Fidelity Bankshares (FFFL) 10-K 2004 FY Annual report

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-2
Consolidated Statements of Financial Position at December 31, 2003 and 2004	F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004	F-4
Consolidated Statements of Comprehensive Operations for the years ended December 31, 2002, 2003 and 2004	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2002, 2003 and 2004	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004	F-6
Notes to Consolidated Financial Statements	F-8

F-1

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

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AT DECEMBER 31, 2003 AND 2004

	2003			2004
	(In Thousands, except share data)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions	$	76,090		$	108,327
Interest-earning deposits		33,797			41,082
Total cash and cash equivalents		109,887			149,409
SECURITIES AVAILABLE FOR SALE (At fair value):
Municipal bonds and government and agency securities		122,731			65,156
Mortgage-backed securities		471,228			440,473
Total securities available for sale		593,959			505,629
SECURITIES HELD TO MATURITY (At cost):
Mortgage-backed securities		—			89,167
LOANS RECEIVABLE, Net of allowance for loan losses - $11,119 and $13,628 at December 31, 2003 and 2004, respectively		2,191,696			2,556,700
OFFICE PROPERTIES AND EQUIPMENT, Net		73,553			83,439
FEDERAL HOME LOAN BANK STOCK, (At cost)		13,322			17,399
ACCRUED INTEREST RECEIVABLE		11,127			12,379
DEFERRED INCOME TAX ASSET		7,598			7,883
OTHER ASSETS		47,080			48,534
TOTAL ASSETS	$	3,048,222		$	3,470,539
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
DEPOSITS	$	2,460,101		$	2,814,670
OTHER BORROWED FUNDS		42,089			46,097
ADVANCES FROM FEDERAL HOME LOAN BANK		264,561			250,855
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE		2,816			3,166
DRAFTS PAYABLE		202			—
JUNIOR SUBORDINATED DEBENTURES		52,320			53,608
OTHER LIABILITIES		41,624			50,860
TOTAL LIABILITIES		2,863,713			3,219,256
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS’ EQUITY
PREFERRED 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			2,442
ADDITIONAL PAID IN CAPITAL		106,392			152,398
RETAINED EARNINGS - substantially restricted		89,793			105,556
TREASURY 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			251,283
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,048,222		$	3,470,539

See Notes to Consolidated Financial Statements.

F-3

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

	2002			2003			2004
	(In Thousands, except share data)
Interest income:
Loans	$	123,492		$	128,230		$	141,916
Investment securities		3,474			1,236			3,219
Other investments		2,895			1,632			1,416
Mortgage-backed and corporate debt securities		8,006			12,585			18,113
Total interest income		137,867			143,683			164,664
Interest expense:
Deposits		40,353			38,605			39,676
Advances from Federal Home Loan Bank and other borrowings		21,415			18,559			20,188
Total interest expense		61,768			57,164			59,864
Net interest income		76,099			86,519			104,800
Provision for loan losses		1,986			3,122			2,736
Net interest income after provision for loan losses		74,113			83,397			102,064
Other income:
Service charges on deposit accounts		7,285			10,082			11,048
Fees for other banking services		8,487			9,788			11,156
Net gain on sale of loans		74			4,159			619
Net gain (loss) on sale of securities		64			(2,364	)		407
Miscellaneous		1,081			851			1,943
Total other income		16,991			22,516			25,173
Operating expense:
Employee compensation and benefits		37,173			44,802			50,475
Occupancy and equipment		11,649			14,476			16,612
(Gain) loss on real estate owned		(119	)		21			(17	)
Marketing		1,970			2,130			2,294
Federal deposit insurance premium		290			322			375
Miscellaneous		12,606			14,762			19,911
Total operating expense		63,569			76,513			89,650
Income before provision for income taxes		27,535			29,400			37,587
Provision (benefit) for income taxes:
Current		11,290			12,813			16,456
Deferred		(553	)		(1,334	)		(1,766	)
Total provision for income taxes		10,737			11,479			14,690
Net income	$	16,798		$	17,921		$	22,897
Earnings per share (Note 1):
Basic	$	0.75		$	0.82		$	1.04
Diluted	$	0.74		$	0.81		$	1.01
Dividends 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		$	22,897
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on assets available for sale:
Unrealized holding gains (losses) arising during period		(41	)		(418	)		2,854
Reclassification adjustment for (gains) losses realized in net income		(39	)		1,442			(248	)
Minimum pension liability adjustment		(1,451	)		(206	)		(292	)
Subtotal		(1,531	)		818			2,314
Comprehensive 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			Accumulated
				Additional			Earnings-						Stock			and			Other
	Common			Paid In			Substantially			Treasury			Ownership			Retention			Comprehensive
	Stock			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	)	$	177,612
Net income for the year		—			—			16,798			—			—			—			—			16,798
Stock options exercised		7			401			—			—			—			—			—			408
Purchase 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			—			—			683
Recognition and Retention Plan		—			—			—			—			—			1,061			—			1,061
Cash 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	)		169,087
Net income for the year		—			—			17,921			—			—			—			—			17,921
Stock options exercised		11			525			—			—			—			—			—			536
Purchase 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			1,024
Minimum 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			—			—			871
Recognition and Retention Plan		—			—			—			—			—			1,576			—			1,576
Cash 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	)		184,509
Net income for the year		—			—			22,897			—			—			—			—			22,897
Stock options exercised		9			2,157			—			—			—			—			—			2,166
Sale of common stock		115			43,714			—			—			—			—			—			43,829
Common 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			2,606
Minimum pension liability adjustment		—			—			—			—			—			—			(292	)		(292	)
Allocation and issuance of common stock for Recognition and Retention Plan		6			329			—			—			—			—			—			335
Amortization of deferred compensation - Employee Stock Ownership Plan		—			971			—			—			348			—			—			1,319
Recognition and Retention Plan		—			—			—			—			—			1,365			—			1,365
Tax benefit of distributions from deferred compensation plans					396																		396
3 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		$	22,897
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		3,661			4,203			6,006
ESOP compensation expense		1,744			2,447			2,685
Accretion 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			2,736
Provisions 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			8,581
Net cash provided by operating activities		15,848			16,198			34,085
CASH 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			169,982
Purchases 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			33,498
Federal Home Loan Bank stock		2,844			987			17,692
Corporate debt securities		—			38,264			—
Municipal bonds and government and agency securities		—			—			114,879
Real estate acquired in settlement of loans		1,023			895			77
Mortgage-backed securities available for sale		4,456			43,483			221,632
Office properties and equipment		75			550			502
Proceeds from maturities of municipal bonds and government and agency securities		274,695			129,140			145
Other		(34	)		(689	)		820
Net 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			44,034
Purchase of treasury stock		(19,957	)		(176	)		—
Issuance of junior subordinated debentures net of issuance costs		—			21,450			29,822
Pay 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			407,798
Certificates 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	)		4,008
Advances by borrowers for taxes and insurance		(22	)		(369	)		350
Net cash provided by financing activities		284,209			586,045			384,461
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		33,375			(19,779	)		39,522
CASH AND CASH EQUIVALENTS, Beginning of year		96,291			129,666			109,887
CASH AND CASH EQUIVALENTS, End of year	$	129,666		$	109,887		$	149,409

See Notes to Consolidated Financial Statements.

F-7

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

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; and
d.	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.

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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

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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			2004
Net Income, as reported	$	16,798		$	17,921		$	22,897
Add: Total stock-based employee compensation expense included in reported net earnings, net of related tax effects		648			961			833
Deduct: 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		$	22,226
Earnings per share:
Basic - as reported		0.75			0.82			1.04
Basic - pro forma		0.73			0.80			1.01
Diluted - as reported		0.74			0.81			1.01
Diluted - 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.

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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.

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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

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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.

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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			Estimated
	Amortized			Unrealized		Unrealized				Fair
	Cost			Gains		Losses				Value
	(Dollars in Thousands)
December 31, 2003:
Municipal Bonds	$	501		$	21	$	—			$	522
United States Government and agency securities		122,208			180		(179	)			122,209
Total	$	122,709		$	201	$	(179	)		$	122,731
Weighted average interest rate		3.03	%
December 31, 2004:
Municipal Bonds	$	355		$	9	$	—			$	364
United States Government and agency securities		65,689			—		(897	)			64,792
Total	$	66,044		$	9	$	(897	)		$	65,156
Weighted 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.

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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, 2004
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(In Thousands)
Due in one year or less	$	145	$	149	$	10,300	$	10,376
Due in one year to five years		122,564		122,582		55,744		54,780
Total	$	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.

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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			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
December 31, 2003:
FHLMC-fixed rate	$	6,358	$	350	$	—		$	6,708
FNMA-fixed rate		21,982		572		(15	)		22,539
GNMA-fixed rate		1,487		78		—			1,565
FHLMC CMO-fixed rate		115,693		61		(2,145	)		113,609
FNMA CMO-fixed rate		134,695		1,162		(683	)		135,174
FNMA-adjustable rate		39,071		—		(1	)		39,070
GNMA-adjustable rate		61,118		—		(660	)		60,458
FHLMC CMO-adjustable rate		15,566		125		—			15,691
FNMA CMO-adjustable rate.		77,018		—		(604	)		76,414
Total	$	472,988	$	2,348	$	(4,108	)	$	471,228
December 31, 2004:
FHLMC-fixed rate	$	62,710	$	489	$	(48	)	$	63,151
FNMA-fixed rate		193,334		3,434		(26	)		196,742
GNMA-fixed rate		29,892		—		(90	)		29,802
FHLMC CMO-fixed rate		54,092		—		(260	)		53,832
FNMA CMO-fixed rate		4,318		49		—			4,367
FHLMC-adjustable rate		25,412		—		(147	)		25,265
FNMA-adjustable rate		67,293		180		(159	)		67,314
Total	$	437,051	$	4,152	$	(730	)	$	440,473

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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.

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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		Estimated
	Amortized			Unrealized		Unrealized		Fair
	Cost			Gains		Losses		Value
	(Dollars in Thousands)
December 31, 2004:
FHLMC-fixed rate	$	89,167		$	881	$	–	$	90,048
Total	$	89,167		$	881	$	–	$	90,048
Weighted 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.

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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	$	1,023,520
Commercial and multi-family real estate mortgages		753,890		972,546
Real estate construction-primarily residential		470,016		634,455
Land loans-primarily residential		36,660		57,661
Total first mortgage loans		2,263,139		2,688,182
Consumer loans		185,450		231,333
Commercial business loans		131,292		125,791
Total gross loans		2,579,881		3,045,306
Less:
Undisbursed portion of loans in process		374,974		472,324
Unearned discounts, premiums and deferred loan fees (costs), net		2,092		2,654
Allowance for loan losses		11,119		13,628
Loans 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		$	11,119
Current provision		1,986			3,122			2,736
Charge-offs		(575	)		(322	)		(252	)
Recoveries		60			1			25
Ending 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

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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		Related
	Balance		Allowance		Balance		Allowance		Balance		Allowance
Impaired loan balances and related allowances:
Loans with related allowance for loan losses	$	1,145	$	546	$	3,508	$	598	$	1,650	$	487
Loans without related allowance for loan losses		7,248		—		9,162		—		8,172		—
	$	8,393	$	546	$	12,670	$	598	$	9,822	$	487
Average 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 Rate
	Book Value			Book Value
Term of Maturity	(In Thousands)		Term to Rate Adjustment	(In Thousands)
1 year or less	$	63,888	1 year or less	$	1,208,309
1 year-3 years		92,131	1 year-3 years		28,679
3 years-5 years		85,773	3 years-5 years		47,927
5 years-10 years		198,870	5 years-10 years		424,878
10 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	$	293,013
Retail buildings		62,652		71,617
Warehouses		40,013		62,170
Multi family		106,042		106,790
Hotels and motels		2,995		2,175

F-29

	2003		2004
	(In Thousands)
Land		163,618		182,307
Other property improvements		169,571		254,474
Total	$	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	$	26,491
Buildings and improvements		53,755		50,891
Furniture and equipment		23,785		27,819
Software		5,347		7,964
Total		100,265		113,165
Less accumulated depreciation		26,712		29,726
Office 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	$	9,524
Investments		959		900
Mortgage-backed securities		1,505		1,955
Accrued interest receivable	$	11,127	$	12,379

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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		2004
Account Type and Rate	(In Thousands)
Non-interest-bearing checking accounts	$	294,358	$	386,790
Interest-bearing checking and funds transfer accounts 2003 and 2004, 1.03 % and 1.13%, respectively		566,028		689,533
Passbook and statement accounts 2003 and 2004, 1.61 % and 1.78%, respectively		615,972		770,124
Variable-rate money market accounts 2003 and 2004, 1.52 % and 1.69%, respectively		297,864		335,573
Total non-certificate accounts		1,774,222		2,182,020
Certificates:
0.00% - 1.00%		78,324		39,562
1.01% - 2.00%		209,013		141,203
2.01% - 3.00%		193,797		263,888
3.01% - 4.00%		60,962		110,897
4.01% - 5.00%		135,450		72,468
5.01% - 6.00%		5,684		2,194
6.01% - 7.00%		2,637		2,438
7.01% - 8.00%		12		—
Total certificates		685,879		632,650
Total	$	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					2004
	Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Maturity
Less 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	%

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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	$	11,860
Interest-bearing checking accounts		4,026		5,553		6,667
Money market accounts		3,186		4,006		5,176
Certificate accounts		28,804		19,403		15,973
Total	$	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

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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		163,582
2006		13,582		13,582
2007		13,582		13,582
2008		58,999		58,999
2009		904		904
Thereafter		206		206
Total	$	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.

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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

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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:

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	2002			2003			2004
	(In Thousands)
Current – federal	$	9,712		$	11,006		$	14,126
Current – state		1,578			1,807			2,330
Total current		11,290			12,813			16,456
Deferred – 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						2004
	Amount		%			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			3.6
Employee stock ownership plan		117		0.4			183			0.6			340			0.9
Other		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	%

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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	$	1,982
Loan fee income and capitalized costs		4,264		3,330
FHLB stock dividends		529		221
Unrealized appreciation in securities		—		988
Deferred state taxes		291		379
Gross deferred tax liabilities		6,560		6,900
Deferred tax assets:
Excess of tax bad debt reserve over book reserve		4,503		5,519
Executive death benefit		187		172
Amortization		220		182
Retirement plan		5,011		5,575
Deferred compensation		1,988		1,502
Unrealized depreciation in securities		678		—
Other accruals		334		385
Minimum pension liability adjustment		1,060		1,246

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	December 31,
	2003		2004
	(In Thousands)
Other		177		202
Gross deferred tax assets		14,158		14,783
Less valuation allowances for deferred tax assets		—		—
Gross deferred tax assets		14,158		14,783
Net 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

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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.

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Components of the Bank’s Pension Plan are as follows:

	2003				2004
	(In Thousands)
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation, beginning of period	$	18,605		$	27,005
Service cost		1,859			2,222
Interest cost		1,375			1,586
Actuarial loss		6,330			1,514
Benefit paid		(1,164	)		(4,675	)
Benefit obligation, end of period	$	27,005		$	27,652
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of period	$	12,720		$	17,233
Actual return on plan assets		3,096			1,664
Employer’s contribution		2,581			3,296
Benefits paid		(1,164	)		(4,675	)
Fair value of plan assets, end of period	$	17,233		$	17,518
ASSET CATEGORY
Equity securities		12	%		72	%
Debt securities		—			9
Cash and cash equivalents		88			19
Total		100	%		100	%
FUNDED STATUS
Funded status	$	(9,772	)	$	(10,134	)
Unrecognized net actuarial loss		10,921			11,507

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	2003			2004
	(In Thousands)
Unrecognized prior service cost		183		178
Net amount recognized-prepaid pension cost	$	1,332	$	1,551
Adjustment required to recognize minimum liability:
Additional minimum liability	$	2,900	$	2,231
Intangible asset		183		178
Accumulated other comprehensive income		2,717		2,053
Net amount recognized-prepaid pension cost	$	1,332	$	1,551
ACCUMULATED 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		$	2,222
Interest cost		1,141			1,375			1,586
Return on assets		1,668			(1,206	)		(1,558	)
Amortization of prior service cost		5			5			5
Recognition of net actuarial (gain) loss		(2,499	)		890			823
Net periodic benefit cost	$	1,876		$	2,923		$	3,078

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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			2004
Discount 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	%

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Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:

Years Ending December 31,	Amount
	(In Thousands)
2005	$	3,309
2006		1,743
2007		1,744
2008		2,488
2009		3,893
2010-2014		17,791
Total	$	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

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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

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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.

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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

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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

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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.

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The following table summarizes the status of all Company stock option plans for the three years ended December 31, 2002, 2003 and 2004.

	Options Price
				Average
	Number of			Exercise
	Options			Price Per		Aggregate
	Outstanding			Share		Price
Options Outstanding
Balance – December 31, 2001		301,392			2.51		756,494
Granted		1,244,925			13.51		16,818,937
Exercised		(96,848	)		2.51		(243,088	)
Canceled		—			—		—
Balance – December 31, 2002		1,449,469			11.96		17,332,343
Granted		7,776			16.93		131,648
Exercised		(170,528	)		3.15		(537,163	)
Canceled		(2,700	)		13.15		(36,477	)
Balance – December 31, 2003		1,284,017			13.15		16,890,351
Granted		44,476			23.85		1,060,773
Exercised		(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

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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 Options
			Weighted-
			Average		Weighted-
			Remaining		Average
	Number of		Contractual		Exercise
	Shares		Life		Price
Range 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		25.59
		1,190,919		7.4	$	13.91

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	Exercisable Options
			Weighted-
	Exercisable		Average
	As of		Exercise
	December 31, 2004		Price
Range 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		25.59
		580,700	$	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.

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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			2004
Pro forma weighted average fair value of options granted	$	4.93		$	6.73		$	6.48
Risk-free interest rate		2.78	%		3.46	%		2.84	%
Expected life (years)		5.00			5.00			5.00
Expected volatility		28.93			28.61			28.37
Annual 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

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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.

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The Bank’s actual capital amounts and ratios are presented in the following table:

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

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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

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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	$	1,951
2006		1,984
2007		2,010
2008		2,048
2009		1,646
Thereafter		15,477
Total	$	25,116

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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

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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 lawsuitWilliam 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

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	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	$	13,440
Cash paid for interest on deposits and other borrowings	$	61,864	$	56,961	$	59,311
Supplemental Schedule of Noncash Investing and Financing Activities:
Property acquired in settlement of loans	$	680	$	870	$	84
Mortgage-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						2004
	Income		Shares		Per-Share		Income		Shares		Per-Share		Income		Shares		Per-Share
	(1)		(2)		Amount		(1)		(2)		Amount		(1)		(2)		Amount
Net income	$	16,798,000					$	17,921,000					$	22,897,000
Basic 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	$	1.04
Effect of diluted shares:
Common stock options				202,639						315,441						680,417
Diluted 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

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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	)	$	1,546
Minimum 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:

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	December 31, 2002								December 31, 2003									December 31, 2004
				Tax								Tax									Tax
	Before-tax			(Expense)		Net-of-Tax			Before-tax			(Expense)			Net-of-Tax			Before-tax			(Expense)			Net-of-Tax
	Amount			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	)	$	2,854
Reclassification 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:

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	December 31, 2003				December 31, 2004
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In Thousands)
Assets:
Cash and amounts due from depository institutions	$	76,090	$	76,090	$	108,327	$	108,327
Interest-bearing deposits		33,797		33,797		41,082		41,082
Securities available for sale		593,959		593,959		505,629		505,629
Securities held to maturity		—		—		89,167		90,048
Loans receivable (net)		2,191,696		2,238,436		2,556,700		2,583,625
Federal Home Loan Bank stock		13,322		13,322		17,399		17,399
Liabilities:
Deposits		2,460,101		2,474,382		2,814,670		2,813,426
Other borrowed funds		42,089		42,080		46,097		46,087
Advances from the Federal Home Loan Bank		264,561		282,385		250,855		256,386
Junior 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.

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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.

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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 CONDITION
Assets:
Cash and cash equivalents	$	9,051	$	13,132
ESOP loan receivable		4,522		4,174
Investment in and advances to Bank subsidiary		220,528		286,594
Other assets		4,457		3796
Total assets	$	238,558	$	307,696
Liabilities	$	54,049	$	56,413
Stockholders’ equity		184,509		251,283
Total liabilities and stockholders’ equity	$	238,558	$	307,696

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	Years Ended December 31,
	2002			2003			2004
				(In Thousands)
STATEMENTS OF OPERATIONS
Income	$	594		$	243		$	415
Expenses		3,496			3,584			5,834
Loss before income taxes and equity in earnings of Bank		(2,902	)		(3,341	)		(5,419	)
Income tax benefit		1,132			1,303			2,064
Loss before equity in earnings of subsidiaries		(1,770	)		(2,038	)		(3,355	)
Equity in earnings of subsidiaries		18,568			19,959			26,252
Net income	$	16,798		$	17,921		$	22,897
STATEMENTS OF CASH FLOWS
Cash flow from (for) operating activities:
Net income	$	16,798		$	17,921		$	22,897
Adjustments 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			3,042
Net 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			348
Investment in subsidiaries		—			(20,000	)		(37,500	)
Other		243			(101	)		2,306
Net 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			44,034
Purchase of treasury stock		(19,957	)		(176	)		—
Proceeds from the issuance of trust preferred securities, net		—			21,450			29,822
Pay 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			39,240
Net increase (decrease) in cash and cash equivalents		(25,576	)		4,319			4,081
Cash and cash equivalents, Beginning of year		30,308			4,732			9,051
Cash and cash equivalents, End of year	$	4,732		$	9,051		$	13,132

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21. QUARTERLY FINANCIAL DATA (UNAUDITED)

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
			(In Thousands, except share data)
Year ended December 31, 2003:
Interest income	$	34,831	$	36,336	$	35,428	$	37,088
Interest expense		14,046		14,650		14,371		14,097
Net interest income		20,785		21,686		21,057		22,991
Provision for loan losses		790		693		558		1,081
Non-interest income		7,011		6,020		5,869		3,616
Non-interest expenses		18,659		18,886		19,145		19,823
Income taxes		3,229		3,196		2,838		2,216
Net Income	$	5,118	$	4,931	$	4,385	$	3,487
Earnings per share
Basic	$	0.24	$	0.23	$	0.20	$	0.16
Diluted	$	0.23	$	0.23	$	0.20	$	0.15

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(In Thousands, except share data)
Year ended December 31, 2004:
Interest income	$	38,062	$	39,091	$	42,986	$	44,525
Interest expense		14,149		14,506		15,246		15,963
Net interest income		23,913		24,585		27,740		28,562
Provision for loan losses		596		794		783		562
Non-interest income		6,463		7,157		6,245		5,308
Non-interest expenses		20,466		21,547		23,077		24,560
Income taxes		3,627		3,713		3,943		3,408
Net Income	$	5,687	$	5,688	$	6,182	$	5,340
Earnings per share
Basic	$	0.26	$	0.26	$	0.28	$	0.24
Diluted	$	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.

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