
|32      |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



60



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| | 
| | 

| | * | Filed as exhibits to the Companys Registration Statement on Form S-2 under the Securities Act of 1933, filed with the SEC on December 15, 1997 (Registration No. 333-42227).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ** | Filed as exhibits to the Companys Registration Statement on Form S-4 under the Securities Act of 1933, filed with the Securities and Exchange Commission on December 12, 1996
(Registration No. 333-17737).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | *** | Filed as exhibits to the Companys Registration Statement on Form S-1 with the Securities and Exchange Commission. (Registration No. 333-53216).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------



| | **** | Filed as an Exhibit to the Company Annual Report on Form 10-K for the year ended December 31, 2001.
| | ---- | ---------------------------------------------------------------------------------------------------



| | (b) | Reports on Form 8-K:
| | --- | --------------------



On October 22, 2003, the Company filed a current Report on Form 8-K, Item 12., Results of Operations and Financial Condition, in which it announced its
September 30, 2003 financial results. On December 22, 2003, the Company filed a current Report on Form 8-K, Item 5., Other Events for the purpose of announcing the sale of $22 million in trust preferred securities by a special purpose trust.



| | (c) | The exhibits listed under (a)(3) above are filed herewith.
| | --- | ----------------------------------------------------------



| | (d) | Not applicable.
| | --- | ---------------



61



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                    |  |  |  |     |  |                           |  |                                                                               
|------------------- |  |  |  | --- |  | ------------------------- |  | ------------------------------------------------------------------------------
|                    |  |  |  |     |  | FIDELITY BANKSHARES, INC.
|                    |  |  | 
|Date: March 9, 2004 |  |  |  | By: |  | /s/    Vince A. Elhilow  
|                    |  |  |  |     |  |                           |  | Vince A. Elhilow, Chairman of the Board, President and Chief Executive Officer



Pursuant to the
requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|    |  |                                                                                                             |  |  |  |     |  |                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------- |  |  |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                             |  | 
|By: |  | /s/    Vince A. Elhilow                                                                                     |  |  |  | By: |  | /s/    Richard D. Aldred                                                                                                       
|    |  | Vince A. Elhilow, Chairman of the Board President and Chief Executive Officer (Principal Executive Officer) |  |  |  |     |  | Richard D. Aldred, Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
|    |  |                                                                                                             |  | 
|    |  | Date: March 9, 2004                                                                                         |  |  |  |     |  | Date: March 9, 2004                                                                                                            
|    |  |                                                                                                             |  | 
|By: |  | /s/    Paul C. Bremer                                                                                       |  |  |  | By: |  | /s/    F. Ted Brown, Jr.                                                                                                       
|    |  | Paul C. Bremer, Director                                                                                    |  |  |  |     |  | F. Ted Brown, Jr., Director                                                                                                    
|    |  |                                                                                                             |  | 
|    |  | Date: March 9, 2004                                                                                         |  |  |  |     |  | Date: March 9, 2004                                                                                                            
|    |  |                                                                                                             |  | 
|By: |  | /s/    Donald E. Warren, M. D.                                                                              |  |  |  | By: |  | /s/    Karl H. Watson                                                                                                          
|    |  | Donald E. Warren, M.D., Director                                                                            |  |  |  |     |  | Karl H. Watson, Director                                                                                                       
|    |  |                                                                                                             |  | 
|    |  | Date: March 9, 2004                                                                                         |  |  |  |     |  | Date: March 9, 2004                                                                                                            
|    |  |                                                                                                             |  | 
|By: |  | /s/    Keith D. Beaty, DirectorKeith D. Beaty, Director                                                     |  |  |  |     |  |                                                                                                                                
|    |  | Keith D. Beaty, Director                                                                                    |  |  |  |     |  |                                                                                                                                
|    |  |                                                                                                             |  | 
|    |  | Date: March 9, 2004                                                                                         |  |  |  |     |  |                                                                                                                                



62



---

EXHIBIT INDEX



|     |     |  |                                                                                                              
|---- | --- |  | -------------------------------------------------------------------------------------------------------------
|     |    
|3.1  |     |  | Certificate of Incorporation of Fidelity Bankshares, Inc.***                                                 
|     |    
|3.2  |     |  | Bylaws of Fidelity Bankshares, Inc.***                                                                       
|     |    
|4.1  |     |  | Form of Indenture with respect to Fidelity Bankshares, Inc.s 8.375% Junior Subordinated Deferrable Interest*
|     |    
|4.2  |     |  | Form of Indenture with respect to Floating Rate Junior Subordinated Debt Securities due 2034                 
|     |    
|10.1 | (a) |  | Employment Agreement between Fidelity Bankshares, Inc. and Vince A. Elhilow                                  
|     |    
|10.1 | (b) |  | Employment Agreement between Fidelity Federal Bank & Trust and Vince A. Elhilow                              
|     |    
|10.2 | (a) |  | Change of Control Agreement between Fidelity Bankshares, Inc. and Richard D. Aldred                          
|     |    
|10.2 | (b) |  | Change of Control Agreement between Fidelity Federal Bank & Trust and Richard D. Aldred                      
|     |    
|10.3 | (a) |  | Change of Control Agreement between Fidelity Bankshares, Inc. and Robert Fugate                              
|     |    
|10.3 | (b) |  | Change of Control Agreement between Fidelity Federal Bank & Trust and Robert Fugate                          
|     |    
|10.4 | (a) |  | Change of Control Agreement between Fidelity Bankshares, Inc. and Joseph Bova                                
|     |    
|10.4 | (b) |  | Change of Control Agreement between Fidelity Federal Bank & Trust and Joseph Bova                            
|     |    
|10.5 | (a) |  | Change of Control Agreement between Fidelity Bankshares, Inc. and Christopher H. Cook                        
|     |    
|10.5 | (b) |  | Change of Control Agreement between Fidelity Federal Bank & Trust and Christopher H. Cook                    
|     |    
|10.6 |     |  | Recognition and Retention Plan for Employees**                                                               
|     |    
|10.7 |     |  | Recognition Plan for Outside Directors**                                                                     
|     |    
|13   |     |  | Consolidated Financial Statements                                                                            
|     |    
|14   |     |  | Code of Ethics                                                                                               
|     |    
|21   |     |  | Subsidiaries of the Registrant                                                                               
|     |    
|23   |     |  | Accountants Consent to incorporate financial statements in Form S-8                                         
|     |    
|31.1 |     |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002           





---

|     |  |                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|     | 
|32   |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---

|* | Filed as exhibits to the Companys Registration Statement on Form S-2 under the Securities Act of 1933, filed with the SEC on December 15, 1997 (Registration No. 333-42227).
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Filed as exhibits to the Companys Registration Statement on Form S-4 under the Securities Act of 1933, filed with the Securities and Exchange Commission on December 12, 1996
(Registration No. 333-17737).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|*** | Filed as exhibits to the Companys Registration Statement on Form S-1 with the Securities and Exchange Commission. (Registration No. 333-53216).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



|**** | Filed as an Exhibit to the Company Annual Report on Form 10-K for the year ended December 31, 2001.
|---- | ---------------------------------------------------------------------------------------------------