<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 2001

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

     For the transaction period from                     to
                                     -------------------    --------------------

                         Commission File Number: 0-29040

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

<TABLE>
<S>                                                                 <C>
                           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)
</TABLE>

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

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

                                      None

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

                     Common Stock, par value $.10 per share
                                (Title of Class)

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

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

     As of March 1, 2002, there were issued and outstanding 15,781,244 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 15, 2002 ($17.435) was
$254,708,787.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Sections of Annual Report to Stockholders for the fiscal year ended
     December 31, 2001 (Parts II and IV).
2.   Proxy Statement for the 2002 Annual Meeting of Stockholders (Parts I and
     III).

<PAGE>



                                     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, 2001, 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 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, 2001, we had $32.5 million of trust assets under administration, including
$20.1 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 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,

<PAGE>

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, 2001 we have opened 15 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. We currently have 38 offices
in our market area, of which 33 are located in Palm Beach County, three are
located in Martin County and two are 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, 2001.
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, 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.

                                       2

<PAGE>

     Fidelity Bankshares, Inc. is the sixth largest financial institution
holding company headquartered in Florida, and the largest headquartered in Palm
Beach, Martin and St. Lucie counties based on total assets. Fidelity Federal
Bank & Trust's share of deposits in Palm Beach County increased from 3.1% in
1995 to 6.5% at September 30, 2001. Our 6.2% share of deposits in Palm Beach,
Martin and St. Lucie counties ranked us fifth among financial institutions in
Florida at September 30, 2001, 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, 2001, approximately $905.1 million, or 57.0%, of our
total loan portfolio, and $76.0 million, or 37.7%, 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, on a servicing
released basis and without recourse to us, a portion of our residential loans
which have terms to maturity exceeding fifteen years. Generally, we retain in
our portfolio all consumer, commercial real estate and multi-family residential
real estate loans.

                                       3

<PAGE>

     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.

<TABLE>
<CAPTION>
                                                                At December 31,
                                  ------------------------------------------------------------------------
                                          1997                     1998                     1999
                                  --------------------    ---------------------     ----------------------
                                    Amount     Percent       Amount     Percent       Amount      Percent
                                  ----------   -------     ----------   -------     -----------   --------
                                                                                    (Dollars in Thousands)
<S>                               <C>            <C>       <C>            <C>       <C>             <C>
Real estate loans:
 One-to four-family /(1)/......   $  720,782      83.7%    $  828,929      84.8%    $   925,384      79.5%
 Construction loans............       38,577       4.5         53,515       5.5          63,589       5.5
 Land loans....................       12,116       1.4          8,583       0.9           9,763       0.8
 Commercial....................       26,947       3.1         62,399       6.4          94,490       8.1
 Multi-family..................       12,999       1.5         12,272       1.2          23,772       2.0
                                  ----------     -----     ----------     -----     -----------     -----

  Total real estate loans......      811,421      94.2        965,698      98.8       1,116,998      95.9
                                  ----------     -----     ----------     -----     -----------     -----

Other loans:
 Consumer /(2)/................       47,758       5.5         48,270       4.9          60,281       5.2
 Commercial business...........       57,289       6.7         46,958       4.8          94,157       8.1
                                  ----------     -----     ----------     -----     -----------     -----

   Total other loans...........      105,047      12.2         95,228       9.7         154,438      13.3
                                  ----------     -----     ----------     -----     -----------     -----

   Total loans receivable......      916,468     106.4      1,060,926     108.5       1,271,436     109.2

Less:
   Undisbursed loan proceeds...       54,471       6.3         84,155       8.6         106,232       9.1

   Unearned discount and net
   deferred fees (costs).......       (2,554)     (0.3)        (3,621)     (0.4)         (2,826)     (0.2)

   Allowance for loan losses...        3,294       0.4          3,226       0.3           3,609       0.3
                                  ----------     -----     ----------     -----     -----------     -----

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

  Mortgage-backed securities...   $  234,132               $  389,263               $   336,212
                                  ==========               ==========               ===========

<CAPTION>
                                                At December 31,
                                  ---------------------------------------------
                                          2000                     2001
                                  --------------------     --------------------
                                    Amount     Percent       Amount     Percent
                                  ----------   -------     ----------   -------

<S>                               <C>           <C>        <C>            <C>
Real estate loans:
 One- to four-family /(1)/.....   $  918,142     67.4%     $  944,046      59.6%
 Construction loans............      177,065     13.1         284,495      18.0
 Land loans....................       14,421      1.0          25,627       1.6
 Commercial....................      122,733      9.0         203,062      12.8
 Multi-family..................       21,254      1.6          30,095       1.9
                                  ----------    -----      ----------     -----

  Total real estate loans......    1,253,615     92.1       1,487,325      93.9
                                  ----------    -----      ----------     -----

Other loans:
 Consumer /(2)/................       85,407      6.3         105,077       6.6
 Commercial business...........      152,524     11.2         188,045      11.9
                                  ----------    -----      ----------     -----

   Total other loans...........      237,931     17.5         293,122      18.5
                                  ----------    -----      ----------     -----

   Total loans receivable......    1,491,546    109.6       1,780,447     112.4

Less:
   Undisbursed loan proceeds...      128,116      9.4         192,464      12.1
   Unearned discount and net
   deferred fees (costs).......      (2,707)    (0.2)         (2,289)     (0.1)
   Allowance for loan losses ..        4,905      0.4           6,847       0.4
                                  ----------    -----      ----------     -----

      Total loans receivable
      -net.....................   $1,361,232    100.0%     $1,583,425     100.0%
                                  ==========    =====      ==========     =====

  Mortgage-backed securities...   $  283,993               $  201,533
                                  ==========               ==========
</TABLE>

----------
/(1)/Includes participations of $3.2 million, $2.2 million, $1.5 million, $1.1
     million and $699,000 at December 31, 1997, 1998, 1999, 2000 and 2001
     respectively.
/(2)/Includes primarily home equity lines of credit, second mortgages and
     automobile loans. At December 31, 2000 and 2001, the disbursed portion of
     equity lines of credit totaled $23.5 million and $40.2 million,
     respectively.

     Loan and Mortgage-Backed Securities Contractual Terms to Maturity. The
following table sets forth certain information as of December 31, 2001,
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.

                                       4

<PAGE>

<TABLE>
<CAPTION>
                                                        Over 1      Over 3       Over 5        Over 10      Beyond
                                            Within    Year to 3   Years to 5   Years to 10   Years to 20     20
                                            1 Year      Years        Years        Years         Years        Years      Total
                                           --------   ---------   ----------   -----------   -----------   --------   ----------
                                                                              (In Thousands)
<S>                                        <C>        <C>          <C>           <C>          <C>          <C>        <C>
Real estate loans:
  One- to four-family residential (1)...   $255,445   $ 122,906    $ 81,553      $199,521     $ 179,174    $260,975   $1,099,574

  Commercial, multi-family and
   land................................     189,396         772         818         2,217        13,914          --      207,117
Consumer and commercial
 business loans (2)....................     187,945      16,596      35,015        22,374        18,975         387      281,292
                                           --------   ---------    --------      --------      --------    --------   ----------
  Total loans receivable (3) ..........    $632,786   $ 140,274    $117,386      $224,112     $ 212,063    $261,362   $1,587,983
                                           ========   =========    ========      ========     =========    ========   ==========
Mortgage-backed securities.............    $     --   $      --    $      3      $  9,290     $  26,368    $165,872   $  201,533
                                           ========   =========    ========      ========     =========    ========   ==========
</TABLE>

----------

/(1)/Includes construction loans.
/(2)/Includes commercial business loans of $181.6 million.
/(3)/Excludes unearned discount and net deferred fees and allowance for loan
     losses.

     The following table sets forth at December 31, 2001, the dollar amount of
all fixed rate and adjustable rate loans and mortgage-backed securities due or
repricing after December 31, 2002.

<TABLE>
<CAPTION>
                                                             Fixed       Adjustable       Total
                                                          -----------   ------------   -----------
                                                                         (In Thousands)

<S>                                                       <C>           <C>            <C>
Real estate loans:
  One- to four-family residential......................   $   507,950   $    336,179   $   844,129
  Commercial, multi-family and land....................        16,874            847        17,721
Consumer and commercial business loans /(1)/...........        93,347             --        93,347
                                                          -----------   ------------   -----------
    Total..............................................   $   618,171   $    337,026   $   955,197
                                                          ===========   ============   ===========
Mortgage-backed securities.............................   $   125,545   $     75,988   $   201,533
                                                          ===========   ============   ===========
</TABLE>

----------
/(1)/Includes commercial business loans of $30.2 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, 2001, $944.0 million, or
59.6%, of our total loan portfolio consisted of one- to four-family residential
mortgage loans. Of this amount, $344.6 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
$217.2 million and $210.1 million during the years ended December 31, 2000 and
2001, 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

                                       5

<PAGE>

monthly basis with principal and interest due each month. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers have the right to
refinance or prepay their loans.

     We currently offer ARM loans with initial interest rate adjustment periods
of one, three, five and seven years, based on changes in a designated market
index. After the initial interest rate adjustment period, our 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 or seven
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 $525.6 million, or 33.2%, of our total
loan portfolio at December 31, 2001.

     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, 2001, $284.5 million, or 16.0%
of our gross loan portfolio consisted of residential construction loans, of
which $131.7 million had been disbursed. We

                                       6

<PAGE>

currently offer fixed rate and adjustable rate residential construction loans
primarily for the construction of owner-occupied, single-family residences.
These loans generally are offered to builders who have a contract for sale of
the property, and to owners who have a contract for construction of the
property. In addition, we make construction loans to builders where the home is
not resold to a buyer which loans totaled $54.9 million at December 31, 2001.
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, 2001, $25.6 million, or 1.6% of our total loan
portfolio, consisted of land loans. Land loans are currently offered with
one-year adjustable rates for terms of up to 15 years. The maximum loan-to-value
ratio for 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. The outstanding principal
balance of loans secured by multi-family residential real estate totaled
approximately $30.1 million, or 1.9% of our total loan portfolio, at December
31, 2001. At December 31, 2001, we had a total of 103 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, 2001, our multi-family residential real estate loans had an average
principal balance of $292,000 and the largest multi-family residential real
estate loan had a principal balance of $5.4 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 generally make
multi-family residential mortgage loans for up to 80% of the appraised value of
the property securing the loan. 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

                                       7

<PAGE>

of the borrower in managing multi-family residential real estate properties. We
also review the operating costs of comparable properties in the market area.
Generally, we require a cash flow to debt service ratio of 125%. In addition, 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 $188.1 million, or
11.9% of our total loan portfolio, at December 31, 2001. Our commercial real
estate loans are secured by 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, 2001,
substantially all of our commercial real estate loans were secured by properties
located within our market area. At December 31, 2001, our commercial real estate
loans had an average principal balance of $617,000. At that date, our largest
commercial real estate loan outstanding had a principal balance of $5.3 million
and was secured by commercial property located in Palm Beach County, Florida. At
December 31, 2001, 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

                                       8

<PAGE>

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, 2001, consumer loans totaled $105.1
million, or 6.6% of our total loan portfolio. 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, 2001, the disbursed portion of home equity lines of
credit totaled $40.2 million, or 38.2% 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 "--Delinquencies and Classified Assets--Non-Performing
Assets," and "Delinquent Loans and Non-Performing Assets--Classification of
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, 2001 totaled $6.5 million, and
was secured by residential property under development located in Indian River
County, Florida. At December 31, 2001, we had 841 commercial business loans
outstanding with an aggregate balance of $181.6 million, or 11.5% of our total
loans. The average commercial business loan balance was approximately $216,000.
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.

                                       9

<PAGE>

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

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

     Loan Originations, Purchases, Sales, Processing, and Commitments. Our new
loan originations come from a number of sources including real estate broker
referrals, existing customers, 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 $300,700 may be
approved by any one of our senior loan underwriters; loans between $300,700 and
$500,000 must be approved by any one of our designated senior lending officers;
loans between $500,000 and $1,000,000 must be approved by at least two of our
designated senior lending officers; and loans in excess of $1,000,000 must be
approved by at least three members of the Board of Directors acting as a loan
committee. 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, 2001, we
had commitments to originate $171.8 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 9% and
28% of our loan originations during the year ended December 31, 2000 and 2001,
respectively, represented the refinancing of loans that we hold. Refinancings
have resulted in a decrease in our interest rate spread.

     In connection with local mortgage brokers, we have established a mortgage
loan broker solicitation program to supplement our internal originations of one-
to four-family residential mortgage loans. Under this program, which is limited
to the origination of one- to four-family residential mortgage loans,
prospective borrowers complete loan applications which are provided by mortgage
brokers. All loans obtained in this manner are reviewed by our underwriting
department in accordance with our customary

                                       10

<PAGE>

underwriting standards. Total originations from all sources under the mortgage
loan broker solicitation program during 2000 and 2001 were $53.1 million and
$80.5 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 $27.2
million and $35.1 million, respectively, of loans from this provider during the
years ended 2000 and 2001.

     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, 2001, $1.2 billion, or 69.0%,
of our total loan portfolio consisted of loans, including residential
construction loans, that were secured by one- to four-family residential real
estate loans. Of this amount, $344.6 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, 2001, $112.3 million, or 7.1% of all loans in our total loan
portfolio, consisted of purchased loans. Of this amount, $9.0 million
represented our interest in purchased loan participations. Our largest loan
participation was a $5.4 million interest in a loan secured by multi-family
residential real estate in Dade County, Florida.

     We do not typically originate loans for sale. On occasion, we will sell
loans where the borrower is located outside of our market area.

                                       11

<PAGE>

     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.

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                --------------------------------------
                                                   1999          2000          2001
                                                ----------    ----------    ----------
                                                                (In Thousands)
<S>                                             <C>           <C>           <C>
Loan receivable-gross, beginning of period ..   $1,060,926    $1,271,436    $1,491,546
                                                ----------    ----------    ----------
Originations:
  Real estate:
   One- to four-family residential /(1)/ ....      241,965       239,612       373,218
   Land loans ...............................       19,123        16,356        43,363
   Commercial ...............................       31,951        37,428        76,301
   Multi-family .............................        9,404         5,701        10,048
  Other loans:
   Consumer .................................       46,358        66,040        73,496
   Commercial business ......................      109,523       158,873       222,224
                                                ----------    ----------    ----------
  Total originations ........................      458,324       524,010       798,650

Transfer of mortgage loans to foreclosed real
  estate ....................................       (1,733)         (308)         (575)
Loan purchases ..............................       28,401        27,164        35,063
Repayments ..................................     (258,749)     (307,856)     (508,634)
Loan sales ..................................      (15,733)      (22,900)      (35,603)
                                                ----------    ----------    ----------
Net loan activity ...........................      210,510       220,110       288,901
                                                ----------    ----------    ----------
Total loans receivable-gross, end of period .   $1,271,436    $1,491,546    $1,780,447
                                                ==========    ==========    ==========
</TABLE>

----------
/(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, 2001, we had $3.7 million of deferred loan origination fees, and
$6.0 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 $5.9 million
and $8.5 million and $11.9 million for the years ended December 31, 1999, 2000
and 2001.

     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, 2001, our largest
outstanding loan balance to one borrower totaled $15.2 million. The loan is
secured by a residential real estate and commercial complex under development in
northern Palm Beach County, Florida.

                                       12

<PAGE>

At that date, our second largest lending relationship totaled $9.6 million and
is secured by residential real property under development in Indian River
County, Florida. Our third largest lending relationship totaled $7.8 million,
and is secured by residential real property under development in Palm Beach and
Indian River Counties, Florida. Our fourth largest lending relationship totaled
$7.6 million and is secured by residential real property under development in
Broward County, Florida. Our fifth largest lending relationship totaled $6.7
million and is secured by residential real property under development in Indian
River 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 $25.6 million
at December 31, 2001.

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, 2001 our mortgage-backed securities had a market
value of $201.5 million. Effective December 31, 1993, we implemented SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." As a result
of the adoption of this accounting principle, we declared our investment in
adjustable rate, mortgage-backed securities as available for sale. In November
1995, FASB issued "A Guide to Implementation of SFAS 115 on Accounting for
Certain Investments in Debt and Equity Securities - Questions and Answers"
("SFAS 115 Q & A Guide"). The SFAS 115 Q & A Guide permits an entity to conduct
a one-time reassessment of the classifications of all four mortgage backed
securities held at that time. On November 28, 1995, in conformity with the SFAS
115 Q & A Guide, we classified all securities as "Available for Sale". As a
result, all such securities are now presented at fair value, as determined by
market quotations.

     Our objective in investing in mortgage-backed securities varies from time
to time depending upon market interest rates, local mortgage loan demand, and
our level of liquidity. Mortgage-backed securities are more liquid than whole
loans and can be readily sold in response to market conditions and changing
interest rates. Mortgage-backed securities purchased by us also have lower
credit risk than mortgage loans because principal and interest are either
insured or guaranteed by the United States Government or agencies thereof.

                                       13

<PAGE>

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

                                                        Year Ended December 31,
                                             ----------------------------------
                                               1999         2000          2001
                                             --------     --------     --------
                                                      (In Thousands)
Mortgage-backed securities at
 beginning of period ....................    $389,263     $336,212     $283,993
Purchases ...............................      57,285           --           --
Sales ...................................      (9,914)     (17,396)     (13,753)
Repayments ..............................     (89,810)     (37,634)     (72,682)
Discount (premium) amortization .........      (2,611)        (718)      (1,115)
Increase (decrease) in market
 value of securities held for sale
  in accordance with SFAS 115 ...........      (8,001)       3,529        5,090
                                             --------     --------     --------
Mortgage-backed securities at
  end of period .........................    $336,212     $283,993     $201,533
                                             ========     ========     ========

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

<TABLE>
<CAPTION>
                                                             At December 31,
                                   ---------------------------------------------------------
                                          1999                 2000               2001
                                   -----------------   -----------------   -----------------
                                      $         %          $         %        $          %
                                   --------   ------   --------   ------   --------   ------
                                              (Dollars In Thousands)
<S>                                <C>        <C>      <C>        <C>      <C>        <C>
Mortgage-backed securities, net:
  Adjustable:
   FreddieMac..............        $ 73,717    21.81%  $ 77,065    27.00%  $ 54,938    27.15%
   FannieMae...............          42,183    12.48     28,305     9.92     21,050    10.40
   GinnieMae...............          11,083     3.28         --       --         --       --
                                   --------   ------   --------   ------   --------   ------
    Total adjustable.......         126,983    37.57    105,370    36.92     75,988    37.55
                                   --------   ------   --------   ------   --------   ------
  Fixed:
   FreddieMac..............         110,744    32.77     96,364    33.76     67,025    33.12
   FannieMae...............          84,600    25.04     70,432    24.67     49,990    24.71
   GinnieMae...............          13,885     4.11     11,827     4.14      8,530     4.22
                                   --------   ------   --------   ------   --------   ------
    Total fixed............         209,229    61.92    178,623    62.57    125,545    62.05
                                   --------   ------   --------   ------   --------   ------
Accrued interest...........           1,726     0.51      1,466     0.51        807     0.40
                                   --------   ------   --------   ------   --------   ------
  Total mortgage-backed
   securities, net.........        $337,938   100.00%  $285,459   100.00%  $202,340   100.00%
                                   ========   ======   ========   ======   ========   ======
</TABLE>

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

                                       14

<PAGE>

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, 2001, we had an insignificant amount of property that was acquired as the
result of foreclosure and classified as REO. At December 31, 2001, we had
nonperforming assets of $5.2 million, and a ratio of nonperforming assets to
total assets of 0.24%.

     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."

<TABLE>
<CAPTION>
                                                             At December 31,
                                             ------------------------------------------
                                              1997     1998     1999     2000     2001
                                             ------   ------   ------   ------   ------
                                                         (Dollars in Thousands)
<S>                                          <C>      <C>      <C>      <C>      <C>
Delinquent Loans:
  One- to four-family residential.........   $2,610   $3,687   $4,080   $3,222   $2,534
  Commercial and multi-family real
     estate...............................      140       51       --       --       --
  Land....................................      187       --       --       --       --
  Consumer and commercial business
     loans/(1)/...........................      291      170      264    1,762    2,476
                                             ------   ------   ------   ------   ------
Total delinquent loans....................    3,228    3,908    4,344    4,984    5,010
Total REO.................................      967      907      775       27      219
                                             ------   ------   ------   ------   ------
      Total nonperforming assets..........   $4,195   $4,815   $5,119   $5,011   $5,229
                                             ======   ======   ======   ======   ======

Total nonperforming loans
  to net loans receivable/(1)/............     0.37%    0.40%    0.37%    0.37%    0.32%
Total nonperforming loans
  to total assets/(1)/....................     0.26%    0.25%    0.25%    0.26%    0.23%
Total nonperforming loans and
  REO to total assets.....................     0.34%    0.31%    0.30%    0.26%    0.24%
</TABLE>

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

     During the year ended December 31, 2001, gross interest income of
approximately $242,000 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 2001.

                                       15

<PAGE>

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

<TABLE>
<CAPTION>
                                                       At December 31,
                                         ------------------------------------------
                                          1997     1998     1999     2000     2001
                                         ------   ------   ------   ------   ------
                                                       (In Thousands)
<S>                                      <C>      <C>      <C>      <C>      <C>
Loans past due 60-89 days:
   One- to four-family residential....   $3,014   $2,049   $2,538   $4,711   $5,086
   Commercial real estate and
     multi-family.....................       54       --       --       --       --
   Consumer and commercial
     business loans...................       83        8      123       84    1,696
   Land loans.........................       --       11       --       --       16
                                         ------   ------   ------   ------   ------
     Total past due 60-89 days........   $3,151   $2,068   $2,661   $4,795   $6,798
                                         ======   ======   ======   ======   ======
</TABLE>

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

     When we classify problem assets as either substandard or doubtful, we are
required to establish 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 OTS, 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.

                                               At December 31,
                                          --------------------------
                                           1999      2000      2001
                                          ------    ------    ------
                                                (In Thousands)

Substandard assets/(1)/...............    $4,884    $4,939    $6,570
Doubtful assets.......................        --        --        --
Loss assets...........................       175        54       493
                                          ------    ------    ------
      Total classified assets.........    $5,059    $4,993    $7,063
                                          ======    ======    ======

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

                                       16

<PAGE>

     The following table sets forth information regarding our delinquent loans,
REO and loans foreclosed in-substance, net of specific valuation allowances at
December 31, 2001.

                                                           Balance        Number
                                                           -------        ------
                                                          (Dollars In Thousands)
Residential real estate loans:
   Loans 60 to 89 days delinquent ....................     $ 5,086           60
   Loans more than 89 days delinquent ................       2,534           30
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 ....................          16            1
   Loans more than 89 days delinquent ................          --           --
Consumer and commercial business loans:
    60 days or more delinquent .......................       2,476           30
Real estate owned ....................................         219            3
                                                           -------          ---
      Total ..........................................     $10,331          124
                                                           =======          ===

     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 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.

                                       17

<PAGE>

     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 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 5 to the Notes to the Consolidated Financial
Statements.

     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

<PAGE>

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

<TABLE>
<CAPTION>
                                                                      At December 31,
                                            ---------------------------------------------------------------
                                              1997        1998         1999          2000           2001
                                            ---------   ---------   -----------   -----------   -----------
                                                                      (Dollars in Thousands)
<S>                                         <C>         <C>         <C>           <C>           <C>
Total net loans receivable
  outstanding ..........................    $ 861,257   $ 977,166   $ 1,164,421   $ 1,361,232   $ 1,583,425
                                            =========   =========   ===========   ===========   ===========
Average net loans receivable
  outstanding ..........................    $ 735,949   $ 917,647   $ 1,067,107   $ 1,272,362   $ 1,458,899
                                            =========   =========   ===========   ===========   ===========
Allowance balance (at beginning of
   period) .............................    $   2,263   $   3,294   $     3,226   $     3,609   $     4,905
Acquired as part of acquisition of
  BankBoynton:
  Residential real estate ..............          628          --            --            --            --
  Consumer and commercial business .....          539          --            --            --            --
                                            ---------   ---------   -----------   -----------   -----------
    Total acquired .....................        1,167          --            --            --            --
                                            ---------   ---------   -----------   -----------   -----------
Provision for losses:
    Residential real estate ............          (83)        637          (734)         (126)          823
    Commercial and multi-family
     residential real estate ...........           36         335           (16)          138           521
    Land loans .........................           95          22           (42)         (146)          114
    Consumer and commercial business ...          122        (917)        1,255         1,462           596
                                            ---------   ---------   -----------   -----------   -----------
         Total provisions for losses ...          170          77           463         1,328         2,054
                                            ---------   ---------   -----------   -----------   -----------
Charge-offs:
    Residential real estate ............         (107)        (73)          (59)          (90)          (43)
    Commercial and multi-family
      residential real estate ..........         (167)        (22)          (21)           --            --
    Land loans .........................           (5)        (28)          (16)           --            --
    Consumer and commercial  business ..          (41)        (39)          (11)          (52)          (74)
                                            ---------   ---------   -----------   -----------   -----------
         Total charge-offs .............         (320)       (162)         (107)         (142)         (117)
                                            ---------   ---------   -----------   -----------   -----------
Recoveries:
    Residential real estate ............           14          17            27             7             3
    Commercial and multi-family
      residential real estate ..........           --          --            --            --            --
    Land loans .........................           --          --            --            --            --
    Consumer and commercial business ...           --          --            --           103             2
                                            ---------   ---------   -----------   -----------   -----------
         Total recoveries ..............           14          17            27           110             5
                                            ---------   ---------   -----------   -----------   -----------
Allowance balance (at end of period) ...    $   3,294   $   3,226   $     3,609   $     4,905   $     6,847
                                            =========   =========   ===========   ===========   ===========
Allowance for loan losses as a percent
  of net loans receivable at end of
  period ...............................         0.38%       0.33%         0.31%         0.36%         0.43%
Net loans charged-off as a percent of
  average loans outstanding ............         0.04%       0.01%         0.01%         0.01%         0.01%
Ratio of allowance for loan losses to
  total non-performing loans at end
  of period ............................       102.04%      82.55%        83.08%        98.41%       136.67%
Ratio of allowance for loan losses to
  total non-performing loans, REO and
  in-substance foreclosures
  at end of period .....................        78.52%      67.00%        70.50%        97.88%       130.94%
</TABLE>

                                       19

<PAGE>

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

<TABLE>
<CAPTION>
                                                                         At December 31,
                                 -----------------------------------------------------------------------------------------
                                         1997                   1998                   1999                  2000
                                 --------------------   --------------------   --------------------   --------------------

                                          % of Loans              % of Loans             % of Loans             % of Loans
                                          in Each                 in Each                in Each                in Each
                                          Category to            Category to            Category to            Category to
                                 Amount   Total Loans   Amount   Total Loans   Amount   Total Loans   Amount   Total Loans
                                 ------   -----------   ------   -----------   ------   -----------   ------   -----------
                                                                                    (Dollars in Thousands)
<S>                              <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
Balance at end
of period applicable to:
  One- to four-family
    residential  mortgage ...    $1,493      78.65%     $1,941      78.13%     $1,075      72.78%     $  722      67.60%

   Construction .............        54       4.21         188       5.04         287       5.00         432       5.83

   Commercial real estate ...       398       2.94         613       5.88         607       7.43         749       8.23

   Multi-family residential..        43       1.42         140       1.16         110       1.87         106       1.42

Land loans ..................       209       1.32         203       0.81         146       0.77          --       0.96

Consumer ....................       353       5.21          77       4.55         473       4.74         700       5.73

Commercial business .........       744       6.25          64       4.43         911       7.41       2,196      10.23
                                            ------      ------     ------      ------     ------      ------     ------
Total allowance for
  loan losses ...............    $3,294     100.00%     $3,226     100.00%     $3,609     100.00%     $4,905     100.00%
                                            ======      ======     ======      ======     ======      ======     ======

<CAPTION>
                                 --------------------
                                         2001
                                 --------------------
                                           % of Loans
                                           in Each
                                          Category to
                                 Amount   Total Loans
                                 ------   -----------
<S>                              <C>         <C>
Balance at end
of period applicable to:
  One- to four-family
    residential  mortgage ...    $1,241      53.02%
   Construction .............       696      15.98

   Commercial real estate ...     1,226      11.41

   Multi-family residential..       149       1.69

Land loans ..................       114       1.44

Consumer ....................       821       5.90

Commercial business .........     2,600      10.56
                                 ------     ------
Total allowance for
  loan losses ...............    $6,847     100.00%
                                 ======     ======
</TABLE>

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 Regulations--Liquidity Requirements" 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 $188.6 million at December 31, 2001. Our interest-earning deposits due
from other financial institutions with original maturities of three months or
less, totaled $43.3 million at December 31, 2001.

     Investment Portfolio. The following tables set forth the carrying value of
our investments at the dates indicated. At December 31, 2001, the market value
of our investments was approximately $188.6 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

<PAGE>

<TABLE>
<CAPTION>
                                                           At December 31,
                                                 ----------------------------------
                                                   1999         2000         2001
                                                 --------     --------     --------
                                                           (In Thousands)
<S>                                              <C>          <C>          <C>
U.S. Government and agency obligations .....     $ 26,317     $ 32,020     $ 93,171
Investment in trust preferred securities ...       38,959       38,230       36,138
Municipal bonds ............................        2,742        2,102        1,351
Interest-earning deposits ..................       19,065       56,426       43,347
Federal Home Loan Bank stock ...............       13,354       14,718       14,577
                                                 --------     --------     --------
      Total investments ....................     $100,437     $143,496     $188,584
                                                 ========     ========     ========
</TABLE>

     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 ("OTS") 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 OTS adopted
limitations on investment in trust preferred securities to 15% of a federal
savings bank's equity capital. A savings bank may appeal this OTS regulatory
limitation under certain circumstances.

     At December 31, 2001, our investment in trust preferred securities totaled
$36.1 million, or 1.7% of total assets and 21.2% of our regulatory capital. Our
investment policy specifically limits our investment in trust preferred
securities to $50 million, and requires that the securities be investment grade
and floating rate to improve our interest rate risk. We have asked the OTS 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 OTS
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

<PAGE>

     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, 2001.

<TABLE>
<CAPTION>
                                                                   At December 31, 2001
                                        ------------------------------------------------------------------------
                                           One Year or Less        One to Three Years      Three to Five Years
                                        ----------------------   ----------------------   ----------------------
                                                    Annualized               Annualized               Annualized
                                                     Weighted                 Weighted                 Weighted
                                        Amortized    Average     Amortized    Average     Amortized    Average
                                          Cost        Yield        Cost        Yield        Cost        Yield
                                        ---------   ----------   ---------   ----------   ---------   ----------
                                                                 (Dollars in Thousands)
<S>                                      <C>           <C>        <C>           <C>        <C>           <C>
Investment securities:
U.S. Government agency
  securities ......................      $15,000       3.42%      $39,991       3.34%      $38,000       5.98%
Investment in trust preferred
  securities ......................           --         --            --         --            --         --
Municipal bonds ...................          695       3.95           285       3.85           357       3.80
Federal Home Loan Bank stock/(2)/..       14,577       6.25            --         --            --         --
Interest-earning deposits .........       43,347       1.53            --         --            --         --
                                         -------       ----       -------       ----       -------       ----
      Total .......................      $73,619       2.87%      $40,276       3.34%      $38,357       5.96%
                                         =======       ====       =======       ====       =======       ====

<CAPTION>
                                                                   At December 31, 2001
                                        ---------------------------------------------------------------------
                                            Over Five Years                          Total
                                        ----------------------   --------------------------------------------
                                                    Annualized                                     Annualized
                                                     Weighted                           Average     Weighted
                                        Amortized    Average     Amortized    Market    Life in     Average
                                          Cost        Yield        Cost       Value     Years(1)     Yield
                                        ---------   ----------   ---------   --------   --------   ----------
                                                                  (Dollars in Thousands)
<S>                                      <C>           <C>       <C>         <C>         <C>         <C>
Investment securities:
U.S. Government agency
  securities ......................      $    --         --%     $ 92,991    $ 93,171     2.67       4.42%
Investment in trust preferred
  securities ......................       40,741       2.79        40,741      36,138    23.48       2.80
Municipal bonds ...................           --         --         1,337       1,351     1.96       3.89
Federal Home Loan Bank stock/(2)/..           --         --        14,577      14,577       --       6.25
Interest-earning deposits .........           --         --        43,347      43,347       --       1.53
                                         -------       ----      --------    --------    -----       ----
      Total .......................      $40,741       2.80%     $192,993    $188,584     8.94       3.57%
                                         =======       ====      ========    ========    =====       ====
</TABLE>

----------
/(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

<PAGE>

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
from 22 branches at December 31, 1998, to 38 branches at December 31, 2001.
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, 2001, certificate of deposit
accounts comprised 54.5% 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, 2001.

<TABLE>
<CAPTION>
  Weighted                                                                                    Percentage
  Average          Minimum                                         Minimum                     of Total
Interest Rate       Term          Checking and Savings Deposits     Amount     Balances        Deposits
-------------   --------------   -------------------------------   -------   --------------   ----------
                                                                             (In Thousands)
   <S>          <C>              <C>                                <C>        <C>             <C>
   0.00%             None        Non-interest bearing demand        $   --     $  168,795       10.81%
   0.55              None        NOW accounts                          100        143,744        9.22
   1.18              None        Passbooks and statement savings       100        206,239       13.23
   1.67              None        Money market accounts               2,500        190,823       12.24

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

   1.00          0 - 3 months    Fixed term, fixed rate              1,000          7,331        0.47
   3.13          3 - 6 months    Fixed term, fixed rate              1,000        180,746       11.59
   3.55          6 - 12 months   Fixed term, fixed rate              1,000        200,356       12.85
   4.42         12 - 36 months   Fixed term, fixed rate              1,000        409,366       26.25
   5.61         36 - 60 months   Fixed term, fixed rate              1,000         52,036        3.34
                                                                               ----------      ------
                                 Total                                         $1,559,436      100.00%
                                                                               ==========      ======
</TABLE>

                                       23

<PAGE>

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

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                             ------------------------------------------------------------------------------------------------------
                                           1999                             2000                             2001
                             --------------------------------   --------------------------------   --------------------------------
                                                     Weighted                           Weighted                           Weighted
       DEPOSIT TYPE                                  Average                            Average                            Average
       ------------           Average     Interest   Interest    Average     Interest   Interest    Average     Interest   Interest
                              Balances    Expense      Rate      Balances    Expense      Rate      Balances    Expense      Rate
                             ----------   --------   --------   ----------   --------   --------   ----------   --------   --------
                                                                      (Dollars in Thousands)
<S>                          <C>          <C>          <C>      <C>          <C>          <C>      <C>          <C>          <C>
Non-interest bearing
   demand ................   $   58,287   $    --        --%    $   91,677   $    --        --%    $  117,117   $    --        --%
NOW accounts .............      111,648       542      0.49        138,383     1,002      0.72        162,288     1,006      0.62
Passbooks ................      139,846     4,080      2.92        147,348     4,371      2.97        177,482     2,936      1.65
Money market accounts ....       62,606     2,190      3.50        134,354     6,763      5.03        186,046     6,529      3.51
Certificates of deposit ..      849,203    44,766      5.27        888,368    51,754      5.83        893,715    50,320      5.63
                             ----------   -------      ----     ----------   -------      ----     ----------   -------      ----
     Total ...............   $1,221,590   $51,578      4.22%    $1,400,130   $63,890      4.56%    $1,536,648   $60,791      3.96%
                             ==========   =======      ====     ==========   =======      ====     ==========   =======      ====
</TABLE>

                                       24

<PAGE>

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

                                                 At December 31,
                                   ------------------------------------------
                                     1999             2000             2001
                                   --------         --------         --------
      Rate                                      (In Thousands)
      ----
0.00 - 1.00% ................      $     --         $     --         $  8,158
1.01 - 2.00% ................           663              486              819
2.01 - 3.00% ................            --               --          189,044
3.01 - 4.00% ................            --           22,637          190,052
4.01 - 5.00% ................       199,817           18,164          283,787
5.01 - 6.00% ................       573,903          175,796           64,150
6.01 - 7.00% ................       114,007          688,678          113,468
7.01 - 8.00% ................           152            1,150              357
                                   --------         --------         --------
                                   $888,542         $906,911         $849,835
                                   ========         ========         ========

     The following table sets forth the amount and maturities of certificates of
deposit at December 31, 2001.

<TABLE>
<CAPTION>
                                             Amount Due
               -----------------------------------------------------------------------
               Less Than     1-2       2-3       3-4       4-5     After 5
                One Year    Years     Years     Years     Years     Years      Total
               ---------   -------   -------   -------   -------   --------   --------
                                           (In Thousands)
      Rate
      ----
<S>             <C>        <C>       <C>       <C>       <C>         <C>      <C>
0.00 - 1.00%    $  8,140   $    18   $    --   $    --   $    --     $ --     $  8,158
1.01 - 2.00%         819        --        --        --        --       --          819
2.01 - 3.00%     172,209    16,670        12        --        46      107      189,044
3.01 - 4.00%     166,168    10,846    12,930         7        --      101      190,052
4.01 - 5.00%     221,863    34,379    16,447        23    11,075       --      283,787
5.01 - 6.00%      44,079    13,965     3,500     1,010     1,596       --       64,150
6.01 - 7.00%      96,038    14,614       340     2,469         7       --      113,468
7.01 - 8.00%         270        87        --        --        --       --          357
                --------   -------   -------   -------   -------     ----     --------
                $709,586   $90,579   $33,229   $ 3,509   $12,724     $208     $849,835
                ========   =======   =======   =======   =======     ====     ========
</TABLE>

     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, 2001. These
deposits represented 13.64% of our total deposits at December 31, 2001.

                    Remaining Maturity                                Amount
                    ------------------                               --------
                                                                  (In Thousands)

Three months or less .........................................       $ 57,451
Three through six months .....................................         46,913
Six through twelve months ....................................         68,135
Over twelve months ...........................................         40,190
                                                                     --------
    Total ....................................................       $212,689
                                                                     ========

                                       25

<PAGE>

     Deposit flow details components of the increase in total deposits. The net
deposit flow for 2000 and 2001 of $176.3 million and $91.5 million,
respectively, was less than the 1999 amount of $200.8 million. This was due to
our ability in 2000 and 2001, utilizing our expanded retail branch network, to
de-emphasize the renewal of higher cost certificates of deposit and to
concentrate on acquiring deposits with lower costs such as checking, NOW
accounts, savings accounts and lower cost certificates of deposit. The following
table sets forth the net changes in our deposits for the periods indicated.

                                                   Year Ended December 31,
                                           -------------------------------------
                                              1999         2000          2001
                                           ----------   ----------   -----------
                                                      (In Thousands)

Deposits ...............................   $6,273,994   $9,054,418   $10,211,384
Withdrawals ............................    6,111,033    8,931,174    10,174,444
                                           ----------   ----------   -----------
Net increase before interest credited ..      162,961      123,244        36,940
Interest credited ......................       37,803       53,064        54,565
                                           ----------   ----------   -----------
Net increase in deposits ...............   $  200,764   $  176,308   $    91,505
                                           ==========   ==========   ===========

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, 2001, we had $290.3 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 3
months and 10 years.

                                                    Year Ended December 31,
                                             ----------------------------------
                                               1999         2000          2001
                                             --------     --------     --------
                                                    (Dollars in thousands)

Federal Home Loan Bank advances:
   Maximum month-end balance ............    $310,976     $329,743     $290,266
   Balance at end of period .............     247,073      274,365      290,266
   Average balance ......................     294,675      291,691      265,459

Weighted average interest rate on:
   Balance at end of period .............        5.81%        6.30%        6.13%
   Average balance for period ...........        6.01%        6.26%        6.38%

                                       26

<PAGE>

Subsidiary Activities

     Fidelity Federal Bank & Trust has 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, 2001, Fidelity Realty and Appraisal
Service, Inc. had a cumulative deficit of $68,000. Fidelity Realty and Appraisal
Service, Inc. incurred a net loss of $63,000 for the year ended December 31,
2000, and net income of $99,000 for the year ended December 31, 2001.

     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
$85,000 and $153,000 for the years ended December 31, 2000 and 2001,
respectively.

     Fidelity Bankshares, Inc. had one subsidiary, 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 OTS 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 OTS such information as may be required by applicable
regulations and must conduct the activity in accordance with the rules and
orders of the OTS. In addition to other enforcement, and supervision powers, the
OTS may determine after notice and opportunity for a hearing that the
continuation of a savings 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 OTS may order the savings bank to divest the subsidiary or
take other actions.

Personnel

     As of December 31, 2001, we had 583 full-time and 55 part-time employees.
None of our employees is represented by a collective bargaining group. We
believe our relationship with our employees is good.

                                       27

<PAGE>

                                   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

<PAGE>

(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, 2001, 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, 2001, 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, 2001, Fidelity Federal Bank &
Trust maintained 70.0% of its portfolio assets in qualified thrift investments
and, therefore, met the qualified thrift lender test.

     Capital Distributions. OTS 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 OTS 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 OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.

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

                                       29

<PAGE>

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 an average
daily balance of specified liquid assets equal to a quarterly average of not
less than a specified percentage of its net withdrawable deposit accounts plus
borrowings payable in one year or less. The current requirement is 4%. Fidelity
Federal Bank & Trust's average liquidity ratio for the quarter ended December
31, 2001 was 13.9%, which exceeded the applicable requirements.

     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, 2001, Fidelity
Federal Bank & Trust was in compliance with these regulations.

                                       30

<PAGE>

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

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

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

<PAGE>

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, 2001,
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,
2001, 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.

                                       32

<PAGE>

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 "--Federal Regulatory Savings Institutions--QTL 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

<PAGE>

                                    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, 2001, 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 is limited to 90% of alternative minimum taxable income.

State Taxation

     Florida Taxation. Foreign corporations, like Fidelity Bankshares, Inc., pay
a 5 1/2% 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.

                                       34

<PAGE>

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

Property

     At December 31, 2001, we conducted our business through our main banking
office located in West Palm Beach, Florida, and 38 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 $59.2 million at December 31, 2001. In
January 2001, we relocated our main administrative office to 205 Datura Street,
West Palm Beach, Florida and opened another branch in Palm Beach County.

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

     There are various claims and lawsuits in which the Bank is periodically
involved incident to our business. We believe that these legal proceedings, in
the aggregate, are not material to our financial condition as 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, 2001 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, 2001, Fidelity Bankshares, Inc. had 9 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, 2001, there
were 15,781,244 shares of Fidelity Bankshares, Inc. common stock issued and
outstanding. At December 31, 2001, Fidelity Bankshares, Inc. had approximately
3,620 stockholders of record. All high and low bid information and cash dividend
information has been adjusted to reflect the second step conversion of Fidelity
Bankshares, MHC on May 15, 2001.

                                                                   Cash Dividend
Fiscal 2001                                   High Bid   Low Bid      Declared
                                              --------   -------   -------------
Quarter Ended December 31, 2001 ...........    $18.400   $12.900       $0.10
Quarter Ended September 30, 2001 ..........    $15.350   $12.400       $0.10
Quarter Ended June 30, 2001 ...............    $14.400   $10.760       $0.10
Quarter Ended March 31, 2001 ..............    $11.794   $ 8.173       $0.10

                                       35

<PAGE>

                                                                   Cash Dividend
Fiscal 2000                                   High Bid   Low Bid      Declared
                                              --------   -------   -------------
Quarter Ended December 31, 2000............    $8.458     $7.449      $ 0.10
Quarter Ended September 30, 2000...........    $8.535     $6.311      $ 0.10
Quarter Ended June 30, 2000................    $6.621     $5.690      $ 0.10
Quarter Ended March 31, 2000...............    $6.518     $5.535      $ 0.10

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, 2000 and 2001 and for the years ended
December 31, 1999, 2000 and 2001, is derived in part from, and should be read
together with, the audited Consolidated Financial Statements and Notes thereto
of Fidelity Bankshares, Inc.

<TABLE>
<CAPTION>
                                                                            At December 31,
                                            ------------------------------------------------------------------------------
                                               1997             1998             1999             2000             2001
                                            ----------       ----------       ----------       ----------       ----------
                                                               (In thousands, except per share amounts)
<S>                                         <C>              <C>              <C>              <C>              <C>
Selected Financial Condition Data:
  Total assets.......................       $1,220,267       $1,566,927       $1,718,933       $1,932,434       $2,136,935
  Loans receivable, net..............          861,257          977,166        1,164,421        1,361,232        1,583,425
  Mortgage-backed securities and
    corporate debt securities........          234,132          433,751          375,171          322,223          237,671
  Investment securities/(2)/.........           61,720           66,557           61,478          105,163          152,446
  Deposits...........................          872,340        1,120,746        1,321,510        1,497,818        1,559,436
  Total borrowings...................          242,871          338,871/(1)/     290,479/(1)/     310,005/(1)/     355,342
  Stockholders' equity...............           87,387           84,999           83,304           91,651          177,612
  Book value per common share........       $     5.33       $     5.36       $     5.31       $     5.83       $    11.25
  Tangible book value per common
    share............................       $     5.12       $     5.18       $     5.10       $     5.64       $    11.12
</TABLE>

----------
/(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.

                                       36

<PAGE>

<TABLE>
<CAPTION>
                                                          For the Years Ended December 31,
                                       ------------------------------------------------------------------
                                        1997          1998           1999           2000           2001
                                       -------       -------       --------       --------       --------
                                                      (In thousands, except per share amounts)
<S>                                    <C>           <C>           <C>            <C>            <C>

Selected Operating Data:
  Interest income...............       $72,272       $98,320       $110,925       $132,580       $138,480
  Interest expense..............        41,606        64,992         72,255         85,671         81,422
                                       -------       -------       --------       --------       --------
  Net interest income...........        30,666        33,328         38,670         46,909         57,058
  Provision for loan losses.....           170            77            463          1,328          2,054
                                       -------       -------       --------       --------       --------
  Net interest income after
    provision for loan losses...        30,496        33,251         38,207         45,581         55,004
                                       -------       -------       --------       --------       --------
  Other income..................         4,910         8,690         12,927/(1)/    13,406/(2)/    13,764
                                       -------       -------       --------       --------       --------
  Non-interest expense..........        24,235        29,687         36,354         45,403         55,722
                                       -------       -------       --------       --------       --------
  Income before taxes...........        11,171        12,254         14,780         13,584         13,046
  Income tax expense............         4,753         4,842          5,666          5,063          5,166
                                       -------       -------       --------       --------       --------
    Net income..................       $ 6,418       $ 7,412       $  9,114       $  8,521       $  7,880
                                       =======       =======       ========       ========       ========
  Income per common share:
  Basic/(3)/....................       $  0.40       $  0.46       $   0.59       $   0.54       $   0.52
                                       =======       =======       ========       ========       ========
  Diluted/(3)/..................       $  0.39       $  0.46       $   0.58       $   0.54       $   0.51
                                       =======       =======       ========       ========       ========
</TABLE>

----------
/(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.

                                       37

<PAGE>

<TABLE>
<CAPTION>
                                                                      At and for the Years ended December 31,
                                                         -----------------------------------------------------------------
                                                          1997          1998          1999           2000           2001
                                                         ------        ------        -------        -------        -------
<S>                                                      <C>           <C>           <C>            <C>            <C>
   Selected Financial Ratios and Other Data:
     Return on average assets (ratio of net
       income to average total assets)...........          0.64%         0.52%          0.55%/(1)/     0.46%/(1)/     0.38%
     Return on average stockholders'
       equity  (ratio of net income to
       average stockholders' equity).............          7.62%         8.33%         11.04%/(1)/     9.97%/(1)/     5.46%
     Non-interest income to average assets.......          0.49%         0.61%          0.78%          0.70%          0.67%
     Non-interest expense to average assets......          2.43%         2.08%          2.19%          2.43%          2.70%
     Net interest rate spread during
       the period................................          3.00%         2.35%          2.45%          2.77%          3.60%
     Net interest margin (net interest income
       to average interest earning assets).......          3.25%         2.48%          2.47%          2.72%          3.00%
     Ratio of average interest-earning assets
       to average interest-bearing liabilities...         105.8%        102.8%        100.51%         99.21%        102.04%
     Efficiency ratio /(2)/......................         68.12%        70.65%         70.46%         75.07%         78.68%
     Dividend payout ratio.......................         88.54%        84.82%         70.42%         76.34%         76.92%

Asset Quality Ratios:
     Nonperforming loans to total loans
       at end of period..........................          0.37%         0.40%          0.37%          0.37%          0.32%
     Allowance for loan losses to
       nonperforming loans at end of period......        102.04%        82.55%         83.08%         98.41%        136.67%
     Allowance for loan losses to
       total loans at end of period..............          0.38%         0.33%          0.31%          0.36%          0.43%
     Non-performing assets to total
       assets at end of period...................          0.34%         0.31%          0.30%          0.26%          0.24%
     Ratio of net charge-offs during
       the period to average loans
       outstanding during the period.............          0.04%         0.01%          0.01%          0.00%          0.00%

Capital Ratios:
     Stockholders' equity to total assets
       at end of period..........................          7.16%         5.42%          4.85%          4.77%          8.31%
     Average stockholders' equity to
       average total assets......................          8.46%         6.25%          4.96%          4.62%          7.00%
     Tangible capital to tangible assets
       at end of period/(3)/.....................          6.67%         6.65%          6.63%          6.32%          7.97%
     Core capital to adjusted tangible
       assets at end of period/(3)/..............          6.67%         6.65%          6.63%          6.32%          7.97%
     Risk-based capital to risk-weighted
       assets at end of period/(3)/..............         14.03%        12.23%         12.19%         11.03%         12.45%

Other Data:
     Number of branch offices
       at end of period..........................            21            22             32             35             38
     Number of deposit accounts
       at end of period..........................        82,983        92,561        109,342        127,467        133,650
</TABLE>

----------
/(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.

                                       38

<PAGE>

Changes in Financial Position

     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 $222.1 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 $5.4 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.

     Comparison of Financial Position at December 31, 1999 and December 31, 2000

     Our assets increased by $204.0 million from $1.7 billion at December 31,
1999 to $1.9 billion at December 31, 2000. The increase in our assets was
primarily attributable to a $196.8 million increase in net loans receivable
offset by a $8.4 million decrease in cash and assets available for sale. In
addition, we increased our investment in office properties and equipment,
primarily for new office sites, by $9.0 million, while all other assets
increased by $6.5 million. Funds for the increase in assets were provided
primarily by an increase in deposits of $176.3 million and an increase in
advances from the Federal Home Loan Bank of $27.3 million. The increases in
loans and deposits reflects our branch expansion in our market area. In
addition, the increase in our deposits primarily reflects the popularity of our
variable rate money market accounts and non-interest bearing NOW accounts which
increased by $68.1 million and $62.0 million, respectively. Stockholders' equity
at December 31, 2000 was $91.7 million, an increase of $8.3 million from
December 31, 1999. This increase primarily consisted of net income for the year
of $8.5 million and a decrease in accumulated other comprehensive loss (net of
taxes) of $2.1 million, which was partially offset by dividends declared of $2.9
million.

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.

                                       39

<PAGE>

     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 $147.5 million, or 8.4%, in 2001, this was largely offset by
a decline in the average yield of these assets to 7.28% 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 $9.3 million, or 11.1%,
from $83.7 million for the year ended December 31, 2000 to $93.0 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 $1.2 billion, which
was offset by a modest decline in the yield on these assets to 7.57% from 7.61%.
Interest income on consumer and commercial business loans increased by $3.5
million, or 20.7% from $17.0 million for the year ended December 31, 2000 to
$20.5 million for the year ended December 31, 2001. While the average balance of
consumer and commercial business loans increased by $58.7 million, or 34%, from
$172.7 million to $231.4 million, this was offset by a significant decline in
yield on these assets from 9.83% in 2000 to 8.86% in 2001. Our average balance
of mortgage-backed securities declined from $349.5 million in 2000 to $291.1
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 5.77% 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 $32.1 million,
or 58.2% from $55.2 million for the year ended December 31, 2000 to $87.3
million for the year ended December 31, 2001. We incurred a decline in yield on
these assets from 7.16% for 2000 to 5.81% for 2001. Interest income on other
investments, which consists of income from the bank's 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 $19.7 million, or 43.1%, the average yield declined from 7.33% in
2000 to 4.81% 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

                                       40

<PAGE>

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 $327.5 million in 2001, together with a decline in the
average cost of these borrowings from 6.48% to 6.30%.

     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 an increase in our net interest spread to 2.91% for 2001 from 2.77% in 2000,
together with an increase in the ratio of our average interest earning assets to
interest bearing liabilities from 99.21% in 2000 to 102.04% 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 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

                                       41

<PAGE>

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.

     Results of Operations for the years ended December 31, 1999 and 2000

     General. We had net income of $8.5 million, or basic earnings per share of
$0.54, for the year ended December 31, 2000. Net income totaled $9.1 million, or
basic earnings per share of $0.59, for 1999. The decrease in net income for the
year ended December 31, 2000, as compared to 1999 was attributable primarily to
an increase in other operating expenses of $9.0 million, or 24.7% from $36.4
million for the year ended December 31, 1999 to $45.4 million for the year ended
December 31, 2000, a $5.1 million gain on the sale of real estate in 1999, and
an increase in our provision for loan losses of $865,000 in 2000. Offsetting
these increased expenses was an increase in net interest income of $8.2 million
to $46.9 million for the year ended December 31, 2000 from $38.7 million in
1999, and a decrease in provision for income taxes of $603,000 from $5.7 million
in 1999 to $5.1 million in 2000.

     Interest Income. Interest income increased by $21.7 million, or 19.5%, from
$110.9 million for the year ended December 31, 1999, to $132.6 million for the
year ended December 31, 2000. The increase in interest income was attributable
to a $159.6 million increase in the average balance of interest earning assets
from $1.6 billion to $1.7 billion, as well as an increase in the average yield
on these assets from 7.10% to 7.70%. The increase in average interest earning
assets reflected a $146.9 million increase in the average balance of mortgage
loans, a $58.3 million increase in the average balance of consumer and
commercial business loans, and a $19.0 million increase in the average balance
of investment securities. The increase in the average yield on our interest
earning assets also reflected the rising interest rate environment generally
during 2000, as well as the changing composition of our loan portfolio which was
comprised of an increasing percentage of higher yielding consumer and commercial
business loans.

     Interest income from mortgage loans increased by $12.7 million, or 17.9%,
from $71.0 million for the year ended December 31, 1999 to $83.7 million for the
year ended December 31, 2000. The increase in

                                       42

<PAGE>

interest income on mortgage loans was attributable to an increase in the average
balance of mortgage loans from $952.7 million to $1.1 billion, as well as an
increase in the average yield from 7.45% to 7.61%. Interest income from consumer
and commercial business loans increased by $6.7 million, or 64.7%, from $10.3
million for the year ended December 31, 1999 to $17.0 million for the year ended
December 31, 2000. The increase was attributable to an increase in the average
balance of consumer and commercial business loans from $114.4 million to $172.7
million, and an increase in the average yield of such loans from 9.02% to 9.83%.
Interest income from mortgage-backed securities increased slightly from $24.3
million in 1999 to $24.6 million in 2000. Our average balance of mortgage-backed
securities decreased from $409.7 million in 1999 to $349.5 million in 2000, as
we redeployed funds from maturing mortgage-backed securities into higher
yielding loans. The average yield on mortgage-backed securities increased from
5.93% to 7.05%. The increase in the average yield of our mortgage-backed
securities portfolio resulted from our investment in adjustable rate securities,
which repriced upward as a result of the general increase in market interest
rates during the period. Interest income from investments increased $1.7 million
from $2.2 million in 1999 to $4.0 million in 2000. The increase was attributable
to an increase in average balance of investments from $36.2 million to $55.2
million, as well as an increase in the average yield from 6.12% to 7.16%.
Interest income from other investments, consisting of interest-earning deposits
in other financial institutions and Federal Home Loan Bank stock, increased
$222,000, from $3.1 million in 1999 to $3.3 million in 2000. The increase
reflected an increase in the average yield of other investments from 6.22% to
7.33%.

     Interest Expense. Interest expense increased by $13.4 million, or 18.6%,
from $72.3 million for the year ended December 31, 1999 to $85.7 million for the
year ended December 31, 2000. The increase in interest expense was attributable
to an increase in the average balance of interest-bearing deposits of $178.5
million, or 14.6%, from $1.2 billion in 1999 to $1.4 billion in 2000. The
increase in the average balance of deposits reflected the introduction and
depositor acceptance of our variable rate money market accounts and non-interest
bearing NOW accounts. In addition, the average cost of deposits increased from
4.22% in 1999 to 4.56% in 2000. Borrowed funds increased $1.1 million, from
$20.7 million in 1999 to $21.8 million in 2000. The increase in interest expense
from borrowed funds was attributable to the increase in the average balance of
such funds from $333.4 million in 1999 to $336.0 million in 2000, as well as an
increase in average cost from 6.20% to 6.48%.

     Net Interest Income. Net interest income increased from $38.7 million for
1999 to $46.9 million for the year ended December 31, 2000, representing an
increase of $8.2 million, or 21.3%. The increase in net interest income resulted
from an increase in our net interest rate spread from 2.45% to 2.77%, which was
partially offset by a decrease in the ratio of our average interest-earning
assets to average interest-bearing liabilities from 100.51% to 99.21%. The
increase in our interest rate spread primarily reflected increased originations
of higher yielding consumer and commercial business loans and an increase in the
average yield on our mortgage loan portfolio.

     Provision for Loan Losses. Our provision for loan losses increased by
$865,000, from $463,000 in 1999 to $1.3 million in 2000, principally to reflect
increased originations of commercial real estate loans, commercial business
loans and consumer loans. Our total allowance for loan losses at December 31,
2000 was $4.9 million and 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. Our ratio of non-performing loans
to total loans was 0.37% at December 31, 2000.

     Other Income. Other income increased by $500,000, or 3.9% from $12.9
million for the year ended December 31, 1999 to $13.4 million for the year ended
December 31, 2000. The biggest increase in other income was due to a $2.0
million increase in other miscellaneous income, which resulted primarily from
the receipt at no cost of 147,232 shares of John Hancock Financial common stock,
valued at $17.00 per share,

                                       43

<PAGE>

which we received in connection with John Hancock Financial's conversion from a
mutual to a stock insurance company. We received these shares as a result of our
ownership of various life insurance policies issued by John Hancock Financial.
Service charges on deposit accounts increased $790,000, from $3.2 million to
$4.0 million. Fees for other banking services increased by $1.8 million, from
$2.7 million to $4.5 million. Net gain on sale of loans, investments and
mortgage-backed securities also increased by $1.0 million from $420,000 to $1.4
million, due to the sale of 147,232 shares of John Hancock Financial common
stock, resulting in a profit of $1.2 million.

     Operating Expense. Operating expense increased by $9.0 million, or 24.7%
from $24.7 million for the year ended December 31, 1999, to $45.4 million for
the year ended December 31, 2000. Operating expense for the year ended 2000
included the expenses associated with opening and operating eight new full
service offices which were in operation for only part of 1999. Employee
compensation and benefits expense increased $5.4 million, from $21.2 million in
1999 to $26.6 million in 2000. This increase, which includes normal salary
increases, resulted primarily from hiring additional personnel in connection
with our branch expansion in 1999 and 2000, and from expanding the staff of our
commercial loan department to enhance our commercial lending capabilities. As a
result, our full time equivalent employees increased by 72 persons, from 506 at
December 31, 1999 to 578 at December 31, 2000. Also contributing to the increase
in employee compensation and benefits expense was increased health care costs.
Health care costs increased by $846,000 from 1999 to 2000. Occupancy and
equipment costs increased by $1.6 million, from $7.3 million to $8.9 million.
The increase in occupancy and equipment costs reflected increases in real estate
taxes and assessments on our properties as well as depreciation expenses
relating to our new computer equipment and new branch office facilities opened
during the latter part of 1999 and 2000. Marketing expense increased $365,000
from $916,000 in 1999 to $1.8 million in 2000, and miscellaneous operating
expense increased by $1.9 million, from $6.5 million in 1999 to $8.4 million in
2000. The increase in miscellaneous operating expense reflects costs associated
with Fidelity Federal Bank & Trust's name change from Fidelity Federal Savings
Bank of Florida. In addition, increased costs incurred as a result of expanding
our branch franchise included costs to provide our additional branches with
supplies, increased postage costs, higher armored-car expense and telephone
expense. Also contributing to our increased operating expense was a decrease in
the gain on real estate owned of $92,000. These increases were partially offset
by a decrease in our federal deposit insurance premium of $395,000, from
$672,000 in 1999 to $277,000 in 2000.

     Income Taxes. Provision for income taxes decreased $603,000 from $5.7
million in 1999 to $5.1 million in 2000. The decrease in the provision for
income taxes was attributable to a decrease in income before the provision for
income taxes of $1.2 million, from $14.8 million in 1999 to $13.6 million in
2000.

                                       44

<PAGE>

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.

<TABLE>
<CAPTION>
                                                            For the Years Ended December 31,
                                                      1999                                   2000
                                         ----------------------------------   ---------------------------------
                                                                    Average                               Average
                                           Average                  Yield/      Average                    Yield/
                                           Balance     Interest      Cost       Balance      Interest       Cost
                                         -----------   ---------    -------   -----------   ---------     -------
                                                                                      (Dollars in Thousands)
<S>                                      <C>           <C>            <C>     <C>           <C>            <C>
Interest-earning assets:
   Mortgage loans.....................   $   952,715   $  70,975      7.45%   $ 1,099,636   $    83,663     7.61%
   Consumer and commercial
      business loans..................       114,392      10,315      9.02        172,726        16,987     9.83
   Mortgage-backed securities(1) .....       409,653      24,311      5.93        349,498        24,646     7.05
   Investment securities..............        36,197       2,215      6.12         55,196         3,953     7.16
   Other investments(2)...............        49,984       3,109      6.22         45,471         3,331     7.33
                                         -----------   ---------    ------    -----------   -----------    -----
     Total interest-earning assets ...     1,562,941     110,925      7.10      1,722,527       132,580     7.70
Non-interest-earning assets...........       100,299                              127,430
                                         -----------                                        -----------
      Total assets....................   $ 1,663,240                                        $ 1,849,957
                                         ===========                          ===========
Interest-bearing liabilities:
   Deposits...........................   $ 1,221,590   $  51,578      4.22%   $ 1,400,130   $    63,890     4.56%
   Borrowed funds.....................       333,439      20,677      6.20        336,065        21,781     6.48
                                         -----------   ---------    ------    -----------   -----------    -----
      Total interest-bearing
         liabilities..................     1,555,029      72,255      4.65      1,736,195        85,671     4.93
Non-interest bearing liabilities......        25,644                               28,301
                                         -----------                          -----------

      Total liabilities...............     1,580,673                            1,764,496
Stockholders' equity..................        82,567                               85,461
                                         -----------                          -----------
       Total liabilities and
          stockholders' equity........   $ 1,663,240                          $ 1,849,957
                                         ============                         ===========
Net interest income...................                 $  38,670                            $    46,909
                                                       =========                            ===========
Net interest rate spread(3)...........                                2.45%                                 2.77%
                                                                    ======                                  ====

Net interest margin(4)................                                2.47%                                 2.72%
                                                                    ======                                  ====
Ratio of average interest-earning
  assets to average interest-bearing
  liabilities.........................                              100.51%                                99.21%
                                                                    ======                                 =====

<CAPTION>
                                                         2001
                                         -----------------------------------     At December 31, 2001
                                                                     Average     ---------------------
                                           Average                    Yield/       Actual      Yield/
                                           Balance       Interest      Cost        Balance      Cost
                                         -----------   -----------   -------     -----------   ------
                                                                                (Dollars in Thousands)
<S>                                      <C>           <C>             <C>       <C>            <C>
Interest-earning assets:
   Mortgage loans.....................   $ 1,227,487   $    92,981     7.57%     $ 1,307,190    7.41%
   Consumer and commercial
      business loans..................       231,412        20,509     8.86          276,235    7.81%
   Mortgage-backed securities(1)......       291,068        16,785     5.77          237,671    4.52%
   Investment securities..............        87,304         5,072     5.81           94,522    4.43%
   Other investments(2)...............        65,145         3,133     4.81           57,924    2.74%
                                         -----------   -----------   ------      -----------
     Total interest-earning assets ...     1,902,416       138,480     7.28        1,973,542    6.84%
Non-interest-earning assets ..........                     159,578                   163,393
                                                       -----------               -----------
      Total assets....................                 $ 2,061,994               $ 2,136,935
                                                       ===========               ===========
Interest-bearing liabilities:
   Deposits...........................   $ 1,536,758   $    60,791     3.96%     $ 1,559,436    2.54%
   Borrowed funds.....................       327,544        20,631     6.30          355,342    6.31%
                                         -----------   -----------               -----------
      Total interest-bearing
         liabilities..................     1,864,302        81,422     4.37        1,914,778    3.24%
Non-interest bearing liabilities .....                      53,369                   44,545

      Total liabilities...............     1,917,671                               1,959,323
Stockholders' equity..................      144,323                                  177,612
                                         -----------                             -----------
       Total liabilities and
         stockholders' equity.........   $ 2,061,994                             $ 2,136,935
                                         ===========                             ===========

Net interest rate spread(3)...........                 $    57,058     2.91%                     3.60%
                                                       ===========   ======                    ======
Net interest margin(4)................                                 3.00%                     3.70%
                                                                     ======                    ======
Ratio of interest-earning
  assets to interest-bearing
  liabilities.........................                                                         103.07%
                                                                     102.04%                   ======
                                                                     ======
</TABLE>

----------
(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.

                                       45

<PAGE>

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.

<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                        ---------------------------------------------------------------------------------
                                                  2000 vs. 1999                            2001 vs. 2000
                                        ---------------------------------------------------------------------------------
                                                Increase/(Decrease)                    Increase/(Decrease)
                                                   Due to                                    Due to
                                        --------------------------     Total      --------------------------     Total
                                                             Rate/    Increase                         Rate/    Increase
                                         Volume     Rate    Volume   (Decrease)    Volume    Rate     Volume   (Decrease)
                                        --------   ------   ------   ---------    -------   -------   ------   ---------
                                                                  (In Thousands)
<S>                                     <C>        <C>       <C>      <C>         <C>       <C>        <C>      <C>
Interest income:
  Mortgage loans...............         $10,945    $1,510    $ 233    $12,688     $ 9,727   $  (367)   $ (42)   $ 9,318
  Consumer and commercial
    business loans.............           5,260       935      477      6,672       5,772    (1,679)    (571)     3,522
  Mortgage-backed securities...          (3,570)    4,577     (672)       335      (4,120)   (4,492)     751     (7,861)
  Investment securities........           1,163       377      198      1,738       2,299      (746)    (434)     1,119
  Other investments............            (281)      553      (50)       222       1,441    (1,144)    (495)      (198)
                                        -------    ------    -----    -------     -------   -------    -----    -------

  Total interest-earning assets          13,517     7,952      186     21,655      15,119    (8,428)    (791)     5,900
                                        -------    ------    -----    -------     -------   -------    -----    -------
Interest expense:
  Deposits.....................           7,538     4,165      609     12,312       6,235    (8,504)    (830)    (3,099)
  Borrowed funds...............             163       934        7      1,104        (552)     (613)      15     (1,150)
                                        -------    ------    -----    -------     -------   -------    -----    -------

  Total interest-bearing liabilities      7,701     5,099      616     13,416       5,683    (9,117)    (815)    (4,249)
                                        -------    ------    -----    -------     -------   -------    -----    -------
Change in net interest income           $ 5,816    $2,853    $(430)   $ 8,239     $ 9,436   $   689    $  24    $10,149
                                        =======    ======    =====    =======     =======   =======    =====    =======
</TABLE>

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 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.

                                       46

<PAGE>

     The following table sets forth our estimated internal calculations of MVPE
as of December 31, 2001.

Changes in Rates                           Market Value of Portfolio Equity
-------------------   -------------------------------------------------------
 (Basis Points)            $ Amount              $ Change            % Change
-------------------   ------------------   -------------------   ------------
                                          (Dollars in Thousands)

     +200 bp              $   246,564          $   (42,535)          -14.7%
     +100 bp              $   262,107          $   (26,992)           -9.3%
       -0-                $   289,099          $        --             0.0%
     -100 bp              $   289,899          $       800             0.3%
     -200 bp              $   290,709          $     1,610             0.6%

     Fidelity Federal Bank & Trust's internal calculation of MVPE at December
31, 2001 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 NOW accounts,
passbook and money market deposits. During 2000, we contracted with a
third-party consultant to perform an analysis of our core deposit accounts and
updated this analysis in 2001. 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 are based on this analysis.

<TABLE>
<CAPTION>
                                               6
                                             Months   1 Year    3 Years   5 Years
                                 Within 6   Through   Through   Through   Through    Over 10
                                  Months    1 Year    3 Years   5 Years   10 Years    Years
                                 --------   -------   -------   -------   --------   -------
<S>                               <C>        <C>       <C>       <C>       <C>       <C>
NOW 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              1.56%      1.56%     0.00%     0.00%     36.55%    100.00%
accounts
</TABLE>

     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

                                       47

<PAGE>

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, 2001, we were not required by the OTS to hold additional
risk-based capital for interest rate risk-purposes.

     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 minimum levels of
liquid assets as defined by OTS regulations. This requirement, which varies from
time to time depending upon economic conditions and deposit flows, is based upon
a percentage of deposits and short-term borrowings. The required liquidity ratio
currently is 4.0% of assets. Our liquidity ratio averaged 21.3% during the month
of December 2000 and 14.12% during the month of December 2001. Liquidity ratios
averaged 21.62%, 20.0% and 18.51% for the years ended December 31, 1999, 2000
and 2001, 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 $19.1 million, $56.4 million and $43.3 million at
December 31, 1999, 2000 and 2001, respectively. Other assets qualifying for
liquidity purposes at December 31, 1999, 2000 and 2001, totaled $286.0 million,
$265.6 million and $208.9 million, respectively. For additional information
about cash flows from our operating, financing, and investing activities, see
Consolidated Statements of Cash Flows included in the 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, 2001, we had $290.3

                                       48

<PAGE>

million in advances from the Federal Home Loan Bank of Atlanta. We borrow from
the Federal Home Loan Bank of Atlanta in order to reduce interest rate risk, and
for liquidity purposes.

     At December 31, 2001, we had outstanding loan commitments of $104.6 million
to originate and/or purchase mortgage loans. This amount does not include the
unfunded portion of loans in process. At December 31, 2001, certificates of
deposit scheduled to mature in less than one year, totaled $709.6 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.

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.

New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 (as amended by SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities"), which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
statement requires that an entity recognize all derivatives (including certain
derivative instruments embedded in other contracts) as either assets or
liabilities on its balance sheet at fair value. If certain conditions are met, a
derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. Entities may reclassify securities from the
held-to-maturity category to the available-for-sale category at the time they
adopt SFAS No. 133. In June of 1999, FASB issued SFAS No. 137 "Deferral of the
Effective Date of FASB Statement No. 133," which makes SFAS 133 effective for
all fiscal quarters of fiscal years beginning after June 15, 2000 and,
accordingly, applies to Fidelity Bankshares, Inc. beginning on January 1, 2001.
Management has determined that Fidelity Bankshares, Inc. or its subsidiaries is
not a party to any transactions involving derivatives as defined by SFAS No.
133.

     In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," which
replaces the accounting and reporting standards of SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS No. 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on a
financial-components approach that focuses on control. The statement also
requires reclassification of financial assets pledged as collateral in the
statement of financial position separately from other assets not so encumbered,
or disclosure of such assets in footnotes to the financial statements based on
certain criteria. This statement is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after March 31,
2001. This statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. Adoption of this
standard did not have to have a material effect on Fidelity Bankshares, Inc.'s
consolidated financial statements.

                                       49

<PAGE>

     In June 2001, the FASB issued SFAS No. 141 "Business Combinations." The
statement makes significant changes tot he accounting for business combinations,
principally by the elimination of 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
would 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 for fiscal years beginning after December 15, 2001. As to the
effects of adoption on our statements, we could determine no impairment in the
carrying value of goodwill arising from previous acquisitions in the amount of
$2,175,000. Amortization of goodwill included in our income statements for the
years ended December 31, 2001 and 2000, respectively, was $245,000 and $255,000.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The statement applies to legal obligations associated
with the retirement of a tangible long-lived asset that results from the
acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lessee obligations. The statement requires
these obligations be recorded at fair value as of the date of retirement and is
effective for fiscal years beginning after June 15, 2002. We do not believe that
the adopting of this accounting principle will have a significant effect on our
financial statements.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement establishes a
single accounting model for long-lived assets to be disposed of by sale, and
requires that long-lived assets to be abandoned, exchanged for similar
productive assets, or distributed to owners in a spinoff, be considered held and
used until disposed of. The statement is effective for fiscal years beginning
after December 15, 2001. We do not believe the adoption of this accounting
principle will have a significant effect on our financial statements.

                                       50

<PAGE>

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 2001.

                                    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, 2001, including their terms of office:

<TABLE>
<CAPTION>
                                     Position Held at                               Current Term
       Name                Age   Fidelity Bankshares, Inc.   Director Since /(1)/     to Expire
------------------         ---   -------------------------   --------------------   ------------

<S>                        <C>    <C>                              <C>                  <C>
Vince A. Elhilow           62          President and
                                  Chief Executive Officer          1984                 2003
Joseph B. Shearouse, Jr.   78       Chairman of the Board          1961                 2002
Keith D. Beaty             51            Director                  1992                 2002
Paul C.  Bremer            58            Director                  2000                 2004
F. Ted Brown, Jr.          72            Director                  1990                 2004
Donald E. Warren, M.D.     74            Director                  1979                 2003
Karl H. Watson             60            Director                  1999                 2004
</TABLE>

----------
/(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.

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

                                       51

<PAGE>

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.

     Joseph B. Shearouse, Jr. is Chairman of the Board of Directors. Mr.
Shearouse joined Fidelity Federal Bank & Trust in 1954 and has held various
positions in Fidelity Federal Bank & Trust. Mr. Shearouse became Chairman of the
Board of Fidelity Federal Bank & Trust in 1987 and was President of Fidelity
Federal Bank & Trust from 1974 to 1987. Mr. Shearouse has been a director of
Fidelity Federal Bank & Trust since 1961. Mr. Shearouse retired as an active
officer of Fidelity Federal Bank & Trust on January 31, 1995, but has continued
as Chairman of the Board. Mr. Shearouse will retire as a director of Fidelity
Bankshares, Inc. effective at the Annual Meeting of Shareholders in May 2002.

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

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

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

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

     Karl H. Watson is President 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.

     Richard D. Aldred has served 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 has served as Executive Vice President and Lending
Operations Manager. Mr. Bova has been employed by Fidelity Federal Bank & Trust
for 30 years.

     Robert L. Fugate has served 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 2002 Annual Meeting of Stockholders.

                                       52

<PAGE>

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 2002 Annual Meeting of Stockholders.

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

     None.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
         REPORTS ON FORM 8-K
----------------------------------------------------

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

     (a)(1) Financial Statements
            --------------------

          .    Independent Auditors' Report
          .    Consolidated Statements of Financial Position,
                    December 31, 2000 and 2001
          .    Consolidated Statements of Operations,
                    Years Ended December 31, 1999, 2000 and 2001
          .    Consolidated Statements of Comprehensive Operations,
                    Years Ended December 31, 1999, 2000 and 2001
          .    Consolidated Statements of Changes in Stockholders' equity,
                    Years Ended December 31, 1999, 2000 and 2001
          .    Consolidated Statements of Cash Flows,
                    Years Ended December 31, 1999, 2000 and 2001
          .    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**

                                       53

<PAGE>

          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

----------
     *    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).

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

          None

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

     (d) Not applicable.

                                       54

<PAGE>

                                   SIGNATURES

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

                                      FIDELITY BANKSHARES, INC.


Date: March 18, 2002                  By:  /s/ Vince A. Elhilow
                                           -------------------------------------
                                           Vince A. Elhilow
                                           President and Chief Executive Officer

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

<TABLE>
<S>                                                      <C>
By:  /s/ Vince A. Elhilow                                By: /s/ Richard D. Aldred
     ------------------------------------------------        --------------------------------------------------------
     Vince A. Elhilow, President and Chief                   Richard  D.  Aldred,   Executive  Vice  President, Chief
     Executive Officer                                       Financial Officer and Treasurer
     (Principal Executive Officer)                           (Principal Financial and Accounting Officer)

Date: March 18, 2002                                     Date: March 18, 2002


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

Date: March 18, 2002                                     Date: March 18, 2002


By:  /s/ Paul C. Bremer                                  By: /s/ F. Ted Brown, Jr.
     ------------------------------------------------        --------------------------------------------------------
     Paul C. Bremer, Director                                F. Ted Brown, Jr., Director

Date: March 18, 2002                                     Date: March 18, 2002


By:  /s/ Donald E. Warren                                By: /s/ Karl H. Watson
     ------------------------------------------------        --------------------------------------------------------
     Donald E. Warren, M.D., Director                        Karl H. Watson, Director

Date: March 18, 2002                                     Date: March 18, 2002
</TABLE>