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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|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, 2002



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



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FIDELITY BANKSHARES, INC.

(Exact Name of
Registrant as Specified in its Charter)



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



(561)
803-9900

(Registrants Telephone Number including area code)



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



None



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



Common Stock, par value $.10 per share

(Title of Class)



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for
such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days.

YES  x    NO ̈



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



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

YES  x    NO ̈



As of March 3, 2003, there were
issued and outstanding 15,902,916 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, 2003 of $17.650 was $237,020,473.



DOCUMENTS INCORPORATED BY REFERENCE



|1. |  | Sections of Annual Report to Stockholders for the fiscal year ended December 31, 2002 (Parts II and IV).
|-- |  | --------------------------------------------------------------------------------------------------------



|2. |  | Proxy Statement for the 2003 Annual Meeting of Stockholders (Parts I and III).
|-- |  | ------------------------------------------------------------------------------



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PART I



ITEM 1. BUSINESS



Fidelity Bankshares, Inc.



Fidelity Bankshares, Inc. is a Delaware corporation which, on
May 15, 2001, became the holding company parent of Fidelity Federal Bank & Trust, following the completion of the second step conversion of Fidelity Bankshares, MHC. Prior to completion of the second step conversion
Fidelity Federal Bank & Trusts mid-tier stock holding company parent was also called Fidelity Bankshares, Inc. References to Fidelity Bankshares, Inc. includes references before and after the second step conversion. As a result
of the second step conversion, we raised $79.5 million in net proceeds, of which $40.9 million was infused into Fidelity Federal Bank & Trust and $38.6 million was retained by us. At December 31, 2002, the only significant asset of
Fidelity Bankshares, Inc. was its ownership of all of the outstanding stock of Fidelity Federal Bank & Trust.



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



In 1998, we sold $28.8 million of cumulative
trust preferred securities through Fidelity Capital Trust I, a special purpose subsidiary of Fidelity Bankshares, Inc. The cumulative trust preferred securities have a yield of 8.375% and are scheduled to mature on January 31, 2028. The cumulative
trust preferred securities may be redeemed in whole, but not in part, prior to January 31, 2003, in which case, holders of the cumulative trust preferred securities will receive the accrued but unpaid interest to the date fixed for redemption plus
107% of the principal amount. In the event the cumulative trust preferred securities are redeemed in whole or in part after January 31, 2003, holders will receive accrued and unpaid interest to the date fixed for redemption plus 100% of the
principal amount. The additional capital raised through the cumulative trust preferred stock issuance provided additional capital to support our asset growth.



Fidelity Federal Bank & Trust



Fidelity Federal Bank & Trust was chartered as a federal mutual savings and loan association in 1952. In 1983, we amended our charter
to become a federally chartered mutual savings bank. In January 1994, the Bank reorganized from a mutual savings bank to the stock form of ownership as part of its mutual holding company reorganization. In July 1999, we began offering insurance and
investment products through our wholly-owned subsidiary  Florida Consolidated Agency, Inc. In February 2000, we began offering trust services, and at December 31, 2002, we had $43.1 million of trust assets under administration, including $30.5
million under trust management.



We are primarily
engaged in the business of attracting deposits from the general public in our market area, and investing such deposits, together with other sources of funds, in loans secured by one- to four-family residential real estate. In recent years, we have
increased our commercial real estate lending, and our consumer and commercial business lending activities. Our goal over the next several years is to continue to increase the origination of these loans, consistent with our standards of safety and
soundness. To a lesser extent, we also originate multi-family loans, construction loans and land loans for single-family properties, and we invest in mortgage-backed securities issued or guaranteed by the United States





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Government or agencies thereof. In addition, we invest a portion of our assets in securities issued by the United States Government, cash and
cash equivalents, including deposits in other financial institutions, corporate securities and Federal Home Loan Bank stock. Our principal sources of funds are deposits and principal and interest payments on loans. Principal sources of income are
interest received from loans and investment securities. Our principal expense is interest paid on deposits and employee compensation and benefits.



Since 1998, we have actively expanded our branch network throughout our market area. From December 1998 through December 31, 2002 we have
opened 17 new branches.



Market Area



We are headquartered in West Palm Beach, Florida, and conduct
our business primarily in Palm Beach, Martin, and St. Lucie Counties in Florida. To a lesser extent, we conduct business in Indian River County. At December 31, 2002, we had 40 offices in our market area, of which 35 were located in Palm Beach
County, three were located in Martin County and two were located in St. Lucie County. Palm Beach, Martin and St. Lucie Counties are located in southeastern Florida, an area that has experienced considerable growth and development since the 1960s.
This three-county area had a total population of 1.5 million as of December 31, 2002. Due to a moderation of economic growth and migration into our market area, management believes that the growth of our market area will be more moderate in the
future.



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



Competition



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



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



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





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Fidelity
Bankshares, Inc. is the seventh largest financial institution holding company headquartered in Florida, and the largest headquartered in Palm Beach, Martin and St. Lucie counties based on total assets. Fidelity Federal Bank & Trusts share
of deposits in Palm Beach County increased from 3.1% in 1995 to 7.01% at September 30, 2002. Our 6.56% share of deposits in Palm Beach, Martin and St. Lucie counties ranked us fifth among financial institutions in the three county area at September
30, 2002, the most recent date for which market share data is available.



Lending Activities



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



In an effort to manage
interest rate risk, we make our interest-earning assets more interest-rate sensitive by originating adjustable rate loans, such as ARM loans and short- and medium-term consumer loans, including home equity loans. We also purchase both fixed rate and
adjustable rate mortgage-backed securities. At December 31, 2002, approximately $1.1 billion, or 54.8%, of our total loan portfolio, and $37.6 million, or 34.2%, of our mortgage-backed securities portfolio, consisted of loans or securities with
adjustable interest rates. We originate fixed rate mortgage loans generally with 15- to 30-year terms to maturity, collateralized by one- to four-family residential properties. One- to four-family fixed rate and adjustable rate residential mortgage
loans generally are originated and underwritten according to standards that allow us to resell such loans in the secondary mortgage market for the purpose of managing interest rate risk and liquidity. We periodically sell both, on a servicing
released and servicing retained basis and without recourse to us, a portion of our residential loans which have terms to maturity of fifteen years and greater. Generally, we retain in our portfolio all consumer, commercial real estate and
multi-family residential real estate loans.



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



|                                                |  | At December 31,        |          
|----------------------------------------------- |  | ---------------------- | ---------
|                                                |  | 1998                   |          
|                                                |  | Amount                 |          
|                                                |  | (Dollars in Thousands) |          
|Real estate loans:                              |  |                        |          
|One- to four-family(1)                          |  | $                      | 828,929  
|Construction loans                              |  |                        | 53,515   
|Land loans                                      |  |                        | 8,583    
|Commercial                                      |  |                        | 62,399   
|Multi-family                                    |  |                        | 12,272   
|                                                |  |                        |          
|Total real estate loans                         |  |                        | 965,698  
|                                                |  |                        |          
|                                               
|Other loans:                                    |  |                        |          
|Consumer(2)                                     |  |                        | 48,270   
|Commercial business                             |  |                        | 46,958   
|                                                |  |                        |          
|Total other loans                               |  |                        | 95,228   
|                                                |  |                        |          
|Total loans receivable                          |  |                        | 1,060,926
|                                               
|Less:                                           |  |                        |          
|Undisbursed loan proceeds                       |  |                        | 84,155   
|Unearned discount and net deferred fees (costs) |  |                        | (3,621   
|Allowance for loan losses                       |  |                        | 3,226    
|                                                |  |                        |          
|Total loans receivable -net                     |  | $                      | 977,166  
|                                                |  |                        |          
|Mortgage-backed securities                      |  | $                      | 389,263  
|                                                |  |                        |          

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|(1) |  | Includes participations of $2.2 million, $1.5 million, $1.1 million, $699,000 and $425,000 at December 31, 1998, 1999, 2000, 2001 and 2002 respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes primarily home equity lines of credit, second mortgages and automobile loans. At December 31, 2001 and 2002, the disbursed portion of equity lines of credit
totaled $40.2 million and $83.5 million, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Loan and Mortgage-Backed Securities Contractual Terms to Maturity. The following table sets forth certain information as of December 31, 2002, regarding the dollar amount of loans and mortgage-backed securities
maturing in our portfolio based on their contractual terms to maturity. The amounts shown represent outstanding principal balances, less loans in process, and are not adjusted for premiums, discounts, reserves, and unearned fees. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Adjustable and floating rate loans and mortgage-backed securities are included in the period in which interest rates are next
scheduled to adjust rather than in which they contractually mature, and fixed rate loans and mortgage-backed securities are included in the period in which the final contractual repayment is due. Fixed rate mortgage-backed securities are assumed to
mature in the period in which the final contractual payment is due on the underlying mortgage.



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|                                          |  | Within1 Year   |         | Over 1 Year to 3 Years |   | Over 3 Years to 5 Years |  | Over 5 Years to 10 Years |         | Over 10 Years to 20 Years |   | Beyond20Years |  | Total
|----------------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | ------------------------ | ------- | ------------------------- | - | ------------- |  | -----
|                                          |  | (In Thousands)
|Real estate loans:                        |  |               
|One- to four-family residential(1)        |  | $              | 210,695 |                        | $ | 85,915                  |  | $                        | 233,245 |                           | $ | 40,639        |  | $    
|Commercial, multi-family and land         |  |                | 366,998 |                        |   | 1,914                   |  |                          | 3,620   |                           |   | 3,695         |  |      
|Consumer and commercial business loans(2) |  |                | 195,550 |                        |   | 23,037                  |  |                          | 28,974  |                           |   | 18,395        |  |      
|                                          |  |                |         |                        |   |                         |  |                          |         |                           |   |               |  |      
|Total loans receivable(3)                 |  | $              | 773,243 |                        | $ | 110,866                 |  | $                        | 265,839 |                           | $ | 62,729        |  | $    
|                                          |  |                |         |                        |   |                         |  |                          |         |                           |   |               |  |      
|Mortgage-backed securities                |  | $              | 37,614  |                        | $ |                        |  | $                        |        |                           | $ | 4,976         |  | $    
|                                          |  |                |         |                        |   |                         |  |                          |         |                           |   |               |  |      

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

|(2) |  | Includes commercial business loans of $142.7 million.
|--- |  | -----------------------------------------------------

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



The following table sets forth at December 31, 2002, the
dollar amount of all fixed rate and adjustable rate loans and mortgage-backed securities due or repricing after December 31, 2003.



|                                          |  | Fixed          |         | Adjustable |   | Total  
|----------------------------------------- |  | -------------- | ------- | ---------- | - | -------
|                                          |  | (In Thousands)
|Real estate loans:                        |  |               
|One- to four-family residential           |  | $              | 740,820 |            | $ | 312,758
|Commercial, multi-family and land         |  |                | 24,023  |            |   | 3,382  
|Consumer and commercial business loans(1) |  |                | 88,474  |            |   |       
|                                          |  |                |         |            |   |        
|Total                                     |  | $              | 853,317 |            | $ | 316,140
|                                          |  |                |         |            |   |        
|Mortgage-backed securities                |  | $              | 70,443  |            | $ |       
|                                          |  |                |         |            |   |        

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|(1) |  | Includes commercial business loans of $32.2 million.
|--- |  | ----------------------------------------------------



One- to Four-Family Residential Real Estate Loans. Our primary lending activity consists of originating one- to four-family,
owner-occupied, residential mortgage loans secured by properties located in our market area. During 1995, we also began to originate one- to four-family residential loans secured by properties outside of our market area. These loans, which were
originated through a network of brokers throughout Florida, are subject to our customary underwriting standards. At December 31, 2002, $1.1 billion, or 54.9%, of our total loans receivable consisted of one- to four-family residential mortgage loans.
Of this amount, $412.2 million are secured by properties located outside of our market area, all of which are located in Florida.



We currently offer one- to four-family residential mortgage loans with terms typically ranging from 15 to 30 years, and with adjustable or
fixed interest rates. Originations of fixed rate mortgage loans versus ARM loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, customer preference, and loan products offered by our
competitors. Therefore, even if managements strategy is to emphasize originating ARM loans, market conditions may be such that there is greater demand for fixed rate mortgage loans. ARM loans originated and purchased totaled $210.1 million and
$163.2 million during the years ended December 31, 2001 and 2002, respectively.



Our fixed rate loans and adjustable rate loans are generally originated and underwritten according to standards that permit their sale in the secondary mortgage market. Whether we can or will sell
loans into the secondary market, however, depends on a number of factors, including the yield and the term of the loan, market conditions, and our current interest rate sensitivity. Our fixed rate mortgage loans amortize on a monthly basis with
principal and interest due each month. One- to four-family residential real estate loans



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often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or
prepay their loans.



We currently offer ARM loans
with initial interest rate adjustment periods of one, three, five, seven and ten years, based on changes in a designated market index. After the initial interest rate adjustment period, our one-, three-, five-, seven- and ten-year ARM loans give the
borrower the option of converting the ARM loan to a fixed rate mortgage for the remaining term of the loan at the prevailing interest rate for comparable fixed rate mortgages at the time of the conversion. The interest rate on one year ARM loans and
on the three-, five- and seven-year ARM loans that are not converted to fixed rate mortgage loans, adjusts annually with an annual interest rate adjustment limit of 200 basis points and with a maximum lifetime interest rate adjustment limit of 600
basis points above the initial interest rate. The interest rate on all owner-occupied one- to four-family ARM loans is 275 to 325 basis points above the appropriate United States Treasury security rates used as the index for ARM originations. We
originate ARM loans with initially discounted rates, which vary depending upon whether the initial interest rate adjustment period is one, three, five, seven or ten years. We determine whether a borrower qualifies for an ARM loan based on the fully
indexed rate of the ARM loan at the time the loan is originated. The outstanding principal balance of one- to four-family residential ARM loans, including construction ARM loans totaled $492.4 million, or 25.4%, of our total loan portfolio at
December 31, 2002.



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



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



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



Construction and Land
Loans. At December 31, 2002, $364.3 million, or 18.8% of our total loans receivable consisted of residential construction loans, of which $172.7 million had been disbursed. We currently offer fixed rate and adjustable rate residential
construction loans primarily for the construction of



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owner-occupied, single-family residences. These loans generally are offered to builders who have a contract for sale of the property, and to
owners who have a contract for construction of the property. In addition, we make construction loans to builders where the home is not under contract for sale to a buyer at the time the loan is closed. The gross amount of loans to these builders
totaled $112.7 million, of which $61.5 had been disbursed at December 31, 2002. Construction loans are generally structured to become permanent mortgage loans once the construction is completed, and are originated with terms of up to 30 years with
an allowance of up to one year for construction. Construction loans require the payment of interest only during the construction period. Funds are disbursed as construction is completed. Construction loans originated prior to December 31, 1999
generally had adjustable interest rates during the construction phase and converted either to a fixed rate mortgage loan or remained an adjustable rate mortgage loan at the end of the construction period. We also make construction loans with fixed
rates of interest. Substantially all of our construction loans are secured by properties located in our market area.



In addition, we originate land loans that are secured by unimproved or improved lots. At December 31, 2002, $29.2 million, or 1.5% of our
total loans receivable, consisted of land loans. Land loans are currently offered with one-year adjustable rates for terms of up to 15 years. The maximum loan-to-value ratio for our land loans is 80%. We currently use the applicable United States
Treasury securities rate as our index on newly originated land loans. Initial interest rates may be below the fully indexed rate. Substantially all of our land loans are secured by properties located in our market area.



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



Multi-Family Residential Real Estate Loans. At December 31, 2002 $45.3 million, or 2.3% of our total loans receivable
consisted of multi-family residential real estate loans. At December 31, 2002, we had 87 loans secured by multi-family properties, and substantially all of our multi-family residential real estate loans are secured by properties located within our
market area. At December 31, 2002, our multi-family residential real estate loans had an average principal balance of $604,000 and the largest multi-family residential real estate loan had a principal balance of $12.1 million. Multi-family
residential real estate loans currently are offered with adjustable interest rates, although in the past we originated fixed rate multi-family real estate loans. The terms of each multi-family residential real estate loan are negotiated on a
case-by-case basis. These loans typically have adjustable interest rates tied to a market index with a 600 basis point lifetime interest rate cap, and an interest rate floor equal to the initial rate. Multi-family residential real estate loans
generally amortize over 15 to 25 years. We may offer initial discount rates depending on market conditions, but generally the initial interest rate on multi-family residential real estate loans is tied to an applicable United States Treasury bill
rate. Our originations of multi-family loans have been limited in recent years.



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



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of 125%. In addition, a personal guarantee of the loan is required from the borrower. We require title insurance, fire and casualty
insurance, and flood insurance, if appropriate.



Loans secured by multi-family residential real estate generally have more credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and borrowers, the impact of the local economy on the borrowers ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family properties is typically dependent upon the successful operation of the real property securing the loan. If the cash flow from the multi-family property is reduced, the borrowers
ability to repay the loan may be impaired.



Commercial Real Estate Loans. The outstanding principal balance of loans secured by commercial real estate constituted approximately $413.8 million, or 21.4% of our total loans receivable, at December 31, 2002. Our
commercial real estate loans are secured by land or improved property such as offices, small business facilities, strip shopping centers, warehouses and other non-residential buildings. Commercial real estate loans are originated for up to 80% of
the appraised value of the property securing the loan. At December 31, 2002, substantially all of our commercial real estate loans were secured by properties located within our market area. At December 31, 2002, our commercial real estate loans had
an average principal balance of $1.1 million. At that date, our largest commercial real estate loan outstanding had a principal balance of $16.0 million and was secured by commercial property located in Palm Beach County, Florida. At December 31,
2002, this loan was performing in accordance with its terms. Commercial real estate loans are currently offered with adjustable rates. In the past we also offered fixed rate commercial real estate loans. The terms of each commercial real estate loan
are negotiated on a case-by-case basis. Generally, these loans have adjustable interest rates tied to a market index, with a 600 basis point lifetime interest rate cap, and a 200 basis point interest rate floor below the initial interest rate. We
may choose to offer initial discount rates depending on market conditions. We use the applicable United States Treasury bill rate as our index on newly originated loans. Our commercial real estate loans generally have terms of 15 to 25 years.



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



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



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secured by commercial real estate generally have higher interest rates than loans secured by one-to four-family residential real estate.



Consumer Loans. As of December 31,
2002, consumer loans totaled $141.3 million, or 7.3% of our total loans receivable. The principal types of consumer loans that we offer are home equity lines of credit, adjustable and fixed rate second mortgage loans and automobile loans. We also
offer boat loans and loans secured by deposit accounts and, to a much lesser extent, unsecured loans. We do not offer credit card loans. Consumer loans are offered on a fixed rate and adjustable rate basis with maturities generally of less than
fifteen years. Our home equity lines of credit and second mortgages are secured by the borrowers principal residence with a maximum loan-to-value ratio, including the principal balances of both the first and second mortgage loans, of 90%. Such
loans are offered on an adjustable-rate or fixed rate basis with terms of up to twenty years. At December 31, 2002, the disbursed portion of home equity lines of credit totaled $83.5 million, or 59.1% of consumer loans.



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



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



Commercial
Business Loans. We also offer commercial business loans to businesses in our market area. Historically, we have offered commercial business loans as a customer service to business account holders. However, our strategy is to substantially
increase our loans and services to commercial business enterprises. To support this strategy, we have hired additional lenders with commercial business lending expertise. The outstanding principal balance of our largest commercial business loan at
December 31, 2002 totaled $10.0 million, and was secured by vacant land located in Palm Beach County, Florida. At December 31, 2002, we had 636 commercial business loans outstanding with an aggregate balance of $146.2 million, or 7.6% of our total
loans receivable. The average commercial business loan balance was approximately $230,000. Commercial business loans are generally offered with adjustable interest rates only, which are tied to The Wall Street Journal prime interest rate,
plus up to 300 basis points. The loans are offered with prevailing terms of five years, but may range up to 15 years. In addition, we offer Small Business Administration loans.



Our underwriting standards for commercial business loans include a review of the borrowers credit
history and an assessment of the borrowers ability to meet existing obligations and payments on the



9



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proposed loan based on cash flows generated by the applicants business. The financial strength of each applicant also is assessed
through a review of financial statements provided by the applicant.



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



Loan Originations, Purchases, Sales, Processing, and Commitments. Our new loan originations come from a number of sources
including real estate broker referrals, existing customers, borrowers, builders, attorneys, and walk-in customers. Upon receiving a loan application, we obtain a credit report and employment verification to verify specific information
relating to the applicants employment, income, and credit standing. In the case of a real estate loan, we obtain an appraisal of the real estate intended to secure the proposed loan. We check the loan application file for accuracy and
completeness, and we verify the information provided. All loans of up to $322,700 may be approved by any one of our senior loan underwriters; loans between $322,700 and $500,000 must be approved by any one of our designated senior lending officers;
loans between $500,000 and $1,500,000 must be approved by at least two of our designated senior lending officers; and loans in excess of $1,500,000 must be approved by at least three members of the Board of Directors acting as a loan committee.
These limits are reduced for unsecured loans. The loan committee meets as needed to review and verify that loan approvals by management are within the scope of managements authority. After the loan is approved, a loan commitment letter is
promptly issued to the borrower. At December 31, 2002, we had commitments to originate and purchase $203.8 million of loans.



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



Borrowers who refinance an existing loan must satisfy our
underwriting criteria at the time they apply to refinance their loan, and must have been current in their loan payments for a minimum of one year. Approximately 2.83% of our loan originations during the year ended December 31, 2002, represented the
refinancing of loans that we hold. Refinancings have resulted in a decrease in our interest rate spread.



The Bank also allows borrowers to apply for a modification of their existing loan rate for a fee. These borrowers must satisfy our
underwriting criteria at the time of application and modification. Modifications do not allow for an increase in the outstanding principal balance of the loan. The new rate on these loans is normally 1/8 percent higher than the current rate for a
new loan. During the year ended December 31, 2002, we modified approximately $217.0 million in existing loans. Modifications decreased the yield on our loan portfolio which in turn decreased our interest rate spread.



In connection with local mortgage brokers, we have established
a mortgage loan broker solicitation program to supplement our internal originations of one- to four-family residential mortgage loans. Under



10



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this program, which is limited to the origination of one- to four-family residential mortgage loans, prospective borrowers complete loan
applications which are provided by mortgage brokers. All loans obtained in this manner are reviewed by our underwriting department in accordance with our customary underwriting standards. Total originations from all sources under the mortgage loan
broker solicitation program during 2001 and 2002 were $80.5 million and $87.9 million, respectively.



We have a correspondent relationship with the wholly-owned mortgage subsidiary of a major South Florida builder-developer, who has
substantial operations in our local service area, whereby the mortgage company originates, processes and closes home mortgages resulting from the sale of the developers inventory of homes. The mortgage files are sent to our underwriting
department and reviewed in accordance with our customary underwriting standards and, if we approve the loans, we will issue a commitment to purchase the loan from the mortgage company. We are not obligated to purchase any loans that are presented
for our review. Purchases are accomplished by assignment of the mortgage from the mortgage company to Fidelity Federal Bank & Trust. We purchased $35.1 million and $53.0 million, respectively, of loans from this provider during the years ended
2001 and 2002.



We also originate one- to
four-family residential real estate loans secured by properties located outside of our market area. These loans, which are originated through a network of brokers throughout Florida, are subject to our customary underwriting standards. At December
31, 2002, $1.4 billion, or 73.7%, of our total loans receivable consisted of loans, including residential construction loans, that were secured by one- to four-family residential real estate loans. Of this amount, $412.2 million were secured by
properties located outside of our market area.



We also purchase mortgage loans which are collateralized by residential real estate located primarily in Florida, although we have in the past purchased loans collateralized by properties located outside of Florida. Generally, we
only purchase residential loans that are underwritten to Freddie Mac or Fannie Mae guidelines. Commercial real estate loans that we may purchase must satisfy the underwriting standards of commercial real estate loans we originate. At December 31,
2002, $110.6 million, or 5.0% of all loans in our total loan portfolio, consisted of purchased loans. Of this amount, $4.5 million represented our interest in purchased loan participations. Our largest loan participation was a $2.3 million interest
in a loan secured by residential real estate in Palm Beach County, Florida.



We have not typically originated loans for sale. On occasion, we have sold loans where the borrower is located outside of our market area. Commencing in 2003, we plan to begin regular sales of mortgage
loans into the secondary markets. Generally, these sales will be on a servicing released basis for loans on properties outside our market area. The servicing will generally be retained on sold loans where the property is within our market area.



11



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



|                                                     |  | Year Ended December 31, |          
|---------------------------------------------------- |  | ----------------------- | ---------
|                                                     |  | 2000                    |          
|                                                     |  | (In Thousands)          |          
|Loan receivable-gross, beginning of period           |  | $                       | 1,271,436
|                                                     |  |                         |          
|Originations:                                        |  |                         |          
|Real estate:                                         |  |                         |          
|One-  to four-family residential(1)                  |  |                         | 239,612  
|Land loans                                           |  |                         | 16,356   
|Commercial                                           |  |                         | 37,428   
|Multi-family                                         |  |                         | 5,701    
|Other loans:                                         |  |                         |          
|Consumer                                             |  |                         | 66,040   
|Commercial business                                  |  |                         | 158,873  
|                                                     |  |                         |          
|Total originations                                   |  |                         | 524,010  
|                                                    
|Transfer of mortgage loans to foreclosed real estate |  |                         | (308     
|Loan purchases                                       |  |                         | 27,164   
|Repayments                                           |  |                         | (307,856 
|Loan sales                                           |  |                         | (22,900  
|                                                     |  |                         |          
|Net loan activity                                    |  |                         | 220,110  
|                                                     |  |                         |          
|Total loans receivable-gross, end of period          |  | $                       | 1,491,546
|                                                     |  |                         |          

---

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



Loan Origination Fees and
Costs and Other Income. In addition to interest earned on loans, we may also charge a fee, often expressed as a percentage of the principal amount of the loan, at the time the loan is originated. To the extent that loans are originated or
acquired for our portfolio, Statement of Financial Accounting Standards (SFAS) 91 Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring loans and Initial Direct Costs of Leases requires that we
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, 2002, we had $5.5 million of deferred loan origination fees, and $7.1 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.



We also receive other fees and, service charges that consist primarily of deposit transaction account service charges, late payment
charges, credit card fees, fees from the sale of insurance and annuity products and income from real estate owned operations. We recognized fees and service charges of $8.5 million, $11.9 million and $15.7 million for the years ended December 31,
2000, 2001 and 2002.



Loans-to-One
Borrower. Federal savings banks are subject to the same loans-to-one borrower limits as those applicable to national banks, which under current regulations restrict loans-to-one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate).
At December 31, 2002, our largest outstanding loan relationship with one borrower totaled $24.6 million. These loans are secured by various residential and commercial properties in northern Palm Beach County, Florida. At that date, our second
largest lending relationship totaled $20.6 million and is secured by commercial properties in Palm Beach County, Florida and land in Orange County, Florida. Our third largest lending relationship totaled $16.0 million, and is secured by commercial
real property under development in Palm Beach County,



12



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Florida. Our fourth largest lending relationship totaled $14.4 million and is secured by residential real property under development in
Broward County, Florida. Our fifth largest lending relationship totaled $12.9 million and is secured by commercial real property in Palm Beach County, Florida. All of the loans comprising these lending relationships are performing in accordance with
their terms. Our regulatory limit on the maximum total loans to a single or related group of borrowers was $28.3 million at December 31, 2002.



Mortgage-Backed Securities



We also invest in mortgage-backed securities issued or guaranteed by the United States Government or agencies thereof. These securities
consist primarily of fixed rate mortgage-backed securities issued or guaranteed by Fannie Mae or Freddie Mac. At December 31, 2002 our mortgage-backed securities had a market value of $109.8 million. Our objective in investing in mortgage-backed
securities varies from time to time depending upon market interest rates, local mortgage loan demand, and our level of liquidity. Mortgage-backed securities are more liquid than whole loans and can be readily sold in response to market conditions
and changing interest rates. Mortgage-backed securities purchased by us also have lower credit risk than mortgage loans because principal and interest are either insured or guaranteed by the United States Government or agencies thereof.



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



|                                                                                            |  | Year Ended December 31, |        
|------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                            |  | 2000                    |        
|                                                                                            |  | (In Thousands)          |        
|                                                                                           
|Mortgage-backed securities at beginning of period                                           |  | $                       | 336,212
|Purchases                                                                                   |  |                         |       
|Sales                                                                                       |  |                         | (17,396
|Repayments                                                                                  |  |                         | (37,634
|Discount (premium) amortization                                                             |  |                         | (718   
|Increase (decrease) in market value of securities held for sale in accordance with SFAS
115 |  |                         | 3,529  
|                                                                                            |  |                         |        
|Mortgage-backed securities at end of period                                                 |  | $                       | 283,993
|                                                                                            |  |                         |        





13



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



|                                      |  | At December 31,        |        
|------------------------------------- |  | ---------------------- | -------
|                                      |  | 2000                   |        
|                                      |  | $                      |        
|                                      |  | (Dollars In Thousands) |        
|                                     
|Mortgage-backed securities, net:      |  |                        |        
|Adjustable:                           |  |                        |        
|FreddieMac                            |  | $                      | 77,065 
|FannieMae                             |  |                        | 28,305 
|GinnieMae                             |  |                        |       
|                                      |  |                        |        
|Total adjustable                      |  |                        | 105,370
|                                      |  |                        |        
|Fixed:                                |  |                        |        
|FreddieMac                            |  |                        | 96,364 
|FannieMae                             |  |                        | 70,432 
|GinnieMae                             |  |                        | 11,827 
|                                      |  |                        |        
|Total fixed                           |  |                        | 178,623
|                                      |  |                        |        
|Accrued interest                      |  |                        | 1,466  
|                                      |  |                        |        
|Total mortgage-backed securities, net |  | $                      | 285,459
|                                      |  |                        |        



Delinquent Loans and
Classified Assets



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



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



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



Real estate
that we acquire as a result of foreclosure or by the deed in lieu of foreclosure is classified as real estate owned (REO) until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure,
it is recorded at its fair value, less estimated costs of disposal. If the value of the property is less than the loan, less any related specific loan loss provisions, the difference is charged against our earnings. Any subsequent write-down of REO
is also charged against earnings. At December 31, 2002, we had an insignificant amount of property that was acquired as the result of foreclosure and classified as REO. At December 31, 2002, we had nonperforming assets of $6.6 million, and a ratio
of nonperforming assets to total assets of 0.27%.



14



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



|                                                     |  | At December 31,        |      
|---------------------------------------------------- |  | ---------------------- | -----
|                                                     |  | 1998                   |      
|                                                     |  | (Dollars in Thousands) |      
|                                                    
|Delinquent Loans:                                    |  |                        |      
|One- to four-family residential                      |  | $                      | 3,687
|Commercial and multi-family real estate              |  |                        | 51   
|Consumer and commercial business loans(1)            |  |                        | 170  
|                                                     |  |                        |      
|Total delinquent loans                               |  |                        | 3,908
|Total REO                                            |  |                        | 907  
|                                                     |  |                        |      
|Total nonperforming assets                           |  | $                      | 4,815
|                                                     |  |                        |      
|Total nonperforming loans to net loans receivable(1) |  |                        | 0.40 
|Total nonperforming loans to total assets(1)         |  |                        | 0.25 
|Total nonperforming loans and REO to total assets    |  |                        | 0.31 

---

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



During the year ended December 31, 2002, gross interest income of approximately $367,000 would have been
recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the periods. No interest income on non-accrual loans was included in income during 2002.



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



|                                       |  | At December 31,
|-------------------------------------- |  | ---------------
|                                       |  | 1998           
|                                       |  | (In Thousands) 
|                                      
|Loans past due 60-89 days:             |  |                
|One- to four-family residential        |  | $              
|Consumer and commercial business loans |  |                
|Land loans                             |  |                
|                                       |  |                
|Total past due 60-89 days              |  | $              
|                                       |  |                



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



15



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savings institution to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses,
are designated special mention by management.



When we classify problem assets as either substandard or doubtful, we are required to establish 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 we classify problem assets as loss, we are required either
to establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or to charge off such amount. Our determination of which assets are classified, and the amount of the valuation allowances that we establish as a
result of asset classification is subject to review by the Office of Thrift Supervision, which can direct us to increase our general or specific loss allowances. We regularly review the problem loans in our portfolio to determine whether any loans
require classification in accordance with applicable regulations.



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



|                        |  | At December 31,
|----------------------- |  | ---------------
|                        |  | 2000           
|                        |  | (In Thousands) 
|                       
|Substandard assets(1)   |  | $              
|Loss assets             |  |                
|                        |  |                
|Total classified assets |  | $              
|                        |  |                

---

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



The following table sets forth information regarding our delinquent loans and REO, net of specific valuation allowances at December 31,
2002.



|                                               |  | Balance                |        | Number
|---------------------------------------------- |  | ---------------------- | ------ | ------
|                                               |  | (Dollars In Thousands)
|Residential real estate loans:                 |  |                       
|Loans 60 to 89 days delinquent                 |  | $                      | 4,997  |       
|Loans more than 89 days delinquent             |  |                        | 4,508  |       
|Commercial and multi-family real estate loans: |  |                       
|Loans 60 to 89 days delinquent                 |  |                        |       |       
|Loans more than 89 days delinquent             |  |                        |       |       
|Land loans:                                    |  |                        |        |       
|Loans 60 to 89 days delinquent                 |  |                        |       |       
|Loans more than 89 days delinquent             |  |                        |       |       
|Consumer and commercial business loans:        |  |                       
|60 days or more delinquent                     |  |                        | 2,082  |       
|Real estate owned                              |  |                        |       |       
|                                               |  |                        |        |       
|Total                                          |  | $                      | 11,587 |       
|                                               |  |                        |        |       



Allowance for Loan Losses. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable estimated losses inherent in
the loan portfolio, and to a lesser extent, unused commitments to provide financing. Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include a formula allowance and specific allowances for
identified problem loans and portfolio segments.



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



16



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judgement, affect the collectibility of the portfolio as of the evaluation date. During the past five years we have not made any changes to
our methodology for calculating of the allowance for loan losses.



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



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



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



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



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



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



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



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



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



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



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



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



The allowance also incorporates the results of measuring
impaired loans as provided in SFAS No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. These accounting standards
prescribe the measurement methods, income recognition and disclosure related to impaired loans. A loan is considered impaired when we determine that it is probable that we will be unable to collect all amounts due according to the original
contractual terms of the loan agreement. Impairment is measured by the difference between the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount) and the estimated present
value of the collateral, if the loan is collateral dependent. Impairment is recognized by adjusting an allocation of the existing allowance for loan losses. See Note 6 to the Notes to the Consolidated Financial Statements.



17



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



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



Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss
provisions may be deemed necessary. The allowance for loan losses is maintained at a level that represents managements best estimate of losses in the loan portfolio at the balance sheet date that were both probable and reasonably estimable.
However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses that may in fact be realized in the future or that additional provisions for loan losses will not be required. Further, as we expand our
portfolio of commercial real estate and loans that are not secured by real estate, which have a higher risk of loss than single family mortgage loans, we expect to provide greater allowances for loan losses than we have considered necessary in the
past.



18



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



|                                                                                                                     |  | At December 31,        |        
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                                                                     |  | 1998                   |        
|                                                                                                                     |  | (Dollars in Thousands) |        
|Total net loans receivable outstanding                                                                               |  | $                      | 977,166
|                                                                                                                     |  |                        |        
|Average net loans receivable outstanding                                                                             |  | $                      | 917,647
|                                                                                                                     |  |                        |        
|Allowance balance (at beginning of period)                                                                           |  | $                      | 3,294  
|                                                                                                                     |  |                        |        
|Provision for losses:                                                                                                |  |                        |        
|Residential real estate                                                                                              |  |                        | 637    
|Commercial and multi-family residential real estate                                                                  |  |                        | 335    
|Land loans                                                                                                           |  |                        | 22     
|Consumer and commercial business                                                                                     |  |                        | (917   
|                                                                                                                     |  |                        |        
|Total provisions for losses                                                                                          |  |                        | 77     
|                                                                                                                     |  |                        |        
|Charge-offs:                                                                                                         |  |                        |        
|Residential real estate                                                                                              |  |                        | (73    
|Commercial and multi-family residential real estate                                                                  |  |                        | (22    
|Land loans                                                                                                           |  |                        | (28    
|Consumer and commercial business                                                                                     |  |                        | (39    
|                                                                                                                     |  |                        |        
|Total charge-offs                                                                                                    |  |                        | (162   
|                                                                                                                     |  |                        |        
|Recoveries:                                                                                                          |  |                        |        
|Residential real estate                                                                                              |  |                        | 17     
|Commercial and multi-family residential real estate                                                                  |  |                        |       
|Land loans                                                                                                           |  |                        |       
|Consumer and commercial business                                                                                     |  |                        |       
|                                                                                                                     |  |                        |        
|Total recoveries                                                                                                     |  |                        | 17     
|                                                                                                                     |  |                        |        
|Allowance balance (at end of period)                                                                                 |  | $                      | 3,226  
|                                                                                                                     |  |                        |        
|Allowance for loan losses as a percent of net loans receivable at end of
period                                      |  |                        | 0.33   
|Net loans charged-off as a percent of average loans outstanding                                                      |  |                        | 0.01   
|Ratio of allowance for loan losses to total non-performing loans at end of
period                                    |  |                        | 82.55  
|Ratio of allowance for loan losses to total non-performing loans, REO and in-substance
foreclosures at end of period |  |                        | 67.00  





19



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



|                                          |  | At December 31,        |      
|----------------------------------------- |  | ---------------------- | -----
|                                          |  | 1998                   |      
|                                          |  | Amount                 |      
|                                          |  | (Dollars in Thousands) |      
|Balance at end of period applicable to:   |  |                        |      
|One-  to four-family residential mortgage |  | $                      | 1,941
|Construction                              |  |                        | 188  
|Commercial real estate                    |  |                        | 613  
|Multi-family residential                  |  |                        | 140  
|Land loans                                |  |                        | 203  
|Consumer                                  |  |                        | 77   
|Commercial business                       |  |                        | 64   
|                                          |  |                        |      
|Total allowance for loan losses           |  | $                      | 3,226
|                                          |  |                        |      



Investment Activities



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



In recent years, we increased the percentage of our assets held as investments, rather than as loans, as part of our strategy of
maintaining higher levels of liquidity and improving our interest rate risk position. Our investment portfolio consists of United States Government and agency securities, corporate debt securities, municipal bonds, Federal Home Loan Bank stock and
interest earning deposits. The carrying value of our investment securities totaled $201.7 million at December 31, 2002. Our interest-earning deposits due from other financial institutions with original maturities of three months or less totaled
$63.5 million at December 31, 2002.



Investment Portfolio.The following tables set forth the carrying value of our investments at the dates indicated. At December 31, 2002, the market value of our investments was approximately $201.7 million. As
allowed by SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, we classified our investment in United States Government and agency obligations as available for sale. As a result, such securities are now presented
at fair value, as determined by market quotations. The market value of investments includes interest-earning deposits and Federal Home Loan Bank stock at book value, which approximates market value.



20



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|                                         |  | At December 31,
|---------------------------------------- |  | ---------------
|                                         |  | 2000           
|                                         |  | (In Thousands) 
|U.S. Government and agency obligations   |  | $              
|Investment in trust preferred securities |  |                
|Municipal bonds                          |  |                
|Interest-earning deposits                |  |                
|Federal Home Loan Bank stock             |  |                
|                                         |  |                
|Total investments                        |  | $              
|                                         |  |                



In 1998
we began to diversify our investments in mortgage-backed securities by purchasing investment grade, floating rate trust preferred securities of other financial institutions. In making these investments, we relied on regulations which permit an
investment of up to 35% of our assets in commercial paper and corporate debt securities. In November 1998, the Office of Thrift Supervision issued Thrift Bulletin TB-73, which, among other things, stated concerns over investment in trust
preferred securities. These concerns included increased interest rate risks, because trust preferred securities generally carry fixed interest rates and some of these securities may have their maturities extended at the issuers option. As a
result, the Office of Thrift Supervision adopted limitations on investment in trust preferred securities to 15% of a federal savings banks equity capital. A savings bank may appeal this Office of Thrift Supervision regulatory limitation under
certain circumstances.



At December 31, 2002, our
investment in trust preferred securities totaled $35.4 million, or 1.5% of total assets and 18.9% of our regulatory capital. Our investment policy specifically limits our investment in trust preferred securities to $50.0 million, and requires that
the securities be investment grade and floating rate to decrease our interest rate risk. We have asked the Office of Thrift Supervision to permit us to maintain our investment in trust preferred securities at current levels. We noted in our appeal
that our investments had floating interest rates and that the issuers did not have the option to extend the maturities. The Office of Thrift Supervision has approved our request to maintain our current level of investment in trust preferred
securities, but has not approved an increase in our investment.



21



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Investment Portfolio Maturities. The following table sets forth the scheduled maturities, amortized cost, market values and average yields of our investment securities at December 31, 2002.



|                                         |  | At December 31, 2002   |       
|---------------------------------------- |  | ---------------------- | ------
|                                         |  | One Year or Less       |       
|                                         |  | Amortized Cost         |       
|                                         |  | (Dollars in Thousands) |       
|Investment securities:                   |  |                        |       
|U.S. Government agency securities        |  | $                      | 9,996 
|Investment in trust preferred Securities |  |                        |      
|Municipal bonds                          |  |                        | 140   
|Federal Home Loan Bank stock(2)          |  |                        | 12,919
|Interest-earning Deposits                |  |                        | 63,488
|                                         |  |                        |       
|Total                                    |  | $                      | 86,543
|                                         |  |                        |       

---

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

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





22



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Sources of Funds



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



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



Our deposit growth has benefitted from the expansion of our branch network to 40 branches at December 31,
2002. During this time, the growth in our checking accounts and savings accounts exceeded the growth in our certificates of deposit. Certificates of deposits generally are higher cost, and more interest rate sensitive deposits than checking and
savings accounts. At December 31, 2002, certificate of deposit accounts comprised 40.4% of our total deposits, as compared to 71.1% of our total deposits at December 31, 1998.



Deposit Portfolio. The following table sets forth information regarding interest rates, terms,
minimum amounts and balances of our deposit portfolio as of December 31, 2002.



|WeightedAverageInterest Rate |  | MinimumTerm            |  | Checking and Savings Deposits      |  | Minimum Amount |       | Balances |   | Percentage of Total Deposits | 
|---------------------------- |  | ---------------------- |  | ---------------------------------- |  | -------------- | ----- | -------- | - | ---------------------------- | 
|                             |  |                        |  |                                    |  | (In Thousands) |      
|0.00%                        |  | None                   |  | Non-interest bearing demand        |  | $              |      |          | $ | 209,695                      | 
|1.35                         |  | None                   |  | Interest bearing checking accounts |  |                | 100   |          |   | 388,179                      | 
|1.67                         |  | None                   |  | Passbooks and statement savings    |  |                | 100   |          |   | 340,709                      | 
|1.63                         |  | None                   |  | Money market accounts              |  |                | 2,500 |          |   | 192,003                      | 
|                            
|                             |  |                        |  | Certificates of Deposit            |  |                |       |          |   |                              | 
|2.77                         |  | 0 - 3 months           |  | Fixed term, fixed rate             |  |                | 1,000 |          |   | 177,649                      | 
|2.70                         |  | 3 - 6 months           |  | Fixed term, fixed rate             |  |                | 1,000 |          |   | 157,380                      | 
|2.37                         |  | 6 - 12 months          |  | Fixed term, fixed rate             |  |                | 1,000 |          |   | 170,029                      | 
|3.54                         |  | 12 - 36 months         |  | Fixed term, fixed rate             |  |                | 1,000 |          |   | 206,517                      | 
|4.36                         |  | 36 - 60 months         |  | Fixed term, fixed rate             |  |                | 1,000 |          |   | 55,977                       | 
|3.20                         |  | Greater than 60 months |  | Fixed term, fixed rate             |  |                | 1,000 |          |   | 203                          | 
|                             |  |                        |  |                                    |  |                |       |          |   |                              | 
|                             |  | Total                  |  |                                    |  |                |       |          | $ | 1,898,341                    | 
|                             |  |                        |  |                                    |  |                |       |          |   |                              | 







23



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



|                                   |  | Years Ended December 31, |          
|---------------------------------- |  | ------------------------ | ---------
|                                   |  | 2000                     |          
|DEPOSIT TYPE                       |  | Average Balances         |          
|                                   |  | (Dollars in Thousands)   |          
|Non-interest bearing demand        |  | $                        | 91,677   
|Interest bearing checking accounts |  |                          | 138,383  
|Passbooks                          |  |                          | 147,348  
|Money market accounts              |  |                          | 134,354  
|Certificates of deposit            |  |                          | 888,368  
|                                   |  |                          |          
|Total                              |  | $                        | 1,400,130
|                                   |  |                          |          



24



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



|             |  | At December 31,
|------------ |  | ---------------
|Rate         |  | 2000           
|             |  |                
|0.00 - 1.00% |  | $              
|1.01 - 2.00% |  |                
|2.01 - 3.00% |  |                
|3.01 - 4.00% |  |                
|4.01 - 5.00% |  |                
|5.01 - 6.00% |  |                
|6.01 - 7.00% |  |                
|7.01 - 8.00% |  |                
|             |  |                
|             |  | $              
|             |  |                



The
following table sets forth the amount and maturities of certificates of deposit at December 31, 2002.



|             |  | Amount Due        
|------------ |  | ------------------
|Rate         |  | Less Than One Year
|             |  | (In Thousands)    
|0.00 - 1.00% |  | $                 
|1.01 - 2.00% |  |                   
|2.01 - 3.00% |  |                   
|3.01 - 4.00% |  |                   
|4.01 - 5.00% |  |                   
|5.01 - 6.00% |  |                   
|6.01 - 7.00% |  |                   
|7.01 - 8.00% |  |                   
|             |  |                   
|             |  | $                 
|             |  |                   



The
following table indicates the amount of our certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2002. These deposits represented 11.7% of our total deposits at December 31, 2002.



|Remaining Maturity        |  | Amount        
|------------------------- |  | --------------
|                          |  | (In Thousands)
|Three months or less      |  | $             
|Three through six months  |  |               
|Six through twelve months |  |               
|Over twelve months        |  |               
|                          |  |               
|Total                     |  | $             
|                          |  |               



25



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



|                                      |  | Year Ended December 31,
|------------------------------------- |  | -----------------------
|                                      |  | 2000                   
|                                      |  | (In Thousands)         
|Deposits                              |  | $                      
|Withdrawals                           |  |                        
|                                      |  |                        
|Net increase before interest credited |  |                        
|Interest credited                     |  |                        
|                                      |  |                        
|Net increase in deposits              |  | $                      
|                                      |  |                        



Borrowings



Savings deposits are the primary source of
funds for our lending and investment activities and for general business purposes. If the need arises, we may borrow from the Federal Home Loan Bank of Atlanta and from the Federal Reserve Bank discount window to supplement our supply of lendable
funds and to meet deposit withdrawal requirements. Loans from the Federal Home Loan Bank are typically collateralized by our Federal Home Loan Bank stock and a portion of our first mortgage loans. At December 31, 2002, we had $253.4 million of
Federal Home Loan Bank advances outstanding. Our borrowings also include $28.8 million of junior subordinated debentures issued in connection with the issuance of 8.375% Cumulative Trust Preferred Securities by Fidelity Capital Trust I.



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



|                                   |  | Year Ended December 31, |        
|---------------------------------- |  | ----------------------- | -------
|                                   |  | 2000                    |        
|                                   |  | (Dollars in thousands)  |        
|Federal Home Loan Bank advances:   |  |                         |        
|Maximum month-end balance          |  | $                       | 329,743
|Balance at end of period           |  |                         | 274,365
|Average balance                    |  |                         | 291,691
|                                  
|Weighted average interest rate on: |  |                         |        
|Balance at end of period           |  |                         | 6.30   
|Average balance for period         |  |                         | 6.26   





26



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Subsidiary Activities



Fidelity Federal Bank & Trust has two
wholly owned subsidiaries. Fidelity Realty and Appraisal Service, Inc., a Florida corporation is primarily engaged in providing appraisal services for Fidelity Federal Bank & Trust and selling our real estate owned. At December 31, 2002,
Fidelity Realty and Appraisal Service, Inc. had total equity capital of $540,000, including retained earnings of $65,000. Fidelity Realty and Appraisal Service, Inc. had a net income of $99,000 for the year ended December 31, 2001, and net income of
$133,000 for the year ended December 31, 2002.



Our other subsidiary, Florida Consolidated Agency, Inc., a Florida corporation doing business as Fidelity Insurance, was established in 1999. On July 16, 1999, Fidelity Insurance acquired Dunn and Noel, Inc., a full-service insurance
agency based in Juno Beach, Florida. Dunn & Noel was founded in 1947, originally as Burns & Company. Fidelity Insurance operates as an independent insurance agency and licensed agents make insurance products available through Fidelity
Federal Bank & Trusts branch offices. Licensed representatives also sell a variety of investment products. Fidelity Insurance had net income of $153,000 and $237,000 for the years ended December 31, 2001 and 2002, respectively.



Fidelity Bankshares, Inc. has one subsidiary in
addition to the Bank, Fidelity Capital Trust I, which was incorporated, in December 1997 as a Delaware chartered statutory business trust. Fidelity Capital Trust I was formed for the purpose of issuing 8.375% Cumulative Trust Preferred Securities
(the Preferred Securities) which represent beneficial interests in Fidelity Capital Trust I. On January 21, 1998, Fidelity Capital Trust I completed the offer and sale of $28.75 million of Preferred Securities. In connection with the
offer and sale of the Preferred Securities, Fidelity Bankshares, Inc. issued an equivalent principal amount of 8.375% Junior Subordinated Deferrable Interest Debentures which were sold to Fidelity Capital Trust I for the equivalent of the net
proceeds of $27.3 million from the sale of the Preferred Securities. The Junior Subordinated Deferrable Interest Debentures are scheduled to mature on January 31, 2028, at which time the Preferred Securities will be redeemed. The annual interest
expense paid on the Junior Subordinated Deferrable Interest Debentures is approximately $2.4 million.



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



Personnel



As of December 31, 2002, we had 648 full-time and 54 part-time employees. None of our employees is represented by a collective bargaining
group. We believe our relationship with our employees is good.



27



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REGULATION



Fidelity Federal Bank & Trust is
examined and supervised extensively by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. This regulation and supervision limits the activities in which Fidelity Federal Bank & Trust may engage. Under this system of
federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following
completion of its examination, the federal agency critiques the institutions operations and assigns its rating (known as an institutions CAMELS). Under federal law, an institution may not disclose its CAMELS rating to the public.
However, Fidelity Federal Bank & Trust has been advised that it is not the subject of regulatory concern as a result of its examination by the Office of Thrift Supervision or the Federal Deposit Insurance Corporation. Fidelity Federal Bank &
Trust also is a member of, and owns stock in, the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. Fidelity Federal Bank & Trust also is regulated to a lesser extent by the Board
of Governors of the Federal Reserve System, governing reserves to be maintained against deposits and other matters. The Office of Thrift Supervision examines Fidelity Federal Bank & Trust and prepares reports for the consideration of its board
of directors on any operating deficiencies. Fidelity Federal Bank & Trusts relationship with its depositors and borrowers is also regulated to a great extent by both federal and state laws, especially in matters concerning the ownership of
deposit accounts and the form and content of Fidelity Federal Bank & Trusts mortgage documents. Any change in this regulation, whether by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the United States
Congress, could have a material adverse impact on the results of the operations of Fidelity Bankshares, Inc. and Fidelity Federal Bank & Trust.



Federal Regulation of Savings Institutions



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



Capital Requirements. The Office of Thrift
Supervision capital regulations require federal savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio; a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS rating system); and an 8%
risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest CAMELS rating), and
together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. Institutions must generally deduct from investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a
national bank.



The risk-based capital standards
for federal savings banks require the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted
assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weighted factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core



28



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(tier 1) capital is defined as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less in tangible assets other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted
assets, and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital may not exceed 100% of core capital.



The capital regulations also incorporate an
interest rate risk component. Savings institutions with above normal interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. For the present time, the
Office of Thrift Supervision has deferred implementation of the interest rate risk capital charge. At December 31, 2002, Fidelity Federal Bank & Trust met each of its capital requirements.



Loans-to-One-Borrower. Federal savings
associations generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus on an unsecured basis. An additional amount may be loaned, equal to 10% of unimpaired capital
and surplus, if the loan is secured by readily marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate. As of December 31, 2002, Fidelity Federal Bank & Trust was in
compliance with its loans-to-one-borrower limitations.



Qualified Thrift Lender Test. As a federal savings association, Fidelity Federal Bank & Trust is required to satisfy a qualified thrift lender test whereby it must maintain at least 65% of its portfolio
assets in qualified thrift investments, which consist primarily of residential mortgages and related investments, including mortgage-backed and related securities. Portfolio assets generally means total assets less
specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used to conduct business. A savings association that fails the qualified thrift lender test must either convert to a bank charter or
operate under specified restrictions. As of December 31, 2002, Fidelity Federal Bank & Trust maintained 75.8% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.



Capital Distributions. Office of Thrift
Supervision regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution. A savings institution must file an
application for Office of Thrift Supervision approval of a capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institutions net income for that year to date plus the
institutions retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or
OTS-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a holding company, as well as certain other
institutions, must still file a notice with the Office of Thrift Supervision at least 30 days before the board of directors declares a dividend or approves a capital distribution.



Any additional capital distributions would require prior Office of Thrift Supervision approval. If Fidelity
Federal Bank & Trusts capital falls below its required levels or the Office of Thrift Supervision notifies it that it is in need of more than normal supervision, Fidelity Federal Bank & Trusts ability to make capital
distributions could be restricted. In addition, the Office of Thrift Supervision may prohibit a proposed



29



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capital distribution by any institution, which would otherwise be permitted by regulation, if the Office of Thrift Supervision determines
that the distribution would constitute an unsafe or unsound practice.



Liquidity. Fidelity Federal Bank & Trust is required to maintain liquid assets at levels considered safe and sound by the Office of Thrift Supervision. Fidelity Federal Bank & Trusts
average liquidity ratio for the quarter ended December 31, 2002 was 7.75%.



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



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



Fidelity Federal Bank & Trusts authority to extend credit to executive officers, directors and 10% stockholders, as well as entities controlled by these persons, is currently governed by
Sections 22(g) and 22(h) of the Federal Reserve Act, and also by Regulation O. Among other things, these regulations generally require these loans to be made on terms substantially the same as those offered to unaffiliated individuals and do not
involve more than the normal risk of repayment. However, recent regulations now permit executive officers and directors to receive the same terms through benefit or compensation plans that are widely available to other employees, as long as the
director or executive officer is not given preferential treatment compared to other participating employees. Regulation O also places individual and aggregate limits on the amount of loans Fidelity Federal Bank & Trust may make to these persons
based, in part, on Fidelity Federal Bank & Trusts capital position, and requires approval procedures to be followed. At December 31, 2002, Fidelity Federal Bank & Trust was in compliance with these regulations.



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



30



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



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



Prompt Corrective Regulatory Action



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



31



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Insurance of Deposit
Accounts



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



Federal Home Loan Bank System



The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. Fidelity Federal Bank & Trust,
as a member of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of December 31, 2002, Fidelity Federal Bank & Trust was in compliance with this requirement. The Federal
Home Loan Banks are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their
members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members.



Federal Reserve System



The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction
accounts, such as negotiable order of withdrawal and regular checking accounts. At December 31, 2002, Fidelity Federal Bank & Trust was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the Office of Thrift Supervision.





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Holding Company Regulation



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



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



Federal law prohibits a savings and loan holding company,
directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision. In evaluating applications by holding companies
to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources, future prospects of Fidelity Federal Bank & Trust and institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive factors.



Prospective Regulation and Legislation



Regulations that affect Fidelity Federal Bank & Trust and Fidelity Bankshares, Inc. on a daily basis may be changed at any time, and the interpretation of the relevant law and regulations may also change because of new
interpretations by the authorities who administer those laws and regulations. Any change in the regulatory structure or the applicable statutes or regulations, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or
the U.S. Congress, could have a material impact of the business and operations of Fidelity Federal Bank & Trust and Fidelity Bankshares, Inc.



Legislation enacted several years ago provided that the Bank Insurance Fund and the Savings Association Insurance Fund would have merged
on January 1, 1999 if there were no savings associations as of that date. Congress did not enact legislation eliminating the savings association charter by that date and accordingly, the Bank Insurance Fund and the Savings Association Insurance Fund
have not been merged, and we are unable to predict whether such funds will eventually be merged and what effect, if any, that may have on our business.



33



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The USA PATRIOT Act



In response to the events of September 11,
2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October 26, 2001. The USA PATRIOT Act gives the federal government
new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title
III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial
institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.



Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:



| |  |  | Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and
controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Section 326 authorizes the Secretary of the Department of Treasury, in conjunction with other bank regulators, to issue regulations by October 26, 2002 that provide
for minimum standards with respect to customer identification at the time new accounts are opened.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Section 312 requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondence accounts in the United States
for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect
and report money laundering.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do
not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Bank regulators are directed to consider a holding companys effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act
applications.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The federal banking
agencies have begun to propose and implement regulations pursuant to the USA PATRIOT Act. These proposed and interim regulations would require financial institutions to adopt the policies and procedures contemplated by the USA PATRIOT Act.



Sarbanes-Oxley Act of 2002



On July 30, 2002, the President signed into law the
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), which implemented legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board that will enforce auditing,
quality control and



34



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



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



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



35



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Although we
anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or
financial condition.



TAXATION



Federal Taxation



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



As a result of the enactment of the Small Business Job Protection Act of 1996, all savings banks and savings associations may convert to a
commercial bank charter, diversify their lending, or be merged into a commercial bank without having to recapture any of their pre-1988 tax bad debt reserve accumulations. However, transactions that would require recapture of the pre-1988 tax bad
debt reserve include redemption of Fidelity Federal Bank & Trusts stock, payment of dividends or distributions in excess of earnings and profits, or failure by the institution to qualify as a bank for federal income tax purposes. At
December 31, 2002, Fidelity Federal Bank & Trust had a balance of approximately $7.4 million of pre-1988 bad debt reserves. A deferred tax liability has not been provided on this amount as management does not intend to make distributions, redeem
stock or fail certain bank tests that would result in recapture of the reserve.



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



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



State Taxation



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



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



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



36



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AVAILABILITY
OF ANNUAL REPORT



Our Annual Report on
Form 10-K may be obtained by accessing our website at www.FidelityFederal.com.



ITEM 2. PROPERTIES



Property



At
December 31, 2002, we conducted our business through our main banking office located in West Palm Beach, Florida, and 40 full service branch offices located in Palm Beach, Martin and St. Lucie Counties and two loan production offices located in Palm
Beach and Indian River Counties. The aggregate net book value of our premises and equipment was $67.8 million at December 31, 2002.



ITEM 3. LEGAL PROCEEDINGS



There are various claims and lawsuits in which the Bank is periodically involved incident to our business. We believe these legal
proceedings, in the aggregate, are not material to our financial condition or results of operations.



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, 2002 to a vote of securityholders.



PART II



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



Fidelity
Bankshares, Inc. common stock, is currently listed on the Nasdaq National Market under the symbol FFFL, and there is an established market for such common stock. At December 31, 2002, Fidelity Bankshares, Inc. had 19 market makers.



The following table sets forth the high and low
bid quotations for Fidelity Bankshares, Inc. common stock and cash dividends per share declared for the periods indicated. These quotations represent prices between dealers and do not include retail markups, markdowns, or commissions and do not
reflect actual transactions. This information has been obtained from monthly statistical summaries provided by the Nasdaq Stock Market. As of December 31, 2002, there were 14,860,327 shares of Fidelity Bankshares, Inc. common stock issued and
outstanding, net of shares held in Treasury. At December 31, 2002, Fidelity Bankshares, Inc. had approximately 3,555 stockholders of record. High and low bid information and cash dividend information for the quarter ended March 31 and June 30, 2001
have been adjusted to reflect the second step conversion of Fidelity Bankshares, MHC on May 15, 2001.



|Fiscal 2002                      |  | High Bid |        | Low Bid |   | Cash Dividend Declared
|-------------------------------- |  | -------- | ------ | ------- | - | ----------------------
|Quarter Ended December 31, 2002  |  | $        | 19.350 |         | $ | 17.200                
|Quarter Ended September 30, 2002 |  | $        | 22.100 |         | $ | 16.600                
|Quarter Ended June 30, 2002      |  | $        | 22.470 |         | $ | 17.700                
|Quarter Ended March 31, 2002     |  | $        | 18.420 |         | $ | 15.600                



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|Fiscal 2001                      |  | High Bid |        | Low Bid |   | Cash Dividend Declared
|-------------------------------- |  | -------- | ------ | ------- | - | ----------------------
|Quarter Ended December 31, 2001  |  | $        | 18.400 |         | $ | 12.900                
|Quarter Ended September 30, 2001 |  | $        | 15.350 |         | $ | 12.400                
|Quarter Ended June 30, 2001      |  | $        | 14.400 |         | $ | 10.760                
|Quarter Ended March 31, 2001     |  | $        | 11.794 |         | $ | 8.173                 



ITEM 6 . SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA



SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

OF FIDELITY BANKSHARES, INC. AND SUBSIDIARY



The following tables set forth selected
consolidated historical financial and other data of Fidelity Bankshares, Inc. for the periods and at the dates indicated. The information at December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002, is derived in part
from, and should be read together with, the audited Consolidated Financial Statements and Notes thereto of Fidelity Bankshares, Inc.



|                                                         |  | At December 31,                         
|-------------------------------------------------------- |  | ----------------------------------------
|                                                         |  | 1998                                    
|                                                         |  | (In thousands, except per share amounts)
|Selected Financial Condition Data:                       |  |                                         
|Total assets                                             |  | $                                       
|Loans receivable, net                                    |  |                                         
|Mortgage-backed securities and corporate debt securities |  |                                         
|Investment securities(2)                                 |  |                                         
|Deposits                                                 |  |                                         
|Total borrowings(1)                                      |  |                                         
|Stockholders equity                                     |  |                                         
|Book value per common share                              |  | $                                       
|Tangible book value per common share                     |  | $                                       

---

|(1) |  | Includes $28.8 million of junior subordinated debentures issued in connection with the issuance of 8.375% Cumulative Trust Preferred Securities by Fidelity Capital
Trust I.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Includes interest-bearing deposits, government and agency securities and Federal Home Loan Bank stock.
|--- |  | ------------------------------------------------------------------------------------------------------



38



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|                                                    |  | For the Years Ended December 31,        
|--------------------------------------------------- |  | ----------------------------------------
|                                                    |  | 1998                                    
|                                                    |  | (In thousands, except per share amounts)
|Selected Operating Data:                            |  |                                         
|Interest income                                     |  | $                                       
|Interest expense                                    |  |                                         
|                                                    |  |                                         
|Net interest income                                 |  |                                         
|Provision for loan losses                           |  |                                         
|                                                    |  |                                         
|Net interest income after provision for loan losses |  |                                         
|                                                    |  |                                         
|Other income                                        |  |                                         
|                                                    |  |                                         
|Non-interest expense                                |  |                                         
|                                                    |  |                                         
|Income before taxes                                 |  |                                         
|Income tax expense                                  |  |                                         
|                                                    |  |                                         
|Net income                                          |  | $                                       
|                                                    |  |                                         
|Income per common share:                            |  |                                         
|Basic(3)                                            |  | $                                       
|                                                    |  |                                         
|Diluted(3)                                          |  | $                                       
|                                                    |  |                                         

---

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



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



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



39



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|                                                                                             |  | At and for the Years ended December 31, |  
|-------------------------------------------------------------------------------------------- |  | --------------------------------------- | -
|                                                                                             |  | 1998                                    |  
|Selected Financial Ratios and Other Data:                                                    |  |                                         |  
|Return on average assets (ratio of net income to average total assets)                       |  | 0.52                                    | %
|Return on average stockholders equity (ratio of net income to average
stockholders equity) |  | 8.33                                    | %
|Non-interest income to average assets                                                        |  | 0.61                                    | %
|Non-interest expense to average assets                                                       |  | 2.08                                    | %
|Net interest rate spread during the period                                                   |  | 2.35                                    | %
|Net interest margin (net interest income to average interest earning
assets)                 |  | 2.48                                    | %
|Ratio of average interest-earning assets to average interest-bearing
liabilities             |  | 102.8                                   | %
|Efficiency ratio(2)                                                                          |  | 70.65                                   | %
|Dividend payout ratio                                                                        |  | 84.82                                   | %
|                                                                                            
|Asset Quality Ratios:                                                                        |  |                                         |  
|Nonperforming loans to total loans at end of period                                          |  | 0.40                                    | %
|Allowance for loan losses to nonperforming loans at end of period                            |  | 82.55                                   | %
|Allowance for loan losses to total loans at end of period                                    |  | 0.33                                    | %
|Non-performing assets to total assets at end of period                                       |  | 0.31                                    | %
|Ratio of net charge-offs during the period to average loans outstanding during the
period    |  | 0.01                                    | %
|                                                                                            
|Capital Ratios:                                                                              |  |                                         |  
|Stockholders equity to total assets at end of period                                        |  | 5.42                                    | %
|Average stockholders equity to average total assets                                         |  | 6.25                                    | %
|Tangible capital to tangible assets at end of period(3)                                      |  | 6.65                                    | %
|Core capital to adjusted tangible assets at end of period(3)                                 |  | 6.65                                    | %
|Risk-based capital to risk-weighted assets at end of period(3)                               |  | 12.23                                   | %
|                                                                                            
|Other Data:                                                                                  |  |                                         |  
|Number of branch offices at end of period                                                    |  | 22                                      |  
|Number of deposit accounts at end of period                                                  |  | 92,561                                  |  

---

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



|(2) |  | The efficiency ratio represents non-interest expense divided by the sum of net interest income before provision for loan losses and non-interest income. Excluding
the non-recurring income/expense items, the efficiency ratio for 1999 and 2000 was 78.23% and 80.00%, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



40



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



Changes in Financial Position



Comparison of Financial Position at December 31, 2001 and December 31, 2002



Our assets increased by $302.5 million from $2.1 billion at December 31, 2001 to $2.4 billion at December 31, 2002. The increase in our
assets is primarily attributable to a $354.8 million increase in net loans receivable, partially offset by a $97.2 million decrease in assets available for sale. In addition, we increased investment in office properties and equipment by $8.5
million, primarily for new office sites, but also for upgraded data processing equipment. Interest bearing deposits with the FHLB increased by $20.1 million, while all other assets increased by $16.3 million. Funds for the increase in assets were
provided primarily by an increase in deposits of $338.9 million, and an increase in borrowed funds of $8.1 million. The increase in loans and deposits reflects our branch expansion in our market area. In addition, the increase in our deposits
primarily reflects the growth of our interest bearing checking accounts and non-interest bearing checking accounts, which increased by $244.4 million and $40.9 million, respectively. Slightly offsetting these increases was a decrease in
stockholders equity of $8.5 million, which resulted from repurchases of Company common stock in the amount of $20.0 million, as well as dividends paid to stockholders, partially offset by $16.8 million in net income.



Comparison of Financial Position at December 31, 2000
and December 31, 2001



Our assets
increased by $204.5 million from $1.9 billion at December 31, 2000 to $2.1 billion at December 31, 2001. The increase in our assets is primarily attributable to a $220.0 million increase in net loans receivable offset by a $28.3 million decrease in
cash and assets available for sale. In addition, we increased investment in office properties and equipment, primarily for new office sites, but also for upgraded data processing equipment, by $5.3 million, while all other assets increased by $7.5
million. Funds for the increase in assets were provided primarily by an increase in deposits of $61.6 million and an increase in advances from the Federal Home Loan Bank and other borrowed funds of $45.3 million. The increase in loans and deposits
reflects our branch expansion in our market area. In May, 2001, we converted from a mutual holding company structure to a fully public company. As a result of this transaction, we raised $79.6 million from the sale of company common stock.
Stockholders equity at December 31, 2001 was $177.6 million, an increase of $86.0 million from December 31, 2000. This increase consisted of net income for the year of $7.9 million, a decrease in accumulated other comprehensive loss (net of
taxes) of $2.0 million, which was partially offset by dividends declared of $5.3 million and the previously mentioned $79.6 million public offering of common stock.



Results of Operations



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





41



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



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



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



Interest income from mortgage loans increased by $9.9 million, or 10.4%, from $95.2 million for the year ended December 31, 2001 to $105.1 million for the year ended December 31, 2002. This increase is attributable to an increase in
the average balance of mortgage loans from $1.3 billion to $1.5 billion, which was offset by a modest decline in the yield on these assets to 7.04% from 7.11%. Interest income on consumer and commercial business loans increased slightly by $128,000,
or 0.7% from $18.3 million for the year ended December 31, 2001 to $18.4 million for the year ended December 31, 2002. The average balance of consumer and commercial business loans increased by $30.0 million, or 13.4%, from $223.4 million to $253.4
million; this was offset by a significant decline in average yield on these assets from 8.18% in 2001 to 7.26% in 2002. Our average balance of mortgage-backed securities declined from $298.6 million in 2001 to $193.5 million in 2002 as we continue
to allocate repayments on these assets to higher yielding loans. As a result of this decline and a decline in the average yield on mortgage-backed securities from 5.62% in 2001 to 4.14% in 2002, income from mortgage-backed securities declined $8.8
million from $16.8 million for the year ended December 31, 2001 to $8.0 million for the year ended December 31, 2002. Interest income on securities decreased by $1.6 million from $5.1 million in 2001 to $3.5 million in 2002. While the average
balance of these assets increased $18.9 million, or 21.6% from $87.4 million for the year ended December 31, 2001 to $106.3 million for the year ended December 31, 2002, we incurred a significant decline in the average yield on these assets from
5.80% for 2001 to 3.27% for 2002 resulting in a decrease in interest income from these securities. Interest income on other investments, which consists of income from our investment in FHLB stock and from interest-earning deposits, declined by
$238,000 from $3.1 million in 2001 to $2.9 million in 2002. Although the average balance of these assets increased by $70.7 million, or 134.5%, the average yield declined from 5.96% in 2001 to 2.35% in 2002.



Interest expense.Interest expense decreased by $19.6
million, or 24.1%, from $81.4 million for the year ended December 31, 2001 to $61.8 million for the year ended December 31, 2002. The decrease in expense is attributable to a decline in the average cost of our deposits from 3.96% in 2001 to 2.30% in
2002. The average balance of our deposits increased by $218.2 million during 2002, from $1.5 billion for the year ended December 31, 2001 to $1.8 billion for the year ended December 31, 2002, reflecting an



42



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increase in savings and checking accounts, offset by a decline in higher cost certificate of deposit balances of $82.1 million. The increase
in interest expense on borrowed funds of $784,000 resulted from an increase in the average balance of borrowed funds from $328.8 million in 2001 to $372.0 million in 2002, however this impact was partially offset by a decline in the average cost of
these borrowings from 6.27% to 5.76%.



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



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



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



Other income.Other income increased by $3.2 million or 23.4%, to $17.0 million in 2002 from $13.8 million in 2001. $1.7 million of this increase was from service charges on deposit accounts,
which resulted from the growth of core deposits (consisting of all deposits except for certificates of deposit) from 45.5% of total deposits at December 31, 2001 to 59.6% of total deposits at December 31, 2002. Fees from other banking services,
which include insurance annuity sales, trust income and appraisal services, increased by $2.2 million. These amounts were slightly offset by declines in gains on loan and securities sales of $437,000 and miscellaneous income of $214.000.



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



43



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subsidiary, both of which cost increases contributed to increased loan production and increases in other income.



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



Results of operations for the years ended December 31,
2000 and 2001



General. We had
net income of $7.9 million, or basic earnings per share of $.52 for the year ended December 31, 2001. This compares to net income of $8.5 million, or basic earnings per share of $.54, for the year ended December 31, 2000. The decrease in net income
of $641,000 for the year ended December 31, 2001, as compared to 2000, is due to a number of factors. Interest income increased to $138.5 million in 2001 from $132.6 million in 2000, while interest expense declined in 2001 to $81.4 million from
$85.7 million in 2000. This resulted in a 21.6% increase in net interest income before provision for loan losses to $57.1 million for the year ended December 31, 2001, compared to $46.9 million in 2000. Primarily as a result of the banks
continuing expansion of its commercial mortgage, consumer and commercial business portfolios, our provision for loan losses increased to $2.1 million in 2001, compared to $1.3 million in 2000. While other income for the year ended December 31, 2001
improved to $13.8 million from $13.4 million in 2000, other income for the year ended December 31, 2000 included $3.7 million of non-recurring income received as a result of John Hancock Financials conversion from a mutual to a stock insurance
company. Our operating expenses for the year ended December 31, 2001 increased by $10.3 million, or 22.7% to $55.7 million from $45.4 million for the year ended December 31, 2000. Included in operating expenses for 2001 was a one time charge of $1.1
million relating to our computer system conversion.



Interest income.Interest income increased by $5.9 million, or 4.5%, from $132.6 million for the year ended December 31, 2000 to $138.5 million for the year ended December 31, 2001. Although the average balance of interest
earning assets increased by $277.6 million, or 16.1%, in 2001, this was largely offset by a decline in the average yield of these assets to 6.92% in 2001, from 7.70% in 2000. The decline in average yield on our interest earning assets resulted,
primarily, from the rapidly declining interest rate environment we experienced in 2001.



Interest income from mortgage loans increased by $11.5 million, or 11.1%, from $83.7 million for the year ended December 31, 2000 to $95.2 million for the year ended December 31, 2001. This increase is
attributable to an increase in the average balance of mortgage loans from $1.1 billion to $1.3 billion, which was offset by a modest decline in the yield on these assets to 7.11% from 7.61%. Interest income on consumer and commercial business loans
increased by $1.3 million, or 7.6% from $17.0 million for the year ended December 31, 2000 to $18.3 million for the year ended December 31, 2001. While the average balance of consumer and commercial business loans increased by $50.7 million, or
29.3%, from $172.7 million to $223.4 million, this was offset by a significant decline in yield on these assets from 9.83% in 2000 to 8.18% in 2001. Our average balance of mortgage-backed securities declined from $349.5 million in 2000 to $298.6
million in 2001 as we continue to allocate repayments on these assets to higher yielding loans. As a result of this decline and a decline in the average yield on these assets from 7.05% in 2000 to 5.62% in 2001, income from mortgage-backed
securities declined $7.9 million from $24.7 million for the year ended December 31, 2000 to $16.8 million for the year ended December 31, 2001. Interest income on securities increased by $1.1 million from $4.0 million in 2000 to $5.1 million in
2001, as the average balance of these assets increased $32.2 million, or 58.4% from $55.2 million for the year ended December 31, 2000 to $87.4 million for the year ended December 31, 2001. We incurred a decline in yield on these assets from 7.16%
for 2000 to 5.80% for 2001. Interest income on other investments, which consists of income from our



44



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investment in FHLB stock and from interest-earning deposits, declined by $198,000 from $3.3 million in 2000 to $3.1 million in 2001. Although
the average balance of these assets increased by $7.1 million, or 15.7%, the average yield declined from 7.33% in 2000 to 5.96% in 2001.



Interest expense.Interest expense decreased by $4.2 million, or 5.0%, from $85.7 million for the year ended December 31, 2000 to
$81.4 million for the year ended December 31, 2001. The decrease in expense is principally attributable to a decline in the average cost of our deposits from 4.56% in 2000 to 3.96% in 2001. The average balance of our deposits increased by $136.6
million during 2001, from $1.4 billion for the year ended December 31, 2000 to over $1.5 billion for the year ended December 31, 2001, despite a decline in higher costing certificate of deposit balances of $57.1 million. The decrease in interest
expense on borrowed funds of $1.2 million resulted from a decrease in the average balance of borrowed funds from $336.1 million in 2000 to $328.8 million in 2001, together with a decline in the average cost of these borrowings from 6.48% to 6.27%.



Net interest income.Our net interest
income increased by $10.1 million from $46.9 million for 2000 to $57.1 million in 2001. This increase was caused by a decrease in our net interest spread to 2.55% for 2001 from 2.77% in 2000, offset by an increase in the ratio of our average
interest earning assets to interest bearing liabilities from 99.21% in 2000 to 107.37% in 2001. This resulted in an increase in our net interest margin from 2.72% in 2000 to 2.85% in 2001. The improvement in this ratio is principally attributable to
funds received in connection with our stock offering in May 2001. The increase in our spread was mainly the result of the growth in our lower costing core deposits, together with the repricing of our certificates of deposit in a lower interest rate
environment. These benefits were partially offset by a decline in the yield on our interest earning assets, also principally due to the lower interest rate environment.



Provision for loan losses. Our provision for loan losses increased by $726,000 from $1.3 million in
2000 to $2.1 million in 2001. The main reason for this increase is our continued increase in production of commercial business, consumer and commercial real estate loans. Our total allowance for loan losses as of December 31, 2001 of $6.8 million is
maintained at a level that represents managements best estimate of losses in the loan portfolio at the balance sheet date which were both probable and reasonably estimable. At December 31, 2001, our ratio of non-performing loans to total loans
was 0.32%.



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



Other income.Other income increased slightly, by $358,000, during the year ended December 31, 2001 to
$13.8 million from $13.4 million in 2000. Other income for the year ended December 31, 2000 included $3.7 million from the receipt and sale of common stock received as a result of the conversion of John Hancock Financial from a mutual to a stock
insurance company. $2.5 million was included in miscellaneous income for the receipt and $1.2 million was reflected in gain on sale of investments for the sale of this common stock. Fee income on deposit accounts increased by $1.6 million, primarily
as a result of growth in checking accounts, from $4.0 million for the year ended December 31, 2000 to $5.6 million for



45



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the year ended December 31, 2001. Income from fees for other banking services, which include insurance and annuity sales, as well as trust
and appraisal fee income, increased by $1.8 million from $4.5 million in 2000 to $6.3 million for the year ended December 31, 2001.



Operating expense.Operating expense increased by $10.3 million or 22.7% from $45.4 million for the year ended December 31, 2000 to
$55.7 million for the year ended December 31, 2001. Of this increase, $5.0 million is attributable to employee compensation and benefits. This represents an increase of 18.8% of such costs. The number of full time equivalent employees increased by
33 persons, 5.7%, to 611 at December 31, 2001. Increased commissions and related compensation of $497,000 were incurred to produce the increase in other income. Health care costs increased by $465,000, while pension costs, principally attributable
to our defined benefit plan, increased by $780,000. Effective January 1, 2001, new employees were no longer covered by the defined benefit pension plan, but, rather, by a defined contribution plan. The remainder of the increase is mainly
attributable to paying a full years compensation to employees hired during the year ended December 31, 2000, a 14.2% increase in number, together with normal salary increases. Occupancy and equipment expense increased by $1.6 million. We
incurred a full years depreciation on the building and furnishings of our corporate headquarters for the year ended December 31, 2001, whereas the year 2000 included only a partial year of such expense, as we began occupying the facility in
mid 2000. We opened two new offices and began depreciation on data processing upgrades relating to our computer conversion. Miscellaneous expense increased by $3.1 million. Of this amount, $1.1 million related to a one time charge to change data
processing service bureaus, $231,000 was incurred as we wrote off obsolete signage due to our banks name change and we absorbed an additional $394,000 in loan production costs for consumer loans. Our telephone costs increased by $319,000 as we
separated this service from our data processing contract to avoid additional mark-ups on this service and we incurred additional, on going, state franchise fees and NASDAQ costs of $171,000 as a result of our conversion to a stock company from a
mutual holding company.



Income taxes.Our
provision for income taxes for the year ended December 31, 2001 of $5.2 million, an increase of $103,000 from $5.1 million for the year ended December 31, 2000 reflects our current rate applied to income before taxes.



46



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



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



|                                                                                 |  | For the Years Ended December 31, |          
|-------------------------------------------------------------------------------- |  | -------------------------------- | ---------
|                                                                                 |  | 2000                             |          
|                                                                                 |  | Average Balance                  |          
|                                                                                 |  | (Dollars in Thousands)           |          
|Interest-earning assets:                                                         |  |                                  |          
|Mortgage loans                                                                   |  | $                                | 1,099,636
|Consumer and commercial business loans                                           |  |                                  | 172,726  
|Mortgage-backed securities(1)                                                    |  |                                  | 349,498  
|Investment securities                                                            |  |                                  | 55,196   
|Other investments(2)                                                             |  |                                  | 45,471   
|                                                                                 |  |                                  |          
|Total interest-earning assets                                                    |  |                                  | 1,722,527
|Non-interest-earning assets                                                      |  |                                  | 127,430  
|                                                                                 |  |                                  |          
|Total assets                                                                     |  | $                                | 1,849,957
|                                                                                 |  |                                  |          
|Interest-bearing liabilities:                                                    |  |                                  |          
|Deposits                                                                         |  | $                                | 1,400,130
|Borrowed funds                                                                   |  |                                  | 336,065  
|                                                                                 |  |                                  |          
|Total interest-bearing liabilities                                               |  |                                  | 1,736,195
|Non-interest bearing liabilities                                                 |  |                                  | 28,301   
|                                                                                 |  |                                  |          
|Total liabilities                                                                |  |                                  | 1,764,496
|Stockholders equity                                                             |  |                                  | 85,461   
|                                                                                 |  |                                  |          
|Total liabilities and stockholders equity                                       |  | $                                | 1,849,957
|                                                                                 |  |                                  |          
|Net interest income                                                              |  |                                  |          
|                                                                                 |  |                                  |          
|Net interest rate spread(3)                                                      |  |                                  |          
|                                                                                 |  |                                  |          
|Net interest margin(4)                                                           |  |                                  |          
|                                                                                 |  |                                  |          
|Ratio of average interest-earning assets to average interest-bearing
liabilities |  |                                  |          
|                                                                                 |  |                                  |          



|                                                                 |  | At December 31, 2002   |          
|---------------------------------------------------------------- |  | ---------------------- | ---------
|                                                                 |  | ActualBalance          |          
|                                                                 |  | (Dollars in Thousands) |          
|Interest-earning assets:                                         |  |                        |          
|Mortgage loans                                                   |  | $                      | 1,657,017
|Consumer and commercial business loans                           |  |                        | 278,982  
|Mortgage-backed securities(1)                                    |  |                        | 145,139  
|Investment securities                                            |  |                        | 89,879   
|Other investments(2)                                             |  |                        | 76,407   
|                                                                 |  |                        |          
|Total interest-earning assets                                    |  |                        | 2,247,424
|Non-interest-earning assets                                      |  |                        | 191,973  
|                                                                 |  |                        |          
|Total assets                                                     |  | $                      | 2,439,397
|                                                                 |  |                        |          
|Interest-bearing liabilities:                                    |  |                        |          
|Deposits                                                         |  | $                      | 1,898,341
|Borrowed funds                                                   |  |                        | 326,537  
|                                                                 |  |                        |          
|Total interest-bearing liabilities                               |  |                        | 2,224,878
|Non-interest bearing liabilities                                 |  |                        | 45,432   
|                                                                 |  |                        |          
|Total liabilities                                                |  |                        | 2,270,310
|Stockholders equity                                             |  |                        | 169,087  
|                                                                 |  |                        |          
|Total liabilities and stockholders equity                       |  | $                      | 2,439,397
|                                                                 |  |                        |          
|Net interest rate spread(3)                                      |  |                        |          
|                                                                 |  |                        |          
|Net interest margin(4)                                           |  |                        |          
|                                                                 |  |                        |          
|Ratio of interest-earning assets to interest-bearing liabilities |  |                        |          
|                                                                 |  |                        |          

---

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



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



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



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



47



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Rate/Volume Analysis



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



|                                       |  | Years Ended December 31,  |       
|-------------------------------------- |  | ------------------------- | ------
|                                       |  | 2002 vs. 2001             |       
|                                       |  | Increase/(Decrease)Due to |       
|                                       |  | Volume                    |       
|                                       |  | (In Thousands)            |       
|Interest income:                       |  |                           |       
|Mortgage loans                         |  | $                         | 10,959
|Consumer and commercial business loans |  |                           | 2,458 
|Mortgage-backed securities             |  |                           | (5,906
|Investment securities                  |  |                           | 1,095 
|Other investments                      |  |                           | 4,212 
|                                       |  |                           |       
|Total interest-earning assets          |  |                           | 12,818
|                                       |  |                           |       
|Interest expense:                      |  |                           |       
|Deposits                               |  |                           | 8,647 
|Borrowed funds                         |  |                           | 2,708 
|                                       |  |                           |       
|Total interest-bearing liabilities     |  |                           | 11,355
|                                       |  |                           |       
|Change in net interest income          |  | $                         | 1,463 
|                                       |  |                           |       



Asset and Liability
ManagementInterest Rate Sensitivity Analysis



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



We monitor interest rate risk by various methods, including gap analysis and analyzing changes in Market Value of Portfolio
Equity (MVPE) which analysis, compared to similar calculations performed by the Office of Thrift Supervision, are reviewed with the Board of Directors on a quarterly basis. MVPE is generally defined as the difference between the
market value of our interest rate sensitive assets and the market value of our interest rate sensitive liabilities. We use an internal model that generates estimates of our MVPE over a range of interest rate scenarios. The model calculates MVPE
essentially by discounting the cash flows from our assets and liabilities to present value using current market rates, and adjusting those discount rates accordingly for various interest rate scenarios.



48



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The following
table sets forth our estimated internal calculations of MVPE as of December 31, 2002, for instantaneous and parallel shifts in the yield curve in 100 basis point increments up and down. Due to the low interest rate environment that existed at
December 31, 2002, an analysis of a 200 basis point downward shift in interest rates is not shown.



|Changes in Rates |  | Market Value of Portfolio Equity |        
|---------------- |  | -------------------------------- | -------
|(Basis Points)   |  | $ Amount                         |        
|                 |  | (Dollars in Thousands)           |        
|+200 bp          |  | $                                | 401,436
|+100 bp          |  | $                                | 388,741
|-0-              |  | $                                | 373,258
|-100 bp          |  | $                                | 347,922



Fidelity
Federal Bank & Trusts internal calculation of MVPE at December 31, 2002 shows the negative effects of rate caps and floors in certain interest earning assets and particularly interest bearing liabilities in both rising and falling interest
rate scenarios. As shown in the previous table, MVPE was negatively affected in both rising and falling rate scenarios as a result of these interest rate caps and floors. In preparing the MVPE table above, we have estimated prepayment rates for our
loans ranging from 8% to 19%, depending on the interest rate scenario and loan type. These rates are managements best estimate based on prior repayment experience.



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



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



The
above assumptions are estimates of annual percentages based on remaining balances. Although management believes these deposit decay rates are a reasonable estimate of future deposit trends based on past performance, they should not be regarded as
indicative of the actual prepayments and withdrawals that may be experienced by us in any given period. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in MVPE requires the
making of certain assumptions that may or may not reflect how actual yields and costs respond to changes in market rates. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react
differently to changes in market interest rates. Also, the changes in the contractual interest rates of our assets and liabilities may not occur at the same time as changes in market interest rates. Additionally, certain assets, such as adjustable
rate (ARM) loans, have features that restrict changes in interest rates on a short-term basis and over the life of the assets. Moreover, in the event of a change in interest rates, prepayment and



49



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early withdrawal levels may deviate significantly from those assumed in calculating the above table. Management also has made estimates of
fair value discount rates that it believes to be reasonable. However, because there is no quoted market for many of the assets and liabilities, there can be no assurance that the fair values presented would be indicative of the value negotiated in
an actual sale.



While the above table provides
an estimate of our interest rate risk exposure at a particular point in time, it is not intended to provide a precise forecast of the effect of market changes on our MVPE, as actual results may vary. At December 31, 2002, we were not required by the
Office of Thrift Supervision to hold additional risk-based capital for interest rate risk-purposes.



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



50



---



The table
below provides information about the Companys financial instruments that are sensitive to changes in interest rates. As shown in the following table, the Companys cumulative one-year interest rate sensitivity gap at December 31, 2002 was
a positive 19.14%.



|                                                                                                            |  | Within three months    |         |   | Four to twelve months |   |         | More than one year to three years |  |    | More than three years to five years |   |  | Over five years |        
|----------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | --------------------- | - | ------- | --------------------------------- |  | -- | ----------------------------------- | - |  | --------------- | -------
|                                                                                                            |  | (Dollars in Thousands) |        
|Interest-earning assets(1):                                                                                 |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Residential mortgage loans:(2)                                                                              |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Fixed rate                                                                                                  |  | $                      | 49,182  |   |                       | $ | 125,622 |                                   |  | $  | 234,992                             |   |  | $               | 142,130
|Adjustable rate                                                                                             |  |                        | 78,116  |   |                       |   | 192,225 |                                   |  |    | 134,752                             |   |  |                 | 112,384
|Commercial mortgage loans:(2)                                                                               |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Fixed rate                                                                                                  |  |                        | 7542    |   |                       |   | 6919    |                                   |  |    | 7,898                               |   |  |                 | 4,460  
|Adjustable rate                                                                                             |  |                        | 131,629 |   |                       |   | 228,290 |                                   |  |    | 1,244                               |   |  |                 | 1,431  
|Other loans:(2)                                                                                             |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Fixed rate                                                                                                  |  |                        | 18,327  |   |                       |   | 24,270  |                                   |  |    | 37,330                              |   |  |                 | 12,174 
|Adjustable rate                                                                                             |  |                        | 168,163 |   |                       |   | 16,894  |                                   |  |    | 0                                   |   |  |                 | 0      
|Mortgage-backed securities                                                                                  |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Fixed rate                                                                                                  |  |                        | 4,459   |   |                       |   | 11,837  |                                   |  |    | 22,606                              |   |  |                 | 13,621 
|Adjustable rate                                                                                             |  |                        | 37,614  |   |                       |   | 0       |                                   |  |    | 0                                   |   |  |                 | 0      
|Municipal bonds and government and agency securitiesfixed rate                                             |  |                        | 0       |   |                       |   | 10,136  |                                   |  |    | 75,265                              |   |  |                 | 4,236  
|Other interest earning assetsadjustable                                                                    |  |                        | 117,112 |   |                       |   | 0       |                                   |  |    | 0                                   |   |  |                 | 0      
|                                                                                                            |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Total                                                                                                       |  | $                      | 612,144 |   |                       | $ | 616,193 |                                   |  | $  | 514,087                             |   |  | $               | 290,436
|                                                                                                            |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Interest-bearing liabilities                                                                                |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Deposits:(3)                                                                                                |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Checking and funds transfer accounts                                                                        |  | $                      | 25,891  |   |                       | $ | 87,213  |                                   |  | $  | 134,751                             |   |  | $               | 68,289 
|Passbook accounts                                                                                           |  |                        | 6,839   |   |                       |   | 19,259  |                                   |  |    | 30,977                              |   |  |                 | 19,988 
|Money market accounts                                                                                       |  |                        | 14,300  |   |                       |   | 47,342  |                                   |  |    | 60,546                              |   |  |                 | 23,866 
|Certificate accounts(4)                                                                                     |  |                        | 177,794 |   |                       |   | 327,837 |                                   |  |    | 206,334                             |   |  |                 | 55,790 
|Borrowings:(4)                                                                                              |  |                        | 46,892  |   |                       |   | 6,688   |                                   |  |    | 166,992                             |   |  |                 | 17,387 
|                                                                                                            |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Total                                                                                                       |  | $                      | 271,716 |   |                       | $ | 488,339 |                                   |  | $  | 599,600                             |   |  | $               | 185,320
|                                                                                                            |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Excess (deficiency) of interest-earning assets over interest-bearing
liabilities                            |  | $                      | 340,428 |   |                       | $ | 127,854 |                                   |  | ($ | 85,513                              | ) |  | $               | 105,116
|                                                                                                            |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Cumulative excess of interest-earning assets over interest-bearing
liabilities                              |  | $                      | 340,428 |   |                       | $ | 468,282 |                                   |  | $  | 382,769                             |   |  | $               | 487,885
|                                                                                                            |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        
|Cumulative excess of interest-earning assets over interest-bearing liabilities as a
percent of total assets |  |                        | 13.96   | % |                       |   | 19.20   | %                                 |  |    | 15.69                               | % |  |                 | 20.00  
|                                                                                                            |  |                        |         |   |                       |   |         |                                   |  |    |                                     |   |  |                 |        

---

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



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



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



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



51



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Certain
shortcomings are inherent in any methodology used to calculate interest rate sensitivity. The asset prepayment speed and deposit decay rate assumptions are based on past experience and should not be regarded as indicative of the actual prepayments
and withdrawals that may be experienced in any given period. In the event of changes in interest rates, prepayment and early withdrawal would possibly deviate significantly from those assumed in calculating the above table. Also, although certain
assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes in market interest rates. Certain assets such as adjustable rate mortgage loans have features that restrict changes in interest rates
on a short term basis and over the life of the asset.



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



Liquidity and Capital Resources



Fidelity Federal Bank & Trust is required to maintain
liquid assets at levels considered safe and sound by the Office of Thrift Supervision. Our liquidity ratio averaged 21.3%, 14.1% and 6.5% during the months ended December 31, 2000, 2001 and 2002, respectively. Our liquidity ratio averaged 20.0%,
18.5% and 11.7% for the years ended December 31, 2000, 2001 and 2002, respectively. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings and loan to fund commitments. We also adjust
liquidity as appropriate to meet asset and liability management objectives.



Our primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and
funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic
conditions, and competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending
requirements. Short-term interest-bearing deposits with the Federal Home Loan Bank of Atlanta amounted to $56.4 million, $43.3 million and $63.5 million at December 31, 2000, 2001 and 2002, respectively. Other assets qualifying for liquidity
purposes at December 31, 2000, 2001 and 2002, totaled $265.6 million, $208.9 million and $67.6 million, respectively. For additional information about cash flows from our operating, financing, and investing activities, see Consolidated Statements of
Cash Flows included in the consolidated financial statements.



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



Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate
them internally, borrowing agreements exist with the Federal Home Loan Bank of Atlanta which provide an additional source of funds. At December 31, 2002, we had $253.4 million in advances from the Federal Home Loan Bank of Atlanta. We borrow from
the Federal Home Loan Bank of Atlanta in order to reduce interest rate risk, and for liquidity purposes.



52



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At December
31, 2002, we had outstanding loan commitments of $158.5 million to originate and/or purchase mortgage loans. This amount does not include the unfunded portion of loans in process. At December 31, 2002, certificates of deposit scheduled to mature in
less than one year, totaled $505.1 million. Based on prior experience, management believes that a significant portion of such deposits will remain with Fidelity Federal Bank & Trust, although there can be no assurance that this will be the case
or that the cost of such deposits could be significantly higher.



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



Our
pension costs for all pension plans approximated $3.5 million and $2.9 million for 2002 and 2001 respectively, and is calculated based on a number of actuarial assumptions, including an expected long-term rate of return on our Qualified Plan assets
of 9%. In developing our expected long-term rate of return assumption, we evaluated input from our actuaries and our investment advisors, including their review of asset class return expectations from respected sources and authorities. We also
evaluated the long-term rate of expected inflation. Projected returns by these sources are based on broad equity and bond indices. We also considered our historical returns in comparison to various market indices. Our expected long-term rate of
return is based on a target asset allocation of 70% in equities and 30% in fixed income. We adopted this change in target allocation in early 2003. Previously, our target allocation was 75% equities and 25% in fixed income investments. We expect a
long-term rate of return on equities of 10% and a long-term rate of return on fixed income investments of 6%. Due to market fluctuations and distributions, our actual asset allocation as of December 31, 2002 was 76% in equities and 24% in fixed
income. We periodically rebalance the actual asset allocation to match the target asset allocation. We believe this is a reasonable long-term rate of return for our Qualified Plan assets, despite the weak market performance of recent years including
the 12.71% loss for 2002. We will continue to evaluate our actuarial assumptions, including our expected rate of return, at least annually, and will adjust as necessary.



We base our determination of pension cost on the market value of assets without adjustments or smoothing to
reduce year-to-year volatility. Actuarial gains and losses are recognized into pension cost, to the extent they exceed the amount allowed in accordance with SFAS No. 87, Employers Accounting for Pensions, that can be excluded in
determining the amount to be amortized (the corridor). The amount of gain and loss in excess of the corridor is amortized over the remaining average expected working lifetime of plan participants, which was 8.9 years for 2002. As of
December 31, 2002, we had cumulative actuarial losses of $7.4 million that had not yet been recognized into pension cost.



The discount rate we utilize for determining future pension obligations is based on a review of long term bond yields. We use Moodys
AA bond index and Merrill Lynchs Corporate 10+ years High Quality bond index as of our measurement date in determining our discount rate each year. The discount rate determined on this basis has decreased from 7.25% as of December 31, 2001 to
6.50% as of December 31, 2002.



Lowering the
expected long-term rate of return on our Qualified Plan assets by 0.5% (from 9.0% to 8.5%) would have increased our fiscal 2002 pension cost by $63,000. Lowering the discount rate and salary increase assumptions by 0.5% would have increased our
fiscal 2002 pension cost by $15,000.



53



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The value of
our Qualified Plan assets increased from $12.5 million at December 31, 2001 to $12.7 million at December 31, 2002. The investment performance returns and declining discount rates have reduced the overfunding in our Qualified Plan, net of accumulated
benefit obligations from $703,000 at December 31, 2001 to an underfunding of $892,000 at December 31, 2002. As a result of this decline in funded status of our Qualified Plan, we expect that based on our actuarial assumptions that we will continue
to make cash contributions to the Qualified Plan in the range of $3.0 million for at least the next three years.



Impact of Inflation and Changing Prices



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



Recent Accounting Pronouncements
Affecting the Company



In June 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations. The statement makes significant changes to the accounting for business
combinations, principally eliminating the pooling-of-interests method of accounting for business combinations. This statement, which is effective for business combinations completed after June 30, 2001, also clarifies the criteria for recognition of
intangible assets separately from goodwill. We have had no business combinations subsequent to the effective date of this promulgation, but will comply with the provision of SFAS No. 141 in the event of future acquisitions.



In June 2001, the FASB issued SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 discontinues the practice of amortizing goodwill and intangible assets with indefinite lives and initiates an annual review for impairment of theses assets. As this promulgation relates to us, it is
effective on January 1, 2002. We did not have any impairment in the carrying value of goodwill arising from previous acquisitions. Amortization of goodwill included in our statements of operations for the years ended December 31, 2001 and 2000, was
$245,000 and $255,000, respectively.



In October
2002, the FASB issued SFAS No. 147, Acquisition of Certain Financial Institutions. This Statement addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction
between two or more mutual enterprises. This Statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of FASB Statement No. 72, Accounting for Certain Acquisitions
of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method. This Statement also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets (such as depositor-borrower-relationship intangible assets and credit cardholder
intangible assets), including those acquired in transactions between two or more mutual enterprises. The Company adopted this statement as of its effective date of October 1, 2002. The Company has had no acquisitions subsequent to the effective date
of this promulgation.



54



---



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



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



In January 2003, the FASB issued FIN 46, Consolidation
of Variable Interest Entities. This interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. This statement is not expected to have a material effect on
the Companys financial statements.



ITEM 7A.
QUALITATIVE AND QUANTITATIVE ANALYSIS OF MARKET RISK



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



ITEM 8. FINANCIAL STATEMENTS



The financial statements identified in Item 14(a)(1) hereof are included as Exhibit 99.1 and are incorporated
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 2002.



55



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PART III



ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT



Directors



The Board of Directors of Fidelity Bankshares, Inc. is
divided into three classes and is elected by stockholders of Fidelity Bankshares, Inc. for staggered three-year terms, or until their successors are elected and qualified. The following table sets forth certain information regarding the composition
of the Board of Directors as of December 31, 2002, including their terms of office:



|Name                   |  | Age |  | Position Held atFidelity Bankshares, Inc.                    |  | Director Since(1) |  | Current Term to Expire
|---------------------- |  | --- |  | ------------------------------------------------------------ |  | ----------------- |  | ----------------------
|Vince A. Elhilow       |  | 63  |  | Chairman of the Board,
President and Chief Executive Officer |  | 1984              |  | 2003                  
|Keith D. Beaty         |  | 52  |  | Director                                                     |  | 1992              |  | 2005                  
|Paul C. Bremer         |  | 59  |  | Director                                                     |  | 2000              |  | 2004                  
|F. Ted Brown, Jr.      |  | 73  |  | Director                                                     |  | 1990              |  | 2004                  
|Donald E. Warren, M.D. |  | 75  |  | Director                                                     |  | 1979              |  | 2003                  
|Karl H. Watson         |  | 61  |  | Director                                                     |  | 1999              |  | 2004                  

---

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



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



Directors



Vince A. Elhilow has been President of Fidelity Federal Bank & Trust since 1987 and Chief Executive Officer of Fidelity Federal Bank & Trust since 1992. In July 2002, Mr. Elhilow was appointed Chairman of the
Board of Directors. Prior to his appointment as President of Fidelity Federal Bank & Trust, Mr. Elhilow was manager of the Loan Department from 1973 to 1992 and Executive Vice President and Chief Operating Officer from 1981 to 1987. Mr. Elhilow
joined Fidelity Federal Bank & Trust in January 1963 and has been a Director since 1984.



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



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



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



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



56



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



Executive
Officers who are not Directors



Richard D. Aldred serves as Executive Vice President, Chief Financial Officer and Treasurer. Mr. Aldred has been employed by Fidelity Federal Bank & Trust for 16 years.



Joseph C. Bova serves as Executive Vice President and
Lending Operations Manager. Mr. Bova has been employed by Fidelity Federal Bank & Trust for 30 years.



Robert L. Fugateserves as Executive Vice President and Banking Operations Manager. Mr. Fugate has been employed by Fidelity
Federal Bank & Trust for 28 years.



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



ITEM 11. EXECUTIVE COMPENSATION



Information required by Item 11 is incorporated by reference
to the Companys Proxy Statement for the 2003 Annual Meeting of Stockholders.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Information required by Item 12 is incorporated by reference to the Companys Proxy Statement for the 2003 Annual Meeting of
Stockholders.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS



None.



PART IV



ITEM 14. CONTROLS AND PROCEDURES



(a) Evaluation of disclosure controls and procedures.



Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a
date (the Evaluation Date) within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.



(b) Changes in internal controls.



57



---



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



See the Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, which immediately precedes the signature page.



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



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



(a)(1) Financial Statements



| |  |  | Independent Auditors Report
| | - |  | ----------------------------

| |  |  | Consolidated Statements of Financial Position,
| | - |  | ----------------------------------------------

| | December |  | 31, 2001 and 2002
| | -------- |  | -----------------

| |  |  | Consolidated Statements of Operations,
| | - |  | --------------------------------------

| | Years |  | Ended December 31, 2000, 2001 and 2002
| | ----- |  | --------------------------------------

| |  |  | Consolidated Statements of Comprehensive Operations,
| | - |  | ----------------------------------------------------

| | Years |  | Ended December 31, 2000, 2001 and 2002
| | ----- |  | --------------------------------------

| |  |  | Consolidated Statements of Changes in Stockholders equity,
| | - |  | -----------------------------------------------------------

| | Years |  | Ended December 31, 2000, 2001 and 2002
| | ----- |  | --------------------------------------

| |  |  | Consolidated Statements of Cash Flows,
| | - |  | --------------------------------------

| | Years |  | Ended December 31, 2000, 2001 and 2002
| | ----- |  | --------------------------------------

| |  |  | Notes to Consolidated Financial Statements.
| | - |  | -------------------------------------------



(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**
| | ---- |  | --------------------------------------------



58



---



| | 10.3 |  | Severance Agreement with Robert Fugate**
| | ---- |  | ----------------------------------------



| | 10.4 |  | Severance Agreement with Joseph Bova**
| | ---- |  | --------------------------------------



| | 10.5 |  | Severance Agreement with Christopher H. Cook****
| | ---- |  | ------------------------------------------------



| | 10.6 |  | 1994 Stock Option Plan for Outside Directors**
| | ---- |  | ----------------------------------------------



| | 10.7 |  | 1994 Incentive Stock Option Plan**
| | ---- |  | ----------------------------------



| | 10.8 |  | Recognition and Retention Plan for Employees**
| | ---- |  | ----------------------------------------------



| | 10.9 |  | Recognition Plan for Outside Directors**
| | ---- |  | ----------------------------------------



| | 21 |  | Subsidiaries of the Registrant
| | -- |  | ------------------------------



| | 99.1 |  | Consolidated Financial Statements
| | ---- |  | ---------------------------------



| | 99.2 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------

---

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



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



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



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



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



None



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



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



59



---



Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002



I, Vince A. Elhilow, President and
Chief Executive Officer, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Fidelity Bankshares, Inc.;
|-- |  | -----------------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|March 18,
2002 |  | /s/    VINCE A.
ELHILOW                               
|-------------- |  | ------------------------------------------------------
|Date           |  | Vince A. Elhilow President and Chief Executive Officer





---



Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002



I, Richard D. Aldred, Executive Vice
President, Chief Financial Officer and Treasurer, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Fidelity Bankshares, Inc.;
|-- |  | -----------------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|March 18, 2003 |  | /S/    RICHARD D.
ALDRED                                                         
|-------------- |  | ---------------------------------------------------------------------------------
|Date           |  | Richard D. Aldred Executive Vice President, Chief Financial Officer and Treasurer





---

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 18, 2003 |  |  |  | By:                     
|                     |  |  |  |                         



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:                  
|                     
|                     
|Date:  March 18, 2003



|                     
|---------------------
|By:                  
|                     
|                     
|Date:  March 18, 2003



|                     
|---------------------
|By:                  
|                     
|                     
|Date:  March 18, 2003



|                     
|---------------------
|By:                  
|                     
|                     
|Date:  March 18, 2003







---



EXHIBIT
INDEX



|3.1  |  | Certificate of Incorporation of Fidelity Bankshares, Inc.***                                                                  
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|    
|3.2  |  | Bylaws of Fidelity Bankshares, Inc.***                                                                                        
|    
|4.1  |  | Form of Indenture with respect to Fidelity Bankshares, Inc.s 8.375% Junior Subordinated Deferrable
Interest*                 
|    
|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 |  | Severance Agreement with Christopher H. Cook****                                                                              
|    
|10.6 |  | 1994 Stock Option Plan for Outside Directors**                                                                                
|    
|10.7 |  | 1994 Incentive Stock Option Plan**                                                                                            
|    
|10.8 |  | Recognition and Retention Plan for Employees**                                                                                
|    
|10.9 |  | Recognition Plan for Outside Directors**                                                                                      
|    
|21   |  | Subsidiaries of the Registrant                                                                                                
|    
|99.1 |  | Consolidated Financial Statements                                                                                             
|    
|99.2 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

---

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



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



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



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