---



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2004



Commission File No. 0-10852



---



SOUTHERN BANCSHARES (N.C.), INC.

(Exact name of Registrant as specified in its charter)



|                                  |  |                       
|--------------------------------- |  | ----------------------
|Delaware                          |  | 56-1538087            
|(State or other jurisdiction      |  | (I.R.S. Employer      
|of incorporation or organization) |  | Identification Number)



116 East Main Street

Mount Olive, North Carolina 28365

(Address of Principal Executive Offices, Zip Code)



(919) 658-7000

(Registrants Telephone Number, including Area Code)



---



| |  |                                    |  |                                                      
| |  | ---------------------------------- |  | -----------------------------------------------------
| |  | Securities registered pursuant to: |  |                                                      
| |  | Section 12(b) of the Act:          |  | 8.25% Junior Subordinated Debentures                 
| |  | Section 12(g) of the Act:          |  | Series B non-cumulative preferred stock, no par value



---



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No ̈



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



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

Yes ̈No x



The aggregate market value of the Registrants common equity held by nonaffiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the Registrants most recently completed second fiscal quarter was approximately $47.2 million. (There is no established market, published quotes or reported prices for the Registrants common
stock. The market value of shares held by nonaffiliates has been calculated based on prices known to management of Registrant in privately negotiated transactions.)



The number of shares outstanding of the Registrants common stock as of March 07, 2004: Common Stock, $5.00 par
value109,452 shares



Portions of the Registrants
definitive Proxy Statement dated March 22, 2005 for the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III.



---



---

CROSS REFERENCE INDEX



|              |  |         |  |                                                                                                                                         |  |            |  
|------------- |  | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | -
|              |  |         |  |                                                                                                                                         |  | PageNumber |  
|PART I        |  | Item 1  |  | Business                                                                                                                                |  | 3          |  
|              |  | Item 2  |  | Properties                                                                                                                              |  | 8          |  
|              |  | Item 3  |  | Legal Proceedings                                                                                                                       |  | 33         |  
|              |  | Item 4  |  | Submission of Matters to a Vote of Security Holders                                                                                     |  | None       |  
|PART II       |  | Item 5  |  | Market for the Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities                        |  | 34         |  
|              |  | Item 6  |  | Selected Financial Data                                                                                                                 |  | 12         |  
|              |  | Item 7  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                   |  | 9          |  
|              |  | Item 7A |  | Quantitative and Qualitative Disclosures about Market Risk                                                                              |  | 23         |  
|              |  | Item 8  |  | Financial Statements and Supplementary Data                                                                                             |  |            |  
|              |  |         |  | Quarterly Financial Summary for 2004 and 2003                                                                                           |  | 32-33      |  
|              |  |         |  | Reports of Independent Registered Public Accounting Firms                                                                               |  | 37-38      |  
|              |  |         |  | Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                            |  | 39         |  
|              |  |         |  | Consolidated Statements of Income and Comprehensive Income                                                                              |  |            |  
|              |  |         |  | for the years ended December 31, 2004, 2003 and 2002                                                                                    |  | 40         |  
|              |  |         |  | Consolidated Statements of Shareholders Equity for the years                                                                           |  |            |  
|              |  |         |  | ended December 31, 2004, 2003 and 2002                                                                                                  |  | 41         |  
|              |  |         |  | Consolidated Statements of Cash Flows for the years ended                                                                               |  |            |  
|              |  |         |  | December 31, 2004, 2003 and 2002                                                                                                        |  | 42         |  
|              |  |         |  | Notes To Consolidated Financial Statements                                                                                              |  | 43-64      |  
|              |  | Item 9  |  | Changes in and Disagreements with Accountants on Accounting                                                                             |  |            |  
|              |  |         |  | and Financial Disclosures                                                                                                               |  | None       |  
|              |  | Item 9A |  | Controls and Procedures                                                                                                                 |  | 36         |  
|              |  | Item 9B |  | Form 8-K Required Disclosures Not Reported                                                                                              |  | None       |  
|PART III      |  | Item 10 |  | Directors and Executive Officers of Registrant                                                                                          |  |            | *
|              |  | Item 11 |  | Executive Compensation                                                                                                                  |  |            | *
|              |  | Item 12 |  | Security Ownership of Certain Beneficial Owners and Management                                                                          |  |            |  
|              |  |         |  | and Related Stockholder Matters                                                                                                         |  |            | *
|              |  | Item 13 |  | Certain Relationships and Related Transactions                                                                                          |  |            | *
|              |  | Item 14 |  | Principal Accountant Fees and Services                                                                                                  |  |            | *
|PART IV       |  | Item 15 |  | Exhibits and Financial Statement Schedules                                                                                              |  |            |  
|              |  | (1)     |  | Financial Statements (see Item 8 for Reference)                                                                                         |  |            |  
|              |  | (2)     |  | Financial Statement Schedules normally required on Form 10-K are omitted since they are not applicable, except as referred to in Item 8 |  |            |  
|              |  | (3)     |  | The Exhibits listed in the Exhibit Index are being filed or furnished with or incorporated into this report                             |  | 67         |  
|SIGNATURES    |  |         |  | 65-66                                                                                                                                   | 
|EXHIBIT INDEX |  |         |  | 67                                                                                                                                      | 

---

|* |  | Information required by Item 10 is incorporated herein by reference to the information that appears under the captions Section 16(a) Beneficial Ownership Reporting
Compliance, PROPOSAL 1: ELECTION OF DIRECTORS, Executive Officers, Audit CommitteeFunction and Audit CommitteeMembers on pages 4, 5, 6 and 10 of Registrants definitive Proxy
Statement dated March 22, 2005, and the information that appears under the captions Code of Ethics, Audit Committee Financial Expert and Procedures for Shareholder Recommendations to Nominating Committee on pages
35 of this report.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Information required by Item 11 is incorporated herein by reference to the information that appears under the captions Director Compensation, Compensation
Committee Interlocks and Insider Participation and Executive Compensation on pages 5, 8 and 10 of the Registrants definitive Proxy Statement dated March 22, 2005.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Information required by Item 12 is incorporated herein by reference to the information that appears under the caption Beneficial Ownership of Voting Securities on pages
2 through 4 of the Registrants definitive Proxy Statement dated March 22, 2005.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Information required by Item 13 is incorporated herein by reference to the information that appears under the caption Transactions with Related Parties on page 12 and 13
of the Registrants definitive Proxy Statement dated March 22, 2005.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Information required by Item 14 is incorporated herein by reference to the information that appears under the caption Services and Fees During 2004 on page 14 of the
Registrants definitive Proxy Statement dated March 22, 2005.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



---

BUSINESS



General.    Southern BancShares (N.C.), Inc. (hereinafter, with all of its subsidiaries, referred to as
BancShares or Registrant), is a bank holding company which was organized during 1986 as the successor to Southern BancShares (N.C.), Inc., a North Carolina corporation (SBS). SBS was formed in 1982 as the parent
company of Southern Bank and Trust Company (Southern). During 1986, SBS was merged into BancShares to effect the reincorporation of Southerns parent company in Delaware.



Southern is BancShares principal operating subsidiary and is currently engaged in commercial banking through 53
offices located primarily in eastern North Carolina.



Bancshares executive offices are located at 116 East Main Street, Mount Olive, North Carolina 28365, and its telephone number is (919) 658-7000.



BancShares principal assets are its investments in and receivables from its bank subsidiary and its investment securities portfolio. Its primary
sources of income are dividends from its bank subsidiary and interest income on its investment securities portfolio. Certain laws and regulations restrict the ability of Southern to transfer funds to BancShares in the form of cash dividends or
loans. All significant activities of BancShares and its subsidiaries are banking related so that BancShares operates within one industry segment. Neither BancShares nor its subsidiaries has any foreign operations.



Services.    Southern provides a full range of
banking and financial services to individuals, small and medium-sized businesses and governmental units located in its banking markets, including regular and interest checking accounts, money market, savings and time deposit accounts, personal and
business loans and a variety of other services incidental to commercial banking. Southern has a wholly-owned subsidiary, Goshen, Inc., which acts as a trustee and agent for credit life and credit accident and health insurance written in connection
with loans made by Southern.



Employees.    All of BancShares Officers serve as Officers of Southern. BancShares has no employees of its own. As of December 31, 2004, Southern employed 406 full-time employees (including executive
officers) and 34 part-time employees. Southern is not a party to any collective bargaining agreement with its employees and it considers its relations with its employees to be good.



Supervision and Regulation.    The business and operations of BancShares and Southern are subject
to extensive federal and state governmental regulation and supervision.



BancShares is a bank holding company registered with the Federal Reserve Board (the FRB) under the Bank Holding Company Act of 1956, as amended (the BHCA). It is subject to supervision and examination by, and the
regulations and reporting requirements of, the FRB. Under the BHCA, a bank holding companys activities are limited to banking, managing or controlling banks, or engaging in any other activities which the FRB determines to be closely related
and a proper incident to banking or managing or controlling banks. The internal affairs of BancShares, including the rights of its shareholders, are governed by Delaware law and by its Articles of Incorporation and Bylaws. BancShares files periodic
reports under the Securities Exchange Act of 1934 and is subject to the jurisdiction of the Securities and Exchange Commission.



The BHCA prohibits a bank holding company from acquiring direct or indirect control of more than 5.0% of the outstanding voting stock, or substantially
all of the assets, of any financial institution, or merging or consolidating with another bank holding company or savings bank holding company, without prior approval of the FRB. Additionally, the BHCA generally prohibits bank holding companies from
engaging in, or acquiring ownership or control of more than 5.0% of the outstanding voting stock of any company that engages in a non-banking activity unless that activity is determined by the FRB to be closely related and a proper incident to
managing or controlling banks.



There are a number of
obligations and restrictions imposed by law on a bank holding company and its insured bank subsidiaries that are designed to minimize potential loss to depositors and the FDIC insurance funds. For example, if a bank holding companys insured
bank subsidiary becomes undercapitalized, the bank holding company is required to guarantee (subject to certain limits) the subsidiarys compliance with the terms of any capital restoration plan filed with its



3



---

federal banking agency. A bank holding company is required to serve as a source of financial strength to its bank subsidiaries and to commit resources to
support those banks in circumstances where it otherwise might not do so, absent such policy. Under the BHCA, the FRB may require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary if the FRB determines
that the activity or control constitutes a serious risk to the financial soundness and stability of a bank subsidiary of the bank holding company.



Regulation of Southern.    Southern is an insured, state-chartered bank. Southerns deposits are insured by the
FDICs Bank Insurance Fund, and is subject to supervision and examination by, and the regulations and reporting requirements of, the Federal Deposit Insurance Corporation (the FDIC) and the North Carolina Commissioner of Banks (the
Commissioner). Southern is not a member of the Federal Reserve System.



As an insured bank, Southern is prohibited from engaging as a principal in an activity that is not permitted for national banks unless (i) the FDIC determines that the activity would pose no significant risk to the
deposit insurance fund and (ii) Southern is, and continues to be, in compliance with all applicable capital standards. Southern is also prohibited from directly acquiring or retaining any equity investment of a type or in an amount not permitted for
national banks.



The FDIC and the Commissioner regulate all
areas of Southerns business, including its reserves, loans, mergers, the payment of dividends, and other aspects of its operations. The regulators conduct regular examinations of Southern, and Southern must furnish periodic reports to its
regulators containing detailed financial and other information regarding its affairs. The federal and state regulators have broad powers to enforce laws and regulations that apply to Southern and to require corrective action of conditions that
affect its safety and soundness. Among others, these powers include issuing cease and desist orders, imposing civil penalties, removing officers and directors, and the ability otherwise to intervene in the operation and management of Southern if
examinations of and reports filed by Southern reflect the need to do so.



Even though it is not a member of the Federal Reserve System, the business of Southern is influenced by the monetary and fiscal policies of the FRB. The actions and policy directives of the FRB determine to a
significant degree the cost and the availability of funds obtained from money market sources for lending and investing and also influence, directly and indirectly, the rates of interest paid by Southern on time and savings deposits. Additionally,
Southerns earnings are affected by general economic conditions, management policies, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above.



The following paragraphs summarize some of the other significant statutes and
regulations that affect BancShares and Southern, but they are not a complete discussion of all the laws that affect their business. Each paragraph is qualified in its entirety by reference to the particular statutory or regulatory provision or
proposal being described.



Gramm-Leach-Bliley
Act.    The federal Gramm-Leach-Bliley Act (the GLB Act) adopted by Congress during 1999 has dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act
expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them.



The GLB Act permits bank holding companies to become financial holding companies and, in general (i) expands
opportunities to affiliate with securities firms and insurance companies; (ii) overrides certain state laws that would prohibit certain banking and insurance affiliations; (iii) expands the activities in which banks and bank holding companies may
participate; (iv) requires that banks and bank holding companies engage in some activities only through affiliates owned or managed in accordance with certain requirements; and (v) reorganizes responsibility among various federal regulators for
oversight of certain securities activities conducted by banks and bank holding companies.



Among its other provisions, the GLB Act also contains extensive customer privacy protection provisions which require banks to adopt and implement policies and procedures for the protection of the financial privacy of
their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons. Under these provisions, a bank must provide to its customers, at the inception of the customer relationship
and annually thereafter, the Banks policies and procedures regarding the handling of customers nonpublic personal financial information. The GLB Act provides that, except for certain limited exceptions, a bank may not provide such
personal information to unaffiliated third parties unless the bank discloses to the customer that such information may be so



4



---

provided and the customer is given the opportunity to opt out of such disclosure. A bank may not disclose to a non- affiliated third party, other than to a
consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLB Act permits states to adopt customer privacy protections that are stricter than those contained in the Act, and it makes it a
criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.



BancShares has not chosen to become a financial holding company, and to date it has not engaged in any new activity authorized as a result
of the GLB Act. The GLB Act has expanded opportunities for Southern to provide other services and obtain other revenues in the future. However, this expanded authority also may present it with new challenges as its larger competitors are able to
expand their services and products into areas that are not feasible for smaller, community oriented financial institutions.



Payment of Dividends.    Under current law, BancShares is authorized to pay dividends such as are declared by its Board of
Directors, provided that no such distribution results in its insolvency on a going concern or balance sheet basis. However, BancShares is a legal entity separate and distinct from Southern, and its principal source of funds with which it can pay
dividends to its shareholders is dividends it receives from Southern. Therefore, BancShares ability to pay dividends effectively is subject to the same limitations that apply to Southern.



In general, Southern may pay dividends only from its undivided profits.
However, if its surplus is less than 50 percent of its paid-in capital stock, then Southerns directors may not declare any cash dividend until it has transferred from undivided profits to surplus 25 percent of its undivided profits or any
lesser percentage necessary to raise its surplus to an amount equal to 50 percent of its paid-in capital stock.



Under federal law, and as an insured bank, Southern is prohibited from making any capital distributions, including paying a cash dividend, if it is, or
after making the distribution it would become, undercapitalized as that term is defined in the Federal Deposit Insurance Act (the FDIA). Additionally, if in the opinion of the FDIC an insured bank under its jurisdiction is
engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the FDIC may require, after notice and hearing, that the bank cease and desist from
that practice. The federal banking agencies have indicated that paying dividends that deplete a banks capital base to an inadequate level would be an unsafe and unsound banking practice. The federal agencies have issued policy statements which
provide that insured banks generally should only pay dividends out of current operating earnings, and under the FDIA no dividend may be paid by an FDIC-insured bank while it is in default on any assessment due the FDIC. The payment of dividends by
Southern also may be affected or limited by other factors, such as requirements that its regulators have the authority to impose to maintain its capital above regulatory guidelines.



Capital Adequacy.    BancShares and Southern each is required to comply with the capital adequacy
standards established by the FRB in the case of BancShares, and by the FDIC in the case of Southern. The FRB and FDIC have promulgated risk-based capital and leverage capital guidelines for determining the adequacy of the capital of a bank holding
company or a bank, and all applicable capital standards must be satisfied for a bank holding company or a bank to be considered in compliance with these capital requirements.



Under the risk-based capital measure, the minimum ratio (Total Capital Ratio) of an entitys total capital
(Total Capital) to its risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. At least half of Total Capital must be composed of common equity, undivided profits, minority interests
in the equity accounts of consolidated subsidiaries, qualifying non-cumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (Tier 1 Capital).
The remainder (Tier 2 Capital) may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of loan loss reserves. A bank or bank holding company that does not
satisfy minimum capital requirements may be required to adopt and implement a plan acceptable to its federal banking regulator to achieve an adequate level of capital.



Under the leverage capital measure, the minimum ratio (the Leverage Capital Ratio) of Tier 1 Capital to average
assets, less goodwill and certain other intangible assets, is 3.0% for entities that meet certain specified criteria, including having the highest regulatory rating. All others generally are required to maintain an additional cushion of 100 to 200
basis points above the stated minimum. The guidelines also provide that banks experiencing internal growth or making



5



---

acquisitions will be expected to maintain strong capital positions substantially above the minimum levels without significant reliance on intangible assets,
and a banks Tangible Leverage Ratio (deducting all intangibles) and other indicia of capital strength also will be taken into consideration by banking regulators in evaluating proposals for expansion or new activities.



The following table lists Southerns capital ratios at December 31,
2004:



|                                       |  |                       |   |  |                                      |   |  |                                      |  
|-------------------------------------- |  | --------------------- | - |  | ------------------------------------ | - |  | ------------------------------------ | -
|                                       |  | Minimum RequiredRatio |   |  | Required Ratio To BeWell Capitalized |   |  | Southerns Ratio atDecember 31, 2004 |  
|Risk-based capital ratios:             |  |                       |   |  |                                      |   |  |                                      |  
|Tier I capital to risk-weighted assets |  | 4.00                  | % |  | 6.00                                 | % |  | 11.32                                | %
|Total capital to risk-weighted assets  |  | 8.00                  | % |  | 10.00                                | % |  | 13.45                                | %
|Leverage capital ratio                 |  | 3.00                  | % |  | 5.00                                 | % |  | 7.39                                 | %



The FRB and the FDIC
also consider interest rate risk (when the interest rate sensitivity of an institutions assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of an entitys capital adequacy. The
bank regulatory agencies methodology for evaluating interest rate risk requires banks with excessive interest rate risk exposure to hold additional amounts of capital against their exposure to losses resulting from that risk. The regulators
also require banks to incorporate market risk components into their risk-based capital. Under these market risk requirements, capital is allocated to support the amount of market risk related to a banks trading activities.



Capital categories are determined solely for the purpose of applying
prompt corrective action rules described below which have been adopted by the various federal banking regulators, and they do not necessarily constitute an accurate representation of a banks overall financial condition or prospects
for other purposes. A failure to meet capital guidelines could subject a bank holding company or bank to a variety of enforcement remedies under those rules, including the issuance of a capital directive, the termination of deposit insurance by the
FDIC, a prohibition on the taking of brokered deposits, and certain other restrictions on its business. As described below, substantial additional restrictions can be imposed on banks that fail to meet applicable capital requirements.



Prompt Corrective Action.    Current federal law
establishes a system of prompt corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized), and it is required to take certain mandatory supervisory actions, and is authorized to take other discretionary actions, with
respect to banks in the three undercapitalized categories. The severity of any actions taken will depend upon the capital category in which a bank is placed. Generally, subject to a narrow exception, current federal law requires the FDIC to appoint
a receiver or conservator for a bank that is critically undercapitalized.



Under the FDICs rules implementing the prompt corrective action provisions, an insured, state-chartered bank that (1) has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, and
a Leverage Ratio of 5.0% or greater, and (2) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is considered to be well capitalized. A bank with a Total Capital
Ratio of 8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater, is considered to be adequately capitalized. A bank that has a Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of
less than 4.0%, or a Leverage Ratio of less than 4.0%, is considered to be undercapitalized. A bank that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is
considered to be significantly undercapitalized, and a bank that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be critically undercapitalized. For purposes of these rules, the term
tangible equity includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all
intangible assets (with various exceptions). A bank may be deemed to be in a capitalization category lower than indicated by its actual capital position if it receives an unsatisfactory examination rating.



A bank that is categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to the FDIC. An undercapitalized bank also is generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In



6



---

addition, the FDIC has authority with respect to any undercapitalized bank to take any of the actions it is required to or may take with respect
to a significantly undercapitalized bank if it determines that those actions are necessary to carry out the purpose of the law. On December 31, 2004, Southern had capital sufficient to qualify as well capitalized.



Reserve Requirements.    Under regulations of
the FRB, all FDIC-insured banks must maintain average daily reserves against their transaction accounts. No reserves are required to be maintained on the first $7.0 million of transaction accounts, but reserves equal to 3.0% must be maintained on
the aggregate balances of those accounts between $7.0 million and $47.6 million, and reserves equal to 10.0% must be maintained on aggregate balances in excess of $47.6 million. Those percentages are subject to adjustment by the FRB. Because
required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of Southerns interest-earning assets.



FDIC Insurance Assessments.    The FDIC currently
uses a risk-based assessment system that takes into account the risks attributable to different categories and concentrations of assets and liabilities for purposes of calculating deposit insurance assessments to be paid by insured banks. The
risk-based assessment system categorizes banks as well capitalized, adequately capitalized or undercapitalized. These three categories are substantially similar to the prompt corrective action categories described
above, with the undercapitalized category including banks that are undercapitalized, significantly undercapitalized and critically undercapitalized for prompt corrective action purposes. Banks also are
assigned by the FDIC to one of three supervisory subgroups within each capital group, with the particular supervisory subgroup to which a bank is assigned being based on a supervisory evaluation provided to the FDIC by the Banks primary
federal banking regulator and information which the FDIC determines to be relevant to the Banks financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the Banks
state supervisor). A different insurance assessment rate (ranging from zero to 27 basis points) applies to each of the nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups). A banks assessment
rate is determined based on the capital category and supervisory subgroup to which it is assigned.



The FDIC may terminate a banks deposit insurance upon a finding that the bank has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.



The FDIC is charged with the responsibility of maintaining the adequacy of the Bank Insurance Fund and the Savings Association Insurance Fund, and the
amounts paid by banks for deposit insurance is influenced not only by the banks capital category and supervisory subgroup but also by the adequacy of the insurance fund at any time. FDIC insurance assessments could be increased substantially
in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the insurance fund.



Restrictions on Transactions with Affiliates.    Southern is subject to the provisions of Section 23A of the Federal Reserve
Act. Section 23A places limits on the amount of:



| |  |  | a banks loans or extensions of credit to, or investment in, its affiliates;
| | - |  | ----------------------------------------------------------------------------



| |  |  | assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount of loans or extensions of credit by a bank to third parties which are collateralized by the securities or obligations of the banks affiliates; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a banks guarantee, acceptance or letter of credit issued on behalf of one of its affiliates.
| | - |  | ---------------------------------------------------------------------------------------------



For purposes of Section 23A, BancShares and any other company or entity controlled by or under common control with
BancShares, will be treated as an affiliate of Southern.



The
total amount of the above transactions by Southern is limited in amount, as to any one affiliate, to 10% of Southerns capital and surplus and, as to all affiliates combined, to 20% of Southerns capital and surplus. In addition to the
limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. Southern also must comply with other provisions of Section 23A designed to avoid the taking of low-quality assets from
an affiliate.



7



---

Southern is also subject to the provisions of Section 23B of the Federal Reserve Act which, among other
things, prohibits a bank from engaging in the above transactions with its affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies.



Federal
law also places restrictions on Southerns ability to extend credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.



USA Patriot Act of 2001.    The USA Patriot Act of
2001 was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work
cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws which
require various new regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering. The Act has required financial institutions to adopt new policies and procedures to combat money laundering, and it grants the Secretary of the Treasury broad authority to establish regulations and impose
requirements and restrictions on financial institutions operations.



Community Reinvestment.    Under the Community Reinvestment Act (CRA), as implemented by regulations of the federal bank regulatory agencies, an insured bank has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for
banks, nor does it limit a banks discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the federal bank regulatory agencies, in
connection with their examination of insured banks, to assess Southerns records of meeting the credit needs of its communities, using the ratings of outstanding, satisfactory, needs to improve, or
substantial noncompliance, and to take that record into account in its evaluation of certain applications by those banks. All insured banks are required to make public disclosure of their CRA performance ratings. Southern received an
outstanding rating in its most recent CRA examination.



Sarbanes-Oxley Act of 2002.    The Sarbanes-Oxley Act of 2002 (the SOX Act) represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting.
Among other requirements, the SOX Act established: (1) new requirements for audit committees of listed companies, including independence, expertise, and responsibilities; (2) additional responsibilities regarding financial statements for the chief
executive officers and chief financial officers of reporting companies; (3) new standards for auditors and regulation of audits; (4) increased disclosure and reporting obligations for reporting companies regarding various matters relating to
corporate governance, and (5) new and increased civil and criminal penalties for violation of the securities laws.



Statistical Data.    Certain statistical disclosures for bank holding companies required by SEC Guide 3 regulations are
included in the information under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations.



PROPERTIES



BancShares does not own or lease any real property. Except for five tracts of land that are leased and upon which are constructed leasehold improvements
for the conduct of its banking business, Southern owns all of the real property utilized in its operations.



Southerns home office is located at 116 East Main Street, Mount Olive, North Carolina. All of Southerns offices are in North Carolina. At
December 31, 2004 there were 53 Southern offices.



8



---

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 2004, 2003 and 2002. 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.



Summary



BancShares earnings and cash flows are primarily derived from the commercial banking activities conducted by Southern.
Southerns commercial banking activities include commercial and consumer lending, deposit and cash management products and various other financial management products and services typically associated with commercial banking. Southern gathers
interest-bearing and noninterest-bearing deposits from retail and commercial customers and gathers supplemental short-term funding through various non-deposit sources. The liquidity generated from these funding sources is primarily invested in
interest-earning assets consisting of various types of loans, investment securities, overnight funds sold investments and the banking premises and equipment used in the delivery of financial services.



Numerous factors influence customer demand for Southerns deposit and
loan products including the overall economy within Southerns markets and the overall level of financial services competition within those markets. During 2004 and 2003, overall economic uncertainty and very low interest rates managed by the
Federal Reserve significantly impacted customer demand for both deposit and loan products. The low interest rate market caused some customers to choose shorter term deposit products including short-term certificates of deposit, transaction, savings
and money market accounts. The low interest rate market also provided many customers with an opportunity to refinance existing loans and the ability to either reduce their overall loan requirements or to increase their loan requirements at much
lower interest rates.



The overall strength of the economy also
influences the quality and collectibility of loans and the level of customer bankruptcies. Southern utilizes various asset and liability management tools to minimize the potential adverse impact of economic trends and to maximize opportunities
provided by favorable economic trends.



Financial institutions
typically focus their strategic planning and operating goals on maximizing profitability and the improvement of the return on average assets and return on average shareholders equity performance profitability measures. BancShares has historically
placed significant emphasis on asset quality, liquidity and capital conservation, even when those goals may ultimately be detrimental to current period earnings performance as reflected by the return on average assets and return on average
shareholders equity performance measures so, BancShares return on average assets and return on average equity has historically compared unfavorably to financial institutions of similar size.



BancShares strategic analysis of its corporate and competitive strengths
indicate many opportunities for growth and expansion of financial services within its markets. Southern operates in diverse eastern North Carolina geographic markets that offer opportunities to expand varying types of services to existing customers
as well as opportunities to expand market share through strategic acquisitions of branch locations from competitor financial institutions. Southern also believes that, through superior customer service, there are opportunities to increase earnings
performance by attracting customers of its financial competitors.



BancShares focuses on mitigating, where possible, growth and profitability risks. BancShares has limited control of risks such as economic, competitive and regulatory risks. Southern considers overall economic risk to be its greatest risk
area. Primarily, economic risks of recession, rapid changes in market interest rates and significant increases in inflation are of the most concern to Management. Southerns smaller asset size and limited capital resources, as compared to its
primary market financial service competitors, require significant and constant Management attention to all areas of economic risk.



An analysis of BancShares overall financial condition and growth can be made by examining the changes and trends in the interest-earning asset and
interest-bearing components in the following tables, discussions, consolidated financial statements and notes to the consolidated financial statements. Tables and discussions are also presented detailing the impact of branch acquisitions, capital
position, loan loss experience, allowances for loan losses, non-interest expenses and non-interest income.



9



---

Consolidated net income was $5.8 million for 2004 compared to $8.1 million for 2003 and $9.1 million for
2002. Net income per share for the year ended December 31, 2004 totaled $49.12 compared to $68.72 in 2003 and $76.77 in 2002. Return on average assets totaled 0.56 percent during 2004, 0.85 percent during 2003 and 1.05 percent during 2002. Table 1
provides a five year summary of financial information for BancShares.



BancShares experienced an 28.06 percent decrease in net income during 2004, compared to 2003. The principal core earnings cause of this decrease was reduced net interest income created by the low interest rate market managed by the Federal
Reserve during 2004 that resulted in total interest earning assets continuing to reprice downward faster than interest bearing liabilities. The resulting decrease in the interest rate spread reduced 2004 net interest earnings significantly. In
addition, in 2004, income, considered to be noncore earnings, consisting of gains on sales of available-for-sale securities and gains on the sales of mortgage loans, totaled $871,000, a 67.34 percent decrease from $2.7 million for such noncore 2003
income.



BancShares experienced an 11.52 percent decrease in
net income during 2003, compared to 2002. The principal cause of this decrease was reduced net interest income created by declining interest rate market managed by the Federal Reserve during 2003 that resulted in interest earning assets repricing
downward faster than interest bearing liabilities. In addition, in 2003, income considered to be noncore earnings and consisting of gains on sales of available-for-sale securities and gains on the sales of mortgage loans, totaled $2.7 million, a
4.82 percent decrease from $2.9 million for such noncore 2002 income.



In 2002, as a result of the overall economy, there were greater opportunities for management to realize earnings from the sale of securities. In 2003, as a result of the significantly increased mortgage financing and refinancing resulting
from the Federal Reserves maintaining the lowest interest rates in several decades, there were significantly increased opportunities for management to profitably sell mortgage loans. In 2004 the Federal Reserve began to slowly increase market
interest rates resulting in significantly decreased mortgage financing, refinancing and opportunities for management to profitably sell mortgage loans.



An analysis of BancShares financial condition and growth can be made by examining the changes and trends in interest-earning assets and
interest-bearing liabilities. Such an analysis also requires an evaluation of noninterest income and noninterest expenses. In recent years, increasing total noninterest income has been a significant focus for BancShares. The introduction of new
revenue sources and modifications to existing products and services has allowed service related noninterest income to grow.



In recent years the recognition of gains and losses on sales of mortgage loans and the recognition of gains and losses on sales of available-for-sale
securities has also had a significant impact on total noninterest income, although management does not consider these sources of noninterest income to be a core source of revenues for BancShares. The sale of mortgage loans also results in the
recognition of mortgage servicing rights (MSRs) income. MSRs represent the estimated value of the right to service mortgage loans for others. Capitalization of MSRs occurs when the underlying mortgage loans are sold and the servicing rights for the
mortgage loans sold are retained. Capitalized MSRs are amortized into income over the projected servicing life of the underlying loans.



Franchise expansion has also contributed to the growth in noninterest income, but has also resulted in large increases in noninterest expense, especially
personnel-related costs, occupancy expenses, equipment expenses and intangible asset amortization expenses. In 2004 one denovo branch was opened in the second quarter and two branch acquisitions were completed in the third quarter. In 2003 one
denovo branch was opened in the first quarter and one branch acquisition was completed in the fourth quarter. Management continues to look for growth opportunities offered though acquisition opportunities and to plan for denovo branch expansion. The
acquisition of existing branches from other financial institutions also results in the payment of acquisition premiums which are allocated to non-earning assets or charged to operating earnings over time.



Members of the Holding family, including Frank B. Holding who serves as a
Director and as Chairman of BancShares Executive Committee, have been actively involved in the management of BancShares. Currently, various members of the Holding family control an aggregate of 70.06% of BancShares common stock. Southern
is party to contracts with an affiliated financial institution, First-Citizens Bank & Trust Company, Raleigh, North Carolina, pursuant to which Southern is provided with various management consulting, support and data processing services. See
Beneficial Ownership of Voting Securities and Transactions with Related Parties in Note 15, Related Parties in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS contained in this report.



10



---

CRITICAL ACCOUNTING POLICIES



BancShares significant accounting policies are set forth in note 1 of the consolidated financial statements. Of these
significant accounting policies, BancShares considers its policy regarding the allowance for loan losses to be its primary critical accounting policy, because it requires managements most subjective and complex judgments. In addition, changes
in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. Bancshares has developed appropriate policies and procedures for assessing the adequacy of
the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. BancShares assessments may be impacted in future periods by changes in economic conditions, the
impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning
BancShares allowance for loan losses and related matters, see Asset Quality.



11



---

Table 1

SELECTED
FINANCIAL DATA



|                                                    |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                    |  | December 31,                                  |          
|                                                    |  | 2004                                          |           |   | 2003 |   |           | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                    |  | (Dollars in thousands, except per share data) |          
|Summary of Operations                               |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                     |  | $                                             | 45,326    |   |      | $ | 46,083    |      |  | $ | 49,422  |   |  | $    | 54,928  |   |  | $ | 49,807  |  
|Interest expense                                    |  |                                               | 12,260    |   |      |   | 12,932    |      |  |   | 15,592  |   |  |      | 25,980  |   |  |   | 24,932  |  
|                                                    |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income                                 |  |                                               | 33,066    |   |      |   | 33,151    |      |  |   | 33,830  |   |  |      | 28,948  |   |  |   | 24,875  |  
|Provision for loan losses                           |  |                                               | 1,200     |   |      |   | 1,800     |      |  |   | 1,950   |   |  |      | 1,000   |   |  |   | 475     |  
|                                                    |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income after provision for loan losses |  |                                               | 31,866    |   |      |   | 31,351    |      |  |   | 31,880  |   |  |      | 27,948  |   |  |   | 24,400  |  
|                                                    |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Noninterest income                                  |  |                                               | 11,021    |   |      |   | 12,487    |      |  |   | 10,670  |   |  |      | 12,983  |   |  |   | 5,336   |  
|Noninterest expense                                 |  |                                               | 35,150    |   |      |   | 32,494    |      |  |   | 29,593  |   |  |      | 29,635  |   |  |   | 25,002  |  
|                                                    |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before income taxes                          |  |                                               | 7,737     |   |      |   | 11,344    |      |  |   | 12,957  |   |  |      | 11,296  |   |  |   | 4,734   |  
|Income taxes                                        |  |                                               | 1,938     |   |      |   | 3,283     |      |  |   | 3,846   |   |  |      | 3,055   |   |  |   | 1,000   |  
|                                                    |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                          |  | $                                             | 5,799     |   |      | $ | 8,061     |      |  | $ | 9,111   |   |  | $    | 8,241   |   |  | $ | 3,734   |  
|                                                    |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Selected Year-End Balances                          |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                        |  | $                                             | 1,057,450 |   |      | $ | 1,016,027 |      |  | $ | 920,603 |   |  | $    | 855,228 |   |  | $ | 803,441 |  
|Loans                                               |  |                                               | 644,191   |   |      |   | 631,171   |      |  |   | 617,150 |   |  |      | 545,300 |   |  |   | 496,966 |  
|Investment securities and overnight funds sold      |  |                                               | 347,384   |   |      |   | 293,046   |      |  |   | 221,180 |   |  |      | 226,648 |   |  |   | 219,958 |  
|Interest-earning assets                             |  |                                               | 991,670   |   |      |   | 898,645   |      |  |   | 838,634 |   |  |      | 772,309 |   |  |   | 704,672 |  
|Deposits                                            |  |                                               | 910,522   |   |      |   | 876,510   |      |  |   | 796,772 |   |  |      | 738,659 |   |  |   | 698,485 |  
|Long-term obligations                               |  |                                               | 23,711    |   |      |   | 23,711    |      |  |   | 23,000  |   |  |      | 23,000  |   |  |   | 23,000  |  
|Interest-bearing liabilities                        |  |                                               | 766,488   |   |      |   | 741,936   |      |  |   | 687,004 |   |  |      | 651,437 |   |  |   | 629,217 |  
|Shareholders equity                                |  |                                               | 96,018    |   |      |   | 88,518    |      |  |   | 77,509  |   |  |      | 67,429  |   |  |   | 59,682  |  
|Common shares outstanding                           |  |                                               | 110,126   |   |      |   | 111,530   |      |  |   | 113,649 |   |  |      | 114,208 |   |  |   | 115,209 |  
|Selected Average Balances                           |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                        |  | $                                             | 1,030,134 |   |      | $ | 953,895   |      |  | $ | 869,546 |   |  | $    | 833,716 |   |  | $ | 716,773 |  
|Loans                                               |  |                                               | 636,245   |   |      |   | 634,687   |      |  |   | 565,292 |   |  |      | 527,204 |   |  |   | 427,939 |  
|Investment securities and overnight funds sold      |  |                                               | 290,122   |   |      |   | 245,844   |      |  |   | 214,646 |   |  |      | 232,317 |   |  |   | 230,927 |  
|Interest-earning assets                             |  |                                               | 926,327   |   |      |   | 880,755   |      |  |   | 797,619 |   |  |      | 747,059 |   |  |   | 659,074 |  
|Deposits                                            |  |                                               | 890,176   |   |      |   | 825,202   |      |  |   | 749,914 |   |  |      | 720,958 |   |  |   | 624,173 |  
|Long-term obligations                               |  |                                               | 23,711    |   |      |   | 23,002    |      |  |   | 23,000  |   |  |      | 23,000  |   |  |   | 23,000  |  
|Interest-bearing liabilities                        |  |                                               | 756,990   |   |      |   | 709,352   |      |  |   | 660,267 |   |  |      | 646,072 |   |  |   | 557,625 |  
|Shareholders equity                                |  |                                               | 91,049    |   |      |   | 83,403    |      |  |   | 72,854  |   |  |      | 65,544  |   |  |   | 55,370  |  
|Common shares outstanding                           |  |                                               | 110,828   |   |      |   | 112,070   |      |  |   | 113,961 |   |  |      | 114,717 |   |  |   | 117,743 |  
|Profitability Ratios (averages)                     |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average total assets                      |  |                                               | 0.56      | % |      |   | 0.85      | %    |  |   | 1.05    | % |  |      | 0.99    | % |  |   | 0.52    | %
|Return on average shareholders equity              |  |                                               | 6.37      |   |      |   | 9.67      |      |  |   | 12.51   |   |  |      | 12.57   |   |  |   | 6.74    |  
|Dividend payout ratio (1)                           |  |                                               | 9.18      |   |      |   | 6.59      |      |  |   | 5.84    |   |  |      | 6.52    |   |  |   | 14.84   |  
|Liquidity and Capital Ratios (averages)             |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loans to deposits                                   |  |                                               | 71.47     | % |      |   | 76.91     | %    |  |   | 75.38   | % |  |      | 73.13   | % |  |   | 68.56   | %
|Shareholders equity to total assets                |  |                                               | 8.84      |   |      |   | 8.74      |      |  |   | 8.38    |   |  |      | 7.86    |   |  |   | 7.72    |  
|Per share of common stock                           |  |                                               |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income (2)                                      |  | $                                             | 49.12     |   |      | $ | 68.72     |      |  | $ | 76.77   |   |  | $    | 68.66   |   |  | $ | 28.51   |  
|Cash dividends                                      |  |                                               | 1.60      |   |      |   | 1.58      |      |  |   | 1.50    |   |  |      | 1.50    |   |  |   | 1.50    |  
|Book value (3)                                      |  |                                               | 851.21    |   |      |   | 773.07    |      |  |   | 661.68  |   |  |      | 570.07  |   |  |   | 497.68  |  

---

|(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 out-standing for the year ended December 31
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



12



---

Branch Acquisitions



During both 2004 and 2003, Southern purchased North Carolina branch offices of other banks. These branch acquisitions were accounted for as purchases,
and, therefore, the results of operations prior to purchase of these branch offices are not included in the consolidated financial statements. Information regarding these purchases is contained in the following table:



Table 2

BRANCH ACQUISITIONS



|                               |  |                |  |                        |        |                  |   |       
|------------------------------ |  | -------------- |  | ---------------------- | ------ | ---------------- | - | ------
|                               |  | Date           |  | LoansAcquired          |        | DepositsAcquired
|                               |  |                |  | (dollars in thousands)
|Capital Bank-Seaboard, NC      |  | September 2004 |  | $                      | 8,441  |                  | $ | 18,231
|Capital Bank-Woodland, NC      |  | September 2004 |  |                        | 2,262  |                  |   | 9,808 
|                               |  |                |  |                        |        |                  |   |       
|2004 Branch Acquisition Totals |  |                |  | $                      | 10,703 |                  | $ | 28,039
|                               |  |                |  |                        |        |                  |   |       
|RBC Centura- Norlina, NC       |  | October 2003   |  | $                      | 1,220  |                  | $ | 18,280
|                               |  |                |  |                        |        |                  |   |       
|2003 Branch Acquisition Totals |  |                |  | $                      | 1,220  |                  | $ | 18,280
|                               |  |                |  |                        |        |                  |   |       



INTEREST-EARNING
ASSETS



Interest-earning assets include loans, investment
securities and overnight investments. Interest-earning assets reflect varying interest rates based on the risk level and maturity of the asset. Riskier investments typically carry a higher rate and expose the investor to potentially higher levels of
default. Southern has historically focused on maintaining high asset quality requiring management to perform significant underwriting and monitoring procedures. Southerns investment portfolio includes primarily United States Treasury and
government agency securities. The level of investment securities is primarily the result of overall loan and deposit trends. When deposit growth exceeds loan growth the excess liquidity primarily increases investment securities. When loan growth
exceeds deposit growth primarily maturing investment securities are utilized to fund the loan growth rather than being reinvested into the securities market. Southern maintains an operating liquidity level of overnight funds sold investments with
other financial institutions that are within Southerns risk tolerance levels.



Interest-earning assets averaged $926.3 million during 2004, an increase of $45.6 million or 5.17 percent over 2003 levels, compared to a $83.1 million or 10.42 percent increase in 2003 over 2002 levels. Growth among
average interest-earning assets during 2004 was primarily due to the September acquisitions of Seaboard and Woodland and internal growth.



Loans.    Loan production is principally driven by the eastern North Carolina economy. Management seeks commercial lending
opportunities collateralized by real estate. Traditional mortgage loan production is also a goal of management. Most mortgage loan production is then sold into the mortgage secondary markets with the servicing rights retained by the Bank. Loan
demand in recent years for consumer loans has declined as consumers have responded to retailer financing promotions and utilized mortgage equity lines of credit to finance their purchases.



13



---

As of December 31, 2004, gross loans outstanding were $644.2 million, a 2.06 percent increase over the
December 31, 2003 balance of $631.2 million, which was a 2.27 percent increase over the December 31, 2002 balance of $617.2 million. Loan growth during 2003 resulted principally from internal loan growth, the de novo opening of the Kenansville
Branch in February and the October acquisition of the Norlina branch. Loan growth during 2004 resulted principally from internal loan growth, the September acquisitions of the Seaboard and Woodland branches and the de novo opening of the Manteo
branch in May. Loan balances for the last five years are provided in Table 3.



Table 3

LOANS



|                                       |  |                        |         |      |   |         |  |      |         |      |   |         |  |   |        
|-------------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                       |  | December 31,          
|                                       |  | 2004                   |         | 2003 |   | 2002    |  | 2001 |         | 2000
|                                       |  | (Dollars in thousands)
|Commercial, financial and agricultural |  | $                      | 90,653  |      | $ | 92,944  |  | $    | 93,855  |      | $ | 92,293  |  | $ | 91,936 
|Real estate:                           |  |                        |         |      |   |         |  |      |         |      |   |         |  |   |        
|Construction                           |  |                        | 62,438  |      |   | 65,484  |  |      | 61,800  |      |   | 52,414  |  |   | 14,621 
|Mortgage:                              |  |                        |         |      |   |         |  |      |         |      |   |         |  |   |        
|Commercial                             |  |                        | 200,588 |      |   | 186,847 |  |      | 176,357 |      |   | 134,562 |  |   | 126,472
|One to four family residential         |  |                        | 133,976 |      |   | 122,534 |  |      | 136,909 |      |   | 132,513 |  |   | 115,473
|Equityline                             |  |                        | 57,153  |      |   | 49,876  |  |      | 49,071  |      |   | 42,504  |  |   | 40,468 
|Other                                  |  |                        | 30,313  |      |   | 47,385  |  |      | 27,956  |      |   | 24,823  |  |   | 39,069 
|Consumer                               |  |                        | 42,771  |      |   | 35,925  |  |      | 40,130  |      |   | 39,581  |  |   | 38,795 
|Lease financing                        |  |                        | 26,299  |      |   | 30,176  |  |      | 31,072  |      |   | 26,610  |  |   | 30,132 
|                                       |  |                        |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total loans                            |  | $                      | 644,191 |      | $ | 631,171 |  | $    | 617,150 |      | $ | 545,300 |  | $ | 496,966
|                                       |  |                        |         |      |   |         |  |      |         |      |   |         |  |   |        

---

All information presented in this table relates to
domestic loans as BancShares makes no foreign loans.



During
2005, management anticipates increased loan growth among loans to commercial borrowers due to the continued relatively low interest rate environment and the overall improvement in the economy. Demand among retail customers has principally shifted to
open-end credit products such as equityline loans and continued growth in equityline loans is expected during 2005.



14



---

To minimize the potential adverse impact of interest rate fluctuations, management monitors the maturity
and repricing distribution of the loan portfolio. BancShares offers variable rate loan products and fixed rate callable loans to reduce interest rate risk. Table 4 details the maturity and repricing distribution as of December 31, 2004. Of the gross
loans outstanding on December 31, 2004, 18.24 percent have scheduled maturities or repricing dates that extend beyond five years.



Table 4

LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY



|                               |  |                        |         |                                     |   |                 |  |       |         |  |   |        
|------------------------------ |  | ---------------------- | ------- | ----------------------------------- | - | --------------- |  | ----- | ------- |  | - | -------
|                               |  | WithinOne Year         |         | After One Year ButWithin Five Years |   | AfterFive Years |  | Total
|                               |  | (Dollars in thousands)
|Commercial and Financial       |  | $                      | 11,785  |                                     | $ | 57,111          |  | $     | 21,757  |  | $ | 90,653 
|Real Estate:                   |  |                        |         |                                     |   |                 |  |       |         |  |   |        
|Commercial                     |  |                        | 26,076  |                                     |   | 126,370         |  |       | 48,142  |  |   | 200,588
|One to four family residential |  |                        | 17,417  |                                     |   | 84,405          |  |       | 32,154  |  |   | 133,976
|Construction                   |  |                        | 62,438  |                                     |   |                |  |       |        |  |   | 62,438 
|Equityline                     |  |                        | 57,153  |                                     |   |                |  |       |        |  |   | 57,153 
|Other                          |  |                        | 3,569   |                                     |   | 20,989          |  |       | 5,755   |  |   | 30,313 
|Consumer                       |  |                        | 5,560   |                                     |   | 26,946          |  |       | 10,265  |  |   | 42,771 
|Lease Financing                |  |                        | 3,419   |                                     |   | 16,568          |  |       | 6,312   |  |   | 26,299 
|                               |  |                        |         |                                     |   |                 |  |       |         |  |   |        
|Total                          |  | $                      | 187,417 |                                     | $ | 332,389         |  | $     | 124,385 |  | $ | 644,191
|                               |  |                        |         |                                     |   |                 |  |       |         |  |   |        
|Fixed Rate                     |  | $                      | 62,660  |                                     | $ | 150,578         |  | $     | 100,410 |  | $ | 313,648
|Variable Rate                  |  |                        | 124,757 |                                     |   | 181,811         |  |       | 23,975  |  |   | 330,543
|                               |  |                        |         |                                     |   |                 |  |       |         |  |   |        
|Total                          |  | $                      | 187,417 |                                     | $ | 332,389         |  | $     | 124,385 |  | $ | 644,191
|                               |  |                        |         |                                     |   |                 |  |       |         |  |   |        



Investment
Securities.    Due to the relatively slow recovery of the eastern North Carolina economy in 2004, loan production opportunities continued to be weak. As a result of the deposit growth in existing markets, the Seaboard and
Woodland branch acquisitions, relatively weak loan demand and the expected continuance of the relatively low interest rate market management by the Federal Reserve in the short-term, investments in primarily two-year maturity or less,
held-to-maturity, U. S. Treasury securities have been made by management. At December 31, 2004 the investment portfolio totaled $311.5 million and at December 31, 2003 the investment portfolio totaled $253.0 million resulting in an increase of $58.5
million or 23.12 percent. Investment securities averaged $245.7 million during 2004, $191.2 million during 2003 and $199.6 million during 2002. In each period U. S. Treasury and government agency securities represented substantially all of the
portfolio. The increase in the average securities portfolio in 2004 and 2003 resulted primarily from deposit growth in existing locations and the acquisitions. The decrease in the average securities portfolio during 2002 resulted primarily from
growth in loans.



15



---

The weighted-average maturity of the investment securities portfolio was 19 months at December 31, 2004
and 21 months at December 31, 2003. Management continues to maintain a portfolio of securities with short maturities and call dates, consistent with BancShares focus on liquidity. Investment securities available for sale include marketable
equity securities that are recorded at their fair value, with the unrealized net gain included as a component of shareholders equity, net of deferred taxes. Table 5 presents detailed information relating to the consolidated balance sheet value
of the investment securities portfolio.



Table 5

INVESTMENT SECURITIES



|                                  |  |                        |         |      |   |         |  |   |        
|--------------------------------- |  | ---------------------- | ------- | ---- | - | ------- |  | - | -------
|                                  |  | December 31,          
|                                  |  | 2004                   |         | 2003 |   | 2002   
|                                  |  | (Dollars in thousands)
|U.S. Government agencies          |  | $                      | 21,012  |      | $ | 90,105  |  | $ | 95,061 
|U.S. Treasury                     |  |                        | 185,798 |      |   | 86,904  |  |   | 20,251 
|States and political subdivisions |  |                        | 42,432  |      |   | 28,606  |  |   | 33,332 
|Other                             |  |                        | 62,270  |      |   | 47,411  |  |   | 41,911 
|                                  |  |                        |         |      |   |         |  |   |        
|Total investment securities       |  | $                      | 311,512 |      | $ | 253,026 |  | $ | 190,555
|                                  |  |                        |         |      |   |         |  |   |        



|                                  |  |                                                     |         |  |                                            |   |  |                                            |         |  |                             |   |  |   |        |  |      |   |  |   |       |  |      |  
|--------------------------------- |  | --------------------------------------------------- | ------- |  | ------------------------------------------ | - |  | ------------------------------------------ | ------- |  | --------------------------- | - |  | - | ------ |  | ---- | - |  | - | ----- |  | ---- | -
|                                  |  | Investment Securities At December 31, 2004 Maturing |        
|                                  |  | Within One YearAmount Yield                         |         |  | After One ButWithin Five YearsAmount Yield |   |  | After Five ButWithin Ten YearsAmount Yield |         |  | After Ten YearsAmount Yield |  
|U.S. Government agencies          |  | $                                                   | 21,012  |  | 1.76                                       | % |  | $                                          |        |  |                            |   |  | $ |       |  |     |   |  | $ |      |  |     |  
|U. S. Treasury                    |  |                                                     | 81,161  |  | 1.66                                       | % |  |                                            | 104,637 |  | 2.42                        | % |  |   |       |  |     |   |  |   |      |  |     |  
|States and political subdivisions |  |                                                     | 25,323  |  | 2.82                                       | % |  |                                            | 6,002   |  | 5.97                        | % |  |   | 9,475  |  | 4.33 | % |  |   | 1,632 |  | 6.01 | %
|Other                             |  |                                                     |        |  |                                           |   |  |                                            |        |  |                            |   |  |   | 61,670 |  | 5.05 | % |  |   | 600   |  | 6.92 | %
|                                  |  |                                                     |         |  |                                            |   |  |                                            |         |  |                             |   |  |   |        |  |      |   |  |   |       |  |      |  
|Total investment securities       |  | $                                                   | 127,496 |  | 2.09                                       | % |  | $                                          | 110,639 |  | 2.61                        | % |  | $ | 71,145 |  | 4.96 | % |  | $ | 2,232 |  | 6.59 | %
|                                  |  |                                                     |         |  |                                            |   |  |                                            |         |  |                             |   |  |   |        |  |      |   |  |   |       |  |      |  



Income on
Interest-Earning Assets.    Table 6 analyzes the interest-earning assets and interest-bearing liabilities for the three years ended December 31, 2004. Table 9 identifies the causes for changes in interest income and interest
expense for 2004 and 2003. Interest income amounted to $45.9 million during 2004, a $473,000 decrease from 2003 levels, compared to a $3.6 million decrease from 2002 to 2003. During both 2004 and 2003, decreased interest rates were the primary
factors for the decrease in interest income from the respective prior years.



Total interest-earning assets yielded 4.96 percent during 2004, a 31 basis point decrease from the 5.27 percent reported in 2003. The average taxable-equivalent yield on the loan portfolio decreased from 6.28 percent
in 2003 to 6.03 percent in 2004. The decreased loan yield during 2004 reflects general market conditions throughout the year, consisting primarily of a very low interest rate environment. Loan interest income decreased $1.5 million or 3.86 percent
from 2003. This followed a decrease of 1.71 percent in loan interest income in 2003 from 2002. During 2004, the decrease in loan interest income was the result of loan growth offset by lower loan yields. During 2003, the decrease in loan interest
income was the result of loan growth with lower loan yields as the average yield on loans declined from 7.18 percent in 2002 to 6.28 percent in 2003.



Interest income earned on the investment portfolio amounted to $7.0 million for the year ended December 31, 2004, $5.9 million for the year ended December
31, 2003 and $8.9 million for the year ended December 31, 2002. The average taxable-equivalent yield on the portfolio for 2004 was 2.86 percent. The average taxable-equivalent yield on the portfolio for 2003 was 3.11 percent. The average
taxable-equivalent yield on the portfolio for 2002 was 4.48 percent. The $1.1 million increase in investment interest income during 2004 results from an increase in average volume that more than offset a decrease in average yields. The $3.0 million
decrease in 2003 investment interest income compared to 2002 investment interest income was due to decreased average yields from 4.48 percent in 2002 to 3.11 percent for 2003 that more than offset an increase in average volume.



16



---

INTEREST-BEARING LIABILITIES



Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations.
Southerns primary funding source is deposits. Other short-term funding sources include commercial customer requirements for cash management services and a borrowing line of credit from another financial institution. Long-term borrowings also
provide capital strength under guidelines established by the Federal Reserve.



At December 31, 2004 interest-bearing liabilities totaled $766.5 million, an increase of $24.6 million or 3.31 percent over December 31, 2003. Interest-bearing liabilities averaged $757.0 million during 2004, an
increase of $47.6 million or 6.72 percent over 2003 levels. Interest-bearing deposits increased $45.9 million. During 2003, interest-bearing liabilities averaged $709.4 million, an increase of $49.1 million or 7.41 percent over 2002.



Deposits.    Total deposits averaged $890.2
million in 2004, an increase of $65.0 million or 7.87 percent over the 2003 average balance. Average interest-bearing deposits were $716.9 million during 2004, an increase of $45.9 million or 6.84 percent compared to 2003. Money market accounts
averaged $128.3 million during 2004, an increase of $18.3 million or 16.66 percent over the 2003 average balance. Checking with interest balances averaged $110.9 million during 2004, an increase of $12.7 million or 12.90 percent over the 2003
average balance. Time deposit balances averaged $402.6 million during 2004, an increase of $7.4 million or 1.87 percent from the 2003 average balance. The overall growth in average deposits during 2004 resulted primarily from internal growth within
the existing branches, the de novo opening of the Manteo branch and the acquisitions of the Seaboard and Woodland branches.



Total deposits averaged $825.2 million in 2003, an increase of $75.3 million or 10.04 percent over the 2002 average balance. Average interest-bearing
deposits were $671.0 million during 2003, an increase of $50.3 million or 8.11 percent compared to 2002. Money market accounts averaged $110.0 million during 2003, an increase of $15.6 million or 16.52 percent over the 2002 average balance. Checking
with interest balances averaged $98.2 million during 2003, an increase of $8.4 million or 9.31 percent over the 2002 average balance. Time deposit balances averaged $395.2 million during 2003, an increase of $20.1 million or 5.37 percent from the
2002 average balance. The overall growth in average deposits during 2003 resulted primarily from internal growth within the existing branches, the opening of the Kenansville branch and the acquisition of the Norlina branch.



17



---

Table 6

AVERAGE
BALANCE SHEET ITEMS, NET INTEREST DIFFERENTIAL AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID





|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|----------------------------------------------- |  | ----------------------- | --------- | -------- | ---- | ----------- |  | ---- | -------------- |  | -------- | ------- | ----------- | - | ------ | -------------- | ----- | -------- |  | ----------- | ------- |  | - | ------ |  | ---- | -
|                                                |  | Year ended December 31, |          
|                                                |  | 2004                    |           |          | 2003 |             |  | 2002 |               
|                                                |  | AVERAGEBALANCE          |           | INTEREST |      | AVERAGERATE |  |      | AVERAGEBALANCE |  | INTEREST |         | AVERAGERATE |   |        | AVERAGEBALANCE |       | INTEREST |  | AVERAGERATE |        
|                                                |  | (Dollars in thousands)  |          
|ASSETS                                          |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Interest earning assets:                        |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Loans (1) (2)                                   |  | $                       | 636,245   |          | $    | 38,348      |  | 6.03 | %              |  | $        | 634,687 |             | $ | 39,888 |                | 6.28  | %        |  | $           | 565,292 |  | $ | 40,582 |  | 7.18 | %
|Taxable investment securities                   |  |                         | 215,668   |          |      | 5,450       |  | 2.53 | %              |  |          | 166,478 |             |   | 4,760  |                | 2.86  | %        |  |             | 175,953 |  |   | 7,339  |  | 4.17 | %
|Nontaxable investment securities (3)            |  |                         | 30,013    |          |      | 1,586       |  | 5.29 | %              |  |          | 24,677  |             |   | 1,178  |                | 4.77  | %        |  |             | 23,600  |  |   | 1,600  |  | 6.78 | %
|Overnight funds sold.                           |  |                         | 44,441    |          |      | 554         |  | 1.23 | %              |  |          | 54,689  |             |   | 537    |                | 0.98  | %        |  |             | 32,453  |  |   | 500    |  | 1.54 | %
|Other interest earning assets                   |  |                         |          |          |      |            |  |     |                |  |          | 224     |             |   | 48     |                | 21.43 | %        |  |             | 321     |  |   | 18     |  | 5.61 | %
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Total interest earning assets                   |  |                         | 926,367   |          |      | 45,938      |  | 4.96 | %              |  |          | 880,755 |             |   | 46,411 |                | 5.27  | %        |  |             | 797,619 |  |   | 50,039 |  | 6.27 | %
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Non-interest earning assets:                    |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Cash and due from banks                         |  |                         | 34,838    |          |      |             |  |      |                |  |          | 31,813  |             |   |        |                |       |          |  |             | 30,732  |  |   |        |  |      |  
|Premises and equipment, net                     |  |                         | 35,370    |          |      |             |  |      |                |  |          | 33,665  |             |   |        |                |       |          |  |             | 32,865  |  |   |        |  |      |  
|Other                                           |  |                         | 33,559    |          |      |             |  |      |                |  |          | 7,662   |             |   |        |                |       |          |  |             | 8,330   |  |   |        |  |      |  
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Total assets                                    |  | $                       | 1,030,134 |          |      |             |  |      |                |  | $        | 953,895 |             |   |        |                |       |          |  | $           | 869,546 |  |   |        |  |      |  
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|                                                |  |                         |           |          |      |             |  |      |               
|LIABILITIES & EQUITY                            |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Interest bearing liabilities:                   |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Demand deposits                                 |  | $                       | 110,921   |          |      | 122         |  | 0.11 | %              |  | $        | 114,072 |             |   | 204    |                | 0.18  | %        |  | $           | 105,357 |  |   | 315    |  | 0.30 | %
|Savings deposits                                |  |                         | 203,351   |          |      | 1,484       |  | 0.73 | %              |  |          | 161,682 |             |   | 1,291  |                | 0.80  | %        |  |             | 140,228 |  |   | 1,713  |  | 1.22 | %
|Time deposits                                   |  |                         | 402,605   |          |      | 8,597       |  | 2.14 | %              |  |          | 395,213 |             |   | 9,289  |                | 2.35  | %        |  |             | 375,077 |  |   | 11,291 |  | 3.01 | %
|Short-term borrowed funds                       |  |                         | 16,402    |          |      | 160         |  | 0.98 | %              |  |          | 15,243  |             |   | 120    |                | 0.78  | %        |  |             | 16,605  |  |   | 203    |  | 1.22 | %
|Long-term obligations (6)                       |  |                         | 23,711    |          |      | 1,897       |  | 8.00 | %              |  |          | 23,142  |             |   | 2,028  |                | 8.76  | %        |  |             | 23,000  |  |   | 2,070  |  | 9.00 | %
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Total interest bearing liabilities              |  |                         | 756,990   |          |      | 12,260      |  | 1.62 | %              |  |          | 709,352 |             |   | 12,932 |                | 1.82  | %        |  |             | 660,267 |  |   | 15,592 |  | 2.36 | %
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Non-interest bearing liabilities:               |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Demand deposits                                 |  |                         | 173,300   |          |      |             |  |      |                |  |          | 154,235 |             |   |        |                |       |          |  |             | 129,252 |  |   |        |  |      |  
|Other                                           |  |                         | 8,795     |          |      |             |  |      |                |  |          | 6,905   |             |   |        |                |       |          |  |             | 7,173   |  |   |        |  |      |  
|Shareholders equity                            |  |                         | 91,049    |          |      |             |  |      |                |  |          | 83,403  |             |   |        |                |       |          |  |             | 72,854  |  |   |        |  |      |  
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Total liabilities and equity                    |  | $                       | 1,030,134 |          |      |             |  |      |                |  | $        | 953,895 |             |   |        |                |       |          |  | $           | 869,546 |  |   |        |  |      |  
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  
|Interest rate spread (4)                        |  |                         |           |          |      |             |  | 3.34 | %              |  |          |         |             |   |        |                | 3.45  | %        |  |             |         |  |   |        |  | 3.91 | %
|Net interest income and net interest margin (5) |  |                         |           |          | $    | 33,678      |  | 3.64 | %              |  |          |         |             | $ | 33,479 |                | 3.80  | %        |  |             |         |  | $ | 34,447 |  | 4.32 | %
|                                                |  |                         |           |          |      |             |  |      |                |  |          |         |             |   |        |                |       |          |  |             |         |  |   |        |  |      |  

---

|(1) |  | Average balances include non-accrual loans.
|--- |  | -------------------------------------------

|(2) |  | Interest income includes amortization of loan fees.
|--- |  | ---------------------------------------------------

|(3) |  | The average rate on nontaxable investment securities has been adjusted to a tax equivalent yield using a combined federal and state tax rate of 38.55%. The taxable equivalent
adjustment was $612 in 2004, $328 in 2003 and $617 in 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Interest rate spread is the difference between interest earning asset yield and interest bearing liability rate.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(5) |  | Net interest margin is net interest income divided by average earning assets.
|--- |  | -----------------------------------------------------------------------------

|(6) |  | Interest expense for long-term obligations includes amortization of issuance costs related to the capital securities.
|--- |  | ---------------------------------------------------------------------------------------------------------------------



18



---

BancShares has historically avoided excessive reliance on high-dollar time deposits, which are generally
defined as time deposit accounts with balances in excess of $100,000. At December 31, 2004, these funds were 13.07 percent of total deposits, compared to 13.89 percent of December 31, 2003 total deposits. Table 7 provides a maturity distribution for
these deposits, which totaled $119.0 million at December 31, 2004.



Table 7

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 2004:



|                                      |  |                       |        
|------------------------------------- |  | --------------------- | -------
|                                      |  | (Dollars inthousands)
|Three months or less                  |  | $                     | 34,966 
|Over three through six months         |  |                       | 25,260 
|Over six months through twelve months |  |                       | 22,791 
|Over one year through five years      |  |                       | 35,982 
|Over five years                       |  |                       |       
|                                      |  |                       |        
|                                      |  | $                     | 118,999
|                                      |  |                       |        



Short-Term
Borrowings.    BancShares has access to various short-term borrowings, including the purchase of federal funds, overnight repurchase obligations and credit lines with various correspondent banks. At December 31, 2004,
short-term borrowings totaled $16.0 million, compared to $15.9 million at December 31, 2003. For the year ended December 31, 2004, short-term borrowings averaged $16.4 million, compared to $15.2 million during 2003 and $16.6 million during 2002.
Table 8 provides additional information regarding short-term borrowed funds.



Table 8

SHORT-TERM BORROWINGS



|                                      |  |                        |        |      |      |   |        |      |        |  |      |        |  |      |        |  |      |  
|------------------------------------- |  | ---------------------- | ------ | ---- | ---- | - | ------ | ---- | ------ |  | ---- | ------ |  | ---- | ------ |  | ---- | -
|                                      |  | 2004                   |        |      | 2003 |   |        | 2002 |       
|                                      |  | Amount                 |        | Rate |      |   | Amount |      | Rate   |  |      | Amount |  | Rate |       
|                                      |  | (Dollars in thousands) |       
|Repurchase agreements:                |  |                        |        |      |      |   |        |      |        |  |      |        |  |      |        |  |      |  
|At December 31                        |  | $                      | 14,152 |      | 1.85 | % |        | $    | 14,643 |  | 0.59 | %      |  | $    | 12,278 |  | 1.01 | %
|Average during year                   |  |                        | 15,071 |      | 0.98 | % |        |      | 13,941 |  | 0.79 | %      |  |      | 15,179 |  | 1.21 | %
|Maximum month-end balance during year |  |                        | 16,899 |      |      |   |        |      | 16,488 |  |      |        |  |      | 16,425 |  |      |  
|U. S. Treasury tax and loan accounts: |  |                        |        |      |      |   |        |      |        |  |      |        |  |      |        |  |      |  
|At December 31                        |  | $                      | 1,865  |      | 1.87 | % |        | $    | 1,227  |  | 0.94 | %      |  | $    | 2,062  |  | 1.01 | %
|Average during year                   |  |                        | 1,331  |      | 0.95 | % |        |      | 1,303  |  | 0.80 | %      |  |      | 1,426  |  | 1.31 | %
|Maximum month-end balance during year |  |                        | 2,053  |      |      |   |        |      | 2,085  |  |      |        |  |      | 2,106  |  |      |  



Long-Term
Obligations.    In June 1998 $23.0 million in long-term obligations were issued. These long-term obligations provide capital to support continued growth. Management views these securities as an effective way to provide
capital resources without diluting current ownership. Under current regulatory standards, these long-term obligations qualify as capital. At both December 31, 2004 and December 31, 2003, long-term obligations totaled $23.7 million. In prior years
the long-term obligations consisted of Trust Securities issued by a finance subsidiary that were included in BancShares consolidated financial statements. As a result of the adoption of a new accounting standard in the fourth quarter of 2003,
long-term obligations include $23.7 million of junior subordinated debentures at both December 31, 2004 and December 31, 2003. See the Notes To Consolidated Financial Statements for a detailed discussion of FASB Interpretation No. 46 (and FIN 46R as
subsequently amended), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.



19



---

Expense of Interest-Bearing Liabilities.    Interest expense amounted to $12.3
million in 2004, a $672,000 or 5.20 percent decrease from 2003. Interest expense amounted to $12.9 million in 2003, a $2.7 million or 17.05 percent decrease from 2002. The decreased interest expenses in 2004 and 2003 were primarily due to market
interest rates managed by the Federal Reserve.



As a result of
overall market interest rates, the average cost of interest-bearing deposits decreased to 1.42 percent during 2004, compared to 1.61 percent in 2003 and 2.15 percent in 2002. Interest expense on total interest-bearing deposits amounted to $10.2
million during 2004, a decrease from the $10.8 million recorded during 2003. Interest expense on total interest-bearing deposits amounted to $10.8 million during 2003, a decrease from $13.3 million recorded during 2002. The decreased interest
expenses on deposits during 2004 and 2003 were primarily the result of overall changes in market interest rates managed by the Federal Reserve. For 2003 and most of 2004 the Federal Reserve managed short-term rates downward to extremely low levels
which resulted in significant reductions in the spread between the cost of interest-bearing liabilities and the yields on interest-bearing assets. In the last half of 2004 the Federal Reserve began to slowly raise short-term market rates. If the
Federal Reserve continues to manage an increase in short-term rates, management expects the spread between interest-bearing assets and the cost of interest-bearing liabilities to significantly improve in 2005. The average rate on time deposits
decreased from 3.01 percent in 2002 to 2.35 percent in 2003 and decreased to 2.14 percent in 2004.



Interest expense on short-term borrowings amounted to $160,000 during 2004, an increase from $120,000 or a 33.33 percent increase from 2003. Interest
expense on short-term borrowings amounted to $120,000 during 2003, a decrease from $203,000 recorded during 2002. The increased interest expense during 2004 was the result of both increased average balances and increased short-term rates. The
average rate on short-term borrowings decreased from 1.22 percent in 2002 to 0.79 percent in 2003 and increased to 0.98 percent in 2004.



Interest expense on long-term obligations amounted to $1.9 million for 2004 and $2.0 million for 2003 and $2.1 million for 2002. The average rate on
long-term borrowings was 9.00 percent in 2002, 8.76% in 2003 and 8.00% in 2004.



20



---

Table 9

AVERAGE
BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL



|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|--------------------------------- |  | ------------------------------------- | ------ | - | ---------------------------------------- | - | ----- | -------------------------------------- |  | - | ------ | -
|                                  |  | December 31, 2004 Increase (Decrease) |       
|                                  |  | TOTALCHANGE2003-2004                  |        |   | AMOUNTATTRIBUTABLETO CHANGE INVOLUME (1) |   |       | AMOUNTATTRIBUTABLETO CHANGE INRATE (1) | 
|                                  |  | (Dollars in thousands)                |       
|ASSETS                            |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Interest earning assets:          |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Loans                             |  | $                                     | (1,541 | ) |                                          | $ | 96    |                                        |  | $ | (1,637 | )
|Taxable investment securities     |  |                                       | 690    |   |                                          |   | 1,325 |                                        |  |   | (635   | )
|Non-taxable investment securities |  |                                       | 409    |   |                                          |   | 268   |                                        |  |   | 141    |  
|Federal funds sold and other      |  |                                       | (31    | ) |                                          |   | (138  | )                                      |  |   | 107    |  
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Total interest income             |  |                                       | (473   | ) |                                          |   | 1,551 |                                        |  |   | (2,024 | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|LIABILITIES & EQUITY              |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Interest bearing liabilities:     |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Demand deposits                   |  |                                       | (82    | ) |                                          |   | (5    | )                                      |  |   | (77    | )
|Savings deposits                  |  |                                       | 193    |   |                                          |   | 318   |                                        |  |   | (125   | )
|Time deposits                     |  |                                       | (693   | ) |                                          |   | 166   |                                        |  |   | (859   | )
|Short-term borrowings             |  |                                       | 40     |   |                                          |   | 10    |                                        |  |   | 30     |  
|Long-term obligations             |  |                                       | (130   | ) |                                          |   | 48    |                                        |  |   | (178   | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Total interest expense            |  |                                       | (672   | ) |                                          |   | 537   |                                        |  |   | (1,209 | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Net interest income               |  | $                                     | 199    |   |                                          | $ | 1,014 |                                        |  | $ | (815   | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  



|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|--------------------------------- |  | ------------------------------------- | ------ | - | ---------------------------------------- | - | ----- | -------------------------------------- |  | - | ------ | -
|                                  |  | December 31, 2003 Increase (Decrease) |       
|                                  |  | TOTALCHANGE2002-2003                  |        |   | AMOUNTATTRIBUTABLETO CHANGE INVOLUME (1) |   |       | AMOUNTATTRIBUTABLETO CHANGE INRATE (1) | 
|                                  |  | (Dollars in thousands)                |       
|ASSETS                            |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Interest earning assets:          |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Loans                             |  | $                                     | (694   | ) |                                          | $ | 4,689 |                                        |  | $ | (5,383 | )
|Taxable investment securities     |  |                                       | (2,579 | ) |                                          |   | (335  | )                                      |  |   | (2,244 | )
|Non-taxable investment securities |  |                                       | (422   | ) |                                          |   | 63    |                                        |  |   | (485   | )
|Federal funds sold and other      |  |                                       | 67     |   |                                          |   | 268   |                                        |  |   | (201   | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Total interest income             |  |                                       | (3,628 | ) |                                          |   | 4,685 |                                        |  |   | (8,313 | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|LIABILITIES & EQUITY              |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Interest bearing liabilities:     |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Demand deposits                   |  |                                       | (111   | ) |                                          |   | 20    |                                        |  |   | (131   | )
|Savings deposits                  |  |                                       | (422   | ) |                                          |   | 214   |                                        |  |   | (636   | )
|Time deposits                     |  |                                       | (2,002 | ) |                                          |   | 540   |                                        |  |   | (2,542 | )
|Short-term borrowings             |  |                                       | (83    | ) |                                          |   | (13   | )                                      |  |   | (70    | )
|Long-term obligations             |  |                                       | (42    | ) |                                          |   | 13    |                                        |  |   | (55    | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Total interest expense            |  |                                       | (2,660 | ) |                                          |   | 774   |                                        |  |   | (3,434 | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  
|Net interest income               |  | $                                     | (968   | ) |                                          | $ | 3,911 |                                        |  | $ | (4,879 | )
|                                  |  |                                       |        |   |                                          |   |       |                                        |  |   |        |  

---

|(1) |  | The variance due to rate and volume is allocated equally between the changes in rate and volume.
|--- |  | ------------------------------------------------------------------------------------------------



Average loan balances include nonaccrual loans. BancShares earns tax-exempt interest on certain loans and investment
securities due to the borrower or issuer being either a governmental agency or a quasi-governmental agency. Yields related to loans and securities exempt from federal income taxes are stated on a taxable-equivalent basis assuming a combined federal
and state income tax rate of 38.55% for all periods. The taxable equivalent adjustment was $612 in 2004, $328 in 2003 and $617 in 2002.



21



---

NET INTEREST INCOME



Net interest income totaled $33.1 million during 2004, a decrease of $85,000 or 0.26 percent from 2003. Net interest income
amounted to $33.2 million during 2003, a decrease from $33.8 million recorded during 2002. Table 9 presents the annual changes in net interest income by components due to changes in volume, yields and rates. Table 9 is presented on a
taxable-equivalent basis to adjust for the tax-exempt status of income earned on certain loans, leases and municipal securities.



The average yield on interest-earning assets was 4.96 percent in 2004, 5.27 percent in 2003 and 6.27 percent in 2002. The lower average yields in 2004 and
2003 were the result of decreased market rates. Overall lower market rates created a lower-yielding earning asset mix for 2004 compared to 2003, resulting in a decrease in the net interest margin from 3.80 percent in 2003 to 3.64 percent in 2004.
The lower net yields realized in 2003 compared to 2002 also resulted from overall lower market rates for earning assets.



Rate Sensitivity.    A principal objective of BancShares asset/liability function is to manage interest rate risk or the
exposure to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby
limiting, to the extent possible, the ultimate interest rate exposure. As a result of the overall weak 2004 economy, consumer concerns over the economys impact on the equity markets and the Federal Reserve managing very low interest rates,
consumers have moved cash into the shorter maturity deposit products of the Bank. Table 10 provides BancShares interest-sensitivity position as of December 31, 2004, which reflected a one year negative interest-sensitivity gap of $258.9
million. As a result of this one year negative gap, increases in interest rates could have an unfavorable impact on net interest income. It should be noted that this analysis reflects BancShares interest sensitivity as of a single point in
time and may not reflect the effects of repricings of assets and liabilities in various interest rate environments.



Table 10

INTEREST-SENSITIVITY ANALYSIS



|                                    |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        
|----------------------------------- |  | ---------------------- | -------- | - | ------------------- | - | -------- | -------------------- |  | - | ------------------------------ | - | ----- | - | ------- |  | - | -------
|                                    |  | December 31, 2004     
|                                    |  | 1-90 DaysSensitive     |          |   | 91-180DaysSensitive |   |          | 181-365DaysSensitive |  |   | Non-RateSensitive& Over 1 Year |   | Total
|                                    |  | (Dollars in thousands)
|Interest Earning Assets:            |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        
|Loans                               |  | $                      | 63,895   |   |                     | $ | 46,205   |                      |  | $ | 77,317                         |   |       | $ | 456,774 |  | $ | 644,191
|Investment securities               |  |                        | 25,496   |   |                     |   | 38,831   |                      |  |   | 62,951                         |   |       |   | 184,234 |  |   | 311,512
|Temporary investments               |  |                        | 35,967   |   |                     |   |         |                      |  |   |                               |   |       |   |        |  |   | 35,967 
|                                    |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        
|Total earning assets                |  | $                      | 125,358  |   |                     | $ | 85,036   |                      |  | $ | 140,268                        |   |       | $ | 641,008 |  | $ | 991,670
|                                    |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        
|Interest-Bearing Liabilities:       |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        
|Savings and core time deposits      |  | $                      | 397,236  |   |                     | $ | 58,493   |                      |  | $ | 54,800                         |   |       | $ | 97,232  |  | $ | 607,761
|Time deposits of $100,000 and more  |  |                        | 34,966   |   |                     |   | 25,260   |                      |  |   | 22,791                         |   |       |   | 35,982  |  |   | 118,999
|Short-term borrowings               |  |                        | 16,017   |   |                     |   |         |                      |  |   |                               |   |       |   |        |  |   | 16,017 
|Long-term obligations               |  |                        |         |   |                     |   |         |                      |  |   |                               |   |       |   | 23,711  |  |   | 23,711 
|                                    |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        
|Total interest bearing liabilities  |  | $                      | 448,219  |   |                     | $ | 83,753   |                      |  | $ | 77,591                         |   |       | $ | 156,925 |  | $ | 766,488
|                                    |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        
|Interest sensitivity gap            |  | $                      | (322,861 | ) |                     | $ | 1,283    |                      |  | $ | 62,677                         |   |       | $ | 484,083 |  | $ | 225,182
|                                    |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        
|Cumulative interest sensitivity gap |  | $                      | (322,861 | ) |                     | $ | (321,578 | )                    |  | $ | (258,901                       | ) |       | $ | 225,182 |  | $ | 225,182
|                                    |  |                        |          |   |                     |   |          |                      |  |   |                                |   |       |   |         |  |   |        



22



---

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, since its interest bearing liabilities generally mature or reprice faster than its interest earning assets.
Management seeks to manage this risk through the use of shorter term maturities where possible. 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, 2004. 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, 2004. 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 2005 since they are subject to immediate repricing. Weighted average variable rates in future periods are based on the implied forward rates in the yield curve as of December 31,
2004.



Table 11

MARKET RISK



|                                      |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | ----- |  | - | ---------- | - |  | - | ------- | - |  | - | -------
|                                      |  | Maturing in Years ended December 31
|                                      |  | 2005                                |         |   | 2006 |   |         | 2007 |  |   | 2008   |   |  | 2009 |        |   | Thereafter |   |        | Total |  |   | Fair Value
|                                      |  | (Dollars in thousands)             
|Assets                                |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Loans                                 |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                            |  | $                                   | 62,660  |   |      | $ | 45,766  |      |  | $ | 53,663 |   |  | $    | 28,955 |   |            | $ | 22,194 |       |  | $ | 100,410    |   |  | $ | 313,648 |   |  | $ | 312,581
|Average rate (%)                      |  |                                     | 7.02    | % |      |   | 7.02    | %    |  |   | 7.02   | % |  |      | 6.86   | % |            |   | 6.83   | %     |  |   | 6.47       | % |  |   | 6.82    | % |  |   |        
|Variable rate                         |  | $                                   | 124,757 |   |      | $ | 58,842  |      |  | $ | 50,909 |   |  | $    | 46,871 |   |            | $ | 25,189 |       |  | $ | 23,975     |   |  | $ | 330,543 |   |  | $ | 330,543
|Average rate (%)                      |  |                                     | 6.11    | % |      |   | 5.81    | %    |  |   | 5.70   | % |  |      | 5.63   | % |            |   | 5.76   | %     |  |   | 5.57       | % |  |   | 5.86    | % |  |   |        
|Investment Securities                 |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                            |  | $                                   | 127,496 |   |      | $ | 107,950 |      |  | $ | 885    |   |  | $    | 840    |   |            | $ | 964    |       |  | $ | 73,377     |   |  | $ | 311,512 |   |  | $ | 311,075
|Average rate (%)                      |  |                                     | 2.09    | % |      |   | 2.54    | %    |  |   | 5.65   | % |  |      | 5.58   | % |            |   | 5.72   | %     |  |   | 5.06       | % |  |   | 2.73    | % |  |   |        
|Liabilities                           |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Savings and interest bearing checking |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                            |  | $                                   | 512,508 |   |      |   |        |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 512,508 |   |  | $ | 512,508
|Average rate (%)                      |  |                                     | 0.54    | % |      |   |        |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   | 0.54    | % |  |   |        
|Certificates of deposit               |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                            |  | $                                   | 259,975 |   |      | $ | 42,786  |      |  | $ | 55,245 |   |  | $    | 33,702 |   |            |   |       |       |  |   |           |   |  | $ | 391,708 |   |  | $ | 394,827
|Average rate (%)                      |  |                                     | 1.83    | % |      |   | 2.89    | %    |  |   | 3.56   | % |  |      | 3.44   | % |            |   |       |       |  |   |           |   |  |   | 2.32    | % |  |   |        
|Variable rate                         |  | $                                   | 4,035   |   |      | $ | 1,481   |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 5,516   |   |  | $ | 5,516  
|Average rate (%)                      |  |                                     | 1.82    | % |      |   | 1.93    | %    |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   | 1.85    | % |  |   |        
|Short-term borrowings                 |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Variable rate                         |  | $                                   | 16,017  |   |      |   |        |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 16,017  |   |  | $ | 16,017 
|Average rate (%)                      |  |                                     | 1.85    | % |      |   |        |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   | 1.85    | % |  |   |        
|Long-term debt                        |  |                                     |         |   |      |   |         |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                            |  |                                     |        |   |      |   |        |      |  |   |       |   |  |      |       |   |            |   |       |       |  | $ | 23,711     |   |  | $ | 23,711  |   |  | $ | 24,541 
|Average rate (%)                      |  |                                     |        |   |      |   |        |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   | 8.00       | % |  |   | 8.00    | % |  |   |        



23



---

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET 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 sheets.



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.



Outstanding standby letters of credit as of December 31, 2004
and December 31, 2003 amounted to $5.9 million and $3.6 million. Outstanding commitments to lend at December 31, 2004 and December 31, 2003 were $182.1 million and $182.7 million and include undisbursed advances on customer lines of credit at
December 31, 2004 of $64.3 million and $57.4 million at December 31, 2003. Outstanding standby letters of credit and commitments to lend at December 31, 2004 generally expire within one year, whereas commitments associated with undisbursed advances
on customer lines of credit at December 31, 2004 generally expire within one to five years.



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. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2004 is $5.9 million. At December 31, 2004, BancShares considers the amount to be immaterial and has
recorded no liability for the current carrying amount of the obligation to perform as a guarantor and no liability is considered necessary. Substantially all standby letters of credit are secured by real estate and/or guaranteed by third parties in
the event BancShares had to advance funds to fulfill the guarantee.



At December 31, 2004, commitments to sell loans amounted to $11.5 million. At December 31, 2003 commitments to sell loans amounted to $2.2 million.



BancShares does not have any special purpose entities or other similar forms of off-balance sheet financing arrangements other than the trust preferred
securities discussed in detail in the notes to the consolidated financial statements.



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 been under criticism for potential health risks.



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.



24



---

ASSET QUALITY



Maintaining excellent asset quality is one of the key performance measures for, and a primary focus area of,
BancShares Management. BancShares and Southern dedicate significant resources to ensuring prudent lending practices, loan performance monitoring and management and prudent, timely recognition of losses. In some cases property that was used as
collateral for loans is foreclosed to satisfy repayment of the loan. Upon completion of foreclosure, this property is classified as an other real estate nonperforming asset. Such other real estate nonperforming assets are aggressively marketed by
Management.



Nonperforming
Assets.    Nonperforming asset balances for the past five years are presented in Table 12. BancShares nonperforming assets of $2.2 million at December 31, 2004 included nonaccrual loans totaling $1.1 million, accruing
loans past due 90 days or more totaling $577,000 and $525,000 of foreclosed property. Nonperforming assets as of December 31, 2004 represented 0.34 percent of loans outstanding. Nonperforming assets totaled $2.2 million at December 31, 2004, $2.9
million at December 31, 2003 and $3.5 million at December 31, 2002. Of the $1.1 million in nonaccrual loans at December 31, 2004, $832,000 were considered to be impaired. Of the $868,000 in nonaccrual loans at December 31, 2003, $547,000 were
considered to be impaired.



Table 12

RISK ELEMENTS



|                                        |  |                         |       |      |   |       |  |      |       |      |   |       |  |   |      
|--------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                        |  | Year ended December 31,
|                                        |  | 2004                    |       | 2003 |   | 2002  |  | 2001 |       | 2000
|                                        |  | (Dollars in thousands) 
|Accruing loans past due 90 days or more |  | $                       | 577   |      | $ | 1,665 |  | $    | 2,180 |      | $ | 1,565 |  | $ | 1,081
|Nonaccrual loans                        |  |                         | 1,087 |      |   | 868   |  |      | 918   |      |   | 407   |  |   | 478  
|Restructured loans                      |  |                         |      |      |   |      |  |      | 25    |      |   | 28    |  |   |     
|                                        |  |                         |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total nonperforming loans               |  |                         | 1,664 |      |   | 2,533 |  |      | 3,123 |      |   | 2,000 |  |   | 1,559
|                                        |  |                         |       |      |   |       |  |      |       |      |   |       |  |   |      
|Other real estate owned                 |  |                         | 525   |      |   | 406   |  |      | 411   |      |   | 64    |  |   |     
|                                        |  |                         |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total nonperforming loans and assets    |  | $                       | 2,189 |      | $ | 2,939 |  | $    | 3,534 |      | $ | 2,064 |  | $ | 1,559
|                                        |  |                         |       |      |   |       |  |      |       |      |   |       |  |   |      



Management continually
monitors the loan portfolio to ensure that problem loans have been identified as nonperforming. Should economic conditions deteriorate, the inability of distressed customers to service their existing debt could cause higher levels of nonperforming
assets.



Allowance for Loan
Losses.    Management evaluates the risk characteristics of the loan portfolio under current economic conditions, reviews the financial condition of the borrower, estimates the fair market value of the loan collateral and
considers any other pertinent factors to estimate current credit losses. 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-offs 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 borrowers 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 accounting
principles generally accepted in the United States of America and in consideration of the current economic environment. While management uses the best information available to make evaluations, future adjustments may be necessary.



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.



At December 31, 2004, BancShares allowance for loan losses was $10.3 million or 1.59 percent of loans outstanding. At December 31, 2003, BancShares allowance for loan losses was $10.1 million or 1.60 percent of loans
outstanding. The increase in the allowance-to-loan ratios since 2002 is primarily attributable to continued loan growth and the overall continued sluggish economy. Traditional commercial loans (commercial loans other than those secured by real
estate)



25



---

generally have a higher level of credit risk than commercial real estate loans; as a result, the commercial real estate loans generally have a lower level of
allowance for loan losses when compared to traditional commercial loans. As a percentage of total loans, traditional commercial loans increased from 11.37 percent of total loans at December 31, 2003 to 14.07 percent of total loans at December 31,
2004.



As a result of the continued sluggish eastern North
Carolina economy in 2004, the Bank experienced both an increase in loan charge-offs and a decrease in recoveries of loans previously charged-off. The provision for loan losses charged to operations was $1.2 million during 2004 compared to $1.8
million during 2003 and $2.0 million in 2002. The provision for loan losses charged to operations in 2004 was primarily due to the continued sluggishness of the eastern North Carolina economy and the $13.0 million increase in outstanding loans.



Net charge-offs during 2004 increased by $233,000 from 2003
net charge-offs of $803,000. Net charge-offs during 2003 increased by $315,000 from 2002 net charge-offs of $488,000. The percentage of charge-offs, net of recoveries, to average outstanding loans was 0.16 percent in 2004, 0.13 percent in 2003 and
0.09 percent in 2002. Table 13 provides details concerning the allowance and provision for loan losses for the past five years.



Table 13

SUMMARY OF LOAN LOSS EXPERIENCE



|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                      |  | Year ended December 31, |        
|                                                      |  | 2004                    |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                      |  | (Dollars in thousands)  |        
|Allowance for loan lossesbeginning of year           |  | $                       | 10,095  |   |      | $ | 9,098   |      |  | $ | 7,636   |   |  | $    | 7,284   |   |  | $ | 6,188   |  
|Charge-offs:                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Consumer                                              |  |                         | 353     |   |      |   | 314     |      |  |   | 392     |   |  |      | 354     |   |  |   | 361     |  
|Real estate:                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Mortgage:                                             |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial                                            |  |                         | 83      |   |      |   | 32      |      |  |   | 101     |   |  |      | 46      |   |  |   | 11      |  
|Equityline                                            |  |                         | 116     |   |      |   | 25      |      |  |   | 67      |   |  |      |        |   |  |   | 11      |  
|One to four family residential                        |  |                         | 226     |   |      |   | 129     |      |  |   | 19      |   |  |      |        |   |  |   | 67      |  
|Other                                                 |  |                         |        |   |      |   | 21      |      |  |   | 54      |   |  |      | 133     |   |  |   |        |  
|Lease financing                                       |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial, financial and agricultural                |  |                         | 419     |   |      |   | 595     |      |  |   | 81      |   |  |      | 269     |   |  |   | 84      |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                     |  |                         | 1,197   |   |      |   | 1,116   |      |  |   | 714     |   |  |      | 802     |   |  |   | 534     |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries:                                           |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Consumer                                              |  |                         | 91      |   |      |   | 86      |      |  |   | 106     |   |  |      | 83      |   |  |   | 152     |  
|Commercial, financial and agricultural                |  |                         | 17      |   |      |   | 179     |      |  |   | 86      |   |  |      | 46      |   |  |   | 56      |  
|Real estate:                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Construction                                          |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Mortgage:                                             |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|One to four family residential                        |  |                         | 23      |   |      |   | 28      |      |  |   |        |   |  |      |        |   |  |   | 13      |  
|Commercial                                            |  |                         | 26      |   |      |   | 11      |      |  |   | 22      |   |  |      |        |   |  |   | 99      |  
|Equityline                                            |  |                         | 4       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | 19      |  
|Other                                                 |  |                         |        |   |      |   | 9       |      |  |   | 12      |   |  |      | 120     |   |  |   | 16      |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                      |  |                         | 161     |   |      |   | 313     |      |  |   | 226     |   |  |      | 249     |   |  |   | 355     |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs                                       |  |                         | 1,036   |   |      |   | 803     |      |  |   | 488     |   |  |      | 553     |   |  |   | 179     |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Provision for loan losses                             |  |                         | 1,200   |   |      |   | 1,800   |      |  |   | 1,950   |   |  |      | 1,000   |   |  |   | 475     |  
|Reduction for sale of credit card portfolio           |  |                         |        |   |      |   |        |      |  |   |        |   |  |      | 95      |   |  |   |        |  
|Additions from bank acquisitions                      |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   | 800     |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan lossesend of year                 |  | $                       | 10,259  |   |      | $ | 10,095  |      |  | $ | 9,098   |   |  | $    | 7,636   |   |  | $ | 7,284   |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Average loans outstanding during the year             |  | $                       | 636,245 |   |      | $ | 634,687 |      |  | $ | 565,292 |   |  | $    | 527,204 |   |  | $ | 427,939 |  
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Ratio of net charge-offs to average loans outstanding |  |                         | 0.16    | % |      |   | 0.13    | %    |  |   | 0.09    | % |  |      | 0.10    | % |  |   | 0.04    | %
|                                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



26



---

Table 14 details managements allocation of the allowance among the various loan types. The process
to allocate the allowance for loan losses considers, among other factors, whether the borrower is a retail or commercial customer, whether the loan is secured or unsecured, and whether the loan is an open or closed-end agreement. Generally, loans to
commercial customers are evaluated individually and assigned a credit grade using such factors as the borrowers cash flow, the value of any underlying collateral and the value of any guarantees, while loans to retail customers are evaluated
among groups of loans with similar characteristics. These ratings, prior loss experience and current economic conditions become the basis for the allowance allocation shown in Table 14.



Table 14

ALLOCATION OF ALLOWANCE FOR
LOAN LOSSES



|                                       |  |                        |        |                                       |     |   |      |   |                                       |  |     |      |  |                                       |       |  |      |   |                                       |   |       |      |     |                                       |  |   |       |  |     |  
|-------------------------------------- |  | ---------------------- | ------ | ------------------------------------- | --- | - | ---- | - | ------------------------------------- |  | --- | ---- |  | ------------------------------------- | ----- |  | ---- | - | ------------------------------------- | - | ----- | ---- | --- | ------------------------------------- |  | - | ----- |  | --- | -
|                                       |  | December 31,           |       
|                                       |  | 2004                   |        | % ofloans ineachcategoryto totalloans |     |   | 2003 |   | % ofloans ineachcategoryto totalloans |  |     | 2002 |  | % ofloans ineachcategoryto totalloans |       |  | 2001 |   | % ofloans ineachcategoryto totalloans |   |       | 2000 |     | % ofloans ineachcategoryto totalloans | 
|                                       |  | (Dollars in thousands) |       
|Commercial, financial and agricultural |  | $                      | 4,400  |                                       | 14  | % |      | $ | 4,300                                 |  | 15  | %    |  | $                                     | 3,800 |  | 15   | % |                                       | $ | 2,800 |      | 17  | %                                     |  | $ | 3,000 |  | 19  | %
|Consumer                               |  |                        | 2,000  |                                       | 6   | % |      |   | 2,000                                 |  | 6   | %    |  |                                       | 2,000 |  | 7    | % |                                       |   | 2,000 |      | 6   | %                                     |  |   | 2,050 |  | 8   | %
|Real estate:                           |  |                        |        |                                       |     |   |      |   |                                       |  |     |      |  |                                       |       |  |      |   |                                       |   |       |      |     |                                       |  |   |       |  |     |  
|Construction                           |  |                        | 300    |                                       | 10  | % |      |   | 300                                   |  | 10  | %    |  |                                       | 300   |  | 10   | % |                                       |   | 300   |      | 10  | %                                     |  |   | 100   |  | 3   | %
|Mortgage:                              |  |                        |        |                                       |     |   |      |   |                                       |  |     |      |  |                                       |       |  |      |   |                                       |   |       |      |     |                                       |  |   |       |  |     |  
|One to four family residential         |  |                        | 1,200  |                                       | 21  | % |      |   | 1,200                                 |  | 19  | %    |  |                                       | 1,200 |  | 22   | % |                                       |   | 1,200 |      | 24  | %                                     |  |   | 1,100 |  | 23  | %
|Commercial                             |  |                        | 1,500  |                                       | 31  | % |      |   | 1,500                                 |  | 30  | %    |  |                                       | 1,000 |  | 29   | % |                                       |   | 550   |      | 25  | %                                     |  |   | 550   |  | 25  | %
|Equityline                             |  |                        | 300    |                                       | 9   | % |      |   | 200                                   |  | 8   | %    |  |                                       | 200   |  | 8    | % |                                       |   | 200   |      | 8   | %                                     |  |   | 200   |  | 8   | %
|Other                                  |  |                        | 159    |                                       | 5   | % |      |   | 195                                   |  | 7   | %    |  |                                       | 198   |  | 4    | % |                                       |   | 186   |      | 5   | %                                     |  |   | 184   |  | 8   | %
|Lease financing                        |  |                        | 400    |                                       | 4   | % |      |   | 400                                   |  | 5   | %    |  |                                       | 400   |  | 5    | % |                                       |   | 400   |      | 5   | %                                     |  |   | 100   |  | 6   | %
|                                       |  |                        |        |                                       |     |   |      |   |                                       |  |     |      |  |                                       |       |  |      |   |                                       |   |       |      |     |                                       |  |   |       |  |     |  
|Total                                  |  | $                      | 10,259 |                                       | 100 | % |      | $ | 10,095                                |  | 100 | %    |  | $                                     | 9,098 |  | 100  | % |                                       | $ | 7,636 |      | 100 | %                                     |  | $ | 7,284 |  | 100 | %
|                                       |  |                        |        |                                       |     |   |      |   |                                       |  |     |      |  |                                       |       |  |      |   |                                       |   |       |      |     |                                       |  |   |       |  |     |  



NONINTEREST INCOME



Management considers the growth of noninterest income
essential to maintaining profitability performance levels. The primary sources of noninterest income are deposit and loan related service charges and fees. Other significant noncore noninterest income is derived from the sale of mortgage loans into
the secondary market and the periodic sale of available-for-sale investment securities.



Total noninterest income was $11.0 million for the year ended December 31, 2004, a decrease of $1.5 million or 11.74 percent. This compares to $12.5 million for the year ended December 31, 2003 and $10.7 million for
the year ended December 31, 2002. There were $229,000 of net securities gains realized in 2004. Net securities gains of $282,000 were realized in the year ended December 31, 2003. Net securities gains of $10.7 million were realized in the year ended
December 31, 2002. There were $662,000 of net gains on sale of mortgage loans realized in 2004, a decrease of $1.8 million, or 72.94 percent, from the net mortgage loan sales gains of $2.4 million realized in the year ended December 31, 2003. Net
mortgage loan sales gains of $1.3 million were realized in the year ended December 31, 2002.



27



---

Table 15 presents the components of noninterest income for the last five years. In recent years
management has searched for various opportunities to enhance noninterest income through new products, new services, new fees and marketing changes to existing products. Net interest income has increased 32.62 percent from 2000 to 2004. Excluding
securities gains, noninterest income, as a percentage of net interest income, has increased from 24.05 percent for 2000 to 32.64 percent for 2004.



Table 15

NONINTEREST INCOME



|                                          |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       |  
|----------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ----- | -
|                                          |  | Year Ended December 31, |       
|                                          |  | 2004                    |        | 2003 |   | 2002   |  | 2001 |        | 2000 |  
|                                          |  | (Dollars in thousands)  |       
|Service charges on deposit accounts       |  | $                       | 7,090  |      | $ | 6,714  |  | $    | 5,688  |      | $ | 5,080  |  | $ | 3,942 |  
|Other service charges and fees            |  |                         | 2,474  |      |   | 2,253  |  |      | 1,786  |      |   | 1,482  |  |   | 1,275 |  
|Gain (loss) on sale of loans              |  |                         | 662    |      |   | 2,446  |  |      | 1,297  |      |   | 729    |  |   | 38    |  
|Investment securities gains (losses), net |  |                         | 229    |      |   | 282    |  |      | 1,569  |      |   | 4,625  |  |   | (746  | )
|Other                                     |  |                         | 566    |      |   | 792    |  |      | 330    |      |   | 1,067  |  |   | 751   |  
|                                          |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       |  
|Total noninterest income                  |  | $                       | 11,021 |      | $ | 12,487 |  | $    | 10,670 |      | $ | 12,983 |  | $ | 5,260 |  
|                                          |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       |  



Income from service
charges on deposit accounts has increased primarily as a result of growth in the existing branches, the opening of new branches and acquisitions of branches from other financial institutions within the Banks eastern North Carolina markets.
Income from service charges on deposit accounts was $7.1 million for the year ended December 31, 2004, an increase of 5.60 percent. Deposit account service charge income was $6.7 million for the year ended December 31, 2003 compared to $5.7 million
for the year ended December 31, 2002.



Income from other
service charges and fees includes mortgage loan commitment fees, mortgage loan servicing fees, automated teller machine fees, check cashing fees and other miscellaneous non deposit related customer service fees. Increases in this category of
noninterest income are the result primarily of customer account growth within the existing branches, the opening of new branches and the acquisitions of branches from other financial institutions. In 2004 the decreased mortgage lending activity
resulting from rising interest rates resulted in significant decreases in the mortgage related fees and charges in this category of noninterest income. In 2003 the increased mortgage lending activity resulting from the very low interest rates
resulted in significant increases in the mortgage related fees and charges in this category of noninterest income. Income from other service charges and fees was $2.5 million for the year ended December 31, 2004, an increase of 9.81 percent. Other
service charges and fee income was $2.3 million for the year ended December 31, 2003 and $1.8 million for the year ended December 31, 2002.



Gains and losses resulting from sales of available-for-sale securities was a net gain of $229,000 for the year ended December 31, 2004, compared to net
gains of $282,000 for 2003 and $1.6 million for the year ended December 31, 2002.



Southern sells mortgage loan production into the secondary mortgage markets and retains servicing on the loans sold. The resulting interest rate market managed by the Federal Reserve and the timing of interest rate
changes within the market directly impacts the level of gains or losses that are realized on mortgage loans sold. Gain on sale of loans decreased $1.8 million from $2.4 million in 2003 to $$662,000 in 2004 as a result of both decreased mortgage loan
production and decreased sales of mortgage loans into the secondary market.



Other noninterest income decreased $226,000 from $792,000 in 2003 to $566,000 in 2004 primarily as a result of a 2003 gain realized on the donation of a vacant banking facility. Other noninterest income increased
$462,000 from $330,000 in 2002 to $792,000 in 2003 primarily as a result of the gain realized on the donation of a vacant banking facility.



28



---

NONINTEREST EXPENSE



The primary noninterest expenses are personnel salaries and benefits, occupancy and equipment costs related to branch
offices and data processing hardware, software product and service delivery costs. Noninterest expenses also include the expensing of intangibles amortization consisting of the costs of acquiring branch locations from other financial institutions
and the expensing of mortgage servicing rights resulting from the sale of mortgage loans into the secondary mortgage markets for which servicing was retained.



Personnel expense was $18.6 million for the year ended December 31, 2004, an increase of $1.9 million or 11.63 percent over the year ended December 31,
2003 compared to a $1.7 million or 11.54 percent increase for the year ended December 31, 2003 over the year ended December 31, 2002. Increases in each period resulted primarily from merit increases, growth in incentive-based compensation,
additional personnel due to the acquisitions discussed in Table 2 and the opening of new offices in Manteo, North Carolina in May 2004 and Kenansville, North Carolina in February 2003. BancShares had 431 full time equivalent employees at December
31, 2004, compared to 427 at December 31, 2003 and 386 at December 31, 2002.



Total noninterest expense for the year ended December 31, 2004 of $35.2 million was $2.7 million higher then the year ended December 31, 2003. Total noninterest expense for the year ended December 31, 2003 was $2.9
million higher than the year ended December 31, 2002. Table 16 presents the components of noninterest expense for the last five years.



Table 16

NONINTEREST EXPENSE



|                          |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       
|------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                          |  | Year Ended December 31,
|                          |  | 2004                    |        | 2003 |   | 2002   |  | 2001 |        | 2000
|                          |  | (Dollars in thousands) 
|Personnel                 |  | $                       | 18,568 |      | $ | 16,633 |  | $    | 14,912 |      | $ | 13,867 |  | $ | 11,751
|Occupancy                 |  |                         | 3,551  |      |   | 3,158  |  |      | 2,853  |      |   | 2,624  |  |   | 2,106 
|Data processing           |  |                         | 3,612  |      |   | 3,049  |  |      | 2,731  |      |   | 2,461  |  |   | 2,224 
|Furniture and equipment   |  |                         | 2,041  |      |   | 2,025  |  |      | 1,896  |      |   | 1,874  |  |   | 1,650 
|Intangibles amortization  |  |                         | 1,496  |      |   | 1,675  |  |      | 1,818  |      |   | 3,852  |  |   | 2,603 
|Professional fees         |  |                         | 893    |      |   | 980    |  |      | 666    |      |   | 600    |  |   | 705   
|Charitable contributions  |  |                         | 422    |      |   | 907    |  |      | 398    |      |   |       |  |   |      
|FDIC insurance assessment |  |                         | 126    |      |   | 124    |  |      | 134    |      |   | 127    |  |   | 122   
|Other                     |  |                         | 4,441  |      |   | 3,943  |  |      | 4,185  |      |   | 4,230  |  |   | 3,867 
|                          |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       
|Total noninterest expense |  | $                       | 35,150 |      | $ | 32,494 |  | $    | 29,593 |      | $ | 29,635 |  | $ | 25,028
|                          |  |                         |        |      |   |        |  |      |        |      |   |        |  |   |       



Intangibles
amortization was $1.5 million for the year ended December 31, 2004, a decrease of $179,000 or 10.69 percent from the year ended December 31, 2003 compared to a $143,000 or 7.87 percent decrease for the year ended December 31, 2003 from the year
ended December 31, 2002. The acquisitions in 2004 and 2003 are listed in Table 2.



Data processing expense was $3.6 million for the year ended December 31, 2004, an increase of $563,000 or 18.47 percent over the year ended December 31, 2003 compared to a $318,000 or 11.64 percent increase for the
year ended December 31, 2003 over the year ended December 31, 2002. In the year acquisitions are made, substantial one time data processing costs are incurred to convert customer account information files from the selling institutions data
processing files to BancShares data processing files. Increases and decreases in each period resulted primarily from the acquisitions listed in Table 2 and the opening of new offices in Manteo, North Carolina in May 2004 and Kenansville, North
Carolina in February 2003.



Furniture and equipment expense was
$2.0 million for the year ended December 31, 2004, an increase of $16,000 or 0.79 percent over the year ended December 31, 2003 compared to a $129,000 or a 6.80 percent increase for the year ended December 31, 2003 over the year ended December 31,
2002. Increases in each period resulted primarily from the acquisitions listed in Table 2, the opening of a new branch in Kenansville, North Carolina in 2003 and the opening of a new branch in Manteo, North Carolina in 2004.



Occupancy expense was $3.6 million for the year ended December 31, 2004, an
increase of $393,000 or 12.44 percent over the year ended December 31, 2003 compared to a $303,000 or 10.62 percent increase for the year ended December 31, 2003 over the year ended December 31, 2002. Increases in each period resulted primarily from
the acquisitions listed in Table 2, the opening of a new branch in Kenansville, North Carolina in 2003 and the opening of a new branch in Manteo, North Carolina in 2004.



29



---

INCOME TAXES



For the year ended December 31, 2004, BancShares recorded total income tax expense of $1.9 million, compared to $3.3 million
of income tax expense for the year ended December 31, 2003 and $3.8 million for the year ended December 31, 2002. BancShares effective tax rate decreased from 29.68 percent for the year ended December 31, 2002 to 28.94 percent for the year
ended December 31, 2002 to 25.05 percent for the year ended December 31, 2004. The decreases in the effective tax rates from 2002 to 2004 primarily resulted from increases in the ratios of tax exempt earnings to total decreased earnings.



RELATED PARTY TRANSACTIONS

|
|



BancShares
has entered into various service contracts with another bank holding company, First Citizens BancShares, Inc. (the Corporation) and its subsidiary First-Citizens Bank & Trust Company (First Citizens). 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, 2004 beneficially owned 32,751 shares, or 29.74%, of BancShares outstanding
common stock and 4,966 shares, or 1.42%, of BancShares outstanding Series B preferred stock. At the same date, the second significant shareholder beneficially owned 27,422 shares, or 24.90%, of BancShares outstanding common stock.



These two significant shareholders are directors and executive
officers of the Corporation and at December 31, 2004, beneficially owned 2,529,534 shares, or 28.89%, and 1,378,670 shares, or 15.74%, of the Corporations outstanding Class A common stock, and 664,533 shares, or 39.61%, and 209,742 shares, or
12.50%, of the Corporations outstanding Class B common stock. The above totals include 464,804 Class A common shares, or 5.31%, and 104,644 Class B common shares, or 6.24%, that are considered to be beneficially owned by both of the
shareholders and, therefore, are included in each of their totals.



As more fully discussed in note 15, Southern incurred expenses for various contractual services provided by First Citizens. Data and item processing expenses were incurred for courier services, proof and encoding, imaging, check storage,
statement rendering and item processing forms. Management has researched alternative, non-related, providers for such services and believes that it pays fair value for these services. BancShares also has a correspondent relationship with the
Corporation. Correspondent account balances with the Corporation included in cash and due from banks totaled $4.2 million at December 31, 2004 and $27.6 million at December 31, 2003. Southerns wholly-owned subsidiary, Goshen, Inc. paid $67,000
to an Insurance Company owned by the Corporation for the sale of insurance written in connection with loans made by Southern in 2004 compared to $82,000 for such insurance written in 2003. BancShares also owns 127,584 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 $3.0 million and $465,000, respectively, at December 31, 2004. The Class A common stock had a fair value of $18.9 million and $15.0 million at
December 31, 2004 and 2003, respectively. The Class B common stock had a fair value of $3.2 million and $2.7 million at December 31, 2004 and 2003, respectively.



BancShares is related through common ownership with Fidelity Bancshares NC Inc., (Fidelity) and Heritage
BancShares, Inc., (Heritage) in that the aforementioned two significant shareholders of BancShares and certain of their related parties are also significant shareholders of Fidelity and Heritage. Fidelity has contracted with BancShares
for BancShares to service, on Fidelitys behalf, $1.9 million of Fidelitys mortgage loans at December 31, 2004. BancShares provides underwriting and processing services for mortgage loans originated through Fidelity and Heritage.



LIQUIDITY



Management places great importance on maintaining a highly liquid investment
portfolio with maturities structured to meet liquidity requirements. The ability to generate deposits is the primary source of liquidity. The average deposit growth rate was 7.87 percent for the year ended December 31, 2004, 10.01 percent for the
year ended December 31, 2003 and 4.02 percent for the year ended December 31, 2002.



At December 31, 2004 the investment portfolio totaled $280.5 million or 27.32 percent of total assets. At December 31, 2003 the investment portfolio totaled $253.0 million or 24.92 percent of total assets. Management
expects maturing securities combined with other traditional sources of liquidity to provide BancShares liquidity requirements.



30



---

The above liquidity sources have traditionally enabled BancShares to place minimal dependence on borrowed
funds to meet liquidity needs, however BancShares has readily available sources for borrowed funds through various correspondent banks.



The acquisition of a branch from another financial institution will usually also increase liquidity as Bancshares receives cash for the difference in the
liabilities acquired (primarily deposits) and the assets acquired (primarily loans). In 2004, $15.4 million of net cash was acquired through branch acquisitions compared to $15.1 million of net cash acquired in 2003 as a result of branch
acquisitions.



BancShares has obligations under existing
contractual obligations that will require payments in future periods. The following table presents aggregated information about such payments to be made in future periods. Transaction deposit accounts with indeterminate maturities have been
classified as having payments due in less than one year.



Table 17

CONTRACTURAL OBLIGATIONS



|                                   |  |                        |         |          |   |          |  |             |        |       |   |        |  |   |        
|---------------------------------- |  | ---------------------- | ------- | -------- | - | -------- |  | ----------- | ------ | ----- | - | ------ |  | - | -------
|                                   |  | Payments due by period
|As of December 31, 2004            |  | Less than1 year        |         | 1-3years |   | 4-5years |  | Over 5years |        | Total
|                                   |  | (In thousands)        
|Deposits                           |  | $                      | 777,308 |          | $ | 99,512   |  | $           | 33,702 |       | $ |       |  | $ | 910,522
|Short-term borrowings              |  |                        | 16,017  |          |   |         |  |             |       |       |   |       |  |   | 16,017 
|Long-term obligations              |  |                        |        |          |   |         |  |             |       |       |   | 23,711 |  |   | 23,711 
|Lease obligations                  |  |                        | 56      |          |   | 97       |  |             | 16     |       |   |       |  |   | 169    
|                                   |  |                        |         |          |   |          |  |             |        |       |   |        |  |   |        
|Total contractual cash obligations |  | $                      | 793,381 |          | $ | 99,609   |  | $           | 33,718 |       | $ | 23,711 |  | $ | 950,419
|                                   |  |                        |         |          |   |          |  |             |        |       |   |        |  |   |        



SHAREHOLDERS
EQUITY AND CAPITAL ADEQUACY



Included in shareholders
equity is accumulated other comprehensive income which is primarily the unrealized net gains on securities available-for-sale at the date of the period identified. Minimum pension liability also is included in accumulated other comprehensive income.
BancShares owns corporate stock and debt securities investments in several financial institutions. As a result of the daily equity market movement of the value of the individual investment instruments, the net after tax value of these investments
above or below the recorded cost of the investments, as of the period date indicated, is reported as accumulated other comprehensive income within shareholders equity. See the notes to the consolidated statements for a detailed discussion of
comprehensive income and minimum pension liability.



31



---

BancShares maintains adequate capital balances and exceeds all minimum regulatory capital requirements.
Table 18 provides additional information on the regulatory capital of BancShares. Failure to meet certain capital requirements as defined by BancShares regulatory agencies could result in specific regulatory actions that could have a material
effect on BancShares financial statements.



Table 18

ANALYSIS OF SOUTHERNS CAPITAL ADEQUACY



Southerns capital ratios as of December 31 are set forth below:



|                         |  |      |           |   |      |   |         |      |  |   |         |  
|------------------------ |  | ---- | --------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                         |  | 2004 |           |   | 2003 |   |         | 2002 | 
|Tier 1 capital (1)       |  | $    | 74,762    |   |      | $ | 72,828  |      |  | $ | 66,546  |  
|Total capital            |  |      | 88,796    |   |      |   | 85,594  |      |  |   | 77,814  |  
|Risk-adjusted assets     |  |      | 660,431   |   |      |   | 659,058 |      |  |   | 625,745 |  
|Average tangible assets  |  |      | 1,011,519 |   |      |   | 955,572 |      |  |   | 867,084 |  
|                         |  |      |          
|Tier 1 capital ratio (1) |  |      | 11.32     | % |      |   | 11.05   | %    |  |   | 10.63   | %
|Total capital            |  |      | 13.45     | % |      |   | 12.99   | %    |  |   | 12.44   | %
|Leverage capital ratio   |  |      | 7.39      | % |      |   | 7.62    | %    |  |   | 7.67    | %

| | 
| | 

| | (1) |  | The Capital Securities issued in 1998 are considered part of Tier I Capital. The minimum ratio of qualifying total capital to risk weighted assets is 8%, of which 4% must be Tier 1
capital, which is common equity, retained earnings, and a limited amount of perpetual preferred stock, less certain intangibles.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The rate of return on average shareholders equity for the year ended December 31, 2004 was 6.37 percent compared to 9.20 percent for the year ended
December 31, 2003 and 12.51 percent for the year ended December 31, 2002. The decreased rates of return recorded during 2004 and 2003 resulted principally from the reduction in net interest income created by the overall interest rate market
structured by the Federal Reserve in 2004 and 2003 that resulted in a significant reduction in the spread between the cost of interest-bearing liabilities and the yield on interest-bearing assets.



The Board of Directors of BancShares has authorized the purchase of shares of
Common, Preferred B and Preferred C stock up to an amount not to equal or exceed 10% of BancShares consolidated net worth during the ensuing year. Management will continue to consider the purchase of outstanding shares when market conditions
are favorable and excess capital is available for such purchases.



FOURTH QUARTER ANALYSIS



BancShares net
income for the fourth quarter of 2004 totaled $1.6 million, an increase of $48,000 or 3.09 percent from the fourth quarter of 2003. Average interest-earning assets for the fourth quarter of 2004 increased $55.2 million or 5.96 percent over the
fourth quarter of 2003. Average loans for the fourth quarter of 2004 increased $9.8 million or 1.54 percent over the fourth quarter of 2003. Average investment securities for the fourth quarter of 2004 increased $80.6 million or 39.12 percent from
the fourth quarter of 2003. Average earning assets, average loans and average investment securities increased primarily as a result of internal growth of existing branches, the addition of one new branch in 2004, the addition of one new branch in
2003 and the acquisitions listed in Table 2.



Interest income
for the fourth quarter of 2004 increased $1.9 million or 19.37 percent from the fourth quarter of 2003 primarily as a result of the increased volume of interest earning assets.



Average interest-bearing liabilities increased $37.6 million, or 5.29 percent, from the fourth quarter of 2003 to the fourth
quarter of 2004 primarily as a result of growth within existing branches, the addition of one new branch in 2004, the addition of one new branch in 2003 and the acquisitions listed in Table 2. The rate on total interest-bearing liabilities decreased
from 1.68 percent for the fourth quarter of 2003 to 1.67 percent for the fourth quarter of 2004.



Net interest income in the fourth quarter of 2004 increased $1.8 million from the fourth quarter of 2003 primarily as a result of lower overall interest
rates offset by growth within the existing branches, the addition of one new branch in 2004, the addition of one new branch in 2003 and the acquisitions listed in Table 2.



32



---

Non-interest income for the fourth quarter of 2004 decreased $608,000 or 17.04 percent from the fourth
quarter of 2003 primarily as a result of reduced gains on sales of loans. Non-interest expense for the fourth quarter of 2004 increased $955,000 or 11.29 percent from the fourth quarter of 2003 primarily as a result of increases in personnel
expense, occupancy and other non-interest expenses related to the addition of one new branch in 2004, the addition of one new branch in 2003 and the acquisitions listed in Table 2.



During the fourth quarter of 2003, in conjunction with the filing of the state income tax return, it was determined that
BancShares would now be likely to pay state income taxes in future years. As a result, the valuation allowance in state deferred tax assets was no longer required. A decrease in tax expense of $280 was recorded in the fourth quarter of 2003.
Additionally, the sharp decline in net income before tax in the fourth quarter resulted in the effective tax rate previously estimated during 2003 being overstated. An adjustment was made in the fourth quarter of 2003 to account for the effect of
these changes.



Table 19

SELECTED QUARTERLY DATA



|                                           |  |        |        |       |   |        |  |       |        |        |   |        |  |        |        |       |   |        |  |   |        |  |   |       
|------------------------------------------ |  | ------ | ------ | ----- | - | ------ |  | ----- | ------ | ------ | - | ------ |  | ------ | ------ | ----- | - | ------ |  | - | ------ |  | - | ------
|                                           |  | 2004   |        | 2003 
|                                           |  | Fourth |        | Third |   | Second |  | First |        | Fourth |   | Third  |  | Second |        | First
|SUMMARY OF OPERATIONS                      |  |        |        |       |   |        |  |       |        |        |   |        |  |        |        |       |   |        |  |   |        |  |   |       
|Interest income                            |  | $      | 11,988 |       | $ | 11,225 |  | $     | 11,184 |        | $ | 10,929 |  | $      | 10,043 |       | $ | 11,807 |  | $ | 12,100 |  | $ | 12,133
|Interest expense                           |  |        | 3,255  |       |   | 3,073  |  |       | 2,968  |        |   | 2,964  |  |        | 3,066  |       |   | 3,116  |  |   | 3,270  |  |   | 3,480 
|                                           |  |        |        |       |   |        |  |       |        |        |   |        |  |        |        |       |   |        |  |   |        |  |   |       
|Net interest income                        |  |        | 8,733  |       |   | 8,152  |  |       | 8,216  |        |   | 7,965  |  |        | 6,977  |       |   | 8,691  |  |   | 8,830  |  |   | 8,653 
|Provision for loan losses                  |  |        | 300    |       |   | 300    |  |       | 300    |        |   | 300    |  |        | 450    |       |   | 450    |  |   | 450    |  |   | 450   
|                                           |  |        |        |       |   |        |  |       |        |        |   |        |  |        |        |       |   |        |  |   |        |  |   |       
|Net income after provision for loan losses |  |        | 8,433  |       |   | 7,852  |  |       | 7,916  |        |   | 7,665  |  |        | 6,527  |       |   | 8,241  |  |   | 8,380  |  |   | 8,203 
|Noninterest income                         |  |        | 2,961  |       |   | 2,726  |  |       | 2,551  |        |   | 2,783  |  |        | 3,569  |       |   | 3,039  |  |   | 3,207  |  |   | 2,672 
|Noninterest expense.                       |  |        | 9,416  |       |   | 8,573  |  |       | 8,606  |        |   | 8,555  |  |        | 8,461  |       |   | 8,663  |  |   | 7,585  |  |   | 7,785 
|                                           |  |        |        |       |   |        |  |       |        |        |   |        |  |        |        |       |   |        |  |   |        |  |   |       
|Income before income taxes                 |  |        | 1,978  |       |   | 2,005  |  |       | 1,861  |        |   | 1,893  |  |        | 1,635  |       |   | 2,617  |  |   | 4,002  |  |   | 3,090 
|Income taxes                               |  |        | 378    |       |   | 560    |  |       | 602    |        |   | 398    |  |        | 83     |       |   | 864    |  |   | 1,376  |  |   | 960   
|                                           |  |        |        |       |   |        |  |       |        |        |   |        |  |        |        |       |   |        |  |   |        |  |   |       
|Net income                                 |  | $      | 1,600  |       | $ | 1,445  |  | $     | 1,259  |        | $ | 1,495  |  | $      | 1,552  |       | $ | 1,753  |  | $ | 2,626  |  | $ | 2,130 
|                                           |  |        |        |       |   |        |  |       |        |        |   |        |  |        |        |       |   |        |  |   |        |  |   |       
|Net income applicable to common shares     |  | $      | 1,510  |       | $ | 1,355  |  | $     | 1,172  |        | $ | 1,407  |  | $      | 1,461  |       | $ | 1,660  |  | $ | 2,539  |  | $ | 2,042 
|                                           |  |        |        |       |   |        |  |       |        |        |   |        |  |        |        |       |   |        |  |   |        |  |   |       



SELECTED QUARTERLY DATA

PER SHARE OF STOCK



|                                     |  |        |       |       |   |        |  |       |       |        |   |       |  |        |       |       |   |       |  |   |       |  |   |      
|------------------------------------ |  | ------ | ----- | ----- | - | ------ |  | ----- | ----- | ------ | - | ----- |  | ------ | ----- | ----- | - | ----- |  | - | ----- |  | - | -----
|                                     |  | 2004   |       | 2003 
|                                     |  | Fourth |       | Third |   | Second |  | First |       | Fourth |   | Third |  | Second |       | First
|Net income per share of common stock |  | $      | 13.69 |       | $ | 12.25  |  | $     | 10.56 |        | $ | 12.62 |  | $      | 13.09 |       | $ | 14.84 |  | $ | 22.71 |  | $ | 18.08
|Cash dividendscommon                |  |        | 0.40  |       |   | 0.40   |  |       | 0.40  |        |   | 0.40  |  |        | 0.40  |       |   | 0.40  |  |   | 0.40  |  |   | 0.38 
|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 



LEGAL PROCEEDINGS



There are no material legal proceedings to which
BancShares or its subsidiaries are a party or to which any of their property is subject, other than ordinary, routine litigation incidental to the business of commercial banking.



33



---

MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS



There is no established market for BancShares common or preferred
stock, although the common stock is quoted in the pink sheets under the trading symbol SBNC.



The approximate number of record holders of BancShares outstanding common stock at December 31, 2004 was 321. 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. Information regarding dividends paid by BancShares on its outstanding common and preferred stock during each quarter of 2004 and 2003 is contained in
the Per Share of Stock section of Table 19.



Common
shareholders are entitled to one vote per share and holders of shares of BancShares Series B and C preferred stock are entitled to one vote for each 38 shares owned.



The following table contains information regarding repurchases by BancShares
of shares of its outstanding equity securities during the quarter ended December 31, 2004:



Table 20

ISSUER REPURCHASES OF EQUITY SECURITIES



|                                    |  |                                      |  |                           |        |                                                                 |     |                                                              |    
|----------------------------------- |  | ------------------------------------ |  | ------------------------- | ------ | --------------------------------------------------------------- | --- | ------------------------------------------------------------ | ---
|Period                              |  | Total Numberof SharesRepurchased (1) |  | AveragePricePaid perShare |        | Total Numberof SharesPurchased as Part ofPubliclyAnnouncedPlans |     | MaximumNumber ofShares thatmay yet bePurchasedUnder thePlans
|Month #1: 10/01/04 through 10/31/04 |  |                                      |  |                           |        |                                                                 |     |                                                              |    
|Common Stock                        |  | 490                                  |  | $                         | 425.00 |                                                                 | N/A |                                                              | N/A
|Series B Preferred Stock            |  |                                     |  |                           | N/A    |                                                                 | N/A |                                                              | N/A
|Series C Preferred Stock            |  |                                     |  |                           | N/A    |                                                                 | N/A |                                                              | N/A
|Month #2: 11/01/04 through 11/30/04 |  |                                      |  |                           |        |                                                                 |     |                                                              |    
|Common Stock                        |  |                                     |  |                           | N/A    |                                                                 | N/A |                                                              | N/A
|Series B Preferred Stock            |  | 150                                  |  | $                         | 11.25  |                                                                 | N/A |                                                              | N/A
|Series C Preferred Stock            |  |                                     |  |                           | N/A    |                                                                 | N/A |                                                              | N/A
|Month #3: 12/01/04 through 12/31/04 |  |                                      |  |                           |        |                                                                 |     |                                                              |    
|Common Stock                        |  |                                     |  |                           | N/A    |                                                                 | N/A |                                                              | N/A
|Series B Preferred Stock            |  | 1,318                                |  | $                         | 11.25  |                                                                 | N/A |                                                              | N/A
|Series C Preferred Stock            |  |                                     |  |                           | N/A    |                                                                 | N/A |                                                              | N/A
|Total numbers of shares:            |  |                                      |  |                           |        |                                                                 |     |                                                              |    
|Common Stock                        |  | 490                                  |  | $                         | 425.00 |                                                                 | N/A |                                                              | N/A
|Series B Preferred Stock            |  | 1,468                                |  | $                         | 11.25  |                                                                 | N/A |                                                              | N/A
|Series C Preferred Stock            |  |                                     |  |                           | N/A    |                                                                 | N/A |                                                              | N/A

---

|(1) |  | All purchases were made pursuant to general authority given each year by BancShares Board of Directors and not pursuant to a formal repurchase plan or program. Under that
authority, BancShares is authorized to repurchase shares of its capital stock from time to time in unsolicited private transactions and/or on the open market. All of the above purchases were unsolicited private transactions. Purchases are subject to
various conditions, including price and volume limitations and compliance with applicable law.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



---

ACCOUNTING AND OTHER MATTERS



ACCOUNTING MATTERS



The new accounting standards are discussed in detail in the notes to the consolidated financial statements.



OTHER MATTERS



Code of Ethics



BancShares has adopted a code of ethics that applies to all its executive officers, including its principal executive and principal financial and
accounting officers. A copy of the code of ethics will be provided without charge to any person upon request. Requests for copies should be directed by mail to Corporate Secretary, Southern BancShares, Inc., Post Office Box 729, Mount Olive, North
Carolina 28365, or by telephone to (919) 658-7007.



Audit Committee
Financial Expert



Rules recently adopted by the Securities
and Exchange Commission (the SEC) require BancShares to disclose whether its Board of Directors has determined that its Audit Committee includes a member who qualifies as an audit committee financial expert as that term is
defined in the SECs rules. To qualify as an audit committee financial expert under the SECs rules, a person must have a relatively high level of accounting and financial knowledge or expertise which he or she has acquired through
specialized education or training or through experience in certain types of positions. BancShares currently does not have a director who its Board believes can be considered an audit committee financial expert and, for that reason, there is no such
person who the Board can appoint to BancShares Audit Committee. In the future, financial expertise and experience will be one of many factors that BancShares Board considers in selecting candidates to become directors. However,
BancShares is not required by any law or regulation to have an audit committee financial expert on its Board or Audit Committee, and the Board believes that small companies such as BancShares will find it difficult to locate persons with the
specialized knowledge and experience needed to qualify as audit committee financial experts who are willing to serve as directors without being compensated at levels higher than BancShares currently pays its directors. BancShares current Audit
Committee members have a level of financial knowledge and experience that its Board believes is sufficient for a bank the size of BancShares that does not engage in a wide variety of business activities. For that reason, the ability to qualify as an
audit committee financial expert will not be the primary criteria in the Boards selection of candidates to become new directors.



Amortizable Intangible Assets



The determination of the amortizable portion of the total intangible asset recorded related to the Seaboard and Woodland acquisition (and subsequent
amortization thereof in 2004) is based upon an internal estimate performed by BancShares.



Procedures for Shareholder Recommendations to Nominating Committee



BancShares Nominating Committee has adopted procedures to be followed by shareholders who wish to recommend candidates to the Committee for its
consideration in connection with its recommendation of director nominees to the Board of Directors. A copy of those procedures is attached as an exhibit to this Report. A copy of these procedures will be provided without charge to any person upon
request. Requests for copies should be directed by mail to Corporate Secretary, Southern BancShares, Inc., Post Office Box 729, Mount Olive, North Carolina 28365, or by telephone to (919) 658-7007.



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.



35



---

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 qualifiers such as expect, believe, estimate,
plan, project or other statements concerning opinions or judgments 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.



CONTROLS AND PROCEDURES



BancShares management, including its Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the design and operation of BancShares disclosure controls and procedures, as defined in Section 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), and
have concluded that, as of the end of the period covered by this Report, those disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed by BancShares in reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods.



No change in BancShares internal control over financial reporting occurred during the 4thquarter of the period covered by this report that was identified in connection with the above evaluation and that has materially affected, or is reasonably
likely to materially affect, BancShares internal control over financial reporting.





36



---

LOGO



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders

Southern BancShares (N.C.), Inc.

Mt. Olive, North Carolina



We have audited the accompanying consolidated balance sheet of
Southern BancShares (N.C.), Inc. and subsidiary (the Company) as of December 31, 2004 and the related consolidated statements of income and comprehensive income, shareholders equity and cash flows for the year then ended. 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 audit.



We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern BancShares (N.C.), Inc. and subsidiary as of December 31, 2004,
and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.



LOGO

Sanford, North Carolina

February
11, 2005



37



---

LOGO



KPMG LLP

Suite 1200

150 Fayetteville Street Mall

PO Box 29543

Raleigh, NC
27626-0543



Report of Independent Registered Public
Accounting Firm



The Board of Directors and Shareholders

Southern BancShares, Inc.:



We have audited the accompanying consolidated balance sheet of Southern Bancshares (N.C.), Inc. and Subsidiaries (the Company) as of December 31, 2003,
and the related consolidated statements of income and comprehensive income, shareholders equity, and cash flows for each of the years in the two-year period ended December 31, 2003. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, 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, 2003, and the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.



As discussed in Note A to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, and Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions.



LOGO



March 5, 2004





KPMG LLP, a U.S. limited liability partnership, is the U.S.

member firm of KPMG International, a Swiss cooperative.



38



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS

(Dollars
in thousands except for shares and per share data)



|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                                                                                                           |  | December 31, |          
|                                                                                                                                                                                                                                                                                           |  | 2004         |           |   | 2003 |  
|ASSETS                                                                                                                                                                                                                                                                                     |  |              |           |   |      |   |           |  
|Cash and due from banks                                                                                                                                                                                                                                                                    |  | $            | 22,283    |   |      | $ | 44,552    |  
|Overnight funds sold                                                                                                                                                                                                                                                                       |  |              | 35,872    |   |      |   | 40,020    |  
|Investment securities:                                                                                                                                                                                                                                                                     |  |              |           |   |      |   |           |  
|Available-for-sale, at fair value (amortized cost of $43,600 and $117,903, respectively)                                                                                                                                                                                                   |  |              | 74,903    |   |      |   | 143,669   |  
|Held-to-maturity, at amortized cost (fair value of $236,172 and $110,346, respectively)                                                                                                                                                                                                    |  |              | 236,609   |   |      |   | 109,357   |  
|Loans                                                                                                                                                                                                                                                                                      |  |              | 639,311   |   |      |   | 628,000   |  
|Loans held for sale                                                                                                                                                                                                                                                                        |  |              | 4,880     |   |      |   | 3,171     |  
|Less allowance for loan losses                                                                                                                                                                                                                                                             |  |              | (10,259   | ) |      |   | (10,095   | )
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|Net loans                                                                                                                                                                                                                                                                                  |  |              | 633,932   |   |      |   | 621,076   |  
|Accrued interest receivable                                                                                                                                                                                                                                                                |  |              | 4,929     |   |      |   | 4,910     |  
|Premises and equipment                                                                                                                                                                                                                                                                     |  |              | 34,513    |   |      |   | 35,605    |  
|Goodwill                                                                                                                                                                                                                                                                                   |  |              | 7,712     |   |      |   | 6,516     |  
|Intangible assets                                                                                                                                                                                                                                                                          |  |              | 3,687     |   |      |   | 4,590     |  
|Other assets                                                                                                                                                                                                                                                                               |  |              | 3,010     |   |      |   | 5,732     |  
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|Total assets                                                                                                                                                                                                                                                                               |  | $            | 1,057,450 |   |      | $ | 1,016,027 |  
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|                                                                                                                                                                                                                                                                                           |  |             
|LIABILITIES                                                                                                                                                                                                                                                                                |  |              |           |   |      |   |           |  
|Deposits:                                                                                                                                                                                                                                                                                  |  |              |           |   |      |   |           |  
|Noninterest-bearing                                                                                                                                                                                                                                                                        |  | $            | 183,762   |   |      | $ | 174,155   |  
|Interest-bearing                                                                                                                                                                                                                                                                           |  |              | 726,760   |   |      |   | 702,355   |  
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|Total deposits                                                                                                                                                                                                                                                                             |  |              | 910,522   |   |      |   | 876,510   |  
|Accrued interest payable                                                                                                                                                                                                                                                                   |  |              | 1,447     |   |      |   | 1,364     |  
|Short-term borrowings                                                                                                                                                                                                                                                                      |  |              | 16,017    |   |      |   | 15,870    |  
|Long-term obligations                                                                                                                                                                                                                                                                      |  |              | 23,711    |   |      |   | 23,711    |  
|Other liabilities                                                                                                                                                                                                                                                                          |  |              | 9,735     |   |      |   | 10,054    |  
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|Total liabilities                                                                                                                                                                                                                                                                          |  |              | 961,432   |   |      |   | 927,509   |  
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|                                                                                                                                                                                                                                                                                           |  |             
|SHAREHOLDERS EQUITY                                                                                                                                                                                                                                                                       |  |              |           |   |      |   |           |  
|Series B non-cumulative preferred stock, no par value; $3,506 and $3,583 liquidation value at December 31, 2004 and December 31, 2003,
respectively; 408,728 shares authorized; 350,593 and 358,316 shares issued and outstanding at December 31, 2004 and December 31, 2003, respectively |  |              | 1,753     |   |      |   | 1,745     |  
|Series C non-cumulative preferred stock, no par value; $397 liquidation value at both December 31, 2004 and December 31, 2003; 43,631 shares
authorized; 39,657 shares issued and outstanding at both December 31, 2004 and December 31, 2003                                              |  |              | 525       |   |      |   | 552       |  
|Common stock, $5 par value; 158,485 shares authorized; 110,126 and 111,530 shares issued and outstanding at December 31, 2004 and December 31,
2003, respectively                                                                                                                          |  |              | 551       |   |      |   | 558       |  
|Surplus                                                                                                                                                                                                                                                                                    |  |              | 10,000    |   |      |   | 10,000    |  
|Retained earnings                                                                                                                                                                                                                                                                          |  |              | 64,528    |   |      |   | 59,919    |  
|Accumulated other comprehensive income                                                                                                                                                                                                                                                     |  |              | 18,661    |   |      |   | 15,744    |  
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|Total shareholders equity                                                                                                                                                                                                                                                                 |  |              | 96,018    |   |      |   | 88,518    |  
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                                                                                 |  | $            | 1,057,450 |   |      | $ | 1,016,027 |  
|                                                                                                                                                                                                                                                                                           |  |              |           |   |      |   |           |  



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



39



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Dollars in thousands except for share and per share data)



|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                   |  | Year ended December 31, |        
|                                                                   |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Interest income:                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Loans                                                              |  | $                       | 38,348  |   |      | $ | 39,888  |      |  | $ | 40,582  |  
|Investment securities:                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|U. S. Government                                                   |  |                         | 3,379   |   |      |   | 3,112   |      |  |   | 5,509   |  
|State, county and municipal                                        |  |                         | 1,107   |   |      |   | 1,062   |      |  |   | 1,203   |  
|Other                                                              |  |                         | 1,938   |   |      |   | 1,484   |      |  |   | 1,628   |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Total investment securities interest income                        |  |                         | 6,424   |   |      |   | 5,658   |      |  |   | 8,340   |  
|Overnight funds sold                                               |  |                         | 554     |   |      |   | 537     |      |  |   | 500     |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Total interest income                                              |  |                         | 45,326  |   |      |   | 46,083  |      |  |   | 49,422  |  
|Interest expense:                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Deposits                                                           |  |                         | 10,203  |   |      |   | 10,784  |      |  |   | 13,319  |  
|Short-term borrowings                                              |  |                         | 160     |   |      |   | 120     |      |  |   | 203     |  
|Long-term obligations                                              |  |                         | 1,897   |   |      |   | 2,028   |      |  |   | 2,070   |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Total interest expense                                             |  |                         | 12,260  |   |      |   | 12,932  |      |  |   | 15,592  |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net interest income                                                |  |                         | 33,066  |   |      |   | 33,151  |      |  |   | 33,830  |  
|Provision for loan losses                                          |  |                         | 1,200   |   |      |   | 1,800   |      |  |   | 1,950   |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net interest income after provision for loan losses                |  |                         | 31,866  |   |      |   | 31,351  |      |  |   | 31,880  |  
|Noninterest income:                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Service charges on deposit accounts                                |  |                         | 7,090   |   |      |   | 6,714   |      |  |   | 5,688   |  
|Other service charges and fees                                     |  |                         | 2,474   |   |      |   | 2,253   |      |  |   | 1,786   |  
|Gain on sale of loans                                              |  |                         | 662     |   |      |   | 2,446   |      |  |   | 1,297   |  
|Investment securities gain, net.                                   |  |                         | 229     |   |      |   | 282     |      |  |   | 1,569   |  
|Other                                                              |  |                         | 566     |   |      |   | 792     |      |  |   | 330     |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Total noninterest income                                           |  |                         | 11,021  |   |      |   | 12,487  |      |  |   | 10,670  |  
|Noninterest expense:                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|Personnel                                                          |  |                         | 18,568  |   |      |   | 16,633  |      |  |   | 14,912  |  
|Data processing                                                    |  |                         | 3,612   |   |      |   | 3,049   |      |  |   | 2,731   |  
|Occupancy                                                          |  |                         | 3,551   |   |      |   | 3,158   |      |  |   | 2,853   |  
|Furniture and equipment                                            |  |                         | 2,041   |   |      |   | 2,025   |      |  |   | 1,896   |  
|Intangibles amortization                                           |  |                         | 1,496   |   |      |   | 1,675   |      |  |   | 1,818   |  
|Professional fees                                                  |  |                         | 893     |   |      |   | 980     |      |  |   | 666     |  
|Other                                                              |  |                         | 4,989   |   |      |   | 4,974   |      |  |   | 4,717   |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Total noninterest expense                                          |  |                         | 35,150  |   |      |   | 32,494  |      |  |   | 29,593  |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Income before income taxes                                         |  |                         | 7,737   |   |      |   | 11,344  |      |  |   | 12,957  |  
|Income taxes                                                       |  |                         | 1,938   |   |      |   | 3,283   |      |  |   | 3,846   |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                         |  |                         | 5,799   |   |      |   | 8,061   |      |  |   | 9,111   |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Other comprehensive income, net of tax:                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Unrealized gains arising during period                             |  |                         | 5,235   |   |      |   | 6,867   |      |  |   | 4,234   |  
|Less: tax effect                                                   |  |                         | (2,016  | ) |      |   | (2,647  | )    |  |   | (1,632  | )
|Less: Reclassification adjustment for gains included in net income |  |                         | (229    | ) |      |   | (282    | )    |  |   | (1,569  | )
|Less: tax effect                                                   |  |                         | 85      |   |      |   | 109     |      |  |   | 605     |  
|Minimum pension liability                                          |  |                         | (257    | ) |      |   | (94     | )    |  |   | (49     | )
|Less: tax effect                                                   |  |                         | 99      |   |      |   | 36      |      |  |   | 19      |  
|Total other comprehensive income                                   |  |                         | 2,917   |   |      |   | 3,989   |      |  |   | 1,608   |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Comprehensive income                                               |  | $                       | 8,716   |   |      | $ | 12,050  |      |  | $ | 10,719  |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Per share information:                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income per common share                                        |  | $                       | 49.12   |   |      | $ | 68.72   |      |  | $ | 76.77   |  
|Cash dividends declared on common shares                           |  |                         | 1.60    |   |      |   | 1.58    |      |  |   | 1.50    |  
|Weighted average common shares outstanding                         |  |                         | 110,828 |   |      |   | 112,070 |      |  |   | 113,961 |  
|                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  



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



40



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(Dollars in thousands except for share and per share data)



|                                                             |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | --------------- | - |  | -------- | ----- | - | ------------ | ------ | - | ------ | - | ------------------------------------ | ------ |  | ------------------------ | ------ |  | - | ------- | - |  | - | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Preferred Stock |   |  |          |       |   |              |        |   |        |   | AccumulatedOtherCompre-hensiveIncome |        |  | TotalShareholdersEquity |       
|                                                             |  | Series B        |   |  | Series C |       |   | Common Stock |        |   |        |   | RetainedEarnings                     |        |  |                         
|                                                             |  | Shares          |   |  | Amount   |       |   | Shares       |        |   | Amount |   |                                      | Shares |  |                          | Amount |  |   | Surplus |   |  |  
|BALANCE, DECEMBER 31, 2001                                   |  | 363,373         |   |  | $        | 1,770 |   |              | 39,716 |   |        | $ | 553                                  |        |  | 114,208                  |        |  | $ | 571     |   |  | $ | 10,000 |  | $ | 44,388 |   |  | $ | 10,147 |   |  | $ | 67,429 |  
|Net income                                                   |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | 9,111  |   |  |   |       |   |  |   | 9,111  |  
|Purchase and retirement of stock                             |  | (2,453          | ) |  |          | (12   | ) |              | (59    | ) |        |   | (1                                   | )      |  | (559                     | )      |  |   | (3      | ) |  |   |       |  |   | (124   | ) |  |   |       |   |  |   | (140   | )
|Cash dividends:                                              |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|Common stock ($1.50 per share)                               |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (170   | ) |  |   |       |   |  |   | (170   | )
|Preferred B ($.90 per share)                                 |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (326   | ) |  |   |       |   |  |   | (326   | )
|Preferred C ($.90 per share)                                 |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (36    | ) |  |   |       |   |  |   | (36    | )
|Other                                                        |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | 33     |   |  |   |       |   |  |   | 33     |  
|Minimum pension liability, net of tax                        |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   |       |   |  |   | (30    | ) |  |   | (30    | )
|Unrealized gain on securities available-for-sale, net of tax |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   |       |   |  |   | 1,638  |   |  |   | 1,638  |  
|                                                             |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|BALANCE, DECEMBER 31, 2002                                   |  | 360,920         |   |  | $        | 1,758 |   |              | 39,657 |   |        | $ | 552                                  |        |  | 113,649                  |        |  | $ | 568     |   |  | $ | 10,000 |  | $ | 52,876 |   |  | $ | 11,755 |   |  | $ | 77,509 |  
|                                                             |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                   |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | 8,061  |   |  |   |       |   |  |   | 8,061  |  
|Purchase and retirement of stock                             |  | (2,604          | ) |  |          | (13   | ) |              |        |   |        |   |                                      |        |  | (2,119                   | )      |  |   | (10     | ) |  |   |       |  |   | (487   | ) |  |   |       |   |  |   | (510   | )
|Cash dividends:                                              |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|Common stock ($1.58 per share)                               |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (172   | ) |  |   |       |   |  |   | (172   | )
|Preferred B ($.90 per share)                                 |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (323   | ) |  |   |       |   |  |   | (323   | )
|Preferred C ($.90 per share)                                 |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (36    | ) |  |   |       |   |  |   | (36    | )
|Minimum pension liability, net of tax                        |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   |       |   |  |   | (58    | ) |  |   | (58    | )
|Unrealized gain on securities available-for-sale, net of tax |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   |       |   |  |   | 4,047  |   |  |   | 4,047  |  
|                                                             |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|BALANCE, DECEMBER 31, 2003                                   |  | 358,316         |   |  | $        | 1,745 |   |              | 39,657 |   |        | $ | 552                                  |        |  | 111,530                  |        |  | $ | 558     |   |  | $ | 10,000 |  | $ | 59,919 |   |  | $ | 15,744 |   |  | $ | 88,518 |  
|                                                             |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|Net income                                                   |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | 5,799  |   |  |   |       |   |  |   | 5,799  |  
|Purchase, retirement and reclass of stock . . . .            |  | (7,723          | ) |  |          | 8     |   |              |        |   |        |   | (27                                  | )      |  | (1,404                   | )      |  |   | (7      | ) |  |   |       |  |   | (658   | ) |  |   |       |   |  |   | (684   | )
|Cash dividends:                                              |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|Common stock ($1.60 per share)                               |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (177   | ) |  |   |       |   |  |   | (177   | )
|Preferred B ($.90 per share)                                 |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (319   | ) |  |   |       |   |  |   | (319   | )
|Preferred C ($.90 per share)                                 |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   | (36    | ) |  |   |       |   |  |   | (36    | )
|Minimum pension liability, net of tax                        |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   |       |   |  |   | (158   | ) |  |   | (158   | )
|Unrealized gain on securities available-for-sale, net of tax |  |                |   |  |          |      |   |              |       |   |        |   |                                     |        |  |                         |        |  |   |        |   |  |   |       |  |   |       |   |  |   | 3,075  |   |  |   | 3,075  |  
|                                                             |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  
|BALANCE, DECEMBER 31, 2004                                   |  | 350,593         |   |  | $        | 1,753 |   |              | 39,657 |   |        | $ | 525                                  |        |  | 110,126                  |        |  | $ | 551     |   |  | $ | 10,000 |  | $ | 64,528 |   |  | $ | 18,661 |   |  | $ | 96,018 |  
|                                                             |  |                 |   |  |          |       |   |              |        |   |        |   |                                      |        |  |                          |        |  |   |         |   |  |   |        |  |   |        |   |  |   |        |   |  |   |        |  



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



41



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                         |  | Year ended December 31, |         
|                                                                                         |  | 2004                    |          |   | 2003 |   |          | 2002 | 
|OPERATING ACTIVITIES:                                                                    |  |                         |          |   |      |   |          |      |  |   |         |  
|Net income                                                                               |  | $                       | 5,799    |   |      | $ | 8,061    |      |  | $ | 9,111   |  
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |                         |          |   |      |   |          |      |  |   |         |  
|Provision for loan losses                                                                |  |                         | 1,200    |   |      |   | 1,800    |      |  |   | 1,950   |  
|Deferred income taxes                                                                    |  |                         | (238     | ) |      |   | (422     | )    |  |   | (681    | )
|Gains on sales, donations and issuer calls of securities                                 |  |                         | (181     | ) |      |   | (282     | )    |  |   | (1,569  | )
|Loss (gain) on sale and abandonment of premises and equipment                            |  |                         | 48       |   |      |   | (167     | )    |  |   | 117     |  
|Gain on sale of foreclosed assets                                                        |  |                         | 53       |   |      |   | 22       |      |  |   | (89     | )
|Gain on sale of loans                                                                    |  |                         | (662     | ) |      |   | (2,446   | )    |  |   | (1,297  | )
|Net amortization (accretion of discounts) of premiums on investments                     |  |                         | 631      |   |      |   | 1,087    |      |  |   | 646     |  
|Amortization of intangibles and mortgage servicing rights                                |  |                         | 1,791    |   |      |   | 1,928    |      |  |   | 2,109   |  
|Depreciation                                                                             |  |                         | 2,783    |   |      |   | 2,484    |      |  |   | 2,401   |  
|Proceeds from sales of loans held for sale                                               |  |                         | 65,555   |   |      |   | 132,148  |      |  |   | 63,173  |  
|Origination of loans held for sale                                                       |  |                         | (71,365  | ) |      |   | (129,096 | )    |  |   | (98,297 | )
|Net increase in intangible assets                                                        |  |                         | (293     | ) |      |   | (549     | )    |  |   | (355    | )
|Net (increase) decrease in accrued interest receivable                                   |  |                         | (19      | ) |      |   | 371      |      |  |   | 816     |  
|Net increase (decrease) in accrued interest payable                                      |  |                         | 83       |   |      |   | (577     | )    |  |   | (1,309  | )
|Net increase in other assets                                                             |  |                         | (554     | ) |      |   | (1,689   | )    |  |   | (1,017  | )
|Net (decrease) increase in other liabilities                                             |  |                         | (320     | ) |      |   | 365      |      |  |   | 1,239   |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES                                         |  |                         | 4,311    |   |      |   | 13,038   |      |  |   | (23,052 | )
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|INVESTING ACTIVITIES:                                                                    |  |                         |          |   |      |   |          |      |  |   |         |  
|Proceeds from maturities and issuer calls of investment securities available-for-sale    |  |                         | 54,015   |   |      |   | 72,650   |      |  |   | 43,529  |  
|Proceeds from maturities and issuer calls of investment securities held-to-maturity      |  |                         | 46,398   |   |      |   | 24,910   |      |  |   | 42,332  |  
|Proceeds from sales of investment securities available-for-sale                          |  |                         |         |   |      |   | 1,815    |      |  |   | 3,387   |  
|Purchases of investment securities held-to-maturity                                      |  |                         | (143,993 | ) |      |   | (106,081 | )    |  |   | (14,797 | )
|Purchases of investment securities available-for-sale                                    |  |                         | (10,555  | ) |      |   | (49,984  | )    |  |   | (57,134 | )
|Net decrease (increase) in loans                                                         |  |                         | 4,167    |   |      |   | (14,632  | )    |  |   | (32,383 | )
|Purchases of premises and equipment                                                      |  |                         | (1,728   | ) |      |   | (5,085   | )    |  |   | (2,059  | )
|Proceeds from sales of foreclosed assets                                                 |  |                         | 646      |   |      |   | 293      |      |  |   | 212     |  
|Net cash received for branches acquired                                                  |  |                         | 15,418   |   |      |   | 15,088   |      |  |   | 24,325  |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES                                         |  |                         | (35,632  | ) |      |   | (61,026  | )    |  |   | 7,412   |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|FINANCING ACTIVITIES:                                                                    |  |                         |          |   |      |   |          |      |  |   |         |  
|Net increase in demand and interest-bearing demand deposits                              |  |                         | 20,923   |   |      |   | 61,680   |      |  |   | 38,920  |  
|Net decrease in time deposits                                                            |  |                         | (14,950  | ) |      |   | (208     | )    |  |   | (12,123 | )
|Net proceeds (repayments) of short-term borrowed funds                                   |  |                         | 147      |   |      |   | 1,530    |      |  |   | (3,806  | )
|Net proceeds of long-term obligations                                                    |  |                         |         |   |      |   | 711      |      |  |   |        |  
|Other                                                                                    |  |                         |         |   |      |   |         |      |  |   | 33      |  
|Cash dividends paid                                                                      |  |                         | (532     | ) |      |   | (531     | )    |  |   | (532    | )
|Purchase and retirement of stock                                                         |  |                         | (684     | ) |      |   | (510     | )    |  |   | (140    | )
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                |  |                         | 4,904    |   |      |   | 62,672   |      |  |   | 22,352  |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                     |  |                         | (26,417  | ) |      |   | 14,684   |      |  |   | 6,712   |  
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                                       |  |                         | 84,572   |   |      |   | 69,888   |      |  |   | 63,176  |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|CASH AND CASH EQUIVALENTS AT THE END OF YEAR                                             |  | $                       | 58,155   |   |      | $ | 84,572   |      |  | $ | 69,888  |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE YEAR FOR:                               |  |                         |          |   |      |   |          |      |  |   |         |  
|Interest                                                                                 |  | $                       | 12,177   |   |      | $ | 13,488   |      |  | $ | 16,901  |  
|Income taxes                                                                             |  | $                       | 1,319    |   |      | $ | 4,327    |      |  | $ | 4,729   |  
|SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:                  |  |                         |          |   |      |   |          |      |  |   |         |  
|Unrealized gains on available-for-sale securities, net of tax                            |  | $                       | 5,006    |   |      | $ | 4,047    |      |  | $ | 1,638   |  
|Foreclosed loans transferred to other real estate                                        |  | $                       | 1,048    |   |      | $ | 42       |      |  | $ | 528     |  
|Minimum pension liability, net of tax                                                    |  | $                       | (158     | ) |      | $ | (58      | )    |  | $ | (30     | )



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



42



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



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 currently operates 53 banking offices in eastern North Carolina. 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 subsidiary, Southern. 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. All significant
intercompany balances have been eliminated in consolidation.



Basis of
Financial Statement Presentation



The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America 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 overnight funds sold. Overnight and 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). Unrealized losses on securities available-for-sale reflecting a decline in value judged to be other than temporary are charged to income in the consolidated statement of income.



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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



43



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



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 until the investments mature or are called. BancShares does not hold trading securities.



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 and the loan has performed in accordance with its terms for a demonstrated period of time. The past due status of loans is based on
the contractual terms of the loan.



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-offs 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 borrowers 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 accounting principles generally accepted in the United States of America and in consideration of the current economic environment. While management uses the best information available to make evaluations, future
adjustments may be necessary.



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 allowance based on the
examiners judgments about information available to them at the time of their examinations.



Other Real Estate



Other real estate, which is included in other assets on the consolidated balance sheet, represents properties acquired through foreclosure or deed in lieu thereof and is carried at the lower of cost or estimated fair
value, less estimated costs to sell. Declines in fair value of properties included in other real estate below carrying value are recognized by a charge to income.



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.



44



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



Intangible Assets



Intangible assets are composed primarily of goodwill, core deposit premiums and mortgage servicing rights. Core deposit
premiums are generally amortized on an accelerated basis over a period of 5 to 10 years and the useful lives are periodically reviewed for reasonableness. Mortgage servicing rights (MSRs) represent the estimated value of the right to service
mortgage loans for others. Capitalization of MSRs occurs when the underlying loans are sold. Capitalized MSRs are amortized into income over the projected servicing life of the underlying loans. Capitalized MSRs are periodically reviewed for
impairment. The MSR balances were $860 and $966 at December 31, 2004 and 2003 respectively. No valuation allowance for impairment was required at either date.



As of December 31, 2004, BancShares had intangible assets totaling $11.4 million. Management evaluated BancShares existing intangible assets and
goodwill as of December 31, 2004. Bancshares will continue to amortize the remaining intangible assets, totaling $3.7 million at December 31, 2004, which relate primarily to acquisitions of branches. These intangible assets will continue to be
amortized over their estimated useful lives. The amortization expense associated with these branches was $1.5 million, $1.7 million, and $1.8 million for the years ended December 31, 2004, 2003 and 2002, respectively.



The following is a summary of the gross carrying amounts and accumulated
amortization of amortized intangible assets as of December 31, 2004 and December 31, 2003 and the gross carrying amount of unamortized intangible assets as of December 31, 2004 and December 31, 2003:



|                               |  |                     |        |                         |   |                     |  |                         |        |  |   |       
|------------------------------ |  | ------------------- | ------ | ----------------------- | - | ------------------- |  | ----------------------- | ------ |  | - | ------
|                               |  | December 31, 2004   |        | December 31, 2003      
|                               |  | GrossCarryingAmount |        | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Amortized Intangible assets:   |  |                     |        |                         |   |                     |  |                         |        |  |   |       
|Branch acquisitions            |  | $                   | 14,691 |                         | $ | 11,888              |  | $                       | 13,981 |  | $ | 10,389
|Mortgage servicing rights      |  |                     | 2,610  |                         |   | 1,749               |  |                         | 2,423  |  |   | 1,457 
|                               |  |                     |        |                         |   |                     |  |                         |        |  |   |       
|Total                          |  | $                   | 17,301 |                         | $ | 13,637              |  | $                       | 16,404 |  | $ | 11,846
|                               |  |                     |        |                         |   |                     |  |                         |        |  |   |       
|Unamortized Intangible assets: |  |                     |        |                         |   |                     |  |                         |        |  |   |       
|Goodwill                       |  | $                   | 7,712  |                         |   |                    |  | $                       | 6,516  |  |   |      
|Pension                        |  | $                   | 23     |                         |   |                    |  | $                       | 31     |  |   |      



At December 31, 2004,
the scheduled amortization expense for intangible assets is as follows:



|               |  |                              |      
|-------------- |  | ---------------------------- | -----
|               |  | ScheduledAmortizationExpense
|2005           |  | $                            | 1,501
|2006           |  |                              | 1,036
|2007           |  |                              | 587  
|2008           |  |                              | 281  
|2009           |  |                              | 143  
|2010 and after |  |                              | 116  
|               |  |                              |      
|Total          |  | $                            | 3,664
|               |  |                              |      



The actual
amortization expense in future periods may be subject to change based on changes in the useful life of the assets, expectations for loan prepayments, future acquisitions and future loan sales.





45



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



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.



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 are 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:



|                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                             |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Net income                                                   |  | $    | 5,799   |   |      | $ | 8,061   |      |  | $ | 9,111   |  
|Less: Preferred dividends                                    |  |      | (355    | ) |      |   | (359    | )    |  |   | (362    | )
|                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net income applicable to common shares                       |  | $    | 5,444   |   |      | $ | 7,702   |      |  | $ | 8,749   |  
|                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Weighted average common shares outstanding during the period |  |      | 110,828 |   |      |   | 112,070 |      |  |   | 113,961 |  
|                                                             |  |      |         |   |      |   |         |      |  |   |         |  



Comprehensive Income



Comprehensive income is defined as the change in equity
during a period for non-owner transactions and comprises net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards.
Components of other comprehensive income for the company consist of the unrealized gains and losses, net of taxes, in the companys available for sale securities portfolio.



Accumulated other comprehensive income at December 31, 2004 and 2003 consists of the following:



|                                                                      |  |      |         |   |      |   |        |  
|--------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                                      |  | 2004 |         |   | 2003 |  
|Unrealized holding gainsinvestment securities available for sale     |  | $    | 30,771  |   |      | $ | 25,765 |  
|Deferred income taxes                                                 |  |      | (11,864 | ) |      |   | (9,933 | )
|                                                                      |  |      |         |   |      |   |        |  
|Net unrealized holding gainsinvestment securities available for sale |  |      | 18,907  |   |      |   | 15,832 |  
|                                                                      |  |      |         |   |      |   |        |  
|Unrealized holding lossminimum pension liability                     |  |      | (401    | ) |      |   | (143   | )
|Deferred income taxes                                                 |  |      | 155     |   |      |   | 55     |  
|                                                                      |  |      |         |   |      |   |        |  
|Net unrealized holding lossminimum pension liability                 |  |      | (246    | ) |      |   | (88    | )
|                                                                      |  |      |         |   |      |   |        |  
|Total accumulated other comprehensive income                          |  | $    | 18,661  |   |      | $ | 15,744 |  
|                                                                      |  |      |         |   |      |   |        |  



46



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



Segment Reporting



The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information (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. This pronouncement
does not have an effect on BancShares consolidated financial statements as banking is considered to be BancShares only segment.



New Accounting Standards



In January 2003, the FASB issued and subsequently amended Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51 (FIN 46 and FIN 46R). FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. FIN 46 applies immediately to variable interests in variable
interest entities created or obtained after January 31, 2003. BancShares has no investments in variable interest entities that require consolidation under FIN 46. The application of Interpretation 46R resulted in the de-consolidation of a trust that
has issued the trust preferred capital securities previously reported in BancShares consolidated financial statements. Prior to December 31, 2003 BancShares reported the trust preferred capital securities as long-term obligations. BancShares
irrevocably and unconditionally fully guarantees the obligations. The trust is a 100 percent owned finance subsidiary of BancShares. Effective with the implementation of FIN 46R, BancShares began reporting the junior subordinated debentures as
long-term obligations. The impact of this change did not have a material effect on BancShares consolidated financial statements.



On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105).
SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments (IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope
Exceptions: When a Loan Commitment is included in the Scope of Statement 133. Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC
valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. The adoption of SAB 105 did not have a material impact on the consolidated financial statements.



In March 2004, the Emerging Issues Task Force (EITF) released
EITF Issue 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. The Issue provides guidance for determining whether an investment is other-than-temporarily impaired and requires certain disclosures with
respect to these investments. The recognition and measurement guidance for other-than-temporary impairment has been delayed by the issuance of FASB Staff Position EITF 03-1-1 on September 30, 2004. The adoption of Issue 03-1 did not result in any
other-than-temporary impairment.



In December 2003, the
American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer. The SOP addresses accounting for differences between contractual cash flows
and cash flows expected to be collected from an investors initial investment in loans or debt securities acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP also prohibits companies from
carrying over or creating a valuation allowance in the initial accounting for loans acquired that meet the scope criteria of the SOP. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption
of this SOP is not expected to have a material impact on the Companys financial position or results of operations.



In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for
the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity



47



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that
the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this
Statement are effective for the first interim reporting period that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending September 30, 2005. The Company does not have a stock option plan and
adoption of SFAS No. 123(R) will not have any effect on the consolidated financial statements.



Note 2.    Investment Securities



The amortized cost and estimated fair values of investment securities at December 31 were as follows:



|                                                 |  |                   |         |                      |   |                       |  |   |           |   |               |   |                      |  |                        |         |  |            |        |  |   |      |   |  |   |        
|------------------------------------------------ |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | --------- | - | ------------- | - | -------------------- |  | ---------------------- | ------- |  | ---------- | ------ |  | - | ---- | - |  | - | -------
|                                                 |  | December 31, 2004 |         | December 31, 2003   
|                                                 |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue |   | AmortizedCost |   | GrossUnrealizedGains |  | GrossUnrealized Losses |         |  | Fair Value
|SECURITIES HELD-TO-MATURITY:                     |  |                   |         |                      |   |                       |  |   |           |   |               |   |                      |  |                        |         |  |            |        |  |   |      |   |  |   |        
|U. S. Treasuries                                 |  | $                 | 185,798 |                      | $ |                      |  | $ | (1,235    | ) |               | $ | 184,563              |  | $                      | 57,892  |  | $          | 74     |  | $ | (13  | ) |  | $ | 57,953 
|U. S. Agencies                                   |  |                   | 15,018  |                      |   |                      |  |   | (46       | ) |               |   | 14,972               |  |                        | 30,417  |  |            | 4      |  |   | (77  | ) |  |   | 30,344 
|Obligations of states and political subdivisions |  |                   | 35,793  |                      |   | 857                   |  |   | (13       | ) |               |   | 36,637               |  |                        | 21,048  |  |            | 1,005  |  |   | (4   | ) |  |   | 22,049 
|                                                 |  |                   |         |                      |   |                       |  |   |           |   |               |   |                      |  |                        |         |  |            |        |  |   |      |   |  |   |        
|                                                 |  | $                 | 236,609 |                      | $ | 857                   |  | $ | (1,294    | ) |               | $ | 236,172              |  | $                      | 109,357 |  | $          | 1,083  |  | $ | (94  | ) |  | $ | 110,346
|                                                 |  |                   |         |                      |   |                       |  |   |           |   |               |   |                      |  |                        |         |  |            |        |  |   |      |   |  |   |        
|SECURITIES AVAILABLE-FOR-SALE:                   |  |                   |         |                      |   |                       |  |   |           |   |               |   |                      |  |                        |         |  |            |        |  |   |      |   |  |   |        
|U. S. Treasuries                                 |  | $                 |        |                      | $ |                      |  | $ |          |   |               | $ |                     |  | $                      | 29,012  |  | $          | 61     |  | $ |     |   |  | $ | 29,073 
|U. S. Agencies                                   |  |                   | 6,001   |                      |   |                      |  |   | (7        | ) |               |   | 5,994                |  |                        | 59,386  |  |            | 302    |  |   |     |   |  |   | 59,688 
|Marketable equity securities                     |  |                   | 26,766  |                      |   | 30,991                |  |   | (143      | ) |               |   | 57,614               |  |                        | 16,025  |  |            | 24,754 |  |   | (4   | ) |  |   | 40,775 
|Obligations of states and political subdivisions |  |                   | 6,401   |                      |   | 238                   |  |   |          |   |               |   | 6,639                |  |                        | 7,220   |  |            | 340    |  |   | (2   | ) |  |   | 7,558  
|Mortgage-backed securities                       |  |                   | 4,432   |                      |   | 224                   |  |   |          |   |               |   | 4,656                |  |                        | 6,260   |  |            | 315    |  |   |     |   |  |   | 6,575  
|                                                 |  |                   |         |                      |   |                       |  |   |           |   |               |   |                      |  |                        |         |  |            |        |  |   |      |   |  |   |        
|                                                 |  | $                 | 43,600  |                      | $ | 31,453                |  | $ | (150      | ) |               | $ | 74,903               |  | $                      | 117,903 |  | $          | 25,772 |  | $ | (6   | ) |  | $ | 143,669
|                                                 |  |                   |         |                      |   |                       |  |   |           |   |               |   |                      |  |                        |         |  |            |        |  |   |      |   |  |   |        
|TOTALS                                           |  | $                 | 280,209 |                      | $ | 32,310                |  | $ | (1,444    | ) |               | $ | 311,075              |  | $                      | 227,260 |  | $          | 26,855 |  | $ | (100 | ) |  | $ | 254,015
|                                                 |  |                   |         |                      |   |                       |  |   |           |   |               |   |                      |  |                        |         |  |            |        |  |   |      |   |  |   |        



Securities with a
carrying value of $116,777 were pledged at December 31, 2004 to secure public deposits and for other purposes as required by law and contractual arrangement.



Temporarily Impaired Securities Losses At December 31, 2004:



|                                                 |  |                     |     |                     |   |                  |  |           |     |                  |   |           |  |   |       |  |   |        
|------------------------------------------------ |  | ------------------- | --- | ------------------- | - | ---------------- |  | --------- | --- | ---------------- | - | --------- |  | - | ----- |  | - | -------
|                                                 |  | Less Than 12 Months |     | 12 Months Or Longer |   | Total           
|                                                 |  | UnrealizedLosses    |     | FairValue           |   | UnrealizedLosses |  | FairValue |     | UnrealizedLosses |   | FairValue
|U. S. Treasuries                                 |  | $                   | 700 |                     | $ | 106,153          |  | $         | 535 |                  | $ | 78,410    |  | $ | 1,235 |  | $ | 184,563
|U. S. Agencies                                   |  |                     |    |                     |   |                 |  |           | 53  |                  |   | 20,966    |  |   | 53    |  |   | 20,966 
|Obligations of states and political subdivisions |  |                     | 4   |                     |   | 4,522            |  |           | 9   |                  |   | 205       |  |   | 13    |  |   | 4,727  
|                                                 |  |                     |     |                     |   |                  |  |           |     |                  |   |           |  |   |       |  |   |        
|Subtotal, debt securities                        |  |                     | 704 |                     |   | 110,675          |  |           | 597 |                  |   | 99,581    |  |   | 1,301 |  |   | 210,256
|Marketable equity securities                     |  |                     | 127 |                     |   | 4,111            |  |           | 16  |                  |   | 531       |  |   | 143   |  |   | 4,642  
|                                                 |  |                     |     |                     |   |                  |  |           |     |                  |   |           |  |   |       |  |   |        
|Total temporarily impaired securities            |  | $                   | 831 |                     | $ | 114,786          |  | $         | 613 |                  | $ | 100,112   |  | $ | 1,444 |  | $ | 214,898
|                                                 |  |                     |     |                     |   |                  |  |           |     |                  |   |           |  |   |       |  |   |        



48



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



The above securities losses are considered temporary losses at December 31,
2004 principally resulting from the low interest rate market managed by the Federal Reserve during the majority of 2003 and 2004. The losses are principally in fifteen U. S. Government investments with less than two years until maturity.



Temporarily Impaired Securities Losses At December 31, 2003:



|                                                 |  |                     |     |                     |   |                  |  |           |   |                  |   |           |  |   |     |  |   |       
|------------------------------------------------ |  | ------------------- | --- | ------------------- | - | ---------------- |  | --------- | - | ---------------- | - | --------- |  | - | --- |  | - | ------
|                                                 |  | Less Than 12 Months |     | 12 Months Or Longer |   | Total           
|                                                 |  | UnrealizedLosses    |     | FairValue           |   | UnrealizedLosses |  | FairValue |   | UnrealizedLosses |   | FairValue
|U. S. Treasuries                                 |  | $                   | 13  |                     | $ | 23,995           |  | $         |  |                  | $ |          |  | $ | 13  |  | $ | 23,995
|U. S. Agencies                                   |  |                     | 77  |                     |   | 24,445           |  |           |  |                  |   |          |  |   | 77  |  |   | 24,445
|Obligations of states and political subdivisions |  |                     | 6   |                     |   | 611              |  |           |  |                  |   |          |  |   | 6   |  |   | 611   
|                                                 |  |                     |     |                     |   |                  |  |           |   |                  |   |           |  |   |     |  |   |       
|Subtotal, debt securities                        |  |                     | 96  |                     |   | 49,051           |  |           |  |                  |   |          |  |   | 96  |  |   | 49,051
|Marketable equity securities                     |  |                     | 4   |                     |   | 833              |  |           |  |                  |   |          |  |   | 4   |  |   | 833   
|                                                 |  |                     |     |                     |   |                  |  |           |   |                  |   |           |  |   |     |  |   |       
|Total temporarily impaired securities            |  | $                   | 100 |                     | $ | 49,884           |  | $         |  |                  | $ |          |  | $ | 100 |  | $ | 49,884
|                                                 |  |                     |     |                     |   |                  |  |           |   |                  |   |           |  |   |     |  |   |       



The above securities
losses were considered temporary losses at December 31, 2003 principally resulting from the continued extraordinarily low interest rate market managed by the Federal Reserve during 2003. The losses were principally in seven U. S. Government
investments with less than two years until maturity.



The
amortized cost and estimated fair value of debt securities at December 31, 2004, 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.



|                                       |  |               |         |           |   |        
|-------------------------------------- |  | ------------- | ------- | --------- | - | -------
|                                       |  | AmortizedCost |         | FairValue
|Securities held-to-maturity:           |  |               |         |           |   |        
|Due in one year or less                |  | $             | 121,134 |           | $ | 120,571
|Due after one year through five years  |  |               | 108,750 |           |   | 108,130
|Due after five years through ten years |  |               | 6,027   |           |   | 6,036  
|Due after ten years                    |  |               | 698     |           |   | 1,435  
|                                       |  |               |         |           |   |        
|Total                                  |  | $             | 236,609 |           | $ | 236,172
|                                       |  |               |         |           |   |        
|Securities available-for-sale:         |  |               |         |           |   |        
|Due in one year or less                |  | $             | 6,356   |           | $ | 6,362  
|Due after one year through five years  |  |               | 1,827   |           |   | 1,889  
|Due after five years through ten years |  |               | 3,371   |           |   | 3,527  
|Due after ten years                    |  |               | 848     |           |   | 855    
|Mortgage-backed securities             |  |               | 4,432   |           |   | 4,656  
|Marketable equity securities           |  |               | 26,766  |           |   | 57,614 
|                                       |  |               |         |           |   |        
|Total                                  |  | $             | 43,600  |           | $ | 74,903 
|                                       |  |               |         |           |   |        



Sales of securities
available-for-sale having a cost basis of $322 in 2004, $1,533 in 2003 and $2,102 in 2002 resulted in gross realized gains of $229 for 2004, $282 for 2003 and $1,569 for 2002.



49



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



Note 3.    Loans



Loans by type were as follows:



|                                                                       |  |              |         |      |   |        
|---------------------------------------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                                                       |  | December 31,
|                                                                       |  | 2004         |         | 2003
|Commercial, financial and agricultural                                 |  | $            | 90,653  |      | $ | 92,944 
|Real estate:                                                           |  |              |         |      |   |        
|Construction                                                           |  |              | 62,438  |      |   | 65,484 
|Mortgage:                                                              |  |              |         |      |   |        
|One to four family residential                                         |  |              | 133,976 |      |   | 122,534
|Commercial                                                             |  |              | 200,588 |      |   | 186,847
|Equityline                                                             |  |              | 57,153  |      |   | 49,876 
|Other                                                                  |  |              | 30,313  |      |   | 47,385 
|Consumer                                                               |  |              | 42,771  |      |   | 35,925 
|Lease financing                                                        |  |              | 26,299  |      |   | 30,176 
|                                                                       |  |              |         |      |   |        
|Total loans                                                            |  | $            | 644,191 |      | $ | 631,171
|                                                                       |  |              |         |      |   |        
|Loans held for sale (included in one-to-four family residential loans) |  | $            | 4,880   |      | $ | 3,171  
|Loans serviced for others (excluded from total loans)                  |  | $            | 229,351 |      | $ | 231,880



On December 31, 2004
total loans to directors, executive officers and related individuals and organizations were $121. On December 31, 2003 total loans to directors, executive officers and related individuals and organizations were $173. During 2004, $68 of new loans
were made to this group and repayments totaled $120. 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 as follows:



|                             |  |      |        |   |      |   |        |      |  |   |       |  
|---------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                             |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Balance at beginning of year |  | $    | 10,095 |   |      | $ | 9,098  |      |  | $ | 7,636 |  
|Provision for loan losses    |  |      | 1,200  |   |      |   | 1,800  |      |  |   | 1,950 |  
|Loans charged off            |  |      | (1,197 | ) |      |   | (1,116 | )    |  |   | (714  | )
|Loan recoveries              |  |      | 161    |   |      |   | 313    |      |  |   | 226   |  
|                             |  |      |        |   |      |   |        |      |  |   |       |  
|Balance at end of the year   |  | $    | 10,259 |   |      | $ | 10,095 |      |  | $ | 9,098 |  
|                             |  |      |        |   |      |   |        |      |  |   |       |  



At December 31, 2004
and 2003, Southern had nonaccrual loans of $1,087 and $868, respectively. At both December 31, 2004 and December 31, 2003, Southern had no restructured loans. At December 31, 2004 and 2003 Southern had accruing loans past due 90 days or more
totaling $577 and $1,665, respectively. The amount of foregone interest on nonaccrual and restructured loans at December 31, 2004, 2003 and 2002, was not material for the periods presented. On December 31, 2004 Southern had loans considered to be
impaired of $832. On December 31, 2003 Southern had loans considered to be impaired of $547.



50



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



Note 5.    Premises and Equipment



The components of premises and equipment were as follows:



|                               |  |              |         |   |      |   |         |  
|------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                               |  | December 31, |        
|                               |  | 2004         |         |   | 2003 |  
|Land                           |  | $            | 8,858   |   |      | $ | 8,801   |  
|Buildings and improvements     |  |              | 31,025  |   |      |   | 30,335  |  
|Furniture and equipment        |  |              | 11,645  |   |      |   | 11,483  |  
|Construction-in-progress       |  |              | 75      |   |      |   | 88      |  
|                               |  |              |         |   |      |   |         |  
|                               |  |              | 51,603  |   |      |   | 50,707  |  
|Less: accumulated depreciation |  |              | (17,090 | ) |      |   | (15,102 | )
|                               |  |              |         |   |      |   |         |  
|Balance at the end of the year |  | $            | 34,513  |   |      | $ | 35,605  |  
|                               |  |              |         |   |      |   |         |  



Depreciation and
amortization amounts of $2,783 in 2004, $2,484 in 2003 and $2,401 in 2002 are included in occupancy and furniture and equipment expenses.



Note 6.    Income Taxes



Allocation of federal and state income taxes between current and deferred portions for the years ended December 31 is as follows:



|                  |  |      |       |   |      |   |       |      |  |   |       |  
|----------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                  |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Current:          |  |      |       |   |      |   |       |      |  |   |       |  
|Federal           |  | $    | 1,771 |   |      | $ | 2,979 |      |  | $ | 3,818 |  
|State             |  |      | 405   |   |      |   | 726   |      |  |   | 709   |  
|                  |  |      |       |   |      |   |       |      |  |   |       |  
|Total             |  | $    | 2,176 |   |      | $ | 3,705 |      |  | $ | 4,527 |  
|                  |  |      |       |   |      |   |       |      |  |   |       |  
|Deferred:         |  |      |       |   |      |   |       |      |  |   |       |  
|Federal           |  | $    | (187  | ) |      | $ | 79    |      |  | $ | (205  | )
|State             |  |      | (51   | ) |      |   | (501  | )    |  |   | (476  | )
|                  |  |      |       |   |      |   |       |      |  |   |       |  
|Total             |  | $    | (238  | ) |      | $ | (422  | )    |  | $ | (681  | )
|                  |  |      |       |   |      |   |       |      |  |   |       |  
|Total tax expense |  | $    | 1,938 |   |      | $ | 3,283 |      |  | $ | 3,846 |  
|                  |  |      |       |   |      |   |       |      |  |   |       |  



A reconciliation of
income tax expense computed at the statutory federal income tax rate to income tax expense included in the consolidated statements of operations is as follows:



|                                         |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                         |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Tax at statutory federal rate. . . . .   |  | $    | 2,638 |   |      | $ | 3,857 |      |  | $ | 4,405 |  
|State income tax, net of federal benefit |  |      | 408   |   |      |   | 148   |      |  |   | 154   |  
|Tax exempt income                        |  |      | (900  | ) |      |   | (808  | )    |  |   | (669  | )
|Dividends received deduction             |  |      | (101  | ) |      |   | (70   | )    |  |   | (95   | )
|Other                                    |  |      | (107  | ) |      |   | 156   |      |  |   | 51    |  
|                                         |  |      |       |   |      |   |       |      |  |   |       |  
|Total                                    |  | $    | 1,938 |   |      | $ | 3,283 |      |  | $ | 3,846 |  
|                                         |  |      |       |   |      |   |       |      |  |   |       |  



51



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



The components of the net deferred tax asset, included in other assets, are
as follows:



|                               |  |              |         |   |      |   |         |  
|------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                               |  | December 31, |        
|                               |  | 2004         |         |   | 2003 |  
|Deferred tax assets:           |  |              |         |   |      |   |         |  
|Allowance for loan losses      |  | $            | 3,955   |   |      | $ | 3,892   |  
|Intangibles                    |  |              | 2,780   |   |      |   | 2,868   |  
|Other                          |  |              | 929     |   |      |   | 638     |  
|Valuation allowance            |  |              | (37     | ) |      |   | (36     | )
|                               |  |              |         |   |      |   |         |  
|Total deferred tax assets      |  |              | 7,627   |   |      |   | 7,362   |  
|                               |  |              |         |   |      |   |         |  
|Deferred tax liabilities:      |  |              |         |   |      |   |         |  
|Depreciation                   |  |              | (1,293  | ) |      |   | (1,220  | )
|Leased assets                  |  |              | (628    | ) |      |   | (628    | )
|Pension liability              |  |              | (11,864 | ) |      |   | (9,878  | )
|Other                          |  |              | (619    | ) |      |   | (665    | )
|                               |  |              |         |   |      |   |         |  
|Total deferred tax liabilities |  |              | (14,404 | ) |      |   | (12,391 | )
|                               |  |              |         |   |      |   |         |  
|Net deferred tax liability     |  | $            | (6,777  | ) |      | $ | (5,029  | )
|                               |  |              |         |   |      |   |         |  



Note
7.    Deposits



Deposits at December
31 are summarized as follows:



|                       |  |      |         |      |   |        
|---------------------- |  | ---- | ------- | ---- | - | -------
|                       |  | 2004 |         | 2003
|Time                   |  | $    | 397,224 |      | $ | 395,788
|Demand                 |  |      | 183,762 |      |   | 174,155
|Money market accounts. |  |      | 131,235 |      |   | 122,554
|Checking with interest |  |      | 123,190 |      |   | 109,222
|Savings                |  |      | 75,111  |      |   | 74,791 
|                       |  |      |         |      |   |        
|Total deposits         |  | $    | 910,522 |      | $ | 876,510
|                       |  |      |         |      |   |        



Total time deposits
with a denomination of $100 or more were $118,999 and $121,723 at December 31, 2004 and 2003, respectively.



At December 31, 2004, the scheduled maturities of all time deposits were:



|                    |  |   |        
|------------------- |  | - | -------
|2005                |  | $ | 264,800
|2006                |  |   | 44,267 
|2007                |  |   | 55,245 
|2008                |  |   | 32,912 
|2009 and thereafter |  |   |       
|                    |  |   |        
|Total time deposits |  | $ | 397,224
|                    |  |   |        



52



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



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



Short-term Borrowings



Short-term borrowings at December 31, were:



|                                    |  |      |        |      |   |       
|----------------------------------- |  | ---- | ------ | ---- | - | ------
|                                    |  | 2004 |        | 2003
|U.S. Treasury tax and loan accounts |  | $    | 1,865  |      | $ | 1,227 
|Repurchase agreements               |  |      | 14,152 |      |   | 14,643
|                                    |  |      |        |      |   |       
|Total short-term borrowings         |  | $    | 16,017 |      | $ | 15,870
|                                    |  |      |        |      |   |       



The U. S. Treasury tax
and loan accounts averaged $1,331 in 2004 and $1,303 in 2003. The highest month-end balance of the U. S. Treasury tax and loan accounts was $2,053 in 2004 and $2,085 in 2003. The average rate on U. S. Treasury tax and loan accounts was 0.95% in 2004
and 0.80% in 2003. The repurchase agreements averaged $15,071 in 2004 and $13,941 in 2003. The highest month-end balance of the repurchase agreements was $16,899 in 2004 and $16,488 in 2003. The average rate on repurchase agreements in 2004 and 2003
was 0.98% and 0.79%, respectively. At December 31, 2004, $38,750 of investment securities were pledged for short-term borrowings. The securities collateralizing the repurchase agreements have been delivered to a third party custodian for
safekeeping.



Long-term Obligations



Effective December 31, 2003, BancShares discontinued the consolidation of
Southern Capital Trust I and began reporting the junior subordinated debentures that BancShares had issued in exchange for the proceeds that resulted from the issuance of the trust preferred securities. The trust preferred securities that were
previously reported and the junior subordinated debentures that were reported effective December 31, 2003, are classified as long-term obligations. The impact of this change did not have a material effect on the consolidated financial statements.
Except for the accounting treatment, the relationship between Bancshares and Southern Capital Trust I has not changed. The $23.7 million long-term obligations 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 at any time. Southern Capital Trust I continues to be a wholly-owned finance subsidiary of BancShares, and the full and unconditional guarantee of BancShares for the repayment of
the trust preferred securities remains in effect.



Note
9.    Acquisitions



BancShares has
consummated numerous bank branch acquisitions 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 as though they had been made at the beginning of the periods presented is not considered material to BancShares consolidated financial statements.



53



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



The following table provides information regarding the branch acquisitions
that have been consummated during the three-year period ending December 31, 2004:



|               |  |                               |  |                    |        |                           |   |                     |  |   |      
|-------------- |  | ----------------------------- |  | ------------------ | ------ | ------------------------- | - | ------------------- |  | - | -----
|Date           |  | Institution/Location          |  | AssetsAcquired (1) |        | DepositLiabilitiesAssumed |   | ResultingIntangible
|September 2004 |  | Capital Bank                  |  | $                  | 18,231 |                           | $ | 18,231              |  | $ | 1,391
|               |  | Seaboard, North Carolina      |  |                    |        |                           |   |                     |  |   |      
|               |  |                               |  |                   
|               |  | Capital Bank                  |  | $                  | 9,808  |                           | $ | 9,808               |  | $ | 515  
|               |  | Woodland, North Carolina      |  |                    |        |                           |   |                     |  |   |      
|               |  |                               |  |                   
|October 2003   |  | RBC Centura                   |  | $                  | 18,280 |                           | $ | 18,280              |  | $ | 1,683
|               |  | Norlina, North Carolina       |  |                    |        |                           |   |                     |  |   |      
|               |  |                               |  |                   
|October 2002   |  | RBC Centura                   |  | $                  | 31,316 |                           | $ | 31,316              |  | $ | 2,610
|               |  | Scotland Neck, North Carolina |  |                    |        |                           |   |                     |  |   |      

---

|(1) |  | Includes the transfer of cash.
|--- |  | ------------------------------



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 First-Citizens Bank & Trust Company 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.



The following sets forth pertinent information regarding the pension plan for the periods indicated:



Benefit Obligations



|                                      |  |                  |        |   |      |   |        |      |  |   |        |  
|------------------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|Change in benefit obligation          |  | Pension Benefits |       
|                                      |  | 2004             |        |   | 2003 |   |        | 2002 | 
|Benefit obligation, beginning of year |  | $                | 17,778 |   |      | $ | 14,097 |      |  | $ | 10,622 |  
|Service cost                          |  |                  | 897    |   |      |   | 751    |      |  |   | 636    |  
|Interest cost                         |  |                  | 1,080  |   |      |   | 1,006  |      |  |   | 795    |  
|Actuarial (gain) loss                 |  |                  | (46    | ) |      |   | 2,279  |      |  |   | 1,171  |  
|Transfers from affiliated banks       |  |                  | 9      |   |      |   | 37     |      |  |   | 1,199  |  
|Benefits paid                         |  |                  | (472   | ) |      |   | (392   | )    |  |   | (326   | )
|                                      |  |                  |        |   |      |   |        |      |  |   |        |  
|Benefit obligation, end of year       |  | $                | 19,246 |   |      | $ | 17,778 |      |  | $ | 14,097 |  
|                                      |  |                  |        |   |      |   |        |      |  |   |        |  



The accumulated
benefit obligation for the pension plan at the end of 2004 and 2003 was $15,562 and $13,372, respectively.



Southern uses a measurement date of December 31 for its pension plan.



Weighted average assumptions used to determine benefit obligations, end of year



|                              |  |      |   |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                              |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate                 |  | 5.70 | % |  | 6.00 | % |  | 6.50 | %
|Rate of compensation increase |  | 4.00 | % |  | 4.50 | % |  | 4.75 | %



54



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



Plan Assets

|
|

|                                             |  |                  |        |   |      |   |        |      |  |   |       |  
|-------------------------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|Change in plan assets                        |  | Pension Benefits |       
|                                             |  | 2004             |        |   | 2003 |   |        | 2002 | 
|Fair value of plan assets, beginning of year |  | $                | 12,213 |   |      | $ | 9,881  |      |  | $ | 7,761 |  
|Actual return on plan assets                 |  |                  | 1,079  |   |      |   | 1,596  |      |  |   | 17    |  
|Employer contribution                        |  |                  | 1,357  |   |      |   | 1,075  |      |  |   | 1,059 |  
|Transfer from affiliated banks               |  |                  | 16     |   |      |   | 53     |      |  |   | 1,370 |  
|Benefits                                     |  |                  | (472   | ) |      |   | (392   | )    |  |   | (326  | )
|                                             |  |                  |        |   |      |   |        |      |  |   |       |  
|Fair value of plan assets, end of year       |  | $                | 14,193 |   |      | $ | 12,213 |      |  | $ | 9,881 |  
|                                             |  |                  |        |   |      |   |        |      |  |   |       |  

Employer contributions and benefits paid in the above table include only those amounts contributed
directly to, or paid directly from, plan assets.



The asset
allocation for Southerns pension plan at the end of 2004 and 2003, and the target allocation for 2005, by asset category, follows. The fair value of plan assets for the plan is $14,193 and $12,213 at the end of 2004 and 2003, respectively. The
expected long term rate of return on the plan assets was 8.50% in 2004 and 8.00% in 2003.



|                  |  |                           |      |  |                                       |      |  |     |      |  |     |  
|----------------- |  | ------------------------- | ---- |  | ------------------------------------- | ---- |  | --- | ---- |  | --- | -
|Asset category    |  | TargetAllocation for 2005 |      |  | Percentage of Plan Assets at Year End |     
|                  |  |                           | 2004 |  |                                       | 2003 |  |     | 2002 | 
|Equity securities |  | 55                        | %    |  | 60                                    | %    |  | 50  | %    |  | 35  | %
|Debt securities   |  | 45                        |      |  | 39                                    | %    |  | 50  | %    |  | 65  | %
|Other             |  |                          |      |  | 1                                     | %    |  |    |      |  |    |  
|                  |  |                           |      |  |                                       |      |  |     |      |  |     |  
|Total             |  | 100                       | %    |  | 100                                   | %    |  | 100 | %    |  | 100 | %
|                  |  |                           |      |  |                                       |      |  |     |      |  |     |  



Southerns
investment strategy calls for earning an adequate return on assets while not exposing the assets to unnecessary risk. The plans assets are invested in marketable, fixed rate U. S Government and corporate securities (45%) and marketable U. S.
Equity securities (55%). In 2004 the plans committee shifted its target allocation of the plans assets, from 50% fixed income and 50% equities, to the above allocations. This change was made after careful deliberation and review of
historic returns in these two categories of investments.



55



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



Funded Status



The funded status of the plan, reconciled to the amount on the statement of financial position, follows:



|                                       |  |                  |        |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ---------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                       |  | Pension Benefits |       
|End of Year                            |  | 2004             |        |   | 2003 |   |        | 2002 | 
|Fair value of plan assets              |  | $                | 14,193 |   |      | $ | 12,213 |      |  | $ | 9,881  |  
|Benefit obligation                     |  |                  | 19,246 |   |      |   | 17,778 |      |  |   | 14,097 |  
|                                       |  |                  |        |   |      |   |        |      |  |   |        |  
|Funded status                          |  |                  | (5,053 | ) |      |   | (5,565 | )    |  |   | (4,216 | )
|Amounts not yet recognized:            |  |                  |        |   |      |   |        |      |  |   |        |  
|Unrecognized net loss                  |  |                  | 4,085  |   |      |   | 4,549  |      |  |   | 3,293  |  
|Unrecognized prior service cost        |  |                  | 23     |   |      |   | 31     |      |  |   | 39     |  
|Unrecognized net transition asset      |  |                  |       |   |      |   |       |      |  |   | (22    | )
|                                       |  |                  |        |   |      |   |        |      |  |   |        |  
|Net amount recognized                  |  | $                | (945   | ) |      | $ | (985   | )    |  | $ | (906   | )
|                                       |  |                  |        |   |      |   |        |      |  |   |        |  
|                                       | 
|                                       |  | Pension Benefits |       
|End of Year                            |  | 2004             |        |   | 2003 |   |        | 2002 | 
|Accrued benefit cost                   |  | $                | (945   | ) |      | $ | (985   | )    |  | $ | (906   | )
|Additional minimum liability           |  |                  | (424   | ) |      |   | (175   | )    |  |   | (87    | )
|Intangible asset                       |  |                  | 23     |   |      |   | 31     |      |  |   | 39     |  
|Accumulated other comprehensive income |  |                  | 401    |   |      |   | 144    |      |  |   | 48     |  
|                                       |  |                  |        |   |      |   |        |      |  |   |        |  
|Net amount recognized                  |  | $                | (945   | ) |      | $ | (985   | )    |  | $ | (906   | )
|                                       |  |                  |        |   |      |   |        |      |  |   |        |  



At the end of 2004 and
2003 the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for a pension plan with a projected benefit obligation in excess of plan assets and for a pension plan with an accumulated benefit obligation
in excess of plan assets was as follows:



|                               |  |                                                                 |        |                                                                   |   |        |  |      |        |  |   |       
|------------------------------ |  | --------------------------------------------------------------- | ------ | ----------------------------------------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                               |  | Projected BenefitObligation Exceedsthe Fair Value ofPlan Assets |        | AccumulatedBenefit ObligationExceeds the FairValue of Plan Assets
|End of Year                    |  | 2004                                                            |        | 2003                                                              |   | 2004   |  | 2003
|Projected benefit obligation   |  | $                                                               | 19,246 |                                                                   | $ | 17,778 |  | $    | 19,246 |  | $ | 17,778
|Accumulated benefit obligation |  | $                                                               | 15,562 |                                                                   | $ | 13,372 |  | $    | 15,562 |  | $ | 13,372
|Fair value of plan assets      |  | $                                                               | 14,193 |                                                                   | $ | 12,213 |  | $    | 14,193 |  | $ | 12,213



|                               |  |                  |      
|------------------------------ |  | ---------------- | -----
|Employer Contributions         |  | Pension Benefits
|2005 (expected) to plan trusts |  | $                | 1,036
|                               | 
|Expected Benefit Payments      |  |                 
|2005                           |  | $                | 582  
|2006                           |  |                  | 646  
|2007                           |  |                  | 748  
|2008                           |  |                  | 828  
|2009                           |  |                  | 935  
|2010  2014                    |  |                  | 6,669



56



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



|                                              |  |                  |       |   |      |   |       |      |  |   |      |  
|--------------------------------------------- |  | ---------------- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | -
|Net Periodic Cost                             |  | Pension Benefits |      
|Components of net periodic benefit cost       |  | 2004             |       |   | 2003 |   |       | 2002 | 
|Service cost                                  |  | $                | 897   |   |      | $ | 751   |      |  | $ | 636  |  
|Interest cost                                 |  |                  | 1,080 |   |      |   | 1,007 |      |  |   | 796  |  
|Expected return on plan assets                |  |                  | (980  | ) |      |   | (820  | )    |  |   | (679 | )
|Amortization of prior service cost (benefit)  |  |                  | 8     |   |      |   | 8     |      |  |   | 8    |  
|Amortization of net actuarial loss (gain)     |  |                  | 313   |   |      |   | 231   |      |  |   | 118  |  
|Amortization of transition obligation (asset) |  |                  |      |   |      |   | (22   | )    |  |   | (41  | )
|                                              |  |                  |       |   |      |   |       |      |  |   |      |  
|Net periodic benefit cost                     |  | $                | 1,318 |   |      | $ | 1,155 |      |  | $ | 838  |  
|                                              |  |                  |       |   |      |   |       |      |  |   |      |  



The weighted-average
assumptions used to determine the net periodic benefit cost for the years ended December 31, 2004, 2003, and 2002 are as follows:



|                               |  |      |   |  |      |   |  |      |  
|------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                               |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate                  |  | 6.00 | % |  | 6.50 | % |  | 7.00 | %
|Rate of compensation increase  |  | 4.50 | % |  | 4.75 | % |  | 4.75 | %
|Expected return on plan assets |  | 8.50 | % |  | 8.00 | % |  | 8.50 | %



The methodology
utilized to establish an appropriate long-term rate of return on plan assets consists of monitoring and aggregating the actual returns of the plan since 1995 as a predictor of probable future returns, modified as appropriate by estimates of future
market conditions as such conditions may modify ether positively or negatively future returns.



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 $15,135 during 2004 and were primarily
satisfied by vault cash.



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. As of December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized Southern bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier
1 leverage ratios as set forth in the following tables. There are on conditions or events since the notification that management believes have changed Southerns category. Southerns actual capital amounts and ratios as of December 31,
2004 and 2003 are presented in the following table.



57



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



|                                         |  |                        |        |       |                                     |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | ----------------------------------- | - | ------ | -------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual                 |        |       | Minimum forcapital adequacypurposes |   |        | Minimum to bewell capitalizedunder promptcorrective actionprovisions |       
|                                         |  | Amount                 |        | Ratio |                                     |   | Amount |                                                                      | Ratio  |  |      | Amount |  | Ratio |       
|As of December 31, 2004:                 |  | (Dollars in thousands) |       
|Total capital (to risk-weighted assets)  |  | $                      | 88,796 |       | 13.45                               | % |        | $                                                                    | 52,834 |  | 8.00 | %      |  | $     | 66,043 |  | 10.00 | %
|Tier 1 Capital (to risk-weighted assets) |  | $                      | 74,762 |       | 11.32                               | % |        | $                                                                    | 26,417 |  | 4.00 | %      |  | $     | 39,626 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  | $                      | 74,762 |       | 7.39                                | % |        | $                                                                    | 40,461 |  | 4.00 | %      |  | $     | 50,576 |  | 5.00  | %
|                                         |  |                        |       
|                                         |  | Actual                 |        |       | Minimum forcapital adequacypurposes |   |        | Minimum to bewell capitalizedunder promptcorrective actionprovisions |       
|                                         |  | Amount                 |        | Ratio |                                     |   | Amount |                                                                      | Ratio  |  |      | Amount |  | Ratio |       
|As of December 31, 2003:                 |  | (Dollars in thousands) |       
|Total capital (to risk-weighted assets)  |  | $                      | 85,594 |       | 12.99                               | % |        | $                                                                    | 52,725 |  | 8.00 | %      |  | $     | 65,906 |  | 10.00 | %
|Tier 1 Capital (to risk-weighted assets) |  | $                      | 72,828 |       | 11.05                               | % |        | $                                                                    | 26,362 |  | 4.00 | %      |  | $     | 39,543 |  | 6.00  | %
|Tier 1 capital (to average assets)       |  | $                      | 72,828 |       | 7.62                                | % |        | $                                                                    | 38,223 |  | 4.00 | %      |  | $     | 47,779 |  | 5.00  | %



The Company is also
subject to these requirements. At December 31, 2004, the Companys total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets were 16.31%, 13.11% and 8.73%, respectively.



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, 2004 BancShares investment in Southern was restricted to an amount equal to the level of regulatory
capital, approximately $88.8 million, that could be transferred to Southern without obtaining prior regulatory approval.



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



58



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



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. The maximum potential amount of undiscounted
future payments related to standby letters of credit at December 31, 2004 is $5,938. At December 31, 2004, BancShares considered this amount to be immaterial and has recorded no liability for the current carrying amount of the obligation to perform
as a guarantor and no liability is considered necessary. Substantially all standby letters of credit are secured by real estate and/or guaranteed by third parties in the event BancShares had to advance funds to fulfill the guarantee.



Outstanding commitments to lend at December 31, 2004 and December 31, 2003
were $182,139 and $182,704 and include undisbursed advances on customer lines of credit of $64,338 and $57,360, respectively. Outstanding standby letters of credit and commitments to lend at December 31, 2004 generally expire within one year,
whereas commitments associated with undisbursed advances on customer lines of credit at December 31, 2004 generally expire within one to five years.



At December 31, 2004, commitments to sell loans amounted to $11,468. At December 31, 2003 commitments to sell loans were $2,158.



BancShares does not have any special purpose entities or other similar forms
of off-balance sheet financing arrangements other than the trust preferred securities discussed in Note 1.



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 been under criticism for potential
health risks.



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.



59



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



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, 2004 and 2003 and condensed statements of income and cash flows for the three years ended December 31, 2004.



CONDENSED BALANCE SHEETS



|                                         |  |              |         |      |   |        
|---------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                         |  | December 31,
|                                         |  | 2004         |         | 2003
|Assets                                   |  |              |         |      |   |        
|Cash                                     |  | $            | 246     |      | $ | 434    
|Investment securities available-for-sale |  |              | 30,973  |      |   | 25,575 
|Other assets                             |  |              | 1,232   |      |   | 1,086  
|Investment in subsidiaries               |  |              | 92,996  |      |   | 90,369 
|                                         |  |              |         |      |   |        
|Total assets                             |  | $            | 125,447 |      | $ | 117,464
|                                         |  |              |         |      |   |        



Liabilities and
Shareholders Equity

|                                           |  |   |         |  |   |        
|------------------------------------------ |  | - | ------- |  | - | -------
|Accrued liabilities                        |  | $ | 5,718   |  | $ | 5,235  
|Notes payable                              |  |   | 23,711  |  |   | 23,711 
|                                           |  |   |         |  |   |        
|Total liabilities                          |  |   | 29,429  |  |   | 28,946 
|Shareholders equity                       |  |   | 96,018  |  |   | 88,518 
|                                           |  |   |         |  |   |        
|Total liabilities and shareholders equity |  | $ | 125,447 |  | $ | 117,464
|                                           |  |   |         |  |   |        



CONDENSED STATEMENTS OF INCOME



|                                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                             |  | Year ended December 31, |       
|                                                             |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Dividends from bank subsidiary                               |  | $                       | 4,262  |   |      | $ | 2,492  |      |  | $ | 2,491  |  
|Securities gains                                             |  |                         | 224    |   |      |   | 221    |      |  |   | 1,346  |  
|Other                                                        |  |                         | 1,030  |   |      |   | 657    |      |  |   | 626    |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Total income                                                 |  |                         | 5,516  |   |      |   | 3,370  |      |  |   | 4,463  |  
|Interest expense                                             |  |                         | (1,898 | ) |      |   | (2,028 | )    |  |   | (2,129 | )
|Other expense                                                |  |                         | (517   | ) |      |   | (807   | )    |  |   | (362   | )
|                                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Income before equity in undistributed income of subsidiaries |  |                         | 3,101  |   |      |   | 535    |      |  |   | 1,972  |  
|Equity in undistributed income of subsidiaries               |  |                         | 2,698  |   |      |   | 7,526  |      |  |   | 7,139  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                                                   |  | $                       | 5,799  |   |      | $ | 8,061  |      |  | $ | 9,111  |  
|                                                             |  |                         |        |   |      |   |        |      |  |   |        |  



60



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                         |  |                         |       
|CONDENSED STATEMENTS OF CASH FLOWS                                                       |  |                         |        |   |      |   |        |      | 
|                                                                                         |  | Year ended December 31, |       
|                                                                                         |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|OPERATING ACTIVITIES:                                                                    |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                                                                               |  | $                       | 5,799  |   |      | $ | 8,061  |      |  | $ | 9,111  |  
|Adjustments to reconcile net income to net cash (used) provided by operating activities: |  |                         |        |   |      |   |        |      |  |   |        |  
|Equity in undistributed net income of subsidiary                                         |  |                         | (2,698 | ) |      |   | (7,526 | )    |  |   | (7,139 | )
|Gains on sales and issuer calls of securities                                            |  |                         | (224   | ) |      |   | (221   | )    |  |   | (1,346 | )
|Decrease (increase) in other assets                                                      |  |                         | 29     |   |      |   | (908   | )    |  |   | 292    |  
|Increase in accrued liabilities                                                          |  |                         | 810    |   |      |   | 1,643  |      |  |   | 736    |  
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  |                         | 3,716  |   |      |   | 1,049  |      |  |   | 1,654  |  
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|INVESTING ACTIVITIES:                                                                    |  |                         |        |   |      |   |        |      |  |   |        |  
|(Purchase) sale of investments                                                           |  |                         | (2,688 | ) |      |   | (2,553 | )    |  |   | 452    |  
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES                                         |  |                         | (2,688 | ) |      |   | (2,553 | )    |  |   | 452    |  
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|FINANCING ACTIVITIES:                                                                    |  |                         |        |   |      |   |        |      |  |   |        |  
|Dividends paid                                                                           |  |                         | (532   | ) |      |   | (531   | )    |  |   | (532   | )
|Purchase and retirement or redemption of stock                                           |  |                         | (684   | ) |      |   | (510   | )    |  |   | (140   | )
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|NET CASH USED BY FINANCING ACTIVITIES                                                    |  |                         | (1,216 | ) |      |   | (1,041 | )    |  |   | (672   | )
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                     |  |                         | (188   | ) |      |   | (2,545 | )    |  |   | 1,434  |  
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                                       |  |                         | 434    |   |      |   | 2,979  |      |  |   | 1,545  |  
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|CASH AND CASH EQUIVALENTS AT THE END OF YEAR                                             |  | $                       | 246    |   |      | $ | 434    |      |  | $ | 2,979  |  
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  
|SUPPLEMENTAL DISCLOSURES OF CASHPAID DURING THE YEAR FOR:                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Interest                                                                                 |  | $                       | 1,898  |   |      | $ | 2,028  |      |  | $ | 2,129  |  
|                                                                                         |  |                         |        |   |      |   |        |      |  |   |        |  



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, overnight funds sold, and accrued interest receivable



The carrying amounts for cash and due from banks, overnight 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.



Loans



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.



61



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



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 borrowings and accrued interest payable



The carrying amounts for short-term borrowings 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 long-term obligations is the market value as of December
31, 2004 and 2003.



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.



62



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



The estimated fair values of BancShares financial instruments at
December 31 are as follows:



|                            |  |                |         |                     |   |                |  |                     |         |  |   |        
|--------------------------- |  | -------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                            |  | 2004           |         | 2003               
|                            |  | CarryingAmount |         | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Financial assets:           |  |                |         |                     |   |                |  |                     |         |  |   |        
|Cash and due from banks     |  | $              | 22,283  |                     | $ | 22,283         |  | $                   | 44,552  |  | $ | 44,552 
|Overnight funds sold        |  |                | 35,872  |                     |   | 35,872         |  |                     | 40,020  |  |   | 40,020 
|Investment securities:      |  |                |         |                     |   |                |  |                     |         |  |   |        
|Held-to-maturity            |  |                | 236,609 |                     |   | 236,172        |  |                     | 109,357 |  |   | 110,346
|Available-for-sale          |  |                | 74,903  |                     |   | 74,903         |  |                     | 143,669 |  |   | 143,669
|Loans, net of allowance     |  |                | 633,932 |                     |   | 632,865        |  |                     | 621,076 |  |   | 625,618
|Accrued interest receivable |  |                | 4,929   |                     |   | 4,929          |  |                     | 4,910   |  |   | 4,910  
|Financial liabilities:      |  |                |         |                     |   |                |  |                     |         |  |   |        
|Deposits                    |  | $              | 910,522 |                     | $ | 912,851        |  | $                   | 876,510 |  | $ | 879,165
|Short-term borrowings       |  |                | 16,017  |                     |   | 16,017         |  |                     | 15,870  |  |   | 15,870 
|Long-term obligations       |  |                | 23,711  |                     |   | 24,541         |  |                     | 23,711  |  |   | 24,588 
|Accrued interest payable    |  |                | 1,447   |                     |   | 1,447          |  |                     | 1,364   |  |   | 1,364  



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, 2004 beneficially owned 32,751 shares, or 29.74%, of BancShares outstanding common stock and 4,966 shares, or 1.42%, of BancShares outstanding Series B preferred stock. At the
same date, the second significant shareholder beneficially owned 27,422 shares, or 24.90%, of BancShares outstanding common stock.



These two significant shareholders are directors and executive officers of the Corporation and at December 31, 2004, beneficially owned 2,529,534 shares,
or 28.89%, and 1,378,670 shares, or 15.74%, of the Corporations outstanding Class A common stock, and 664,533 shares, or 39.61%, and 209,742 shares, or 12.50%, of the Corporations outstanding Class B common stock. The above totals
include 464,804 Class A common shares, or 5.31%, and 104,644 Class B common shares, or 6.24%, 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).



The following table lists the various charges paid to the Corporation during the years ended December 31:



|                                   |  |      |       |      |   |       |  |   |      
|---------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                   |  | 2004 |       | 2003 |   | 2002 
|Data and item processing           |  | $    | 3,152 |      | $ | 2,712 |  | $ | 2,521
|Forms, supplies and equipment      |  |      | 1,047 |      |   | 1,347 |  |   | 631  
|Internet banking                   |  |      | 154   |      |   | 163   |  |   | 107  
|Consulting fees                    |  |      | 107   |      |   | 105   |  |   | 97   
|Trustee for employee benefit plans |  |      | 70    |      |   | 62    |  |   | 60   
|Other services                     |  |      | 126   |      |   | 82    |  |   | 83   
|                                   |  |      |       |      |   |       |  |   |      
|Total                              |  | $    | 4,656 |      | $ | 4,471 |  | $ | 3,499
|                                   |  |      |       |      |   |       |  |   |      



Data and item
processing expenses include courier services, proof and encoding, imaging, check storage, statement rendering and item processing forms. Forms, supplies and equipment includes branch data processing customer service equipment replacements and
additions. During 2003 the majority of the branch computer hardware and software was upgraded or replaced. BancShares also has a correspondent relationship with the Corporation. Correspondent account



63



---

SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(Dollars in thousands)



balances with the Corporation included in cash and due from banks totaled $4,159 at December
31, 2004 and $27,564 at December 31, 2003. Southerns wholly-owned subsidiary, Goshen, Inc. paid $67 to an Insurance Company owned by the Corporation for the sale of insurance written in connection with loans made by Southern in 2004 compared
to $82 paid in 2003. BancShares also owns 127,584 and 22,219 shares of Class A and Class B common stock of the Corporation. The Class A and Class B common stock had a cost basis of $3.0 million and $465, respectively, at December 31, 2004. The Class
A common stock had a fair value of $18.9 million and $15.0 million at December 31, 2004 and 2003, respectively. The Class B common stock had a fair value of $3.2 million and $2.7 million at December 31, 2004 and 2003, respectively.



BancShares is related through common ownership with Fidelity Bancshares NC
Inc., (Fidelity) and Heritage BancShares, Inc., (Heritage) in that the aforementioned two significant shareholders of BancShares and certain of their related parties are also significant shareholders of Fidelity and Heritage.
Fidelity has contracted with BancShares for BancShares to service, on Fidelitys behalf, $1.9 million of Fidelitys mortgage loans at December 31, 2004. BancShares also provides underwriting and processing services for mortgage loans
originated through Fidelity and Heritage.



64



---

SIGNATURES



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



Dated: March 8, 2005

SOUTHERN BANCSHARES (N.C.), INC.



By:

/s/    JOHN C. PEGRAM,
JR.John C. Pegram, Jr. Chairman of the Board of Directors, President and Chief Executive Officer




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



|                                                  |  |                                                                                                         |  |              
|------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                         |  | Title                                                                                                   |  | Date         
|                                                  |  |                                                                                                        
|/s/    JOHN C. PEGRAM,
JR.  John C. Pegram, Jr.   |  | Chairman of the Board of Directors, President and Chief Executive Officer (principal executive officer) |  | March 8, 2005
|                                                  |  |                                                                                                        
|/s/    DAVID A.
BEAN  David A. Bean               |  | Treasurer (principal financial and accounting officer)                                                  |  | March 8, 2005
|                                                  |  |                                                                                                        
|/S/    BYNUM R.
BROWN  Bynum R. Brown             |  | Director                                                                                                |  | March 8, 2005
|                                                  |  |                                                                                                        
|/S/    WILLIAM H.
BRYAN  William H. Bryan         |  | Director                                                                                                |  | March 8, 2005
|                                                  |  |                                                                                                        
|/s/  Robert J. Carroll                            |  | Director                                                                                                |  |              
|                                                  |  |                                                                                                        
|/s/  Hope H. Connell                              |  | Director                                                                                                |  |              
|                                                  |  |                                                                                                        
|/S/    J. EDWIN DREW
 J. Edwin Drew               |  | Director                                                                                                |  | March 8, 2005
|                                                  |  |                                                                                                        
|/S/    MOSES B. GILLAM,
JR.  Moses B. Gillam, Jr. |  | Director                                                                                                |  | March 8, 2005
|                                                  |  |                                                                                                        
|/s/  LeRoy C. Hand, Jr.                           |  | Director                                                                                                |  |              



65



---

|                                                        |  |          |  |              
|------------------------------------------------------- |  | -------- |  | -------------
|Signature                                               |  | Title    |  | Date         
|                                                        |  |         
|/s/  Frank B. Holding                                   |  | Director |  |              
|                                                        |  |         
|/S/    M. J. MCSORLEY
 M. J. McSorley                   |  | Director |  | March 8, 2005
|                                                        |  |         
|/S/    W. HUNTER MORGAN,
SR.  W. Hunter Morgan, Sr.     |  | Director |  | March 8, 2005
|                                                        |  |         
|/S/    W. A. POTTS  W. A. Potts                         |  | Director |  | March 8, 2005
|                                                        |  |         
|/S/    CHARLES L. REVELLE,
JR.  Charles L. Revelle, Jr. |  | Director |  | March 8, 2005
|                                                        |  |         
|/S/    CHARLES O.
SYKES  Charles O. Sykes               |  | Director |  | March 8, 2005
|                                                        |  |         
|/S/    JOHN N. WALKER
 John N. Walker                   |  | Director |  | March 8, 2005
|                                                        |  |         
|/S/    R.S. WILLIAMS  R.S. Williams                     |  | Director |  | March 8, 2005



66



---

EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                                                                                      
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number
|               | 
|3.1            |  | Certificate of Incorporation and Certificate of Amendment to the Certificate of Incorporation of the Registrant (filed as exhibit 3.1 to the Registrants Registration Statement on Form
S-1 (No. 33-52107) filed May 7, 1998 and incorporated herein by reference)                                                  
|               | 
|3.2            |  | Registrants Bylaws (filed as exhibit to the Registrants Registration Statement on Form S-1 (No. 33-52107) filed May 7, 1998 and incorporated herein by reference)                                                                                                                                                  
|               | 
|4.1            |  | Amended and Restated Trust Agreement of Southern Capital Trust I (filed as Exhibit 4.3 to Amendment No. 1 to Registrants Registration Statement on Form S-1 (No. 333-52107) filed June 3,
1998 and incorporated herein by reference.)                                                                               
|               | 
|4.2            |  | Form of Guarantee Agreement (filed as Exhibit 4.5 to Amendment No. 1 to Registrants Registration Statement on Form S-4 (No. 333-52107) filed June 3, 1998 and incorporated herein by
reference).                                                                                                                    
|               | 
|4.3            |  | Junior Subordinated Indenture between Registrant and Bankers Trust Company, as Debenture Trustee (filed as Exhibit 4.6 to Amendment No. 1 to Registrants Registration Statement on Form
S-4 (No. 333-52107) filed June 3, 1998 and incorporated herein by reference).                                               
|               | 
|10.1           |  | Assignment and Assumption Agreement and First Amendment of Noncompetition and Consultation Agreement between First-Citizens Bank & Trust Company, Southern Bank and Trust Company and M. J.
McSorley (filed as exhibit 10.3 to the Registrants 1989 Annual Report on Form 10-K and incorporated herein by reference)
|               | 
|10.2           |  | Employee Deferred Compensation, Post Retirement Non-Competition and Death Benefit Agreement dated January 5, 2004 between Southern Bank and Trust Company and John C. Pegram filed as exhibit
10.1 to the Registrants March 31, 2004 Form 10-Q and incorporated herein by reference.                                
|               | 
|10.3           |  | Employee Deferred Compensation, Post Retirement Non-Competition and Death Benefit Agreement dated January 5, 2004 between Southern Bank and Trust Company and Paul A. Brewer filed as exhibit
10.2 to the Registrants March 31, 2004 Form 10-Q and incorporated herein by reference.                                
|               | 
|10.4           |  | Employee Deferred Compensation, Post Retirement Non-Competition and Death Benefit Agreement dated January 7, 2004 between Southern Bank and Trust Company and R. D. Ray filed as exhibit 10.3
to the Registrants March 31, 2004 Form 10-Q and incorporated herein by reference.                                     
|               | 
|21             |  | Subsidiaries of the Registrant (filed as exhibit 21 to the Registrants 1999 Annual Report on Form 10-K and incorporated herein by reference)                                                                                                                                                                        
|               | 
|31.1           |  | Certification of BancShares Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith)                                                                                                                                                                                                                      
|               | 
|31.2           |  | Certification of BancShares Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith)                                                                                                                                                                                                                      
|               | 
|32             |  | Certification of BancShares Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith)                                                                                                                                                                                  
|               | 
|99.1           |  | Registrants Procedures for Shareholder Recommendations to Nominating Committee (filed herewith)                                                                                                                                                                                                                     
|               | 
|99.2           |  | Registrants definitive Proxy Statement dated March 22, 2005 for the 2004 Annual Shareholders Meeting (being filed separately)                                                                                                                                                                                      



COPIES OF EXHIBITS
ARE AVAILABLE UPON WRITTEN REQUEST TO DAVID A. BEAN, SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER OF SOUTHERN BANCSHARES (N.C.), INC.



67