SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the Fiscal Year Ended December 31, 2004
OR

Commission File Number: 0-29040

FIDELITY BANKSHARES, INC.

(561) 803-9900

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

None

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

Common Stock, par value $.10 per share

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

YES þ NO o

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

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

YES þ NO o

     As of June 30, 2004, there were issued and outstanding 22,695,039 shares of the Registrant’s Common Stock. The aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of the Common Stock as of June 30, 2004 ($22.83) was $414,705,512.

DOCUMENTS INCORPORATED BY REFERENCE

1.	Sections of Annual Report to Stockholders for the fiscal year ended December 31, 2004 (Parts II and IV).
2.	Proxy Statement for the 2005 Annual Meeting of Stockholders (Parts I and III).

Table of Contents

PART I

ITEM 1. BUSINESS

Fidelity Bankshares, Inc.

     Fidelity Bankshares, Inc. is a Delaware corporation which, on May 15, 2001, became the holding company parent of Fidelity Federal Bank & Trust, following the completion of the “second step” mutual-to-stock conversion of Fidelity Bankshares, MHC. Prior to completion of the “second step” conversion, Fidelity Federal Bank & Trust’s mid-tier stock holding company parent was also called Fidelity Bankshares, Inc. References to Fidelity Bankshares, Inc. includes references before and after the “second step” conversion. The conversion was accounted for as a change in corporate form with no subsequent change in the historical basis of the Company’s assets, liabilities and equity. All references in this filing to share data (including number of shares and per-share amounts) have been restated giving retroactive recognition to the exchange rate. At December 31, 2004, the only significant asset or business activity of Fidelity Bankshares, Inc. was its ownership of all of the outstanding stock of Fidelity Federal Bank & Trust. Our corporate office is located at 205 Datura Street, West Palm beach, Florida 33401. Our telephone number is (561) 803-9900.

     On September 22, 2004, we entered into an agreement to acquire First Community Bancorp, Inc. and its subsidiary, First Community Bank of Palm Beach County, located in Pahokee, Florida. We agreed to pay $14.75 in cash and 0.3937 of a share of Fidelity Bankshares common stock for each outstanding share of common stock of First Community Bancorp, Inc., for an aggregate purchase price of approximately $27.1 million. First Community Bank of Palm Beach County will merge into Fidelity Federal Bank & Trust at the completion of this acquisition. As of September 30, 2004, First Community Bancorp, Inc. had total consolidated assets of $157.1 million, deposits of $144.8 million and shareholders’ equity of $11.6 million. First Community Bank of Palm Beach County operates five community banking offices in Palm Beach County. Completion of the First Community Bancorp, Inc. acquisition is subject to approval by First Community Bancorp, Inc.’s shareholders, as well as applicable regulatory authorities. The Office of Thrift Supervision approved the acquisition on February 15, 2005. First Community Bancorp, Inc. shareholders approved the acquisition on March 8, 2005. This transaction is expected to be completed in April 2005.

     In December 2004, we completed the sale of 1,150,000 shares of our common stock in an underwritten public offering. Net proceeds from the sale of the common stock was $43.8 million.

     In December 2003, we sold $22.7 million of cumulative trust preferred securities and issued related junior subordinated debentures. The cumulative trust preferred securities have a floating rate of 285 basis points above the three-month LIBOR rate. In October 2004, we sold $30.9 million of floating rate trust preferred securities. The floating rate trust preferred securities have a floating rate of 197 basis points over the three-month LIBOR rate. The proceeds from this trust preferred securities offering were used to fund the redemption of $29.6 million higher cost, fixed-rate trust preferred securities issued in 1998. The net proceeds raised from our 2003 and 2004 trust preferred securities offerings and our common stock offering have provided additional capital to support the growth of our business.

     At December 31, 2004, we had consolidated assets and consolidated stockholders’ equity of $3.5 billion and $251.3 million, respectively. Our deposits totaled $2.8 billion at December 31, 2004.

Fidelity Federal Bank & Trust

     Fidelity Federal Bank & Trust was originally chartered as a federal mutual savings and loan association in 1952. In January 1994, Fidelity Federal Bank & Trust reorganized from a mutual savings bank to the stock form of ownership as part of its mutual holding company reorganization. In July 1999, we began offering insurance and investment products through our wholly owned subsidiary – Florida Consolidated Agency, Inc. In February 2000, we began offering trust services, and at December 31, 2004, we had $77.9 million of trust assets under administration, including $63.2 million under trust management.

     We are primarily engaged in the business of attracting deposits from the general public in our market area, and investing such deposits, together with other mortgage loans funds, in one- to four-family residential mortgage loans, commercial real estate loans, commercial business and consumer loans. Our goal over the next several years is to continue to increase the origination of commercial real estate, commercial business and consumer loans, consistent with our standards of safety and soundness. To a lesser extent, we also originate multi-family loans, construction loans and land loans for single-family properties, and we invest in mortgage-backed securities issued by government sponsored enterprises. In addition, we invest a portion of our assets in securities issued by the United States Government, cash and cash equivalents, including deposits in other financial institutions, corporate securities and Federal Home Loan Bank stock. Our principal sources of funds are deposits and principal and interest payments on loans. Principal sources of income are interest received from loans and investment securities. Our principal expense is interest paid on deposits and employee compensation and benefits.

     Since 1998, we have expanded our branch network throughout our market area. Since December 1998 we have opened 21 new branches.

Market Area

     We are headquartered in West Palm Beach, Florida, and we conduct our business primarily in Palm Beach, Martin, and St. Lucie Counties in Florida. To a lesser extent, we conduct business in Indian River and Broward Counties. At December 31, 2004, we had 43 offices in our market area, of which 38 were located in Palm Beach County, three were located in Martin County and two were located in St. Lucie County. Palm Beach, Martin and St. Lucie Counties are located in southeastern Florida, an area that has experienced considerable growth and development since the 1960s. This three-county area had a total population of 1.6 million as of December 31, 2004.

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

Competition

     Our market area in southeast Florida has a large number of financial institutions. All of these financial institutions compete with us to varying degrees, and many of them are significantly larger and have greater financial resources than we have. As a result, we encounter strong competition both in attracting deposits and in originating real estate and other loans. Our most direct competition for deposits historically has come from commercial banks, securities brokerage firms, other savings associations, and credit unions, and we expect continued strong competition from these financial institutions in the foreseeable future. Our market area includes branches of several commercial banks that are substantially

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larger than Fidelity Federal Bank & Trust in terms of state-wide deposits. We compete for deposits by offering customers a high level of personal service and expertise, and a wide range of financial services.

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

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

     Fidelity Bankshares, Inc. is the sixth largest financial institution holding company headquartered in Florida, and the largest headquartered in Palm Beach, Martin and St. Lucie counties based on total assets. Fidelity Federal Bank & Trust’s share of deposits in Palm Beach County increased from 3.1% in 1995 to 8.3% at June 30, 2004. Our 7.6% share of deposits in Palm Beach, Martin and St. Lucie counties ranked us fourth among financial institutions in the three county area at June 30, 2004, the most recent date for which market share data are available.

Lending Activities

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

     In an effort to manage interest rate risk, we make our interest-earning assets more sensitive to changes in interest rates by originating adjustable rate mortgage loans, such as ARM loans, and short- and medium-term consumer loans, including home equity loans. We also purchase both fixed rate and adjustable rate mortgage-backed securities. At December 31, 2004, approximately $1.7 billion, or 66.5%, of our total loan portfolio, net of loans in process and $92.6 million, or 17.5%, of our mortgage-backed securities portfolio, consisted of loans or securities with adjustable interest rates. We originate fixed rate mortgage loans generally with 15- to 30-year terms to maturity, collateralized by one- to four-family residential properties. One- to four-family fixed rate and adjustable rate residential mortgage loans generally are originated and underwritten according to standards that allow us to resell such loans in the secondary mortgage market for the purpose of managing interest rate risk and liquidity. We periodically sell without recourse to us, a portion of our residential mortgage loans which have terms to maturity of fifteen years and greater, both on a servicing released and servicing retained basis. Generally, we retain in our portfolio all consumer, commercial real estate and multi-family residential real estate loans.

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

     Loan and Mortgage-Backed Securities Contractual Terms to Maturity. The following table sets forth certain information as of December 31, 2004, regarding the dollar amount of loans and mortgage-backed securities maturing in our portfolio based on their contractual terms to maturity. The amounts shown represent outstanding principal balances, less loans in process, and are not adjusted for premiums, discounts, reserves, and unearned fees. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Adjustable and floating rate loans and mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust rather than in which they contractually mature, and fixed rate loans and mortgage-backed securities are included in the period in which the final contractual repayment is due. Fixed rate mortgage-backed securities are assumed to mature in the period in which the final contractual payment is due.

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     The following table sets forth at December 31, 2004, the dollar amount of all fixed rate and adjustable rate loans and mortgage-backed securities due or repricing after December 31, 2005.

     One- to Four-Family Residential Real Estate Loans. Our primary lending activity consists of originating one- to four-family, owner-occupied, residential mortgage loans secured by properties located in our market area. We also originate one- to four-family residential loans secured by properties outside of our market area. These loans, which are originated through a network of brokers throughout Florida, are subject to our customary underwriting standards. At December 31, 2004, $1.0 billion, or 40.0%, of our net loans receivable consisted of one- to four-family residential mortgage loans. Of this amount, $157.3 million are secured by properties located outside of our market area, all of which are located in Florida.

     We currently offer one- to four-family residential mortgage loans with terms typically ranging from 15 to 30 years, and with adjustable or fixed interest rates. Originations of fixed rate mortgage loans versus ARM loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, customer preference, and loan products offered by our competitors. Therefore, even if management’s strategy is to emphasize originating ARM loans, market conditions may be such that there is greater demand for fixed rate mortgage loans. ARM loans originated and purchased totaled $370.3 million and $528.4 million during the years ended December 31, 2003 and 2004, respectively.

     Our fixed rate loans and adjustable rate loans are generally originated and underwritten according to standards that permit their sale in the secondary mortgage market. Whether we can or will sell loans into the secondary market, however, depends on a number of factors, including the yield and the term of the loan, market conditions, and our current interest rate sensitivity. Our fixed rate mortgage loans amortize on a monthly basis with principal and interest due each month. One- to four-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans.

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     We currently offer ARM loans with initial interest rate adjustment periods of one, three, five, seven and ten years, based on changes in a designated market index. After the initial interest rate adjustment period, our one-, three-, five-, seven- and ten-year ARM loans give the borrower the option of converting the ARM loan to a fixed rate mortgage for the remaining term of the loan at the prevailing interest rate for comparable fixed rate mortgages at the time of the conversion. The interest rate on one year ARM loans and on the three-, five-, seven and ten-year ARM loans that are not converted to fixed rate mortgage loans, adjusts annually with an annual interest rate adjustment limit of 200 basis points and with a maximum lifetime interest rate adjustment limit of 600 basis points above the initial interest rate. The initial interest rate on all owner-occupied one- to four-family ARM loans is 275 to 325 basis points above the appropriate United States Treasury security rates used as the index for ARM originations. We originate ARM loans with initially discounted rates, which vary depending upon whether the initial interest rate adjustment period is one, three, five, seven or ten years. We determine whether a borrower qualifies for an ARM loan based on the fully indexed rate of the ARM loan at the time the loan is originated. The outstanding principal balance of one- to four-family residential ARM loans, including construction ARM loans, totaled $654.8 million, or 25.6%, of our net loan portfolio at December 31, 2004.

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

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

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

     Construction and Land Loans. At December 31, 2004, $634.5 million, or 24.8% of our net loans receivable consisted of residential construction loans, of which $311.2 million was disbursed and outstanding. We currently offer fixed rate and adjustable rate residential construction loans primarily for the construction of owner-occupied, single-family residences. These loans generally are offered to builders who have a contract for sale of the property, and to owners who have a contract for construction of the property. In addition, we make construction loans to builders where the home is not under contract for sale to a buyer at the time the loan is closed. The gross amount of loans to these builders where the

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home is not under contract for sale totaled $203.0 million, of which $116.5 million was disbursed and outstanding at December 31, 2004. Construction loans are generally structured to become permanent mortgage loans once the construction is completed, and are originated with terms of up to 30 years with an allowance of up to one year for construction. Construction loans require the payment of interest only during the construction period. Funds are disbursed as construction is completed. Substantially all of our construction loans are secured by properties located in our market area.

     In addition, we originate land loans that are secured by unimproved or improved lots. At December 31, 2004, $57.7 million, or 2.3% of our net loans receivable, consisted of land loans. Land loans are currently offered with one-year adjustable rates for terms of up to 15 years. The maximum loan-to-value ratio for our land loans is 85%. We currently use the applicable United States Treasury securities rate as our index on newly originated land loans. Initial interest rates may be below the fully indexed rate. Substantially all of our land loans are secured by properties located in our market area.

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

     Multi-Family Residential Real Estate Loans. At December 31, 2004, $106.8 million, or 4.2% of our net loans receivable, consisted of multi-family residential real estate loans. At December 31, 2004, we had 84 loans secured by multi-family properties, and substantially all of our multi-family residential real estate loans are secured by properties located within our market area. At December 31, 2004, our multi-family residential real estate loans had an average principal balance of $1.3 million and the largest multi-family residential real estate loan had a principal balance outstanding of $18.0 million and is located in Martin County, Florida. At December 31, 2004, this loan was performing in accordance with its terms. Multi-family residential real estate loans currently are offered with adjustable interest rates, although in the past we originated fixed rate multi-family real estate loans. The terms of each multi-family residential real estate loan are negotiated on a case-by-case basis. These loans typically have adjustable interest rates tied to a market index with a 600 basis point lifetime interest rate cap, and an interest rate floor equal to the initial rate. Multi-family residential real estate loans generally amortize over 15 to 25 years. We may offer initial discount rates depending on market conditions, but generally the initial interest rate on multi-family residential real estate loans is tied to an applicable United States Treasury bill rate.

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

     Loans secured by multi-family residential real estate generally have more credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of the local economy on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured

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by multi-family properties is typically dependent upon the successful operation of the real property securing the loan. If the cash flow from the multi-family property is reduced, the borrower’s ability to repay the loan may be impaired.

     Commercial Real Estate Loans. At December 31, 2004, our loans secured by commercial real estate totaled $865.8 million, or 33.9% of our net loans receivable. Our commercial real estate loans are secured by land or improved property such as offices, small business facilities, strip shopping centers, warehouses and other non-residential buildings. At December 31, 2004, substantially all of our commercial real estate loans were secured by properties located within our market area. At December 31, 2004, our commercial real estate loans had an average principal balance of $1.1 million. At that date, our largest commercial real estate loan outstanding had a principal balance of $18.9 million and was secured by commercial property located in Palm Beach County, Florida. At December 31, 2004, this loan was performing in accordance with its terms. Commercial real estate loans are currently offered with adjustable rates. The terms of each commercial real estate loan are negotiated on a case-by-case basis. Generally, these loans have adjustable interest rates tied to a market index. We may choose to offer initial discount rates on our commercial real estate loans depending on market conditions. We use the applicable United States Treasury bill rate as our index on newly originated loans. Our commercial real estate loans generally have terms of 15 to 25 years.

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

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

     Consumer Loans. As of December 31, 2004, consumer loans totaled $231.3 million, or 9.0% of our net loans receivable. The principal types of consumer loans that we offer are home equity lines of credit, adjustable and fixed rate second mortgage loans and automobile loans. We also offer boat loans and loans secured by deposit accounts and, to a much lesser extent, unsecured loans. We do not offer credit card loans. Consumer loans are offered on a fixed rate and adjustable rate basis with maturities generally of less than fifteen years. Our home equity lines of credit and second mortgages are secured by the borrower’s principal residence with a maximum loan-to-value ratio, including the principal balances of both the first and second mortgage loans, of 90%. Such loans are offered on an adjustable-rate or fixed rate basis with terms of up to twenty years. At December 31, 2004, the disbursed portion of home equity lines of credit totaled $190.9 million, or 74.3%, of our consumer loans.

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

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

     Commercial Business Loans. We also offer commercial business loans to businesses in our market area. Our strategy is to substantially increase our loans and services to commercial business enterprises, and to support this strategy, we have hired additional lenders with commercial business lending expertise. Our largest commercial business loan at December 31, 2004 had a principal balance outstanding of $6.7 million, and was secured by business assets located in Palm Beach County, Florida. At December 31, 2004, we had 658 commercial business loans outstanding with an aggregate balance of $125.8 million, or 4.9% of our net loans receivable. The average commercial business loan balance was approximately $191,000. Commercial business loans are generally offered with adjustable interest rates only, which are tied to The Wall Street Journal prime interest rate, plus up to 300 basis points. The loans are offered with prevailing terms of five years, but may range up to 15 years. In addition, we offer Small Business Administration loans.

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

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

     Loan Originations, Purchases, Sales, Processing, and Commitments. Our new loan originations come from a number of sources including real estate broker referrals, existing customers, borrowers, builders, attorneys, and “walk-in” customers. Upon receiving a loan application, we obtain a

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credit report and employment verification to verify specific information relating to the applicant’s employment, income, and credit standing. In the case of a real estate loan, we obtain an appraisal of the real estate intended to secure the proposed loan. We check the loan application file for accuracy and completeness, and we verify the information provided. All loans of up to $359,650 may be approved by any one of our senior loan underwriters; loans between $359,651 and $750,000 must be approved by one of our designated senior lending officers; loans between $750,001 and $2.0 million must be approved by at least two of our designated senior lending officers; and loans in excess of $2.0 million must be approved by at least three members of the Board of Directors acting as a loan committee. These limits are reduced for unsecured loans. The loan committee meets as needed to review and verify that loan approvals by management are within the scope of management’s authority. After the loan is approved, a loan commitment letter is promptly issued to the borrower. At December 31, 2004, we had commitments to originate and purchase $239.2 million of loans.

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

     Borrowers who refinance an existing loan must satisfy our underwriting criteria at the time they apply to refinance their loan, and must have been current in their loan payments for a minimum of one year. Approximately 3.1% of our loan originations during the year ended December 31, 2004, represented the refinancing of loans that we hold. Refinancings have resulted in a decrease in our interest rate spread.

     The Bank also allows borrowers to apply for a modification of their existing loan rate for a fee. These borrowers must satisfy our underwriting criteria at the time of application and modification. Modifications do not allow for an increase in the outstanding principal balance of the loan. The new rate on these loans is normally 1/8 percent higher than the current rate for a new loan. During the year ended December 31, 2004, we modified approximately $57.6 million in existing loans. Modifications decreased the yield on our loan portfolio which in turn decrease our interest rate spread.

     In connection with local mortgage brokers throughout the state of Florida, we have established a mortgage loan broker solicitation program to supplement our internal originations of one- to four-family residential mortgage loans. Under this program, which is limited to the origination of one- to four-family residential mortgage loans, prospective borrowers complete loan applications which are provided by mortgage brokers. All loans obtained in this manner are reviewed by our underwriting department in accordance with our customary underwriting standards. Total originations from all sources under the mortgage loan broker solicitation program during 2003 and 2004 were $101.9 million and $106.6 million, respectively.

     We have a correspondent relationship with the wholly owned mortgage subsidiary of a major South Florida builder-developer, who has substantial operations in our local service area, whereby the mortgage company originates, processes and closes home mortgages resulting from the sale of the developer’s inventory of homes. The mortgage files are sent to our underwriting department and reviewed in accordance with our customary underwriting standards and, if we approve the loans, we will issue a commitment to purchase the loan from the mortgage company. We are not obligated to purchase any loans that are presented for our review. Purchases are accomplished by assignment of the mortgage from the mortgage company to Fidelity Federal Bank & Trust. We purchased $40.9 million and $38.1 million, respectively, of loans from this provider during the years ended 2003 and 2004.

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     We also originate one- to four-family residential real estate loans secured by properties located outside of our market area. These loans, which are originated through a network of brokers throughout Florida, are subject to our customary underwriting standards. At December 31, 2004, $1.7 billion, or 64.8%, of our net loans receivable consisted of loans, including residential construction loans, that were secured by one- to four-family residential real estate loans. Of this amount, $203.1 million were secured by properties located outside of our market area.

     We also purchase mortgage loans which are collateralized by residential real estate located primarily in Florida, although we have in the past purchased loans collateralized by properties located outside of Florida. Generally, we only purchase residential mortgage loans that are underwritten to Freddie Mac or Fannie Mae guidelines. At December 31, 2004, $124.9 million, or 4.1% of all loans in our total loan portfolio, consisted of purchased loans. Of this amount, $102.1 million represented our interest in purchased one-to four-family residential real estate loans. Commercial real estate loans that we may purchase or participate in must satisfy the underwriting standards of commercial real estate loans we originate. Our largest loan participation was a $9.8 million interest in a loan secured by residential real estate in Palm Beach County, Florida.

     Prior to 2003 we generally did not originate loans for sale. On occasion, we sold loans where the borrower was located outside of our market area. Commencing in 2003, we began regular sales of fixed rate mortgage loans into the secondary markets. Generally, these sales are on a servicing released basis for loans on properties located outside our market area. The servicing is generally retained on sold loans where the property is within our market area.

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

     Loan Origination Fees and Costs and Other Income. In addition to interest earned on loans, we may also charge a fee, often expressed as a percentage of the principal amount of the loan, at the time the loan is originated. To the extent that loans are originated or acquired for our portfolio, Statement of Financial Accounting Standards (“SFAS”) 91 “Accounting for Nonrefundable Fees and Costs Associated

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with Originating or Acquiring loans and Initial Direct Costs of Leases” requires that we defer loan origination fees and costs and amortize such fees and accrete such costs as an adjustment of yield over the life of the loan by use of the level yield method. Fees and costs deferred under SFAS 91 are recognized into income immediately upon prepayment or the sale of the related loan. At December 31, 2004, we had $12.8 million of deferred loan origination fees, and $10.1 million of deferred loan origination costs. Such fees vary with the volume and type of loans originated and commitments and competitive conditions in the mortgage markets.

     We also receive other fees and, service charges that consist primarily of deposit transaction account service charges, late payment charges, credit card fees, fees from the sale of insurance and annuity products and income from real estate owned operations. We recognized fees and service charges of $15.7 million, $19.9 million and $22.2 million for the years ended December 31, 2002, 2003 and 2004.

     Loans-to-One Borrower. Federal savings banks are subject to the same loans-to-one borrower limits as those applicable to national banks, which under current regulations restrict loans-to-one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate). At December 31, 2004, our largest outstanding loan relationship with one borrower totaled $32.5 million. These loans are secured by various residential and commercial properties in Palm Beach County, Florida. At that date, our second largest lending relationship totaled $27.7 million and is secured by various residential properties in Palm Beach County. Our third largest lending relationship totaled $27.5 million, and is secured by residential property in Palm Beach County, Florida. Our fourth largest lending relationship totaled $27.4 million and is secured by residential properties in Palm Beach County, Florida. Our fifth largest lending relationship totaled $27.3 million and is secured by residential properties in Palm Beach County, Florida. All of the loans comprising these lending relationships are performing in accordance with their terms. Our regulatory limit on the maximum total loans to a single or related group of borrowers was $44.3 million at December 31, 2004.

Mortgage-Backed Securities

     We also invest in mortgage-backed securities issued or guaranteed by the United States Government or enterprises sponsored by the United States Government. These securities consist primarily of fixed rate mortgage-backed securities issued or guaranteed by Fannie Mae or Freddie Mac. At December 31, 2004 our mortgage-backed securities had a market value of $530.5 million of which $440.5 million was classified as available for sale and $90.0 million was classified as held to maturity. Our objective in investing in mortgage-backed securities classified as available for sale varies from time to time depending upon market interest rates, local mortgage loan demand, and our level of liquidity. Mortgage-backed securities classified as available for sale are more liquid than whole loans and can be readily sold in response to market conditions and changing interest rates. Mortgage-backed securities purchased by us also have lower credit risk than mortgage loans because principal and interest are either insured or guaranteed by the United States Government or enterprises sponsored by the United States Government.

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     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:

     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.

     The following table shows our purchases and sales of mortgage-backed securities, which are classified as available for sale or held to maturity, for the periods indicated.

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     The following table sets forth the allocation of fixed and adjustable rate mortgage-backed securities, classified as available for sale or held to maturity for the periods indicated.

Delinquent Loans and Classified Assets

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

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

     Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. Residential mortgage loans are placed on non-accrual status when either principal or interest is 90 days or more past due. Consumer and commercial business loans are placed on non-accrual status when either principal or interest is 60 days or more past due. Interest accrued and unpaid at the time a loan is placed on a non-accrual status is charged against interest income.

     Real estate that we acquire as a result of foreclosure or by the deed in lieu of foreclosure is classified as real estate owned (“REO”) until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less estimated costs of disposal. If the value of the property is less than the loan, less any related specific loan loss provisions, the difference is charged against our earnings. Any subsequent write-down of REO is also charged against

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earnings. At December 31, 2004, we had no property that was acquired as the result of foreclosure and classified as REO. At December 31, 2004, we had nonperforming assets of $6.4 million, and a ratio of nonperforming assets to total assets of 0.19%.

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

     During the year ended December 31, 2004, gross interest income of approximately $438,000 would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the periods. No interest income on non-accrual loans was included in income during 2004.

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

     Classification of Assets. Federal regulations provide that loans and other assets, such as debt and equity securities, that are of lesser quality, must be classified as “substandard,” “doubtful,” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the savings institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that these weaknesses make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value

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that their continuation as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are designated “special mention” by management.

     When we classify problem assets as either substandard or doubtful, we are required to establish allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When we classify problem assets as “loss,” we are required either to establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or to charge off such amount. Our determination of which assets are classified, and the amount of the valuation allowances that we establish as a result of asset classification is subject to review by the Office of Thrift Supervision, which can direct us to increase our general or specific loss allowances. We regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

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

     The following table sets forth information regarding our delinquent loans and real estate owned, net of specific valuation allowances at December 31, 2004.

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

     The formula allowance is calculated by applying loss factors to outstanding loans based on an internal risk grading of such loans or pools of loans. Changes in risk grades of both performing and

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nonperforming loans affect the amount of the formula allowance. Loss factors are based primarily on our historical loss experience and may be adjusted for other significant conditions that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. During the past five years we have not made any changes to our methodology for calculating of the allowance for loan losses.

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

	•	general economic and business conditions affecting our key lending areas;
	•	credit quality trends (including trends in nonperforming loans expected to result from existing conditions);
	•	collateral values;
	•	loan volumes and concentrations;
	•	seasoning of the loan portfolio;
	•	specific industry conditions within portfolio segments;
	•	recent loss experience in particular segments of the loan portfolio;
	•	duration of the current business cycle; and
	•	bank regulatory examination results.

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

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

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

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

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

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

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

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

Investment Activities

     We maintain liquid assets at levels we consider adequate to meet our liquidity needs. We adjust our liquidity levels to fund deposit growth, repay borrowings or to fund our loan commitments. We also adjust our liquidity levels depending upon the yields available on alternative investments and upon management’s judgment as to the attractiveness of those yields relative to other opportunities, its expectation of whether more attractive yields will be available in the future, and its projections of the short term demand for funds to be used for our loan originations and other activities.

     In recent years, we increased the percentage of our assets held as investments, rather than as loans, as part of our strategy of maintaining higher levels of liquidity and improving our interest rate risk position. Our investment portfolio consists of United States Government and United States Government-sponsored agency securities, municipal bonds, Federal Home Loan Bank stock and interest earning deposits. The carrying value of our investment securities totaled $123.6 million at December 31, 2004, including our interest-earning deposits with other financial institutions with original maturities of three months or less which totaled $41.1 million at December 31, 2004.

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     Investment Portfolio. The following tables set forth the carrying value of our investments at the dates indicated. At December 31, 2004, the market value of our investments was approximately $123.6 million. As allowed by SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” we classified our investment in United States Government and United States Government-sponsored agency obligations as available for sale. As a result, such securities are now presented at fair value, as determined by market quotations. The market value of investments includes interest-earning deposits and Federal Home Loan Bank stock at book value, which approximates market value.

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     Investment Portfolio Maturities. The following table sets forth the scheduled maturities, amortized cost, market values and average yields of our investment securities at December 31, 2004.

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Sources of Funds

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

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

     Our deposit growth has benefited from the expansion of our branch network to 43 branches at December 31, 2004. During this time, the growth in our checking accounts and savings accounts exceeded the growth in our certificates of deposit. Certificates of deposits generally are higher cost, and more interest rate sensitive than checking and savings accounts. At December 31, 2004, certificate of deposit accounts comprised 22.5% of our total deposits.

     Deposit Portfolio. The following table sets forth information regarding interest rates, terms, minimum amounts and balances of our deposit portfolio as of December 31, 2004 based on original term to maturity.