##### 



EXHIBIT 13 CONSOLIDATED FINANCIAL STATEMENTS




---



##### 



Exhibit 13 Fidelity Bankshares, Inc.
and Subsidiaries
Consolidated Financial Statements Table of Contents Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Financial Position
at December 31, 2003 and 2004
    
    
    F-3Consolidated Statements of Operations
for the years ended December 31, 2002, 2003 and 2004
    
    
    F-4Consolidated Statements of Comprehensive Operations
for the years ended December 31, 2002, 2003 and 2004
    
    
    F-5Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2002, 2003 and 2004
    
    
    F-5Consolidated Statements of Cash Flows
for the years ended December 31, 2002, 2003 and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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##### 



Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders of
Fidelity Bankshares, Inc.
West Palm Beach, Florida We have audited the accompanying consolidated statements of financial position of Fidelity
Bankshares, Inc. and subsidiaries (the Company) as of December 31, 2003 and 2004, and the related
consolidated statements of operations, comprehensive operations, changes in stockholders equity
and cash flows for each of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated
financial statements present fairly, in all materials respects,
the financial position of the Company as of December 31, 2003 and 2004,
and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted in the United States
of America. We have also audited, in accordance
with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal
control over financial reporting as of December 31, 2004, based on the criteria established in Internal
Control-Intergrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 14, 2005 expressed an unqualified opinion on
managements assessment of the effectiveness of the Companys internal control over financial reporting and an
unqualified opinion of the effectiveness of the Companys internal control over financial reporting. /s/ Deloitte & Touche
LLP Deloitte & Touche LLP
Certified Public Accountants West Palm Beach, Florida
March 14, 2005 F-2




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##### 



CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONAT DECEMBER 31, 2003 AND 2004 
 2003
    
    
    2004(In Thousands, except share data)ASSETSCASH AND CASH EQUIVALENTS:Cash and amounts due from depository institutions
    
    $
    76,090
    
    
    $
    108,327Interest-earning deposits
    
    
    33,797
    
    
    
    41,082Total cash and cash equivalents
    
    
    109,887
    
    
    
    149,409SECURITIES AVAILABLE FOR SALE (At fair value):Municipal bonds and government and agency securities
    
    
    122,731
    
    
    
    65,156Mortgage-backed securities
    
    
    471,228
    
    
    
    440,473Total securities available for sale
    
    
    593,959
    
    
    
    505,629SECURITIES HELD TO MATURITY (At cost):Mortgage-backed securities
    
    
    
    
    
    
    89,167LOANS
RECEIVABLE, Net of allowance for loan losses - $11,119 and
$13,628 at December 31, 2003 and 2004, respectively
    
    
    2,191,696
    
    
    
    2,556,700OFFICE PROPERTIES AND EQUIPMENT, Net
    
    
    73,553
    
    
    
    83,439FEDERAL HOME LOAN BANK STOCK, (At cost)
    
    
    13,322
    
    
    
    17,399ACCRUED INTEREST RECEIVABLE
    
    
    11,127
    
    
    
    12,379DEFERRED INCOME TAX ASSET
    
    
    7,598
    
    
    
    7,883OTHER ASSETS
    
    
    47,080
    
    
    
    48,534TOTAL ASSETS
    
    $
    3,048,222
    
    
    $
    3,470,539LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESDEPOSITS
    
    $
    2,460,101
    
    
    $
    2,814,670OTHER BORROWED FUNDS
    
    
    42,089
    
    
    
    46,097ADVANCES FROM FEDERAL HOME LOAN BANK
    
    
    264,561
    
    
    
    250,855ADVANCES BY BORROWERS FOR TAXES AND INSURANCE
    
    
    2,816
    
    
    
    3,166DRAFTS PAYABLE
    
    
    202
    
    
    
    JUNIOR SUBORDINATED DEBENTURES
    
    
    52,320
    
    
    
    53,608OTHER LIABILITIES
    
    
    41,624
    
    
    
    50,860TOTAL LIABILITIES
    
    
    2,863,713
    
    
    
    3,219,256COMMITMENTS AND CONTINGENCIES (Note 15)STOCKHOLDERS EQUITYPREFERRED STOCK, 2,000,000 shares authorized, none issued
    
    
    
    
    
    
    COMMON STOCK ($.10 par value) 30,000,000 authorized shares:
outstanding 22,536,972 and 24,425,050 at December 31, 2003 and 2004,
respectively (Note 1)
    
    
    1,502
    
    
    
    2,442ADDITIONAL PAID IN CAPITAL
    
    
    106,392
    
    
    
    152,398RETAINED
EARNINGS - substantially restricted
    
    
    89,793
    
    
    
    105,556TREASURY
STOCK - at cost
472,041 and 441,082 shares at December 31, 2003 and 2004, respectively
    
    
    (1,794
    )
    
    
    (1,756
    )COMMON STOCK ALLOCATED TO:Employee stock ownership plan
    
    
    (4,257
    )
    
    
    (3,909
    )Recognition and retention plan
    
    
    (4,410
    )
    
    
    (3,045
    )ACCUMULATED OTHER COMPREHENSIVE LOSS
(Net of applicable income taxes)
    
    
    (2,717
    )
    
    
    (403
    )TOTAL STOCKHOLDERS EQUITY
    
    
    184,509
    
    
    
    251,283TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,048,222
    
    
    $
    3,470,539
 See Notes to Consolidated Financial Statements. F-3




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##### 



CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 
 2002
    
    
    2003
    
    
    2004(In Thousands, except share data)Interest income:Loans
    
    $
    123,492
    
    
    $
    128,230
    
    
    $
    141,916Investment securities
    
    
    3,474
    
    
    
    1,236
    
    
    
    3,219Other investments
    
    
    2,895
    
    
    
    1,632
    
    
    
    1,416Mortgage-backed and corporate debt securities
    
    
    8,006
    
    
    
    12,585
    
    
    
    18,113Total interest income
    
    
    137,867
    
    
    
    143,683
    
    
    
    164,664Interest expense:Deposits
    
    
    40,353
    
    
    
    38,605
    
    
    
    39,676Advances from Federal Home Loan Bank and other borrowings
    
    
    21,415
    
    
    
    18,559
    
    
    
    20,188Total interest expense
    
    
    61,768
    
    
    
    57,164
    
    
    
    59,864Net interest income
    
    
    76,099
    
    
    
    86,519
    
    
    
    104,800Provision for loan losses
    
    
    1,986
    
    
    
    3,122
    
    
    
    2,736Net interest income after provision for loan losses
    
    
    74,113
    
    
    
    83,397
    
    
    
    102,064Other income:Service charges on deposit accounts
    
    
    7,285
    
    
    
    10,082
    
    
    
    11,048Fees for other banking services
    
    
    8,487
    
    
    
    9,788
    
    
    
    11,156Net gain on sale of loans
    
    
    74
    
    
    
    4,159
    
    
    
    619Net gain (loss) on sale of securities
    
    
    64
    
    
    
    (2,364
    )
    
    
    407Miscellaneous
    
    
    1,081
    
    
    
    851
    
    
    
    1,943Total other income
    
    
    16,991
    
    
    
    22,516
    
    
    
    25,173Operating expense:Employee compensation and benefits
    
    
    37,173
    
    
    
    44,802
    
    
    
    50,475Occupancy and equipment
    
    
    11,649
    
    
    
    14,476
    
    
    
    16,612(Gain) loss on real estate owned
    
    
    (119
    )
    
    
    21
    
    
    
    (17
    )Marketing
    
    
    1,970
    
    
    
    2,130
    
    
    
    2,294Federal deposit insurance premium
    
    
    290
    
    
    
    322
    
    
    
    375Miscellaneous
    
    
    12,606
    
    
    
    14,762
    
    
    
    19,911Total operating expense
    
    
    63,569
    
    
    
    76,513
    
    
    
    89,650Income before provision for income taxes
    
    
    27,535
    
    
    
    29,400
    
    
    
    37,587Provision (benefit) for income taxes:Current
    
    
    11,290
    
    
    
    12,813
    
    
    
    16,456Deferred
    
    
    (553
    )
    
    
    (1,334
    )
    
    
    (1,766
    )Total provision for income taxes
    
    
    10,737
    
    
    
    11,479
    
    
    
    14,690Net income
    
    $
    16,798
    
    
    $
    17,921
    
    
    $
    22,897Earnings per share (Note 1):Basic
    
    $
    0.75
    
    
    $
    0.82
    
    
    $
    1.04Diluted
    
    $
    0.74
    
    
    $
    0.81
    
    
    $
    1.01Dividends declared per share
    
    $
    0.27
    
    
    $
    0.27
    
    
    $
    0.28
 See Notes to Consolidated Financial Statements. F-4




---



##### 



CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 
 2002
    
    
    2003
    
    
    2004(In Thousands)Net Income
    
    $
    16,798
    
    
    $
    17,921
    
    
    $
    22,897Other comprehensive income (loss), net of tax:Unrealized gains (losses) on assets available for sale:Unrealized holding gains (losses) arising during period
    
    
    (41
    )
    
    
    (418
    )
    
    
    2,854Reclassification adjustment for (gains) losses realized in net income
    
    
    (39
    )
    
    
    1,442
    
    
    
    (248
    )Minimum pension liability adjustment
    
    
    (1,451
    )
    
    
    (206
    )
    
    
    (292
    )Subtotal
    
    
    (1,531
    )
    
    
    818
    
    
    
    2,314Comprehensive income
    
    $
    15,267
    
    
    $
    18,739
    
    
    $
    25,211
 F-5




---



##### 



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 
 Retained
    
    
    
    
    
    
    Employee
    
    
    Recognition
    
    
    AccumulatedAdditional
    
    
    Earnings-
    
    
    
    
    
    
    Stock
    
    
    and
    
    
    OtherCommon
    
    
    Paid In
    
    
    Substantially
    
    
    Treasury
    
    
    Ownership
    
    
    Retention
    
    
    ComprehensiveStock
    
    
    Capital
    
    
    Restricted
    
    
    Stock
    
    
    Plan
    
    
    Plan
    
    
    Income (Loss)
    
    
    Total(In Thousands)Balance  December 31, 2001
    
    $
    1,578
    
    
    $
    117,889
    
    
    $
    66,839
    
    
    $
    (1,721
    )
    
    $
    (4,969
    )
    
    $
    
    
    
    $
    (2,004
    )
    
    $
    177,612Net income for the year
    
    
    
    
    
    
    
    
    
    
    16,798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,798Stock options exercised
    
    
    7
    
    
    
    401
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    408Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,957
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,957
    )Common stock retired
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )Reclassification of common stock held
by SMPIAP and related obligation
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recognition of unrealized decrease in fair value
of assets available for sale, net of income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,451
    )
    
    
    (1,451
    )Allocation and issuance of common stock for
Recognition and Retention Plan
    
    
    2
    
    
    
    7,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,047
    )
    
    
    
    
    
    
    Amortization of deferred compensation -
Employee Stock Ownership Plan
    
    
    
    
    
    
    323
    
    
    
    
    
    
    
    
    
    
    
    360
    
    
    
    
    
    
    
    
    
    
    
    683Recognition and Retention Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,061
    
    
    
    
    
    
    
    1,061Cash dividends declared ($0.27 per share)
    
    
    
    
    
    
    
    
    
    
    (5,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,950
    )Balance  December 31, 2002
    
    
    1,587
    
    
    
    125,648
    
    
    
    77,687
    
    
    
    (21,705
    )
    
    
    (4,609

    )
    
    
    (5,986
    )
    
    
    (3,535
    )
    
    
    169,087Net income for the year
    
    
    
    
    
    
    
    
    
    
    17,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,921Stock options exercised
    
    
    11
    
    
    
    525
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    536Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176
    )Common stock retired
    
    
    (103
    )
    
    
    (20,339
    )
    
    
    
    
    
    
    20,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (309
    )Reclassification of common stock held
by SMPIAP and related obligation
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recognition of unrealized increase in fair value
of assets available for sale, net of income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,024
    
    
    
    1,024Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (206
    )
    
    
    (206
    )Allocation and issuance of common stock for
Recognition and Retention Plan
    
    
    7
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation -
Employee Stock Ownership Plan
    
    
    
    
    
    
    519
    
    
    
    
    
    
    
    
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    871Recognition and Retention Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,576
    
    
    
    
    
    
    
    1,576Cash dividends declared ($0.27 per share)
    
    
    
    
    
    
    
    
    
    
    (5,815
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,815
    )Balance  December 31, 2003
    
    
    1,502
    
    
    
    106,392
    
    
    
    89,793
    
    
    
    (1,794
    )
    
    
    (4,257
    )
    
    
    (4,410
    )
    
    
    (2,717
    )
    
    
    184,509Net income for the year
    
    
    
    
    
    
    
    
    
    
    22,897

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,897Stock options exercised
    
    
    9
    
    
    
    2,157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,166Sale of common stock
    
    
    115
    
    
    
    43,714
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,829Common stock retired
    
    
    (4
    )
    
    
    (1,523
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,527
    )Reclassification of common stock held
by SMPIAP and related obligation
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recognition of unrealized increase in fair value
of assets available for sale, net of income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,606
    
    
    
    2,606Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (292
    )
    
    
    (292
    )Allocation and issuance of common stock for
Recognition and Retention Plan
    
    
    6
    
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    335Amortization of deferred compensation -
Employee Stock Ownership Plan
    
    
    
    
    
    
    971
    
    
    
    
    
    
    
    
    
    
    
    348
    
    
    
    
    
    
    
    
    
    
    
    1,319Recognition and Retention Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,365
    
    
    
    
    
    
    
    1,365Tax benefit of distributions from deferred
compensation plans
    
    
    
    
    
    
    396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3963 for 2 common stock split
    
    
    814
    
    
    
    
    
    
    
    (814
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends declared ($0.28 per share)
    
    
    
    
    
    
    
    
    
    
    (6,320
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,320
    )Balance - December 31, 2004
    
    $
    2,442
    
    
    $
    152,398
    
    
    $
    105,556
    
    
    $
    (1,756
    )
    
    $
    (3,909
    )
    
    $
    (3,045
    )
    
    $
    (403
    )
    
    $
    251,283
 See Notes to Consolidated Financial Statements. F-6




---



##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 
 2002
    
    
    2003
    
    
    2004(In Thousands)CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:Net Income
    
    $
    16,798
    
    
    $
    17,921
    
    
    $
    22,897Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    3,661
    
    
    
    4,203
    
    
    
    6,006ESOP compensation expense
    
    
    1,744
    
    
    
    2,447
    
    
    
    2,685Accretion of discounts, amortization of premiums and goodwill, and other deferred
yield items
    
    
    (3,138
    )
    
    
    (1,027
    )
    
    
    (4,281
    )Provision for loan losses
    
    
    1,986
    
    
    
    3,122
    
    
    
    2,736Provisions for losses and net (gains) losses on sales of real estate owned
    
    
    (125
    )
    
    
    (33
    )
    
    
    (12
    )Net (gain) loss on sale of:Loans
    
    
    (74
    )
    
    
    (4,159
    )
    
    
    (619
    )Securities
    
    
    (64
    )
    
    
    2,364
    
    
    
    (407
    )Office properties and equipment
    
    
    33
    
    
    
    177
    
    
    
    (302
    )(Increase) decrease in accrued interest receivable
    
    
    1,047
    
    
    
    (1,429
    )
    
    
    (1,252
    )Increase in other assets
    
    
    (3,899
    )
    
    
    (5,278
    )
    
    
    (96
    )Increase (decrease) in drafts payable
    
    
    (5,955
    )
    
    
    (5,979
    )
    
    
    (202
    )Increase in deferred income taxes
    
    
    (553
    )
    
    
    (1,334
    )
    
    
    (1,649
    )Increase in other liabilities
    
    
    4,387
    
    
    
    5,203
    
    
    
    8,581Net cash provided by operating activities
    
    
    15,848
    
    
    
    16,198
    
    
    
    34,085CASH FLOW FROM (FOR) INVESTING ACTIVITIES:Loan originations, net of principal payments on loans
    
    
    (310,902
    )
    
    
    (409,276
    )
    
    
    (446,092
    )Principal payments received on mortgage-backed securities
    
    
    124,275
    
    
    
    281,571
    
    
    
    169,982Purchases of:Loans
    
    
    (47,167
    )
    
    
    (40,854
    )
    
    
    (38,137
    )Mortgage-backed securities
    
    
    (37,054
    )
    
    
    (693,042
    )
    
    
    (355,069
    )Federal Home Loan Bank stock
    
    
    (1,186
    )
    
    
    (1,390
    )
    
    
    (21,769
    )Municipal bonds and government and agency securities
    
    
    (270,000
    )
    
    
    (162,516
    )
    
    
    (59,755
    )Office properties and equipment
    
    
    (12,853
    )
    
    
    (8,617
    )
    
    
    (17,429
    )Proceeds from sales of:Loans
    
    
    5,146
    
    
    
    199,472
    
    
    
    33,498Federal Home Loan Bank stock
    
    
    2,844
    
    
    
    987
    
    
    
    17,692Corporate debt securities
    
    
    
    
    
    
    38,264
    
    
    
    Municipal bonds and government and agency securities
    
    
    
    
    
    
    
    
    
    
    114,879Real estate acquired in settlement of loans
    
    
    1,023
    
    
    
    895
    
    
    
    77Mortgage-backed securities available for sale
    
    
    4,456
    
    
    
    43,483
    
    
    
    221,632Office properties and equipment
    
    
    75
    
    
    
    550
    
    
    
    502Proceeds from maturities of municipal bonds and government and agency securities
    
    
    274,695
    
    
    
    129,140
    
    
    
    145Other
    
    
    (34
    )
    
    
    (689
    )
    
    
    820Net cash used for investing activities
    
    
    (266,682
    )
    
    
    (622,022
    )
    
    
    (379,024
    )CASH FLOW FROM (FOR) FINANCING ACTIVITIES:Proceeds from the sale of common stock, net of issuance costs
    
    
    124
    
    
    
    309
    
    
    
    44,034Purchase of treasury stock
    
    
    (19,957
    )
    
    
    (176
    )
    
    
    Issuance of junior subordinated debentures net of issuance costs
    
    
    
    
    
    
    21,450
    
    
    
    29,822Pay off junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    (28,750
    )Cash dividends paid
    
    
    (6,036
    )
    
    
    (5,792
    )
    
    
    (5,866
    )Net increase (decrease) in:NOW accounts, demand deposits and savings accounts
    
    
    420,985
    
    
    
    643,636
    
    
    
    407,798Certificates of deposit
    
    
    (82,080
    )
    
    
    (81,876
    )
    
    
    (53,229
    )Advances from Federal Home Loan Bank
    
    
    (36,895
    )
    
    
    11,190
    
    
    
    (13,706
    )Other borrowed funds
    
    
    8,090
    
    
    
    (2,327
    )
    
    
    4,008Advances by borrowers for taxes and insurance
    
    
    (22
    )
    
    
    (369
    )
    
    
    350Net cash provided by financing activities
    
    
    284,209
    
    
    
    586,045
    
    
    
    384,461NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    33,375
    
    
    
    (19,779
    )
    
    
    39,522CASH AND CASH EQUIVALENTS, Beginning of year
    
    
    96,291
    
    
    
    129,666
    
    
    
    109,887CASH AND CASH EQUIVALENTS, End of year
    
    $
    129,666
    
    
    $
    109,887
    
    
    $
    149,409
 See Notes to Consolidated Financial Statements. F-7




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fidelity Bankshares, Inc. (the Company) is the parent of Fidelity Federal Bank & Trust (the
Bank), a wholly-owned subsidiary of the Company. The Banks lending markets are primarily concentrated in Palm Beach, Martin and St. Lucie counties
in Southeast Florida. The accounting and reporting policies of the Company and its subsidiaries conform, in all material
respects, to accounting principles generally accepted in the United States of America (generally
accepted accounting principles). The following summarizes the more significant of these policies: Principles of Consolidation- The consolidated financial statements include the accounts of the
Company, the Bank and the Banks wholly-owned subsidiaries, Fidelity Realty and Appraisal Services,
Inc. (FRAS) and Florida Consolidated Agency, Inc. (Fidelity Insurance). All significant
intercompany balances and transactions have been eliminated. Neither the Bank nor its subsidiaries
are or have been involved in any joint ventures during any periods presented. FRAS, principally, performs appraisals for and sells real estate owned by the Bank. Fidelity
Insurance, an insurance agency, sells a full line of insurance products. F-8




---



##### 



Use of Estimates in the Preparation of Financial Statements- The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. Cash Equivalents- For presentation purposes in both the consolidated statements of financial
position and cash flows, the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Securities- Debt securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost. Securities not
classified as held to maturity, including equity securities with readily determinable fair values,
are classified as available for sale and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive operations. Purchase premiums and discounts are recognized in interest income using the interest method over
the terms of the securities. Declines in the fair value of held to maturity and available for sale
securities below their cost that are deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method. Transfers of Financial Assets- Transfers of financial assets, which for the Company are primarily
mortgage loans, are accounted for as sales when control over the assets has been surrendered.
Control over transferred assets is deemed surrendered when (1) the assets have been isolated from
the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the F-9




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##### 



transferred assets, and (3) the Company does not maintain effective control over the assets through
an agreement to repurchase them before maturity. Upon completion of a transfer of assets that satisfies the conditions described above to be
accounted for as a sale, the Company:  a.
    Derecognizes all assets sold;b.
    Recognizes all assets obtained and liabilities incurred in consideration as proceeds of
the sale;c.
    Initially measures, at fair value, assets obtained and liabilities incurred in a sale;
andd.
    Recognizes any gain or loss on the sale. Upon completion of a transfer of assets, such as the securitization of loans and retention of the
securities representing the Companys continuing interest in such loans as assets Held to Maturity,
the Company applies steps a., b., and c., above. However, no gain is recognized, as the transaction
does not meet the requirements for sale treatment. To the extent that the fair values of the assets
retained are less than the costs of the assets transferred, at the date of transfer, the carrying
values of the retained assets are reduced to fair value by a corresponding charge against income. Interest Rate Risk- The Bank is engaged principally in providing first mortgage loans (both
adjustable rate and fixed rate mortgage loans) to individuals (See Note 5 for the composition of
the mortgage loan portfolio). Mortgage loans and investment securities are funded primarily with
short-term liabilities which have interest rates that vary with market rates over time. Net
interest income and the market value of net interest-earning assets will fluctuate based on changes
in interest rates and changes in the levels of interest-sensitive assets and F-10




---



##### 



liabilities. The actual duration of interest-earning assets and interest-bearing liabilities may
differ significantly from the stated duration as a result of prepayment, early withdrawals, and
similar factors. Loans Held for Sale- Loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from
investors or current investor yield requirements. Net unrealized losses are recognized through a
valuation allowance by charges to income. Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the
Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the
associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized
based on the difference between the selling price and the carrying value of the related mortgage
loans sold. Loans- The Company grants mortgage, commercial and consumer loans to customers. A substantial
portion of the loan portfolio is represented by mortgage loans throughout Florida. The ability of
the Companys debtors to honor their contracts is dependent upon the real estate and general
economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off generally are reported at their outstanding unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method. The accrual of interest on mortgage loans is discontinued at the time the loan is 90 days past due.
The accrual of interest on consumer and commercial business loans is discontinued at the time the
loan is 60 days past due. Past F-11




---



##### 



due status is based on contractual terms of the loan. In all cases, loans are placed on
non-accrual or charged-off at an earlier date if collection of principal or interest is considered
doubtful. Allowance for Loan Losses- The Company maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the
probable estimated losses inherent in the loan portfolio. The allowance is increased by the
provision for loan losses, which is charged against current period operating results and decreased
by the amount of charge-offs, net of recoveries. Loan losses are charged off against the allowance
when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if
any, are credited to the allowance. The Companys methodology for assessing the appropriateness of
the allowance consists of several key elements, which include a formula allowance and specific
allowances. The formula allowance is calculated by applying loss factors to outstanding loans based on an
internal risk grade of such loans or pools of loans. Changes in risk grades of both performing and
nonperforming loans affect the amount of the formula allowance. Loss factors are based primarily on
the Companys historical loss experience and may be adjusted for other significant factors that, in
managements judgement, affect the collectibility of the portfolio as of the evaluation date. Pooled loan loss factors (not individually graded loans) are derived from a model that tracks five
years of historical loss experience. Pooled loans are loans that are homogeneous in nature, such as
consumer installment and residential mortgage loans. F-12




---



##### 



Specific allowances are established in cases where management has identified significant conditions
or circumstances related to a loan that management believes indicate the probability that a loss
has been incurred in excess of the amount determined by the application of the formula allowance. The allowance also incorporates the results of measuring impaired loans. A loan is considered
impaired when management determines that it is probable that the Company will be unable to collect
all amounts due according to the original contractual terms of the loan agreement. Impairment is
measured by the difference between the recorded investment in the loan (including accrued interest,
net deferred loan fees or costs and unamortized premium or discount) and the estimated present
value of total expected future cash flows, discounted at the loans effective rate, or the fair
value of the collateral, if the loan is collateral dependent. Impairment is recognized by
establishing a specific loan loss allowance for the impaired loan. Uncollected Interest- The Bank reverses all accrued interest against interest income when a loan
is more than 90 or 60 days delinquent depending on the type of loan and ceases accruing interest
thereafter. Such interest ultimately collected is credited to income in the period of recovery. Real Estate Owned- Properties acquired through foreclosure, or a deed in lieu of foreclosure are
carried at the lower of fair value less estimated costs to sell, or cost. If the fair value less
the estimated cost to sell an individual property declines below the cost of such property, a
provision for losses is charged to operations. Subsequent costs relating to the improvement of property are capitalized in amounts not to exceed
the propertys fair value. Costs relating to holding the property are charged to expense when
incurred. At December 31, 2003 and 2004, the Company owned no real estate acquired through foreclosure. F-13




---



##### 



Office Properties and Equipment- Office properties and equipment are carried at cost less
accumulated depreciation. Land is carried at cost. Depreciation is computed on the straight-line
method over the estimated useful lives of the assets, which range from three to forty years for
buildings and improvements and three to ten years for furniture and equipment. Goodwill- Goodwill resulting from acquisitions is subject to annual impairment testing. Based on
current year analysis, no impairment in the carrying value of goodwill was noted. The balance of
goodwill included in other assets was $ 2,171,000 at December 31, 2003 and 2004, respectively. Long-Lived Assets- Long-lived assets, such as office, properties and equipment, to be held and
used by the Company are reviewed to determine whether any events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be
held and used, the Company bases its evaluation on impairment indicators such as the nature of the
assets, the future economic benefit of the assets, any historical or future profitability
measurements, as well as other external market conditions or factors that may be present. If
impairment indicators are present or other factors exist that indicate the carrying amount of the
asset may not be recoverable, the Company determines whether an impairment has occurred through the
use of an undiscounted cash flows analysis of assets at the lowest level for which identifiable
cash flows exist. If impairment has occurred, the Company recognizes a loss for the difference
between the carrying amount and the estimated fair value of the asset. The fair value of the asset
is measured using quoted market prices or, in the absence of quoted fair market prices, fair value
is based on the estimate of discounted cash flow analysis. F-14




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##### 



Drafts Payable- Drafts payable represent checks drawn by the Bank on a third party payer, for
deposit account withdrawals and payment of the Banks expenses. Under the agreement between the
Bank and its third party payer, the Bank funds the checks written on the day following their
issuance. Loan Origination Fees and Costs- Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan. Deferred loan fees
and costs are amortized to income over the contractual life of the loans using the interest method. Commitment Fees- Non-refundable fees received for commitments to make or purchase loans in the
future, net of direct costs of underwriting the commitments, are deferred and, if the commitment is
exercised, recognized over the life of the loan as an adjustment of yield. If the commitment
expires unexercised, income is recognized upon expiration of the commitment. Pension and Retirement Plans- The Companys policy is to fund pension and retirement plan costs as
they accrue based on normal cost. Income Taxes- The Company and its subsidiaries file consolidated federal and state income tax
returns (See Note 11). Deferred income taxes are provided on items recognized for financial
reporting purposes in periods different than such items are recognized for income tax purposes. Stock Option Plans- At December 31, 2004, the Company has three stock-based compensation plans,
which are described more fully in Note 13. The Company accounts for those plans using the intrinsic
value method. Accordingly, no stock-based employee compensation cost relative to stock options is
reflected in net income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common F-15




---



##### 



stock on the date of grant. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition method to stock-based employee
compensation. Years Ended December 31,2002
    
    
    2003
    
    
    2004Net Income, as reported
    
    $
    16,798
    
    
    $
    17,921
    
    
    $
    22,897Add: Total stock-based employee compensation expense
included in reported net earnings, net of related tax effects
    
    
    648
    
    
    
    961
    
    
    
    833Deduct: Total stock-based employee compensation
for all awards using the fair value method, net of related
tax effects
    
    
    (1,147
    )
    
    
    (1,482
    )
    
    
    (1,504
    )Pro forma net income
    
    $
    16,299
    
    
    $
    17,400
    
    
    $
    22,226Earnings per share:Basic - as reported
    
    
    0.75
    
    
    
    0.82
    
    
    
    1.04Basic - pro forma
    
    
    0.73
    
    
    
    0.80
    
    
    
    1.01Diluted - as reported
    
    
    0.74
    
    
    
    0.81
    
    
    
    1.01Diluted - pro forma
    
    
    0.72
    
    
    
    0.79
    
    
    
    0.98
 The weighted-average number of shares used to calculate basic and diluted earnings per share
for the years ended December 31, 2002, 2003 and 2004 are retroactively adjusted to reflect the 2004
3 for 2 stock split. F-16




---



##### 



In December 2004, the FASB issued FAS 123 (revised 2004), Share-Based Payment. Under this
promulgation, companies are required to reflect costs associated with employee stock options in
their income statements at fair value. The statement becomes effective for interim or annual
periods beginning after June 15, 2005. The Company will begin reflecting stock option costs under
the fair value method commencing in the quarter beginning July 1, 2005 as required. The Company is
still evaluating the effects of adoption of this principle. Earnings Per Common Share- Basic earnings per common share is computed by dividing income
available to common stockholders by the weighted average number of common shares outstanding during
the period less the weighted average unallocated ESOP shares of common stock. The computation of diluted earnings per share is similar to the computation of basic earnings per
share except that the denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares had been issued. Stock Splits- During 2004, the Company announced a 3 for 2 common stock split in the form of a
stock dividend paid on January 15, 2005 to stockholders of record on December 31, 2004. All share
and per share data have been restated to give retroactive effect to this stock split. Segment Reporting- The Companys derives all of its income from one line of business,
banking-related activities. As such, no segment information is presented. F-17




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##### 



Recent Accounting Pronouncements Affecting the Company- In November 2002, the FASB Interpretation
No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others was issued. This interpretation requires elaborating
on the disclosures that must be made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The disclosure requirements of this
Interpretation are effective for statements issued after December 15, 2002 and its recognition
requirements are applicable for guarantees issued or modified after December 31, 2002. The adoption
of FIN 45 effective as of the first quarter of 2003 did not have a material effect on the Companys
results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure, an amendment of FASB Statement No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used on
reported results. The provisions of Statement 148 are effective for interim periods beginning after
December 15, 2002, with early application encouraged. The Company adopted the disclosure provisions
of SFAS No. 148. In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities which
addresses consolidation of variable interest entities (VIEs) certain of which are also referred
to as special purpose entities (SPEs). The FASB revised FIN 46 in December 2003. VIEs are
entities in which equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to F-18




---



##### 



finance its activities without additional subordinated financial support from other parties. Under
the provisions of FIN 46, a company is to consolidate a VIE if the company has a variable interest
(or combination of variable interests) that will absorb a majority of the VIEs expected losses if
they occur, received a majority of the VIEs expected residual returns if they occur, or both. The
implementation of FIN 46 is required for public entities at the end of the first interim period
ending after March 15, 2004 if the VIE was created before February 1, 2003, with early adoption
allowed, and immediately for entities created after February 1, 2003. The Company early adopted FIN
46 and has deconsolidated the Fidelity Capital Trust I at December 31, 2003. The deconsolidation of
Fidelity Capital Trust I did not have a material impact on the Companys consolidated financial
position or results of operations. On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 was effective May 31, 2003 for all
new and modified financial instruments and otherwise was effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could be accounted for as equity. SFAS
No. 150 requires that those instruments be classified as liabilities or in some circumstances
assets. The adoption of this statement did not have a material impact on the Companys results of
operations or financial condition. In November 2003, the EITF reached a consensus on the disclosure provisions of EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. EITF
No. 03-1 requires that certain quantitative and qualitative disclosures be made for certain debt
securities classified as available-for-sale under SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. Debt securities within the scope of EITF
Issue No. 99-20, are not subject to these disclosure provisions. The F-19




---



##### 



disclosures are required for fiscal years ending after December 15, 2003, and accordingly the
Company adopted the disclosure provisions of EITF No. 03-1 for the year ended December 31, 2003. In December 2003, the FASB Issued Statement of Financial Accounting Standards No. 132 (revised
2003), Employees Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88 and 106, to address the increasing significance of corporate pension
plans to company financial statements and the call for greater transparency in financial reports.
The statement requires additional disclosures, regarding plan assets, investment strategy,
measurement date, plan obligations, cash flows and components of net periodic benefit cost of
defined benefit pension plans and other postretirement benefit plans. However, it does not change
the measurement or recognition of those plans required by SFAS No. 87, SFAS No. 88 and SFAS No.
106. The Company adopted the disclosure provisions of Financial Accounting Standards No. 132
(revised 2003) for the year ended December 31, 2003. In December 2004, the FASB issued FAS 123 (revised 2004), Share-Based Payment. Under this
promulgation, companies are required to reflect costs associated with employee stock options in
their income statements at fair value. The statement becomes effective for interim or annual
periods beginning after June 15, 2005. The Company will begin reflecting stock option costs under
the fair value method commencing in the quarter beginning July 1, 2005 as required. The Company is
still evaluating the effects of adoption of this principle. Reclassifications- Certain amounts in the consolidated financial statements have been reclassified
to be consistent with the current years presentation. F-20




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##### 



2. U.S. GOVERNMENT AND AGENCY SECURITIES AND MUNICIPAL BONDS AVAILABLE FOR SALE Securities available for sale are summarized as follows: Gross
    
    
    Gross
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in Thousands)December 31, 2003:Municipal Bonds
    
    $
    501
    
    
    $
    21
    
    
    $
    
    
    
    $
    522United States Government and agency securities
    
    
    122,208
    
    
    
    180
    
    
    
    (179
    )
    
    
    122,209Total
    
    $
    122,709
    
    
    $
    201
    
    
    $
    (179
    )
    
    $
    122,731Weighted average interest rate
    
    
    3.03
    %December 31, 2004:Municipal Bonds
    
    $
    355
    
    
    $
    9
    
    
    $
    
    
    
    $
    364United States Government and agency securities
    
    
    65,689
    
    
    
    
    
    
    
    (897
    )
    
    
    64,792Total
    
    $
    66,044
    
    
    $
    9
    
    
    $
    (897
    )
    
    $
    65,156Weighted average interest rate
    
    
    3.56
    %
 As of December 31, 2003 and 2004, the Company held no municipal bonds and government and
agency securities available for sale that were in a continuous unrealized loss position for twelve
months or more. F-21




---



##### 



The following table sets forth the contractual maturity of the Companys municipal bonds and agency
securities available for sale at December 31, 2003 and 2004. December 31, 2003
    
    
    December 31, 2004Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value(In Thousands)Due in one year or less
    
    $
    145
    
    
    $
    149
    
    
    $
    10,300
    
    
    $
    10,376Due in one year to five years
    
    
    122,564
    
    
    
    122,582
    
    
    
    55,744
    
    
    
    54,780Total
    
    $
    122,709
    
    
    $
    122,731
    
    
    $
    66,044
    
    
    $
    65,156
 The Bank had total U.S.Government and Agency securities available for sale pledged at December
31, 2003 and 2004 of $ 120.0 million and $ 48.8 million, respectively. Of the $ 48.8 million of
securities pledged at December 31, 2004, $ 23.3 million was pledged for customer accounts that
exceeded $ 100,000, $ 20.5 million was pledged as collateral for other borrowed funds, $ 2.9
million was pledged as collateral for Treasury Tax and Loan (TT&L) accounts held for the benefit
of the federal government and $ 2.1 million was pledged as collateral for trust accounts. Sales of Municipal bonds and U.S. Government and Agency securities for the year ended December 31,
2004, resulted in proceeds of $ 114.9 million, gross realized gains of $ 249,000 and gross realized
losses of $ 397,000. There were no sales of Municipal Bonds and U.S. Government and Agency securities during the years
ended December 31, 2002 or 2003. F-22




---



##### 



3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE Mortgage-backed securities available for sale at December 31, 2003 and 2004 are summarized as
follows: Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In Thousands)December 31, 2003:FHLMC-fixed rate
    
    $
    6,358
    
    
    $
    350
    
    
    $
    
    
    
    $
    6,708FNMA-fixed rate
    
    
    21,982
    
    
    
    572
    
    
    
    (15
    )
    
    
    22,539GNMA-fixed rate
    
    
    1,487
    
    
    
    78
    
    
    
    
    
    
    
    1,565FHLMC CMO-fixed rate
    
    
    115,693
    
    
    
    61
    
    
    
    (2,145
    )
    
    
    113,609FNMA CMO-fixed rate
    
    
    134,695
    
    
    
    1,162
    
    
    
    (683
    )
    
    
    135,174FNMA-adjustable rate
    
    
    39,071
    
    
    
    
    
    
    
    (1
    )
    
    
    39,070GNMA-adjustable rate
    
    
    61,118
    
    
    
    
    
    
    

    (660
    )
    
    
    60,458FHLMC CMO-adjustable rate
    
    
    15,566
    
    
    
    125
    
    
    
    
    
    
    
    15,691FNMA CMO-adjustable rate.
    
    
    77,018
    
    
    
    
    
    
    
    (604
    )
    
    
    76,414Total
    
    $
    472,988
    
    
    $
    2,348
    
    
    $
    (4,108
    )
    
    $
    471,228December 31, 2004:FHLMC-fixed rate
    
    $
    62,710
    
    
    $
    489
    
    
    $
    (48
    )
    
    $
    63,151FNMA-fixed rate
    
    
    193,334
    
    
    
    3,434
    
    
    
    (26
    )
    
    
    196,742GNMA-fixed rate
    
    
    29,892
    
    
    
    
    
    
    
    (90
    )
    
    
    29,802FHLMC CMO-fixed rate
    
    
    54,092
    
    
    
    
    
    
    
    (260
    )
    
    
    53,832FNMA CMO-fixed rate
    
    
    4,318
    
    
    
    49
    
    
    
    
    
    
    
    4,367FHLMC-adjustable rate
    
    
    25,412
    
    
    
    
    
    
    
    (147
    )
    
    
    25,265FNMA-adjustable rate
    
    
    67,293
    
    
    
    180
    
    
    
    (159
    )
    
    
    67,314Total
    
    $
    437,051
    
    
    $
    4,152
    
    
    $
    (730
    )
    
    $
    440,473
 F-23




---



##### 



As of December 31, 2003 and 2004, the Company held no mortgage-backed securities available for
sale that were in a continuous unrealized loss position for twelve months or more. Sales of mortgage-backed securities available for sale for the year ended December 31, 2002,
resulted in proceeds of $ 4.5 million, gross realized gains of $ 64,000 and no gross realized
losses. There were $ 43.4 million in sales of mortgage-backed securities classified as available
for sale during the year ended December 31, 2003, resulting in proceeds of $ 43.5 million, gross
realized gains of $ 110,000 and no gross realized losses. Sales of mortgage-backed securities
available for sale during the year ended December 31, 2004, resulted in proceeds of $ 221.6
million, gross realized gains of $ 1.2 million and gross realized losses of $ 656,000. The Bank had total mortgage-backed securities available for sale pledged at December 31, 2003 and
2004 of $ 190.1 million and $ 325.6 million, respectively. Of the $ 325.6 million of
securities pledged at December 31, 2004, $ 109.4 million was pledged for customer accounts that
exceeded $ 100,000, $ 123.6 million was pledged as collateral for other borrowed funds and $ 92.5
million was pledged to the State of Florida as collateral for certificates of deposit. F-24




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##### 



4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY During 2004, the Bank securitized certain of its one- to four-family mortgage loans, receiving
mortgage-backed securities secured by these loans. These securities, all classified as Held to
Maturity, are summarized as follows: Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in Thousands)December 31, 2004:FHLMC-fixed rate
    
    $
    89,167
    
    
    $
    881
    
    
    $
    
    
    
    $
    90,048Total
    
    $
    89,167
    
    
    $
    881
    
    
    $
    
    
    
    $
    90,048Weighted average interest rate
    
    
    4.64
    %
 Since the Bank retained all interest in the loans securitized, no portion of this
securitization was accounted for as a sale. As a result of this transaction, the Bank received
securities representing its interests in the loans transferred and contractual servicing rights
related to these loans. The book value of these loans was allocated to the securities and to the
servicing rights based on relative fair value, as determined by quoted prices for such assets on
the date each transfer was effected. The Bank held no such assets at December 31, 2003. F-25




---



##### 



5. LOANS RECEIVABLE Loans receivable at December 31, 2003 and 2004 consist of the following: 2003
    
    
    2004(In Thousands)One-to-four single family, residential real estate mortgages
    
    $
    1,002,573
    
    
    $
    1,023,520Commercial and multi-family real estate mortgages
    
    
    753,890
    
    
    
    972,546Real estate construction-primarily residential
    
    
    470,016
    
    
    
    634,455Land loans-primarily residential
    
    
    36,660
    
    
    
    57,661Total first mortgage loans
    
    
    2,263,139
    
    
    
    2,688,182Consumer loans
    
    
    185,450
    
    
    
    231,333Commercial business loans
    
    
    131,292
    
    
    
    125,791Total gross loans
    
    
    2,579,881
    
    
    
    3,045,306Less:Undisbursed portion of loans in process
    
    
    374,974
    
    
    
    472,324Unearned discounts, premiums and deferred loan fees (costs), net
    
    
    2,092
    
    
    
    2,654Allowance for loan losses
    
    
    11,119
    
    
    
    13,628Loans receivable-net
    
    $
    2,191,696
    
    
    $
    2,556,700
 The amount of loans on which the Bank has ceased accruing interest or does not charge interest
aggregated to approximately $ 10,940,000 and $ 6,226,000, net of specific valuation allowances of $
278,000 and $ 207,000, at December 31, 2003 and 2004, respectively. The amount of interest not
accrued relating to non accrual loans was approximately $ 513,000, $ 352,000 and $ 434,000 at
December 31, 2002, 2003 and 2004, respectively. The F-26




---



##### 



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. An analysis of the changes in the allowance for loan losses is as follows: 2002
    
    
    2003
    
    
    2004(In Thousands)Balance at beginning of period
    
    $
    6,847
    
    
    $
    8,318
    
    
    $
    11,119Current provision
    
    
    1,986
    
    
    
    3,122
    
    
    
    2,736Charge-offs
    
    
    (575
    )
    
    
    (322
    )
    
    
    (252
    )Recoveries
    
    
    60
    
    
    
    1
    
    
    
    25Ending balance
    
    $
    8,318
    
    
    $
    11,119
    
    
    $
    13,628
 The Bank originates both adjustable and fixed rate mortgage loans. At December 31, 2003 and
2004, the Bank had $ 958,000 and $ 226.1 million in loans held for sale or transfer, respectively.
Of the $ 226.1 million in loans held for sale or transfer as of December 31, 2004, $ 224.8 million
related to the securitization of one- to four-family mortgage loans where the Bank will retain the
resulting mortgage-backed securities. A loan is considered impaired when, based on current information and events, it is probable that
the Bank will be unable to collect all amounts due according to the contractual terms of the loan
agreement. An analysis of the F-27




---



##### 



recorded investment in impaired loans owned by the Bank at December
31, 2002, 2003 and 2004 and the related allowance for those loans is as follows: 2002
    
    
    2003
    
    
    2004(In Thousands)Loan
    
    
    Related
    
    
    Loan
    
    
    Related
    
    
    Loan
    
    
    RelatedBalance
    
    
    Allowance
    
    
    Balance
    
    
    Allowance
    
    
    Balance
    
    
    AllowanceImpaired loan balances and related allowances:Loans with related allowance for loan losses
    
    $
    1,145
    
    
    $
    546
    
    
    $
    3,508
    
    
    $
    598
    
    
    $
    1,650
    
    
    $
    487Loans without related allowance for loan losses
    
    
    7,248
    
    
    
    
    
    
    
    9,162
    
    
    
    
    
    
    
    8,172
    
    
    
    $
    8,393
    
    
    $
    546
    
    
    $
    12,670
    
    
    $
    598
    
    
    $
    9,822
    
    
    $
    487Average balance of impaired loans
    
    $
    7,658
    
    
    
    
    
    
    $
    10,532
    
    
    
    
    
    
    $
    11,246
 No interest income was recorded on impaired loans during the impairment periods shown. The Banks policy on interest income on impaired loans is to reverse all accrued interest against
interest income if a loan becomes more than 60 or 90 days delinquent, depending on the type of
loan, and cease accruing interest thereafter. Any interest ultimately collected is credited to
income in the period of recovery. At December 31, 2004, the composition and maturity or repricing of the loan portfolio, net of the
undisbursed portion of loans in process is presented below: F-28




---



##### 



Fixed Rate
    
    
    Adjustable RateBook Value
    
    
    
    
    Book ValueTerm of Maturity
    
    (In Thousands)
    
    
    Term to Rate Adjustment
    
    (In Thousands)1 year or less
    
    $
    63,888
    
    
    1 year or less
    
    $
    1,208,3091 year-3 years
    
    
    92,131
    
    
    1 year-3 years
    
    
    28,6793 years-5 years
    
    
    85,773
    
    
    3 years-5 years
    
    
    47,9275 years-10 years
    
    
    198,870
    
    
    5 years-10 years
    
    
    424,87810 years-20 years
    
    
    260,601
    
    
    10 years-20 years
    
    
    Over 20 years
    
    
    161,926
    
    
    Over 20 years
    
    
    Total
    
    $
    863,189
    
    
    Total
    
    $
    1,709,793
 Commercial Real Estate Lending The Bank originates and purchases commercial real estate
loans, which are considered by management to be of somewhat greater risk of uncollectibility due to
the dependency on income production or future development of the real estate. Accordingly, Bank
management establishes greater provisions for probable but not yet identified losses on these loans
than on less risky residential mortgage loans. The composition of commercial real estate loans and
its primary collateral are approximately as follows: 2003
    
    
    2004(In Thousands)Office buildings
    
    $
    208,999
    
    
    $
    293,013Retail buildings
    
    
    62,652
    
    
    
    71,617Warehouses
    
    
    40,013
    
    
    
    62,170Multi family
    
    
    106,042
    
    
    
    106,790Hotels and motels
    
    
    2,995
    
    
    
    2,175
 F-29




---



##### 



2003
    
    
    2004(In Thousands)Land
    
    
    163,618
    
    
    
    182,307Other property improvements
    
    
    169,571
    
    
    
    254,474Total
    
    $
    753,890
    
    
    $
    972,546
 Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), a
federally chartered savings and loan associations aggregate non-residential real estate loans may
not exceed 400% of its capital as determined under the capital standards provisions of FIRREA. The
Bank is federally chartered and subject to this limitation. FIRREA does not require divestiture of
any loan that was lawful when it was originated. At December 31, 2004 the Bank estimates that,
while complying with this limitation, it could originate an additional $ 387.8 million, of
commercial real estate loans, though the Banks current business plan indicates no intentions to do
so. Loans to One Borrower Limitation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). This 15% limitation results in a dollar limitation of approximately
$ 44.3 million at December 31, 2004. At December 31, 2004, the Bank was in compliance with the
loans to one borrower limitation under currently existing regulations. Servicing Assets -Mortgage and commercial business loans serviced for others are not included in
the accompanying consolidated statements of financial position. The unpaid balances of these loans
at December 31, 2003 and 2004 were $ 158.6 million and $ 252.8 million, respectively. Custodial
escrow balances maintained in F-30




---



##### 



connection with the foregoing loan servicing were $ 434,000 and $
575,000 at December 31, 2003 and 2004, respectively. The balance of deferred servicing assets
relating to serviced loans were $ 1.2 million and $ 2.1 million at December 31, 2003 and 2004,
respectively. The fair value of these rights at December 31, 2003 and 2004 exceeded carrying
value. Related Party Loans- The Bank offers loans to its employees, including Directors and Senior
Management at prevailing market interest rates. These loans are made in the ordinary course of
business and on substantially the same terms and collateral requirements as those of comparable
transactions prevailing at the time. The loans to Directors, Executive Officers, and associates of such persons amounted to $ 3,193,000
and $ 3,335,000 at December 31, 2003 and 2004, respectively, which did not exceed 5% of
stockholders equity. Collateral for Advances from the Federal Home Loan Bank The terms of a security agreement with
the FHLB include a blanket floating lien that requires the Bank to maintain qualifying first
mortgage loans as pledged collateral in an amount equal to the advances, when discounted at 80% of
the unpaid principal balances of the qualifying first mortgage loans. 6. OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment at December 31, 2003 and 2004 are summarized as follows: F-31




---



##### 



2003
    
    
    2004(In Thousands)Land
    
    $
    17,378
    
    
    $
    26,491Buildings and improvements
    
    
    53,755
    
    
    
    50,891Furniture and equipment
    
    
    23,785
    
    
    
    27,819Software
    
    
    5,347
    
    
    
    7,964Total
    
    
    100,265
    
    
    
    113,165Less accumulated depreciation
    
    
    26,712
    
    
    
    29,726Office properties and equipment  net
    
    $
    73,553
    
    
    $
    83,439
 7. ACCRUED INTEREST RECEIVABLE Accrued interest receivable at December 31, 2003 and 2004 consists of the following: 2003
    
    
    2004(In Thousands)Loans
    
    $
    8,663
    
    
    $
    9,524Investments
    
    
    959
    
    
    
    900Mortgage-backed securities
    
    
    1,505
    
    
    
    1,955Accrued interest receivable
    
    $
    11,127
    
    
    $
    12,379
 F-32




---



##### 



8. DEPOSITS The weighted-average interest rates on deposits at December 31, 2003 and 2004 were 1.51% and 1.53%,
respectively. Deposit accounts, by type and range of rates at December 31, 2003 and 2004 consist of
the following: 2003
    
    
    2004Account Type and Rate
    
    (In Thousands)Non-interest-bearing checking accounts
    
    $
    294,358
    
    
    $
    386,790Interest-bearing checking and funds transfer accounts
2003 and 2004, 1.03 % and 1.13%, respectively
    
    
    566,028
    
    
    
    689,533Passbook and statement accounts
2003 and 2004, 1.61 % and 1.78%, respectively
    
    
    615,972
    
    
    
    770,124Variable-rate money market accounts
2003 and 2004, 1.52 % and 1.69%, respectively
    
    
    297,864
    
    
    
    335,573Total non-certificate accounts
    
    
    1,774,222
    
    
    
    2,182,020Certificates:0.00% - 1.00%
    
    
    78,324
    
    
    
    39,5621.01% - 2.00%
    
    
    209,013
    
    
    
    141,2032.01% - 3.00%
    
    
    193,797
    
    
    
    263,8883.01% - 4.00%
    
    
    60,962
    
    
    
    110,8974.01% - 5.00%
    
    
    135,450
    
    
    
    72,4685.01% - 6.00%
    
    
    5,684
    
    
    
    2,1946.01% - 7.00%
    
    
    2,637
    
    
    
    2,4387.01% - 8.00%
    
    
    12
    
    
    
    Total certificates
    
    
    685,879
    
    
    
    632,650Total
    
    $
    2,460,101
    
    
    $
    2,814,670
 F-33




---



##### 



Individual deposits greater than $ 100,000 at December 31, 2003 and 2004 aggregated
approximately $ 1.3 billion and $ 1.5 billion, respectively. Deposit balances up to $ 100,000 are
FDIC insured. Interest on deposit accounts, presented in the consolidated statements of operations, is net of
interest forfeited by depositors on early withdrawal of certificate accounts of approximately $
139,000, $ 112,000 and $ 98,000 for the years ended December 31, 2002, 2003 and 2004, respectively. Scheduled maturities of certificate accounts are as follows: December 31,2003
    
    
    2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)MaturityLess than 1 year
    
    $
    453,839
    
    
    
    66.17
    %
    
    $
    422,159
    
    
    
    66.73
    %1 year-2 years
    
    
    122,966
    
    
    
    17.93
    %
    
    
    98,482
    
    
    
    15.57
    %2 years-3 years
    
    
    60,885
    
    
    
    8.88
    %
    
    
    88,849
    
    
    
    14.04
    %3 years-4 years
    
    
    31,047
    
    
    
    4.52
    %
    
    
    16,498
    
    
    
    2.61
    %4 years-5 years
    
    
    17,142
    
    
    
    2.50
    %
    
    
    6,662
    
    
    
    1.05
    %Total
    
    $
    685,879
    
    
    
    100.00
    %
    
    $
    632,650
    
    
    
    100.00
    %
 F-34




---



##### 



Under FIRREA, any insured depository institution that does not meet its applicable minimum
capital requirements may not accept brokered deposits after December 7, 1992. This prohibition
includes renewals and rollovers of existing brokered deposits and deposit solicitations at higher
than prevailing interest rates paid by institutions in the Banks normal market area. Even though
the Bank meets all of the applicable minimum capital requirements at December 31, 2004, the Bank
had no brokered deposits. Interest expense on deposits consists of the following during the years ended December 31, 2002,
2003 and 2004: 2002
    
    
    2003
    
    
    2004(In Thousands)Passbook accounts
    
    $
    4,337
    
    
    $
    9,643
    
    
    $
    11,860Interest-bearing checking accounts
    
    
    4,026
    
    
    
    5,553
    
    
    
    6,667Money market accounts
    
    
    3,186
    
    
    
    4,006
    
    
    
    5,176Certificate accounts
    
    
    28,804
    
    
    
    19,403
    
    
    
    15,973Total
    
    $
    40,353
    
    
    $
    38,605
    
    
    $
    39,676
 9. ADVANCES FROM FEDERAL HOME LOAN BANK The Bank had outstanding advances from the FHLB of $ 264.6 million with interest rates ranging from
1.00% to 7.01% and $ 250.9 million with interest rates ranging from 1.00% to 7.01% at December 31,
2003 and 2004 F-35




---



##### 



respectively. All of the advances shown had fixed interest rates and, depending on market rates,
may have substantial prepayment penalties. The advances at the dates specified are repayable as
follows: Years Ending
    
    At December 31,
    
    
    At December 31,December 31,
    
    2003
    
    
    2004(In Thousands)2004
    
    $
    13,706
    
    
    $
    2005
    
    
    163,582
    
    
    
    163,5822006
    
    
    13,582
    
    
    
    13,5822007
    
    
    13,582
    
    
    
    13,5822008
    
    
    58,999
    
    
    
    58,9992009
    
    
    904
    
    
    
    904Thereafter
    
    
    206
    
    
    
    206Total
    
    $
    264,561
    
    
    $
    250,855
 The Bank has a collateral agreement with the FHLB which includes a blanket floating lien that
requires the Bank to maintain qualifying first mortgage loans as pledged collateral in an amount
equal to the advances when discounted at 80% of the unpaid principal balances of the qualifying
first mortgage loans. As of December 31, 2004, the Banks maximum borrowing capacity at the FHLB was approximately $
503.4 million, leaving $ 252.5 million as additional borrowing capacity. F-36




---



##### 



10. JUNIOR SUBORDINATED DEBENTURES In January, 1998 the Company issued $ 29.6 million of mandatorily redeemable, Preferred Securities
out of a grantor trust, Fidelity Capital Trust I, a Delaware statutory trust, which was created by
the Company for this sole purpose. These securities were fully redeemed and liquidated on November
24, 2004 with proceeds from an issue of trust preferred securities from Fidelity Capital Trust III. In December 2003 the Company issued $ 22.7 million of mandatorily redeemable, Preferred Securities
as part of a pooled trust preferred stock offering out of a grantor trust, Fidelity Capital Trust
II, a Delaware statutory business trust, which was created by the Company for this sole purpose. As
its only asset, the trust owns $ 22.7 million of the Companys Junior Subordinated Debentures due
January 23, 2034, purchased with the proceeds of the preferred securities issuance. These
securities pay interest at a floating rate of 285 basis points above the three month LIBOR rate and
averaged 4.40% for the year ended December 31, 2004. The junior subordinated debentures are
scheduled to mature on January 23, 2034, at which time the trust preferred securities will be
redeemed. As a result of the above, the Preferred Securities of the trust are considered fully and
unconditionally guaranteed by the Company. In October 2004 the Company issued $ 30.9 million of mandatorily redeemable, Preferred Securities
as part of a pooled trust preferred stock offering out of a grantor trust, Fidelity Capital Trust
III, a Delaware statutory business trust, which was created by the Company for this sole purpose.
As its only asset, the trust owns $ 30.9 million of the Companys Junior Subordinated Debentures
due November 23, 2034, purchased with the proceeds of the preferred securities issuance. These
securities pay interest at a floating rate of 197 basis points above the three month LIBOR rate and
averaged 4.05% for the year ended December 31, 2004. The junior subordinated debentures are
scheduled to mature on November 23, 2034 at which time the trust preferred securities will be F-37




---



##### 



redeemed. As a
result of the above, the Preferred Securities of the trust are considered fully and unconditionally
guaranteed by the Company. The Company used proceeds from this issue to fully redeem all securities
issued under Fidelity Capital Trust I, terminating that Trusts existence. Distributions on the preferred securities of both Trust II and Trust III are cumulative and are
payable at the same rate as the Companys junior subordinated debentures described above. The
Companys junior subordinated debentures, due January 23, 2034, are redeemable in whole or in part
at the Companys discretion at 100% of principal amount commencing January 23, 2009. The preferred
securities issued by both trusts are subject to mandatory redemption, in whole or in part as
applicable, upon the repayment of the junior subordinated debentures. 11. INCOME TAXES Deferred income tax assets and liabilities are computed annually for differences between financial
statement and tax basis of assets and liabilities that will result in taxable or deductible amounts
in the future based on enacted tax laws and rates applicable to periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period adjusted for the change during the period in deferred tax
assets and liabilities. The components of the provisions for income taxes for the years ended December 31, 2002, 2003 and
2004 are as follows: F-38




---



##### 



2002
    
    
    2003
    
    
    2004(In Thousands)Current  federal
    
    $
    9,712
    
    
    $
    11,006
    
    
    $
    14,126Current  state
    
    
    1,578
    
    
    
    1,807
    
    
    
    2,330Total current
    
    
    11,290
    
    
    
    12,813
    
    
    
    16,456Deferred  federal and state
    
    
    (553
    )
    
    
    (1,334
    )
    
    
    (1,766
    )Total
    
    $
    10,737
    
    
    $
    11,479
    
    
    $
    14,690
 The Companys provision for income taxes differs from the amounts determined by applying the
statutory federal income tax rate to income before income taxes for the following reasons: Years Ended December 31,2002
    
    
    2003
    
    
    2004Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in Thousands)Tax at federal tax rate
    
    $
    9,637
    
    
    
    35.0
    %
    
    $
    10,290
    
    
    
    35.0
    %
    
    $
    13,155
    
    
    
    35.0
    %State income taxes, net of federal
income tax benefits
    
    
    974
    
    
    
    3.6
    
    
    
    1,050
    
    
    
    3.6
    
    
    
    1,350
    
    
    
    3.6Employee stock ownership plan
    
    
    117
    
    
    
    0.4
    
    
    
    183
    
    
    
    0.6
    
    
    
    340
    
    
    
    0.9Other
    
    
    9
    
    
    
    
    
    
    
    (44
    )
    
    
    (0.2
    )
    
    
    (155
    )
    
    
    (0.5
    )Total provision and effective tax rate
    
    $
    10,737
    
    
    
    39.0
    %
    
    $
    11,479
    
    
    
    39.0
    %
    
    $
    14,690
    
    
    
    39.0
    %
 F-39




---



##### 



The tax effect of temporary differences which give rise to deferred tax assets and deferred
tax liabilities are presented below: December 31,2003
    
    
    2004(In Thousands)Deferred tax liabilities:Depreciation
    
    $
    1,476
    
    
    $
    1,982Loan fee income and capitalized costs
    
    
    4,264
    
    
    
    3,330FHLB stock dividends
    
    
    529
    
    
    
    221Unrealized appreciation in securities
    
    
    
    
    
    
    988Deferred state taxes
    
    
    291
    
    
    
    379Gross deferred tax liabilities
    
    
    6,560
    
    
    
    6,900Deferred tax assets:Excess of tax bad debt reserve over book reserve
    
    
    4,503
    
    
    
    5,519Executive death benefit
    
    
    187
    
    
    
    172Amortization
    
    
    220
    
    
    
    182Retirement plan
    
    
    5,011
    
    
    
    5,575Deferred compensation
    
    
    1,988
    
    
    
    1,502Unrealized depreciation in securities
    
    
    678
    
    
    
    Other accruals
    
    
    334
    
    
    
    385Minimum pension liability adjustment
    
    
    1,060
    
    
    
    1,246
 F-40




---



##### 



December 31,2003
    
    
    2004(In Thousands)Other
    
    
    177
    
    
    
    202Gross deferred tax assets
    
    
    14,158
    
    
    
    14,783Less valuation allowances for deferred tax assets
    
    
    
    
    
    
    Gross deferred tax assets
    
    
    14,158
    
    
    
    14,783Net deferred tax assets
    
    $
    7,598
    
    
    $
    7,883
 During 1996, a law was enacted that repealed Section 593 of the Internal Revenue Code for

taxable years beginning after December 31, 1995. Section 593 allowed thrift institutions,
including the Bank, to use the percentage-of-taxable income bad debt accounting method, if more
favorable than the specific charge-off method, for federal income tax purposes. The excess
reserves (deduction based on the percentage-of-taxable income less the deduction based on the
specific charge-off method) accumulated post-1987 are required to be recaptured ratably over a six
year period beginning in 1996. Such amounts were fully recaptured as of December 31, 2003. The
same legislation allowed thrift institutions to convert to commercial bank charter, diversify their
lending, or be merged into a commercial bank without having to recapture the pre-1988 tax bad debt
reserve. However, the reserve would have to be recaptured if the institution redeems its own
stock, pays dividends or distributions in excess of earnings and profits or fails to qualify as a
bank for federal income tax purposes. The Company intends to meet all requirements that prevent it
from recapturing the pre-1988 reserves. The unrecorded potential liability related to this reserve
is $2.9 million. 12. PENSION AND EMPLOYEE BENEFIT PLANS Savings  401K Plan Effective January 1, 1988, the Board of Directors approved a 401(k) deferred
savings plan for all Bank employees who are 21 years of age with one or more years of service. The
401(k) deferred savings plan allows qualified employees to save from 1% to 25% of their income.
Presently, one-half of an F-41




---



##### 



employees
contribution is matched by the Bank, up to 6% of the employees salary. The Banks matching
percentage will be determined annually by the Board of Directors after taking into consideration
such factors as profit performance and ability to meet capital requirements. The Banks
contribution to the plan totaled $ 542,000, $ 632,000 and $ 709,000 for the years ended December
31, 2002, 2003 and 2004, respectively. The Banks employees hired after December 31, 2000 participate in a qualified defined contribution
plan in addition to the Banks Savings Plan 401(k). The Bank provides these employees with an
additional pension account within the 401(k) plan. To be eligible for participation, an employee
must be 21 years of age. Fidelity Federal will contribute 3% of the employees base salary to the
pension account for each year that the employee works 1,000 hours. If the employee has completed at
least seven years of service, the contribution percentage will increase to 4% annually and after 14
years of service the percentage will increase to 5% annually. Pension Plan The Banks employees hired prior to January 1, 2001 participate in the Banks
qualified defined benefit pension plan covering substantially all of these employees. The plan
calls for benefits to be paid to eligible employees at retirement based primarily upon years of
service with the Bank and compensation rates during those years. The Banks policy is to fund the
qualified retirement plan in an amount that falls between the minimum contribution required by the
Employee Retirement Income Security Act and the maximum tax deductible contribution. Plan assets
consist primarily of common stock, U.S. Government obligations and certificates of deposit. F-42




---



##### 



Components of the Banks Pension Plan are as follows: 2003
    
    
    2004(In Thousands)CHANGE IN BENEFIT OBLIGATIONSBenefit obligation, beginning of period
    
    $
    18,605
    
    
    $
    27,005Service cost
    
    
    1,859
    
    
    
    2,222Interest cost
    
    
    1,375
    
    
    
    1,586Actuarial loss
    
    
    6,330
    
    
    
    1,514Benefit paid
    
    
    (1,164
    )
    
    
    (4,675
    )Benefit obligation, end of period
    
    $
    27,005
    
    
    $
    27,652CHANGE IN PLAN ASSETSFair value of plan assets, beginning of period
    
    $
    12,720
    
    
    $
    17,233Actual return on plan assets
    
    
    3,096
    
    
    
    1,664Employers contribution
    
    
    2,581
    
    
    
    3,296Benefits paid
    
    
    (1,164
    )
    
    
    (4,675
    )Fair value of plan assets, end of period
    
    $
    17,233
    
    
    $
    17,518ASSET CATEGORYEquity securities
    
    
    12
    %
    
    
    72
    %Debt securities
    
    
    
    
    
    
    9Cash and cash equivalents
    
    
    88
    
    
    
    19Total
    
    
    100
    %
    
    
    100
    %FUNDED STATUSFunded status
    
    $
    (9,772
    )
    
    $
    (10,134
    )Unrecognized net actuarial loss
    
    
    10,921
    
    
    
    11,507
 F-43




---



##### 



2003
    
    
    2004(In Thousands)Unrecognized prior service cost
    
    
    183
    
    
    
    178Net amount recognized-prepaid pension cost
    
    $
    1,332
    
    
    $
    1,551Adjustment required to recognize minimum liability:Additional minimum liability
    
    $
    2,900
    
    
    $
    2,231Intangible asset
    
    
    183
    
    
    
    178Accumulated other comprehensive income
    
    
    2,717
    
    
    
    2,053Net amount recognized-prepaid pension cost
    
    $
    1,332
    
    
    $
    1,551ACCUMULATED BENEFIT OBLIGATION
    
    $
    18,801
    
    
    $
    18,198
 Components of net periodic benefit cost are as follows: For the Years Ended December 31,2002
    
    
    2003
    
    
    2004(In Thousands)Service cost
    
    $
    1,561
    
    
    $
    1,859
    
    
    $
    2,222Interest cost
    
    
    1,141
    
    
    
    1,375
    
    
    
    1,586Return on assets
    
    
    1,668
    
    
    
    (1,206
    )
    
    
    (1,558
    )Amortization of prior service cost
    
    
    5
    
    
    
    5
    
    
    
    5Recognition of net actuarial (gain) loss
    
    
    (2,499
    )
    
    
    890
    
    
    
    823Net periodic benefit cost
    
    $
    1,876
    
    
    $
    2,923
    
    
    $
    3,078
 F-44




---



##### 



For the years ended December 31, 2002, 2003 and 2004, pension expense amounts were based upon
actuarial computations. The Bank funded $ 1,995,000, $ 2,581,000 and $ 3,296,500 as required for the 2002, 2003 and 2004
plan years, and expects to make a contribution for the 2005 plan year of $3,615,000 dollars. The Company, in cooperation with its actuaries and asset managers, determines the discount rate to
be used which includes reviewing the rates used on high quality fixed-income investments such as
Moodys Aa long-bond index. The annual increase in future compensation levels is a composite rate
which reflects anticipated inflation, merit increases and promotions for the group of covered
participants. The long term rate of return used is a composite rate which is derived as the sum of
the estimated percentages invested in each principal asset class included in the portfolio
multiplied by their expected rates of return. The assumptions used in computing the present value of the projected benefit obligation and the net
periodic pension expense are as follows: December 31,2002
    
    
    2003
    
    
    2004Discount rate in determining benefit obligation
    
    
    6.50
    %
    
    
    6.00
    %
    
    
    5.75
    %Rate of increase in future compensation levels for
determining benefit obligations
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.25
    %Expected return on plan assets
    
    
    9.00
    %
    
    
    9.00
    %
    
    
    9.00
    %
 F-45




---



##### 



Estimated future benefit payments, which reflect expected future service, as appropriate, are
as follows: Years Ending December 31,
    
    Amount(In Thousands)2005
    
    $
    3,3092006
    
    
    1,7432007
    
    
    1,7442008
    
    
    2,4882009
    
    
    3,8932010-2014
    
    
    17,791Total
    
    $
    30,968
 At December 31, 2003 and 2004, the Bank had a minimum pension liability of $2.9 million and
$2.2 million, respectively. A minimum pension liability is prescribed when the accumulated benefit
obligation in the plan exceeds the fair value of the underlying pension plan assets and accrued
pension liabilities. The adjustment is reflected in other comprehensive income and other long-term
liabilities, as appropriate. The Company has a pension committee whose responsibility is to monitor the managing of plan assets
in accordance with the plans established investment policy. The purpose of the investment policy
is to provide guidelines for asset allocation, set policies for selection of appropriate investment
funds and to guide the F-46




---



##### 



committee in its fiduciary duties. The overall objective of the investment
policy is to ensure the plan has the ability to pay all benefit and expense obligations when due,
to maximize return on assets within reasonable and prudent levels of risk and to control the costs
of administering the plan and managing plan assets. The plans targeted asset allocation is to
maintain approximately 70% of its assets in equity securities with the remaining 30% in fixed
income or debt securities. At the end of 2003, the Companys pension committee decided to change
asset managers for the defined benefit plan from Security Trust Company, N.A. to Charles Schwab
Trust Company. As a result, at December 31, 2003, of the $17.2 million in plan assets, $15.1 million or
88% was in cash and cash equivalents awaiting transfer to Charles Schwab Trust Company while the
remaining $2.1 million or 12% was in a debt securities mutual fund which transferred to Charles
Schwab Trust Company in kind. After the transfer of assets was completed, the assets were invested
based on the plans targeted allocation of approximately 70% equity securities and 30% debt
securities. At December 31, 2003 and 2004 the plan had no investment in the common stock of the
Company. Retirement Plans for Officers and Directors-Non-Qualified During 1989, the Bank established
non-qualified defined benefit plans for certain officers and directors. The directors plan became
effective on January 1, 1991. For the years ended December 31, 2002, 2003 and 2004, the net
periodic pension expense for the Supplemental Executive Retirement Plan for Officers totaled $
1,439,000, $ 1,572,000 and $ 1,892,000, respectively. The projected benefit obligation as of
December 31, 2003 and 2004, was estimated at $ 15,763,000 and $ 20,453,000 respectively. For 2002,
2003 and 2004, respectively, the discount rates used to measure the projected benefit obligation
were 6.50%, 6.00% and 5.75%. The rate of increase in future compensation levels in 2002 was 4.25%,
in 2003 was 4.25% and 2004 was 4.25%. For the years ended December 31, 2002, 2003 and 2004, the net periodic pension expense for the
Retirement Plan for the Directors totaled $ 87,000, $ 90,000 and $ 91,000, respectively. The
projected benefit obligation for the F-47




---



##### 



Retirement Plan for Directors as of December 31, 2003 and 2004
was estimated at $ 1,599,000 and $ 1,689,000, respectively. For 2002, 2003 and 2004, the discount
rates used to measure that projected benefit obligation were 6.50%, 6.00% and 5.75%, respectively.
For the years ended December 31, 2002, 2003 and 2004, the rate of increase in future compensation
levels for the Retirement Plan for Directors was 0.00%. Incentive Program The Bank also has a Senior Management Performance Incentive Award Program
(SMPIAP) to provide the opportunity for those executives to be rewarded in future earnings
growth. A designated percentage of income at December 31 of each year is used to determine the
award fund contribution. This percentage will be determined annually by the Board of Directors
after taking into consideration such factors as profit performance and ability to meet capital
requirements. Awards amounting to $ 1,022,000, $ 1,230,000 and $ 1,691,000 were made during the
years 2002, 2003 and 2004, respectively, for distribution in subsequent years. The assets of the
SMPIAP are held in a Rabbi trust for the benefit of senior management. The SMPIAP participants may
elect to invest their awards in either Company stock or other third party investment options. The
assets of the Rabbi trust are included in the accompanying financial statements and are accounted
as follows: (1) Assets, other than Company stock, (primarily trading securities) are included in
other assets at fair value ($ 1,419,000 at December 31, 2004) with the corresponding obligation to
the employees of a like amount included in other liabilities. Changes in the fair value of the
assets and changes in the amount of the liability are included in earnings; and (2) Company stock
(441,082 shares at December 31, 2004) is carried at cost ($ 1.8 million at December 31, 2004) and
included in treasury stock with the corresponding obligation to the employees (which can only be
settled through delivery of the shares) of a like amount included in additional paid-in capital. F-48




---



##### 



Employee Stock Ownership Plan On January 7, 1994, in connection with the Banks Plan of
Reorganization into a Mutual Holding Company, the Bank adopted a tax qualified Employee Stock
Ownership Plan (ESOP) for all eligible employees. The ESOP purchased 770,331 shares of the Banks
stock at the date of the Reorganization. The funds used to purchase the shares were borrowed from a
third party lender. Effective June 30, 1997, the loan was purchased and was held by Fidelity
Bankshares, Inc. As of December 31, 2000, the loan had been paid in full and all of the 770,331 shares
had been allocated to employees individual ESOP accounts. In connection with the Banks second step mutual-to-stock conversion of its Mutual Holding Company
parent on May 15, 2001, the ESOP purchased an additional 782,637 shares of the Banks stock. The
funds used to purchase the shares were borrowed from Fidelity Bankshares, Inc. and therefore have
been eliminated in consolidation. Beginning March 31, 2002, the Bank began contributing to the ESOP
sufficient funds to pay the principal and interest on the loan over 15 years. Under the ESOP, benefits generally become 100% vested after five years of credited service.
However, contributions to the ESOP and shares allocated among participants proportional to
repayment of the ESOP loan will be allocated among participants on the basis of compensation in the
year of allocation, subject to regulatory maximum limitations. The Bank recognized $ 682,000, $
871,000 and $ 1,320,000 by a charge against income in 2002, 2003 and 2004, respectively, under this
plan. Bank Recognition and Retention Plan On May 21, 2002, the Company adopted and the stockholders
approved the 2002 Recognition and Retention Plan to encourage key employees and Directors to remain
with the Bank. Under the 2002 plan, the Company reserved and granted 521,757 shares of common stock
to key employees and outside directors. These granted shares will vest and be allocated to the
affected employees and F-49




---



##### 



directors ratably over five years, subject to various conditions requiring
their acceleration. The Bank recognized expense of $ 1,062,000, $ 1,576,000 and $ 1,365,000 in
2002, 2003 and 2004 respectively under the plan. 13. STOCK OPTION PLANS The Company reserved 825,356 shares of common stock under its 1994 Incentive Stock Option Plan,
which was approved by stockholders on January 7, 1994. The plan provided for the granting of
options to key employees until its expiration on January 6, 2004. All options were granted at the
closing price on the date of grant and were exercisable at a rate of twenty percent per year, not
to exceed ten years. At December 31, 2002 and 2003 there were 81,788 and 7,433 options outstanding
and exercisable. All of these options were exercised or expired on January 6, 2004. The Company reserved 275,115 shares of common stock under its 1994 Stock Option Plan for Outside
Directors, which was approved by stockholders on January 7, 1994. The plan provides for the
granting of options to directors until its expiration on January 6, 2004. All options were granted
at the closing price on the date of grant and are exercisable at any time up to ten years. At
December 31, 2002 and 2003 there were 122,756 and 36,498 options outstanding and exercisable,
respectively. All of these options were exercised or expired on January 6, 2004. On May 21, 2002, the Company adopted and stockholders approved the 2002 Incentive Stock Benefit
Plan. Under the 2002 plan, the Company has reserved 1,304,391 shares of common stock, of which
options to purchase 1,244,925 shares were granted to key employees and outside directors during
2002. The term of the stock option awards is ten years from the date of grant. The 1,055,850 option
awards granted to outside directors and certain executive officers will vest commencing with the
first 16 2/3% vested on the date of grant and the remaining F-50




---



##### 



shares vesting at 16 2/3% per year over
a 5 year period. The remaining 189,075 options granted to other key employees vest at a rate of 20%
each year and will be fully vested five years after the date of grant. At December 31, 2003 and
2004 there were 1,240,086 and 1,190,919 options outstanding. At December 31, 2004, 64,056 options
remained available for grant. F-51




---



##### 



The following table summarizes the status of all Company stock option plans for the three years
ended December 31, 2002, 2003 and 2004. Options PriceAverageNumber of
    
    
    ExerciseOptions
    
    
    Price Per
    
    
    AggregateOutstanding
    
    
    Share
    
    
    PriceOptions OutstandingBalance  December 31, 2001
    
    
    301,392
    
    
    
    2.51
    
    
    
    756,494Granted
    
    
    1,244,925
    
    
    
    13.51
    
    
    
    16,818,937Exercised
    
    
    (96,848
    )
    
    
    2.51
    
    
    
    (243,088
    )Canceled
    
    
    
    
    
    
    
    
    
    
    Balance  December 31, 2002
    
    
    1,449,469
    
    
    
    11.96
    
    
    
    17,332,343Granted
    
    
    7,776
    
    
    
    16.93
    
    
    
    131,648Exercised
    
    
    (170,528
    )
    
    
    3.15
    
    
    
    (537,163
    )Canceled
    
    
    (2,700
    )
    
    
    13.15
    
    
    
    (36,477
    )Balance  December 31, 2003
    
    
    1,284,017
    
    
    
    13.15
    
    
    
    16,890,351Granted
    
    
    44,476
    
    
    
    23.85
    
    
    
    1,060,773Exercised
    
    
    (135,684
    )
    
    
    10.00
    
    
    
    (1,356,747
    )Canceled
    
    
    (1,890
    )
    
    
    13.51
    
    
    
    (25,534
    )Balance  December 31, 2004
    
    
    1,190,919
    
    
    $
    13.91
    
    
    $
    16,568,843
 F-52




---



##### 



The range of exercise prices for options outstanding at December 31, 2004 was $ 13.51 to $
25.59. The range of exercise prices for options is due to changes in the price of the Companys
stock over the period of the grants. The following summarizes information about options outstanding at December 31, 2004. Outstanding OptionsWeighted-Average
    
    
    Weighted-Remaining
    
    
    AverageNumber of
    
    
    Contractual
    
    
    ExerciseShares
    
    
    Life
    
    
    PriceRange of exercise prices:$13.51
    
    
    1,140,683
    
    
    
    7.4
    
    
    $
    13.51$16.93
    
    
    5,760
    
    
    
    7.4
    
    
    
    16.93$22.38
    
    
    13,292
    
    
    
    7.4
    
    
    
    22.38$23.13
    
    
    11,388
    
    
    
    7.4
    
    
    
    23.13$24.90
    
    
    8,030
    
    
    
    7.4
    
    
    
    24.90$25.30
    
    
    3,951
    
    
    
    7.4
    
    
    
    25.30$25.59
    
    
    7,815
    
    
    
    7.4
    
    
    
    25.591,190,919
    
    
    
    7.4
    
    
    $
    13.91
 F-53




---



##### 



Exercisable OptionsWeighted-Exercisable
    
    
    AverageAs of
    
    
    ExerciseDecember 31, 2004
    
    
    PriceRange of exercise prices:$13.51
    
    
    532,464
    
    
    $
    13.51$16.93
    
    
    5,760
    
    
    
    16.93$22.38
    
    
    11,292
    
    
    
    22.38$23.13
    
    
    11,388
    
    
    
    23.13$24.90
    
    
    8,030
    
    
    
    24.90$25.30
    
    
    3,951
    
    
    
    25.30$25.59
    
    
    7,815
    
    
    
    25.59580,700
    
    
    $
    14.33
 These options will expire if not exercised by May 2013. The prices for the options exercisable
at December 31, 2004 ranged from $ 13.51 to $ 25.59 As discussed in Note 1, the Company discloses the pro forma effect on net income and earnings per
share had the options granted been accounted for at fair value. The fair value of the options
granted in fiscal 2002, 2003 and 2004 have been estimated at the date of grant using the
Black-Scholes option-pricing model. F-54




---



##### 



The pro forma disclosures amortize to expense the estimated compensation costs for the Companys
stock options granted in the years 2003 and 2004 over the options vesting period. The Companys
year 2003 and 2004 pro forma weighted average fair value options granted, with related assumptions
are reflected below: December 31,2002
    
    
    2003
    
    
    2004Pro forma weighted average fair value of options granted
    
    $
    4.93
    
    
    $
    6.73
    
    
    $
    6.48Risk-free interest rate
    
    
    2.78
    %
    
    
    3.46
    %
    
    
    2.84
    %Expected life (years)
    
    
    5.00
    
    
    
    5.00
    
    
    
    5.00Expected volatility
    
    
    28.93
    
    
    
    28.61
    
    
    
    28.37Annual dividend yield
    
    
    1.97
    %
    
    
    1.57
    %
    
    
    1.16
    %
 14. REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the Office of Thrift
Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory
and possible discretionary actions by regulators that, if undertaken, could have a direct material
effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Banks assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Banks capital amounts and F-55




---



##### 



classifications are also subject to qualitative judgments by regulators about components,
risk-weighting and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios of Tangible capital of not less than 1.5% of adjusted total
assets, Total capital to risk-weighted assets of not less than 8%, Tier I capital of not less than
3.0% of adjusted total assets, and Tier I capital to risk-weighted assets of 4.0% (as defined in
the regulations). At December 31, 2003 and 2004, the Bank met all capital adequacy requirements to
which it was subject. The most recent notification from the OTS categorized the Bank as Well Capitalized under the
framework for prompt corrective action. To be considered well capitalized under Prompt Corrective
Action Provisions, the Bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the following table. There are no conditions or events since that
notification that management believes have changed the Banks categorization. F-56




---



##### 



The Banks actual capital amounts and ratios are presented in the following table: To be ConsideredMinimum for
    
    
    Well CapitalizedCapital Adequacy
    
    
    for Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsRatio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount(Dollars in Thousands)As of December 31, 2003
Stockholders Equity and ratio to
total assets
    
    
    7.2
    %
    
    $
    220,528Unrealized decrease in market
value of assets available for
sale (net of applicable income
taxes)
    
    
    
    
    
    
    1,060Goodwill
    
    
    
    
    
    
    (5,615
    )Disallowed servicing assets
    
    
    
    
    
    
    (124
    )Tangible capital and ratio to
adjusted total assets
    
    
    7.1
    %
    
    $
    215,849
    
    
    
    1.5
    %
    
    $
    45,630Tier I (core) capital and ratio
to adjusted total assets
    
    
    7.1
    %
    
    $
    215,849
    
    
    
    3.0
    %
    
    $
    91,259
    
    
    
    5.0
    %
    
    $
    152,099Tier I (core) capital and ratio
to risk-weighted total assets
    
    
    10.3
    %
    
    $
    215,849
    
    
    
    4.0
    %
    
    $
    83,790
    
    
    
    6.0
    %
    
    $
    125,685Allowable Tier 2 capital:General loan valuation allowances.
    
    
    
    
    
    
    10,149Total risk-based capital and
ratio to risk-weighted total
assets
    
    
    10.8
    %
    
    $
    225,998
    
    
    
    8.0
    %
    
    $
    167,580
    
    
    
    10.0
    %
    
    $
    209,475Total assets
    
    
    
    
    
    $
    3,045,981Adjusted total assets
    
    
    
    
    
    $
    3,041,980Risk-weighted assets
    
    
    
    
    
    $
    2,094,753As of December 31, 2004
Stockholders Equity and ratio to
total assets
    
    
    8.3
    %
    
    $
    286,594Unrealized decrease in market
value of assets available for
sale (net of applicable income
taxes)
    
    
    
    
    
    
    (1,546
    )Goodwill
    
    
    
    
    
    
    (2,930
    )Disallowed servicing assets
    
    
    
    
    
    
    (213
    )Tangible capital and ratio to
adjusted total assets
    
    
    8.1
    %
    
    $
    281,905
    
    
    
    1.5
    %
    
    $
    51,966Tier I (core) capital and ratio
to adjusted total assets
    
    
    8.1
    %
    
    $
    281,905
    
    
    
    3.0
    %
    
    $
    103,932
    
    
    
    5.0
    %
    
    $
    173,220Tier I (core) capital and ratio
to risk-weighted total assets
    
    
    11.3
    %
    
    $
    281,905
    
    
    
    4.0
    %
    
    $
    99,862
    
    
    
    6.0
    %
    
    $
    149,793Allowable Tier 2 capital:General loan valuation allowances.
    
    
    
    
    
    
    12,639Total risk-based capital and
ratio to risk-weighted total
assets
    
    
    11.8
    %
    
    $
    294,544
    
    
    
    8.0
    %
    
    $
    199,725
    
    
    
    10.0
    %
    
    $
    249,656Total assets
    
    
    
    
    
    $
    3,470,068Adjusted total assets
    
    
    
    
    
    $
    3,464,391Risk-weighted assets
    
    
    
    
    
    $
    2,496,558
 F-57




---



##### 



At periodic intervals, both the OTS and the FDIC routinely examine the Companys and the
Banks financial statements as part of their legally proscribed oversight of the savings and loan
industry. Based on these examinations, the regulators can direct that the financial statements be
adjusted in accordance with their findings. During the year ended December 31, 2004, an OTS examination resulted in no significant adjustments
to the consolidated financial statements. 15. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Bank makes commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. The interest rates on both fixed and variable rate mortgage
loans are generally based on the market rates in effect on the date the loan application is taken.
Commitments generally have fixed expiration dates of no longer than 60 days and other termination
clauses and may require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The
amount of collateral obtained by the Bank upon extension of credit is based on managements credit
evaluation of the
customer. Collateral held varies but may include single-family homes, marketable securities and
income-producing residential and commercial properties. Credit losses may occur when one of the
parties fails to perform in accordance with the terms of the contract. The Banks exposure to
credit risk is represented by the contractual amount of the commitments to extend credit.
Allowances for incurred losses on commitments to extend credit are based on managements best
estimate of probable losses that have been incurred as of the consolidated statement of financial
position date. If an allowance is deemed necessary, management would record such in other
liabilities. At December 31, 2003 and 2004, the Bank provided no such allowances for losses on
commitments to F-58




---



##### 



extend credit. At December 31, 2004, the Bank had commitments to extend credit for
or purchase loans of $ 239.2 million ($59.9 million in fixed rate commitments with interest rates
ranging from 5.00% to 14.5%, and the balance of commitments in either variable rate or for which
rates had not yet been set). At December 31, 2004, the Bank also has a pre-approval program which
commits dollar amounts to potential loan customers based on their credit history. This program,
however, does not commit to locked in rates. No fees are received in connection with such
commitments. The Bank also issues standby letters of credit which are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentiality the same as that involved in extending loan
facilities to customers. At December 31, 2003 and 2004, standby letters of credit amounted to
$7,282,000 and $14,565,000, respectively. The Bank leases various property for original periods ranging from one to fifty-one years. Rent
expense for the years ended December 31, 2002, 2003 and 2004, was approximately $ 1,024,000, $
1,525,000 and $ 1,696,000, respectively. At December 31, 2004, future minimum lease payments under
these operating leases are as follows: Years Ending December 31,
    
    Amount(In Thousands)2005
    
    $
    1,9512006
    
    
    1,9842007
    
    
    2,0102008
    
    
    2,0482009
    
    
    1,646Thereafter
    
    
    15,477Total
    
    $
    25,116
 F-59




---



##### 



The Bank has entered into a three year employment agreement with its Chief Executive Officer.
This agreement, among other matters, would provide for severance payments of up to three years
salary in the event of termination for reasons other than cause. In addition, the Bank has entered
into severance agreements with four of its executive officers. The severance agreements would
provide for payments of up to three years salary for these executives, but only in the event of
change of control of the Bank. In December 2002, the Board of Directors of the Company adopted a plan for certain executives,
under which the Company has agreed to reimburse them for any excise taxes which may be imposed on
them under the federal tax code in connection with payments made following a change in control. The Company is subject to various claims, legal actions and complaints arising in the ordinary
course of business. Other than as set forth below , in the Companys opinion, the disposition of
these matters will not have a material adverse effect on our financial condition, results of
operations or cash flows. On July 1, 2003, Fidelity Federal Bank & Trust was named as defendant in the lawsuit, James
Kehoe v. Fidelity Federal Bank & Trust, filed in the United States District Court for the
Southern District of Florida. In this action, James Kehoe (Kehoe), on behalf of himself and
other similarly situated persons, has alleged that Fidelity Federal violated the Driver Privacy
Protection Act by obtaining driver registration information from the State of Florida for use its
marketing efforts. Kehoe sought as damages a statutory minimum of $2,500.00 per violation on
behalf of the class of plaintiffs. On June 14, 2004, the Court granted Fidelity Federals Motion
for Summary Judgment and entered a Final Judgment in favor of the bank against Mr. Kehoe. A Notice
of Appeal was filed by Mr. Kehoes lawyers on June 28, 2004. Fidelity Federal, in consultation
with counsel, has concluded that the F-60




---



##### 



lawsuit is without merit and intends to defend against the
Plaintiffs Appeal of the Courts Final Judgment in the banks favor. On February 18, 2004, Fidelity Federal Bank & Trust was named as defendant in a lawsuit William
Adams et al., vs. Thomson Financial, Inc., Fidelity Federal Bank & Trust, N.A., Fidelity
Investments Services, L.L.C., d/b/a Fidelity Investments, National Financial Services, L.L.C.,
f/k/a National Financial Services Corporation, Zoe Marrero,filed in the Fifteenth Judicial
Circuit in and for Palm Beach County, Florida. The plaintiffs in this case have alleged various
causes of action against numerous defendants which arise from plaintiffs investments in various
entities controlled and generated by Thomas Abrams, who was convicted for running a Ponzi Scheme.
Fidelity Federal is a named defendant in one count of the complaint alleging aiding and abetting
breaches of fiduciary duty. The allegations are based upon Fidelity Federal allowing Abrams to set
up accounts with Fidelity Federal, deposit monies in them, issue bank checks based upon the
deposits and instructions from authorized
signatures on the accounts and generally offer banking services to the Abrams entities. There are
additional allegations that Fidelity Federal solicited clients for the Abrams entities and
pressured clients to place deposits with the Abrams entities and Fidelity Federal, which are
without basis. There is no specific request for damages, other than the jurisdictional amount of
in excess of $15,000.00. The Plaintiffs allege they lost in excess of $18,000,000.00 investing
with Abrams. The actual amount of losses incurred by the plaintiffs are as of yet undetermined.
The Company has moved to dismiss the second amended complaint, and intends to vigorously defend its
position on the basis that it acted solely as a depository bank in the transactions and allegations
of improper conduct by the Company are factually inaccurate. 16. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS F-61




---



##### 



For the Years Ended December 31,2002
    
    
    2003
    
    
    2004(In Thousands)Supplemental Disclosure of Cash Flow Information:Cash paid for income taxes
    
    $
    12,607
    
    
    $
    13,748
    
    
    $
    13,440Cash paid for interest on deposits and other borrowings
    
    $
    61,864
    
    
    $
    56,961
    
    
    $
    59,311Supplemental Schedule of Noncash Investing and Financing Activities:Property acquired in settlement of loans
    
    $
    680
    
    
    $
    870
    
    
    $
    84Mortgage-backed securities retained from the
securitization of mortgage loans
    
    $
    
    
    
    $
    
    
    
    $
    89,167
 17. EARNINGS PER SHARE The weighted-average number of shares used to calculate basic and diluted earnings per share for
the years ended December 31, 2002, 2003 and 2004, retroactively adjusted to reflect the 2004 3 for
2 stock split, are as follows: For the Year Ended December 31,
    
    
    For the Year Ended December 31,
    
    
    For the Year Ended December 31,2002
    
    
    2003
    
    
    2004Income
    
    
    Shares
    
    
    Per-Share
    
    
    Income
    
    
    Shares
    
    
    Per-Share
    
    
    Income
    
    
    Shares
    
    
    Per-Share(1)
    
    
    (2)
    
    
    Amount
    
    
    (1)
    
    
    (2)
    
    
    Amount
    
    
    (1)
    
    
    (2)
    
    
    AmountNet income
    
    $
    16,798,000
    
    
    
    
    
    
    
    
    
    
    $
    17,921,000
    
    
    
    
    
    
    
    
    
    
    $
    22,897,000Basic EPS:Income available to
common stockholders
    
    $
    16,798,000
    
    
    
    22,436,460
    
    
    $
    0.75
    
    
    $
    17,921,000
    
    
    
    21,747,880
    
    
    $
    0.82
    
    
    $
    22,897,000
    
    
    
    22,068,136
    
    
    $
    1.04Effect of diluted shares:Common stock options
    
    
    
    
    
    
    202,639
    
    
    
    
    
    
    
    
    
    
    
    315,441
    
    
    
    
    
    
    
    
    
    
    
    680,417Diluted EPS:Income available to
common stockholders
    
    $
    16,798,000
    
    
    
    22,639,099
    
    
    $
    0.74
    
    
    $
    17,921,000
    
    
    
    22,063,321
    
    
    $
    0.81
    
    
    $
    22,897,000
    
    
    
    22,748,552
    
    
    $
    1.01
   (1)
    
    Numerator(2)
    
    Denominator F-62




---



##### 



Weighted average shares outstanding for the years ended December 31, 2003 and 2004 were
reduced for the unearned treasury shares held by the Banks SMPIAP. (See Note 12). 18. ACCUMULATED OTHER COMPREHENSIVE LOSS An analysis of the components of Accumulated Other Comprehensive Loss for the years ended December
31, 2002, 2003 and 2004, net of related tax effects, is as follows: December 31,2002
    
    
    2003
    
    
    2004(In Thousands)Unrealized gain (loss) on assets available for sale:
    
    $
    (2,084
    )
    
    $
    (1,060
    )
    
    $
    1,546Minimum pension liability
    
    
    (1,451
    )
    
    
    (1,657
    )
    
    
    (1,949
    )Ending balance
    
    $
    (3,535
    )
    
    $
    (2,717
    )
    
    $
    (403
    )
 An analysis of the related tax effects allocated to Other Comprehensive Income Loss is as
follows: F-63




---



##### 



December 31, 2002
    
    
    December 31, 2003
    
    
    December 31, 2004Tax
    
    
    
    
    
    
    
    
    
    
    Tax
    
    
    
    
    
    
    
    
    
    
    TaxBefore-tax
    
    
    (Expense)
    
    
    Net-of-Tax
    
    
    Before-tax
    
    
    (Expense)
    
    
    Net-of-Tax
    
    
    Before-tax
    
    
    (Expense)
    
    
    Net-of-TaxAmount
    
    
    Benefit
    
    
    Amount
    
    
    Amount
    
    
    Benefit
    
    
    Amount
    
    
    Amount
    
    
    Benefit
    
    
    Amount(In Thousands)Unrealized gain (loss) on assets
available for sale:Unrealized holding gains (losses)
arising during period
    
    $
    (67
    )
    
    $
    26
    
    
    $
    (41
    )
    
    $
    (685
    )
    
    $
    267
    
    
    $
    (418
    )
    
    $
    4,679
    
    
    $
    (1,825
    )
    
    $
    2,854Reclassification adjustment for
(gains) losses realized in net
income
    
    
    (64
    )
    
    
    25
    
    
    
    (39
    )
    
    
    2,364
    
    
    
    (922
    )
    
    
    1,442
    
    
    
    (407
    )
    
    
    159
    
    
    
    (248
    )Minimum pension liability adjustment
    
    
    (2,378
    )
    
    
    927
    
    
    
    (1,451
    )
    
    
    (339
    )
    
    
    133
    
    
    
    (206
    )
    
    
    (478
    )
    
    
    186
    
    
    
    (292
    )Other comprehensive income (loss)
    
    $
    (2,509
    )
    
    $
    978
    
    
    $
    (1,531
    )
    
    $
    1,340
    
    
    $
    (522
    )
    
    $
    818
    
    
    $
    3,794
    
    
    $
    (1,480
    )
    
    $
    2,314
 19. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The fair value of the Companys financial instruments at
December 31, 2003 and 2004 is as follows: F-64




---



##### 



December 31, 2003
    
    
    December 31, 2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(In Thousands)Assets:Cash and amounts due from depository institutions
    
    $
    76,090
    
    
    $
    76,090
    
    
    $
    108,327
    
    
    $
    108,327Interest-bearing deposits
    
    
    33,797
    
    
    
    33,797
    
    
    
    41,082
    
    
    
    41,082Securities available for sale
    
    
    593,959
    
    
    
    593,959
    
    
    
    505,629
    
    
    
    505,629Securities held to maturity
    
    
    
    
    
    
    
    
    
    
    89,167
    
    
    
    90,048Loans receivable (net)
    
    
    2,191,696
    
    
    
    2,238,436
    
    
    
    2,556,700
    
    
    
    2,583,625Federal Home Loan Bank stock
    
    
    13,322
    
    
    
    13,322
    
    
    
    17,399
    
    
    
    17,399Liabilities:Deposits
    
    
    2,460,101
    
    
    
    2,474,382
    
    
    
    2,814,670
    
    
    
    2,813,426Other borrowed funds
    
    
    42,089
    
    
    
    42,080
    
    
    
    46,097
    
    
    
    46,087Advances from the Federal Home Loan Bank
    
    
    264,561
    
    
    
    282,385
    
    
    
    250,855
    
    
    
    256,386Junior Subordinated Debentures
    
    
    52,320
    
    
    
    51,511
    
    
    
    53,608
    
    
    
    50,411
 The following methods and assumptions were used to estimate fair value of each major class of
financial instrument at December 31, 2003 and 2004. Cash and Amounts due from Depository Institutions and Interest-Bearing Deposits- The carrying
amount of these assets is a reasonable estimate of their fair value. Securities Available for Sale and Held to Maturity- The fair value of these securities are based on
quoted market prices. Loans Receivable- The fair value of fixed and variable rate loans is estimated by discounting the
future cash flows of the loans using the current rates at which similar loans would be made to
borrowers with similar credit rating for the same remaining maturities. Federal Home Loan Bank Stock The carrying value of Federal Home Loan Bank stock approximates fair
value based on the redemption provisions of the Federal Home Loan Bank. F-65




---



##### 



Deposits- The fair value of demand deposits, savings accounts and money market accounts are equal
to the amount payable on demand at the reporting date. The fair values of fixed maturity
certificate accounts are estimated by discounting the future cash flows of the certificates using
the current rates for advances from the Federal Home Loan Bank with similar maturities. Other Borrowed Funds- Fair value is estimated using rates currently offered for advances from the
Federal Home Loan Bank with similar maturities. Advances from the Federal Home Loan Bank- The fair value of these advances is estimated by
discounting the future cash flows of these advances using the current rates at which similar term
advances could be obtained. Junior Subordinated Debentures- The fair value of these debentures is estimated by discounting the
future cash flows of these debentures using the current rates at which similar term debentures

could be obtained. Commitments to Extend Credit and Standby Letters of Credit- The fair value of these commitments is
insignificant. Although management uses its best judgment in estimating the fair value of these financial
instruments, there are inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amounts which the Bank could
realize in a current transaction. F-66




---



##### 



20. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed statements of financial position as of December 31, 2003, and 2004 and the
condensed statements of operations and statements of cash flows for the periods then ended should
be read in conjunction with the consolidated financial statements and related notes. December 31,2003
    
    
    2004(In Thousands)STATEMENTS OF FINANCIAL CONDITIONAssets:Cash and cash equivalents
    
    $
    9,051
    
    
    $
    13,132ESOP loan receivable
    
    
    4,522
    
    
    
    4,174Investment in and advances to Bank subsidiary
    
    
    220,528
    
    
    
    286,594Other assets
    
    
    4,457
    
    
    
    3796Total assets
    
    $
    238,558
    
    
    $
    307,696Liabilities
    
    $
    54,049
    
    
    $
    56,413Stockholders equity
    
    
    184,509
    
    
    
    251,283Total liabilities and stockholders equity
    
    $
    238,558
    
    
    $
    307,696
 F-67




---



##### 



Years Ended December 31,2002
    
    
    2003
    
    
    
    
    
    
    2004(In Thousands)STATEMENTS OF OPERATIONSIncome
    
    $
    594
    
    
    $
    243
    
    
    
    
    
    
    $
    415Expenses
    
    
    3,496
    
    
    
    3,584
    
    
    
    
    
    
    
    5,834Loss before income taxes and equity in earnings of Bank
    
    
    (2,902
    )
    
    
    (3,341
    )
    
    
    
    
    
    
    (5,419
    )Income tax benefit
    
    
    1,132
    
    
    
    1,303
    
    
    
    
    
    
    
    2,064Loss before equity in earnings of subsidiaries
    
    
    (1,770
    )
    
    
    (2,038
    )
    
    
    
    
    
    
    (3,355
    )Equity in earnings of subsidiaries
    
    
    18,568
    
    
    
    19,959
    
    
    
    
    
    
    
    26,252Net income
    
    $
    16,798
    
    
    $
    17,921
    
    
    
    
    
    
    $
    22,897STATEMENTS OF CASH FLOWSCash flow from (for) operating activities:Net income
    
    $
    16,798
    
    
    $
    17,921
    
    
    
    
    
    
    $
    22,897Adjustments to reconcile net income to
net cash used for operating activities -
Equity in earnings of subsidiaries
    
    
    (18,568
    )
    
    
    (19,959
    )
    
    
    
    
    
    
    (26,252
    )Other
    
    
    1,472
    
    
    
    2,569
    
    
    
    
    
    
    
    3,042Net cash (used for) provided by operating activities
    
    
    (298
    )
    
    
    531
    
    
    
    
    
    
    
    (313
    )Cash flow from (for) investing activities:Dividends received from subsidiaries
    
    
    
    
    
    
    7,750
    
    
    
    

    
    
    
    Principal payments on ESOP loan
    
    
    348
    
    
    
    348
    
    
    
    
    
    
    
    348Investment in subsidiaries
    
    
    
    
    
    
    (20,000
    )
    
    
    
    
    
    
    (37,500
    )Other
    
    
    243
    
    
    
    (101
    )
    
    
    
    
    
    
    2,306Net cash (used for) provided by investing activities
    
    
    591
    
    
    
    (12,003
    )
    
    
    
    
    
    
    (34,846
    )Cash flow from (for) financing activities:Proceeds from the sale of stock
    
    
    124
    
    
    
    309
    
    
    
    
    
    
    
    44,034Purchase of treasury stock
    
    
    (19,957
    )
    
    
    (176
    )
    
    
    
    
    
    
    Proceeds from the issuance of trust preferred securities, net
    
    
    
    
    
    
    21,450
    
    
    
    
    
    
    
    29,822Pay off Trust Preferred Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,750
    )Cash dividends paid
    
    
    (6,036
    )
    
    
    (5,792
    )
    
    
    
    
    
    
    (5,866
    )Net cash provided by (used for) financing activities
    
    
    (25,869
    )
    
    
    15,791
    
    
    
    
    
    
    
    39,240Net increase (decrease) in cash and cash equivalents
    
    
    (25,576
    )
    
    
    4,319
    
    
    
    
    
    
    
    4,081Cash and cash equivalents, Beginning of year
    
    
    30,308
    
    
    
    4,732
    
    
    
    
    
    
    
    9,051Cash and cash equivalents, End of year
    
    $
    4,732
    
    
    $
    9,051
    
    
    
    
    
    
    $
    13,132
 F-68




---



##### 



21. QUARTERLY FINANCIAL DATA (UNAUDITED) First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In Thousands, except share data)Year ended December 31, 2003:Interest income
    
    $
    34,831
    
    
    $
    36,336
    
    
    $
    35,428
    
    
    $
    37,088Interest expense
    
    
    14,046
    
    
    
    14,650
    
    
    
    14,371
    
    
    
    14,097Net interest income
    
    
    20,785
    
    
    
    21,686
    
    
    
    21,057
    
    
    
    22,991Provision for loan losses
    
    
    790
    
    
    
    693
    
    
    
    558
    
    
    
    1,081Non-interest income
    
    
    7,011
    
    
    
    6,020
    
    
    
    5,869
    
    
    
    3,616Non-interest expenses
    
    
    18,659
    
    
    
    18,886
    
    
    
    19,145
    
    
    
    19,823Income taxes
    
    
    3,229
    
    
    
    3,196
    
    
    
    2,838
    
    
    
    2,216Net Income
    
    $
    5,118
    
    
    $
    4,931
    
    
    $
    4,385
    
    
    $
    3,487Earnings per shareBasic
    
    $
    0.24
    
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.16Diluted
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.15
 First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In Thousands, except share data)Year ended December 31, 2004:Interest income
    
    $
    38,062
    
    
    $
    39,091
    
    
    $
    42,986
    
    
    $
    44,525Interest expense
    
    
    14,149
    
    
    
    14,506
    
    
    
    15,246
    
    
    
    15,963Net interest income
    
    
    23,913
    
    
    
    24,585
    
    
    
    27,740
    
    
    
    28,562Provision for loan losses
    
    
    596
    
    
    
    794
    
    
    
    783
    
    
    
    562Non-interest income
    
    
    6,463
    
    
    
    7,157
    
    
    
    6,245
    
    
    
    5,308Non-interest expenses
    
    
    20,466
    
    
    
    21,547
    
    
    
    23,077
    
    
    
    24,560Income taxes
    
    
    3,627
    
    
    
    3,713
    
    
    
    3,943
    
    
    
    3,408Net Income
    
    $
    5,687
    
    
    $
    5,688
    
    
    $
    6,182
    
    
    $
    5,340Earnings per shareBasic
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.28
    
    
    $
    0.24Diluted
    
    $
    0.25
    
    
    $
    0.25
    
    
    $
    0.27
    
    
    $
    0.23
 Due to rounding, the sum of each quarterly earnings per share may not agree with the annual
earnings per share as shown on the Consolidated Statements of Operations. F-69