SOUTHERN BANCSHARES (N.C.), INC.

                               1998 ANNUAL REPORT






                                MISSION STATEMENT

The  mission  of  our  Company  is to  provide  quality  financial  services  to
individuals  and small  businesses  in our defined  trade areas at a  reasonable
profit  while at all times  maintaining  high  quality  assets,  high  levels of
liquidity,  reasonable  capital,  and a well  trained  staff that is willing and
eager to fulfill this mission.






               THIS REPORT HAS NOT BEEN REVIEWED OR CONFIRMED FOR
                  ACCURACY OR RELEVANCE BY THE FEDERAL DEPOSIT
                             INSURANCE CORPORATION.
<PAGE>
                                CHAIRMAN'S LETTER

March 17, 1999

    For  Southern  BancShares,  1998 was a year of major  accomplishments.  Your
Company made significant  strides in technology,  customer service,  deposit and
lending growth. Net income decreased $1.0 million,  or 15%, from $6.6 million in
1997 to $5.6  million in 1998.  This  decrease was  principally  the result of a
donation of  appreciated  securities  which  significantly  reduced  1997 income
taxes. No similiar contribution was made in 1998. Total deposits of your Company
at December 31, 1998,  totaled $557 million compared to $513 million at year-end
1997, an 8% increase.  Total loans of your Company at December 31, 1998, totaled
$364  million  compared to $349 million at year-end  1997, a 4% increase.  Total
consolidated  assets of your Company at December 31, 1998,  totaled $649 million
compared to $591 million at year-end 1997, a 10% increase.

    Net interest income  increased 6% during 1998,  while  noninterest  expenses
decreased  12%.  To a large  extent,  we credit  balance  sheet  growth  for the
increase  in net  interest  income,  while  the  1997  additional  funding  of a
charitable  foundation  resulted  in higher  noninterest  expenses  in 1997.  In
addition,  the 1998 personnel expenses increased,  resulting from a full year of
expenses for three locations acquired in May 1997 and a partial year of expenses
for branches acquired in May 1998, October 1998 and December 1998.

    Charitable  contribution  expenses  decreased $4.1 million in 1998. In 1996,
BancShares initially funded a foundation to support charitable  organizations by
donating  securities  which  resulted in a $458,000  contribution  expense and a
$536,000 gain on investments. In 1997, BancShares provided additional funding to
the  foundation  by the  donation  of  securities  resulting  in a $4.1  million
contribution  expense.  This  donation,  and the sale of additional  securities,
resulted in $5.6 million of investment gains in 1997.

    These  overall  results  are  particularly   gratifying  because  they  were
accomplished  in a year during which your Company  made  important  progress and
investments  in new product  delivery  systems,  continued  staff  training  and
consumated branch acquisitions as discussed below.

Acquisitions

    During 1998, your Company entered into strategic  acquisitions that improved
its  position by expanding  services to  customers  in three new North  Carolina
markets:  Enfield,  Gates and Red Springs. As of March 17, 1999 your Company had
45  branches  serving  42 North  Carolina  communities.  On March 12,  1999 your
Company announced plans to purchase, subject to regulatory approval, the Ahoskie
branch of  First-Citizens  Bank &Trust Company.  This acquisition is planned for
the third quarter of 1999 and is projected to increase deposits by approximately
$16 million and loans by approximately $8 million.

Product Delivery Systems

    As your  Company  expanded its  geographic  presence,  it also  continued to
improve the efficiency of its product  delivery systems to meet the needs of all
of its  customers.  The  Company  expanded  personal  computer  banking  for its
customers in 1998 and expanded its internet  web-site  containing  bank history,
product and service  information,  banking locations and E-mail  capabilities at
www.southernbank.com.  During 1998 the  Automated  Teller  Machine (ATM) network
provided 24 hour service to a total of 19 communities.

The Year Ahead

    I believe  that the North  Carolina  economy in general  should  continue to
outpace  most of the  nation in 1999 and that the  economic  base of the  market
service area of your Company will continue to support economic growth.

    The  management  of your Company  understands  that, in order to be the best
bank for our customers in our market service  areas,  we must put our customers'
needs first in each of the  products,  policies  and  procedures  under which we
operate.

    Your Company  believes that its  investments  in quality  personnel,  modern
technology,  extensive  education,  expansion  of its service  market  areas and
improvements in customer  product  delivery  systems will help it to realize its
goal of being the first choice in its markets for all financial services.

    I am pleased with the overall  results  accomplished in 1998 and I thank our
shareholders,  staff,  customers and friends for their confidence in, loyalty to
and support of Southern Bank and Trust Company.

Sincerely,

/s/R. S. Williams

R. S. Williams
Chairman of the Board

                                       2
<PAGE>
BUSINESS:

    Southern BancShares (N.C.), Inc., a Delaware corporation (hereinafter,  with
all of its subsidiaries, referred to as "BancShares"), is a bank holding company
pursuant to the provisions of the Bank Holding  Company Act of 1956, as amended.
BancShares  is the  successor  to  Southern  BancShares  (N.C.),  Inc.,  a North
Carolina  corporation  ("SBS")  which was  formed in 1982 to become  the  parent
company of Southern Bank and Trust Company ("Southern"), its principal operating
subsidiary,  which it  acquired in late 1982.  BancShares  was formed in 1986 in
order to effect  the  reincorporation  in  Delaware  of the  holding  company of
Southern by the merger of SBS into  BancShares,  which was effective on December
28, 1986. In 1998 BancShares formed a wholly-owned subsidiary,  Southern Capital
Trust I, a statutory  business  trust that issued $23.0 million of 8.25% Capital
Securities  (the  "Capital  Securities")  in June  1998  maturing  in 2028.  All
significant  activities  of the  Registrant  and its  subsidiaries  are  banking
related so that the Registrant  operates  within one industry  segment.  Neither
BancShares nor its subsidiaries have any foreign operations.

    Southern  conducts a general banking business  designed to meet the needs of
the people of its market area.  These services,  all of which are offered at its
45 offices,  include,  among other items:  taking  deposits;  cashing checks and
providing for  individual  and  commercial  cash needs;  and providing  numerous
checking  and savings  plans,  including  automatic  transfer  services,  direct
deposit, and banking by mail.

    Southern also makes  commercial,  consumer and mortgage loans at its 35 full
service offices and provides individual retirement account service, safe deposit
box  rental,  travelers'  check  service,  and  MasterCard  and Visa credit card
programs.

    Southern has nineteen automatic teller machines: one each in Ahoskie, Ayden,
Belhaven,  Bethel,  Edenton,  Farmville,  LaGrange,  Mount Olive,  Murfreesboro,
Nashville,  Plymouth,  Roanoke  Rapids,  Warsaw,  Whitakers  and Windsor,  North
Carolina and two in Kill Devil  Hills,  North  Carolina  and Rocky Mount,  North
Carolina.

    Southern has a wholly-owned  subsidiary,  Goshen,  Inc., which acts as agent
for credit life and credit accident and health  insurance  written in connection
with loans made by Southern Bank.

FORM 10-K

    BancShares'  Annual  Report on Form 10-K is  available  on the  internet  at
www.sec.gov/cgi-bin/srch-edgar  or a copy is  available  by  providing a written
request to David A. Bean,  Secretary,  Southern  BancShares  (N.C.),  Inc., Post
Office Box 729, Mount Olive,  North Carolina  28365-0729.  A copy of BancShares'
Annual  Report  on Form  10-K  for  1998,  including  Financial  Statements  and
Schedules  thereto,  will be provided  without charge to the shareholder  making
such request.

                                       3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:

                                  INTRODUCTION

    This discussion provides information  concerning changes in the consolidated
financial  condition and results of operations  of Southern  BancShares  (N.C.),
Inc.  ("BancShares")  and  its  subsidiary,  Southern  Bank  and  Trust  Company
("Southern"),  for 1998,  1997 and 1996. The comments are intended to supplement
and  should  be  reviewed  in  conjunction  with  the   consolidated   financial
statements,  related  notes and  selected  financial  data  presented  elsewhere
herein.
<TABLE>
<CAPTION>
Table 1
Five-Year Financial Summary, Selected Balances and Ratios
(Dollars in thousands, except share data and ratios)
                                                                      December 31,
-----------------------------------------------------------------------------------------------------
                                                  1998       1997        1996      1995       1994
-----------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>        <C>        <C>        <C>   
Summary of Operations
Interest income ............................   $ 41,702     39,055     36,776     32,894     27,164
Interest expense ...........................     20,328     18,827     17,450     16,055     11,044
-----------------------------------------------------------------------------------------------------
Net interest income ........................     21,374     20,228     19,326     16,839     16,120
Provision for loan losses ..................        155         60        140       --         --
-----------------------------------------------------------------------------------------------------
Net interest income
    after provision for loan losses ........     21,219     20,168     19,186     16,839     16,120
Noninterest income .........................      6,651      9,849      4,508      4,028      2,888
Noninterest expense ........................     20,214     23,064     18,203     15,661     13,918
-----------------------------------------------------------------------------------------------------
Income before income taxes .................      7,656      6,953      5,491      5,206      5,090
Income taxes ...............................      2,060        340      1,127      1,293      1,402
-----------------------------------------------------------------------------------------------------
Net income .................................   $  5,596      6,613      4,364      3,913      3,688
=====================================================================================================

Selected Year-End Balances
Total assets ...............................   $649,425    590,752    540,758    496,980    408,035
Investment securities and federal funds sold    221,102    190,373    179,709    164,526    123,852
Loans ......................................    364,489    349,216    317,755    287,960    252,611
Interest-earning assets ....................    590,699    544,789    499,164    452,486    376,463
Deposits ...................................    556,752    513,328    480,566    449,002    367,522
Interest-bearing liabilities ...............    507,326    458,335    422,941    396,631    326,442
Shareholders' equity .......................     56,033     54,984     44,778     37,163     30,965
Common shares outstanding ..................    119,266    119,918    119,918    119,918    121,767
-----------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Table 1
Five-Year Financial Summary, Selected Balances and Ratios
(Dollars in thousands, except share data and ratios)
                                                                      December 31,
-----------------------------------------------------------------------------------------------------
                                                  1998       1997        1996      1995       1994
-----------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>        <C>        <C>        <C>   
Selected Average Balances
Total assets ...............................   $615,828    567,236    519,541    456,499    407,554
Investment securities and federal funds sold    182,356    162,936    157,779    145,417    131,923
Loans ......................................    362,298    340,195    310,389    270,563    242,217
Interest-earning assets ....................    550,021    507,971    469,792    415,980    374,140
Deposits ...................................    526,555    498,303    459,552    407,252    367,618
Interest-bearing liabilities ...............    478,396    445,354    411,960    366,597    331,104
Shareholders' equity .......................     56,423     45,703     40,234     34,657     28,445
Common shares outstanding ..................    119,685    119,918    119,918    121,226    123,521
-----------------------------------------------------------------------------------------------------
Profitability Ratios (averages)
Return on average total assets .............        .91%      1.17%      0.84%      0.86%      0.90%
Return on average shareholders' equity .....       9.92      14.47      10.85      11.29      12.97
Dividend payout ratio (1) ..................      10.38       8.85      13.45      13.57      12.80
-----------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loans to deposits ..........................      68.81%     68.27%     67.54%     66.44%     65.93%
Shareholders' equity to total assets .......       9.16       8.06       7.74       7.59       6.98
-----------------------------------------------------------------------------------------------------
Per share of common stock
Net income (2) .............................   $  43.40    $ 51.77    $ 33.00    $ 28.90    $ 27.04
Cash dividends .............................       1.50       1.50       1.50       1.00       1.00
Book value (3) .............................     448.82     437.22     352.02     288.48     232.98
-----------------------------------------------------------------------------------------------------
</TABLE>

(1)  Total common and preferred  dividends  paid for the year ended  December 31
     divided by net income for the year ended December 31

(2)  Net income less  preferred  dividends  paid for the year ended  December 31
     divided by the average  number of common  shares  outstanding  for the year
     ended December 31

(3)  Shareholders'  equity less  Preferred B and C at December 31 divided by the
     number of common shares outstanding at December 31

                                       4
<PAGE>
                          ACQUISITIONS AND DISPOSITIONS

     In May 1998 Southern acquired the Enfield, North Carolina office of Enfield
Savings Bank and sold the Littleton,  North Carolina  office of Enfield  Savings
Bank to First-Citizens  Bank & Trust Company.  In October 1998 Southern acquired
the Gates,  North Carolina  office of  First-Citizens  Bank & Trust Company.  In
December 1998 Southern acquired the Red Springs,  North Carolina office of First
Union National Bank. In May 1997 Southern acquired the Aulander, North Carolina,
the Aurora, North Carolina and the Hamilton,  North Carolina offices of Wachovia
Bank of North Carolina, N.A. These acquisitions were accounted for as purchases,
and,  therefore,  the results of  operations  prior to purchase of the financial
institutions  are not included in the  consolidated  financial  statements.  The
acquisitions were as follows:
<TABLE>
<CAPTION>
Table 2

Branch Transactions                                                             Loans           Deposits
(dollars in thousands)                                      Transaction       Acquired          Acquired
                                                            Date               (Sold)            (Sold)
---------------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>                <C>
Enfield Savings Bank - Enfield, NC                          May 1998       $16,662            $18,041
Enfield Savings Bank - Littleton, NC (1)                    May 1998            (3)            (2,420)

First-Citizens Bank & Trust Company  - Gates, NC            October 1998       226              5,302
First Union National Bank  - Red Springs, NC                December 1998       76             16,440
---------------------------------------------------------------------------------------------------------
    Net 1998 acquisition totals                                            $16,961            $37,363
=========================================================================================================
Wachovia  Bank of North Carolina, N.A. - Aulander, NC       May 1997       $   180            $ 5,117
Wachovia  Bank of North Carolina, N. A. - Aurora, NC        May 1997           852             11,838
Wachovia  Bank of North Carolina, N. A. - Hamilton, NC      May 1997           412              4,106
---------------------------------------------------------------------------------------------------------
    1997 acquisition totals                                                $ 1,444            $21,061
=========================================================================================================
</TABLE>

(1) Represents the sale of this branch to First-Citizens Bank & Trust Company

                              RESULTS OF OPERATIONS
Earnings

    For 1998 net income of $5.6 million  represented a 15.38% decrease from 1997
net income of $6.6 million.  Net income for 1996 was $4.4  million.  Higher 1997
net income  was  principally  the result of gains on sale of  available-for-sale
securities  and a  reduction  in income  taxes  resulting  from the  donation of
available-for-sale  securities.  Excluding  the impact of  securities  gains and
charitable contributions,  income before income taxes increased by approximately
$407,000 between 1997 and 1998,  principally due to increased income  associated
with expansion in existing and new markets.

    The increase in 1997 net income was  principally the result of gains on sale
of available-for-sale  securities and a reduction in income taxes resulting from
the donation of available-for-sale  securities.  Net income per average share of
common stock  decreased to $43.40 in 1998, from $51.77 in 1997, due primarily to
the 1997  reduction in income taxes as discussed  above.  Net income per average
share of common stock  increased  to $51.77 in 1997,  from $33.00 in 1996 due to
increased earnings and reduced income taxes in 1997 as discussed above.

Net Interest Income

     The greatest  portion of BancShares'  earnings is from net interest income,
which is the difference between interest income on  interest-earning  assets and
interest paid on deposits and other  interest-bearing  liabilities.  The primary
factors affecting net interest income are changes in the volume and yields/rates
on earning assets and interest-bearing  liabilities,  and the ability to respond
to changes in interest  rates through  asset/liability  management.  In 1998 net
interest  income was $21.4  million as  compared  to $20.2  million in 1997,  an
increase of $1.1 million or 5.67%. In 1997 net interest income was $20.2 million
as compared to $19.3 million in 1996, an increase of $902,000 or 4.67%. The 1998
increase  was  primarily  attributable  to  increased  loan revenue from a 6.29%
increase in average loan balances  outstanding,  from $340.2  million in 1997 to
$362.3 million in 1998.  The yields  received on average loans  outstanding  for
1998 decreased to 8.57% from 8.59% for 1997. The rates paid on  interest-bearing
liabilities  increased  1 basis point  during 1998 and average  interest-bearing
liabilities increased 7.42% between 1997 and 1998, resulting in a 7.97% increase
in total interest expense.

    The 1997 increase was primarily  attributable to increased loan revenue from
a 9.60%  increase in average loan balances  outstanding  from $310.4  million in
1996 to $340.2  million in 1997.  The yields  received on average loans for 1997
decreased  to 8.59% from  8.66% for 1996.  The rates  paid on  interest  bearing
liabilities decreased 1 basis point during 1997 and the average interest bearing
liabilities  increased 8.11% between 1996 and 1997 resulting in a 7.89% increase
in total interest expense.

    Loans produced the largest component of interest income,  amounting to $31.0
million  in  1998,  $29.2  million  in 1997 and  $26.9  million  in  1996.  This
represented an increase in 1998 of 6.07%.  For the year ended December 31, 1997,
interest income on loans increased 8.73%.  During 1998 average loans outstanding
increased $22.1 million or 6.50%. This increase was primarily due to loan growth
in the existing branch network and the impact of the 1998 branch acquisitions as
set forth in Table 2. The 1997 increase in interest  income was primarily due to
loan  growth in the  existing  branch  network and the impact of the 1997 branch
acquisitions  discussed  above. In 1998, the average yield on loans decreased to
8.57% from 8.59% in 1997.  This  decrease  resulted  from  overall  lower market
interest rates during most of 1998. The 1996 average yield was 8.66%.

                                       5
<PAGE>
    Earnings  from  investments  and federal  funds sold provided the balance of
interest income,  contributing  $10.7 million in 1998, $9.8 million in 1997, and
$9.9 million in 1996. In 1998,  BancShares  realized  lower yields on investment
securities  and  federal  funds  sold  and  larger  average  balances.  In 1997,
BancShares realized lower yields on investment securities and federal funds sold
and maintained slightly larger average balances.  Average investment  securities
and federal  funds sold were  $182.4  million in 1998,  an increase  from $162.9
million  in 1997.  The 1998  average  increase  was  principally  the  result of
additional liquid assets being made available from the acquisitions.

    Total 1998 interest expense for BancShares  increased 7.97% after increasing
in 1997 by 7.89%.  The  principal  component of  BancShares'  interest  expense,
interest paid on deposits,  totaled $18.7 million in 1998, $18.2 million in 1997
and $16.9 million in 1996.  BancShares'  deposit base  increased  8.46% in 1998,
primarily  as a result  of the  1998  acquisitions.  The  interest  expense  for
interest-bearing  deposits also  increased in 1998  primarily as a result of the
1998 acquisitions.  The interest expense for interest-bearing deposits increased
in 1997 principally as a result of the 1997 acquisitions.  The average effective
rate paid on  interest-bearing  liabilities was 4.24% in 1998, 4.23% in 1997 and
4.24% in 1996. During 1997,  BancShares utilized long-term borrowings to provide
a $5.0  million  investment  of capital  into its  subsidiary  and to  refinance
existing  long-term  borrowings.  During  1998,  BancShares  utilized  long-term
borrowings to provide a $12.0 million  investment of capital into its subsidiary
and to  refinance  the  remaining  balance  of the  1997  borrowings.  The  1996
long-term  debt was being repaid at $100,000 per month plus  interest.  The 1997
long-term debt was being repaid at $450,000 per quarter plus interest.  The 1998
long-term debt of $23.0 million of 8.25% capital  securities issued in June 1998
matures in 2028.  Interest on these  long-term  obligations  was $1.3 million in
1998,  $295,000 in 1997 and $117,000 in 1996. The outstanding  long-term debt at
December 31, 1998 was $23.0 million.

    BancShares'  interest  rate  spread on a tax  equivalent  basis was 3.44% in
1998,  3.60%  in 1997 and  3.75% in 1996.  BancShares'  ability  to  maintain  a
favorable  spread between interest income and interest expense is a major factor
in generating earnings; therefore, it is necessary to effectively manage earning
assets and interest-bearing liabilities.

Noninterest Income

    Noninterest  income,  which consists primarily of securities gains,  service
charges,  commissions,  fees and gains on sales of loans, decreased $3.2 million
in 1998. Total noninterest  income was $6.7 million in 1998, as compared to $9.8
million in 1997 and $4.5  million  in 1996.  Total  noninterest  income for 1998
includes   securities   gains   of  $1.8   million   related   to  the  sale  of
available-for-sale  securities.  Total  noninterest  income  for  1997  includes
securities  gains of $5.6  million  related to ( i ) the funding of a charitable
foundation  by  the  contribution  of  appreciated   available-for-sale   equity
securities  and ( ii ) the sale of  appreciated  available-for-sale  securities.
Service charges on deposit  accounts  increased  $281,000,  or 9.63%, in 1998 to
$3.2  million,   from  $2.9  million  in  1997.   This  increase  was  primarily
attributable to the full year impact of the accounts  subject to service charges
acquired in 1997 and the partial year impact of the 1998  acquisitions.  Service
charges on deposit  accounts  increased  $254,000,  or 9.53%, in 1997, from $2.7
million  in  1996  to  $2.9  million  for  1997.  This  increase  was  primarily
attributable to the full year impact of the accounts  subject to service charges
acquired in 1996 and the partial year impact of the 1997 acquisitions.

    BancShares  had an  increase  in 1998 in other  service  charges and fees of
$261,000 primarily  attributable to the full year impact of the accounts subject
to service  charges  acquired  in 1997 and the  partial  year impact of the 1998
acquisitions.  BancShares  had an increase in 1997 in other service  charges and
fees of $88,000.

     During  1998,  the  remaining  noninterest  income  increased  $38,000 from
$496,000 in 1997 to $534,000 in 1998.  This increase was primarily  attributable
to increased credit card merchant  discount  income.  During 1997, the remaining
noninterest income decreased $108,000 from $604,000 in 1996 to $496,000 in 1997.
This decrease was primarily  attributable to a gain of $213,000 on the sale of a
branch in 1996.

Noninterest Expense

    The 1996,  1997 and 1998  acquisitions  should enhance the future  operating
results of BancShares.  However,  for the following ten years,  earnings will be
reduced as BancShares amortizes  intangibles  resulting from these acquisitions.
Noninterest  expense  also  includes  personnel,  data  processing,   occupancy,
furniture  and  equipment,   Federal  Deposit  Insurance   Corporation  ("FDIC")
insurance assessments,  printing, supplies, legal and professional fees, postage
and  other  miscellaneous  operating  expenses.  Noninterest  expense  was $20.2
million in 1998  compared to $23.1 million in 1997 and $18.2 million in 1996. In
1997  BancShares  recorded  $4.1  million of  charitable  contributions  expense
related to the funding of a charitable foundation.

    The most significant element of BancShares' noninterest expense is personnel
costs. In 1998,  salaries and benefits  represented $9.5 million,  or 47.00%, of
total noninterest  expense.  The personnel costs of 1998 include the impact of a
full year of the costs  related to the 1997  acquisitions  and a partial year of
costs  for the  acquisitions  made in  1998.  In  1997,  salaries  and  benefits
represented $8.8 million, or 37.99%, of total noninterest expense. The personnel
costs of 1997  include  the  impact of a full year of the costs  related  to the
acquisitions  made in 1996 and a partial year of costs for the acquisitions made
in 1997. In 1996, salaries and benefits  represented $8.0 million, or 43.81%, of
total noninterest  expense. The personnel costs of 1996 included the impact of a
full year of the costs related to the acquisitions made in 1995 and partial year
costs for the acquisitions made in 1996.

    The  1998   noninterest   expense,   other  than  personnel  and  charitable
contributions,  was $10.7 million, an increase of $486,000, or 4.75%, from $10.2
million in 1997.  Occupancy expenses increased from $1.2 million in 1996 to $1.4
million in 1997 to $1.6 million in 1998.  These increases of 15.38% for 1997 and
12.90% for 1998 are principally the result of additional  expenditures  incurred
as a result of the 1996, 1997 and 1998  acquisitions,  the replacements of aging
branch  facilities  and the 1997  opening of a second  location in Rocky  Mount,
North Carolina.  Furniture and equipment expenses increased from $1.3 million in
1996 to $1.6  million  in 1997 and  decreased  to $1.5  million  in  1998.  This
increase of 24.28% for 1997 and  decrease of 8.02% for 1998  reflect the related
equipment  expenses  incurred as a result of the  acquisitions in 1996, 1997 and

                                       6
<PAGE>
1998,  the opening of the second Rocky Mount branch in 1997 and the write-off of
existing assets  disposed of in the replacement of aging  facilities in 1996 and
1997. There were no such replacements of aging facilities in 1998.

     Data  processing  costs  represent  charges by vendors  that  perform  data
processing services for Southern.  Data processing fees are primarily based upon
per  item or per  account  charges.  Data  processing  costs in 1998  were  $2.0
million,  an  increase  of 25.22%  over 1997 data  processing  expenses  of $1.6
million.  This  increase  was the result of the 1997 and 1998  acquisitions  and
volume  increases in the existing branch system.  Data processing  costs in 1997
were $1.6 million,  an increase of 10.97%, over 1996 data processing expenses of
$1.4 million. This increase was the result of the 1996 and 1997 acquisitions and
volume increases in the existing branch system.

    Intangibles  amortization  in 1998 was $1.5 million,  a 12.59% decrease from
the 1997 intangibles amortization.  Intangible amoritization is calculated on an
accelerated  basis  beginning  in the first  full  month of  purchase.  The 1998
decrease was  primarily the result of the 1997  purchases  being made earlier in
the year than the 1998  purchases  and the reduced 1998  amortization  for prior
period   acquisitions  due  to  the  accelerated  basis  of  amortization.   The
amortization for the Red Springs purchase in December 1998 will begin in January
1999.  Intangibles  amortization in 1997 was $1.8 million, a 7.14% increase over
the  1996  intangibles  amortization  of $1.6  million.  The  1998  amortization
included a full year's  amortization for the 1997  acquisitions and partial year
of  amortization  for the  acquisitions  made in  1998.  The  1997  amortization
included a full year's  amortization for the 1996  acquisitions and partial year
of  amortization  for the  acquisitions  made in  1997.  The  1996  amortization
included a full year's  amortization for the 1995  acquisitions and partial year
of amortization for the acquisitions made in 1996.

     Southern has deposits insured under both of the FDIC's insurance funds, the
Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF").
In July  1995,  the  FDIC  and  other  regulatory  agencies  proposed  a plan to
recapitalize the SAIF, and Congress mandated a one-time  assessment for all SAIF
insured  deposits  on  September  30,  1996.  Congress  required  that 80.00% of
Southern's SAIF insured  deposits as reported on Southern's  March 31, 1995 call
report and 100.00% of SAIF insured  deposits  purchased by Southern  after March
31, 1995 be assessed at 0.657%. On September 30, 1996 Southern had approximately
$87.0 million of SAIF-insured deposits based on the above formula and recorded a
$569,000  charge to  earnings  on  September  30,  1996 as a one-time  FDIC SAIF
insurance  expense.  The FDIC  insurance  expense  decrease of $660,000 for 1997
resulted primarily from the 1996 one-time assessment discussed above.

    BancShares  expects that under current FDIC  assessment  guidelines  that it
will not  incur  any FDIC  deposit  insurance  assessments  for  1999.  However,
beginning in 1997 the FDIC began  collecting  from all banks an  assessment  for
Financing  Corporation ("FICO") funding  requirements.  Accordingly,  BancShares
expects a 1999 FDIC FICO assessment expense of approximately $120,000,  based on
the FDIC FICO assessment rates in effect for the last quarter of 1998.

    Charitable contributions decreased $4.1 million, to $2,000 in 1998 from $4.1
million in 1997 after increasing $3.5 million from $589,000 in 1996.  Charitable
contributions  expense for 1997 includes $4.1 million  related to the additional
funding of a  charitable  foundation  through the  contribution  of  appreciated
available-for-sale   securities.   Charitable  contributions  expense  for  1996
includes $459,000 related to the contribution of  available-for-sale  securities
to the same charitable foundation.

     Other  miscellaneous  noninterest  operating expenses were $4.0 million for
1998, $3.7 million for 1997 and $3.3 million for 1996.

     BancShares had taxable income for book purposes that resulted in income tax
expense for 1998 of $2.1  million,  $340,000 for 1997 and $1.1 million for 1996.
The 1997 decrease is principally a result of tax deductions  related to the 1997
contribution  of  appreciated  available-for-sale  securities to the  charitable
foundation discussed above.

                               FINANCIAL CONDITION

Earning and Nonearning Assets

    Earning  assets  consist of loans,  investment  securities,  and  short-term
investments  that earn interest.  Average earning assets during 1998 were $550.0
million,  an increase  of 8.28% from the 1997  average of $508.0  million.  This
increase  was due  primarily  to the  acquisitions  discussed  above.  The  cash
received in the  acquisitions  was  ultimately  invested  primarily in loans and
short-term investments.

    Average earning assets during 1997 were $508.0 million, an increase of 8.13%
from the 1996 average of $469.8 million.  This increase was due primarily to the
full-year average impact of the 1996 acquisitions and the partial year impact of
the 1997  acquisitions.  The cash received in the  acquisitions  was  ultimately
invested primarily in loans and short-term investments including federal funds.

    Average  noninterest  earning  assets  during  1998 were $65.8  million,  an
increase of 11.04% from the 1997 average of $59.3 million. This increase was due
primarily to the 1998 full year average impact of the 1997  acquisitions and the
partial  year  impact of the 1998  acquisitions.  Average  non-interest  earning
assets  during  1997 were $59.3  million,  an  increase  of 19.32% from the 1996
average of $49.7 million.  The principal nonearning asset for BancShares is cash
and due from  banks.  Cash and due from banks  averaged  $19.3  million in 1998,
$17.7 million in 1997 and $15.7 million in 1996.

    Return on total average assets was 0.91% in 1998, 1.17% in 1997 and 0.84% in
1996.  The  higher  return  levels  of 1998 and 1997 as  compared  to 1996  were
principally the result of gains on the sales of  available-for-sale  securities.
Gains on sales of  available-for-sale  securities in 1998 were $1.8  million,  a
decrease  of  $3.8   million  from  the  $5.6  million  of  gains  on  sales  of
available-for-sale  securities  in 1997  and a $1.3  million  increase  from the
$460,000 of gains on sales of available-for-sale securities in 1996.

Interest-Bearing and Noninterest Bearing Liabilities

    Interest-bearing liabilities consist of deposits,  short-term borrowed funds
and long-term notes payable.  Average  interest-bearing  liabilities during 1998
were  $478.4  million,  an  increase  of 7.42%  from the 1997  average of $445.4
million.  This

                                       7
<PAGE>
increase was due primarily to the 1998 full year impact of the 1997 acquisitions
and the partial year impact of the 1998 acquisitions. In addition, $23.0 million
of 8.25%  Capital  Securities  maturing in 2028 were issued in 1998 as discussed
above.   The  principal   interest-bearing   liabilities   of   BancShares   are
interest-bearing deposits. Average  noninterest-bearing  liabilities during 1998
were $81.0 million, an increase of 6.34% from the 1997 average of $76.2 million.
This  increase  was due  primarily  to the 1998  full  year  impact  of the 1997
acquisitions   and  the   partial   year   impact  of  the  1998   acquisitions.
Noninterest-bearing  demand  deposits  are  the  principal   noninterest-bearing
liability.  The cost of total interest-bearing  liabilities was 4.25% in 1998 as
compared to 4.23% in 1997.  The increase in 1998 was  principally  the result of
the 1998 issuance of the 8.25% Capital Securities discussed above.

    Average  interest-bearing  liabilities  during 1997 were $445.4 million,  an
increase of 8.11% from the 1996 average of $412.0 million. This increase was due
primarily to the 1997 full year impact of the 1996  acquisitions and the partial
year impact of the 1997 acquisitions.  Average  noninterest-bearing  liabilities
during 1997 were $76.2  million,  an increase of 13.22% from the 1996 average of
$67.3   million.   Noninterest-bearing   demand   deposits  are  the   principal
noninterest-bearing  liability. This increase was also due primarily to the 1997
full year impact of the 1996  acquisitions  and the  partial  year impact of the
1997 acquisitions.  The cost of total interest-bearing  liabilities was 4.23% in
1997 as compared to 4.24% in 1996.  The  decrease  in 1997 was  principally  the
result of a generally lower deposit interest rate market in 1997.

Loans

    As of December 31, 1998,  loans,  net of allowance for loan losses,  totaled
$358.5  million  compared to $343.2  million at year-end  1997.  This growth was
related entirely to the current year acquisitions,  as discussed above. The loan
portfolio grew $17.0 million through these acquisitions.

    Rate  sensitivity and liquidity in the loan portfolio are achieved by making
loans  with  adjustable  interest  rates and  shorter  maturities.  This  allows
Southern to adjust its pricing  structure with changes in interest rates. At the
end of 1998,  60.34% of the loan portfolio was due to mature or be available for
repricing of interest rates during 1999.

Investments

    Management's  asset/liability  strategies include  maintaining an investment
securities  portfolio with  appropriate  maturities to preclude the necessity of
selling investment securities for purposes of liquidity.

    Traditionally,  BancShares has maintained a larger investment portfolio than
its peers. BancShares  traditionally has carried unrealized gains on investments
significantly  greater than the average of its peers in North Carolina primarily
due to its investments in marketable equity  securities.  At the end of 1998 and
1997, BancShares' subsidiary,  Southern, had one of the highest ratios of Market
Value  to Book  Value  for its  investment  securities  in the  state  of  North
Carolina.

    At  December  31,  1998 the  fair  value  of  available-for-sale  securities
exceeded the carrying  value by $17.2  million,  deferred taxes related to these
available-for-sale   securities  were  $5.8  million  and  shareholders'  equity
included   $11.4  million  for  the  net   unrealized   gain  related  to  these
available-for-sale   securities.   At  December  31,  1997  the  fair  value  of
available-for-sale  securities  exceeded  the carrying  value by $22.9  million,
deferred taxes related to these available-for-sale  securities were $7.8 million
and  shareholders'  equity  included $15.1 million for the net unrealized  gains
related to these available-for-sale  securities.  BancShares does not maintain a
trading account.

    On December  17, 1996,  the board of  directors  of Southern  Bank and Trust
Company  approved  the  contribution  of  7,500  shares  of  marketable   equity
securities to the Southern Bank  Foundation.  These  investments  had an average
cost basis of $78,000  and,  on December  17,  1996,  a fair value of  $536,000.
Southern  recorded a securities  gain of $458,000 and a charitable  contribution
expense of $536,000 related to this transaction.

    On February  14, 1997,  the board of  directors  of Southern  Bank and Trust
Company  approved  the  contribution  of  48,250  shares  of  marketable  equity
securities to the Southern Bank  Foundation.  These  investments  had an average
cost basis of $542,000  and, on February 5, 1997, a fair value of $4.1  million.
Southern  recorded  a 1997  securities  gain  of  $3.5  million  and  charitable
contribution expense of $4.1 million related to this transaction.

                                  ASSET QUALITY

Provision and allowance for loan losses

    Because the loan portfolio  represents  BancShares'  largest  earning asset,
BancShares  continually  monitors  the quality of its loan  portfolio.  Southern
operates in an area dominated by agriculture  and,  accordingly,  many loans are
made to  commercial  enterprises  or to consumers who are directly or indirectly
supported by the region's agricultural economy. In 1998, BancShares had net loan
charge-offs  of $433,000,  an increase,  due to increased  net  charge-offs,  of
$181,000 over 1997 net  charge-offs of $252,000.  This increase is primarily the
result of a $100,000  decrease in recoveries  for 1998  compared to 1997.  Loans
charged off  increased  $81,000 in 1998  compared  to 1997.  The  percentage  of
charge-offs (net of recoveries) to average  outstanding  loans was 0.12% in 1998
and 0.07% in 1997.

     The  increase in the ratio of total  non-performing  loans to total  loans,
from 0.20% at December 31, 1997 to 0.28% at December  31,1998,  was  principally
due to increases in non-performing loans (nonaccrual, restructured, and accruing
loans  greater  than 90 days past due) to $1.0  million at  December  31,  1998,
compared to $696,000 at December 31, 1997. The ratio of non-performing loans and
assets to total assets increased to 0.17% at December 31, 1998 from 0.13% a year
before.  This  increase was  primarily  the result of  increased  non-performing
loans. At December 31, 1998 BancShares had $84,000 of assets classified as other
real estate. At December 31, 1997 BancShares had $48,000 of assets classified as
other real estate.

    Accrual of interest is discontinued  on a loan when management  believes the
borrower's  financial condition is such that collection of principal or interest
is  doubtful.  Loans  are  returned  to the  accrual  status  when  the  factors
indicating doubtful collectibility cease to exist.

                                       8
<PAGE>
    Management considers a loan to be impaired when based on current information
or events,  it is probable that a borrower will be unable to pay all amounts due
according to the  contractual  terms of the loan  agreement.  Impaired loans are
valued using either the discounted expected cash flow method or the value of the
collateral. When the ultimate collectibility of the impaired loan's principal is
doubtful,  all cash  receipts  are  applied  to  principal.  Once  the  recorded
principal  balance has been reduced to zero, future cash receipts are applied to
interest income, to the extent that any interest has been foregone.  Future cash
receipts are recorded as recoveries of any amounts previously charged-off.

    There are certain loans classified for regulatory purposes as substandard or
special mention that have not been disclosed in the nonperforming  asset amounts
above. Such loans do not represent or result from trends or uncertainties  which
management  reasonably  expects will materially impact future operating results,
liquidity,  or capital  resources.  Such classified  loans also do not represent
material credits about which management is aware of any information which causes
management to have serious  doubts as to the ability of such borrowers to comply
with the loan repayment terms.

    In assessing the allowance for loan losses management  considers current and
historical   net   charge-offs   by  loan   category,   current  and  historical
nonperforming loans by loan category, the relative concentration levels of total
loans by loan  category and credit grade and current  economic  conditions.  The
allowance  for  loan  losses  represented  588.00%  of  non-performing  loans at
December  31,  1998.  This was a decrease  of 270 basis  points from the 857.90%
ratio at December 31, 1997. The allowance for loan losses  represented  1.64% of
loans  outstanding at year end 1998.  The allowance for loan losses  represented
1.71% of loans  outstanding  at year end  1997.  Southern's  provision  for loan
losses  charged  against  earnings  was  $155,000  in 1998,  $60,000 in 1997 and
$140,000 in 1996.

    Management  considers  the  December  31,  1998  allowance  for loan  losses
adequate  to cover  the  losses  inherent  in the loan  portfolio.  Management's
periodic evaluation of the adequacy of the allowance is based on Southern's past
loan  loss  experience,  known  and  inherent  risks in the  portfolio,  adverse
situations that may affect the borrower's experience, the estimated value of any
underlying  collateral,  current  economic  conditions  and other risk  factors.
Management  believes  it  has  established  the  allowance  in  accordance  with
generally  accepted  accounting  principles and in  consideration of the current
economic  environment.  While management uses the best information  available to
make  evaluations,  future  adjustments  may be  necessary if economic and other
conditions differ substantially from the assumptions used.

    In  addition,  various  regulatory  agencies,  as an integral  part of their
examination  process,  periodically review Southern's  allowance for loan losses
and losses on other real estate  owned.  Such  agencies may require  Southern to
recognize  additions to the allowances  based on the examiners'  judgments about
information available to them at the time of their examinations.

                 LIQUIDITY, MARKET RISK AND INTEREST SENSITIVITY

Liquidity

    Liquidity  refers to the ability of BancShares to generate  sufficient funds
to meet its financial  obligations and commitments at a reasonable  cost. One of
BancShares'  objectives is to maintain a high level of liquidity,  and this goal
continues to be met. Maintaining  liquidity ensures that funds will be available
for  reserve  requirements,  customer  demand for loans,  withdrawal  of deposit
balances and maturities of other deposits and liabilities. These events may take
place daily or at other intervals in the normal operation of the business.  Past
experiences  help  management  anticipate  cyclical  demands and amounts of cash
required.  These  obligations can be met by existing cash reserves or funds from
maturing loans and investments,  but in the normal course of business are met by
deposit growth.

    In assessing  liquidity,  many relevant  factors are considered,  including:
stability  of  deposits,  quality of  assets,  economy  of the  markets  served,
business   concentrations,   competition  and  BancShares'   overall   financial
condition.  BancShares'  liquid  assets  include  available-for-sale  investment
securities,  federal  funds  sold,  and cash and due from  banks.  These  assets
represented  29.85% of total  deposits at December  31,  1998,  a decrease  from
31.65% at December 31, 1997.

    Southern's liquidity ratio, which is defined as net cash plus short-term and
available-for-sale   securities   divided  by  net   deposits   and   short-term
liabilities,  was 30.78% at December  31,  1998,  compared to 33.98% at year-end
1997 and 27.40% at year-end 1996.

    BancShares  has   traditionally   maintained  a  high  level  of  liquidity,
characteristic of the high ratio of investment securities to total assets and/or
total deposits that BancShares  maintains.  Maturing investments whose funds are
not immediately necessary to sustain BancShares' liquidity,  will be invested in
similar  instruments  or used to fund any  increased  loan  demand.  Investments
scheduled to mature  within the one-year  time frame  represented  43.23% of the
total investment  securities  portfolio at December 31, 1998, 29.00% at December
31, 1997 and 33.38% at December 31, 1996.

     Included  in  investments  maturing  within  one  year are  investments  in
marketable  equity  securities  held by  BancShares  with  fair  values of $27.1
million at December 31,  1998,  $30.3  million at December  31, 1997,  and $24.8
million at December 31, 1996.  Although these investments do not "mature" in the
next  twelve  months,  they  are   available-for-sale   and  could  be  sold  at
management's discretion.

    Since the volume of investments  actually maturing during 1999 is comparable
to the volumes  that  matured  during 1998 and 1997,  the effect on net interest
margin and operating results for 1999 should also be similar to effects realized
in 1998 and 1997.

    The consolidated statements of cash flows disclose the principal sources and
uses of cash from operating,  investing and financing activities for 1998, 1997,
and 1996. In 1998,  operating  activities  of BancShares  provided cash flows of
$5.1  million.  Net income of $5.6  million,  adjusted  for  non-cash  operating
activities,  provided the majority of cash generated from operations.  Increases
in other assets of $1.0 million and decreases in other  liabilities  of $674,000
reduced  the  contribution  of net income to  BancShares'  cash flow.  Investing
activities,  including lending,  utilized $7.7 million of BancShares' cash flow.
Loans originated, net of principal collected,  provided $1.4 million. BancShares
received  $13.1 million in cash in connection  with the branches  purchased from
other financial institutions in 1998.

                                       9
<PAGE>
    Net  additional  cash  inflows  of $20.9  million  resulted  from  financing
activities.  Net deposit  inflows of $6.1 million were  decreased by  short-term
borrowed funds repayments of $1.7 million and by an increase of $18.3 million in
long-term obligations and reduced by payments for cash dividends and retirements
of stock totaling $812,000.

    Southern has no brokered  deposits.  Jumbo  certificates of deposit ("CD's")
are  considered  to include all CD's of $100,000 or more.  Southern does not and
has never aggressively bid on these deposits. Southern does not seek nor does it
accept deposits from outside of its general trade area. Almost all of Southern's
Jumbo CD customers have other  relationships  with Southern,  including savings,
demand and other time deposits,  and in some cases,  loans. At December 31, 1998
Jumbo CD's represented 10.79% of total deposits. At December 31, 1997 Jumbo CD's
represented 10.33%, of total deposits.

    In the  opinion  of  management,  BancShares  has the  ability  to  generate
sufficient amounts of cash to cover normal requirements and any additional needs
which may arise,  within realistic  limitations,  and management is not aware of
any known demands,  commitments or uncertainties that will affect liquidity in a
material way.

Market Risk

    Market  risk  reflects  the risk of economic  loss  resulting  from  adverse
changes in market price and interest  rates.  This risk of loss can be reflected
in either  diminished  current  market values or reduced  potential net interest
income in future periods.

     BancShares'  market risk arises  primarily from interest rate risk inherent
in its lending and deposit taking activities.  The structure of BancShares' loan
and deposit portfolios is such that a significant increase in the prime rate may
adversely  impact net  interest  income.  Management  seeks to manage  this risk
through the use of shorter  term  maturities.  The  composition  and size of the
investment  portfolio is managed so as to reduce the  interest  rate risk in the
deposit  and loan  portfolios  while  at the  same  time  maximizing  the  yield
generated from the loan portfolio.

    The table below  presents in tabular form the  contractual  balances and the
estimated fair value of financial  instruments at their expected  maturity dates
as  of  December  31,  1998.  The  expected   maturity   categories   take  into
consideration   historical   prepayment   experience  as  well  as  management's
expectations based on the interest rate environment as of December 31, 1998. For
core deposits without  contractual  maturity (i.e.,  interest bearing  checking,
savings and money market accounts),  the table presents  principal cash flows as
maturing in 1999 since they are subject to immediate repricing. Weighted average
variable  rates are based on the implied  forward rates in the yield curve as of
December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
                                      Maturing in Years ended December 31
--------------------------------------------------------------------------------
                              1999        2000        2001       2002       2003       Thereafter     Total      Fair Value
---------------------------------------------------------------------------------------------------------------------------
<S>                        <C>         <C>         <C>         <C>       <C>          <C>          <C>             <C>     
Assets
   Loans
     Fixed Rate            $42,766     $28,703     $27,164     $26,046   $25,718      $74,594      $224,991        $228,728
     Average rate (%)         8.41%       8.37%       8.45%       9.08%     8.39%        6.71%         7.92%
     Variable rate         $79,573      $8,084      $7,400      $5,287    $4,051      $35,103      $139,498        $139,498
     Average rate (%)         8.38%       8.34%       8.23%       8.24%     8.16%        7.92%         8.23%

   Investment Securities
     Fixed Rate            $83,221     $70,311       $1,118     $1,073    $1,706      $42,949      $200,378        $201,549
     Average rate (%)         5.72%       4.92%        6.19%      6.09%     6.00%        5.84%         5.42%
     Variable rate              --          --          --          --        --       $1,189        $1,189          $1,189
     Average rate (%)           --          --          --          --        --         6.65%         6.65%

Liabilities
   Savings and interest
        bearing checking
     Fixed Rate           $185,218          --          --          --        --           --      $185,218       $185,218
     Average rate (%)         1.99%         --          --          --        --           --          1.99%
   Certificates of 
     deposit
     Fixed Rate           $237,108     $39,978      $5,315      $2,388      $679           --      $285,468       $287,260
     Average rate (%)         5.02%       5.83%      5.11%        5.10%     5.10%          --          5.13%
     Variable rate          $5,900      $2,616          --          --        --           --        $8,516         $8,516
     Average rate (%)         4.40%       4.40%         --          --        --           --          4.40%
   Long-term debt
     Fixed Rate                 --          --          --          --        --      $23,000       $23,000       $23,288
     Average rate (%)           --          --          --          --        --         8.25%         8.25%
</TABLE>

                                       10
<PAGE>
Interest Sensitivity

    Deregulation of interest rates and  short-term,  interest  bearing  deposits
which are more volatile,  have created a need for shorter  maturities of earning
assets.  As a result,  an increasing  percentage of commercial,  installment and
mortgage  loans are being  made with  variable  rates or shorter  maturities  to
increase liquidity and interest rate sensitivity.

    The  difference  between  interest  sensitive  asset and interest  sensitive
liability  repricing  within time  periods is referred to as the  interest  rate
sensitivity  gap. Gaps are  identified as either  positive  (interest  sensitive
assets  in excess of  interest  sensitive  liabilities)  or  negative  (interest
sensitive liabilities in excess of interest sensitive assets).

    As of December 31, 1998,  BancShares had a negative one year  cumulative gap
position of 30.37%.  BancShares  has interest  earning  assets of $262.3 million
maturing or repricing within one year and interest bearing liabilities of $436.0
million  repricing or maturing  within one year. This is primarily the result of
stable core  deposits  being used to fund longer term interest  earning  assets,
such as loans and investment  securities.  A negative gap position implies that,
in a falling rate  environment,  interest  bearing  liabilities  (deposits) will
reprice at a faster rate than interest  earning assets (loans and  investments).
This  position will  generally  have a positive  effect on earnings,  while in a
rising rate  environment  this position will generally have a negative effect on
earnings.

     BancShares'  core  deposits  of $419.1  million  include  interest  bearing
checking  accounts of $75.3 million.  These deposits are considered as repricing
in the earliest period because the rate can be changed weekly. However,  history
has shown that the decreases in the interest  rates paid on these  deposits have
little, if any, effect on their movement out of Southern. Therefore, in reality,
they are not  sensitive  to changes in market rates and could be  considered  as
non-rate sensitive.

Inflation

    The effect of inflation on financial institutions differs from the impact on
other types of businesses.  Since assets and  liabilities of banks are primarily
monetary in nature,  they are more affected by changes in interest rates than by
the rate of inflation.

    Inflation  generates  increased  credit demand and  fluctuation  in interest
rates.  Although  credit  demand and  interest  rates are not  directly  tied to
inflation, each can significantly impact net interest income. As in any business
or industry, expenses such as salaries, equipment, occupancy and other operating
expenses are also subject to the upward pressures created by inflation.

    Since the rate of  inflation  has been  relatively  stable  during  the last
several years, the impact of inflation on the earnings  presented in this report
is insignificant.

                                CAPITAL RESOURCES

Shareholders' Equity and Capital Adequacy

    Sufficient  levels of capital  are  necessary  to sustain  growth and absorb
losses.  To this  end,  the  Federal  Reserve  Board  ("FRB"),  which  regulates
BancShares,  and the FDIC, which regulates  Southern,  have established  capital
adequacy  guidelines.  These  guidelines  relate to a company's Tier 1 and Total
Risk Based Capital ("RBC") for BancShares and Leverage Capital, Tier 1 and Total
Risk Based  Capital  ("RBC") for  Southern.  In 1998,  BancShares  and  Southern
experienced increases in all regulatory capital ratios.

    Within the RBC calculations,  BancShares' assets,  including  commitments to
lend and other  off-balance  sheet  items,  are  weighted  according  to Federal
regulatory guidelines for the risk considered inherent in the assets. Tier 1 RBC
also is comprised of total  equity and the balance of Capital  Securities,  less
intangible assets and unrealized gains on AFS securities. BancShares' Tier 1 RBC
ratio as of December  31, 1998 was 16.01% which is, along with a ratio of 11.43%
at  December  31,  1997 and 9.33% at  December  31,  1996,  representative  of a
well-capitalized  institution. The calculation of the Total RBC ratio is similar
to that for Tier 1 RBC,  except that it also allows the inclusion of BancShares'
allowance  for loan  losses in  capital,  but only to a maximum of 1.25% of risk
weighted assets. As of December 31, 1998 BancShares' Total RBC ratio was 20.52%,
which is representative of a well-capitalized  institution.  The total RBC ratio
for 1997 was 12.78%  and the total RBC ratio for 1996 was  10.66%  both of which
were  also  representative  of a well  capitalized  financial  institution.  The
increase  in 1998  is  primarily  the  result  of the  issuance  of the  Capital
Securities discussed above.

    BancShares'  primary  source of new capital in 1998 was the  issuance of the
Capital  Securities  discussed  above.  In 1998,  equity  capital also increased
through retention of earnings by $4.8 million.  Retention of earnings  increased
equity capital by $6.0 million in 1997 and by $3.8 million in 1996.  BancShares'
internal capital  generation rate was 11.65% in 1998,  13.19% in 1997, and 9.39%
in 1996.  As of December 31, 1998,  shareholders'  equity  totaled $56.0 million
compared to $55.0 million in 1997. The  shareholders'  equity for 1998 included,
as discussed  above,  $11.4  million of net  unrealized  securities  gains.  The
shareholders' equity for 1997 included, as discussed above, $15.1 million of net
unrealized securities gains.

    The ratio of average  shareholders' equity to average total assets was 9.16%
in 1998 and  8.06% in 1997.  The 1998  increase  was  primarily  the  result  of
increased average retained earnings and increased average net urealized gains on
available-for-sale securities.

    Retention of sufficient  earnings to maintain an adequate  capital  position
that provides  BancShares with expansion  capabilities is an important factor in
determining  dividends.  During 1998,  BancShares  paid  $581,000 in  dividends,
versus  $585,000 in 1997 and $587,000 in 1996.  As a  percentage  of net income,
dividends  were  10.38%  in 1998,  8.85% in 1997 and  13.45%  in 1996.  The 1998
percentage  increase  was  principally  the result of  decreased  1998  earnings
compared  to the 1997  earnings  resulting  from the sale of  available-for-sale
securities in 1998 versus the 1997 sales of available-for-sale securities.

                                       11
<PAGE>
Economy of Eastern North Carolina

    BancShares is  headquartered  and operates  primarily in rural eastern North
Carolina.  Economic  information from state and national sources  indicates that
the  eighteen  counties  served by  Southern  lag the  median  figures  of North
Carolina in the areas of per capita income, family income, and population growth
rates. Between 1980 and 1990,  Southern's market counties experienced a negative
net  migration  of  the  population.  Only  in the  area  of  unemployment  does
Southern's  market area compare favorably to the rest of eastern North Carolina,
but this may be related to the  negative  growth  during the same period and the
agricultural nature of the area.

    Management of BancShares  recognizes  that future growth in BancShares  will
not come from people moving into the markets served by BancShares. Southern must
win customers from other institutions or purchase customers in existing markets,
as it did in 1996, and 1997, or expand into new markets as it did in 1996,  1997
and 1998.

    BancShares  does  anticipate  some  offices of other  institutions  becoming
available in the near future.

Dependence on Local Agriculture and Tobacco Industry

    The tobacco  industry  contributes  significantly  to the economy of eastern
North  Carolina,  especially in the 18 eastern North Carolina  counties in which
Southern operates. For several decades, the tobacco industry, both in the United
States and abroad, has faced, and continues to face, a number of issues that may
adversely affect the volume,  operating revenues,  cash flows,  operating income
and financial position of businesses operating in eastern North Carolina and, by
consequence, BancShares.

    In the United States,  these issues,  include  proposed  federal  regulatory
controls  (including,  as discussed below, the issuance of final  regulations by
the  United  States  Food and Durg  Administration  (the  "FDA")  that  regulate
cigarettes  as "drugs" or "medical  devices");  actual and  proposed  excise tax
increases; actual and proposed federal, state and local governmental and private
bans and  restrictions  on smoking  (including  in  workplaces  and in buildings
permitting  public  access);   actual  and  proposed   restrictions  on  tobacco
manufacturing,  marketing, advertising (including decisions by certain companies
to limit or not accept tobacco advertising) and sales;  proposed legislation and
regulations to require  additional health warnings on cigarette  packages and in
adverising,  and to eliminate the tax  deductability of tobacco  advertising and
promotional  costs;  actual and proposed  requirements  regarding  disclosure of
cigarette  ingredients and other  proprietary  information;  actual and proposed
requirements  regarding  disclosure  of the yields of "tar,"  nicotine and other
constituents  found in cigarette smoke;  increased  assertions of adverse health
effects associated with both smoking and exposure to environmental tobacco smoke
("ETS");  legislation  or other  governmental  action  seeking to ascribe to the
industry  responsibility  and liability for the purported adverse health effects
associated  with both  smoking  and  exposure  to ETS;  the  diminishing  social
acceptance of smoking;  increased pressure from anti-smoking groups; unfavorable
press reports; governmental and grand jury investigations; and increased smoking
and health  litigation,  including private plaintiff class action litigation and
health care cost recovery actions brought by state and local governments, unions
and  others  seeking   reinbursement  for  Medicaid  and/or  other  health  care
expenditures allegedly caused by cigarette smoking.

                          ACCOUNTING AND OTHER MATTERS

    In June 1998,  the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement 133,  "Accounting for Derivative  Instruments and Hedging Activities."
This statement  establishes  accounting  and reporting  standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, and for hedging activities.  It requires that an entity recognize all
derivatives  as either  assets or  liabilities  in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative  depends on the intended use of the  derivative  and the  resulting
designation. This statement is effective for all fiscal quarters of fiscal years
beginning  after June 15, 1999.  Earlier  application  of all provisions of this
statement is encouraged.  BancShares plans to adopt this statement on January 1,
2000 and does not anticipate any material effect on its  consolidated  financial
statements.

    In  October  1998,   the  FASB  issued   Statement  134,   "Accounting   for
Mortgage-Backed  Securities  Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking  Enterprise." This statement allows mortgage
banking firms to account for certain  securities  and other  interests  retained
after  securitizing  mortgage  loans that were held for sale based on the intent
and ability to hold or sell such  investments.  This  statement is effective for
the first fiscal quarter beginning after December 15, 1998.  BancShares plans to
adopt  this  statement  effective  January 1, 1999 and does not  anticipate  any
material effect on its consolidated financial statements.

    The FASB also issues  exposure  drafts for proposed  statements of financial
accounting  standards.  Such  exposure  drafts are  subject to comment  from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of  financial  accounting  standards.  Management  considers  the  effect of the
proposed statements on the consolidated  financial  statements of BancShares and
monitors  the  status of  changes  to issued  exposure  drafts  and to  proposed
effective dates.

                                       12
<PAGE>
Year 2000 Issue

Introduction

The  year  2000  issue  confronting  BancShares  and its  suppliers,  customers,
customers'  suppliers  and  competitors  centers on the  inability  of  computer
systems to recognize the year 2000. Many existing  computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these  programs and computers  will  recognize "00" as the year 1900 rather than
the year 2000. These problems may also arise from other sources as well, such as
the use of special codes and  conventions  in software that make use of the date
field.

Awareness

    Financial  institution  regulators  recently have increased their focus upon
year  2000   compliance   issues  and  have  issued   guidance   concerning  the
responsibilities  of senior  management  and  directors.  The Federal  Financial
Institutions  Examination  Council  ("FFIEC")  has  issued  several  interagency
statements on year 2000.

    These  statements  require  financial  institutions  to, among other things,
examine the year 2000 implications of their reliance on vendors and with respect
to data  exchange  and the  potential  impact  of the year  2000  issue on their
customers, suppliers and borrowers. These statements also require each federally
regulated  financial  institution  to survey its exposure,  measure its risk and
prepare a plan to address the year 2000 issue. In addition,  the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any year 2000
problems.  The federal banking agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's failure to address appropriately the year
2000 issue could result in  supervisory  action,  including the reduction of the
institution's  supervisory  ratings,  the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties. Southern has
addressed, or is in the process of addressing,  each of these areas as discussed
below.

Risks

    Like most financial service providers,  BancShares and its operations may be
significantly  affected  by  the  year  2000  issue  due to  its  dependence  on
information  technology and date sensitive data.  Computer hardware and software
and other equipment,  both within and outside  BancShares'  direct control,  and
third parties with whom BancShares  electronically  or operationally  interfaces
(including  without limitation its customers and third party vendors) are likely
to be  affected.  If computer  systems  are not  modified in order to be able to
identify  the  year  2000,  many  computer  applications  could  fail or  create
erroneous  results.  As a result,  many  calculations  which  rely on date field
information,  such  as  interest,  payment  or due  dates  and  other  operating
functions,  could  generate  results  which  are  significantly  misstated,  and
BancShares  could  experience  an  inability  to process  transactions,  prepare
statements or engage in similar  normal  business  activities.  Likewise,  under
certain circumstances, a failure to adequately address the year 2000 issue could
adversely  affect the viability of  BancShares'  suppliers and creditors and the
creditworthiness of its borrowers.  Thus, if not adequately addressed,  the year
2000  issue  could  result  in  a  significant  adverse  impact  on  BancShares'
operations and, in turn, its financial condition and results of operations.

State of Readiness

    During October 1997,  BancShares developed its plan to address the year 2000
issue.  A  substantial  portion of  BancShares'  data  processing  functions are
performed  by  First-Citizens  Bank & Trust  Company  ("FCB")  on its  mainframe
systems and/or on systems supported by FCB, which also provides similar services
to several other financial institutions. See "Related Parties" in Note 15 of the
"NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS".  Therefore,  BancShares' plan for
addressing  the year 2000 issue  divides  information  technology  systems  ("IT
Systems")  into  groups  which  include  (i) FCB's  mainframe  systems  used for
processing BancShares' data ("Group A Systems"),  (ii) BancShares'  nonmainframe
systems  which are supported by FCB ("Group B Systems"),  and (iii)  BancShares'
separate  nonmainframe  systems ("Group C Systems").  BancShares' year 2000 plan
also addresses noninformation  technology systems ("NonIT Systems"). As to Group
A Systems  and Group B  Systems,  BancShares'  year  2000  plan  necessarily  is
designed  to be  implemented  jointly  with FCB.  FCB has  retained  an  outside
consultant to plan and direct its year 2000 compliance  efforts,  and BancShares
participates in a committee made up of  representatives  of the consultant,  FCB
and each of the financial  institutions  for which FCB provides data  processing
services.  This  committee  meets  periodically  to monitor  the status of FCB's
compliance  efforts.  Periodic progress reports are made to BancShares' Board of
Directors.

                                       13
<PAGE>
    The following paragraphs summarize the phases of BancShares' year 2000 plan:

Assessment Phase

    During the assessment  phase,  a year 2000 corporate  inventory and business
risk  assessment  was made  (jointly with FCB in the case of Group A Systems and
Group B  Systems,  and  separately  in the case of  Group C  Systems  and  NonIT
Systems) to quantify the extent of  BancShares'  year 2000 exposure and identify
systems that required remediation.  Each Group B and C application or system was
given two separate  codes;  a Priority Code and a Status Code. The Priority Code
quantifies  the importance of each asset to BancShares'  daily  operations.  The
Status Code  represents  the current claim of compliance by the asset's  vendor.
Used in concert, these codes prioritize the remediation, testing and contingency
planning processes. This phase is complete.

Remediation and Testing Phase

    With respect to IT Systems,  this phase  contemplates the  implementation of
modifications,  upgrades or system  replacements  determined  to be necessary to
achieve year 2000 compliance and the testing of modified or upgraded  systems to
determine their  functionality and operating  capability.  As to Group A Systems
and Group B Systems,  FCB's outside  consultant is responsible for  coordinating
necessary modifications, upgrades or replacements. This phase has been completed
for all Group A Systems and for higher priority Group B Systems,  and during the
first and  second  quarters  of 1999 the  remaining  Group B  Systems  are to be
completed. As to Group C Systems,  BancShares' staff is coordinating remediation
(which, in most cases,  entails the installation of upgrades provided by outside
vendors) and testing.  This phase has been  completed  for all mission  critical
systems.

Validation Phase

    The validation phase contemplates  testing, in an isolated  environment,  of
the  ability  of new and  modified  systems,  which have been  determined  to be
functional, to accurately process date sensitive data beginning January 1, 2000.
Validation  testing on Group A Systems and Group B Systems is being conducted by
FCB's  outside  consultant  and is expected to be  completed  by March 31, 1999.
BancShares' staff is conducting  validation  testing on Group C Systems which is
expected to be substantially completed by May 30, 1999.

Implementation Phase

    Under  BancShares'  plan, once new and modified systems that require testing
have  been  tested  for  functionality,  they are  being  put  into  production.
BancShares'  target  is to  have  substantially  completed  the  validation  and
implementation phases with respect to substantially all systems by May 30, 1999.

Non-IT Systems, Third Party Service Providers and Loan Customers

    Activities under BancShares' plan with respect to Non-IT Systems  (including
security  systems,   office  equipment,   etc.)  primarily  involve  identifying
potential year 2000 problems and insuring that outside vendors provide necessary
upgrades  or  replacements.  Each  system  has been  assigned  to an  officer of
BancShares  whose  responsibility  it is to communicate  with the vendor of that
system and  coordinate  remediation.  As needed,  validation  testing for Non-IT
Systems is planned for the first and second quarter of 1999.

    During early 1998,  BancShares  identified  those borrowing  customers whose
existing  aggregate  borrowings  from  BancShares met certain  criteria based on
aggregate  credit  exposure,  loan  collateral,  and whose  businesses were of a
nature that they could be adversely  affected by the year 2000 issue.  A meeting
was held individually with each such borrowing customer to assess the customer's
plan for and progress toward addressing the year 2000 issue.  Follow-up meetings
are being held with each  customer  whose  assessment  indicated  a higher  than
typical level of risk.  With respect to new and renewed loans,  an assessment of
year 2000 risk and steps  being  taken by the  customer to address the year 2000
issue have been made a part of the credit approval process.

Costs

    BancShares is expensing all costs associated with required system changes as
those costs are incurred, and such costs are being funded through operating cash
flows.  Because a substantial  portion of BancShares' data processing  functions
are performed by FCB on its  mainframe  systems  and/or on systems  supported by
FCB,  FCB is  bearing a  substantial  portion  of the  expenses  related  to the
remediation  and  testing of systems  that  affect  BancShares.  BancShares  has
budgeted $200,000 for its separate year 2000 project expenses. Expenses actually
incurred through December 31, 1998 were not material. BancShares does not expect
significant  increases  in future data  processing  costs  relating to year 2000
compliance.

                                       14
<PAGE>
Contingency Plans

    During  the  assessment  phase,  BancShares  began to  identify  a backup or
contingency  plan for  systems or non-IT  assets  which may be  affected by year
2000.  Virtually  all of  BancShares'  systems  are  dependent  upon third party
vendors or service providers;  therefore,  contingency plans include selecting a
new  vendor or service  provider  and  converting  to their  system.  BancShares
believes  its most  likely  worst  case  scenario  will be a failure  by certain
customers  and vendors to achieve  year 2000  readiness.  Contingency  plans are
already active for BancShares'  most reasonably  likely worst case scenario.  In
the event a current  vendor's system fails during the validation phase and it is
determined  that the  vendor is unable or  unwilling  to  correct  the  failure,
BancShares will convert to a new system.  In each case,  realistic trigger dates
have  been  established  to  allow  for  orderly  and  successful   conversions.
Preliminary  contingency  plans for system  failures on or after January 1, 2000
have been developed. These plans will be refined when the validation and testing
phases are complete.

Planned Acquisition

    On March  12,  1999  BancShares  announced  plans to  purchase,  subject  to
regulatory  approval,  the Ahoskie branch of First-Citizens Bank &Trust Company.
This acquisition,  planned for the third quarter of 1999, will increase deposits
by approximately $16.0 million and loans by approximately $8.0 million.

    Management is not aware of any other known trends, events, uncertainties, or
current  recommendations  by regulatory  authorities  that will have or that are
reasonably  likely to have a material effect on BancShares'  liquidity,  capital
resources or other operations.

    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS:

    There is no active trading market for BancShares'  common or preferred stock
although isolated  transactions  occur from time to time. Prices for BancShares'
common  and  preferred  stock  listed  in  the  following  table  are  based  on
management's knowledge of the most recent sales prices for specific transactions
of each security.

    The approximate  number of record holders of BancShares'  outstanding common
stock at December 31, 1998 was 349. Dividends paid to shareholders of BancShares
are dependent upon dividends  received by BancShares from Southern.  Southern is
restricted as to dividend  payout by state laws  applicable to banks and may pay
dividends only out of undivided profits.  Should at any time its surplus be less
than 50% of its paid-in capital stock, Southern may not declare a dividend until
it has  transferred  from  undivided  profits to surplus,  25% of its  undivided
profits or any lesser  percentage that may be required to restore its surplus to
an amount equal to 50% of its paid-in capital stock.

    Additionally,  dividends  paid by  Southern  may be  limited  by the need to
retain sufficient  earnings to satisfy minimum capital  requirements  imposed by
the Federal Deposit Insurance Corporation. Dividends on BancShares' common stock
may be paid only after  dividends  on  preferred  Series "B" and "C" shares have
been paid.  Common share dividends are based upon BancShares'  profitability and
are paid at the discretion of the Board of Directors. Management does not expect
any of the  foregoing  restrictions  to  materially  limit  its  ability  to pay
dividends comparable to those paid in the past.

    Common  shareholders  are entitled to one vote per share and both classes of
preferred  stockholders  are  entitled to one vote for each 38 shares owned of a
class.

                           FORWARD-LOOKING STATEMENTS

    The  foregoing  discussion  may  contain  statements  that  could be  deemed
forward-looking  statements  within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private  Securities  Litigation  Reform Act,  which
statements are inherently  subject to risks and  uncertainties.  Forward-looking
statements are statements that include projections, predictions, expectations or
beliefs  about  future  events or results or  otherwise  are not  statements  of
historical  fact.  Such  statements  are  often  characterized  by  the  use  of
qualifying  words  (and  their   derivatives)   such  as  "expect,"   "believe,"
"estimate,"  "plan,"  "project"  or  other  statements  concerning  opinions  or
judgment of BancShares  and its  management  about future  events.  Factors that
could influence the accuracy of such forward-looking statements include, but are
not limited to, the  financial  success or changing  strategies  of  BancShares'
customers, actions of government regulators, the level of market interest rates,
and general economic conditions.

                                       15
<PAGE>
<TABLE>
<CAPTION>
SELECTED QUARTERLY DATA
                                                          1998                                    1997
                                 ---------------------------------------      -----------------------------------------
                                     Fourth    Third     Second    First      Fourth        Third      Second     First
                                 ---------------------------------------      -----------------------------------------
                                                    (thousands except per share data and ratios)
<S>                              <C>          <C>       <C>       <C>       <C>          <C>         <C>         <C>   
SUMMARY OF OPERATIONS

Interest income ..............   $   10,593   $10,515   $10,501   $10,093   $   10,100   $   9,989   $   9,711   $9,255
Interest expense .............        5,271     5,086     5,169     4,802        4,881       4,845       4,738    4,363
-----------------------------------------------------------------------------------------------------------------------
Net interest income ..........        5,322     5,429     5,332     5,291        5,219       5,144       4,973    4,892
Provision for loan losses ....          .15        20        60        60         --          --          --         60
-----------------------------------------------------------------------------------------------------------------------
Net income after provision for
     loan losses .............        5,307     5,409     5,272     5,231        5,219       5,144       4,973    4,832
Noninterest income ...........        1,107     1,392     1,219     2,933        3,234       1,166         979    4,470
Noninterest expense ..........        5,195     5,118     5,113     4,788        5,046       4,874       4,679    8,465
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes ...        1,219     1,683     1,378     3,376        3,407       1,436       1,273      837
Income taxes .................          330       470       451       809          100          30         130       80
-----------------------------------------------------------------------------------------------------------------------
Net income ...................   $      889   $ 1,213   $   927   $ 2,567   $    3,307   $   1,406   $   1,143   $  757
Net income applicable to
    common shares ............   $      788   $ 1,110   $   828   $ 2,468   $    3,203   $   1,303   $   1,045   $  657

PER SHARE OF STOCK

Net income per share of common
    stock ....................         6.63      9.27      6.91     20.58        26.71       10.87        8.71     5.48
Cash dividends - common ......         0.38      0.37      0.37      0.38         0.38        0.38        0.37     0.37
Cash dividends - preferred B .         0.23      0.23      0.22      0.22         0.23        0.23        0.22     0.22

Cash dividends - preferred C .         0.23      0.23      0.22      0.22         0.23        0.23        0.22     0.22

Common sales price
    High .....................       175.00    175.00    175.00    175.00       175.00      175.00      175.00   175.00
    Low ......................       175.00    175.00    175.00    175.00       175.00      175.00      175.00   175.00
Preferred B sales price
    High .....................        11.25     11.25     11.25     11.25        11.25       11.25       11.25    11.25
    Low ......................        11.25     11.25     11.25     11.25        11.25       11.25       11.25    11.25
Preferreed C sales price
    High .....................        11.25     11.25     11.25     11.25        11.25       11.25       11.25    11.25
    Low ......................        11.25     11.25     11.25     11.25        11.25       11.25       11.25    11.25
</TABLE>


                                       16
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Southern BancShares (N.C.), Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets  of  Southern
BancShares (N.C.), Inc. and subsidiaries (the "Company") as of December 31, 1998
and 1997,  and the related  consolidated  statements  of income,  cash flows and
changes in shareholders'  equity for each of the years in the three-year  period
ended  December  31,  1998.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Southern BancShares
(N.C.),  Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

                                  /s/KPMG LLP


Raleigh, North Carolina
February 10, 1999

                                       17
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.) INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
                                                                                           December 31
-------------------------------------------------------------------------------------------------------------
                                                                                        1998         1997
-------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>          <C>      
ASSETS

Cash and due from banks .........................................................   $  37,419    $  28,381
Federal funds sold ..............................................................      19,535       10,240

Investment securities:
     Held-to-maturity, at amortized cost
     (fair value of $93,511 and $57,294, respectively) ..........................      92,340       56,281
     Available-for-sale, at fair value
     (amortized cost of $92,012 and $100,978, respectively) .....................     109,227      123,852
Loans ...........................................................................     364,489      349,216
     Less allowance for loan losses .............................................      (5,962)      (5,971)
-------------------------------------------------------------------------------------------------------------
Net loans .......................................................................     358,527      343,245
Premises and equipment ..........................................................      18,902       18,157
Accrued interest receivable .....................................................       4,571        4,205
Intangible assets ...............................................................       6,972        5,643
Other assets ....................................................................       1,932          748
-------------------------------------------------------------------------------------------------------------
         Total assets ...........................................................   $ 649,425    $ 590,752
=============================================================================================================
<PAGE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.) INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
                                                                                           December 31
-------------------------------------------------------------------------------------------------------------
                                                                                        1998         1997
-------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>          <C>      
LIABILITIES
Deposits:

     Noninterest-bearing ........................................................   $  77,550    $  66,565
     Interest-bearing ...........................................................     479,202      446,763
-------------------------------------------------------------------------------------------------------------
Total deposits ..................................................................     556,752      513,328
Short-term borrowings ...........................................................       5,124        6,826
Long-term obligations ...........................................................      23,000        4,750
Accrued interest payable ........................................................       4,505        4,394
Other liabilities ...............................................................       4,011        6,470
-------------------------------------------------------------------------------------------------------------
         Total liabilities ......................................................     593,392      535,768
-------------------------------------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Series B non-cumulative preferred stock, no par value; 408,728 shares authorized;
     398,653 and 405,645 shares issued and outstanding at December 31, 1998 and
     December 31, 1997, respectively ............................................       1,942        1,976
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized;
     40,373 and 43,631 shares issued and outstanding at December 31, 1998 and
     December 31, 1997, respectively ............................................         562          578
Common  stock, $5  par  value; 158,485 shares authorized; 119,266 and    
     119,918 shares issued and outstanding at December 31, 1998 and
     December 31, 1997, respectively ............................................         596          600
Surplus .........................................................................      10,000       10,000
Retained earnings ...............................................................      31,571       26,733
Accumulated other comprehensive income ..........................................      11,362       15,097
-------------------------------------------------------------------------------------------------------------
         Total shareholders' equity .............................................      56,033       54,984
-------------------------------------------------------------------------------------------------------------
         Total liabilities and shareholders' equity .............................   $ 649,425    $ 590,752
=============================================================================================================
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       18
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share and per share data)

Year ended December 31,

                                                                1998        1997       1996
----------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>        <C>      
Interest income:

   Loans ................................................   $  31,000    $ 29,225   $  26,878
   Investment securities:
    U. S. Government ....................................       7,149       6,353       6,756
    State, county and municipal .........................       1,792       2,057       2,163
    Other ...............................................         789         797         577
----------------------------------------------------------------------------------------------

        Total investment securities interest income .....       9,730       9,207       9,496
  Federal funds sold ....................................         972         623         402
----------------------------------------------------------------------------------------------
         Total interest income ..........................      41,702      39,055      36,776

Interest expense:

   Deposits .............................................      18,716      18,229      16,933
   Short-term borrowings ................................         292         303         400
   Long-term obligations ................................       1,320         295         117
----------------------------------------------------------------------------------------------

      Total interest expense ............................      20,328      18,827      17,450
----------------------------------------------------------------------------------------------

      Net interest income ...............................      21,374      20,228      19,326
Provision for loan losses ...............................         155          60         140
----------------------------------------------------------------------------------------------
      Net interest income after provision for loan losses      21,219      20,168      19,186

Noninterest income:

   Service charges on deposit accounts ..................       3,199       2,918       2,664
   Other service charges and fees .......................       1,129         868         780
   Investment securities gains, net .....................       1,789       5,567         460
   Insurance commissions ................................          72          90         145
   Gain (loss) on sale of loans .........................        (112)         52        (158)
   Other ................................................         574         354         617
----------------------------------------------------------------------------------------------

      Total noninterest income ..........................       6,651       9,849       4,508
<PAGE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share and per share data)

Year ended December 31,

                                                                1998        1997       1996
----------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>        <C>      
Noninterest expense:

   Personnel ............................................       9,501       8,763       7,975
   Intangibles amortization .............................       1,534       1,755       1,638
   Data processing ......................................       2,001       1,598       1,440
   Furniture and equipment ..............................       1,502       1,633       1,314
   Occupancy ............................................       1,567       1,388       1,203
   FDIC insurance assessment ............................         115         112         772
   Charitable contributions .............................           2       4,076         589
   Other ................................................       3,992       3,739       3,272
----------------------------------------------------------------------------------------------
     Total noninterest expense ..........................      20,214      23,064      18,203
----------------------------------------------------------------------------------------------
Income before income taxes ..............................       7,656       6,953       5,491
Income taxes ............................................       2,060         340       1,127
----------------------------------------------------------------------------------------------

        Net income ......................................       5,596       6,613       4,364
----------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:

   Unrealized (losses) gains arising during period ......      (2,554)      7,875       4,154
   Less: reclassification adjustment for gains included
        in net income ...................................       1,181       3,674         304
----------------------------------------------------------------------------------------------
        Comprehensive income ............................   $   1,861    $ 10,814   $   8,214
==============================================================================================
Per share information:

   Earnings per common share ............................   $   43.40    $  51.77   $   33.00
   Cash dividends declared on common shares .............        1.50        1.50        1.50
   Weighted average common shares outstanding ...........     119,685     119,918     119,918
==============================================================================================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       19
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                                                                                            Year ended December 31,
                                                                                   1998             1997            1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>               <C>             <C>    
OPERATING ACTIVITIES:
   Net income .................................................................. $ 5,596           $ 6,613       $ 4,364
   Adjustments to reconcile net income to net cash
   provided by operating activities:
      Provision for loan losses ................................................     155                60             140
      Contribution expense for donation of marketable equity securities ........      --             4,071             536
      Gain on contribution of marketable equity securities .....................      --            (3,529)           (458)
      Gains on sales and issuer calls of securities ............................  (1,789)           (2,038)             (2)
      Loss on sale and abandonment of premises and equipment ...................     116               317              55
      Loss (gain) on sale of loans .............................................     112               (52)            158
      Net accretion on discounts on investments ................................     (54)              (88)            (66)
      Amortization of intangibles ..............................................   1,534             1,755           1,638
      Depreciation .............................................................   1,394             1,139             963
      Net increase in accrued interest receivable ..............................    (366)             (206)            (28)
      Net increase (decrease) in accrued interest payable ......................     111             1,190            (287)
      Net (increase) decrease in other assets ..................................  (1,006)            1,754          (1,824)
      Net (decrease) increase in other liabilities .............................    (674)           (1,339)          2,275
---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......................................   5,129             9,647           7,464
---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
   Proceeds from maturities and issuer calls of
      investment securities available-for-sale .................................  46,625            25,798             111
   Proceeds from maturities and issuer calls of
      investment securities held-to-maturity ...................................   5,569            43,856          53,749
   Proceeds from sales of investment securities available-for-sale .............   1,976            2,246             105
   Purchases of investment securities held-to-maturity ......................... (42,786)          (37,261)        (11,414)
   Purchases of investment securities available-for-sale ....................... (32,046)          (38,134)        (58,592)
   Net decrease (increase) in loans ............................................   1,392           (30,269)        (24,748)
   Purchases of fixed assets ...................................................  (1,653)           (4,084)         (4,557)
   Sales of fixed assets .......................................................      48               185              97
   Proceeds from net cash received for bank and branches acquired ..............  13,144            17,966           3,380
---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN  INVESTING ACTIVITIES .........................................  (7,731)          (19,697)        (41,869)
---------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                                                                                            Year ended December 31,
                                                                                   1998             1997            1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>               <C>             <C>    
FINANCING ACTIVITIES:
   Net increase (decrease) in demand and
      interest-bearing demand deposits .........................................  14,592            (4,658)         15,455
      Net (decrease) increase in time deposits .................................  (8,531)           16,360           6,713
   Proceeds from issuance of long-term obligations .............................  23,000             5,000              --
   Debt issuance costs .........................................................    (862)               --              --
   Payments of long-term obligations ...........................................  (4,750)           (1,650)         (1,200)
   Net (repayments) proceeds of short-term borrowed funds ......................  (1,702)            1,762           3,595
   Cash dividends paid .........................................................    (581)             (585)           (587)
   Purchase and retirement of stock ............................................    (231)              (23)            (12)
---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......................................  20,935            16,206          23,964
---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)  IN CASH AND
   CASH EQUIVALENTS ............................................................ $18,333          $  6,156        $(10,441)
CASH AND CASH EQUIVALENTS AT
   THE BEGINNING OF YEAR .......................................................  38,621            32,465          42,906
---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR ................................... $56,954           $38,621         $32,465
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING
   THE YEAR FOR:
   Interest .................................................................... $20,217           $17,637         $17,737
   Income taxes ................................................................ $ 2,977           $ 1,776         $ 1,085
===========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
   AND FINANCING ACTIVITIES:
  Unrealized gain (loss) on securities available for sale ...................... ($5,659)          $ 6,365         $ 5,833
===========================================================================================================================
</TABLE>



              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       20
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands except per share data)

                                                                                                   
                                               Preferred Stock                                              Accumulated             
                                      ----------------------------------       Common                         Other                 
                                         Series B           Series C            Stock                         Compre-    Total      
                                      ---------------   ----------------  --------------           Retained   hensive  Shareholders'
                                      Shares   Amount   Shares    Amount  Shares   Amount Surplus  Earninmgs  Income     Equity
                                      ------   ------   ------    ------  ------   ------ -------  ---------  ------     ------
<S>                                  <C>       <C>      <C>        <C>   <C>        <C>   <C>      <C>      <C>       <C>    
BALANCE, DECEMBER 31, 1995           408,728   $1,991   43,631     $578  119,918    $600  $10,000  $16,948  $ 7,046   $37,163
Net income                                --       --       --       --       --      --       --   4,364        --     4,364
Retirement of stock                     (976)      (5)      --       --       --      --       --       (7)      --       (12)
Cash dividends:
     Common stock ($1.50 per share)       --       --       --       --       --      --       --     (180)      --      (180)
     Preferred B ($.90 per share)         --       --       --       --       --      --       --     (368)      --      (368)
     Preferred C ($.90 per share)         --       --       --       --       --      --       --      (39)      --       (39)
Unrealized gain on securities
     available-for-sale,
     net of tax                           --       --       --       --       --      --       --       --     3,850    3,850
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996           407,752   $1,986   43,631     $578  119,918    $600  $10,000  $20,718  $10,896   $44,778
-----------------------------------------------------------------------------------------------------------------------------

Net income                                --       --       --       --       --      --       --    6,613       --     6,613
Retirement of stock                   (2,107)     (10)      --       --       --      --       --      (13)      --       (23)
Cash dividends:
     Common stock ($1.50 per share)       --       --       --       --       --      --       --     (180)      --      (180)
     Preferred B ($.90 per share)         --       --       --       --       --      --       --     (366)      --      (366)
     Preferred C ($.90 per share)         --       --       --       --       --      --       --      (39)      --       (39)
Unrealized gain on securities
     available-for-sale,
     net of tax                          --        --       --       --       --      --       --       --    4,201     4,201
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997           405,645   $1,976   43,631     $578  119,918    $600  $10,000  $26,733  $15,097   $54,984
-----------------------------------------------------------------------------------------------------------------------------

Net income                                --       --       --       --       --      --       --    5,596       --     5,596
Retirement of stock                   (6,992)     (34)  (3,258)     (16)    (652)     (4)      --     (177)      --      (231)
Cash dividends:
     Common stock ($1.50 per share)       --       --       --       --       --      --       --     (179)      --      (179)
     Preferred B ($.90 per share)         --       --       --       --       --      --       --     (363)      --      (363)
     Preferred C ($.90 per share)         --       --       --       --       --      --       --      (39)      --       (39)
Unrealized loss on securities
     available-for-sale,
     net of tax                          --        --       --       --       --      --       --       --   (3,735)   (3,735)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998           398,653   $1,942   40,373     $562  119,266    $596  $10,000  $31,571  $11,362   $56,033
=============================================================================================================================
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       21
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

Note 1.           Summary of Significant Accounting Policies

                  BancShares

                  Southern BancShares (N.C.), Inc. ("BancShares") is the holding
                  company  for  Southern  Bank and Trust  Company  ("Southern"),
                  which operates 45 banking  offices in eastern North  Carolina,
                  and Southern Capital Trust I, a statutory  business trust that
                  issued $23.0 million of 8.25% Capital Securities (the "Capital
                  Securities")  in June 1998 maturing in 2028.  Southern,  which
                  began operations in January,  1901, has a non-bank subsidiary,
                  Goshen, Inc., whose insurance agency operations complement the
                  operations  of  its  parent.   Southern  and   BancShares  are
                  headquartered in Mount Olive,  North Carolina.  BancShares has
                  no  foreign   operations   and   BancShares'   customers   are
                  principally located in eastern North Carolina.

                  Principles of Consolidation

                  The consolidated  financial statements include the accounts of
                  BancShares  and its  wholly-owned  subsidiaries,  Southern and
                  Southern  Capital  Trust I. The  statements  also  include the
                  accounts  of  Goshen,   Inc.  a  wholly-owned   subsidiary  of
                  Southern.   BancShares'   financial  resources  are  primarily
                  provided by dividends  from Southern and there are no material
                  differences  between the results of  operations  or  financial
                  position  of  BancShares  and  of  Southern.  All  significant
                  intercompany balances have been eliminated in consolidation.

                  Basis of Financial Statement Presentation

                  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
                  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.  The
                  most   significant   estimates   made  by  BancShares  in  the
                  preparation of its consolidated  financial  statements are the
                  determination  of the allowance for loan losses and fair value
                  estimates for financial instruments.

                  Reclassifications

                  Certain prior year balances have been  reclassified to conform
                  to the current year presentation.  Such  reclassifications had
                  no effect on net income or shareholders'  equity as previously
                  reported.

                  Cash and Cash Equivalents

                  For   purposes  of  reporting   cash  flows,   cash  and  cash
                  equivalents  include cash and due from banks and federal funds
                  sold.  Federal  funds  are  purchased  and  sold  for  one day
                  periods.

                  Investment Securities

                  BancShares  accounts  for  investment   securities  under  the
                  provisions  of  Statement of  Financial  Accounting  Standards
                  ("Statement") No. 115,  "Accounting for Certain Investments in
                  Debt and  Equity  Securities".  Statement  115  requires  that
                  investments   in  certain  debt  and  equity   securities   be
                  classified as either:  held-to-maturity (reported at amortized
                  cost),  trading  (reported at fair value with unrealized gains
                  and  losses  included  in  earnings),   or  available-for-sale
                  (reported  at fair  value  with  unrealized  gains and  losses
                  excluded  from earnings and  reported,  net of related  income
                  taxes, as a separate component of shareholders' equity).

                  BancShares'   investment  securities  are  classified  in  two
                  categories as follows:

                  -  Securities  held-to-maturity:  Securities  held-to-maturity
                     consist of debt  instruments  for which  BancShares has the
                     positive intent and ability to hold to maturity.

                  -  Securities  available-for-sale:  Securities  available-for-
                     sale  consist  of  certain  debt  and   marketable   equity
                     securities  not  classified  as trading  securities  nor as
                     securities  held-to-maturity,  and  consist  of  securities
                     which may be sold in response to changes in interest rates,
                     prepayment  risk,   regulatory  capital   requirements  and
                     liquidity needs.

                                       22
<PAGE>
                  Gains and losses on the sale and  contribution  of  securities
                  available-for-sale      are      determined      using     the
                  specific-identification  method.  Premiums and  discounts  are
                  amortized into income on a level yield basis.

                  Loans

                  Loans are stated at principal amounts outstanding,  reduced by
                  unearned income and an allowance for loan losses.

                  Southern  originates  certain  residential  mortgages with the
                  intent to sell. Such loans held-for-sale are included in loans
                  in the accompanying  consolidated  balance sheets at the lower
                  of cost or fair value as determined by outstanding commitments
                  from investors or current quoted market prices.

                  Interest income on substantially  all loans is recognized in a
                  manner that  approximates  the level yield method when related
                  to the principal  amount  outstanding.  Accrual of interest is
                  discontinued on a loan when management believes the borrower's
                  financial  condition is such that  collection  of principal or
                  interest is doubtful. Loans are returned to the accrual status
                  when the factors indicating doubtful  collectibility  cease to
                  exist.

                  Management  considers  a loan to be  impaired  when  based  on
                  current  information or events, it is probable that a borrower
                  will  be  unable  to pay  all  amounts  due  according  to the
                  contractual  terms of the loan  agreement.  Impaired loans are
                  valued using either the  discounted  expected cash flow method
                  or the collateral value.  When the ultimate  collectibility of
                  the impaired loan's  principal is doubtful,  all cash receipts
                  are applied to principal.  Once the recorded principal balance
                  has been reduced to zero,  future cash receipts are applied to
                  interest  income,  to the extent  that any  interest  has been
                  foregone.  Future cash  receipts are recorded as recoveries of
                  any amounts previously charged-off.

                  Southern  provides an  allowance  for loan losses on a reserve
                  basis and includes in operating  expenses a provision for loan
                  losses  determined by management.  The allowance is reduced by
                  charge-off's   and   increased   by   subsequent   recoveries.
                  Management's  periodic  evaluation  of  the  adequacy  of  the
                  allowance is based on  Southern's  past loan loss  experience,
                  known and inherent risks in the portfolio,  adverse situations
                  that may affect the borrower's experience, the estimated value
                  of any underlying collateral,  current economic conditions and
                  other risk factors. Management believes it has established the
                  allowance in accordance  with  generally  accepted  accounting
                  principles  and  in  consideration  of  the  current  economic
                  environment.   While  management  uses  the  best  information
                  available  to  make  evaluations,  future  adjustments  may be
                  necessary   if   economic   and   other   conditions    differ
                  substantially from the assumptions used.

                  In addition,  various regulatory agencies, as an integral part
                  of their examination  process,  periodically review Southern's
                  allowance  for loan  losses and  losses on other  real  estate
                  owned.   Such  agencies  may  require  Southern  to  recognize
                  additions to the allowances based on the examiners'  judgments
                  about  information  available  to  them at the  time of  their
                  examinations.

                  Premises and Equipment

                  Premises  and  equipment  are stated at cost less  accumulated
                  depreciation and  amortization.  Depreciation and amortization
                  are computed using the straight-line method over the estimated
                  lives  of the  assets,  ranging  from  15 to  31.5  years  for
                  buildings and improvements and 3 to 10 years for furniture and
                  equipment.

                  Intangible Assets

                  Intangible  assets,  primarily  core deposit  intangibles  and
                  goodwill, are generally amortized on an accelerated basis over
                  a period of 5 to 10 years.  Intangible  assets are  subject to
                  periodic review and are adjusted for any impairment of value.

                  Income Taxes

                  BancShares uses the asset and liability  method to account for
                  deferred  income  taxes.   The  objective  of  the  asset  and
                  liability  method is to  establish  deferred  tax  assets  and
                  liabilities   for  the  temporary   differences   between  the
                  financial   reporting  basis  and  the  income  tax  basis  of
                  BancShares'  assets and  liabilities at enacted rates expected
                  to be in effect when such amounts are realized or settled.

                                       23
<PAGE>
                  BancShares files a consolidated federal income tax return with
                  Southern and its subsidiary  The method of allocating  federal
                  income  tax  expense  is  determined  under  a tax  allocation
                  agreement  between  BancShares  and  the  subsidiaries.   This
                  allocation agreement specifies that income tax expense will be
                  computed for subsidiaries on a separate company basis.

                  Recognition  of deferred  tax assets is based on  management's
                  belief that it is "more  likely than not" that the tax benefit
                  associated  with  certain   temporary   differences   will  be
                  realized.  A valuation  allowance is recorded for deferred tax
                  assets when the "more likely than not" standard is not met.

                  Shareholders' Equity

                  Common  shareholders  are  entitled  to one vote per share and
                  both  classes of  preferred  shareholders  are entitled to one
                  vote  for  each 38  shares  owned  of a  class.  Dividends  on
                  BancShares'  common  stock  may  be  paid  only  after  annual
                  dividends of $.90 per share on both  preferred  series "B" and
                  "C" shares have been paid.

                  Earnings Per Common Share

                  Statement   128  "Earnings   per  Share"   ("Statement   128")
                  establishes  standards for computing and  presenting  earnings
                  per share  ("EPS") and applies to entities  with publicly held
                  common stock or potential common stock.

                  Earnings  per common  share is  computed  by  dividing  income
                  applicable to common shares by the weighted  average number of
                  common shares outstanding during the period. Income applicable
                  to common shares  represents  net income  reduced by dividends
                  paid to preferred shareholders.  BancShares has no potentially
                  dilutive securities.

                  Earnings  per  common  share  are  calculated   based  on  the
                  following amounts for the years ended December 31:
<TABLE>
<CAPTION>
                                               1998         1997         1996
--------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>      
Net income ..............................   $   5,596    $   6,613    $   4,364
Less: Preferred dividends ...............        (402)        (405)        (407)
--------------------------------------------------------------------------------
Net income applicable to common  shares .   $   5,194    $   6,208    $   3,957
================================================================================
Weighted average common shares
   outstanding during the period ........     119,685      119,918      119,918
================================================================================
</TABLE>
<PAGE>
                  Comprehensive Income

                  In  June  1997,  the  Financial   Accounting  Standards  Board
                  ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income"
                  ("Statement  130").  Statement 130  establishes  standards for
                  reporting  and  display  of   comprehensive   income  and  its
                  components  in  a  full  set  of   general-purpose   financial
                  statements.  It does not  address  issues  of  recognition  or
                  measurement  for  comprehensive  income  and  its  components.
                  BancShares  adopted this  statement  for its annual  financial
                  statements  in  1998,  reclassifying  prior  period  financial
                  statements  for  comparative   purposes.   Accumulated   other
                  comprehensive  income  consists  entirely of  unrealized  gain
                  (loss) on securities available for sale.

                  The tax effects of other  comprehensive  income  components as
                  displayed  in the  consolidated  statements  of income  are as
                  follows for the years ended December 31:
<TABLE>
<CAPTION>
                                                        1998       1997    1996
--------------------------------------------------------------------------------
<S>                                                   <C>        <C>      <C>   
Unrealized (losses) gains arising during period ...   $(1,316)   $4,057   $2,139
Less: Reclassification adjustment for gains
      included in net income ......................       608     1,893      156
--------------------------------------------------------------------------------
Total tax effect ..................................   $(1,924)   $2,164   $1,983
================================================================================
</TABLE>

                                       24
<PAGE>
                  Segment Reporting

                  In June 1997, the FASB issued SFAS No. 131, "Disclosures about
                  Segments of an Enterprise and Related Information" ("Statement
                  131"). Statement 131 requires that public business enterprises
                  report  certain   information  about  operating   segments  in
                  complete sets of financial  statements issued to shareholders.
                  It also  requires  that  public  business  enterprises  report
                  certain  information  about their  products and services,  the
                  geographic  areas  in  which  they  operate  and  their  major
                  customers.  The  provisions of Statement 131 are effective for
                  fiscal years  beginning  after December 15, 1997.  Adoption of
                  this   pronouncement   did  not  have  a  material  effect  on
                  BancShares'  consolidated  financial  statements as BancShares
                  has no operating segments as defined by Statement 131.

                  Disclosures About Pensions

                  In February 1998, the FASB issued  Statement 132,  "Employers'
                  Disclosures about Pensions and other Postretirement Benefits."
                  This statement  standardizes  the disclosure  requirements  of
                  pensions  and  other  postretirement  benefits.   Adoption  of
                  Statement 132 by  BancShares  did not result in changes to any
                  measurement  or  recognition  provisions,  but has resulted in
                  altered disclosures relating to pension obligations.

                  New Accounting Standards

                  In June 1998, the FASB issued  Statement 133,  "Accounting for
                  Derivative Instruments and Hedging Activities." This statement
                  establishes  accounting and reporting standards for derivative
                  instruments, including certain derivative instruments embedded
                  in other contracts,  and for hedging  activities.  It requires
                  that an entity  recognize all  derivatives as either assets or
                  liabilities in the balance sheet and measure those instruments
                  at fair value. The accounting for changes in the fair value of
                  a derivative depends on the intended use of the derivative and
                  the resulting designation. This statement is effective for all
                  fiscal quarters of fiscal years beginning after June 15, 1999.
                  Earlier  application  of all  provisions of this  statement is
                  encouraged.  BancShares  plans  to  adopt  this  statement  on
                  January 1, 2000 and does not anticipate any material effect on
                  its consolidated financial statements.

                  In October 1998, the FASB issued  Statement  134,  "Accounting
                  for    Mortgage-Backed    Securities    Retained   after   the
                  Securitization  of Mortgage  Loans Held for Sale by a Mortgage
                  Banking  Enterprise."  This statement  allows mortgage banking
                  firms to account for certain  securities  and other  interests
                  retained after securitizing  mortgage loans that were held for
                  sale  based on the  intent  and  ability  to hold or sell such
                  investments.  This statement is effective for the first fiscal
                  quarter beginning after December 15, 1998. BancShares plans to
                  adopt this  statement  effective  January 1, 1999 and does not
                  anticipate any material effect on its  consolidated  financial
                  statements.
<PAGE>
Note 2.           Investment Securities

                  The  amortized  cost and  estimated  fair values of investment
                  securities at December 31 were as follows:
<TABLE>
<CAPTION>
                                                               1998                                           1997
------------------------------------------------------------------------------------------------------------------------------------
                                                       Gross        Gross     Estimated                 Gross      Gross   Estimated
                                         Amortized   Unrealized  Unrealized     Fair      Amortized  Unrealized  Unrealized   Fair
                                           Cost        Gains       Losses       Value       Cost        Gains    Losses       Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>         <C>           <C>     <C>       <C>         <C>            <C>    <C>    
SECURITIES
HELD-TO-MATURITY:

  U. S. Government ..................   $ 72,070       360         (41)    72,389   $ 33,969       122        --       34,091
  Obligations of states and
    political subdivisions ..........     20,170       850        --       21,020     22,212       890        --       23,102
  Corporate debenture ...............        100         2        --          102        100         1        --          101
------------------------------------------------------------------------------------------------------------------------------------
                                          92,340     1,212         (41)    93,511     56,281     1,013        --       57,294
------------------------------------------------------------------------------------------------------------------------------------
SECURITIES
AVAILABLE-FOR-SALE:

  U. S. Government ..................     71,046       369        (135)    71,280     82,471       130          (9)    82,592
  Marketable equity securities ......     10,747    16,867        (487)    27,127      8,119    22,183          (8)    30,294
  Obligations of states and
    political subdivisions ..........      8,539       573          (1)     9,111      8,411       527        --        8,938
  Mortgage-backed securities ........      1,680        38          (9)     1,709      1,977        51        --        2,028
------------------------------------------------------------------------------------------------------------------------------------
                                          92,012    17,847        (632)   109,227    100,978    22,891         (17)   123,852
------------------------------------------------------------------------------------------------------------------------------------
TOTALS ..............................   $184,352    19,059        (673)   202,738   $157,259    23,904         (17)   181,146
====================================================================================================================================
</TABLE>

                  Securities  with  a par  value  of  $55,184  were  pledged  at
                  December  31,  1998 to secure  public  deposits  and for other
                  purposes as required by law and contractual arrangement.

                                       25
<PAGE>
                  The amortized cost and estimated fair value of debt securities
                  at December  31,  1998,  by  contractual  maturity,  are shown
                  below.   Expected  maturities  will  differ  from  contractual
                  maturities  because  issuers  may  have  the  right to call or
                  prepay   obligations   with  or  without  call  or  prepayment
                  penalties.
<TABLE>
<CAPTION>
                                                                             Amortized          Fair
                                                                                Cost            Value
---------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>     
Securities held-to-maturity:
  Due in one year or less ................................................   $38,519         $  38,643
  Due after one year through five years ..................................     46,085           46,400
  Due after five years through ten years .................................      5,522            5,869
  Due after ten years ....................................................      2,214            2,599
---------------------------------------------------------------------------------------------------------
 .........................................................................     92,340           93,511
=========================================================================================================
Available-for-sale securities:
  Due in one year or less ................................................     41,180           41,416
  Due after one year through five years ..................................     30,961           31,009
  Due after five years through ten years .................................      2,167            2,344
  Due after ten years ....................................................      5,277            5,622
  Mortgage-backed securities .............................................      1,680            1,709
  Marketable equity securities ...........................................     10,747           27,127
---------------------------------------------------------------------------------------------------------
                                                                              $92,012         $109,227
=========================================================================================================
</TABLE>

                  On  December  17,  1996,  the board of  directors  of Southern
                  approved the contribution of 7,500 shares of marketable equity
                  securities to the Southern Bank Foundation.  These investments
                  had a cost basis of $78 and a fair value of $536 on that date,
                  resulting in the recognition of a realized  securities gain of
                  $458.  BancShares recorded charitable  contribution expense of
                  $536 related to this transaction.

                  On  February  14,  1997,  the board of  directors  of Southern
                  approved  the  contribution  of 48,250  shares  of  marketable
                  equity  securities  to the  Southern  Bank  Foundation.  These
                  investments  had a cost  basis  of $542  and a fair  value  of
                  $4,071  on  that  date,  resulting  in  the  recognition  of a
                  realized  securities  gain  of  $3,529.   BancShares  recorded
                  charitable  contribution  expense  of $4,071  related  to this
                  transaction.

                  Sales of securities  available-for-sale having a cost basis of
                  $187 in 1998 and $216 in 1997 resulted in gross realized gains
                  of $1,789 for 1998 and $2,030 for 1997. There were no sales of
                  securities  available-for-sale  during the year ended December
                  31, 1996.  Excluding the gains discussed above, other gains on
                  investment  securities in 1997 and 1996 were  attributable  to
                  issuer calls of debt securities.
<PAGE>
Note 3.           Loans

                  Loans by type were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                            1998          1997
--------------------------------------------------------------------------------
<S>                                                      <C>            <C>     
Commercial, financial and agricultural ...........       $ 86,980       $ 84,281
Real estate
  Construction ...................................          5,276          5,209
Mortgage:
  One to four family residential .................        113,984        106,444
  Commercial .....................................         62,446         58,056
  Equityline .....................................         28,698         27,759
  Other ..........................................         26,846         27,868
Consumer .........................................         36,775         35,643
Lease financing ..................................          3,484          3,956
--------------------------------------------------------------------------------
    Total loans ..................................       $364,489       $349,216
================================================================================
Loans held for sale ..............................       $  6,858       $  3,019
Loans serviced for others ........................       $163,455       $ 78,426
</TABLE>

                                       26
<PAGE>
                  On  December  31,  1998 total  loans to  directors,  executive
                  officers  and  related   individuals  and  organizations  were
                  $1,227.  On  December  31,  1997  total  loans  to  directors,
                  executive  officers and related  individuals and organizations
                  were $1,469.  During 1998, $344 of new loans were made to this
                  group and repayments  totaled $586. There were no restructured
                  or  nonaccrual  loans  to  directors,  executive  officers  or
                  related  individuals  and  organizations.  All  extensions  of
                  credit to such persons  have been made in the ordinary  course
                  of  business  on  substantially  the  same  terms,   including
                  interest rates and collateral, as those prevailing at the time
                  in  comparable  transactions  with  others and did not involve
                  more than normal risks of collectibility.

Note 4.           Allowance for Loan Losses

                  Transactions  in the  allowance  for loan losses for the three
                  years ended December 31 were:
<TABLE>
<CAPTION>
                                                         December 31,
--------------------------------------------------------------------------------
                                              1998          1997          1996
--------------------------------------------------------------------------------
<S>                                         <C>           <C>           <C>    
Balance at beginning of year .........      $ 5,971       $ 6,163       $ 6,321
Allowance from bank acquisition ......          269          --            --
Provision for loan losses ............          155            60           140
Loans charged off ....................         (544)         (463)         (539)
Loan recoveries ......................          111           211           241
--------------------------------------------------------------------------------
Balance at end of the year ...........      $ 5,962       $ 5,971       $ 6,163
================================================================================
</TABLE>

                   At December  31, 1998 and  December  31,  1997,  Southern had
                  nonaccrual loans of $166 and $230,  respectively.  At December
                  31, 1998 Southern had  restructured  loans of $43. At December
                  31, 1997 Southern had no  restructured  loans. At December 31,
                  1998 and  December 31, 1997  Southern had accruing  loans past
                  due 90 days or more totaling $805 and $466, respectively.  The
                  amount of foregone  interest on  nonaccrual  and  restructured
                  loans at December 31, 1998 and 1997,  was not material for the
                  periods presented.  At December 31, 1998 and 1997,  Southern's
                  impaired loans,  as determined  under Statement 114 as amended
                  by  Statement   118,  were  less  than  the   nonaccrual   and
                  restructured  loan amounts  presented above, and no additional
                  allowances  for loan losses  were  required as a result of the
                  application  of Statement  114 as amended by Statement  118 to
                  these impaired loans.
<PAGE>
Note 5.           Premises and Equipment

                  The components of premises and equipment were as follows:
<TABLE>
<CAPTION>

December 31,
--------------------------------------------------------------------------------
                                                         1998            1997
--------------------------------------------------------------------------------
<S>                                                   <C>              <C>     
Land .........................................        $  3,763         $  3,377
Buildings and improvements ...................          15,333           14,292
Furniture and equipment ......................           6,816            6,387
Construction-in-progress .....................             103               90
--------------------------------------------------------------------------------
                                                        26,015           24,146
Less: accumulated depreciation ...............          (7,113)          (5,989)
--------------------------------------------------------------------------------
                                                      $ 18,902         $ 18,157
================================================================================
</TABLE>

Note 6.           Income Taxes

                  The  components of income tax expense  (benefit) for the years
                  ended December 31 were:
<TABLE>
<CAPTION>
                                        1998             1997             1996
--------------------------------------------------------------------------------
<S>                                   <C>              <C>              <C>    
Current:
  Federal ...................         $ 2,221          $ 1,737          $ 1,348
  State .....................               6                8               21
--------------------------------------------------------------------------------
                                        2,227            1,745            1,369
Deferred:
  Federal ...................            (167)          (1,405)            (242)
--------------------------------------------------------------------------------
                                      $ 2,060          $   340            1,127
================================================================================
</TABLE>

                                       27
<PAGE>
                  A  reconciliation  of the expected  tax expense,  based on the
                  Federal  statutory  rate of 34%, to the actual tax expense for
                  the years ended December 31 is as follows:
<TABLE>
<CAPTION>
                                                       1998          1997      1996
--------------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>    
Amount of tax computed at Federal
  statutory rate of 34 percent ....................   $ 2,603     $ 2,364     $ 1,867
Increase (decrease) in taxes
resulting from:

  Tax exempt income ...............................      (908)       (943)       (792)
              Amortization of intangible assets ...       143         172         167
              Nontaxable gain on securities donated      --        (1,200)       (162)
  State income tax (net of federal  benefit) ......         2           5          14
              Other, net ..........................       220         (58)         33
--------------------------------------------------------------------------------------
                                                      $ 2,060     $   340     $ 1,127
======================================================================================

            Effective tax rate ....................        27%          5%         21%
======================================================================================
</TABLE>
<PAGE>
                  Significant components of BancShares' deferred tax liabilities
                  and (assets) are as follows:
<TABLE>
<CAPTION>
                                                              1998        1997
--------------------------------------------------------------------------------
<S>                                                        <C>          <C>    
Deferred tax liabilities:
  Depreciation .......................................     $   637      $   709
  Leased assets ......................................         178          164
  Investment securities ..............................       5,853        7,777
  Other ..............................................         183          265
--------------------------------------------------------------------------------
                Gross deferred tax liabilities .......       6,851        8,915
--------------------------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses ..........................      (1,778)      (1,685)
  Intangible assets ..................................        (870)        (711)
  Other ..............................................        (971)      (1,196)
--------------------------------------------------------------------------------
                Gross deferred tax assets ............      (3,619)      (3,592)
--------------------------------------------------------------------------------
Net deferred tax liability ...........................     $ 3,232      $ 5,323
================================================================================
</TABLE>

                  No valuation allowance for deferred tax assets was required at
                  December 31, 1998 or 1997.  Management has determined  that it
                  is more likely than not that the net deferred tax asset can be
                  supported  by  carrybacks  to  federal  taxable  income in the
                  carryback  period. A portion of the change in the net deferred
                  tax  liability  relates  to  unrealized  gains  and  losses on
                  securities   available-for-sale.   The  related  deferred  tax
                  benefit of  approximately  $1,924 for the year ended  December
                  31, 1998 has been recorded  directly to shareholders'  equity.
                  The related  deferred tax charge of  approximately  $2,164 for
                  the year ended December 31, 1997 has been recorded directly to
                  shareholders' equity.

                                       28
<PAGE>
Note 7.           Deposits

                  Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
                                                        1998             1997
--------------------------------------------------------------------------------
<S>                                                   <C>               <C>     
Demand .....................................          $ 77,550          $ 66,565
Checking  with  interest ...................            75,270            66,695
Savings ....................................            56,499            51,087
Money market accounts ......................            53,449            50,061
Time .......................................           293,984           278,920
--------------------------------------------------------------------------------
   Total deposits ..........................          $556,752          $513,328
================================================================================
</TABLE>

                  Total time deposits with a  denomination  of $100 or more were
                  $60,063 at  December  31,  1998.  Total time  deposits  with a
                  denomination  of $100 or more were  $53,004  at  December  31,
                  1997.

                  At  December  31,  1998,  the  scheduled  maturities  of  time
                  deposits were:

                    1999                                       $ 243,008
                    2000                                          42,594
                    2001                                           5,315
                    2002                                           2,388
                    2003 and thereafter                              679
                    ----------------------------------------------------
                       Total time deposits                     $ 293,984
                    ====================================================

Note 8.           Short-Term Borrowings and Long-Term Obligations

                  Short-Term Borrowings
<TABLE>
<CAPTION>
                                                                 December 31,
                                                             1998          1997
--------------------------------------------------------------------------------
<S>                                                        <C>            <C>   
U.S. Treasury tax and loan accounts ..............         $  171         $2,065
Repurchase agreements ............................          4,953          4,761
--------------------------------------------------------------------------------
   Total short-term borrowings ...................         $5,124         $6,826
================================================================================
</TABLE>

                  The U. S. Treasury tax and loan accounts averaged $861 in 1998
                  and $997 in 1997. The highest  month-end  balance of the U. S.
                  Treasury  tax and loan  accounts was $2,206 in 1998 and $2,215
                  in  1997.  The  average  rate on U. S.  Treasury  tax and loan
                  accounts was 5.97% in 1998 and 5.85% in 1997.

                  The repurchase  agreements  averaged $5,655 in 1998 and $4,819
                  in 1997.  The  highest  month-end  balance  of the  repurchase
                  agreements  was $6,459 in 1998 and $5,929 in 1997. The average
                  rate on  repurchase  agreements in 1998 and 1997 was 4.09% and
                  4.18%. At December 31, 1998, $13,000 of investment  securities
                  were  pledged  for  repurchase   agreements.   The  securities
                  collateralizing the repurchase  agreements have been delivered
                  to a third party custodian for safe keeping.

                                       29
<PAGE>
                  Long-Term Obligations

                  The $23.0 million  long-term  obligations at December 31, 1998
                  are Capital  Trust  Securities  of Southern  Capital  Trust I,
                  ("the  Trust")  a  wholly-owned  statutory  business  trust of
                  BancShares. These long-term obligations, which qualify as Tier
                  1 Capital for BancShares, bear interest at 8.25% and mature in
                  2028. BancShares may redeem the long-term obligations in whole
                  or in part on or after  June 30,  2003.  The sole asset of the
                  Trust is $23.0 million of 8.25% Junior Subordinated Debentures
                  of BancShares due 2028. Considered together,  the undertakings
                  constitute a full and unconditional guarantee by BancShares of
                  the Trust's obligations under the Capital Trust Securities.

                  The $4,750  long-term  obligation  at December 31,  1997,  was
                  payable to a bank and was  negotiated by BancShares to provide
                  additional  capital  to its  subsidiary,  and was  secured  by
                  investment securities.

Note 9.           Acquisitions and dispositions

                  BancShares   has   consummated   numerous   acquisitions   and
                  dispositions  in recent years.  All of the  acquisitions  have
                  been  accounted for under the purchase  method of  accounting,
                  with the results of  operations  not  included in  BancShares'
                  Consolidated  Statements of Income until after the transaction
                  date.   The  pro  forma   impact  of  the   acquisitions   and
                  dispositions  as though they had been made at the beginning of
                  the  periods   presented  is  not   material  to   BancShares'
                  consolidated financial statements.
<PAGE>
                  The  following  table  provides   information   regarding  the
                  acquisitions  and  dispositions  that  have  been  consummated
                  during the three-year period ending December 31, 1998:
<TABLE>
<CAPTION>
                                                                  Assets           Liabilities
                                                                 Acquired            Assumed        Resulting
Date                       Institution/Location                   (Sold)             (Sold)         Intangible
---------------------------------------------------------------------------------------------------------------------------
<S>                   <C>                                        <C>                <C>               <C>
December 1998         First Union National Bank                  $16,440            $16,440           $1,685
                      Red Springs, North Carolina

October 1998          First-Citizens Bank & Trust Company          5,309              5,302              186
                      Gates, North Carolina

May 1998              Enfield Savings Bank                        18,174             18,041              448
                      Enfield, North Carolina

May 1998              Enfield Savings Bank (1)                    (2,420)            (2,420)             (85)

                      Littleton, North Carolina

May 1997              Wachovia Bank of North Carolina, N.A.        5,083              5,117              179
                      Aulander, North Carolina

May 1997              Wachovia Bank of North Carolina, N.A.       11,803             11,838              947
                      Aurora, North Carolina

May 1997              Wachovia Bank of North Carolina, N.A.        4,073              4,106              144
                      Hamilton, North Carolina

August 1996           United Carolina Bank                         6,085              6,085              419
                      Edenton, North Carolina

June 1996             First-Citizens Bank & Trust Company          7,352              7,348              539
                      Windsor, North Carolina
</TABLE>

(1) Represents the sale of this branch to First-Citizens Bank & Trust Company.

                                       30
<PAGE>
Note 10.          Retirement Plans

                  Southern has a  noncontributory,  defined benefit pension plan
                  which covers substantially all full-time employees.  Employees
                  who qualify  under  length of service  and other  requirements
                  participate in the  noncontributory  defined  benefit  pension
                  plan. Under the plan,  retirement  benefits are based on years
                  of service  and  average  earnings.  The policy is to fund the
                  maximum amount allowable for federal income tax purposes.  The
                  plan's assets  consist  primarily of  investments in a related
                  bank's common trust funds,  which include listed common stocks
                  and fixed income  securities  (see Note 15). It is  Southern's
                  policy to  determine  the service cost and  projected  benefit
                  obligation using the Projected Unit Credit Cost method.

                  Pension expense is included in personnel  expense and includes
                  the following components:
<TABLE>
<CAPTION>
                                                              1998        1997       1996
-------------------------------------------------------------------------------------------
<S>                                                        <C>         <C>         <C>    
Change in benefit obligation
Net benefit obligation at beginning of year ............   $ 6,598     $ 5,417     $ 4,909
Service cost ...........................................       356         298         256
Interest cost ..........................................       489         418         373
Actuarial loss .........................................       414         645          53
Gross benefits paid ....................................      (210)       (180)       (174)
-------------------------------------------------------------------------------------------
Net benefit obligation at end of year ..................   $ 7,647     $ 6,598     $ 5,417
===========================================================================================
Change in plan assets
Fair value of plan assets at beginning of year .........   $ 5,943     $ 4,936     $ 4,583
Actual return on plan assets ...........................       920         817         309
Employer contributions .................................       283         370         218
Gross benefits paid ....................................      (210)       (180)       (174)
-------------------------------------------------------------------------------------------
Fair value of plan assets at end of year ...............   $ 6,936     $ 5,943     $ 4,936
===========================================================================================
Funded status at end of year ...........................   $  (711)    $  (655)    $  (481)
Unrecognized net actuarial loss ........................       352         530         409
Unrecognized prior service cost ........................        73          81          90
Unrecognized net transition asset ......................      (184)       (225)       (265)
-------------------------------------------------------------------------------------------
Net amount recognized as a liability in the consolidated
     balance sheets at end of year .....................   $  (470)    $  (269)    $  (247)
===========================================================================================
Assumptions as of December 31
Discount rate ..........................................      6.75%       7.25%       7.25%
Expected return on plan assets .........................      8.00%       8.25%       8.25%
Rate of compensation increase ..........................      4.50%       4.50%       4.25%

Components of net periodic benefit cost
Service cost ...........................................   $   356     $   298     $   256
Interest cost ..........................................       489         418         373

Expected return on assets ..............................      (395)       (345)       (319)
Amortization of:
   Transition asset ....................................       (41)        (41)        (41)
   Prior service cost ..................................         8           8           8
   Actuarial loss ......................................        67          53          45
-------------------------------------------------------------------------------------------
Total net periodic benefit cost ........................   $   484         391     $   322
===========================================================================================
</TABLE>

                  Employees  are also  eligible  to  participate  in a  matching
                  savings plan after one year of service.  During 1998  Southern
                  made participating contributions to this plan of $245 compared
                  to $220 during 1997 and $198 during 1996.

                                       31
<PAGE>
Note 11.          Regulatory Requirements and Restrictions

                  BancShares  and its banking  subsidiary are subject to certain
                  requirements imposed by state and federal banking statutes and
                  regulations.   These  regulations   establish  guidelines  for
                  minimum capital levels, restrict certain dividend payments and
                  require  the   maintenance  of   noninterest-bearing   reserve
                  balances at the Federal Reserve Bank.  Such reserves  averaged
                  $10,753  during 1998 of which  $8,447 was  satisfied  by vault
                  cash and the remainder by amounts held in the Federal  Reserve
                  Bank.

                  Various regulatory  agencies have implemented  guidelines that
                  evaluate capital based on risk adjusted assets.  An additional
                  capital  computation   evaluates  tangible  capital  based  on
                  tangible assets. Minimum capital requirements set forth by the
                  regulators  require a Tier 1 capital  ratio of no less than 4%
                  of risk-adjusted assets, a total capital ratio of no less than
                  8% of risk-adjusted assets, and a leverage capital ratio of no
                  less than 4% of average tangible  assets.  To meet the Federal
                  Deposit Insurance  Corporation's  ("FDIC") "well  capitalized"
                  standards,  the  Tier 1  ratios  must be at  least  6%,  total
                  capital  ratios  must be at  least  10% and  Leverage  capital
                  ratios must be at least 5%.  Failure to meet  minimum  capital
                  requirements  may result in certain actions by regulators that
                  could  have a  direct  material  effect  on  the  consolidated
                  financial  statements.  As of December 31, 1998,  Southern was
                  considered to be "well capitalized" by the FDIC.

                  Southern's  capital  ratios  as of  December  31 are set forth
                  below:
<TABLE>
<CAPTION>
                                                   1998                  1997
--------------------------------------------------------------------------------
<S>                                            <C>                  <C>        
Tier 1 capital .......................         $    49,198          $    33,999
Total capital ........................              53,234               37,876
Risk-adjusted assets .................             311,341              295,654
Average tangible assets ..............             582,955              564,633

Tier 1 capital ratio .................               15.80%               11.50%
Total capital ratio ..................               17.10%               12.81%
Leverage capital ratio ...............                8.44%                6.02%
</TABLE>

                  The  primary  source  of  funds  for  the  dividends  paid  by
                  BancShares to its shareholders is dividends  received from its
                  Banking subsidiary. Southern Bank is restricted as to dividend
                  payout by state laws applicable to banks and may pay dividends
                  only out of retained  earnings.  Should at anytime its surplus
                  be less than 50% of its paid-in  capital stock,  Southern Bank
                  may not  declare  a  dividend  until it has  transferred  from
                  retained  earnings to surplus 25% of its undivided  profits or
                  any lesser  percentage  that may be  required  to restore  its
                  surplus  to an  amount  equal  to 50% of its  paid-in  capital
                  stock.  Additionally,  dividends  paid by Southern Bank may be
                  limited by the need to retain  sufficient  earnings to satisfy
                  minimum capital requirements imposed by the FDIC. Dividends on
                  BancShares'  common shares may be paid only after dividends on
                  preferred  Series  "B" and "C" shares  have been paid.  Common
                  share dividends are based upon BancShares'  profitability  and
                  are  paid  at  the  discretion  of  the  Board  of  Directors.
                  Management  does not expect any of the foregoing  restrictions
                  to materially limit its ability to pay dividends comparable to
                  those paid in the past.  At December  31,  1998,  Southern had
                  available  for the payment of dividends  undivided  profits of
                  approximately  $12.6 million,  unless declaration of dividends
                  for  such  amount  would  reduce  the  regulatory  capital  of
                  Southern below the minimum levels discussed above. At December
                  31,  1998,   approximately   $35.8   million  of   BancShares'
                  investment  in  Southern  was  restricted  as to  transfer  to
                  BancShares without obtaining prior regulatory approval.

                                       32
<PAGE>
Note 12.          Commitments, Contingencies and Concentration of Credit Risk

                  In the normal course of business there are various commitments
                  and contingent  liabilities  outstanding,  such as guarantees,
                  commitments to extend credit, etc., which are not reflected in
                  the accompanying financial statements.

                  Southern   is   party   to    financial    instruments    with
                  off-balance-sheet  risk in the normal  course of  business  to
                  meet the  financing  needs of its  customers and to reduce its
                  own  exposure  to  fluctuations   in  interest  rates.   These
                  financial  instruments  include  commitments to extend credit,
                  standby letters of credit and undisbursed advances on customer
                  lines  of  credit.   These  instruments  involve,  to  varying
                  degrees,  elements of credit and interest  rate risk in excess
                  of the amount recognized in the consolidated balance sheet.

                  Southern  is  exposed  to  credit   loss,   in  the  event  of
                  nonperformance by the other party to the financial instrument,
                  for commitments to extend credit and standby letters of credit
                  which is represented  by the  contractual  notional  amount of
                  those  instruments.  Southern uses the same credit policies in
                  making these  commitments  and  conditional  obligations as it
                  does for on-balance-sheet instruments.

                  Commitments  to extend  credit  and  undisbursed  advances  on
                  customer  lines of credit are agreements to lend to a customer
                  as long as there is no violation of any condition  established
                  in the contract.  Commitments  generally have fixed expiration
                  dates or other termination  clauses and may require payment of
                  a fee. Since many commitments  expire without being drawn, the
                  total commitment  amounts do not necessarily  represent future
                  cash  requirements.  Southern evaluates each customer's credit
                  worthiness on a case-by-case  basis.  The amount of collateral
                  obtained,  if deemed necessary by Southern,  upon extension of
                  credit,  is based on  management's  credit  evaluation  of the
                  borrower.   Collateral  held  varies  but  may  include  trade
                  accounts  receivable,   property,  plant,  and  equipment  and
                  income-producing commercial properties.

                  Standby letters of credit are  commitments  issued by Southern
                  to guarantee the  performance  of a customer to a third party.
                  The  credit  risk  involved  in  issuing  letters of credit is
                  essentially  the same as that  involved in extending  loans to
                  customers.

                  Outstanding  standby letters of credit as of December 31, 1998
                  and  December   31,  1997   amounted  to  $1,625  and  $1,324.
                  Outstanding  commitments at December 31, 1998 and December 31,
                  1997  were  $51,466  and  $53,763.   Undisbursed  advances  on
                  customer lines of credit at December 31, 1998 and December 31,
                  1997 were $47,639 and $29,602.  Southern  does not  anticipate
                  any losses as a result of these transactions.

                  Southern grants agribusiness, commercial and consumer loans to
                  customers  primarily  in  eastern  North  Carolina.   Although
                  Southern  has a  diversified  loan  portfolio,  a  substantial
                  portion of its  debtors'  ability to honor their  contracts is
                  dependent upon the agricultural industry and in particular the
                  tobacco segment thereof.  For several decades tobacco has come
                  under   increasing   criticism  for  potential  health  risks.
                  Management   is  unable   to   predict   the   impact  of  the
                  contingencies inherent in this market segment as it relates to
                  Southern.

                  BancShares is also  involved in various legal actions  arising
                  in the normal course of business. Management is of the opinion
                  that the  outcome  of such  actions  will not have a  material
                  adverse  effect on the  consolidated  financial  condition  of
                  BancShares.

                                       33
<PAGE>
Note 13.          Parent Company Financial Statements

                  Presented  below  are the  condensed  balance  sheets  (parent
                  company  only)  of  Southern  BancShares  (N.C.),  Inc.  as of
                  December 31, 1998 and 1997 and condensed  statements of income
                  and cash flows for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
                                                                                     December 31,
---------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS                                                           1998           1997
---------------------------------------------------------------------------------------------------------
<S>                                                                              <C>            <C>    
ASSETS
Cash ........................................................................... $ 3,802        $    33
Investment securities available-for-sale .......................................  14,659         14,782
Other assets ...................................................................   1,333            790
Investment in subsidiaries .....................................................  62,553         47,700
---------------------------------------------------------------------------------------------------------
   Total assets ................................................................ $82,347        $63,305
=========================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities ............................................................$  2,603        $ 3,562
Accrued interest payable .......................................................      --              9
Notes payable ..................................................................  23,711          4,750
---------------------------------------------------------------------------------------------------------
   Total liabilities ...........................................................  26,314          8,321
Shareholders' equity ...........................................................  56,033         54,984
---------------------------------------------------------------------------------------------------------
   Total liabilities and shareholders' equity .................................. $82,347        $63,305
=========================================================================================================
<CAPTION>

CONDENSED STATEMENTS OF INCOME                                            Year ended December 31,
---------------------------------------------------------------------------------------------------------
                                                                 1998              1997           1996
---------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>            <C>   
Dividends from bank subsidiary ..............................   $3,090            $5,458         $2,637
Other dividends .............................................      152                80             78
---------------------------------------------------------------------------------------------------------
   Total income .............................................    3,242             5,538          2,715
Interest expense ............................................   (1,320)             (295)          (117)
Other expense ...............................................     (293)              (49)           (42)
---------------------------------------------------------------------------------------------------------
Income before equity in undistributed income
   of subsidiary ............................................    1,629             5,194          2,556
Equity in undistributed income of subsidiary ................    3,967             1,419          1,808
---------------------------------------------------------------------------------------------------------
   Net income ...............................................   $5,596            $6,613         $4,364
=========================================================================================================
</TABLE>

                                       34
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS                                Year ended December 31,
--------------------------------------------------------------------------------------------
                                                                1998        1997       1996
--------------------------------------------------------------------------------------------
<S>                                                          <C>         <C>        <C>    
OPERATING ACTIVITIES:
  Net income .............................................   $  5,596    $ 6,613    $ 4,364
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Equity in undistributed net income of subsidiary ...     (3,967)    (1,419)    (1,808)
      Increase in other assets ...........................       (543)      --         --
      (Decrease) increase in accrued liabilities .........       (959)      --          642
      Dividend income in the form of investment securities       --       (2,753)      --
      Increase (decrease) in accrued interest payable ....         (9)         9        (39)
--------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................        118      2,450      3,159
--------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
  Purchase of  investments ...............................     (1,787)      (205)    (1,318)
  Investments in subsidiaries ............................    (12,711)    (5,000)      --
--------------------------------------------------------------------------------------------
NET CASH USED IN  INVESTING ACTIVITIES ...................    (14,498)    (5,205)    (1,318)
--------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
  Dividends paid .........................................       (581)      (585)      (587)
  Purchase and retirement or redemption of stock .........       (231)       (23)       (12)
  Change in notes payable, net ...........................     18,961      3,350     (1,200)
--------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED)
  BY FINANCING ACTIVITIES ................................     18,149      2,742     (1,799)
--------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
  IN CASH AND CASH EQUIVALENTS ...........................      3,769        (13)        42
CASH AND CASH EQUIVALENTS AT THE
  BEGINNING OF YEAR ......................................         33         46          4
--------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE
  END OF YEAR ............................................   $  3,802    $    33    $    46
============================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH PAID
  DURING THE YEAR FOR:
  Interest ...............................................   $  1,329    $   286    $   156
  Income taxes ...........................................   $     11    $     7    $     7
============================================================================================
</TABLE>

Note 14.          Fair Value of Financial Instruments

                  The following  methods and  assumptions  were used to estimate
                  the fair value of each class of financial instrument:

                  Cash and due from banks, federal funds sold, 
                  and accrued interest receivable

                  The  carrying  amounts  for cash and due from  banks,  federal
                  funds sold and accrued interest  receivable are equal to their
                  fair  values due to the short term  nature of these  financial
                  instruments.

                  Investment securities

                  Fair  values  of  investment  securities  are  based on quoted
                  market prices. If a quoted market price is not available, fair
                  value is  estimated  using  quoted  market  prices for similar
                  securities.

                                       35
<PAGE>
                  Loans receivable

                  For variable-rate  loans that are performing,  fair values are
                  based on carrying values.  The fair values of fixed rate loans
                  that are performing  are estimated by  discounting  the future
                  cash flows  using the  current  rates at which  similar  loans
                  would be made to borrowers with similar credit ratings and for
                  the same remaining maturities. The fair value of nonperforming
                  loans  is  based  on the  book  value  of each  loan,  less an
                  applicable reserve for credit losses.  This reserve for credit
                  losses is determined on a loan by loan basis for nonperforming
                  assets  based  on  one  or a  combination  of  the  following:
                  external  appraisals,  internal  assessments  using  available
                  market  information  and  specific  borrower  information,  or
                  discounted cash flow analysis.

                  Deposits

                  The fair value of demand deposits,  savings accounts and money
                  market  deposits is the amount  payable on demand at year end.
                  The fair value of  certificates  of deposit  is  estimated  by
                  discounting the future cash flows using the current rates paid
                  for similar deposits.

                  Short-term borrowed funds and accrued interest payable

                  The carrying amounts for short-term borrowed funds and accrued
                  interest payable are equal to the fair values due to the short
                  term nature of these financial instruments.

                  Long-term obligations

                  The fair value of the 1998 long-term  obligation is the market
                  value at the last trade date in 1998. The carrying  amount for
                  the 1997  long-term  obligation  was considered to be equal to
                  its fair value since the  underlying  note bore  interest at a
                  variable rate.

                  Commitments

                  Southern's commitments to extend credit have no carrying value
                  and are  generally at variable  rates  and/or have  relatively
                  short  terms  to  expiration.   Accordingly,  these  financial
                  instruments are deemed to have no material fair value.

                  Limitations on Fair Value Assumptions

                  Fair value estimates are made by management at specific points
                  in time  based on  relevant  information  about the  financial
                  instrument and the market.  These estimates do not reflect any
                  premium or discount  that could result from  offering for sale
                  at  one  time  BancShares'  entire  holdings  of a  particular
                  financial   instrument  nor  are  potential  taxes  and  other
                  expenses that would be incurred in an actual sale  considered.
                  Because  no  market  exists  for  a  significant   portion  of
                  BancShares'  financial  instruments,  fair value estimates are
                  based on judgments  regarding future expected loss experience,
                  current economic  conditions,  risk characteristics of various
                  financial  instruments and other factors.  These estimates are
                  subjective in nature and involve  uncertainties and matters of
                  significant  judgment and therefore  cannot be determined with
                  precision.  Changes in assumptions and/or the methodology used
                  could significantly affect the estimates disclosed. Similarly,
                  the  fair  values  disclosed  could  vary  significantly  from
                  amounts realized in actual transactions.

                  Fair value estimates are based on existing  on-and-off balance
                  sheet financial instruments without attempting to estimate the
                  value of anticipated  future  business and the value of assets
                  and liabilities that are not considered financial instruments.
                  For example,  BancShares has premises and equipment  which are
                  not considered financial instruments.  Accordingly,  the value
                  of these assets has not been  incorporated into the fair value
                  estimates.  In  addition,  tax  ramifications  related  to the
                  realization  of the  unrealized  gains and  losses  can have a
                  significant  effect on fair value  estimates and have not been
                  considered in any of the estimates.

                                       36
<PAGE>
                  The estimated fair values of BancShares' financial instruments
                  at December 31 are as follows:
<TABLE>
<CAPTION>
                                                                               1998                                 1997
------------------------------------------------------------------------------------------------------------------------------------
                                                                   Carrying           Estimated           Carrying        Estimated
                                                                    Amount            Fair Value            Amount       Fair Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                <C>                <C>                <C>     
Financial assets:
  Cash and due from banks ..............................           $ 37,419           $ 37,419           $ 28,381           $ 28,381
  Federal funds sold ...................................             19,535             19,535             10,240             10,240
  Investment securities:
      Held-to-maturity .................................             92,340             93,511             56,281             57,294
      Available-for-sale ...............................            109,227            109,227            123,852            123,852
  Loans ................................................            358,527            362,264            343,245            349,668
  Accrued interest receivable ..........................              4,571              4,571              4,205              4,205
Financial liabilities:
  Deposits .............................................           $556,752           $558,544           $513,328           $514,095
  Short-term borrowings ................................              5,124              5,124              6,826              6,826
  Long-term obligations ................................             23,000             23,288              4,750              4,750
  Accrued interest payable .............................              4,505              4,505              4,394              4,394
</TABLE>

Note  15.         Related Parties

                  BancShares  has entered into various  service  contracts  with
                  another  bank  holding   company  and  its   subsidiary   (the
                  "Corporation").    The   Corporation   has   two   significant
                  shareholders,  which  are  also  significant  shareholders  of
                  BancShares. The first significant shareholder is a director of
                  BancShares and at December 31, 1998 beneficially  owned 32,294
                  shares, or 27.08%, of BancShares' outstanding common stock and
                  22,171 shares, or 5.56%, of BancShares'  outstanding  Series B
                  preferred  stock.  At the same date,  the  second  significant
                  shareholder  beneficially  owned 27,577 shares,  or 23.12%, of
                  BancShares'  outstanding  common stock, and 17,205 shares,  or
                  4.32%,  of  BancShares'  Series B preferred  stock.  The above
                  totals  include  17,205 Series B preferred  shares,  or 4.32%,
                  that are  considered to be  beneficially  owned by both of the
                  shareholders  and,  therefore,  are  included in each of their
                  totals.

                  These two significant shareholders are directors and executive
                  officers  of  the   Corporation  and  at  December  31,  1998,
                  beneficially  owned 2,553,656 shares, or 28.69%, and 1,543,942
                  shares, or 17.35%,  of the  Corporation's  outstanding Class A
                  common  stock,  and  641,641  shares,  or 37.30%,  and 164,347
                  shares,  or 9.55%, of the  Corporation's  outstanding  Class B
                  common stock.  The above totals include 530,522 Class A common
                  shares, or 5.96%, and 110,668 Class B Common shares, or 6.43%,
                  that are  considered to be  beneficially  owned by both of the
                  shareholders  and,  therefore,  are  included in each of their
                  totals. A subsidiary of the Corporation is First-Citizens Bank
                  & Trust Company ("First Citizens"). As more fully discussed in
                  note 9 and 16, Southern  acquired branches from First Citizens
                  in 1998 and 1996,  sold a branch to First Citizens in 1998 and
                  plans to acquire a branch from First Citizens in 1999.

                                       37
<PAGE>
                  The  following  table  lists the various  charges  paid to the
Corporation during the years ended December 31:
<TABLE>
<CAPTION>
                                                      1998              1997        1996
---------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>              <C>   
Data and item processing .........................  $2,345            $1,840           $1,828
Forms, supplies and equipment ....................     231               220              300
Trustee for employee benefit plans ...............      79                66               62
Consulting fees ..................................      78                79               79
Trust investment services ........................      20                22               24
Internal auditing services .......................       1                41              165
Other services ...................................     114                94              143
---------------------------------------------------------------------------------------------
                                                    $2,868            $2,362           $2,601
=============================================================================================
</TABLE>

                  Data and item processing  expenses  include courier  services,
                  proof and encoding,  microfilming,  check  storage,  statement
                  rendering and item  processing  forms.  BancShares  also has a
                  correspondent relationship with the Corporation. Correspondent
                  account balances with the Corporation included in cash and due
                  from banks totaled $15,988 at December 31, 1998 and $10,071 at
                  December 31, 1997. Southern's wholly-owned subsidiary, Goshen,
                  Inc., paid $98,000 and $121,000 to an Insurance  Company owned
                  by the  Corporation  for the  sale  of  insurance  written  in
                  connection  with  loans  made by  Southern  in 1998 and  1997,
                  respectively.  Beginning June 23, 1998 the trust department of
                  the Corporation  assumed the duties of Stock Transfer Agent of
                  BancShares.  BancShares also owns 124,584 and 22,219 shares of
                  Class A and Class B Common Stock of the Corporation. The Class
                  A and  Class B  Common  Stock  had an  amortized  cost of $2.6
                  million and $465,000,  respectively,  at December 31, 1998 and
                  1997.  The Class A Common  Stock  had a market  value of $11.2
                  million  and $13.0  million  at  December  31,  1998 and 1997,
                  respectively.  The Class B Common  Stock had a market value of
                  $2.0  million and $2.3  million at December 31, 1998 and 1997,
                  respectively.

 Note 16.         Subsequent Events

                  Southern has received approval from the regulatory authorities
                  to open de novo branches in three new eastern  North  Carolina
                  markets. These branches are planned to open in 1999.

                  Southern has announced plans to acquire, subject to regulatory
                  approval,   the  Ahoskie  branch  of  the  Corporation.   This
                  acquisition  is planned  for the third  quarter of 1999 and is
                  projected to increase deposits by approximately  $16.0 million
                  and loans by approximately $8.0 million.

                                       38
<PAGE>
DIRECTORS _______________________________________________________________

Bynum R. Brown
Murfreesboro, NC
President and Owner,
Bynum R. Brown Agency, Inc.
(Real Estate and Insurance)
President and Owner, Brown Manor, Inc.
(Family Care Home)
Secretary-Treasurer, Roanoke
Valley Nursing Home, Inc.

William H. Bryan
Mount Olive, NC
President, Director and Treasurer
Mount Olive Pickle Company, Inc.
(Manufacturer of Pickle and Pepper Products)

D. Hugh Carlton
Warsaw, NC
President and Owner, Carlton Insurance Agency, Inc.
(Insurance)

Robert J. Carroll
Gates, NC
President and Owner, Carroll's Garage, Inc.
(Truck and Farm Equipment Sales and Service)

Hope H. Connell
Raleigh, NC
Senior Vice President,
First-Citizens Bank & Trust Company

J. Edwin Drew
Macclesfield, NC
Retired Physician
Former President, J. Edwin Drew, M.D., P.A.

Sam E. Ewell, Jr.
Wendell, NC
President and Owner, Ewell Ford Sales, Inc.

Moses B. Gillam, Jr.
Windsor, NC
Senior Partner, Gillam and Gillam, Attorneys

LeRoy C. Hand
Camden, NC
Retired Physician, former President,
Albemarle Emergency Associates, P.A.

J.D. Hines
Rocky Mount, NC
President and Owner, Hines Equipment Company
President and Owner, Enfield Tractor and Equipment Company
<PAGE>
Frank B. Holding
Smithfield, NC
Executive  Vice Chairman of the Board,
First-Citizens Bank & Trust Company and
First Citizens BancShares, Inc.

George A. Hux
Rocky Mount, NC
Retired Attorney
Former Partner, Hux, Livermon &Armstrong, L.L.P.

M. J. McSorley
Rocky Mount, NC
Vice Chairman,
Southern Bank and Trust Company;
Vice President, Southern BancShares (N.C.), Inc.
Former President and CEO,
Southern Bank and Trust Company

W. B. Midyette, Jr.
Bath, NC
Retired Farmer

W. Hunter Morgan
Sunbury, NC
President, Kellogg-Morgan Agency, Inc.
(Insurance)

John C. Pegram, Jr.
Mount Olive, NC
President and Chief Executive Officer,
Southern BancShares (N.C.), Inc.
President and Chief Executive Officer,
Southern Bank and Trust Company

Charles I. Pierce, Sr.
Ahoskie, NC
President, Pierce Printing Co., Inc.
(Commercial Printers)

W. A. Potts
Mount Olive, NC
Vice Chairman,
Southern BancShares (N.C.), Inc.
(Retired Veterinarian)

Charles L. Revelle, Jr.
Murfreesboro, NC
Chairman of the Board,
Revelle Agri-Products, Inc.;
Vice President, Revelle Builders of N. C.,  Inc.;
President, Revelle Equipment Co., Inc.
(Agribusiness)
<PAGE>
Watson N. Sherrod, Jr.
Enfield, NC
Senior Vice President,
Southern Bank and Trust Company
Former President and CEO, ESB Bancorp, Inc.
and Enfield Savings Bank, Inc. SSB

Charles O. Sykes
Mount Olive, NC
President, Mount Olive Livestock
Market, Inc.
(Livestock Auction Market and Dealer)

Raymond M. Sykes
Whitakers, NC
Retired Farmer

John N. Walker
Mount Olive, NC
President Emeritus,
Mount Olive Pickle Company, Inc.

R. S. Williams
Mount Olive, NC
Chairman of the Board and Consultant,
Southern BancShares (N.C.), Inc.
and Southern Bank and Trust Company

                                       39
<PAGE>
OFFICERS ________________________________________________________________

Officers of Southern BancShares (N.C.), Inc.

R. S. Williams, Chairman of the Board

John C. Pegram, Jr., President and Chief Executive Officer

M. J. McSorley, Vice President

David A. Bean, Secretary and Treasurer

Paul A. Brewer, Assistant Secretary

R.D. Ray, Assistant Treasurer



Executive Officers of Southern Bank and Trust Company

R. S. Williams, Chairman of the Board

M. J. McSorley,  Vice Chairman of the Board

John C. Pegram, Jr., President and Chief Executive Officer

Paul A. Brewer, Executive Vice President

R. D. Ray, Executive Vice President

David A. Bean, Senior Vice President,
Controller and Secretary

                                       40
<PAGE>
SOUTHERN BANK OFFICES ___________________________________________________

Branch                        County       
------                        ------       

Ahoskie                     Hertford       
507 E. Main St.                            
Ahoskie, NC 27910-0825                     
(252) 332-5149                             

Askewville                    Bertie       
104 W. Askewville St.                      
Windor, NC 27983-0529                      
(252) 794-3029                             

Aulander                      Bertie       
119 S. Commerce St.                        
Aulander, NC  27805-0129              
(252) 345-4061                             

Aurora                      Beaufort       
298 North Fifth St.                        
Aurora, NC 27806-0427                      
(252) 322-4161                             

Aydn                           Pitt       
1107 W. 3rd St.                            
Ayden, NC 28513-0368                       
(252) 746-6138                             

Bath                        Beaufort       
Highway 92                                 
Bath, NC 27808-0217                        
(252) 923-8381                             

Belhaven                    Beaufort       
106 E. Main St.                            
Belhaven, NC 27810-0087                    
(252) 943-2184                             

Bethel                          Pitt       
124 N. Main St.                            
Bethel, NC 27812-0819                      
(252) 825-0031                             

Calypso                       Duplin       
104 West Trade St.                         
Calypso, NC 28325-0729                     
(919) 658-7070                             

Deep Run                      Lenoir       
Highway 11 & SR 1144                       
Deep Run, NC 28525-0126                    
(252) 568-4141                             
<PAGE>
Branch                        County       
------                        ------       

Dudley                         Wayne       
Highway 117 Alternate South                
Dudley, NC 28333-0729                      
(919) 734-5375                             

Edenton                       Chowan       
1207 N. Broad St                           
Edenton, NC 27932-0546                     
(252) 482-7466                             

Edenton                       Chowan       
101 W. Queen St                            
Edenton, NC 27932-0868                     
(252) 482-8466                             

Enfield                      Halifax       
201Batchelor Avenue                        
Enfield, NC 27823-0368                     
(252) 445-2016                             

Faison                        Duplin       
110 W. Center St South                     
Faison, NC 28341-0628                      
(910) 267-4351                             

Farmville                       Pitt                  
107 E. Church St.                                     
Farmville, NC 27828-0146                              
(252) 753-2161                                        
                                                      
Garland                      Sampson                  
96 South Ingold Ave.                                  
Garland, NC 28441-0397                                
(910) 529-3651                                        
                                                      
Gates                          Gates                  
Gates Bank Road                                       
Gates, NC 27937-0064                                  
(252) 357-1250                                        
                                                      
Gatesville                     Gates                  
203 Main St.                                          
Gatesville NC 27938-0203                              
(252) 357-0190                                        

Grantham                       Wayne                  
3382 U.S. 13 South                                    
Goldsboro, NC 27530-0729                              
(919) 689-2300                                        
                                                      
Hamilton                     Martin                   
100 S. Front Street                                   
Hamilton, NC   27840-0425                             
(252) 798-6971                                        
<PAGE>
Branch                        County       
------                        ------       
                                                      
Kill Devil Hills North          Dare                  
3105 N. Croatan Highway                               
Kill Devil Hills, NC 27948-2036                       
(252) 441-2871                                        
                                                      
Kill Devil Hills South          Dare                  
1906 S. Croatan Highway                               
Kill Devil Hills, NC 27948-0329                       
(252) 441-6355                                        
                                                      
LaGrange                      Lenoir                  
208 S. Caswell St.                                    
LaGrange, NC 28551-0248                               
(252) 566-4020                                        
                                                      
Lewiston                      Bertie                  
127 Main St.                                          
Lewiston-Woodville, NC 27849-0190                     
(252) 348-2561                                        
                                                      
Macclesfield               Edgecombe                  
105 N. Railroad St.                                   
Macclesfield, NC 27852-0339                           
(252) 827-2111                                        
                                                      
Mount Olive                    Wayne                  
100 North Center St.                                  
Mount Olive, NC 28365-0729                            
(919) 658-7000                                        
                                                      
Mount Olive                    Wayne                  
800 North Breazeale Ave.                              
Mount Olive, NC 28365-0729                            
(919) 658-7100                                        
                                                      
Murfreesboro                Hertford                  
336 East Main St                                      
Murfreesboro, NC 27855-0277                           
(252) 398-4174                                        
                                                      
Nashville                       Nash                  
209 Barnes St.                                        
Nashville, NC 27856-0758                              
(252) 459-2117                                        

Plymouth                   Washington  
612 Washigton St.                      
Plymouth, NC 27962-1023                
(252) 793-1115                         
<PAGE>
Branch                        County       
------                        ------       
                                       
Pollocksville                   Jones  
214 Main St.                           
Pollocksville, NC 28573-0171           
(252) 224-5191                         
                                       
Red Springs                   Robeson  
300 South Main St.                     
Red Springs, NC 28377-1624             
(910) 843-4135                         
                                       
Roanoke Rapids                Halifax  
1580 E. 10th St.                       
Roanoke Rapids, NC 27870-4109          
(252) 535-3043                         

*Robersonville                  Martin  
111 N. Main St.                        
Robersonville, NC 27871-0369           
(252) 795-3041                         
                                       
Rocky Mount                      Nash  
230 Sunset Ave.                        
Rocky Mount, NC 27802-0428             
(252) 977-2825                         
                                       
Rocky Mount                     Nash   
3690 Sunset Ave.                       
Rocky Mount, NC    27802-0428          
(252)-443-7800                           
                                       
Roxobel                        Bertie  
113 South Main St.                     
Roxobel, NC 27872-0159                 
(252) 344-5641                         
                                       
Salemburg                     Sampson  
102 South Main St.                     
Salemburg, NC 28385-0160               
(910) 525-4149                         
                                       
Seven Springs                   Wayne  
Main St.                               
Seven Springs, NC 28578-0060           
(252) 569-3161                         
                                       
Turkey                        Sampson  
45 Union Rd.                           
Turkey, NC 28393-0375                  
(910) 592-7321                         
                                       
Warsaw                         Duplin  
114 N. Pine St.                        
Warsaw, NC 28398-0896                  
(910) 293-7176                         
<PAGE>
Branch                        County       
------                        ------       
                                       
Whitakers                        Nash  
101 N. White St.                       
Whitakers, NC 27891-0130               
(252) 437-0611                         
                                       
Windsor                        Bertie  
101 N. King St.                        
Windsor, NC 27983-0529                 
(252) 794-3011                         
                                       
Winton                       Hertford  
301 N. Main St.                        
Winton, NC 27986-0278                  
(252) 358-3111                         
                                       



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<PAGE>
GENERAL INFORMATION_____________________________________________________

Shareholders' Meeting

The Annual Meeting of Shareholders will be held on Wednesday,  April 21, 1999 at
3:00 P. M. at the Goldsboro Country Club, 1500 South Slocumb Street,  Goldsboro,
North Carolina.

Stock Transfer Agent and Registrar

First-Citizens Bank &Trust Company
100 E. Tryon Road
Raleigh, North Carolina 27603

General Counsel

Ward and Smith, P.A.
New Bern, North Carolina  28563-0867

Auditors

KPMG LLP

Raleigh, North Carolina 27601

Form 10-K

Copies of Southern  BancShares' Annual Reports on Form 10-K are available on the
internet at www.sec.gov/cgi-bin/srch-edgar or upon written request to Secretary,
Southern  BancShares  (N.C.),  Inc.  Post  Office Box 729,  Mount  Olive,  North
Carolina  28365-0729.  A copy of Southern BancShares' Annual Report on Form 10-K
for 1998, including Financial Statements and Schedules thereto, will be provided
without charge to any shareholder making such request.

Equal Opportunity Employer

Southern Bank and Trust Company is an equal opportunity employer

Member FDIC

This report has not been reviewed or conformed for accuracy by the FDIC.


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