<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1999
                                       OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
     For the transaction period from __________________ to ___________________


                        Commission File Number:  0-29040
                                                 -------

                           FIDELITY BANKSHARES, INC.
              ---------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

             Delaware                                        65-0717085
--------------------------------                  ------------------------------
(State or Other Jurisdiction of                  (I.R.S. Employer Identification
 Incorporation or Organization)                               Number)

218 Datura Street, West Palm Beach, Florida                    33401
-------------------------------------------                 ----------
  (Address of Principal Executive Offices)                  (Zip Code)

                                (561) 659-9900
              ---------------------------------------------------
              (Registrant's Telephone Number including area code)

          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)

     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]

     As of March 3, 2000, there were issued and outstanding 6,835,768 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 March 3, 2000 ($14.875) was $36,735,969.

                      DOCUMENTS INCORPORATED BY REFERENCE

1.   Sections of Annual Report to Stockholders for the fiscal year ended
     December 31, 1999 (Parts II and IV).
2.   Proxy Statement for the 2000 Annual Meeting of Stockholders (Parts I and
     III).
<PAGE>

                                     PART I

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

General

     Fidelity Bankshares, Inc.

     Fidelity Bankshares, Inc. (the "Company") is a Delaware corporation which
was organized in May 1996.  The only significant asset of the Company is its
investment in Fidelity Federal Savings Bank of Florida (the "Bank").  The
Company is majority owned by Fidelity Bankshares, M.H.C., a federally-chartered
mutual holding company (the "Mutual Holding Company").  On January 29, 1997 the
Company acquired all of the issued and outstanding common stock of the Bank in
connection with the Bank's reorganization into the two-tier form of mutual
holding company ownership.  At that time, each share of Bank common stock was
automatically converted into one share of Company common stock, par value $.l0
per share (the "Common  Stock").   3,542,000 shares of Common Stock were issued
to the Mutual Holding Company and 3,206,625 shares of Common Stock were issued
to the Bank's public stockholders.

     In December 1997 the Company incorporated Fidelity Capital Trust I, a
statutory business trust created under the laws of the State of Delaware
("Fidelity Capital").  Fidelity Capital was formed for the purpose of issuing
8.375% Cumulative Trust Preferred Securities (the "Preferred Securities") which
represent beneficial interests in Fidelity Capital.  On January 21, 1998,
Fidelity Capital completed the offer and sale of $28.75 million in Preferred
Securities.  In connection with the offer and sale of the Preferred Securities,
the Company issued an equivalent principal amount of 8.375% Junior Subordinated
Deferrable Interest Debentures which were sold to Fidelity Capital for the
equivalent of the net proceeds of $27.3 from the sale of the Preferred
Securities.  The Junior Subordinated Deferrable Interest Debentures are
scheduled to mature on January 31, 2028.

     Fidelity Federal Savings Bank of Florida

     The Bank is a federally chartered savings bank headquartered in West Palm
Beach, Florida.  The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC").  The Bank was chartered originally as a federal
mutual savings and loan association in 1952, and in 1983, amended its charter to
become a federally chartered mutual savings bank.  On January 7, 1994, the Bank
completed a reorganization into a federally chartered mutual holding company.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System.  At December
31, 1999, the Bank had total assets of $1.7 billion, total deposits of $1.3
billion, and stockholders' equity of $111.0 million.

     The Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area, and investing such deposits,
together with other sources of funds, in loans secured by one- to four-family
residential real estate.  To a lesser extent, the Bank also originates
construction loans and land loans for single-family properties and invests in
mortgage-backed securities issued or guaranteed by the United States Government
or agencies thereof.  In addition, the Bank invests a portion of its assets in
securities issued by the United States Government, cash and cash equivalents
including deposits in other financial institutions, and FHLB stock.  The Bank's
principal sources of funds are deposits and principal and interest payments on
loans.  Principal sources of income are interest received from loans and
investment
<PAGE>

securities.  The Bank's principal expense is interest paid on deposits and
employee compensation and benefits.

     The Company's and the Bank's principal executive office is located at 218
Datura Street, West Palm Beach, Florida, and its telephone number at that
address is (561) 659-9900.

Market Area

     The Bank is headquartered in West Palm Beach, Florida, and operates in Palm
Beach, Martin, and St. Lucie Counties in Florida.  At December 31, 1999, the
Bank had 32 offices in its market area, one of which is located in St. Lucie
County, three of which are located in Martin County, and 28 of which are located
in Palm Beach County. Palm Beach, Martin and St. Lucie Counties, located in
Southeastern Florida, have experienced considerable growth and development since
the 1960s, and had a total population of 1.4 million as of 1999.  Due to
significant growth controls established at the state and local governmental
levels, as well as a moderation of economic growth and migration in the Bank's
market area, management believes growth of the local market area may be more
moderate in the future.

     The Bank's business and operating results are significantly affected by the
general economic conditions prevalent in its market areas.  The southeast
Florida economy is significantly dependent upon government, foreign trade,
tourism, and its attraction as a retirement area.  Unemployment in Palm Beach
County is higher than the national and State of Florida averages.  Major
employers in the Bank's market area include Pratt & Whitney, Motorola, St.
Mary's Medical Center, Florida Power and Light, Bell South and the Palm Beach
County School Board.

     As previously reported, one of Palm Beach County's largest employers, Pratt
& Whitney, has announced that it will be substantially closing its operations in
Florida by September 2000.  Employees will be offered transfers to Pratt &
Whitney's Connecticut operations, early retirement or be terminated.  Of the
estimated four thousand employees affected, approximately two-thirds reside in
Palm Beach County, while the remainder live in Martin County.  Both counties are
within the Bank's primary service area. Management is unable to estimate the
effects on the Bank's operations, if any, resulting from Pratt & Whitney's plant
closing.

Lending Activities

     General.  Historically, the principal lending activity of the Bank has been
the origination of fixed and adjustable rate mortgage loans collateralized by
one- to four-family residential properties located in its market area.  The Bank
currently originates adjustable rate mortgage ("ARM") loans for retention in its
portfolio, and fixed rate loans, the majority of which are eligible for sale in
the secondary mortgage market. To a lesser extent, the Bank also originates
loans secured by commercial real estate and multi-family residential real
estate, construction loans, commercial business loans and consumer loans.

     In an effort to manage interest rate risk, the Bank has sought to make its
interest-earning assets more interest rate sensitive by originating adjustable
rate loans, such as ARM loans, home equity loans, and short-and medium-term
consumer loans.  The Bank also purchases both fixed and adjustable rate
mortgage-backed securities.  At December 31, 1999, approximately $606.6 million,
or 52.1%, of the Bank's total loan portfolio, and $127.0 million, or 37.8%, of
the Bank's mortgage-backed securities portfolio, consisted of loans or
securities with adjustable interest rates.  The Bank originates fixed rate
mortgage loans generally with 15- to 30-year terms to maturity, collateralized
by one- to four-family residential properties.  One- to

                                       2
<PAGE>

four-family fixed rate residential mortgage loans generally are originated and
underwritten according to standards that allow the Bank to resell such loans in
the secondary mortgage market for purposes of managing interest rate risk and
liquidity. The Bank periodically sells a portion of its fixed-rate loans which
have terms to maturity exceeding fifteen years. The Bank retains in its
portfolio all consumer, commercial real estate and multi-family residential real
estate loans.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                           At December 31,
                             -------------------------------------------------------------------------------------------------------
                                     1995                 1996               1997                1998                  1999
                             -------------------  ------------------ ------------------  -------------------  ----------------------
                              Amount    Percent    Amount   Percent   Amount   Percent     Amount   Percent     Amount     Percent
                             ---------  --------  --------- -------- --------- --------  ---------- --------  -----------  --------
                                                                         (Dollars in Thousands)
<S>                          <C>        <C>       <C>       <C>      <C>       <C>       <C>        <C>       <C>          <C>
Real estate loans:
 One- to four-family/(1)/.   $432,387      81.2%  $528,689     79.9% $720,782     83.7%  $  828,929    84.8%  $  925,384      79.5%
 Construction loans........    40,522       7.6     58,493      8.8    38,577      4.5       53,515     5.5       63,589       5.5
 Land loans................    10,769       2.0     11,875      1.8    12,116      1.4        8,583     0.9        9,763       0.8
 Commercial................    31,359       5.9     29,030      4.4    26,947      3.1       62,399     6.4      117,225      10.0
 Multi-family..............    13,748       2.6     13,781      2.1    12,999      1.5       12,272     1.2        1,037       0.1
                             --------     -----   --------    -----  --------    -----   ----------   -----   ----------     -----

  Total real estate loans..   528,785      99.3    641,868     97.0   811,421     94.2      965,698    98.8    1,116,998      95.9
                             --------     -----   --------    -----  --------    -----   ----------   -----   ----------     -----

Non-real estate loans:
 Consumer/(2)/............     26,855       5.0     39,478      6.0    47,758      5.5       48,270     4.9       60,281       5.2
 Commercial business.......     5,834       1.1     18,585      2.8    57,289      6.7       46,958     4.8       94,157       8.1
                             --------     -----   --------    -----  --------    -----   ----------   -----   ----------     -----

  Total non-real estate
   loans...................    32,689       6.1     58,063      8.8   105,047     12.2       95,228     9.7      154,438      13.3
                             --------     -----   --------    -----  --------    -----   ----------   -----   ----------     -----

  Total loans receivable...   561,474     105.4    699,931    105.8   916,468    106.4    1,060,926   108.5    1,271,436     109.2

Less:
 Undisbursed loan proceeds.    27,261       5.1     37,575      5.7    54,471      6.3      84,155      8.6      106,232       9.1
 Unearned discount and net
  deferred fees (costs)....      (385)     (0.1)    (1,607)    (0.2)   (2,554)    (0.3)     (3,621)    (0.4)      (2,826)     (0.2)
 Allowance for loan losses.     2,265       0.4      2,263      0.3     3,294      0.4       3,226      0.3        3,609       0.3
                             --------     -----   --------    -----  --------    -----  ----------    -----   ----------     -----

  Total loans
   receivable--net.........  $532,333     100.0%  $661,700    100.0% $861,257    100.0% $  977,166    100.0%  $1,164,421     100.0%
                             ========     =====   ========    =====  ========    =====  ==========    =====   ==========     =====

Mortgage-backed securities.  $159,761             $123,599           $234,132           $  389,263            $  336,212
                             ========             ========           ========           ==========            ==========
</TABLE>

____________________
/(1)/ Includes participations of $5.6 million, $4.3 million, $3.2 million, $2.2
      million and $1.5 million at December 31, 1995, 1996, 1997, 1998 and 1999,
      respectively.
/(2)/ Includes primarily home equity lines of credit, automobile loans, boat
      loans and passbook loans.  At December 31, 1999, the disbursed portion of
      equity lines of credit totaled $18.9 million.

                                       4
<PAGE>

     Loan and Mortgage-Backed Securities Maturity Schedule.  The following table
sets forth certain information as of December 31, 1999, regarding the dollar
amount of loans and mortgage-backed securities maturing in the Bank's 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 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.

<TABLE>
<CAPTION>
                                                             Over 1      Over 3        Over 5      Over 10      Beyond
                                                 Within    Year to 3   Years to 5   Years to 10  Years to 20      20
                                                 1 Year      Years       Years         Years       Years        Years       Total
                                                ---------  ----------  -----------  -----------  -----------    -------     -----
                                                                                   (In Thousands)
<S>                                             <C>        <C>         <C>          <C>          <C>           <C>       <C>
Real estate loans:
 One- to four-family residential /(1)/........   $211,522    $ 99,500      $68,245     $109,317    $179,258    $238,992  $  906,834
 Commercial, multi-family and land............    112,885       1,842        1,388        6,264      18,023          --     140,402
Consumer and commercial business loans /(2)/..     69,504      11,968       21,373       12,530       2,315         278     117,968
                                                 --------    --------      -------     --------    --------    --------  ----------
 Total loans receivable.......................   $393,911    $113,310      $91,006     $128,111    $199,596    $239,270  $1,165,204
                                                 --------    --------      -------     --------    --------    --------  ----------
Mortgage-backed securities....................   $125,621    $     --      $    --     $     --    $ 64,923    $149,586  $  340,130
                                                 --------    --------      -------     --------    --------    --------  ----------
</TABLE>

____________________

/(1)/  Includes construction loans.
/(2)/  Includes commercial business loans of $58.2 million.

     The following table sets forth at December 31, 1999, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
2000.

<TABLE>
<CAPTION>
                                                 Fixed    Adjustable   Total
                                                --------  ----------  --------
                                                        (In Thousands)
<S>                                             <C>       <C>         <C>
Real estate loans:
 One- to four-family residential..............  $476,003    $219,309  $695,312
 Commercial, multi-family and land............    27,517                27,517
Consumer and commercial business loans /(1)/..    48,464                48,464
                                                --------    --------  --------
  Total.......................................  $551,984    $219,309  $771,293
                                                --------    --------  --------
Mortgage-backed securities....................  $214,509    $     --  $214,509
                                                --------    --------  --------
</TABLE>

__________________

/(1)/ Includes commercial business loans of $9.3 million.

     One- to Four-Family Residential Real Estate Loans.  The Bank's primary
lending activity consists of the origination of one- to four-family, owner-
occupied, residential mortgage loans secured by properties located in the Bank's
market area.  During 1995, the Bank began to originate one- to four-family
residential loans on properties outside of its market area.  These loans which
were originated through a network of brokers throughout Florida, are subject to
internal controls established by the Bank, as well as the Bank's customary
underwriting standards.  At December 31, 1999, $989.0 million, or 77.8%, of the
Bank's total gross loan portfolio consisted of one- to four-family residential
mortgage loans, including residential construction loans of which $99.6 million
were originated outside the Bank's market area.

                                       5
<PAGE>

     The Bank currently offers 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, the Bank's interest rate gap
position, and loan products offered by the Bank's competitors.  Therefore, even
if management's strategy is to emphasize ARM loans, market conditions may be
such that there is greater demand for fixed rate mortgage loans.  ARM loan
originations totaled $219.3 million during the year ended December 31, 1999.

     The Bank's fixed rate loans generally are originated and underwritten
according to standards that permit sale in the secondary mortgage market.
Whether the Bank can or will sell fixed rate loans into the secondary market,
however, depends on a number of factors including the yield and the term of the
loan, market conditions, and the Bank's current gap position.  The Bank's fixed
rate mortgage loans are amortized 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 may refinance or prepay loans at their option.

     The Bank currently offers ARM loans with initial interest rate adjustment
periods of one, three, five and seven years, based on changes in a designated
market index.  After the initial interest rate adjustment period, three, five
and seven year ARM loans have the option of converting to a fixed rate mortgage
for the remaining term of the loan at the prevailing interest rate for fixed
rate mortgages at the time of the conversion.  The interest rate on one year ARM
loans and the three, five and seven year ARM loans that do not convert to a
fixed rate mortgage adjust annually with an annual interest rate adjustment
limitation of 200 basis points and with a maximum lifetime interest rate of  600
basis points above the initial rate.  The interest rate on all non-owner-
occupied one- to four-family mortgage loans is 300 basis points above the
appropriate U.S. Treasury securities as the index for ARM originations.  The
Bank originates ARM loans with initially discounted rates, which vary depending
upon whether the initial interest rate adjustment period is one, three, five or
seven years.  The Bank determines 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.  One- to four-family residential ARM loans totaled $427.8 million,
or 36.7%, of the Bank's total gross loan portfolio at December 31, 1999.

     The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive.  However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans may not offer the
Bank as predictable cash flows as long-term, fixed rate loans.  See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management-Interest Rate Sensitivity Analysis"
contained in the Bank's 1999 Annual Report to Stockholders (the "Annual
Report").  ARM loans carry increased credit risk associated with potentially
higher monthly payments by borrowers as general 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 the borrower.

     The Bank's one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank 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
adjusting the rates on the Bank's fixed rate mortgage loan portfolio, and the
Bank has generally exercised its rights under these clauses.

                                       6
<PAGE>

     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 the Bank's 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.  The Bank's lending policies generally limit the maximum loan-to-
value ratio on both fixed rate and ARM loans without private mortgage insurance
to 80% of the lesser of the appraised value or the purchase price of the
property to serve as collateral for the loan.

     The Bank makes one- to four-family real estate loans with loan-to-value
ratios in excess of 80%. For one- to four-family real estate loans with loan-to-
value ratios of between 80% and 90%, the Bank generally requires the borrower to
obtain private mortgage insurance.  For loans in excess of 90% the Bank requires
the borrower to obtain private mortgage insurance.  The Bank requires fire and
casualty insurance, as well as a title guaranty regarding good title, on all
properties securing real estate loans made by the Bank.

     Construction and Land Loans.  The Bank currently offers fixed rate and
adjustable rate residential construction loans primarily for the construction of
owner-occupied single-family residences to builders who have a contract for sale
of the property or owners who have a contract for construction.  At December 31,
1999, the Bank held $63.6 million, or 5.5%, of its loan portfolio in
constructions loans.  In addition, the Bank makes construction loans to builders
for homes held for sale which totaled $45 million at December 31, 1999.
Construction loans are generally structured to become permanent loans, and are
originated with terms of up to 30 years with an allowance of up to one year for
construction.  During the construction phase the loans made prior to December
31, 1999 predominately had an adjustable interest rate that adjusted annually
and converted into either a fixed rate or remained an adjustable rate mortgage
loan at the end of the construction period.  The Bank also makes construction
loans with fixed rates of interest.  Such loans become permanent one- to four-
family loans upon completion of construction.  Advances are made as construction
is completed.

     In addition, the Bank originates loans which are secured by individual
unimproved or improved lots. At December 31, 1999, $9.8 million, or 1.0%, of the
Bank's total loan portfolio 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 the Bank's land loans is 75%.  The Bank uses the
applicable U.S. Treasury securities rate as its index on newly originated loans.
Initial interest rates may be below the fully indexed rate.

     Construction lending generally involves a greater degree of credit risk
than one- to four-family residential mortgage lending.  The repayment of the
construction loan is often dependent 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.   Loans securing multi-family
real estate constituted approximately $23.8 million, or 1.9%, of the Bank's
total loan portfolio at December 31, 1999.  At December 31, 1999, the Bank had a
total of 92 loans secured by multi-family properties.  The Bank's multi-family
real estate loans are secured by multi-family residences, such as rental
properties.  At December 31, 1999, substantially all of the Bank's multi-family
loans were secured by properties located within the Bank's market area.  At
December 31, 1999, the Bank's multi-family real estate loans had an average
principal balance of $259,000 and the largest multi-family real estate loan had
a principal balance of $1.4 million.  Multi-family real estate loans currently
are offered with adjustable interest rates, although in the past the Bank
originated fixed rate multi-family real estate loans.  The terms of each multi-
family loan are negotiated on a case-by-

                                       7
<PAGE>

case basis. Such 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 the initial rate, and amortize over 15 to 25 years. The Bank
generally makes multi-family mortgage loans up to 80% of the appraised value of
the property securing the loan. The Bank may choose to offer initial discount
rates depending on market conditions, but generally the initial interest rate on
multi-family real estate loans has been priced at the applicable U.S. Treasury
securities as its index on newly originated loans. The Bank's originations of
multi-family loans have been limited in recent years.

     Loans secured by multi-family real estate generally involve a greater
degree of 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 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 multi-family and
commercial real estate is typically dependent upon the successful operation of
the related real estate property.  If the cash flow from the project is reduced,
the borrower's ability to repay the loan may be impaired.

     Commercial Real Estate Loans.  Loans secured by commercial real estate
constituted approximately $88.1 million, or 7.6%, of the Bank's total loan
portfolio at December 31, 1999.  The Bank's commercial real estate loans are
secured by improved property such as offices, small business facilities, strip
shopping centers, warehouses and other non-residential buildings.  At December
31, 1999, substantially all of the Bank's commercial real estate loans were
secured by properties located within the Bank's market area.  At December 31,
1999, the Bank's commercial real estate loans had an average principal balance
of $452,000. At that date, the largest commercial real estate loan had a
principal balance of $3.3 million, secured by commercial property located in
Palm Beach Gardens, Florida and was currently performing.  This was the largest
commercial real estate lending relationship at the Bank and was within the
current loans-to-one borrower limits.  Commercial real estate loans currently
are offered with adjustable rates, although in the past the Bank has originated
fixed rate commercial real estate loans.  The terms of each commercial real
estate loan are negotiated on a case-by-case basis, although such loans
typically have adjustable interest rates tied to a market index, with a 600
basis point lifetime interest rate cap, and a 200 basis point interest rate
floor below the initial interest rate.  The Bank may choose to offer initial
discount rates depending on market conditions.  The Bank uses the applicable
U.S. Treasuries rate as its index on newly originated loans.  Commercial real
estate loans originated by the Bank generally amortize over 15 to 25 years.

     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 related real
estate project.  If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.

     Consumer Loans.  As of December 31, 1999, consumer loans totaled $60.3
million, or 4.7%, of the Bank's total gross loan portfolio.  The principal types
of consumer loans offered by the Bank are home equity lines of credit,
adjustable and fixed rate second mortgage loans, automobile loans, unsecured
personal loans, and loans secured by deposit accounts.  Consumer loans are
offered on a fixed rate and adjustable rate basis with maturities generally of
less than ten years.  The Bank's home equity lines of credit are secured by the

                                       8
<PAGE>

borrower's principal residence with a maximum loan-to-value ratio, including the
principal balances of both the first and second mortgage loans, of 80% or less
(up to 90% if the Bank has a first mortgage on the property).  Such loans are
offered on an adjustable rate basis with terms of up to ten years.  At December
31, 1999, the disbursed portion of home equity lines of credit totaled $18.9
million, or 31.4% of consumer loans.

     The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history and an assessment of ability
to meet existing obligations and payments on the proposed loan.  The stability
of the applicant'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 applicant 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, the Bank obtains a title guarantee or an opinion as to
the validity of title.

     Consumer loans entail greater credit risk than do 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.  The Bank adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience.  See "--Delinquencies and Classified Assets--Non-Performing
Assets," and "Delinquent Loans and Non-Performing Assets--Classification of
Assets" for information regarding the Bank's loan loss experience and reserve
policy.

     Commercial Business Loans.  The Bank currently offers commercial business
loans to finance businesses in its market area.  Historically, the Bank offered
commercial business loans as a customer service to business account holders.
However, the Bank has begun to significantly expand and aggressively market its
loans and services to commercial business enterprises.  During the year, the
Bank originated a $6.0 million loan secured by accounts receivable and
inventory, which is the Bank's largest commercial business loan.  At December
31, 1999, the Bank had 588 commercial business loans outstanding with an
aggregate balance of $96.5 million.  The average commercial business loan
balance was approximately $164,000. Commercial business loans are generally
offered with adjustable interest rates only, which are tied to The Wall Street
Journal prime rate, plus up to 300 basis points.  The loans are offered with
prevailing terms of five years but which may range up to 15 years.  In addition,
the Bank offers Small Business Administration loans.

     Underwriting standards employed by the Bank for commercial business loans
include a determination of the applicant's ability to meet existing obligations
and payments on the proposed loan for normal 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 than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business.  The Bank generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.

                                       9
<PAGE>

     Loan Originations, Solicitation, Processing, and Commitments.  Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers.  Upon receiving a loan application, the Bank obtains 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, an appraiser approved by the Bank appraises the real estate
intended to secure the proposed loan.  A loan processor in the Bank's loan
department checks the loan application file for accuracy and completeness, and
verifies the information provided.  All loans of up to $300,000 may be approved
by any one of the Bank's senior lending officers; loans between $300,000 and
$400,000 must be approved by any one of the Bank's designated senior officers;
loans between $400,000 and $1,000,000 must be approved by at least two of the
Bank's designated senior officers which includes the Chief Executive Officer;
and loans in excess of $1,000,000 must be approved by at least three members of
the Board of Directors acting as a loan committee.  The loan committee meets as
needed to review and verify that management's approvals of loans are made within
the scope of management's authority.  Fire and casualty insurance is required at
the time the loan is made and throughout the term of the loan, and upon request
of the Bank, flood insurance may be required. After the loan is approved, a loan
commitment letter is promptly issued to the borrower. At December 31, 1999, the
Bank had commitments to originate $73.0 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.  The borrower must 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 must satisfy the Bank's underwriting criteria at
the time they apply to refinance their loan and have been current in their loan
payments for a minimum of one year.  Approximately 15% of the Bank's loan
originations during the year ended December 31, 1999 represented the refinancing
of the Bank's existing loans.  Refinancings have resulted in a decrease in the
Bank's interest rate spread.  See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1999 Annual Report to
Stockholders.

     The Bank in connection with local mortgage brokers has a mortgage loan
broker solicitation program to supplement the Bank's internal originations of
one- to four-family residential loans.  Under this program, which is limited to
the origination of one- to four-family residential loans, prospective borrowers
complete loan applications which are provided by mortgage brokers.  The
completed applications are forwarded to the Bank.  All loans obtained in this
manner are reviewed in accordance with the Bank's customary underwriting
standards.  Total originations from all sources under the mortgage loan broker
solicitation program during 1999 were $60.6 million and are included as
originations in the following table.

     The Bank has entered into an agreement with the wholly-owned mortgage
subsidiary of a major South Florida builder-developer, who has substantial
operations in the Bank's 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 the Bank by the
mortgage company for review and, if approved by the Bank, it issues a commitment
to purchase the loan from the mortgage company.  Purchases are accomplished by
assignment of the mortgage from the mortgage company to the Bank.  The Bank
purchased $23.7 million in loans from this provider in 1999.

                                       10
<PAGE>

     The Bank's recently purchased loans are collateralized by properties
located primarily in Florida, although the Bank has in the past purchased loans
collateralized by properties located outside the State of Florida.  At December
31, 1999, $100.2 million, or 7.9%, of all loans in the Bank's portfolio, were
purchased from others.  Of this amount, $9.5 million represented the Bank's
interest in purchased participations.  The Bank's largest loan participation was
a $3.8 million interest in a loan secured by one- to four-family residences.

     Origination, Purchase and Sale of Loans.  The table below shows the Bank's
loan origination, purchase and sales activity for the periods indicated.

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                        ------------------------------------
                                                           1997        1998         1999
                                                        ----------  -----------  -----------
                                                                   (In Thousands)
<S>                                                     <C>         <C>          <C>
Loan receivable-gross, beginning of period............  $ 699,931   $  916,468   $1,060,926
Originations:
Real estate:
 One- to four-family residential/(1)/.................    177,111      255,444      241,965
 Land loans...........................................     30,908       23,089       19,123
 Commercial...........................................      5,664        9,668       31,951
 Multi-family.........................................      7,227        5,975        9,404
Non-real estate loans:................................
 Consumer.............................................     29,276       34,382       46,358
   Commercial Business................................     61,383       67,465      109,523
                                                        ---------   ----------   ----------
Total originations....................................    311,569      396,023      458,324
Acquired as part of acquisition.......................     52,957           --           --
Transfer of mortgage loans to foreclosed real estate
 and in-substance foreclosure.........................     (2,403)      (1,542)      (1,733)
Loan purchases........................................     35,647       45,157       28,401
Repayments............................................   (169,599)    (241,478)    (258,749)
Loan sales............................................    (11,634)     (53,702)     (15,733)
                                                        ---------   ----------   ----------
Net loan activity.....................................    216,537      144,458      210,510
                                                        ---------   ----------   ----------
Total loans receivable-gross, end of period...........  $ 916,468   $1,060,926   $1,271,436
                                                        =========   ==========   ==========
</TABLE>

____________________________
/(1)/ Includes loans to finance the construction of one- to four-family
      residential properties, and loans originated for sale in the secondary
      market.
/(2)/ This table is being presented on a gross loan receivable basis.

     Loan Origination Fees and Other Income.  In addition to interest earned on
loans, the Bank generally receives loan origination fees.  To the extent that
loans are originated or acquired for the Bank's portfolio, Statement of
Financial Accounting Standards ("SFAS") 91 "Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring loans and Initial Direct
Costs of Leases" requires that the Bank defer loan origination fees and costs
and amortize such amounts 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, 1999, the Bank had $2.6 million of deferred loan
origination fees and $5.5 million of deferred loan origination costs.  Such fees
vary with the volume and type of loans and commitments made and purchased,
principal repayments, and competitive conditions in the mortgage markets, which
in turn respond to the demand and availability of money.

     The Bank also receives other fees, service charges, and other income that
consist primarily of deposit transaction account service charges, late charges,
credit card fees, and income from REO operations.  The Bank recognized fees and
service charges of $3.6 million, $4.6 million and $5.5 million for the years
ended December 31, 1997, 1998, and 1999, respectively.

                                       11
<PAGE>

     Loans-to-One Borrower.  Savings associations 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, 1999, the Bank's
largest outstanding loan balance to one borrower totaled $11.0 million which was
secured by residential property under development in northern Palm Beach County,
Florida.  At that date, the Bank's second largest lending relationship totaled
$10.1 million and was secured by various residential properties. The Bank's
third largest lending relationship totaled $9.8 million and was secured by
accounts receivable and inventory.  The Bank's fourth largest lending
relationship totaled $9.4 million and was secured by various residential
properties.  The Bank's fifth largest lending relationship totaled $9.2 million
and was secured by various residential properties.  The Bank's regulatory limit
on loans-to-one borrower was $16.6 million at December 31, 1999.

Mortgage-Backed Securities

     The Bank also invests 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 the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC").  Mortgage-backed securities totaled $343.5 million at
December 31, 1999 and had a market value of $336.2 million.  Effective December
31, 1993, the Bank implemented SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities."  As a result of the adoption of this accounting
principle, the Bank declared its investment in adjustable rate, mortgage-backed
securities as available for sale.  In November 1995, FASB issued "A Guide to
Implementation of SFAS 115 on Accounting for Certain Investments in Debt and
Equity Securities - Questions and Answers" ("SFAS 115 Q & A Guide").  SFAS 115 Q
& A Guide permits an entity to conduct a one time reassessment of the
classifications of all securities held at that time.  On November 28, 1995, in
conformity with the SFAS 115 Q & A Guide, management of the Bank classified all
securities as "Available for Sale".  As a result, all such securities are now
presented at fair value, as determined by market quotations.

     The Bank's objectives in investing in mortgage-backed securities varies
from time to time depending upon market interest rates, local mortgage loan
demand, and the Bank's level of liquidity.  The Bank's mortgage-backed
securities are more liquid than whole loans and can be readily sold in response
to market conditions and interest rates.  Mortgage-backed securities purchased
by the Bank 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.

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                      --------------------------------
                                                                        1997        1998       1999
                                                                      ---------  ----------  ---------
                                                                               (In Thousands)
<S>                                                                   <C>        <C>         <C>
Mortgage-backed securities at beginning of period...................  $123,599   $ 234,132   $389,263
Purchases...........................................................   131,956     310,581     57,285
Acquired as part of Acquisition of BankBoynton......................       205          --         --
Sales...............................................................        --     (26,044)    (9,914)
Repayments..........................................................   (22,325)   (125,105)   (89,810)
Discount (premium) amortization.....................................      (304)     (2,503)    (2,611)
Increase (decrease) in market value of securities held for sale in
 accordance with SFAS 115...........................................     1,001      (1,798)    (8,001)
                                                                      --------   ---------   --------
Mortgage-backed securities at end of period.........................  $234,132   $ 389,263   $336,212
                                                                      ========   =========   ========
</TABLE>

                                       12
<PAGE>

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

<TABLE>
<CAPTION>
                                                             At December 31,
                                         -------------------------------------------------------
                                                1997               1998               1999
                                         -----------------  -----------------  -----------------
                                            $         %        $         %        $         %
                                         --------  -------  --------  -------  --------  -------
                                                         (Dollars In Thousands)
<S>                                      <C>       <C>      <C>       <C>      <C>       <C>
Mortgage-backed securities, net:
Adjustable:
 FHLMC.................................  $ 48,469   20.57%  $102,756   26.27%  $ 73,717   21.81%
 FNMA..................................    43,825   18.60     56,490   14.44     42,183   12.48
 GNMA..................................     1,586    0.67        995    0.25     11,083    3.28
                                         --------  ------   --------  ------   --------  ------
  Total adjustable.....................    93,880   39.84    160,241   40.96    126,983   37.57
                                         --------  ------   --------  ------   --------  ------
Fixed:
 FHLMC.................................    83,326   35.36    122,463   31.30    110,744   32.77
 FNMA..................................    26,497   11.24     86,166   22.02     84,600   25.04
 GNMA..................................    30,429   12.91     20,393    5.22     13,885    4.11
                                         --------  ------   --------  ------   --------  ------
  Total fixed..........................   140,252   59.51    229,022   58.54    209,229   61.92
                                         --------  ------   --------  ------   --------  ------
Accrued interest.......................     1,530    0.65      1,941    0.50      1,726    0.51
                                         --------  ------   --------  ------   --------  ------
Total mortgage-backed securities, net..  $235,662  100.00%  $391,204  100.00%  $337,938  100.00%
                                         ========  ======   ========  ======   ========  ======
</TABLE>

Delinquencies and Classified Assets

     Delinquencies.  The Bank's 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 delinquency continues, at
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 ("HUD").  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 a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement.

     Non-Performing 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 and considered non-performing 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.  At December 31,
1999, the Bank had non-performing loans of $4.2 million, and a ratio of non-
performing loans to net loans receivable of 0.36%.

     Real estate acquired by the Bank 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

                                       13
<PAGE>

is charged against the Bank's earnings. Any subsequent write-down of REO is also
charged against earnings. At December 31, 1999, the Bank had approximately
$775,000 of property acquired as the result of foreclosure and classified as
REO. At December 31, 1999, the Bank had non-performing assets of $5.0 million
and a ratio of non-performing assets to total assets of .29%.

Delinquent Loans and Non-Performing Assets

     The following table sets forth information regarding the Bank's 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, the Bank fully reserves all accrued interest thereon and ceases to
accrue interest thereafter.  For all the dates indicated, the Bank did not have
any material restructured loans within the meaning of SFAS 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructurings".

<TABLE>
<CAPTION>
                                                               At December 31,
                                                 -------------------------------------------
                                                  1995     1996     1997     1998     1999
                                                 -------  -------  -------  -------  -------
                                                            (Dollars in Thousands)
<S>                                              <C>      <C>      <C>      <C>      <C>
Delinquent Loans:
 One- to four-family residential/(1)/..........  $1,513   $2,637   $2,610   $3,677   $4,022
 Commercial and multi-family real estate.......     201      461      140       51       --
 Land..........................................      10       84      187       --       --
 Consumer and commercial business loans/(3)/...     140      108      312      131      221
                                                 ------   ------   ------   ------   ------
Total Delinquent loans.........................   1,864    3,290    3,249    3,859    4,243
Total REO and loans foreclosed in-substance....     643       93      967      907      775
                                                 ------   ------   ------   ------   ------
   Total nonperforming assets/(2)/.............  $2,507   $3,383   $4,216   $4,766   $5,018
                                                 ======   ======   ======   ======   ======

Total loans delinquent 90 days or more to net
 loans receivable/(3)/.........................    0.35%    0.50%    0.38%    0.39%    0.36%
Total loans delinquent 90 days or more to
 total assets/(3)/.............................    0.24%    0.38%    0.27%    0.25%    0.25%
Total nonperforming loans, loans foreclosed
  in substance and REO to total assets.........    0.32%    0.39%    0.35%    0.30%    0.29%
</TABLE>

________________________________________
/(1)/ At December 31, 1999, the Bank had no delinquent or non-performing
      construction loans.
/(2)/ Net of specific valuation allowances.
/(3)/ Includes consumer and commercial business loans delinquent 60 days or
      more.

     During the year ended December 31, 1999, gross interest income of
approximately $469,000 would have been recorded on loans accounted for on a non-
accrual basis if the loans had been current throughout the period.  No interest
income on non-accrual loans was included in income during 1999.

                                       14
<PAGE>

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

<TABLE>
<CAPTION>
                                                       At December 31,
                                            --------------------------------------
                                             1995    1996    1997    1998    1999
                                            ------  ------  ------  ------  ------
                                                        (In Thousands)
<S>                                         <C>     <C>     <C>     <C>     <C>
Loans past due 60-89 days:
 One- to four-family residential/(1)/.....  $1,272  $2,038  $3,014  $2,049  $2,538
 Commercial real estate and multi-family..     106      55      54      --      --
 Consumer and commercial business loans...     106      19      83       8     123
 Land loans...............................       1      --      --      11      --
                                            ------  ------  ------  ------  ------
  Total past due 60-89 days...............  $1,485  $2,112  $3,151  $2,068  $2,661
                                            ======  ======  ======  ======  ======
</TABLE>

______________
/(1)/  (Includes construction loans)

     Classification of Assets.  Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality 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 continuance 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 a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general 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 a savings institution classifies
problem assets as "loss," it is 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.  A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances.  The Bank regularly reviews the problem
loans in its portfolio to determine whether any loans require classification in
accordance with applicable regulations.


     The following table sets forth the aggregate amount of the Bank's
classified assets at the dates indicated.

<TABLE>
<CAPTION>
                                          At December 31,
                                   -----------------------------
                                    1997       1998        1999
                                   -----------------------------
                                            (In Thousands)
<S>                                <C>         <C>        <C>
Substandard assets/(1)(2)/.         $3,961     $4,752     $4,794
Doubtful assets/(2)/.......             --         --         --
Loss assets/(2)/...........             --         --         --
                                    ------     ------     ------
 Total classified
  assets/(2)/..............         $3,961     $4,752     $4,794
                                    ======     ======     ======
</TABLE>

_________________________
/(1)/ Includes REO and in-substance foreclosures.
/(2)/ Net of specific valuation allowances.

                                       15
<PAGE>

     The following table sets forth information regarding the Bank's delinquent
loans, REO and loans foreclosed in-substance, net of specific valuation
allowance, at December 31, 1999.

<TABLE>
<CAPTION>
                                                   Balance     Number
                                                 -----------  ---------
                                                 (Dollars In Thousands)
     <S>                                         <C>          <C>
     Residential real estate:
      Loans 60 to 89 days delinquent...........       $2,538         39
      Loans more than 89 days delinquent.......        4,022         40
     Commercial and multi-family real estate:
      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..............          221         15
     REO.......................................          775          8
                                                      ------        ---
        Total..................................       $7,556        102
                                                      ======        ===
</TABLE>

     Allowance for Loan Losses.  Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred.  The Bank regularly reviews its loan
portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses.  Such evaluation, which includes a review of all loans of which full
collectibility of interest and principal may not be reasonably assured,
considers, among other matters, the estimated net realizable value (or fair
value, where appropriate) of the underlying collateral.  Other factors
considered by management include the size and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods.  Management calculates the general allowance for loan losses in part
based on past experience, and in part based on specified percentages of loan
balances.  While both general and specific loss allowances are charged against
earnings, general loan loss allowances are added back to capital in computing
risk-based capital under OTS regulations.

     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.  Management believes that the Bank's current allowance for
loan losses is adequate; however, there can be no assurance that the allowance
for loan losses will be adequate to cover losses that may in fact be realized in
the future or that additional provisions for loan losses will not be required.
Further, as the Bank is expanding its portfolio of commercial business loans,
which are deemed to have greater credit risk than single family mortgage loans,
management of the Bank expects to provide greater allowances for loan losses
than have been considered necessary in the past.

                                       16
<PAGE>

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

<TABLE>
<CAPTION>
                                                                        At December 31,
                                                   ------------------------------------------------------
                                                     1995       1996        1997       1998      1999
                                                   ---------  ---------  ---------  --------   ----------
                                                                   (Dollars in Thousands)
<S>                                                <C>        <C>        <C>        <C>        <C>
Total net loans receivable outstanding...........  $532,333   $661,700   $861,257   $977,166   $1,164,421
                                                   ========   ========   ========   ========   ==========
Average net loans receivable outstanding.........  $490,088   $605,507   $735,949   $917,647   $1,067,107
                                                   ========   ========   ========   ========   ==========
Allowance balance (at beginning of period).......  $  2,566   $  2,265   $  2,263   $  3,294   $    3,226
Reclassification of valuation allowances
  on in-substance foreclosure....................        --         --         --         --           --
Acquired as part of Acquisition of BankBoynton:
 Real estate.....................................        --         --        208         --           --
 Consumer........................................        --         --        959         --           --
Provision for losses:
 Real estate.....................................      (199)       133        165        115          379
 Consumer and commercial business loans..........       (11)        31          5        (38)          84
Charge-offs:
 Real estate.....................................       (89)      (145)       (98)       (85)         (48)
 Consumer and commercial business loans..........        (2)       (21)      (208)       (60)         (32)
Recoveries:
 Real estate.....................................        --         --         --         --           --
 Consumer and commercial business loans..........        --         --         --         --           --
                                                   --------   --------   --------   --------   ----------
    Allowance balance (at end of period).........  $  2,265   $  2,263   $  3,294   $  3,226   $    3,609
                                                   ========   ========   ========   ========   ==========
Allowance for loan losses as a percent of net
   loans receivable at end of period.............      0.43%      0.34%      0.38%      0.33%        0.31%
Net loans charged-off as a percent of average
 loans outstanding...............................      0.02%      0.03%      0.04%      0.01%        0.01%
Ratio of allowance for loan losses to total
 non-performing loans at end of period/(1)/......    121.51%     68.78%    101.39%    100.59%      131.57%
Ratio of allowance for loan losses to total
 non-performing loans, REO and in-substance
 foreclosures at end of period/(1)/..............     90.35%     66.89%     78.13%     78.42%      102.59%
</TABLE>

_____________________
/(1)/  Net of specific reserves.

     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.

<TABLE>
<CAPTION>
                                                                                     At December 31,
                                                        --------------------------------------------------------------------------
                                                                 1997                        1998                   1999
                                                        -------------------------  -------------------------  --------------------
                                                                      % of Loans                 % of Loans            % of Loans
                                                                       In Each                    In Each               In Each
                                                                     Category to                Category to           Category to
                                                          Amount     Total Loans     Amount     Total Loans   Amount  Total Loans
                                                        -----------  ------------  -----------  ------------  ------  ------------
                                                                                  (Dollars in Thousands)
<S>                                                     <C>          <C>           <C>          <C>           <C>     <C>
Balance at end of period applicable to:
 One- to four-family residential mortgage.............       $1,547        82.86%       $2,128        83.18%  $1,360        77.78%
 Commercial real estate and multi-family residential..          441         7.04           753         7.04      729         9.30
 Land loans...........................................          209         1.32           203         0.81      146         0.77
 Other................................................        1,097         8.78           142         8.97    1,374        12.15
                                                             ------       ------        ------       ------   ------       ------
  Total allowance for loan losses.....................       $3,294       100.00%       $3,226       100.00%  $3,609       100.00%
                                                             ======       ======        ======       ======   ======       ======
</TABLE>

Investment Activities

     In prior years, the Bank increased the percentage of its assets held in its
investment portfolio as part of its strategy of maintaining higher levels of
liquidity which improve the Bank's interest rate risk position. The Bank's
investment portfolio comprises U.S. government and agency securities, corporate
debt securities, municipal bonds, FHLB Stock and interest earning deposits.  The
carrying value of the Bank's investment

                                       17
<PAGE>

securities totaled $100.4 million at December 31, 1999, compared to $111.0
million at December 31, 1998.

     The Bank's interest-earning deposits due from other financial institutions
with original maturities of three months or less, totaled $19.1 million at
December 31, 1999, compared to $32.1 million at December 31, 1998.

     The Bank is required under federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short term securities and
certain other investments.  See "Regulation--Federal Regulations--Liquidity
Requirements" below and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" in the
Annual Report.  The Bank generally has maintained a portfolio of liquid assets
that exceeds regulatory requirements.  Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of yield that
will be available in the future, as well as management's projections as to the
short term demand for funds to be used in the Bank's loan origination and other
activities.

     Investment Portfolio.  The following tables set forth the carrying value of
the Bank's investments at the dates indicated.  At December 31, 1999, the market
value of the Bank's investments was approximately $100.4 million.  As allowed by
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities,"
the Bank declared its investment in U.S. 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 FHLB stock at book value, which
approximates market value.

<TABLE>
<CAPTION>
                                                At December 31,
                                          ---------------------------
                                           1997      1998      1999
                                          -------  --------  --------
                                                (In Thousands)
<S>                                       <C>      <C>       <C>
U.S. Government and agency obligations..  $13,861  $ 15,924  $ 26,317
Corporate debt securities...............       --    44,488    38,959
Municipal bonds.........................    2,216     2,900     2,742
Interest-earning deposits...............   33,688    32,075    19,065
FHLB stock..............................   11,955    15,658    13,354
                                          -------  --------  --------
 Total investments......................  $61,720  $111,045  $100,437
                                          =======  ========  ========
</TABLE>

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

     At December 31, 1999, the Bank's investment in trust preferred securities
was 2.3% of its assets and 34.1% of its regulatory capital.  Most issues of
trust preferred securities appear to be fixed rate and unrated as to credit risk
including Fidelity Bankshares, Inc.'s issue of "Guaranteed Preferred Beneficial
Interests in Company's Debentures."  However, the Bank's investment policy
specifically restricts its investment in such securities to $50 million,
investment grade and floating rate to improve its interest rate risk.  The Bank
appealed to the OTS to permit it to continue its investment at current levels
and noted in its appeal that its investments had floating interest rates and the
issuers did not have the option to extend the maturities.  The OTS has approved
the Bank maintaining its current market investment in these securities but not
to increase its investment.

                                       18
<PAGE>

     Investment Portfolio Maturities.  The following table sets forth the
scheduled maturities, amortized cost, market values and average yields for the
Bank's investment securities at December 31, 1999.

<TABLE>
<CAPTION>
                                                                   At December 31, 1999
                             ---------------------------------------------------------------------------------------------
                                One Year or Less        One to Three Years      Three to Five Years     Over Five Years
                             -----------------------  -----------------------  ---------------------  --------------------
                                         Annualized               Annualized              Annualized            Annualized
                                          Weighted                 Weighted                Weighted              Weighted
                             Amortized     Average    Amortized     Average    Amortized    Average   Amortized   Average
                                Cost        Yield        Cost        Yield        Cost       Yield      Cost      Yield
                             ----------  -----------  ----------  -----------  ----------  ---------  ---------  --------
                                                                (Dollars in Thousands)
<S>                          <C>         <C>          <C>         <C>          <C>         <C>        <C>        <C>
Debt securities:
U.S. Government agency
 securities................     $ 2,000         6.1%     $17,000         5.5%      $5,000       6.3%    $ 2,832      7.3%
Corporate debt Securities..          --          --           --          --           --        --      40,741      6.8
Municipal bonds............         666         4.0        1,478         3.9          285       3.9         357      3.8
FHLB stock.................      13,354         7.5           --          --           --        --          --       --
Interest-earning deposits..      19,065         5.0           --          --           --        --          --       --
                                -------         ---   ----------  ----------   ----------  --------     -------      ---
   Total...................     $35,085         6.0%     $18,478         5.4%      $5,285       6.2%    $43,930      6.8%
                                =======         ===   ==========  ==========   ==========  ========     =======      ===

<CAPTION>
                                     At December 31, 1999
                             ------------------------------------------
                                              Total
                             ------------------------------------------
                                                             Annualized
                                                   Average    Weighted
                              Amortize   Market    Life in    Average
                                Cost     Value    Years/(1)/   Yield
                              --------  --------  ----------  ---------
                                        (Dollars in Thousands)
<S>                           <C>       <C>       <C>         <C>
Debt securities:
U.S. Government agency
 securities................   $ 26,832  $ 26,317         2.7      5.9%
Corporate debt Securities..     40,741    38,959        28.0      6.8
Municipal bonds............      2,786     2,742         2.4      3.9
FHLB stock.................     13,354    13,354          --      7.5
Interest-earning deposits..     19,065    19,065          --      5.0
                              --------  --------        ----      ---
   Total...................   $102,778  $100,437        17.3      6.2%
                              ========  ========        ====      ===
</TABLE>
_________________________________
/(1)/ Total weighted average life in years calculated only on United States
      Government agency securities, corporate debt securities and municipal
      bonds.

                                       19
<PAGE>

Sources of Funds

     General.  Deposits are the major source of the Bank's funds for lending and
other investment purposes.  In addition to deposits, the Bank derives funds from
the amortization and prepayment of loans and mortgage-backed securities, the
maturity of investment securities, operations and, if needed, advances from the
FHLB.  Scheduled loan principal repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions.  Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources or on a longer term basis for general business
purposes.

     Deposits.  Consumer and commercial deposits are attracted principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including non-interest-bearing demand accounts, NOW
accounts, passbook savings, money market deposits, term certificate accounts and
individual retirement accounts.  Deposit account terms vary according to the
minimum balance required, the period of time during which the funds must remain
on deposit, and the interest rate, among other factors. The Bank regularly
evaluates its internal cost of funds, surveys rates offered by competing
institutions, reviews the Bank's cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate.  The Bank does not
obtain funds through brokers.

     Deposit Portfolio.  The following table sets forth information regarding
interest rates, terms, minimum amounts and balances of the Bank's deposit
portfolio as of December 31, 1999.

<TABLE>
<CAPTION>
     Weighted                                                                         Percentage
     Average                                                        Minimum           of Total
  Interest Rate      Minimum Term   Checking and Savings Deposits   Amount  Balances  Deposits
------------------  --------------  ------------------------------  ------  --------  ---------
                                                                         (In Thousands)
<S>                 <C>             <C>                             <C>     <C>       <C>
0.00  %                  None       Non-interest-bearing demand     $    0  $  65,203      4.93%
0.75                     None       NOW accounts                       100    129,468      9.80
2.00                     None       Passbooks                          100    144,430     10.93
2.50                     None       Money market accounts            2,500     93,867      7.10

                                       Certificates of Deposit
                                    -----------------------------

4.55                 0 - 3 months   Fixed term, fixed rate           1,000  $  23,742      1.80%
5.70                 3 - 6 months   Fixed term, fixed rate           1,000     39,638      3.00
5.95                6 - 12 months   Fixed term, fixed rate           1,000    373,294     28.25
6.10                12 - 36 months  Fixed term, fixed rate           1,000    370,049     28.00
6.10                36 - 60 months  Fixed term, fixed rate           1,000     81,819      6.19
                                                                           ----------     -----
                                                                     Total $1,321,510     100.0%
                                                                           ==========     =====
</TABLE>

<PAGE>

          The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.

<TABLE>
<CAPTION>
                              Balance    Increase    Balance   Deposit    Increase    Balance   Deposit    Increase     Balance
                              12/31/95  (Decrease)   12/31/96     %      (Decrease)   12/31/97     %      (Decrease)    12/31/98
                             ---------  ---------   ---------  -------   ---------   ---------  -------   ---------   ----------
                                                                   (Dollars in Thousands)
<S>                          <C>        <C>         <C>        <C>       <C>         <C>        <C>       <C>         <C>
Noninterest bearing demand
 accounts..................  $  21,430    $ 4,976   $  26,406      3.8%   $  9,482   $  35,888      4.1%  $  21,114   $   57,002
NOW, Super NOW and funds
 transfer accounts.........     67,886      2,672      70,558     10.2      11,594      82,152      9.4      12,696       94,848
Passbook and statement
 accounts..................     86,471      1,063      87,534     12.6      17,548     105,082     12.1      22,412      127,494
Variable rate money market
 accounts..................     44,677       (665)     44,012      6.3      (1,877)     42,135      4.8       2,346       44,481
Time Deposits:
 Maturing within 12 months.    294,202     64,710     358,912     51.7      28,599     387,511     44.4    (133,230)     254,281
 Maturing within 12-36
  months...................     57,236     22,658      79,894     11.5      89,334     169,228     19.4     263,897      433,125
 Maturing beyond 36 months.     23,278      4,124      27,402      3.9      22,942      50,344      5.8      59,171      109,515
                             ---------    -------   ---------    -----    --------   ---------    -----   ---------   ----------

  Total....................  $ 595,180    $99,538   $ 694,718    100.0%   $177,622   $ 872,340    100.0%  $ 248,406   $1,120,746
                             =========    =======   =========    =====    ========   =========    =====   =========   ==========
<CAPTION>
                              Deposit    Increase     Balance    Deposit
                                 %       (Decrease)   12/31/99      %
                              -------    ---------  -----------  -------
                                       (Dollars in Thousands)
<S>                           <C>        <C>        <C>          <C>
Noninterest bearing demand
 accounts..................       5.1%   $  8,201   $   65,203      4.9%
NOW, Super NOW and funds
 transfer accounts.........       8.5      34,620      129,468      9.8
Passbook and statement
 accounts..................      11.4      16,936      144,430     10.9
Variable rate money market
 accounts..................       4.0      49,386       93,867      7.1
Time Deposits:
 Maturing within 12 months.      22.7     182,393      436,674     33.0
 Maturing within 12-36
  months...................      38.6     (63,076)     370,049     28.0
 Maturing beyond 36 months.       9.7     (27,696)      81,819      6.3
                                -----    --------   ----------   ------

  Total....................     100.0%   $200,764   $1,321,510   100.00%
                                =====    ========   ==========   ======
</TABLE>

                                       21
<PAGE>

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

<TABLE>
<CAPTION>
                                              At December 31,
                                     ---------------------------------
Rate                                    1997        1998        1999
----                                 ----------  ---------   ---------
                                             (In Thousands)
<S>                                  <C>         <C>         <C>
 1.01 - 2.00%......................  $    895    $  1,018    $    728
 2.01 - 3.00%......................       301          --          --
 3.01 - 4.00%......................         6           6          --
 4.01 - 5.00%......................    11,225     125,019     204,301
 5.01 - 6.00%......................   441,810     564,002     569,356
 6.01 - 7.00%......................   152,453     106,719     114,006
 7.01 - 8.00%......................       353         157         151
 8.01 - 9.00%......................        40          --          --
                                     --------    --------    --------
                                     $607,083    $796,921    $888,542
                                     ========    ========    ========
</TABLE>

   The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1999.

<TABLE>
<CAPTION>
                                                                                           Amount Due
                                                          --------------------------------------------------------------------
                                                          Less Than    1-2       2-3      3-4       4-5     After 5
                                                          One Year    Years     Years    Years     Years     Years      Total
                                                          ---------  --------  -------- -------- --------- ---------   -------
                                                                                           (In Thousands)
Rate
----
<S>                                                       <C>       <C>       <C>       <C>      <C>       <C>         <C>
  1.01 - 2.00%..........................................  $    663  $     65  $     --  $    --  $     --  $     --      $    728
  2.01 - 3.00%..........................................        --        --        --       --        --        --            --
  3.01 - 4.00%..........................................        --        --        --       --        --        --            --
  4.01 - 5.00%..........................................   179,435    22,081     1,195       47     1,543        --       204,301
  5.01 - 6.00%..........................................   473,251    61,857    17,921   11,871     3,638       818       569,356
  6.01 - 7.00%..........................................    44,952    31,845    33,180    3,582       140       307       114,006
  7.01 - 8.00%..........................................       114        --        37       --        --        --           151
                                                          --------  --------  --------  -------  --------  --------    ----------
                                                          $698,415  $115,848  $ 52,333  $15,500  $  5,321  $  1,125      $888,542
                                                          ========  ========  ========  =======  ========  ========    ==========
</TABLE>

     The following table indicates the amount of the Bank's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1999.

<TABLE>
<CAPTION>
                   Remaining Maturity                                         Amounts
                 ----------------------                                   --------------
                                                                          (In Thousands)
       <S>                                                               <C>
       Three months or less...................................              $   72,061
       Three through six months...............................                  83,481
       Six through twelve months..............................                  63,536
       Over twelve months.....................................                  36,436
                                                                            ----------
        Total.................................................              $  255,514
                                                                            ==========

</TABLE>

     The following table sets forth the net changes in the deposit activities of
the Bank for the periods indicated.

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
                                                                                             ----------------------------------
                                                                                                1997        1998        1999
                                                                                             ----------  ----------  ----------
                                                                                                    (In Thousands)
   <S>                                                                                       <C>         <C>         <C>
   Deposits................................................................................  $3,353,672  $4,359,705  $6,273,994
   Acquired as part of acquisition.........................................................      41,730          --          --
   Withdrawals.............................................................................   3,250,906   4,145,444   6,116,775
                                                                                             ----------  ----------  ----------
   Net increase before interest credited...................................................     144,496     214,261     157,219
   Interest credited.......................................................................      33,126      34,145      37,803
                                                                                             ----------  ----------  ----------
   Net increase in deposits................................................................  $  177,622  $  248,406  $  195,022
                                                                                             ==========  ==========  ==========
</TABLE>

                                       22
<PAGE>


Borrowings

     Savings deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes.  If the need
arises, the Bank, may rely upon advances from the FHLB and the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements.  Advances from the FHLB typically are
collateralized by the Bank's stock in the FHLB and a portion of the Bank's first
mortgage loans.  At December 31, 1999, the Bank had $247.1 million in FHLB
advances outstanding.

     The FHLB functions as a central reserve bank providing credit for the Bank
and other member savings institutions and financial institutions.  As a member,
the Bank is required to own capital stock in the FHLB and is authorized to apply
for advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed by,
the United States) provided certain standards related to creditworthiness have
been met.  Advances are made pursuant to several different programs.  Each
credit 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 FHLB's assessment of
the institution's creditworthiness.  All FHLB advances have fixed interest rates
and mature between one and 10 years, except for $40.0 million in such advances,
bearing interest at 4.55%, which matures daily and $25.0 million in such
advances, bearing interest at 6.17%, which matures in the third quarter, 2000.

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                      -------------------------------
                                        1997       1998       1999
                                      ---------  ---------  ---------
                                              (In Thousands)
<S>                                   <C>        <C>        <C>
FHLB advances:
 Maximum month-end balance..........  $239,091   $318,527   $310,976
 Balance at end of period...........   239,091    303,140    247,073
 Average balance....................   119,759    286,094    294,675

Weighted average interest rate on:
 Balance at end of period...........      6.41%      5.94%      5.81%
 Average balance for period.........      6.27%      6.06%      6.01%
</TABLE>

Competition

     The Bank's market area in Southeast Florida has a large concentration of
financial institutions, many of which are significantly larger and have greater
financial resources than the Bank, and all of which are competitors of the Bank
to varying degrees.  As a result, the Bank encounters strong competition both in
attracting deposits and in originating real estate and other loans.  Its most
direct competition for deposits has come historically from commercial banks,
brokerage houses, other savings associations, and credit unions in its market
area, and the Bank expects continued strong competition from such financial
institutions in the foreseeable future.  The Bank's market area includes
branches of several commercial banks that are substantially larger than the Bank
in terms of state-wide deposits.  The Bank competes for savings by offering
depositors a high level of personal service and expertise together with a wide
range of financial services.

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

     The Bank competes for loans primarily through the interest rates and loan
fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders.  Factors that affect

                                      23
<PAGE>

competition include general and local economic conditions, current interest rate
levels, and volatility of the mortgage markets.

     Based on total assets of $1.7 billion, the Bank was the largest savings
institution headquartered in Palm Beach County, and the Bank held approximately
5.6% of all financial institution deposits in Palm Beach County.

Subsidiary Activities

     The Bank has two active wholly owned subsidiaries.  Fidelity Realty and
Appraisal Service, Inc., a Florida corporation ("FRAS") primarily engaged in
providing appraisal services for the Bank and selling the Bank's REO.  At
December 31, 1999, FRAS had a cumulative deficit of $104,000.  For the year
ended December 31, 1999, FRAS had a net loss of $8,000.

     The Bank's second subsidiary, Florida Consolidated Agency, Inc., 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 will operate as an independent agency and
licensed agents will make insurance products available through the Bank's branch
offices.  Fidelity Insurance occurred a net loss for the period from July 16
through December 31, 1999 of $62,000.

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

Personnel

     As of December 31, 1999, the Bank had 477 full-time and 57 part-time
employees.  None of the Bank's employees is represented by a collective
bargaining group.  The Bank believes its relationship with its employees to be
good.

Regulation

     As a federally chartered, SAIF-insured savings association the Bank is
subject to examination, supervision and extensive regulation by the OTS, and the
FDIC.  The Bank is a member of and owns stock in the FHLB of Atlanta, which is
one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors.

     The Bank also is subject to regulation by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") governing reserves to be
maintained against deposits and certain other matters. The Holding Company will
be subject to supervision and regulation by the OTS.

                                       24
<PAGE>

     The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that they may
find in the Bank's operations.  The FDIC also examines the Bank in its role as
the administrator of the SAIF.  The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.  Any change in such regulation,
whether by the FDIC, OTS, or Congress, could have a material adverse impact on
the Holding Company and the Bank and their operations.

     The Federal Deposit Insurance Corporation Improvement Act of 1991.  The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
primarily addresses the recapitalization of the BIF, which insures the deposits
of commercial banks and savings banks.  In addition, FDICIA established a number
of new mandatory supervisory measures for savings associations and banks.

     Standards for Safety and Soundness.  FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits.  The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits or could lead
to material financial loss.  In addition the federal banking regulatory agencies
are required to prescribe by regulation standards specifying:  (i) maximum
classified assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of depository
institutions and depository institution holding companies.

     Financial Management Requirements.  Pursuant to FDICIA, in May 1993, the
FDIC adopted rules establishing annual independent audits and financial
reporting requirements for all depository institutions with  assets of more than
$500 million, their management and their independent auditors.  The rules also
establish new requirements for the composition, duties, and authority of such
institutions' audit committees and boards of directors, effective in fiscal
years beginning after December 31, 1992.  Among other things, all depository
institutions with assets in excess of $500 million are required to prepare and
make available to the public annual reports on their financial condition and
management, including statements of management's responsibility under
regulations relating to safety and soundness, and an assessment of the
institution's compliance with internal controls, laws and regulations.  The
institution's independent auditors are required to attest to these management
assessments.  Each such institution also is required to have an audit committee
composed of independent directors.  Audit Committees of large institutions
(institutions with assets exceeding $3.0 billion) must:  (i) include members
with banking or related financial management experience; (ii) have the ability
to engage their own independent legal counsel; and (iii) must not include any
large customers (as defined) of the institution.

Federal Regulations

     Regulatory Capital.  The capital requirements consist of a "tangible
capital requirement," a "leverage limit" and a "risk-based capital requirement."

     Under the tangible capital requirement, a savings association must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights.  Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS 115 is
excluded from the regulatory capital calculation.

                                       25
<PAGE>

     The leverage limit adopted by the OTS requires that savings associations
maintain "core capital" in an amount equal to at least 3% of adjusted total
assets.  The OTS, however, has proposed an amendment to this requirement that
would increase core capital requirements for nearly all savings associations, as
discussed below.  Core capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock, and
minority interests in the equity accounts of consolidated subsidiaries, plus
purchased mortgage servicing rights valued at the lower of 90% of fair market
value, 90% of original cost or the current amortized book value as determined
under generally accepted accounting principles ("GAAP"), and "qualifying
supervisory goodwill," less non-qualifying intangible assets.

     In addition, the OTS has proposed a rule that would limit the amount of
purchased mortgage servicing rights includable as core capital to 50% of such
capital.  No assurance can be given as to the final form of such regulation, the
date of its effectiveness, or whether it will differ materially from the
proposal. The proposal, if adopted as proposed, is not anticipated to have any
immediate effect on the Bank.

     Savings associations receiving a CAMEL rating of "1", the best possible
rating on a scale of 1 to 5, are required to maintain a ratio of  core capital
to adjusted total assets of 3%.  All other savings associations are required to
maintain minimum core capital of 4% to 5% of total adjusted assets.  In
determining the required minimum core capital ratio, the OTS will assess the
quality of risk management and the level of risk in each savings association on
a case-by-case basis.  At December 31, 1999, the Bank's ratio of core capital to
total adjusted assets was 6.6%.  The OTS prohibits savings associations from
disclosing their CAMEL ratings.  (See notes to consolidated financial
statements.)

     A savings association that does not meet the minimum regulatory capital
requirements because of the failure to satisfy the core capital requirement will
be required to submit a capital restoration plan to the OTS that sets forth in
reasonable detail the steps the association will take to be in compliance.  The
capital plans will be required to be filed within 60 days of the effective date
of the new regulation.  If the OTS rejects a savings association's capital plan,
the OTS may require an amended capital plan to be filed, or the OTS can take
supervisory action against the association.

     Under the risk-based capital requirement, a savings association must
maintain total capital (which is defined as core capital plus supplementary
capital) equal to at least 8.0% of risk-weighted assets.  A savings association
must calculate its risk-weighted assets by multiplying each asset and off-
balance sheet item by various risk factors, which range from 0% for cash and
securities issued by the United States Government or its agencies to 100% for
repossessed assets or loans more than 90 days past due. Supplementary capital
may include, among other items, cumulative perpetual preferred stock, perpetual
subordinated debt, mandatory convertible subordinated debt, intermediate-term
preferred stock, and general allowances for loan losses.  The allowance for loan
losses includable in supplementary capital is limited to 1.25% of risk-weighted
assets.  Supplementary capital is limited to 100% of core capital.

     The OTS and the FDIC generally are authorized to take enforcement action
against a savings association that fails to meet its capital requirements, which
action may include restrictions on operations and banking activities, the
imposition of a capital directive, a cease-and-desist order, civil money
penalties or harsher measures such as the appointment of a receiver or
conservator or a forced merger into another institution.  In addition, under
current regulatory policy, a savings association that fails to meet its capital
requirements is prohibited from paying any dividends.  Except under certain
circumstances, further disclosure of final enforcement actions by the OTS is
required.

     Federal Home Loan Bank System.  The Bank is a member of the Federal Home
Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional FHLBs.  As a
member of the FHLB, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to the greater of 1% of

                                       26
<PAGE>

its aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year, or 1/20 (or such greater
fraction as established by the FHLB) of outstanding FHLB advances. At December
31, 1999 the Bank had $13.4 million in FHLB of Atlanta stock, which was in
compliance with this requirement. In past years the Bank has received dividends
on its FHLB stock. Over the past five years such dividends have averaged 7.35%,
and was 7.75% for the year ended December 31, 1999. Certain provisions of FIRREA
require all 12 FHLBs to provide financial assistance for the resolution of
troubled savings associations and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
could cause rates on the FHLB advances to increase and could affect adversely
the level of FHLB dividends paid and the value of FHLB stock in the future.

     Each FHLB serves as a reserve or central bank for its members within its
assigned region.  It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System.  It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.  These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board (the "FHFB").

     FHLB advances must be fully secured by sufficient collateral as determined
by the FHLB.  Eligible collateral consists of mortgage loans less than 90 days
delinquent or securities evidencing interests therein, securities (including
mortgage-backed securities) issued, insured, or guaranteed by the federal
government or any agency thereof, FHLB deposits, and to a limited extent, real
estate with readily ascertainable value in which a perfected security interest
may be obtained.  Other forms of collateral may be accepted as collateralization
under certain circumstances.  All long-term advances are required to be used to
provide funds for residential home financing.  In addition, the FHFB has
established standards of community service that members must meet to maintain
access to long-term advances.  FHLBs are authorized to make short-term liquidity
advances to solvent associations in poor financial condition but with prospects
of improving, upon the request of the OTS.  In addition, pursuant to FHLB
regulations, each FHLB is required to establish programs for affordable housing
that involve interest subsidies from the FHLBs on advances to members engaged in
lending at subsidized interest rates for low- and moderate-income, owner-
occupied housing and affordable housing, and certain other community purposes.

     Qualified Thrift Lender Test.  The qualified thrift lender ("QTL") test
requires that a savings institution maintain at least 65% of its total portfolio
assets in "qualified thrift investments" on an average basis in nine out of
every twelve months.  For purposes of the test, portfolio assets are defined as
the total assets of the savings institution minus:  goodwill and other
intangible assets, the value of property used by the savings institution to
conduct its business and liquid assets not to exceed 20% of the savings
institution's total assets.

     Under the QTL's statutory and regulatory provisions, all forms of home
mortgages, home improvement loans, home equity loans and loans on the security
of other residential real estate and mobile homes as well as a designated
percentage of consumer loans are "qualified thrift investments," as are shares
of stock of the FHLB, investments or deposits in other insured institutions,
securities issued by the FNMA, FHLMC or GNMA and other mortgage-related
securities.  Investments in nonsubsidiary corporations or partnerships whose
activities include servicing mortgages or real estate development are also
considered qualified thrift investments in proportion to the amount of primary
revenue such entities derive from housing-related activities.  Also included in
qualified thrift investments are mortgage servicing rights, whether such rights
are purchased by the insured institution or created when the institution sells
loans and retains the right to service such loans.

                                       27
<PAGE>

     A savings institution that fails to become, or maintain its status as, a
qualified thrift lender must either become a bank (other than a savings bank) or
be subject to certain restrictions.  A savings institution that fails to meet
the QTL test and does not convert to a bank will be: (i) prohibited from making
an investment or engaging in activities that would not be permissible for
national banks; (ii) prohibited from establishing any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) ineligible to obtain new advances from any
Federal Home Loan Bank; and (iv) subject to limitations on the payment of
dividends comparable to the statutory and regulatory dividend restrictions
applicable to national banks.  Also, beginning three years after the date on
which the savings institution ceases to be a qualified thrift lender, the
savings institution would be prohibited from retaining any investment or
engaging in any activity not permissible for a national bank and would be
required to repay any outstanding advances to any FHLB.  A savings institution
may requalify as a qualified thrift lender if it thereafter complies with the
QTL test.

     As of December 31, 1999, the Bank was in compliance with the QTL
requirement.  At December 31, 1999, 83.1% of the Bank's assets were "qualified
thrift investments."

     Liquidity Requirements.  Federally insured savings associations are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of average daily balances of net withdrawable
deposit accounts and borrowings payable in one year or less.  The liquidity
requirement may vary from time to time (between 4.0% and 10.0%) depending upon
economic conditions and savings flows of all savings associations.  At the
present time, the required liquid asset ratio is 4.0%.

     For purposes of this ratio, liquid assets include specified short-term
assets (such as cash, certain time deposits, certain bankers' acceptances and
short-term United States Treasury obligations), and long-term assets such as
United States Treasury obligations of more than one and less than five years and
federal agency obligations with a minimum term of 18 months.  The regulations
governing liquidity requirements include as liquid assets debt securities hedged
with forward commitments obtained from dealers in United States Government
securities or Associations whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial futures position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of such securities.  FIRREA also
authorizes the OTS to designate as liquid assets certain mortgage-related
securities and certain mortgage loans (qualifying as backing for certain
mortgage-backed securities) with less than one year to maturity. Short-term
liquid assets currently must constitute at least 1% of an association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of the liquidity
requirements.  The monthly average liquidity ratio of the Bank for December 1999
was 21.3% and exceeded the then applicable requirement of 4.0%.

     Insurance of Accounts and Regulation by the FDIC.  The Bank's deposits are
insured up to $100,000 per insured member (as defined by law and regulation) by
the SAIF.  This insurance is backed by the full faith and credit of the United
States Government.  The SAIF is administered and managed by the FDIC.  As
insurer, the FDIC is authorized to conduct examinations of and to require
reporting by SAIF-insured associations.  It also may prohibit any SAIF-insured
association from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the SAIF.  The FDIC also has the authority to
initiate enforcement actions against savings associations, after first giving
the OTS an opportunity to take such action.

     The minimum annual deposit insurance premiums are currently assessed at the
rate of .065% of deposits for all SAIF-insured members.  The FDIC, however, is
authorized to raise premiums in certain circumstances related to fund losses and
severe economic circumstances and has exercised this authority

                                       28
<PAGE>

several times with respect to premiums paid to the BIF by commercial banks and
BIF-member savings associations.

     Limitations on Capital Distributions.  OTS regulations impose limitations
on all capital distributions by savings institutions.  Capital distributions
include cash dividends, payments to repurchase or otherwise acquire the savings
association's shares, payments to stockholders of another institution in a cash-
out merger, and other distributions charged against capital.  The rule
establishes three tiers of institutions.  An institution that exceeds all fully
phased-in capital requirements before and after a proposed capital distribution
("Tier 1 Association") may, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year up to (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its surplus capital at the beginning of the calendar year or (ii) 75%
of its net income over the most recent four-quarter period.  Any additional
capital distributions would require prior regulatory approval.  An institution
that meets its regulatory capital requirement, but not its fully phased-in
capital requirement before or after its capital distribution ("Tier 2
Association") may, after prior notice but without the approval of the OTS, make
capital distributions of:  up to 75% of its net income over the most recent four
quarter period if it satisfies the risk-based capital requirement that would be
applicable to it on January 1, 1993, computed based on its current portfolio; up
to 50% of its net income over the most recent four quarter period if it
satisfies the risk based capital standard that was applicable to it on January
1, 1991, computed based on its current portfolio; and up to 25% of its net
income over the most recent four quarter period if it satisfies its current
risk-based capital requirement.  In computing the institution's permissible
percentage of capital distributions, previous distributions made during the
prior four quarter period must be included.  A savings institution that does not
meet its current regulatory capital requirement before or after payment of a
proposed capital distribution ("Tier 3 Association") may not make any capital
distributions without the prior approval of the OTS.  In addition, the OTS would
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.  In addition,
FDICIA provides that, as a general rule, a financial institution may not make a
capital distribution if it would be undercapitalized after making the capital
distribution.  Also, an institution meeting the Tier 1 capital criteria which
has been notified that it needs more than normal supervision will be treated as
a Tier 2 or Tier 3 Association unless the OTS deems otherwise.  A recently
proposed OTS rule would amend the capital distribution regulation to provide
that a Tier 1 Association would be permitted to make capital distributions under
the Tier 1 standard or, consistent with the highest Tier 2 standard, at 75% of
its net income to date over the most recent four quarter period. As of December
31, 1999, the Bank was a Tier 1 Association.

     Investment Limitations.  FIRREA generally provides that state-chartered
savings associations may not engage as principal in any type of activity, or in
any activity in any amount not permitted for federally-chartered associations,
or directly acquire or retain any equity investment of a type or amount not
permitted for federally-chartered associations.  The FDIC has authority to grant
exceptions from these prohibitions (other than with respect to non-service
corporation equity investments) if it determines no significant risk to the
insurance fund is posed by the amount of the investment or the activity to be
engaged in if the Bank is and continues to be in  compliance with fully phased-
in standards.  Among activity restrictions applicable to federally-chartered
institutions that are also applicable to the Bank is the prohibition on
investing directly in equity securities or real estate (other than that used for
offices and related facilities or acquired through, or in lieu of, foreclosure).
In addition, the Bank is authorized to invest directly in service corporation to
a maximum of 2% of the Bank's assets, plus an additional 1% of assets if the
amount over 2% is used for specified community or intercity development
purposes.  Federal laws and regulations also impose certain limitations on
operations, including restrictions on loans to one borrower, transactions with
affiliates and affiliated persons and liability growth.

                                       29
<PAGE>

     FIRREA also imposed investment and lending restrictions that are applicable
to all federally- or state-chartered associations.  FIRREA provides that no
savings association may invest in corporate debt securities not rated in one of
the four highest rating categories by a nationally recognized rating
organization. FIRREA and FDICIA amend the authority of savings associations to
engage in transactions with affiliates or to make loans to certain insiders, by
making such transactions subject to Sections 23A, 23B, 22(g) and 22(h) of the
Federal Reserve Act.  Among other things, these provisions generally require
that these transactions with affiliates be on terms and conditions comparable to
those for similar transactions with non-affiliates.  In addition, these
affiliate transactions may be regulated further by the OTS to address safety and
soundness concerns.

     Holding Company Regulation.  The Company and the Mutual Holding Company are
holding companies within the meaning of the Home Owners' Loan Act of 1933
("HOLA").  As such, the Company and the Mutual Holding Company are registered
with and is subject to OTS examination and supervision as well as certain
reporting requirements.  In addition, the operations of the Company and the
Mutual Holding Company are subject to the Regulations as well as other
regulations promulgated by the OTS from time to time.  As a SAIF-insured
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in dealing with the Company and Mutual Holding Company and with
other persons affiliated with the Company and the Mutual Holding Company and
will continue to be subject to examination and supervision by the OTS and the
FDIC.

     Transactions with Affiliates.  Section 11 of HOLA provides that
transactions between an insured subsidiary of a holding company and an affiliate
thereof will be subject to the restrictions that apply to transactions between
banks that are members of the Federal Reserve System and their affiliates
pursuant to Sections 23A and 23B of the Federal Reserve Act.  Generally,
Sections 23A and 23B: (i) limit the extent to which a financial institution or
its subsidiaries may engage in "covered transactions" with an "affiliate," to an
amount equal to 10% of the institution's capital and surplus, and limit all
"covered transactions" in the aggregate with all affiliates to an amount equal
to 20% of such capital and surplus; and (ii) require that all transactions with
an affiliate, whether or not "covered transactions," be on terms substantially
the same, or at least as favorable to the institution or subsidiary as those
provided to a non-affiliate.  The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guarantee and similar types of
transactions.  Management believes that the Bank is in compliance with the
requirements of Sections 23A and 23B.  In addition to the restrictions that
apply to financial institutions generally under Sections 23A and 23B, Section 11
of the HOLA places three other restrictions on savings associations, including
those that are part of a holding company organization.  First, savings
associations may not make any loan or extension of credit to an affiliate unless
that affiliate is engaged only in activities permissible for bank holding
companies. Second, savings associations may not purchase or invest in affiliate
securities except for those of a subsidiary.  Finally, the Director is granted
authority to impose more stringent restrictions when justifiable for reasons of
safety and soundness.

     Extensions of credit by the Bank to executive officers, directors, and
principal stockholders and related interests of such persons are subject to
Sections 22 (g) and 22(h) of the Federal Reserve Act and Subpart A of the
Federal Reserve Board's Regulation O.  These rules prohibit loans to any such
individual where the aggregate amount exceeds an amount equal to 15% of an
institution's  unimpaired capital and surplus plus an additional 10% of
unimpaired capital and surplus in the case of loans that are fully secured by
readily marketable collateral, and/or when the aggregate amount outstanding to
all such individuals exceeds the institution's unimpaired capital and unimpaired
surplus.  These rules also provide that no institution shall make any loan or
extension of credit in any manner to any of its executive officers or directors,
or to any person who directly or indirectly, or acting through or in concert
with one or more persons, owns, controls, or has the power to vote more than 10%
of any class of voting securities of such institution ("Principal Stockholder"),
or to a related interest (i.e., any company controlled by such executive

                                       30
<PAGE>

officer, director, or Principal Stockholder), or to any political or campaign
committee the funds or services of which will benefit such executive officer,
director, or Principal Stockholder or which is controlled by such executive
officer, director, or Principal Stockholder, unless such loan or extension of
credit is made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, does not involve more than the normal risk of repayment or
present other unfavorable features, and the institution follows underwriting
procedures that are not less stringent than those applicable to comparable
transactions by the institution with persons who are not executive officers,
directors, Principal Stockholders, or employees of the institution. A savings
association is therefore prohibited from making any new loans or extensions or
credit to the savings association's executive officers, directors, and 10%
stockholders at different rates or terms than those offered to employees of the
Bank generally. The rules identify limited circumstances in which an institution
is permitted to extend credit to executive officers. Management believes that
the Bank is in compliance with Sections 22(g) and 22(h) of the Federal Reserve
Act and Subpart A of the Federal Reserve Board's Regulation O.

     The Federal Reserve System.  Federal Reserve Board regulations require all
depository institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and non-
personal time deposits.  Reserves of 3% must be maintained against total
transaction accounts of $54.0 million or less (after a $4.0 million exemption),
and an initial reserve of 10% (subject to adjustment by the Federal Reserve
Board to a level between 8% and 14%) must be maintained against that portion of
total transaction accounts in excess of such amount.  At December 31, 1999, the
Bank 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 that may be imposed by the OTS.  See "--
Federal Regulations--Liquidity Requirements."

     Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from the Federal Reserve Bank.

Gramm-Leach-Bliley Financial Services Modernization Act of 1999

     In November 1999, President Clinton signed into law the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999, federal legislation intended to
modernize the financial services industry by establishing a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers.  To the extent the
legislation permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
This could result in a growing number of larger financial institutions that
offer a wider variety of financial services than the Bank currently offers and
that can aggressively compete in the markets the Bank currently serves.

Federal and State Taxation

     Federal Taxation.  For federal income tax purposes, the Company files a
federal income tax return on a calendar year basis.  Because the Mutual Holding
Company owns less than 80% of the outstanding common stock of the Bank, it is
not permitted to file a consolidated federal income tax return with the Bank.
Because the Mutual Holding Company has nominal assets other than the stock of
the Bank, it will initially have no material federal income tax liability.

     Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, and "large"
associations, i.e., the quarterly average of the

                                       31
<PAGE>

association's total assets or of the consolidated group of which it is a member,
exceeds $500 million for the year, may no longer be entitled to use the
experience method of computing additions to their bad debt reserve. A "large"
association must use the direct write-off method for deducting bad debts, under
which charge-offs are deducted and recoveries are taken into taxable income as
incurred. If the Bank is not a "large" association, the Bank will continue to be
permitted to use the experience method. The Bank will be required to recapture
(i.e., take into income) over a six-year period its applicable excess reserves,
i.e, the balance of its reserves for losses on qualifying loans and
nonqualifying loans, as of the close of the last tax year beginning before
January 1, 1996, over the greater of (a) the balance of such reserves as of
December 31, 1987 (pre-1988 reserves) or (b) in the case of a bank which is not
a "large" association, an amount that would have been the balance of such
reserves as of the close of the last tax year beginning before January 1, 1996,
had the Bank always computed the additions to its reserves using the experience
method. Postponement of the recapture is possible for a two-year period if an
association meets a minimum level of mortgage lending for 1996 and 1997.

     If an association ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the association no longer qualifies as a bank.  The balance of the pre-
1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.

     Delaware Taxation.  As a Delaware holding company doing business in another
state, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual fee to the State of
Delaware.  The Company is also subject to an annual franchise tax imposed by the
State of Delaware.

     Florida Taxation.  Foreign corporations, like the Company, pay a 5 1/2% tax
on the portion of their net taxable income which is allocable to the State of
Florida.

     The Company 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.

                                       32
<PAGE>

Executive Officers of the Registrant

     Listed below is information, as of December 31, 1999, concerning the
Registrant's executive officers. There are no arrangements or understandings
between the Registrant and any of persons named below with respect to which he
or she was or is to be selected as an officer.

<TABLE>
<CAPTION>
Name                                                 Age                      Position and Term
---------------------------------------------------  ---  ----------------------------------------------------------
<S>                                                  <C>  <C>
Vince A. Elhilow                                      60  President since 1987 and Chief Executive Officer since
                                                          1992; Director of the Bank since 1984

Richard D. Aldred                                     55  Executive Vice President as of December 31, 1994;
                                                          Treasurer and Chief Financial Officer since 1985

Joseph C. Bova                                        55  Executive Vice President as of December 31, 1994; Lending
                                                          Operations Manager

Robert L. Fugate                                      51  Executive Vice President as of December 31, 1994; Banking
                                                          Operations Manager since 1982

Christopher H. Cook                                   56  Executive Vice President as of December 31, 1996;
                                                          Corporate Counsel since 1996

Patricia C. Clager                                    64  Vice President since 1990; Corporate Secretary since 1987;
                                                          Assistant to the Chairman of the Board
</TABLE>

ITEM 2.  PROPERTIES
-------------------

     The Bank conducts its business through its main office located in West Palm
Beach, Florida, and 20 additional full service branch offices located in Palm
Beach and Martin counties and two loan production offices located in Palm Beach
and Broward counties.  The following table sets forth certain information
concerning the main office and each branch office of the Bank at December 31,
1999.  The aggregate net book value of the Bank's premises and equipment was
$45.0 million at December 31, 1999.

<TABLE>
<CAPTION>
LOCATION                       OPENING DATE   OWNERSHIP    ANNUAL RENT
--------                       ------------  ------------  -----------
<S>                            <C>           <C>           <C>
Main Office                    12/22/52      Fee Simple/      $143,100
218 Datura St.                               Ground Lease
West Palm Beach, Florida

45th St.                       10/23/60      Fee Simple             --
4520 45th St.
West Palm Beach, Florida

Northlake                      11/15/65      Fee Simple             --
950 Northlake Blvd
Lake Park, Florida

Forest Hill                     4/05/71      Fee Simple             --
399 Forest Hill Blvd
West Palm Beach, Florida

Palm Beach                      6/18/73      Fee Simple             --
245 Royal Poinciana
Palm Beach, Florida

Century Corners                 6/25/73      Fee Simple             --
4835 Okeechobee Blvd
West Palm Beach, Florida
</TABLE>

                                       33
<PAGE>

<TABLE>
<CAPTION>
LOCATION                       OPENING DATE  OWNERSHIP     ANNUAL RENT
--------                       ------------  ------------  -----------
<S>                            <C>           <C>           <C>
Singer Island                   2/04/74      Fee Simple             --
1200 E. Blue Heron
Riviera Beach, Florida

Tequesta                        1/26/76      Ground Lease     $ 13,250
171 Tequesta Dr
Tequesta, Florida

Royal Palm Beach                3/15/76      Fee Simple             --
100 Royal Palm Beach Blvd
Royal Palm Beach, Florida

Boynton Beach                  12/19/77      Lease            $134,831
1501 Corporate Dr
Boynton Beach, Florida

West Lake Worth                12/03/79      Fee Simple             --
6535 Lake Worth Rd
Lake Worth, Florida

Wellington                      6/02/80      Fee Simple             --
12000 W. Forest Hill Blvd
Wellington, Florida

Delray Beach                   10/20/80      Ground Lease     $ 79,370
5017 W. Atlantic Ave
Delray Beach, Florida

Jensen Beach                    9/14/81      Fee Simple             --
1021 NE Jensen Beach Blvd
Jensen Beach, Florida

Bear Lakes                      5/15/89      Lease            $210,998
701 Village Blvd
West Palm Beach, Florida

Palm Beach Gardens              5/20/91      Lease            $159,872
10973 N. Military Tr
Palm Beach Gardens, Florida

Kanner/Monterey                 7/06/93      Fee Simple             --
2401 S. Kanner Highway
Stuart, Florida

Martin Square (Stuart)         12/13/93      Fee Simple             --
2980 South Federal Highway
Stuart, Florida

West Boynton Beach              4/24/95      Fee Simple             --
9875 Jog Road
Boynton Beach, Florida

West Forest Hill                9/30/96      Fee Simple             --
3989 Forest Hill Blvd.
West Palm Beach, Florida
</TABLE>

                                       34
<PAGE>

<TABLE>
<CAPTION>
LOCATION                             OPENING DATE  OWNERSHIP   ANNUAL RENT
--------                             ------------  ----------  -----------
<S>                                  <C>           <C>         <C>

Jupiter
1240 W. Indiantown Road              6/23/97       Fee Simple           --
Jupiter, Florida

Jupiter Farms
10058 Indiantown Road                3/16/98       Fee Simple           --
Jupiter, Florida

Vero Beach Loan Production Office
1701 Highway AIA                     6/15/98       Lease           $37,450
Vero Beach, Florida

Palm Springs                         1/11/99       Fee Simple           --
3320 South Congress Avenue
Palm Springs, Florida

Boca Raton Loan Portfolio            2/22/99       Lease           $58,205
7400 North Federal Highway
Suite C6
Boca Raton, Florida

Victoria Square Marketplace          5/03/99       Lease           $55,986
281 Port St. Lucie Boulevard
Port Lucie, Florida

Downtown Lake Worth                  6/21/99       Fee Simple           --
412 Lucerne Avenue
Lake Worth, Florida

Jupiter Markekplace                  7/20/99       Lease           $55,968
3757 Military Trail
Jupiter, Florida

Devonshire                           7/21/99       Lease           $12,720
800 Devonshire Boulevard
Palm beach Gardens, Florida

Grove Market                         8/18/99       Lease           $55,968
5060 Seminole Pratt-Whitney Road
Loxahatchee, Florida

West Hypoluxo                       10/18/99       Fee Simple           --
6400 Hypoluxo Road
Lantana, Florida

West Okeechobee                     10/12/99       Fee Simple           --
10031 Fox Trail Road South
Royal Palm Beach, Florida

Abacoa                              11/08/99       Fee Simple           --
5460 S. Central Boulevard
Jupiter, Florida

Belevedere Marketplace              12/22/99       Lease           $55,968
500 Belevedere Road
West Palm Beach, Florida
</TABLE>

     The Bank's accounting and record keeping activities are maintained on the
Fiserv Solutions, Inc. (Fiserv) service bureau system. The Bank also owns data
processing equipment it uses for its internal processing needs.

                                       35
<PAGE>

ITEM 3.   LEGAL PROCEEDINGS
---------------------------

     There are various claims and lawsuits in which the Bank is periodically
involved incident to the Bank's business.  In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.

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, 1999 to a vote of securityholders.

                                    PART II

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

     For information concerning the market for the Company's common stock, the
section captioned "Stockholder Information" in the Company's Annual Report to
Stockholders for the Year Ended December 31, 1999 (the "Annual Report to
Stockholders") is incorporated herein by reference.

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
-------   ----------------------------------------------

     The "Selected Consolidated Financial and Other Data" section of the
Company's Annual Report to Stockholders is incorporated herein by reference.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------------

     The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.

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

     For information regarding market risk see the "Management's Discussion and
Analysis of Financial Conditions and Results of Operation" section of the
Company's Annual Report to Stockholders which is incorporated herein by
reference.

ITEM 8.   FINANCIAL STATEMENTS
------------------------------

     The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.

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

     There were no changes in or disagreements with accountants in the Company's
accounting and financial disclosure during 1999.

                                       36
<PAGE>

                                   PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT
--------------------------------------------------

     Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement dated March 17, 2000
(the "Proxy Statement"), specifically the section captioned "Proposal I--
Election of Directors."  In addition, see Item 1. "Executive Officers of the
Registrant" for information concerning the Company's executive officers.

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

     Information concerning executive compensation is incorporated herein by
reference from the Registrant's Proxy Statement, specifically the sections
captioned "Proposal I--Election of Directors--Executive Compensation," "--
Directors' Compensation," and "--Benefits."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT
---------------------------------------------------------

     Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement.

ITEM 13.  CERTAIN TRANSACTIONS
------------------------------

     Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement.

                                    PART IV

ITEM 14.  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 Condition,
                  December 31, 1998 and 1999
          .  Consolidated Statements of Operations,
                  Years Ended December 31, 1997, 1998 and 1999
          .  Consolidated Statements of Changes in Stockholders' equity,
                  Years Ended December 31, 1997, 1998 and 1999
          .  Consolidated Statements of Cash Flows,
                  Years Ended December 31, 1997, 1998 and 1999
          .  Notes to Consolidated Financial Statements.

                                       37
<PAGE>

(a)(2)    Financial Statement Schedules
          -----------------------------

          No financial statement schedules are filed because the required
          information is not applicable or is included 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*

          10.1   Employment Agreement with Vince A. Elhilow**

          10.2   Severance Agreement with Richard D. Aldred**

          10.3   Severance Agreement with Robert Fugate**

          10.4   Severance Agreement with Joseph Bova**

          10.5   1994 Stock Option Plan for Outside Directors**

          10.6   1994 Incentive Stock Option Plan**

          10.7   Recognition and Retention Plan for Employees**

          10.8   Recognition Plan for Outside Directors**

          13     1999 Annual Report to Stockholders

          21     Subsidiaries of the Registrant

          27     Financial Data Schedule

          _______________
          *      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 with the Securities and Exchange Commission on May 13,
                 1997.

                                       38
<PAGE>

          ****   Filed with the Securities and Exchange Commission on August 14,
                 1997.

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

          None

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

     (d)  Not applicable.

                                       39
<PAGE>

                                   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 21, 2000               By:  /s/ Vince A. Elhilow
                                        --------------------
                                        Vince A. Elhilow
                                        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,                          Richard D. Aldred, Executive
    President and Chief                        Vice President, Chief
    Executive Officer                          Financial Officer and Treasurer
    (Principal Executive Officer)              (Principal Financial and
                                               Accounting Officer)

Date: March 21, 2000                      Date: March 21, 2000



By: /s/ Joseph B. Shearouse, Jr.          By:  /s/ Keith D. Beaty
    ----------------------------               ------------------
    Joseph B. Shearouse, Jr.,                  Keith D. Beaty, Director
    Chairman of the Board

Date: March 21, 2000                      Date: March 21, 2000



By: /s/ F. Ted Brown, Jr.                 By:  /s/ Donald E. Warren
    ---------------------                      --------------------
    F. Ted Brown, Jr., Director                Donald E. Warren, Director

Date: March 21, 2000                      Date: March 21, 2000