<PAGE>

                                  UNITED STATES
                       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 year ended December 31, 2001
                                        -----------------

                        Commission File Number: 001-15089

                        Fidelity BancShares (N.C.), Inc.
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            (Exact name of Registrant as specified in its charter)

            Delaware                                    56-1586543
            --------                                    ----------
  (state or other jurisdiction           (I.R.S. Employer Identification Number)
of incorporation or organization)

           100 South Main Street, Fuquay-Varina, North Carolina 27526
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          (Address of principal executive offices)          (zip code)

                                (919) 552-2242
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              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
         8.50% Capital Securities issued by FIDBANK Capital Trust I
         8.50% Junior Subordinated Debentures, issued by Registrant

Securities registered pursuant to Section 12(g) of the Act:
         NONE

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

         The aggregate market value of the voting stock held by nonaffiliates of
the Registrant as of March 25, 2001: The Registrant's voting stock has no
readily ascertainable market value as of any date within the last sixty days or
otherwise for the reason that such stock is not regularly traded and has no
quoted prices. Therefore, the aggregate market value of the voting stock held by
non-affiliates is not determinable.

                  Common Stock - $25 Par Value, - 28,011 shares
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         (Number of shares outstanding, by class, as of March 25, 2002)

                                      1

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PART I

ITEM 1 - BUSINESS

General. Fidelity BancShares (N.C.), Inc. ("BancShares"), headquartered in
Fuquay-Varina, North Carolina, was organized under the laws of Delaware on
November 13, 1987 as a registered bank holding company for The Fidelity Bank
(the "Bank"). BancShares operates through the Bank, which provides a variety of
retail and commercial banking products and services to individuals and small- to
medium-sized businesses in the communities it serves. BancShares currently is
engaged in an expansion program, which involves acquisitions of other financial
institutions, or offices and/or deposits of other institutions, and the opening
of de novo branches. Certain statistical information with respect to BancShares'
business required by Guide 3 is contained in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Item 8.
Financial Statements and Supplementary Data" which appears elsewhere in this
filing.

BancShares has a second wholly-owned subsidiary, FIDBANK Capital Trust I (the
"Trust"), a statutory business trust created under the laws of the State of
Delaware, that issued $23.0 million of 8.50% Capital Securities (the "Capital
Securities") in June 1999 maturing in 2029.

Members of the Holding family, including Lewis R. Holding, have been actively
involved in the management of BancShares. As a result, BancShares has been
managed from a long-term perspective with primary emphasis being placed on
balance sheet liquidity, loan quality, and earnings stability. Consistent with
its management philosophy, BancShares has emphasized a low-risk loan portfolio
derived from its local markets. (See "Item 12. Security Ownership of Certain
Beneficial Owners and Management" and "Item 13. Certain Relationships and
Related Transactions.")

All significant activities of BancShares and its subsidiaries are banking
related so that BancShares operates within one industry. Neither BancShares nor
its subsidiary has any foreign operations.

The Bank is a state-chartered commercial bank. Its predecessor bank, Bank of
Fuquay, was organized during 1909 and merged with Bank of Biscoe during 1970, at
which time the continuing bank's name was changed to The Fidelity Bank. The Bank
currently operates 64 banking offices in 47 separate central North Carolina
communities, 31 of which have been opened or acquired from other institutions
within the past five fiscal years. Most recently, during 1998 the Bank purchased
an aggregate of $35.7 million in assets and assumed an aggregate of $75.1
million in deposit liabilities, associated with five branch offices of a related
financial institution, First-Citizens Bank & Trust Company, Raleigh, North
Carolina ("FCB"), and during 1999, it purchased an aggregate of $29.1 million in
assets and assumed an aggregate of $99.6 million in deposit liabilities,
associated with seven additional branch offices of FCB. In 2001 the bank
purchased an aggregate of $5.8 million in assets and assumed an aggregate of
$49.5 million in deposit liabilities associated with three branch offices of
First Union National Bank. (See "Item 13. Certain Relationships and Related
Transactions" and note 15 to BancShares' consolidated financial statements.)
Additionally, during 1999, 2000 and 2001, the Bank opened 22 de novo branch
offices.

The Bank has two wholly-owned subsidiaries, Fidelity Properties, Inc. and TFB
Financial Services. TFB Financial Services, Inc. ("TFB Financial Services"),
formerly Servco Service Corporation, was acquired on September 1, 1996 in the
acquisition of Perpetual State Bank and provides non-deposit investment
products, including mutual funds, annuities, stocks, and bonds. Fidelity
Properties currently is inactive.

BancShares' principal executive offices are located at 100 South Main Street,
Fuquay-Varina, North Carolina 27526 and its telephone number is (919) 552-2242.
BancShares' internet website is www.fidelitybanknc.com.

Description of Business. The Bank is a community-oriented bank which is engaged
in a general commercial and consumer banking business. Its operations are
primarily retail oriented and directed towards individuals and small- to
medium-sized businesses in its market area. While the Bank provides most
traditional commercial and consumer banking services, its principal activities
are the taking of demand and time deposits and the making of secured and
unsecured loans. The Bank's deposits are insured by the FDIC to the maximum
amount permitted by law.

The Bank is focused on community-oriented banking via (i) localized lending,
(ii) core deposit funding, (iii) conservative balance sheet management, and (iv)
stable growth. The Bank's franchise is well diversified, serving both large
cities and small rural towns in North Carolina. By outsourcing its core data
processing requirements to FCB (see "Item 13. Certain Relationships and Related
Transactions"), the Bank can offer a complete array of financial services while
maintaining its

                                      2

<PAGE>

community banking orientation. The Bank's focus on diverse markets and its
emphasis on customer service provide it with a stable source of core funding.

The Bank's primary source of revenue is interest income from its lending
activities. Since it commenced business, the Bank has pursued a strategy of
growth through internal expansion by establishing branch offices in communities
in its geographic market and by acquiring smaller institutions or offices of
other institutions in its existing markets or in new markets.

Competition. Commercial banking in North Carolina is highly competitive. In its
market areas, the Bank competes directly with a number of local, regional and
superregional banking organizations. Competition among financial institutions
for loans and deposits is based, to a large extent, on interest rates charged or
paid. Fees and charges for other services, office location, the quality of
customer services, community reputation and continuity of personnel, and, in the
case of loans to large commercial borrowers, relative lending limits, also are
important competitive factors. Many of the Bank's competitors have greater
resources, broader geographic markets and higher lending limits and offer more
services than the Bank, and they can better afford and make more effective use
of media advertising, support services and electronic technology than can the
Bank. The Bank depends on its reputation in its local community, direct customer
contact, its ability to make credit and other business decisions locally, and
personalized service to counter these competitive disadvantages.

In recent years, federal and state legislation has heightened the competitive
environment in which all financial institutions must conduct their business, and
the potential for competition among financial institutions of all types has
increased significantly. Additionally, with the elimination of restrictions on
interstate banking, a North Carolina commercial bank may be required to compete
not only with other North Carolina financial institutions, but also with
out-of-state financial institutions which may acquire North Carolina
institutions and are able to provide certain financial services across state
lines, thereby adding to the competitive atmosphere of the industry in general.

Employees. At December 31, 2001, the Bank employed 376 full-time employees and
25 part-time employees. The Bank is not a party to any collective bargaining
agreements and considers relations with its employees to be good. BancShares
does not have any separate employees.

Supervision and Regulation. 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 "Act"), and is subject to supervision and examination by,
and the regulations and reporting requirements of, the FRB.

The Bank is a North Carolina-chartered commercial bank, and its deposits are
insured by the FDIC. It is subject to supervision and examination by, and the
regulations and reporting requirements of, the North Carolina Commissioner of
Banks (the "Commissioner") and the FDIC. As a result of its ownership of the
Bank, BancShares also is registered with and subject to regulation by the
Commissioner under the state's bank holding company laws.

As an insured bank, the Bank is prohibited from engaging as a principal in
activities that are not permitted for national banks unless (i) the FDIC
determines that the activity would pose no significant risk to the appropriate
deposit insurance fund, and (ii) the Bank is, and continues to be, in compliance
with all applicable capital standards. Insured institutions also are prohibited
from acquiring or retaining any equity investment of a type or in an amount not
permitted for national banks. The Bank is not a member of the Federal Reserve
System, but is subject to reserve requirements applicable to non-member banks.

The FRB, FDIC and Commissioner all have broad powers to enforce laws and
regulations applicable to BancShares and the Bank and to require corrective
action of conditions affecting the safety and soundness of the Bank. Among
other, these powers include cease and desist orders, the imposition of civil
penalties and the removal of officers and directors.

ITEM 2 - PROPERTIES

At December 31, 2001 the Bank maintained 65 banking offices in 47 central North
Carolina communities. BancShares owns the majority of the buildings and leases
other facilities from third parties. Statistical information with respect to
BancShares' property and equipment is contained in this filing under "Item 8.
Financial Statements and Supplementary Data."

                                      3

<PAGE>

ITEM 3 - LEGAL PROCEEDINGS

The Bank is a party to various legal proceedings in the ordinary course of its
business. However, based on information presently available, and after
consultation with legal counsel, BancShares' management believes that the
ultimate outcome in such proceedings, in the aggregate, will not have any
material adverse effect on BancShares' financial condition.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5 - MARKET FOR BANCSHARES' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

BancShares' common stock is not traded in an established public trading market.
On March 15, 2002, there were 119 record holders of BancShares' common stock.

The per share cash dividends paid by BancShares during each quarterly period
during 2001 and 2000 are set forth in Table XI, under Management's Discussion
and Analysis of Financial Condition and Results of Operations in Item 7 of this
report. A cash dividend of $8.00 per share was declared by the Board of
Directors on January 28, 2002, payable March 30, 2002, to holders of record as
of March 1, 2002. BancShares' sole source of funds for the payment of dividends
to its shareholders is dividends it receives from the Bank. Payments of
dividends by BancShares and the Bank are made at the discretion of their Boards
of Directors and are contingent upon satisfactory earnings as well as projected
future capital needs. Subject to the foregoing, it is currently management's
expectation that comparable cash dividends will continue to be paid in the
future.

ITEM 6 - SELECTED FINANCIAL DATA

         The following table sets forth certain selected consolidated financial
information for BancShares as of and for the years ended December 31, 2001,
2000, 1999, 1998 and 1997. The data has been derived from BancShares' audited
consolidated financial statements. The consolidated financial statements as of
December 31, 2001 and 2000 and for each of the years in the three year period
ended December 31, 2001, and the independent auditors' report thereon, are
included elsewhere in this filing. The following should also be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.

TABLE 1

SELECTED FINANCIAL DATA
(Dollars in thousands, except share data and ratios)

<TABLE>
<CAPTION>
                                   As of and for the year ended December 31,
------------------------------------------------------------------------------------------------------------
                                                          2001      2000       1999       1998       1997
------------------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>        <C>        <C>        <C>
Summary of Operations
Interest income.....................................   $ 66,156   $ 67,047   $ 55,379   $ 46,570   $ 43,249
Interest expense....................................     29,514     30,474     23,213     19,892     19,016
------------------------------------------------------------------------------------------------------------
Net interest income.................................     36,642     36,573     32,166     26,678     24,233
Provision for loan losses...........................      3,000      2,625      1,200        630        360
------------------------------------------------------------------------------------------------------------
Net interest income
   after provision for loan losses..................     33,642     33,948     30,966     26,048     23,873
Noninterest income..................................      9,950      7,166      5,183      5,476      3,974
Noninterest expense.................................     31,917     28,396     24,044     19,418     15,878
------------------------------------------------------------------------------------------------------------
Income before income taxes..........................     11,675     12,718     12,105     12,106     11,969
Income taxes........................................      4,278      4,617      4,468      4,457      4,581
------------------------------------------------------------------------------------------------------------
Net income..........................................   $  7,397   $  8,101   $  7,637   $  7,649   $  7,388
============================================================================================================
</TABLE>

                                      4

<PAGE>

<TABLE>
<S>                                                  <C>          <C>          <C>           <C>          <C>
Selected Period-End Balances
Total assets.......................................  $  984,719   $  907,670   $  839,088    $  694,134   $  582,995
Investment securities and overnight funds sold.....     188,242      180,554      165,356       186,804      177,240
Loans, gross.......................................     668,984      614,817      551,148       439,208      358,250
Interest-earning assets............................     887,998      824,720      759,311       357,874      537,293
Deposits...........................................     841,435      772,520      716,014       609,646      505,237
Interest-bearing liabilities.......................     750,543      711,971      658,212       533,380      448,832
Shareholders' equity...............................      85,030       77,513       69,895        64,808       59,117
Common shares outstanding..........................      28,026       28,070       28,170        28,410       28,410
---------------------------------------------------------------------------------------------------------------------

Selected Average Balances
Total assets.......................................  $  949,158   $  853,293   $  753,286    $  610,306   $  558,119
Investment securities and overnight funds sold.....     190,488      171,074      166,835       156,254      163,113
Loans, gross.......................................     637,682      587,468      493,023       390,162      349,526
Interest-earning assets............................     864,572      774,422      686,557       559,348      514,410
Deposits...........................................     808,227      726,126      647,566       528,672      487,985
Interest-bearing liabilities.......................     731,661      664,215      584,675       465,999      433,979
Shareholders' equity...............................      82,263       73,577       66,804        61,870       54,840
Common shares outstanding..........................      28,049       28,132       28,279        28,410       28,410
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Profitability Ratios
Return on average total assets.....................        0.78%        0.95%        1.01%         1.25%        1.32%
Return on average shareholders' equity.............        8.99        11.01        11.43         12.36        13.47
Dividend payout ratio /(1)/........................       12.13        11.11        11.85         11.88        12.31
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Liquidity and Capital Ratios
Average loans to average deposits..................       78.90%       80.90%       76.13%        73.80%       71.63%
Average shareholders' equity to average total
   assets..........................................        8.67         8.62         8.87         10.14         9.83
Tier 1 capital ratio /(2)/.........................       12.27        11.87        12.06         10.30        12.96
Total capital ratio /(2)/..........................       14.03        13.29        13.34         11.87        14.09
Leverage capital ratio.............................        8.99         9.72         9.12          7.65         8.28
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Per share of common stock
Net income /(3)/...................................  $   263.71    $  287.97    $  270.05     $  269.25    $  260.04
Cash dividends.....................................       32.00        32.00        32.00         32.00        32.00
Book value /(4)/...................................    3,033.98     2,761.41     2,481.17      2,281.17     2,080.86
---------------------------------------------------------------------------------------------------------------------

Asset Quality Ratios
NonPerforming assets to total gross loans and other
   real estate owned...............................        0.00%        0.01%        0.02%         0.03%        0.02%
Net charge-offs to average loans...................        0.15         0.08         0.19          0.04         0.10
Total allowance for loan losses to total loans.....        1.39         1.19         0.93          1.05         1.16
----------------------------------------------------------------------------------------------------------------------
</TABLE>

/(1)/    For each indicated period, total common dividends declared divided by
         net income.
/(2)/    See "Supervision and Regulation - Capital Adequacy" for a more detailed
         description of these ratios.
/(3)/    For each indicated  period,  net income divided by the average number
         of common shares  outstanding.  BancShares has no potentially dilutive
         securities.
/(4)/    At the end of each indicated period, shareholders' equity divided by
         the number of common shares outstanding.

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

         Management's discussion and analysis of earnings and related financial
data are presented to assist in understanding the financial condition and
results of operations of Fidelity BancShares (N.C.), Inc. and Subsidiaries
("BancShares"), for the years 2001, 2000, and 1999. This discussion and analysis
should be read in conjunction with the audited Consolidated Financial Statements
and related notes presented under "Item 8. Financial Statements and
Supplementary Data." BancShares is a bank holding company with two wholly owned
subsidiaries - The Fidelity Bank (the "Bank"), a North Carolina-chartered bank,
and FIDBANK Capital Trust I (the "Trust") - a statutory business trust created
under the laws of the State of Delaware.

                                      5

<PAGE>

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 a
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.

ACQUISITIONS

         2001 Acquisitions. In February 2001, BancShares acquired the deposits
of three North Carolina branches of First Union National Bank (see note 2 to
BancShares' consolidated financial statements). These acquisitions were
accounted for as a purchase and, therefore, the results of operations prior to
the purchase are not included in BancShares' consolidated financial statements.
These acquisitions were as follows:

(dollars in thousands)

                                         Transaction       Loans      Deposits
    Acquisitions                            Date         Acquired     Acquired
------------------------------------------------------------------------------
Yanceyville branch..................    February 2001    $   2,384   $  29,594
Mebane Washington Street branch.....    February 2001          833       6,392
Rockingham Main branch..............    February 2001          659      13,499
                                                         ---------   ---------
    2001 Acquisition Totals.........                     $   3,876   $  49,485
                                                         =========   =========

         2000 Acquisitions.   BancShares made no acquisitions during 2000.

         1999 Acquisitions. In August 1999, BancShares acquired the deposits of
seven North Carolina branches of First-Citizens Bank & Trust Company ("FCB"),
(see RELATED PARTY TRANSACTIONS). These acquisitions were accounted for as a
purchase and, therefore, the results of operations prior to the purchase are not
included in BancShares' consolidated financial statements. These acquisitions
were as follows:

  (dollars in thousands)

                                          Transaction     Loans        Deposits
    Acquisitions                             Date       Acquired       Acquired
-------------------------------------------------------------------------------
Gibsonville branch...................    August 1999    $    4,496   $   11,465
Kings Mountain branch................    August 1999         6,021       22,910
Polkville branch.....................    August 1999         1,811        8,749
Shelby branch........................    August 1999         7,094       20,649
Stokesdale branch....................    August 1999         2,467        6,040
Stoneville branch....................    August 1999         2,366       19,475
Wentworth branch.....................    August 1999         3,783       10,285
                                                        ----------   ----------
    1999 Acquisition Totals..........                   $   28,038   $   99,573
                                                        ==========   ==========

                                      6

<PAGE>

RESULTS OF OPERATIONS

         Net Income. For 2001, net income of $7.4 million represented an 8.7%
decrease from 2000 net income of $8.1 million. BancShares experienced a strong
increase in noninterest income during 2001. This growth was hampered by an
increase in noninterest expense. Noninterest expense increased due to the
acquisition of 3 branches during the first quarter of 2001, the opening of 3 de
novo branches in 2001 and the one time impairment loss of $471,000 on the
closing of 2 branch offices.

         Net income of $8.1 million in 2000 represented a 6.1% increase from
1999 net income of $7.6 million. BancShares experienced a strong increase in net
interest income as well as noninterest income during 2000, slightly offset by an
increase in the provision for loan losses due to strong loan growth and industry
conditions.

         Net income per share for 2001 was $263.71 compared to $287.97 for 2000;
the decrease is attributable to decreased earnings, slightly offset by decreased
average shares outstanding due to the repurchase by BancShares of 44 shares of
common stock.

          Net income per share was $17.92 more in 2000 than the $270.05
recognized for 1999. The increase in net income per share during 2000 was
attributable to a decrease in average shares outstanding with BancShares'
repurchase of 100 shares of common stock during 2000.

         Net Interest Income. The greatest portion of BancShares' earnings is
from net interest income, which is the difference between interest income on
earning assets and interest paid on deposits and other interest bearing
liabilities. The primary factors affecting net interest income are changes in
the volume and yields/rates on earning assets and interest bearing liabilities
and the ability to respond to changes in interest rates through asset/liability
management. Table I sets forth the average balances on interest earning assets
and interest bearing liabilities, as well as the average yields earned and
average rates paid for 2001, 2000, and 1999. The average prime rate, as set by
the Federal Reserve, was 6.91%, 9.23% and 8.00%, for the years ended December
31, 2001, 2000, and 1999, respectively.

         In 2001, net interest income was $36.6 million compared to $36.6
million in 2000, an increase of $68,000 or 0.19%. 2000 net interest income was
$4.4 million (13.7%) greater than 1999 net interest income of $32.2 million. In
2001 the amount of increase in net interest income was very small due to the
Federal Reserve cutting the prime rate eleven times in 2001. Because 50.0% of
BancShares' loans are tied to prime, the decline in interest rates has reduced
interest income. The increase in net interest income in 2000 and 1999 was
attributable to increased interest income from loans that occurred due to
increased loan balances in both years. In 2001, interest income declined
$892,000 or 1.33% compared to that of 2000. During 2000 interest income grew
$11.7 million or 21.1% compared to $8.8 million or 18.92% in 1999. Interest
expense decreased $960,000 or 3.15% in year 2001. Interest expense increased
$7.3 million or $31.3%, in 2000 and $3.3 million or 16.70% in 1999 compared to
the previous year. Interest expense was $29.5 million in 2001, $30.5 million in
2000, and $23.2 million in 1999. In 2001 the bank experienced higher volumes of
interest bearing liabilities, but dramatic decreases in interest rates
contributed to the lower interest expense. The increase in interest expense in
2000 was due to higher volumes of interest bearing liabilities and the
increasing interest rate environment. In 1999, the increase was attributable to
higher volumes of interest bearing liabilities. The rates paid on interest
bearing liabilities were 4.03%, 4.59%, and 3.97% in 2001, 2000, and 1999,
respectively.

         Loans produced the largest component of interest income, amounting to
$56.1 million in 2001, $56.4 million in 2000, and $45.3 million in 1999. This
represented a decrease of $369,000 or 0.65% in 2001 and an increase of $11.2
million or 24.7% in 2000. During 2001 and 2000, average loans outstanding
increased $50.2 million or 8.55% and $94.4 million or 19.2%, respectively. In
both years, loan growth within the existing branches and de novo branch openings
contributed to the increase in average loans. Average yields on loans during
2001, 2000 and 1999 were 8.81%, 9.63%, and 9.21% respectively. The decrease in
the 2001 average yield was due to the decrease in the average prime rate during
2001 compared to 2000. Likewise, the increase in the 2000 average yield on loans
was due to the increase in the average prime rate during 2000 compared to 1999.

                                      7

<PAGE>

         Earnings from investments and overnight funds sold provided the
remainder of interest income, contributing $10.1 million in 2001, $10.6 million
in 2000, and $10.1 million in 1999. Average balances and yields on these
securities are shown in Table I. Average interest bearing cash balances during
2001 and 2000 were $34.1 and $13.7 million, which earned an average rate of
3.86% and 6.19%, respectively.

         As noted above, total 2001 interest expense decreased 3.15% below that
of 2000, which increased 31.3% compared to 1999. The principal component of
BancShares' interest expense is interest paid on deposits, which totaled $26.8
million in 2001, $27.5 million in 2000, and $21.5 million in 1999. Average
interest bearing deposit balances for 2001, 2000, and 1999, were $683.2 million,
$618.6 million, and $553.9 million, respectively. This represents an increase of
10.4% in 2001 and 11.7% in 2000 over the prior years due to de novo branch
openings and growth within the existing branch network. Additionally, the growth
during 2001 was partially attributable to the acquisition of branches. Included
in the $23.2 million of interest expense in 1999, is interest expense of $1.1
million resulting from the $23.0 million Capital Trust Securities issued by the
Trust during 1999 (see note 8 to BancShares' consolidated financial statements).
These long-term obligations, which qualify as Tier 1 Capital for BancShares,
bear interest at 8.50%, are callable in 2004, and mature in 2029. The average
balance on the long-term obligations during both 2001 and 2000 was $23 million.
The average rate paid on the obligations was 8.50% in 2001 and 2000.

         BancShares' interest rate spread was 3.63%, 4.09%, and 4.12% on a tax
equivalent basis in 2001, 2000, and 1999, respectively. BancShares' ability to
maintain a favorable spread between interest income and interest expense is a
major factor in generating earnings. Therefore, it is necessary for BancShares
to effectively manage earning assets and interest bearing liabilities.

         Provision for Loan Losses. BancShares' provision for loan losses
charged against earnings was $3.0 million, $2.6 million and $1.2 million in
2001, 2000, and 1999, respectively. The provision for loan losses increased
primarily due to increased loan balances, de novo branch openings, growth within
the existing branch network, and the impact of a declining economy on the loan
portfolio. As noted above, average loans grew $50.2 million or 8.55% in 2001
compared to $94.4 million or 19.2% in 2000. BancShares' also experienced an
increase in net charge-offs during 2001 compared to 2000, as discussed herein
under `ASSET QUALITY', which influenced the provision for loan losses in those
years. During 2001, BancShares noted a softening in its market area, with
increases in unemployment and increases in bankruptcies. These conditions
contributed to the increase in net charge-offs during the year. While the full
impact of these changes may not be known until future periods, management
concluded that additional provisions were necessary to reflect this change in
economic conditions during the year.


         Noninterest Income. Noninterest income, which consists primarily of
service charges, commissions and fees, increased $2.8 million in 2001 over 2000
and increased $2.0 in 2000 compared to 1999. Total noninterest income was $9.9
million in 2001, $7.2 million in 2000, and $5.2 million in 1999. The increase in
2001 in noninterest income is attributable to growth in fee-earning transaction
accounts, increases in fees charged, and improved fee collection on accounts.
The primary reasons for increased service charges on deposit accounts are an
overall increase in deposit accounts, fees earned on an overdraft checking
product, and increased NSF fees. A gain on the exchange of an equity security
also attributed to the increase in noninterest income. The 2000 increase in
noninterest income compared to 1999 is also attributable to growth in deposit
accounts, a new overdraft checking product, and increased NSF fee income.

         Noninterest Expense. Noninterest expense includes expenses attributable
to personnel, occupancy, furniture and equipment, data processing, FDIC
assessments, printing, supplies, legal and professional fees, postage,
amortization of intangibles, and other miscellaneous operating expenses.
Noninterest expense was $31.9 million in 2001, $28.4 million in 2000, and $24.0
million in 1999. Control of noninterest expense is an important aspect in
managing net income. Acquisition of branches during 2001 and 1999 should enhance
future operating results of BancShares; however, earnings will be reduced in
future periods as BancShares amortizes intangibles resulting from these
acquisitions.

         The most significant element of BancShares' noninterest expense is
personnel costs. Salaries and benefits represented 52.5%, 53.7%, and 52.22% of
total noninterest expense during 2001, 2000, and 1999, respectively. Salaries
and benefits increased by $1.5 million or 9.86% in 2001 and $2.7 million or
21.4% in 2000. The primary causes of these increases are the opening of three de
novo branches and the acquisition of three branches in 2001, as well as the
opening of three de novo branches in 2000.

         Occupancy and equipment expenses increased from $4.4 million in 1999 to
$4.8 million in 2000 to $5.0 million in 2001. These increases of $191,000 in
2001 and $362,000 in 2000 were attributable to acquired branches and the de novo
branch openings noted above.

                                      8

<PAGE>

         Data processing costs represent charges by vendors that perform data
processing services for the Bank. Data processing fees are primarily based upon
per item or per account charges. Data processing costs were $3.0 million, $2.5
million, and $1.9 million, 2001, 2000, and 1999, respectively. These increases
were due to the addition of acquired and de novo branches as well as growth in
the loan and deposit base in the existing branch network, as noted above. As
discussed in note 15 to the consolidated financial statements, BancShares' data
processing services are provided by a related party. See RELATED PARTY
TRANSACTIONS.

         Amortization of intangibles during 2001 increased $368,000 to
$1,489,000 compared to $1,121,000 for 2000. Amortization of intangibles was
$924,000 in 1999. The increase in amortization of intangibles during 2001 and
2000 was attributable to the acquisition of three branches in the first quarter
of 2001 and the acquisition of seven branches in the third quarter of 1999.
Intangibles from these acquisitions amounted to $10.5 million (see notes 2 and
15 to BancShares' consolidated financial statements). Also impacting intangibles
amortization in 2001 and 2000 was the effect of a full year of amortization on
intangible assets arising from the 1999 acquisitions.

         BancShares also had a one time impairment loss of $471,000 on fixed
assets during 2001. BancShares analyzed the results of operations of two
branches taking into consideration recent economic conditions and the projected
performance of these branches. BancShares concluded the carrying value of these
branches were impaired and therefore recorded an impairment loss of $304,000 to
reduce the carrying value of these branches to fair value. The fixed assets
consisted primarily of leasehold improvements, which are deemed to have very
minimal fair value. The Board of Directors of BancShares approved closing these
two branches and recorded a charge of $167,000 for the remaining lease payments
and costs to close these branches.

         Other miscellaneous operating expenses were $5.3 million, $4.7 million,
and $4.2 million in 2001, 2000, and 1999, respectively. These increases, as well
as the $557,000 current year increase, were the result of increases in costs
across all categories of other operating expenses due to the increased customer
base and account activity resulting from acquired branches, de novo branch
openings and growth within the existing branch network.

         Income Taxes. In 2001, 2000, and 1999, BancShares had taxable income
for book purposes that resulted in income tax expense of $4.3 million, $4.6
million, and $4.5 million, respectively. The resulting effective income tax
rates for the years ended December 31, 2001, 2000, and 1999 were 36.6%, 36.3%,
and 36.91%, respectively.

FINANCIAL CONDITION

         Earning and Noninterest Earning Assets. Earning assets consist of
loans, investment securities, and short-term investments that earn interest.
Average earning assets during 2001 were $864.6 million, an increase of $90.2
million or 11.64% over 2000's interest earning assets of $774.4 million. During
2000, average interest earning assets increased $87.9 million or 12.8% from the
1999 average of $686.6 million. Increases during both years resulted from de
novo branch openings and growth within the existing branch network. Further, in
2001 and 2000, growth in average balances was partially attributable to the
full-year effect of the 1999 acquisition of branches noted above. Cash received
from the $23.0 million Capital Trust Securities issuance and acquisition of
branches in 1999 was invested in loans and short-term investments, including
overnight funds and interest bearing cash deposits.

         Average noninterest earning assets during 2001 were $84.6 million
compared to $78.9 million in 2000, an increase of 7.25%. During 2000, an
increase of $12.1 million or 18.20% occurred compared to the 1999 average of
$66.7 million. The 2001 and 2000 increases were primarily due to increases in
cash, fixed assets and intangible assets resulting from the acquired branches or
de novo branch openings. The average balances of noninterest earning assets are
shown in Table I.

         Return on average total assets for 2001 was 0.78%, compared to 0.95%
and 1.01% in 2000 and 1999, respectively. The decline for 2001 was the result of
lower earnings, arising from a decreased net interest margin due to the Federal
Reserve cutting rates eleven times in 2001, opening of three de novo branches,
acquisition of three branches and a one time impairment loss on closing 2
in-store branches. The decline for 2000 was the result of increased total
average assets, primarily attributable to de novo branch openings in 2000 and a
full year's impact of branches that opened in 1999, that was proportionately
greater than the increase in earnings. Changes in the composition of average
balances are shown in Table I and Table II.

                                      9

<PAGE>

         Return on average equity for 2001 was 8.99%, compared to 11.01% and
11.43% in 2000 and 1999, respectively. In 2001, the decline was due to decreased
earnings and increased average equity due to earnings and unrealized gains on
securities available for sale. The decline in the 2000 return on average equity
was due to only a slight increase in net income and an increase in average
equity driven by earnings and unrealized gains on securities available for sale.

         Interest Bearing and Noninterest Bearing Liabilities. Interest bearing
liabilities consist of deposits, short-term borrowed funds and long-term
borrowed funds. Average interest bearing liabilities during 2001 were $731.7
million, an increase of 10.15% from the 2000 average of $664.2 million, which
was 13.6% higher than that of 1999, $584.7 million. BancShares' principal
interest bearing liabilities are interest bearing deposits. Interest bearing
deposits represented $683.2 million, $618.6 million, and $553.9 million of
average interest bearing liabilities in 2001, 2000, and 1999, respectively.
Short-term borrowings and long-term borrowings represent the remaining balances.
The cost of total interest bearing liabilities was 4.03%, 4.59%, and 3.97% in
2001, 2000, and 1999, respectively.

         Average noninterest bearing liabilities during 2001 were $135.2
million, an increase of $19.7 million or 17.08% over 2000's average, $115.5
million. During 2000, the average noninterest bearing liabilities increased
$13.7 million or 13.5% over the 1999 average of $101.8 million. Noninterest
bearing demand deposits are the principal noninterest bearing liability.
Increases in noninterest bearing demand deposit balances are attributable to
acquired branches, de novo branch openings and expansion within the existing
branch network. See Table I.

         Loans. As of December 31, 2001, loans, net of the allowance for loan
losses, totaled $659.7 million compared to $607.5 million and $546.0 million at
year-end 2000 and 1999, respectively. The increase was attributable to normal
loan growth, from the existing branch network and de novo branch openings in
2001 and 2000. Also in 2001, growth was due to acquired loans of $3.9 million
from the acquisition of three branches in first quarter 2001. The composition of
the loan portfolio for each of the years in the five year period ended December
31, 2002 is listed in Table IV.

         Rate sensitivity and liquidity in the loan portfolio are achieved by
making loans with adjustable interest rates and shorter maturities. This allows
the Bank to adjust its pricing structure with changes in interest rates. At the
end of 2001, 60.7% of the loan portfolio was due to mature or would be available
for interest rate repricing in 2001. See Table IV.

         Investments. Management's asset/liability strategies include
maintaining an investment securities portfolio with appropriate maturities to
preclude the necessity of selling investment securities for purposes of
liquidity. Traditionally, BancShares has maintained a larger investment
portfolio than its peers.

         BancShares accounts for investment securities under the provisions of
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities," which
requires that investments in debt and equity securities be classified in three
categories and accounted for as follows: debt securities that BancShares has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; debt and equity securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings; and debt and equity securities not
classified as either held-to-maturity securities or trading securities are
classified as available for sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Securities available for sale consist of
securities which may be sold in response to changes in interest rates,
prepayment risk, regulatory capital requirements and liquidity needs.

         At December 31, 2001, the fair value of available for sale securities
exceeded the carrying value by $8.0 million, Deferred taxes related to these
available for sale securities were $3.2 million, and shareholders' equity
included $4.8 million for the net unrealized gain related to these available for
sale securities. At December 31, 2000, the fair value of available for sale
securities exceeded the carrying value by $6.2 million. Deferred taxes related
to these available for sale securities were $2.5 million, and shareholders'
equity included $4.8 million for the net unrealized gain related to these
available for sale securities. BancShares does not maintain a trading account.

                                      10

<PAGE>

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

         BancShares is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
lines of credit and standby letters of credit. These instruments involve
elements of credit risk in excess of amounts recognized in the accompanying
consolidated financial statements. Substantially all such instruments expire
within one to three years.

         BancShares' risk of loss in the event of nonperformance by the other
party to the commitment to extend credit, line of credit or standby letter of
credit is represented by the contractual amount of these instruments. BancShares
uses the same credit policies on the borrower in making commitments under such
instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include accounts receivable,
inventory, real estate and time deposits with financial institutions. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.

         As of December 31, 2001 and 2000, outstanding financial instruments
whose contract amounts represent credit risk were as follows:

<TABLE>
<CAPTION>
                                                         2001               2000
                                                   -----------------   ----------------
<S>                                             <C>                         <C>
Outstanding commitments to lend, unfunded
   loans and lines of credit                    $       221,656,178         213,329,957
                                                   =================   ================

Standby and commercial letters of credit        $         3,275,000           2,142,718
                                                   =================   ================
</TABLE>

         BancShares does not have any special purpose entities or other similar
forms of off-balance sheet financing arrangements.

         BancShares' lending is concentrated primarily in central North Carolina
and the surrounding communities in which it operates. Credit has been extended
to certain of BancShares' customers through multiple lending transactions;
however, there is no concentration to any single customer or industry.

ASSET QUALITY

         Provision and Allowance for Loan Losses. Because BancShares' loan
portfolio represents its largest earning asset, BancShares continually monitors
the quality of its loan portfolio. The Bank operates in a diversified economic
environment and, in the opinion of management, is not unduly exposed to any one
particular industry. In 2001, BancShares charged-off loans net of recoveries of
$985,000. This represents an increase of $516,000 from 2000 net charge-offs of
$469,000. The increase was partially attributable to the impact of a decline in
economic conditions in BancShares' market areas. The 2000 net charge-offs of
$469,000 were a decrease of $470,000 from 1999 net charge-offs of $939,000. This
decrease is primarily the result of increased recoveries in 2000. The percentage
of charge-offs (net of recoveries) to average outstanding loans was 0.15% in
2001, 0.08% in 2000, and 0.19% in 1999. See Table V.

         The ratio of total non-performing assets to total loans plus other real
estate was 0.00% and 0.01% at December 31, 2001 and 2000, respectively. Assets
classified as other real estate were $15,000 and $75,000 at December 31, 2001
and 2000, respectively.

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

         Management considers a loan to be impaired when, based on current
information or events, it is probable that a borrower will be unable to pay all
amounts due according to the contractual terms of the loan agreement. Impaired
loans are valued using either the discounted expected cash flow method or the
value of the collateral.

                                      11

<PAGE>

         While a loan (including an impaired loan) is classified as nonaccrual
and the future collectibility of the recorded loan balance is doubtful,
collections of interest and principal are generally applied as a reduction to
the principal outstanding. When the future collectibility of the recorded loan
balance is not in doubt, interest income may be recognized on a cash basis. In
the case where a nonaccrual loan had been partially charged-off, recognition of
interest on a cash basis is limited to that which would have been recognized on
the recorded loan balance at the contractual interest rate. Receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.

         At December 31, 2001 and 2000, the Bank did not have any nonaccrual
loans, nor did the Bank have any restructured or impaired loans. At December 31,
2001 and 2000, the Bank did not have any accruing loans 90 days or more past
due.

         The allowance for loan losses represented 1.39% and 1.19% of loans
outstanding at year-end 2001 and 2000, respectively. The increase in the
allowance for loan losses as a percentage of loans is attributable to the
increase in the provision for loan losses, for the reasons discussed below, as
well as the impact of a softening economy on certain segments of the loan
portfolio. Specifically, BancShares believes that the decline in economic
conditions has the greatest impact on the commercial, industrial and
agricultural loans as well as consumer loans. As a result, allocations to these
segments of the portfolio increased during the year. These types of loans
generally require a larger allocation of allowance for loan losses in
BancShares' allowance for loan losses model when compared to other loan types
carrying less risk, such as one to four family mortgage loans and commercial
real estate loans. This increased allocation contributed to the increase in the
percentage of allowance for loan losses to total loans from 1.19% at December
31, 2000 to 1.39% at December 31, 2001. The Bank's provision for loan losses
charged against earnings was $3,000,000, $2,625,000, and $1,200,000, in 2001,
2000, and 1999, respectively. The increase in the provision for loan losses in
2001 and 2000 was primarily attributable to loan growth from de novo branch
openings and expansion in the existing branch network in both years, as well as
the origination of loans in acquired branches during 2001. BancShares also
experienced an increase in net charge-offs during 2001 compared to 2000, which
influenced the provision for loan losses in 2001. BancShares' provision for loan
losses was also impacted in 2001 by a softening in the economy during the year.

         Management considers the December 31, 2001 allowance for loan losses
adequate to cover probable losses inherent in the loan portfolio. Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's experience, the estimated value of any
underlying collateral, current economic conditions, analysis of peer bank
trends, 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 if economic or other conditions
differ substantially from the assumptions used.

         BancShares continually reviews its allowance for loan losses
estimation process, and makes revisions where necessary. During 2002, management
of BancShares expects to continue this practice. As a result, there may be
certain reallocations of amounts among the components of the portfolio to better
reflect management's estimates at that time of the allocations of the allowance
for loan losses. Such reallocations, of themselves, are not expected to have a
significant impact on the overall level of the allowance for loan losses or the
provision for loan losses when compared to prior periods.

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

RELATED PARTY TRANSACTIONS

         BancShares has entered into various service contracts with another bank
holding company and its subsidiary (the "Corporation"). The Corporation has two
significant shareholders, who are also significant shareholders of the
BancShares. At December 31, 2001, the first significant shareholder beneficially
owned 11,155 shares, or 39.81 percent, of BancShares' outstanding common stock.
At the same date, the second significant shareholder beneficially owned 1,696
shares, or 6.05 percent, of BancShares' outstanding common stock.

         These two significant shareholders are directors and executive officers
of the Corporation and at December 31, 2001, beneficially owned 2,524,210
shares, or 28.67 percent, and 1,421,621 shares, or 16.15 percent, respectively,
of the Corporation's outstanding Class A common stock, and 649,188 shares, or
38.35 percent, and 199,052 shares, or 11.76 percent, respectively, of the
Corporation's outstanding Class B common stock. The above totals include 472,855
Class A common shares, or 5.37 percent, and 104,644 Class B common shares, or
6.18 percent, 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 FCB.

                                      12

<PAGE>

         The Bank's contract with FCB was negotiated at arms-length and was
approved by BancShares' Board of Directors. Based on its comparison in previous
years of the terms of the contract with terms available to it from other
providers of the services being obtained from FCB, management of the Bank
believes the terms of its contract with FCB, including prices, are no less
favorable to the Bank than could be obtained from an unrelated provider.

         The following are expenses paid by BancShares to the Corporation:

<TABLE>
<CAPTION>
                                      2001               2000                1999
                                 ---------------    ---------------    ---------------
<S>                           <C>                   <C>                <C>
Data and items processing     $      3,042,000          2,549,000          1,925,000
Trustee fees                            72,000             82,000             84,000
Other                                  611,000            447,000          1,027,000
                                 ---------------    ---------------    ---------------

                              $      3,725,000          3,078,000          3,036,000
                                 ===============    ===============    ===============
</TABLE>

         The BancShares also has a correspondent relationship with the
Corporation. Correspondent account balances with the Corporation included in
cash and due from banks and overnight funds sold totaled $41,448,498 and
$50,450,392 at December 31, 2001 and 2000, respectively.

         BancShares is related through common ownership with Southern Bank and
Trust Co. ("Southern") in that the aforementioned two significant shareholders
of BancShares and certain of their related parties are also significant
shareholders of Southern. BancShares has contracted with Southern to service on
its behalf $6.3 million of BancShares' mortgage loans.

         See note 2 to BancShares' consolidated financial statements for a
discussion of certain acquisitions of branches from FCB.

                                      13

<PAGE>

         While BancShares and the Corporation intend to negotiate these
arrangements at arms length, there is no guarantee that the results of
operations of BancShares would not be different if these transactions were with
unrelated parties.

LIQUIDITY, MARKET RISK AND INTEREST SENSITIVITY

         Liquidity. Liquidity refers to the ability of BancShares to generate
sufficient funds to meet its financial obligations and commitments at a
reasonable cost. Maintaining liquidity ensures that funds will be available for
reserve requirements, customer demand for loans, withdrawal of deposit balances
and maturities of other deposits and liabilities. Past experience helps
management anticipate cyclical demands and amounts of cash required. These
obligations can be met by existing cash reserves or funds from maturing loans
and investments, but in the normal course of business are met by deposit growth.

         In assessing liquidity, many relevant factors are considered, including
stability of deposits, quality of assets, economy of the markets served,
business concentration, competition and BancShares' overall financial condition.
BancShares' liquid assets include all investment securities (minus pledged
securities), overnight funds sold, and cash and due from banks. These assets
represented 22.08% of deposits at December 31, 2001, an increase from 20.46% at
December 31, 2000.

         BancShares' liquidity ratio, which is defined as cash plus short-term
and marketable securities (minus pledged securities) divided by deposits and
short-term liabilities, was 21.39% at December 31, 2001, compared to 19.78% at
December 31, 2000. In addition, the Bank has a $118 million line of credit with
the Federal Home Loan Bank to meet liquidity needs.

         BancShares has traditionally maintained high levels of liquidity,
characteristic of the high ratio of investment securities to total assets that
it maintains. Although loans have increased in each of the recent fiscal
periods, BancShares' ability to manage its liquidity is enhanced by the mortgage
loan department's ability to sell mortgage loans originated for liquidity or
other asset/liability management requirements.

         Funds received from any maturing investments that are not immediately
necessary to sustain BancShares' liquidity are invested in similar instruments
or used to fund any increased loan demand. Investments scheduled to mature
within the one year time frame, without consideration of marketable equity
securities, represented 88.00% and 84.32% of the total investment securities
portfolio at December 31, 2001 and 2000, respectively.

         In addition, BancShares held marketable equity securities with fair
values of $11.6 million and $8.8 million at December 31, 2001 and 2000,
respectively. These investments are classified as available for sale and could
be sold at management's discretion.

         BancShares' consolidated statements of cash flows disclose the
principal sources and uses of cash from operating, investing, and financing
activities for 2001, 2000, and 1999. In 2001, BancShares' operating activities
provided cash flows of $14.9 million. Net income of $7.4 million, adjusted for
non-cash operating activities, provided the majority of cash generated from
operations. Investing activities, including lending, provided $694,000 of
BancShares' cash flow. Loans originated, net, of principal collected, used $51.7
million. Securities purchases provided $16.7 million, and expenditures for
premises and equipment utilized $2.0 million of BancShares' cash flow. The cash
outflows from these investing activities were offset by $148 million of cash
received from investment maturities and $38.7 million of cash received in branch
acquisitions. Net additional cash inflows of $18.9 million resulted from
financing activities, principally from deposit inflows of $19.4 million.

         In 2000, BancShares' operating activities provided cash flows of $14.3
million. Net income of $8.1 million, adjusted for non-cash operating activities,
provided the majority of cash generated from operations. Investing activities,
including lending, used $76.5 million of BancShares' cash flow. Loans
originated, net of principal collected, used $64.3 million. Securities
purchases, net of maturities, used $7.7 million, and expenditures for premises
and equipment utilized $4.4 million of BancShares' cash flow. Net additional
cash inflows of $59.0 million resulted from financing activities, principally
from deposit inflows of $56.5 million.

                                      14

<PAGE>

         In 1999, BancShares' operating activities provided cash flows of $9.8
million. Net income of $7.6 million, adjusted for non-cash operating activities,
provided the majority of cash generated from operations. Investing activities,
including lending, used $72.9 million of BancShares' cash flow. Loans
originated, net of principal collected, used $84.8 million. Cash received in
connection with the acquisition of branches provided $66.3 million of BancShares
cash flow. Securities net of maturities used $45.2 million, and expenditures for
premises and equipment utilized $9.2 million of BancShares' cash flow. Net
additional cash inflows of $39.8 million resulted from financing activities,
principally from short-term and long-term borrowing inflows of $11.3 million and
$23.0 million, respectively.

         The Bank has no brokered funds. Jumbo certificates of deposit ("CD's")
are considered to include all CD's of $100,000 or more. The Bank does not and
has never aggressively bid on these deposits, and it does not seek nor does it
accept deposits from outside of its general trade area. Almost all of the Bank's
jumbo CD customers have other relationships with the Bank, including savings,
demand and other time deposits and, in some cases, loans. At December 31, 2001
and 2000, jumbo CD's represented 11.52% and 10.47% of total deposits,
respectively.

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

         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.

CONTRACTUAL OBLIGATIONS
AS OF DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                                   Payments due by period
                                                   (dollars in thousands)
                               Less than
                               ---------
                                1 year     1-3 years   4-5 years   Over 5 years     Total
                                ------     ---------   ---------   ------------     -----
<S>                             <C>        <C>         <C>          <C>           <C>
Deposits                        $759,665     $67,934     $13,836        $    -    $841,435
Short-term borrowings             27,073          -           -              -      27,073
Long-term obligations                 -           -           -          23,000     23,000
Lease obligations                    350         671         224            741      1,986
Total contractual cash
                            ---------------------------------------------------------------
   obligations                  $787,088     $68,605     $14,060        $23,741   $893,494
                            ===============================================================
</TABLE>

         Market Risk. Market risk reflects the risk of economic loss resulting
from adverse changes in market price and interest rates. The 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. Management seeks to
manage this risk through the use of shorter term maturities. The composition and
size of the investment portfolio is managed so as to reduce the interest rate
risk in the deposit and loan portfolios while at the same time maximizing the
yield generated by the portfolio.

                                      15

<PAGE>

         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, 2001. 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, 2001. 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 2001 since they are subject to immediate repricing.

<TABLE>
<CAPTION>
                                                          Maturing in period ended December 31,
                        ---------------------------------------------------------------------------------  ---------- -----------
                            2002        2003           2004           2005         2006       Thereafter     Total     Fair Value
                        -----------  ------------  ------------  -------------  ------------  -----------  ---------- -----------
                                                                  (Dollars in thousands)
<S>                      <C>         <C>           <C>            <C>           <C>           <C>         <C>         <C>
Assets

  Loans:

     Fixed rate........  $  101,388    $  70,922      $  113,599   $  15,683    $  15,898     $ 17,066    $  334,556  $ 336,795

     Average rate (%)..        9.05%        8.79%           8.14%       8.18%        7.53%        7.74%         8.51%

     Variable rate.....  $  171,503    $  21,670      $   32,735   $   8,410    $   9,092     $ 91,018    $  334,428  $ 334,428

     Average rate (%)..       12.58%        5.48%           5.40%       5.38%        5.19%        6.17%         9.28%

  Investment securities
     /(1)/:

     Fixed rate........  $  110,394    $  15,045               -           -            -     $      8    $  125,447  $ 126,503

     Average rate (%)..         4.5%        4.72%              -           -            -        10.91%         4.53%

Liabilities

  Savings and interest
     bearing checking:
     Fixed rate........  $  294,219            -               -           -            -            -    $  294,219  $ 294,219

     Average rate (%)..        0.90%           -               -           -            -            -          0.90%

  Certificates of
     deposit:
     Fixed rate........  $  324,480    $  56,732      $   11,202   $  13,837            -            -     $ 406,251  $ 412,165

     Average rate (%)..        3.90%        4.93%           4.82%       5.80%           -            -          4.15%

  Short-term
     obligations:
     Variable rate.....  $   27,073            -               -           -            -            -     $  27,073  $  27,073

     Average rate (%)..        2.71%           -               -           -            -            -          2.71%

  Long-term obligations:
      Fixed rate.......           -            -               -           -            -     $ 23,000     $  23,000  $  23,115

     Average rate (%)..           -            -               -           -            -         8.50%         8.50%
</TABLE>

-------------------------------------------------------------------------------
/(1)/  Marketable equity securities with a book value of approximately
       $3,634,000 and a fair value of approximately $11,596,000 have been
       excluded from this table.

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

                                      16

<PAGE>

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

         As of December 31, 2001, BancShares had a positive one year cumulative
gap position of 13.98% and a positive total cumulative gap position of 15.48%.
BancShares has interest earning assets of $596.2 million maturing or repricing
within one year and interest bearing liabilities of $472.1 million repricing
within one year. BancShares experienced growth in loans and investments with
maturities of one year or less which were outpaced by the growth in deposits and
short-term borrowings which also had maturities of one year or less. A positive
gap position implies that interest earning assets (loans and investments) will
reprice at a faster rate than interest bearing liabilities (deposits). In a
falling rate environment, this position will generally have a negative effect on
earnings, while in a rising rate environment this position will generally have a
positive effect on earnings.

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

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

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

CAPITAL RESOURCES

         Shareholders' Equity and Capital Adequacy. Sufficient levels of capital
are necessary to sustain growth and absorb losses. To this end, the Federal
Reserve, which regulates BancShares, and the FDIC, which regulates the Bank,
have established risk based capital ("RBC") adequacy guidelines.

         As of December 31, 2001, BancShares' Leverage Capital Ratio (as defined
herein) was 8.99%, as compared to 9.72% and 9.12%, respectively, at year-end
2000 and 1999. Within RBC calculations, BancShares' assets, including
commitments to lend and other off-balance sheet items, are weighted according to
Federal regulatory guidelines for the risk considered inherent in the assets.
BancShares' Tier 1 Capital Ratio (as defined herein) as of December 31, 2001 was
12.27% compared to ratios of 11.87% and 12.06% for 2000 and 1999, respectively.
The calculation of Total Capital Ratio (as defined herein) allows, in
BancShares' circumstances, the inclusion of BancShares' allowance for loan
losses in capital, but only to a maximum of 1.25% of risk weighted assets. As of
December 31, 2001, BancShares' Total Capital Ratio was 14.03%. The Total Capital
Ratios for 2000 and 1999 were 13.29% and 13.34%, respectively.

         As of December 31, 2001, the Bank`s Leverage Capital Ratio (as defined
above) was 8.27%, which, along with 9.17% and 8.67% as of December 31, 2000 and
1999, respectively, represents a well-capitalized institution under FDIC
standards (one whose ratio exceeds 5%). The Bank's Tier 1 Capital ratio (as
defined above) as of December 31, 2001 was 11.30%, which, along with 11.26% and
12.28% as of December 31, 2000 and 1999, respectively, represents a
well-capitalized institution under FDIC standards (one whose ratio exceeds 6%).
As of December 31, 2001, the Bank's Total Capital Ratio (as defined above) was
12.55%. The Total Capital ratios for 2000 and 1999 were 12.31% and 13.17%,
respectively. Total Capital Ratio in all three years represented
well-capitalized institutions under FDIC standards (the ratio exceeds 10%).

         These ratios will improve if BancShares' capital increases at a rate
proportionately faster than liabilities. Management is aware that growth must be
controlled. BancShares' recent expansion plans discussed elsewhere herein may
appear to be contrary to this policy but management is also aware that the
process of expanding market share by normal business processes can be very
difficult and expensive. Management believes that improvement in its overall
market share within an existing trade area is valuable in the long run and
should be pursued by BancShares, when it can be done prudently.

                                      17

<PAGE>

         BancShares' primary source of new capital is earnings. In 2001, equity
capital increased through retention of earnings by $6.5 million, compared to
$7.2 million in 2000 and 1999, respectively. At December 31, 2001, shareholders'
equity totaled $85.0 million, compared to $77.5 million in 2000. Shareholders'
equity at December 31, 2001 and 2000 included, as discussed above, $4.8 million
and $3.7 million, respectively, of net unrealized securities gains on available
for sale securities.

         The ratio of average shareholders' equity to average total assets was
8.67% in 2001, 8.62% in 2000, and 8.87% in 1999.

         Retention of sufficient earnings to maintain an adequate capital
position that provides BancShares with expansion capabilities is an important
factor in determining dividends. During 2001, BancShares paid $898,000 in
dividends, versus $900,000 and $905,000 in 2000 and 1999, respectively. As a
percentage of net income, dividends were 12.13% in 2001, 11.11% in 2000, and
11.85% in 1999. The decrease in dividends paid in 2001 compared to 2000 and 2000
compared to 1999 is attributable to a decrease in the number of shares
outstanding each year.

ACCOUNTING AND OTHER MATTERS

         In June 1998, the Financial Accounting Standard Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This statement, as
amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Earlier application of all
provisions of this statement is encouraged. The Company adopted this statement
on January 1, 2001, with no material effect on its consolidated financial
statements.

         The FASB issued SFAS No. 140  "Accounting  for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No.  140"),
which replaced SFAS No. 125.  SFAS No. 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration.  SFAS No. 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001.  This statement is effective for recognition and
classification of collateral and disclosures relating to securitization
transactions and collateral for fiscal years beginning after December 15, 2000.
The adoption of SFAS No. 140 had no material impact on BancShares consolidated
financial statements.

         In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 (Statement 141), "Business Combinations", and Statement of
Financial Accounting Standards No. 142 (Statement 142), "Goodwill and Other
Intangible Assets". Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria which must be met for intangible assets
acquired in a purchase method business combination to be recognized and reported
apart from goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
142. Statement 142 will also require that identifiable intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of".

         BancShares was required to adopt the provisions of Statement 141 and
certain provisions of Statement 142 as of June 30, 2001 and will fully adopt
Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate accounting literature issued prior to Statement 142. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 continued to be amortized in 2001 prior to the adoption of Statement 142 on
January 1, 2002.

                                      18

<PAGE>

         Statement 141 requires, upon adoption of Statement 142, that BancShares
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, BancShares will be required to
reassess the useful lives and residual values of all identifiable intangible
assets acquired in purchase business combinations, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. In addition, any intangible asset classified as goodwill under
Statement 142 will be subjected to a transitional impairment test during the
first six months of 2002 based on the level of goodwill as of January 1, 2002.
Any impairment losses identified as a result of this transitional impairment
test will be recognized in the 2002 statement of income as the effect of a
change in accounting principle.

         As of December 31, 2001, BancShares had intangible assets totaling
$17.3 million. Management has evaluated BancShares's existing intangible assets
and goodwill as of January 1, 2002 and will make appropriate reclassifications
in order to conform to the new criteria in Statement 141 for recognition apart
from goodwill, as further described below.

         BancShares has determined that upon adoption of Statement 142 on
January 1, 2002, BancShares had $744,000 of goodwill that will no longer be
amortized beginning in 2002. The amortization expense associated with this
goodwill during the years ended December 31, 2001, 2000 and 1999 was $77,000 per
year, respectively. In accordance with Statement 142, BancShares will perform a
transitional impairment test of this goodwill in the first six months of 2002,
and will perform an annual impairment test of the goodwill in 2002 and
thereafter.

         The remaining intangible assets, totaling $16.6 million at December 31,
2001, relate to acquisitions of branches that are being accounted for in
accordance with Statement of Financial Accounting Standards No. 72 (Statement
72), "Accounting for Certain Acquisitions of Banking and Thrift Institutions."
Statement 72, which was not amended by Statement 142, requires that identified
intangible assets and unidentified intangible assets associated with certain
acquisitions of branches be amortized into expense. Accordingly, these
intangible assets will continue to be amortized over their useful lives
(generally 15 years). Management periodically reviews the useful lives of these
assets and adjusts them downward where appropriate. The amortization expense
associated with these branches was $1.4 million, $1.1 million, and $847,000 for
the years ended December 31, 2001, 2000 and 1999, respectively, and is expected
to be $1.4 million for the year ending December 31, 2002.

         In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (Statement 143), "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement cost. This standard requires BancShares to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and or normal
use of the assets. BancShares also is to record a corresponding increase to the
carrying amount of the related long-lived asset and to depreciate that cost over
the life of the asset. The liability is changed at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the initial fair value measurement. This statement is effective for
fiscal years beginning after June 15, 2002. BancShares does not expect adoption
of this statement to have a material effect on its consolidated financial
statements.

         In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (Statement 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard provides guidance on differentiating between long-lived assets to
be held and used, long-lived assets to be disposed of other than by sale and
long-lived assets to be disposed of by sale. Statement 144 supersedes FASB
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Statement 144 also supersedes Accounting Principals Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for fiscal years beginning
after December 15, 2001. BancShares does not expect adoption of this statement
to have a material effect on its consolidated financial statements.

         Management is not aware of any other 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.

                                      19

<PAGE>


STATISTICAL INFORMATION

The following tables contain certain additional information regarding
BancShares' business operations.

TABLE I.
AVERAGE BALANCE SHEET ITEMS AND NET INTEREST DIFFERENTIAL
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                     2001                       2000                       1999
                                           -------------------------- -------------------------- ---------------------------
                                                     Interest                    Interest                   Interest
                                            Average  Income/   Yield/   Average  Income/  Yield/   Average  Income/   Yield/
                                            Balance  Expense   Rate     Balance  Expense   Rate    Balance  Expense    Rate
                                           --------- --------  ------  --------  -------- ------   -------  --------  -------
                                                                      (Dollars in thousands, taxable-equivalent)

<S>                                      <C>          <C>      <C>    <C>         <C>      <C>    <C>         <C>      <C>
Assets
Interest earning assets:
    Loans /(1)//(2)/.................    $   637,682  $56,167  8.81 % $  587,468  $56,561  9.63 % $  493,023  $45,412   9.21 %
      Taxable investment
         securities..................        133,118    6,787  5.10      149,375    8,569  5.74      131,509    7,168   5.45
    Non taxable investment
       Securities/(2)/...............         --        --      --         1,322       84  6.35          137        8   5.84
    Overnight funds sold.............         46,378    1,673  3.61       13,138      834  6.35       35,189    1,764   5.01
    Other investments................         13,269      300  2.26        9,382      294  3.13       10,003      306   3.06
    Interest bearing deposits
       in other banks................         34,125    1,316  3.86       13,737      851  6.19       16,696      872   5.22
                                           --------- --------  ----     -------- -------- -----    --------- --------  -----
Total interest earning assets            $   864,572  $66,243  7.66 % $  774,422  $67,193  8.68 % $  686,557  $55,530   8.09 %
                                           --------- --------  ----     -------- -------- -----    --------- --------  -----
Noninterest earning assets:

    Cash and due from banks..........        33,600                      29,928                      24,948
    Premises and equipment...........        35,012                      34,629                      28,454

    Other assets.....................        24,643                      20,386                      18,266

    Reserve for loan losses..........        (8,669)                     (6,072)                     (4,939)
                                           ---------                    --------                   ---------
Total assets                             $   949,158                  $  853,293                  $  753,286
                                           ---------                    --------                   ---------
Liabilities & Shareholders' Equity

Interest bearing liabilities:
    Demand deposits..................    $   105,342  $   750  0.71 % $  102,117  $ 1,594  1.56 % $   97,987   $1,475   1.51 %
    Savings deposits.................        172,220    4,157  2.41      158,504    5,682  3.58      137,276    4,050   2.95
    Time deposits....................        405,625   21,942  5.41      357,997   20,223  5.65      318,608   15,960   5.01
    Short-term borrowings/(3)/.......         25,474      710  2.79       22,597    1,019  4.51       18,201      664   3.65
    Long-term borrowings.............         23,000    1,955  8.50       23,000    1,955  8.50       12,603    1,064   8.44

Total interest bearing                     --------- --------  ----     -------- -------- -----    --------- --------  -----
    liabilities......................    $   731,661  $29,514  4.03 % $  664,215  $30,473  4.59 % $  584,675  $23,213   3.97 %
                                           --------- --------  ----     -------- -------- -----    --------- --------  -----
Noninterest bearing liabilities:
    Demand deposits..................        125,039                     107,508                      93,695
    Other liabilities................         10,195                       7,993                       8,112

Shareholders' equity.................         82,263                      73,577                      66,804
                                           ---------                    --------                   ---------
Total liabilities and shareholders'
   equity............................    $   949,158                  $  853,293                  $  753,286
                                           ---------                    --------                   ---------
Interest rate spread /(4)/...........                          3.63 %                      4.09 %                       4.12 %
                                                               ----                       -----                        -----
Net interest income and net
    interest margin /(5)/............                 $36,729  4.25 %             $36,720  4.74 %             $32,317   4.71 %
                                                     --------  ----              -------- -----              --------  -----
</TABLE>

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

                                      20

<PAGE>

/(2)/ The average rate on nontaxable loans and investment securities has been
      adjusted to a tax equivalent yield using a 36.5% tax rate for 2001 and
      2000 and 34% tax rate for 1999. The taxable equivalent adjustment was
      approximately $87,000, $145,000, and $151,000 for the years 2001, 2000 and
      1999, respectively.
/(3)/ See Table X.
/(4)/ Interest rate spread is the difference between earning asset yield and
      interest bearing liability rate.
/(5)/ Net interest margin is net interest income divided by average earning
      assets.

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

<TABLE>
<CAPTION>
                                                                    2001                               2000
                                                      ----------------------------------- ---------------------------------
                                                            Change from previous               Change from previous
                                                                year due to:                       year due to:
                                                      ----------------------------------- -----------------------------------
                                                                     Yield/     Total                  Yield/       Total
                                                        Volume        Rate      Change     Volume       Rate        Change
                                                      ----------  ----------  ----------- ---------  -----------  -----------
                                                                               (Dollars in thousands)

<S>                                                    <C>         <C>         <C>         <C>         <C>         <C>
Interest earning assets:
   Loans.........................................      $  4,628    $ (5,022)   $   (394)   $  9,054    $  2,095    $   11,149
   Taxable investment securities.................         (881)        (901)     (1,782)        999         402         1,401

   Non taxable investment                                  (42)         (42)        (84)         74           2            76
   securities....................................
   Overnight funds sold..........................         1,654        (815)         839    (1,252)         322         (930)

   Other investments.............................            66         (60)           6        (3)         (9)          (12)

   Interest bearing balances in other

     banks.......................................         1,026        (561)         465      (169)         148          (21)
                                                      ----------  ----------  ----------- ---------  -----------  -----------
Total interest earning assets....................      $  6,451    $ (7,401)   $   (950)   $  8,703    $  2,960    $   11,663
                                                      ----------  ----------  ----------- ---------  -----------  -----------

Interest bearing liabilities:
   Demand deposits...............................          (82)        (762)       (844)         25          94           119

   Savings deposits..............................           485      (2,010)     (1,525)        809         823         1,632

   Time deposits.................................         2,634        (915)       1,719      2,099       2,164         4,263

   Short-term borrowings.........................           104        (413)       (309)        173         182           355

   Long-term borrowings..........................             -            -           -        881          10           891
                                                      ----------  ----------  ----------- ---------  -----------  -----------
Total interest bearing liabilities...............      $  3,141    $ (4,100)   $   (959)   $  3,987    $  3,273    $    7,260
                                                      ----------  ----------  ----------- ---------  -----------  -----------
Change in net interest income....................      $  3,310    $ (3,301)   $       9   $  4,716    $  (313)    $    4,403
                                                      ==========  ==========  =========== =========  ===========  ===========
</TABLE>

----------
         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 both federal and
state income taxes, federal income taxes only, or state income taxes only, are
stated on a taxable equivalent basis assuming a blended statutory income tax
rate of 36.5% for 2001 and 2000 and 34% for 1999. The taxable equivalent
adjustment was approximately $87,000, $145,000, and $151,000 for the years 2001,
2000 and 1999, respectively. The variance due to rate and volume is allocated
equally between the changes in volume and rate.

                                      21

<PAGE>

TABLE III. INVESTMENT PORTFOLIO

         The following table sets forth the carrying amount of investment
securities:

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                     ------------
                                                            2001         2000          1999
                                                            ----         ----          ----
                                                                (Dollars in thousands)

<S>                                                      <C>           <C>           <C>
U.S. Treasury and U.S. Government agencies........       $  125,446    $  142,905    $  133,006
States and political subdivisions.................                                        2,000
Marketable equity securities......................           11,596         8,799         7,749
                                                            -------       -------       -------
         Total....................................       $  137,042    $  151,704    $  142,755
                                                            =======       =======       =======
</TABLE>

         The following table sets forth the maturities of investment securities
at December 31, 2001 and the weighted average yields of such securities. (Note
that nontaxable investment securities have not been adjusted to a tax equivalent
basis).

<TABLE>
<CAPTION>
                                                                               Maturing After One
                                                       Within One Year        But Within Five Years      After Ten Years
                                                     -------------------------------------------------------------------
                                                     Amount      Yield       Amount         Yield        Amount     Yield
                                                     --------------------------------------------------------------------
                                                                              (Dollars in thousands)

<S>                                                  <C>        <C>          <C>           <C>          <C>        <C>
U.S. Treasury and U.S. Government agencies /(1)/     $110,394   4.50%        $15,045       4.72%        $     8    10.91%

Other /(1)/.....................................        3,634   3.80%           -            -             -         -
                                                     --------   -----        -------       -----        -------    ------

         Total..................................     $114,028   4.48%        $15,045       4.72%        $     8    10.91%
                                                     ========   =====        =======       =====        =======    ======
</TABLE>

/(1)/The "Within One Year" column of the "Other" category includes marketable
     equity securities held by BancShares. Accordingly, the yield on these
     securities represents anticipated dividend income rather than interest
     income.

TABLE IV. LOAN PORTFOLIO

                    ANALYSIS OF LOANS BY TYPE AND MATURITY

         The table below classifies loans by major category:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                          ------------
                                                   2001           2000        1999         1998         1997
                                                   ---------------------------------------------------------
                                                                     (Dollars in thousands)

<S>                                                <C>         <C>         <C>         <C>         <C>
Real estate:
       Construction and land development.........  $ 109,452   $ 100,727   $  79,576   $  51,499   $  33,851
       Mortgage:
          One to four family residential.........    164,748     150,164     141,937     134,681     141,301
          Commercial.............................    140,637      89,657      74,320      65,339      57,222
</TABLE>

                                      22

<PAGE>

<TABLE>
<S>                                       <C>         <C>         <C>         <C>         <C>
          Equity lines of credit.......     81,996      80,766      75,015      62,205      44,915
          Farmland.....................      6,176       4,950       5,502       4,983       4,579
Commercial and industrial..............    121,621     139,599     124,858      79,724      41,851
Consumer...............................     35,142      39,124      37,675      33,849      28,630
Agricultural...........................      4,560       4,697       3,957       4,523       3,335
Other..................................      4,652       5,133       8,308       2,405       2,566
                                           -------    --------    --------    --------    --------
          Total........................   $668,984    $614,817    $551,148    $439,208    $358,250
Less allowance for loan losses.........    (9,312)     (7,298)     (5,142)     (4,601)     (4,145)
                                          --------    --------    --------    --------    --------
          Net loans....................   $659,672    $607,519    $546,006    $434,607    $354,105
                                          ========    ========    ========    ========    ========
</TABLE>

         The following table identifies the maturities of all loans as of
December 31, 2001, and addresses the sensitivity of these loans to changes in
interest rates.

                                LOAN SENSITIVITY

<TABLE>
<CAPTION>
                                                                        December 31, 2001
                                                                        -----------------
                                                             Within   One to Five   After five
                                                            One Year     Years         Years         Total
                                                            ----------------------------------------------
                                                                        (Dollars in thousands)

<S>                                                     <C>           <C>          <C>          <C>
Real estate - construction and land development.....    $  109,452    $       -    $       -    $    109,452

Commercial and industrial...........................        49,611        52,360        19,650       121,621
Other...............................................       113,827       235,649        88,435       437,911
                                                           -------       -------       -------       -------
                                                        $  272,890    $  288,009   $   108,085  $    668,984
                                                           =======       =======       =======       =======
Loans maturing after one year with:
          Fixed interest rates......................                  $  216,103   $    17,066  $    233,169
          Floating or adjustable rates..............                      71,906        91,019       162,925
                                                                         -------       -------       -------
                                                                      $  288,009   $   108,085  $    396,094
                                                                         =======       =======       =======
</TABLE>

                             NONPERFORMING ASSETS

         The following analysis identifies other real estate owned and loans
that were either on non-accrual, past-due or restructured:

<TABLE>
<CAPTION>
                                                  2001          2000         1999          1998         1997
                                               ------------   ----------   ----------   -----------   ---------

<S>                                            <C>            <C>          <C>          <C>           <C>
Non accrual loans.........................    $     --       $    --      $    --       $    --      $    --

Restructured loans........................          --            --           --            --           --
                                               ------------   ----------   ----------   -----------   ---------
    Total nonperforming loans.............          --            --           --            --           --

Other real estate.........................          15            75          117           111           57
                                               ------------   ----------   ----------   -----------   ---------
    Total nonperforming assets............    $     15       $    75      $   117       $   111      $    57
                                               ============   ==========   ==========   ===========   =========

Accruing loans 90 days or more                $     --       $    --      $    --       $    --      $    85

    past due..............................

Loans at December 31......................    $   668,984    $  614,817   $  551,148    $ 439,208    $ 358,250

Ratio of nonperforming assets to total

    loans plus other real estate..........          0.00%         0.01%        0.02%        0.03%        0.02%

Interest income that would have been

    earned on nonperforming loans

    had they been performing..............    $     --       $    --      $    --       $    --      $    --

Interest income earned on nonperforming

     loans................................    $     --       $    --      $    --       $   --       $    --
</TABLE>

                                      23

<PAGE>

TABLE V. SUMMARY OF LOAN LOSS EXPERIENCE

                    ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

         The table presented below summarizes activity in the allowance for loan
losses for each of the years in the five year period ended December 31, 2001:

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                ----------------------------------------------------------
                                                                     2001      2000         1999       1998      1997
                                                                ----------------------------------------------------------
                                                                                    (Dollars in thousands)

<S>                                                               <C>       <C>          <C>        <C>       <C>
Allowance for loan losses -beginning of year...............         $7,298    $5,142       $4,601     $4,145    $4,139

Charge-offs:

 Commercial and industrial.................................            411       442          430         96       196

 Real estate:

  Construction and land development........................             --        --           --         --        --

  Mortgage:

      One to four family...................................          1,015       581          994      1,192       273

      Commercial...........................................            230        --           --         --        --

      Equity lines of credit...............................             --        --           --         --        --

      Farmland.............................................             --       301            4         --        --

 Consumer..................................................            361       165          206        253       379
                                                                ---------- ---------   ----------  --------- ---------
Total charge-offs..........................................          2,017     1,489        1,634      1,541       848
                                                                ---------- ---------   ----------  --------- ---------
Recoveries:

 Commercial and industrial.................................            146       178          208         36        63

 Real estate:

  Construction and land development........................             47        --           --         --        --

  Mortgage:

      One to four family...................................            121       692          291      1,193       308

      Commercial...........................................            487        --           --         --        --

      Equity lines of credit...............................             --        --           --         --        --

      Farmland.............................................             --        96            4         --        --

 Consumer..................................................            230        54          192        138       123
                                                                ---------- ---------   ----------  --------- ---------
Total recoveries...........................................          1,031     1,020          695      1,367       494
                                                                ---------- ---------   ----------  --------- ---------
Net charge-offs............................................            986       469          939        174       354

Provision for loan losses..................................          3,000     2,625        1,200        630       360

Addition due to acquired branches..........................             --        --          280         --        --
                                                                ---------- ---------   ----------  --------- ---------
Allowance for loan losses - end of year....................         $9,312    $7,298       $5,142     $4,601    $4,145
                                                                ========== =========   ==========  ========= =========
Average loans outstanding during the year..................       $637,682  $587,468     $493,023   $390,162  $349,526
                                                                ========== =========   ==========  ========= =========
Ratio of net charge-offs to average loans

 outstanding...............................................           0.15 %    0.08 %       0.19 %     0.04 %    0.10 %
                                                                ========== =========   ==========  ========= =========
</TABLE>

                                      24

<PAGE>

                   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

         The composition of the allowance by loan category shown in the table
below is based upon management's evaluation of the loan portfolio, past history,
and prevailing economic conditions:

<TABLE>
<CAPTION>
                                                                 December 31,

                          ----------------------------------------- -------------------------------------------------------------
                                    2001                   2000                       1999                     1998
                          ----------------------------------------- -------------------------------------------------------------
                                      % of loans             % of loans                 % of loans                % of loans

                                       in each                 in each                    in each                   in each

                                       category                category                   category                  category

                           Amount   to total loans   Amount   to total loans   Amount   to total loans   Amount   to total loans
                          --------  --------------- --------  --------------- --------  --------------- --------  ---------------
                                                                  (Dollars in thousands)

<S>                         <C>         <C>         <C>            <C>         <C>           <C>         <C>          <C>
 (Real estate:

   Construction and

     land development.....   $ 328       16     %    $ 201          16     %    $ 159         14     %   $  154        12     %

   Mortgage:

     One to four family

      residential.........     827       26            660          24            286         26            456        31

     Commercial...........   1,134       21            998          16            166         14            328        15

     Equity lines of

      credit..............     369       12            162          13            150         14            187        14

Commercial, industrial and

   agricultural...........   4,424       19          3,217          24          2,712         23          2,132        19

Consumer..................   2,039        5          1,329           6            851          7            911         8

Other.....................     140        1            141           1            228          2             72         1

Unallocated...............      51        -            590           -            590          -            361         -

                          --------  -----------    -------    ------------    -------   ------------    -------   ------------
   Total..................  $9,312      100     %   $7,298         100     %   $5,142        100     %   $4,601       100      %
                          ========  ===========    =======    ============    =======   ============    =======   ============
<CAPTION>
                          -------------------------
                                  1997
                          -------------------------
                                    % of loans

                                      in each

                                      category

                           Amount   to total loans
                          --------  ---------------

<S>                         <C>           <C>
 (Real estate:

   Construction and

     land development..... $  102         10      %

   Mortgage:

     One to four family

      residential.........    617         39

     Commercial...........    620         16

     Equity lines of

      credit..............    135         13

Commercial, industrial and

   agricultural...........  1,227         12

Consumer..................    958          8

Other.....................     77          2

Unallocated...............    409          -

                          --------  -------------
   Total..................  $4,145        100     %
                          ========  =============
</TABLE>

TABLE VI. DEPOSITS

         The average monthly volume of deposits and the average rates paid on
such deposits are presented below:

<TABLE>
<CAPTION>
                                              2001                             2000                             1999
                                  ----------------------------     -----------------------------     -----------------------
                                        Average       Average            Average        Average         Average    Average

                                        Balance        Rates             Balance         Rates          Balance     Rates
                                  ----------------------------     -----------------------------     -----------------------
                                                                      (Dollars in thousands)

<S>                                <C>                 <C>         <C>                   <C>        <C>              <C>
Noninterest bearing demand.....    $    125,039          --    %   $     107,508          --    %   $    93,695       --     %

Interest bearing demand........         105,342        0.71              102,117         1.56            97,987      1.51

Savings........................         172,220        2.41              158,504         3.58           137,276      2.95

Time deposits..................         405,625        5.41              357,997         5.65           318,608      5.01
                                  --------------------             ---------------------             --------------
           Total deposits......    $    808,226                    $     726,126                    $   647,566
                                  ====================             =====================             ==============
</TABLE>

                                      25

<PAGE>

         Maturities of time certificates of deposit of $100,000 or more at
December 31, 2001 are summarized as follows (dollars in thousands):

Maturity category:

Three months or less..........................................  $       32,830

Over three months through six months..........................          44,516

Over six months through twelve months.........................          15,784

Over one year.................................................           3,782
                                                                 -------------
                                                                $       96,912
                                                                 =============

TABLE VII. RETURN ON EQUITY AND ASSETS

         The following table presents certain ratios of BancShares:

<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                                   2001                  2000             1999
                                                          ----------------------------------------------------
<S>                                                               <C>                   <C>              <C>
Return on average assets................................           0.78    %             0.95   %         1.01  %

Return on average shareholders' equity..................           8.99                 11.01            11.43

Dividend payout ratio...................................          12.13                 11.11            11.85

Average shareholders' equity to average total assets....           8.67                  8.62             8.87
</TABLE>

TABLE VIII. CAPITAL ADEQUACY

         The following table presents certain calculations of BancShares'
capital and related ratios:

                                                   Year ended December 31,
                                                  2001        2000      1999
                                              --------------------------------
                                                    (Dollars in thousands)
Total shareholders' equity................     $ 85,030    $ 77,513    $ 69,895
Leverage capital..........................       85,902      84,047      75,601
Tier I capital............................       85,902      84,047      75,601
Total capital.............................       98,245      94,114      83,665

Leverage capital ratio /(1)/..............       8.99 %      9.72 %      9.12 %
Tier I capital ratio......................      12.27       11.87       12.06
Total capital ratio /(2)/.................      14.03       13.29       13.34

----------
/(1)/Bank holding companies operating at the 3% minimum are expected to have
     well diversified risk profiles, including no undue interest rate risk,
     excellent asset quality, high liquidity and strong earnings. Bank holding
     companies not meeting these requirements are expected to maintain a
     leverage ratio somewhat higher than the 3% minimum applicable to the
     highest rated companies.
/(2)/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, capital trust
     certificates, less certain intangibles.

                                      26

<PAGE>

TABLE IX. INTEREST RATE SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
                                                                  December 31, 2001
                             --------------------------------------------------------------------------------------------
                                1-30        31-90        91-180       181-365         Total        Total
                                Days         Days         Days          Days        One-Year       Non-
                              Sensitive   Sensitive     Sensitive    Sensitive      Sensitive    sensitive       Total
                             ------------ -----------  ------------  -----------    -----------  ----------    ----------
                                                               (Dollars in thousands)

<S>                          <C>          <C>          <C>           <C>            <C>          <C>           <C>
Assets:

Loans...................... $   318,063   $  35,340    $   17,580    $  35,159      $  406,142   $  262,842    $ 668,984

Investment securities......      35,047      10,001        45,010       20,336         110,394       26,648      137,042

Overnight funds sold.......      51,200        --            --           --            51,200         --         51,200

Other......................        --          --            --           --             --           2,309        2,309

Interest bearing deposits

   in other banks..........      28,463        --            --           --            28,463         --         28,463
                             ------------  ----------   -----------   ----------     ----------   ---------     ---------
   Total interest earning

       assets.............. $   432,773   $  45,341    $   62,590    $  55,495      $  596,199   $  291,799    $ 887,998
                             ============  ==========   ===========   ==========     ==========   =========     =========

Liabilities:

Savings and checking

   with interest........... $      --     $    --      $     --      $    --        $    --      $  173,685    $ 173,685

Money market saving........     120,534        --            --           --           120,534         --        120,534

Time deposits..............      58,844      73,051       106,377       86,209         324,481       81,770      406,251

Short-term borrowings......      27,073        --            --           --            27,073         --         27,073

Long-term borrowings.......        --          --            --           --             --          23,000       23,000
                             ------------  ----------   -----------   ----------     ----------   ---------     ---------
   Total interest bearing

      liabilities.......... $   206,451   $  73,051    $  106,377    $  86,209      $  472,088   $  278,455    $ 750,543
                             ============  ==========   ===========   ==========     ==========   =========     =========

Interest sensitivity gap... $   226,322   $ (27,710)   $  (43,787)   $ (30,714)     $  124,111   $   13,344    $ 137,455
                             ============  ==========   ===========   ==========     ==========   =========     =========

Cumulative interest

  sensitivity gap.......... $   226,322   $ 198,612    $  154,825    $ 124,111      $  124,111   $  137,455    $ 137,455

Cumulative interest

  sensitivity gap to total

  interest earning assets..         25.49%      22.37%        17.44%       13.98  %       13.98%       15.48%        15.48%
</TABLE>

                                      27

<PAGE>

         Assets and liabilities with maturities of one year or less and those
that may be adjusted within this period are considered interest-sensitive. The
interest-sensitivity position has meaning only as of the date for which it was
prepared.

TABLE X. SHORT-TERM BORROWINGS

<TABLE>
<CAPTION>
                                                     2001               2000                 1999              1998
                                                ----------------   ----------------   ------------------  ----------------
                                                 Amount   Rate      Amount   Rate       Amount   Rate      Amount    Rate
                                                -------  -------   -------  -------   --------  -------   --------  -------
                                                                          (Dollars in thousands)

<S>                                            <C>        <C>    <C>          <C>   <C>          <C>    <C>           <C>
Federal funds purchased:
   At December 31........................      $    --     --  % $   --       --  %       --      --  %      --       --   %
   Average during year...................           --     --        41       3.01  $     45     5.28   $    --       --
   Maximum month end balance during year.           --               --                   --                 --

Repurchase agreements:
   At December 31........................      $ 23,461   2.91 % $  23,066    4.50% $   19,753   4.52 % $  11,467     3.21 %
   Average during year...................        23,193   2.74      20,430    4.34      16,079   3.50       8,251     3.87
   Maximum month end balance during year.        25,078             23,205              23,145             11,467

US Treasury tax and loan accounts:
   At December 31........................      $  3,612   1.40 % $   3,576    5.72% $    3,220   3.66 % $     150     4.11 %
   Average during year...................         2,281   3.33       2,126    6.15       2,078   4.79       1,661     5.55
   Maximum month end balance during year.         3,612              3,614               4,396              3,591
</TABLE>

TABLE XI. SELECTED QUARTERLY DATA

<TABLE>
<CAPTION>

                                                        2001                                      2000
                                        Fourth      Third    Second      First           Fourth      Third     Second
First
----------------------------------------------------------------------------------------------------------------------

                                                            (Dollars in thousands, except per share data)
<S>                                    <C>        <C>       <C>        <C>       <C>       <C>       <C>       <C>
SUMMARY OF OPERATIONS

Interest income...................     $15,341    $16,375   $16,957    $17,483   $17,748   $17,039   $16,536   $15,724
Interest expense..................       6,175      7,265     7,848      8,226     8,304     7,873     7,339     6,958
----------------------------------------------------------------------------------------------------------------------
Net interest income...............       9,166      9,110     9,109      9,257     9,444     9,166     9,197     8,766
Provision for loan losses.........         750        750       750        750       750       750       750       375
----------------------------------------------------------------------------------------------------------------------
Net income after provision for
    loan losses...................       8,416      8,360     8,359      8,507     8,694     8,416     8,447     8,391
Noninterest income................       2,531      2,511     2,445      2,463     1,905     1,970     1,888     1,403
Noninterest expense...............       8,027      7,794     8,087      8,009     7,376     7,332     7,015     6,673
----------------------------------------------------------------------------------------------------------------------
Net income before income taxes....       2,920      3,077     2,717      2,961     3,223     3,054     3,320     3,121
Income taxes......................       1,074      1,130       993      1,081     1,167     1,110     1,211     1,129
----------------------------------------------------------------------------------------------------------------------
Net income........................     $ 1,846    $ 1,947   $ 1,724    $ 1,880   $ 2,056   $ 1,944   $ 2,109   $ 1,992
======================================================================================================================
PER SHARE INFORMATION
Net income per shares.............     $ 65.88    $ 69.45   $ 61.42    $ 66.96   $ 73.24   $ 69.14   $ 74.88   $ 70.71
Cash dividends declared...........        8.00       8.00      8.00       8.00      8.00      8.00      8.00      8.00
</TABLE>

FORWARD-LOOKING STATEMENTS

         This 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 the
qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan,"

                                      28

<PAGE>

"project," "anticipate," or other statements concerning opinions or judgements
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.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information is included in Item 7 in the text of BancShares' Management's
Discussion and Analysis of Financial Condition and Results of Operations (under
the caption "Liquidity, Market Risk and Interest Sensitivity") and is
incorporated herein by reference.

                                      29

<PAGE>

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Fidelity BancShares (N.C.), Inc.:

We have audited the accompanying consolidated balance sheets of Fidelity
BancShares (N.C.), Inc. and subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of income, changes in
shareholders' equity and comprehensive income and cash flows for each of the
years in the three year period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 Fidelity BancShares
(N.C.), Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.



                                                                 KPMG LLP

Raleigh, North Carolina
March 8, 2002

<PAGE>

               FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                          December 31, 2001 and 2000

<TABLE>
<CAPTION>
                            Assets                                    2001         2000
                                                                 ------------- ------------
<S>                                                             <C>            <C>
Cash and due from banks                                         $  46,517,398   35,657,872
Interest bearing deposits in other banks                           28,462,716   27,178,095
Overnight funds sold                                               51,200,000   28,850,000
                                                                 ------------- ------------
               Total cash and cash equivalents                    126,180,114   91,685,967

Investment securities ($28,510,945 in 2001 and $28,489,130
   in 2000 pledged for repurchase agreements):
      Held to maturity (estimated fair value of $126,502,713
         in 2001 and $142,796,950 in 2000)                        125,446,167  142,904,792
      Available for sale (cost of $3,633,777 in 2001 and
         $2,644,600 in 2000 )                                      11,595,935    8,799,080
                                                                 ------------- ------------
               Total investment securities                        137,042,102  151,703,872

Loans                                                             668,984,155  614,817,472
Allowance for loan losses                                          (9,312,384)  (7,297,833)
                                                                 ------------- ------------
               Loans, net                                         659,671,771  607,519,639

Federal Home Loan Bank of Atlanta stock, at cost                    2,309,400    2,169,700
Premises and equipment, net                                        35,575,442   34,749,653
Accrued interest receivable                                         5,453,035    5,961,767
Intangible assets                                                  17,311,024   12,777,041
Other assets                                                        1,176,004    1,102,807
                                                                 ------------- ------------
               Total assets                                     $ 984,718,892  907,670,446
                                                                 ============= ============
                 Liabilities and Shareholders' Equity

Deposits:
   Noninterest-bearing demand deposits                            140,965,066  110,191,311
   Savings and interest-bearing demand deposits                   294,219,134  288,374,723
   Time deposits                                                  406,251,104  373,953,911
                                                                 ------------- ------------
               Total deposits                                     841,435,304  772,519,945

Short-term borrowings                                              27,072,692   26,641,586
Long-term borrowings                                               23,000,000   23,000,000
Accrued interest payable                                            6,257,923    6,306,181
Other liabilities                                                   1,922,588    1,689,965
                                                                 ------------- ------------
               Total liabilities                                  899,688,507  830,157,677
                                                                 ------------- ------------
Shareholders' equity:
   Common stock ($25 par value; 29,200 shares authorized;
      28,026 and 28,070 shares issued and outstanding in 2001
      and 2000, respectively)                                         700,650      701,750
   Surplus                                                          6,166,681    6,176,362
   Accumulated other comprehensive income                           4,817,106    3,688,615
   Retained earnings                                               73,345,948   66,946,042
                                                                 ------------- ------------
               Total shareholders' equity                          85,030,385   77,512,769
                                                                 ------------- ------------
               Total liabilities and shareholders' equity       $ 984,718,892  907,670,446
                                                                 ============= ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      32

<PAGE>

               FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES

                       Consolidated Statements of Income

                 Years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                            2001          2000          1999
                                                       -------------  ------------  ------------
<S>                                                   <C>              <C>           <C>
Interest income:
   Interest and fees on loans                         $  56,080,065    56,448,614    45,264,188
   Interest and dividends on investment securities:
      Non taxable interest income                               --         50,588         5,080
      Taxable interest                                    8,102,521     9,420,583     8,039,638
      Dividend income                                       300,291       293,792       305,726
   Interest on overnight funds sold                       1,672,926       833,781     1,764,036
                                                       -------------  ------------  ------------
               Total interest income                     66,155,803    67,047,358    55,378,668
                                                       -------------  ------------  ------------

Interest expense:
   Deposits                                              26,848,493    27,499,766    21,484,771
   Short-term borrowings                                    710,484     1,019,244       664,136
   Long-term borrowings                                   1,955,000     1,955,000     1,064,389
                                                       -------------  ------------  ------------
               Total interest expense                    29,513,977    30,474,010    23,213,296
                                                       -------------  ------------  ------------
               Net interest income                       36,641,826    36,573,348    32,165,372

Provision for loan losses                                 3,000,000     2,625,000     1,200,000
                                                       -------------  ------------  ------------
               Net interest income after provision for
                  loan losses                            33,641,826    33,948,348    30,965,372
                                                       -------------  ------------  ------------
Noninterest income:
   Service charges on deposit accounts                    6,171,758     4,202,024     2,999,046
   Other service charges and fees                         3,191,263     2,478,240     2,091,139
   Other income                                             100,621       485,743        92,966
   Gain on exchange of marketable equity securities         458,395           --            --
   Gain on sale of marketable equity securities              27,746           --            --
                                                       -------------  ------------  ------------
               Total noninterest income                   9,949,783     7,166,007     5,183,151
                                                       -------------  ------------  ------------
Noninterest expenses:
   Salaries and employee benefits                        16,749,395    15,245,959    12,556,789
   Occupancy and equipment                                4,958,703     4,767,258     4,405,599
   Data processing                                        2,978,869     2,549,314     1,924,771
   Amortization of intangibles                            1,488,690     1,121,078       924,312
   Other expense                                          5,270,257     4,712,929     4,232,231
   Impairment loss on fixed assets                          470,740           --            --
                                                       -------------  ------------  ------------
                Total noninterest expense                31,916,654    28,396,538    24,043,702
                                                       -------------  ------------  ------------
                Net income before income taxes           11,674,955    12,717,817    12,104,821

Income tax expense                                        4,278,278     4,616,567     4,468,172
                                                       -------------  ------------  ------------
                Net income                            $   7,396,677     8,101,250     7,636,649
                                                       =============  ============  ============

Per share information:

   Net income                                         $      263.71        287.97        270.05

   Cash dividends declared                            $       32.00         32.00         32.00

   Weighted average shares outstanding                       28,049        28,132        28,279
</TABLE>

See accompanying notes to consolidated financial statements.

                                      33

<PAGE>

              FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
                                    Income

                 Years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                                                    Accumulated
                                                     Common stock                      other
                                                   ------------------              comprehensive    Retained     Comprehensive
                                                    Shares    Amount      Surplus      income       earnings         income
                                                   --------  --------   ----------- -----------  -------------  ---------------
<S>                                                <C>       <C>        <C>         <C>          <C>            <C>
Balance December 31, 1998                           28,410  $ 710,250    6,251,174    4,186,818    53,659,934           --
   Net income for 1999                                 --         --           --         --        7,636,649         7,636,649
   Cash dividends ($32.00 per share)                   --         --           --         --         (905,280)          --
   Purchase and retirement of common stock            (240)    (6,000)     (52,808)       --         (421,191)          --
   Unrealized loss on securities available for sale,
      net of deferred taxes of $693,901                --         --           --    (1,164,847)          --         (1,164,847)
                                                   --------  --------   ----------- ------------ -------------  ----------------
   Comprehensive income                                                                                        $      6,471,802
                                                                                                                ================
Balance December 31, 1999                           28,170    704,250    6,198,366    3,021,971    59,970,112
                                                   --------  --------   ----------- ------------ -------------
   Net income for 2000                                 --         --           --         --        8,101,250         8,101,250
   Cash dividends ($32.00 per share)                   --         --           --         --         (899,824)          --
   Purchase and retirement of common stock            (100)    (2,500)     (22,004)       --         (225,496)          --
   Unrealized gain on securities, available for
      sale, net of deferred taxes of $383,184          --         --           --       666,644           --            666,644
                                                   --------  --------   ----------- ------------ -------------  ----------------
   Comprehensive income                                                                                        $      8,767,894
                                                                                                                ================
Balance December 31, 2000                           28,070    701,750    6,176,362    3,688,615    66,946,042
                                                   --------  --------   ----------- ------------ -------------
   Net income for 2001                                 --         --           --         --        7,396,677         7,396,677
   Cash dividends ($32.00 per share)                   --         --           --         --         (897,552)          --
   Purchase and retirement of common stock             (44)    (1,100)      (9,681)       --          (99,219)          --
   Unrealized gain on securities, available for
      sale, net of deferred taxes of $679,187          --         --           --     1,128,491           --          1,128,491
                                                   --------  --------   ----------- ------------ -------------  ----------------
   Comprehensive income                                                                                        $      8,525,168
                                                                                                                 ===============
Balance December 31, 2001                           28,026  $ 700,650    6,166,681    4,817,106    73,345,948
                                                   ========  ========   =========== ============ =============
<CAPTION>
                                                      Total
                                                   shareholders'
                                                     equity
                                                   -------------
<S>                                                 <C>
Balance December 31, 1998                           64,808,176
   Net income for 1999                               7,636,649
   Cash dividends ($32.00 per share)                  (905,280)
   Purchase and retirement of common stock            (479,999)
   Unrealized loss on securities available for sale
      net of deferred taxes of $693,901             (1,164,847)
                                                    ------------
   Comprehensive income

Balance December 31, 1999                           69,894,699
                                                    ------------
   Net income for 2000                               8,101,250
   Cash dividends ($32.00 per share)                  (899,824)
   Purchase and retirement of common stock            (250,000)
   Unrealized gain on securities, available for
      sale, net of deferred taxes of $383,184          666,644
                                                    ------------
   Comprehensive income

Balance December 31, 2000                           77,512,769
                                                    ------------
   Net income for 2001                               7,396,677
   Cash dividends ($32.00 per share)                  (897,552)
   Purchase and retirement of common stock            (110,000)
   Unrealized gain on securities, available for
      sale, net of deferred taxes of $679,187        1,128,491
                                                    ------------
   Comprehensive income

Balance December 31, 2001                           85,030,385
                                                    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      34

<PAGE>

                        FIDELITY BANCSHARES (N.C.), INC. AND SUBSIDIARIES

                                Consolidated Statements of Cash Flows

                            Years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>

                                                                           2001          2000           1999
                                                                       --------------  ------------  --------------
<S>                                                                    <C>             <C>           <C>
Cash flows from operating activities:
  Net income                                                           $   7,396,677     8,101,250      7,636,649
  Adjustments to reconcile net income to net cash
    provided by operating activities:
       Depreciation and amortization                                       4,075,445     3,658,864      3,216,484
       Amortization (accretion) on investment securities                     133,119      (246,358)       132,266
       Loss (gain) on disposition or abandonment of premises
         and equipment                                                           661       (16,260)         1,637
       Impairment loss on premises and equipment                             470,740           --             --
       Provision for loan losses                                           3,000,000     2,625,000      1,200,000
       Origination of loans held for sale                                 (5,972,250)   (3,508,450)   (12,818,050)
       Proceeds from sales of loans held for sale                          6,004,882     3,555,810     12,860,521
       Gain on sales of loans held for sale                                  (32,632)      (47,360)       (42,471)
       Gain on exchange of marketable equity securities                     (458,395)          --             --
       Gain on sale of marketable equity securities                          (27,746)          --             --
       Proceeds from sales of other real estate owned                        443,519           --             --
       Loss on other real estate                                              31,481       138,235            --
       Deferred income taxes                                              (1,153,726)   (1,015,704)      (581,537)
       Decrease (increase) in accrued interest receivable                    508,732    (1,137,500)    (1,172,612)
       Decrease (increase) in other assets, net                            1,020,529       748,045     (1,052,154)
       Decrease in other liabilities, net                                   (446,564)     (154,486)      (186,536)
       (Decrease) increase in accrued interest payable                       (48,258)    1,576,396        606,321
                                                                       --------------  ------------  --------------
            Net cash provided by operating activities                     14,946,214    14,277,482      9,800,518
                                                                       --------------  ------------  --------------
Cash flows from investing activities:
  Purchase of securities held to maturity                               (130,675,124)  (39,653,069)  (104,996,900)
  Purchase of securities available for sale                               (1,000,000)         --             --
  Proceeds from sale of securities available for sale                        496,964          --             --
  Proceeds from maturities and issuer calls of
    securities held to maturity                                          148,000,630    32,001,079     60,004,666
  Purchase of FHLB of Atlanta stock                                         (139,700)     (110,400)      (196,898)
  Net increase in loans                                                  (51,690,926)  (64,276,382)   (84,841,466)
  Purchases of premises and equipment                                     (2,991,518)   (4,436,232)    (9,171,037)
  Proceeds from sales of premises and equipment                                  --            --           2,000
  Net cash received on purchases of branches                              38,694,109           --      66,305,756
                                                                       --------------  ------------  ---------------
             Net cash provided (used) by investing activities                694,435   (76,475,004)   (72,893,879)
                                                                       --------------  ------------  ---------------
Cash flows from financing activities:
  Net increase in deposits                                                19,429,944    56,506,319      6,794,010
  Net increase in short-term borrowings                                      431,106     3,669,035     11,355,207
  Issuance of long-term borrowings                                               --            --      23,000,000
  Cash dividends paid                                                       (897,552)     (899,824)      (905,280)
  Purchase and retirement of common stock                                   (110,000)     (250,000)      (479,999)
                                                                       --------------  ------------  ---------------
             Net cash provided by financing activities                    18,853,498    59,025,530     39,763,938
                                                                       --------------  ------------  ---------------
             Net increase (decrease) in cash and cash equivalents         34,494,147    (3,171,992)   (23,329,423)

Cash and cash equivalents at beginning of year                            91,685,967    94,857,959    118,187,382
                                                                       --------------  ------------  ---------------
Cash and cash equivalents at end of year                               $ 126,180,114    91,685,967     94,857,959
                                                                       ==============  ============  ===============
Supplemental disclosures of cash flow information:

  Cash paid during the year for interest                               $  29,562,235    28,897,614     22,606,975
                                                                       ==============  ============  ===============
  Cash paid during the year for income taxes                           $   5,162,160     5,823,064      4,524,559
                                                                       ==============  ============  ===============
Supplemental disclosure of noncash financing and
  investing activities:
     Unrealized gains (losses) on available-for-sale
       securities, net of deferred tax effects of $679,187,
       $383,184 and ($693,901), respectively                           $   1,128,491       666,644     (1,164,847)
                                                                       ==============  ============  ===============
     Transfer of foreclosed loans to other real estate                 $     415,000       187,861        117,000
                                                                       ==============  ============  ===============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      35

<PAGE>

(1)     SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

        (A)   NATURE OF OPERATIONS

              Fidelity BancShares (N.C.), Inc. (the "Company") is a bank holding
              company incorporated under the General Corporation Law of the
              State of Delaware. The principal activity of the Company is
              ownership of The Fidelity Bank (the "Bank"), which operates
              sixty-four offices primarily in central North Carolina, and
              FIDBANK Capital Trust I (the "Trust"), a statutory business trust
              created under the laws of the State of Delaware that issued
              $23,000,000 of 8.50% Capital Securities (the "Capital Securities")
              in June 1999 maturing in 2029.

              The Bank's primary source of revenue is derived from interest
              income on loans to customers and from its investment securities
              portfolio. The loan portfolio is comprised mainly of real estate,
              commercial, consumer, and equity line of credit loans. These loans
              are primarily collateralized by residential and commercial
              properties, commercial equipment, and personal property.

        (B)   CONSOLIDATION

              The accompanying consolidated financial statements of the Company
              include the accounts of the Bank and the Trust, the Company's
              wholly-owned subsidiaries. The Bank also has two wholly-owned
              subsidiaries, Fidelity Properties, Inc. and TFB Financial
              Services. There have been no transactions by Fidelity Properties,
              Inc. other than the initial capitalization. TFB Financial
              Services, Inc., provides depositors alternative non-deposit
              investment products. All significant intercompany transactions
              have been eliminated in consolidation.

        (C)   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 assets and liabilities at the reporting
              date and the reported amounts of revenues and expenses during the
              reporting period. Actual results could differ from those
              estimates.

        (D)   CASH AND CASH EQUIVALENTS

              Cash and cash equivalents include cash on hand, amounts due from
              banks, and overnight funds sold. Generally, overnight funds are
              purchased and sold for one-day periods.

                                      36

<PAGE>

        (E)   INVESTMENT SECURITIES

              The Company accounts for investment securities under Statement of
              Financial Accounting Standards ("SFAS") No. 115, "Accounting for
              Certain Investments in Debt and Equity Securities". This statement
              addresses the accounting and reporting for investments in equity
              securities that have readily determinable fair values and for all
              investments in debt securities. These investments are to be
              classified into three categories and accounted for as follows: (1)
              debt securities that the entity has the positive intent and the
              ability to hold to maturity are classified as held-to-maturity and
              reported at amortized cost; (2) debt and equity securities that
              are bought and held principally for the purpose of selling them in
              the near term are classified as trading securities and reported at
              fair value, with unrealized gains and losses included in earnings;
              and (3) debt and equity securities not classified as either
              securities held to maturity or trading securities are classified
              as available for sale and consist of securities which may be sold
              in response to changes in interest rates, prepayment risk,
              regulatory capital requirements and liquidity needs. Such
              securities are reported at fair value, with unrealized gains and
              losses excluded from earnings and reported as a separate component
              of shareholders' equity. The classification of securities is
              determined by management at the date of purchase. The Company does
              not hold any trading securities.

              Amortization of premiums and accretion of discounts are recognized
              as adjustments to interest income using the interest method. Gains
              and losses on sales of securities, computed based on specific
              identification of the amortized cost of each security, are
              included in other income at the time of the sale. Gains or losses
              are also recognized on equity securities when the issuer is
              involved in a business combination. These transactions are
              recognized in the period the business combinations are
              consummated.

        (F)   LOANS

              Loans are stated at the amount of unpaid principal, reduced by an
              allowance for loan losses. Interest on loans is recorded as earned
              on an accrual basis.

              Loans, including impaired loans, are generally classified as
              nonaccrual if they are past due as to maturity or payment of
              principal or interest for a period of more than 90 days, unless
              such loans are well-secured and in the process of collection.
              Loans that are current or past due less than 90 days may also be
              classified as nonaccrual if repayment in full of principal and/or
              interest is in doubt. Loans may be returned to accrual status when
              all principal and interest amounts contractually due (including
              arrearages) are reasonably assured of repayment within an
              acceptable period of time, and there is a sustained period of
              repayment performance (generally a minimum of six months) by the
              borrower, in accordance with the contractual terms.

                                      37

<PAGE>

              While a loan (including an impaired loan) is classified as
              nonaccrual and the future collectibility of the recorded loan
              balance is doubtful, collections of interest and principal are
              generally applied as a reduction to the principal outstanding.
              When the future collectibility of the recorded loan balance is not
              in doubt, interest income may be recognized on a cash basis. In
              the case where a nonaccrual loan had been partially charged-off,
              recognition of interest on a cash basis is limited to that which
              would have been recognized on the recorded loan balance at the
              contractual interest rate. Receipts in excess of that amount are
              recorded as recoveries to the allowance for loan losses until
              prior charge-offs have been fully recovered.

        (G)   ALLOWANCE AND PROVISION FOR LOAN LOSSES

              The Company provides for loan losses on the allowance method.
              Additions to the allowance for loan losses are provided by charges
              to operations based on various factors which, in management's
              judgment, deserve current recognition in estimating probable
              losses inherent in the loan portfolio. Such factors considered by
              management include the market value of the underlying collateral,
              growth and composition of the loan portfolio, the relationship of
              the allowance for loan losses to outstanding loans, delinquency
              trends, and economic conditions.

              Allowances for loan losses related to loans that are identified as
              impaired are based on discounted cash flows using the loan's
              initial interest rate or the fair value of the collateral if the
              loan is collateral dependent. Larger groups of smaller balance
              homogeneous loans that are collectively evaluated for impairment
              (such as credit card, residential mortgage and consumer
              installment loans) are excluded from this impairment evaluation
              and their allowance for loan losses is calculated in accordance
              with the allowance for loan losses policy discussed above.

              Management evaluates the carrying value of loans periodically and
              the allowance is adjusted accordingly. While management uses the
              best information available to make evaluations, future adjustments
              to the allowance may be necessary if conditions differ
              substantially from the assumptions used in making the evaluations.

              In addition, various regulatory agencies, as an integral part of
              their examination process, periodically review the Company's
              allowance for loan losses. Such agencies may require the Company
              to recognize additions to the allowance based on their judgments
              about information available to them at the time of their
              examination.

                                      38

<PAGE>

        (H)   ASSETS ACQUIRED IN SETTLEMENT OF LOANS

              Assets acquired in settlement of loans consist primarily of
              property acquired through a foreclosure proceeding or acceptance
              of a deed-in-lieu of foreclosure. Assets acquired in settlement of
              loans are recorded initially at the lower of the loan balance plus
              unpaid accrued interest or estimated fair value of the property
              less estimated selling costs at the date of foreclosure. The
              initial recorded value may be subsequently reduced by additional
              allowances, which are charged to earnings, if the estimated fair
              value of the property, less estimated selling costs, declines
              below the initial recorded value. Costs related to the improvement
              of the property are capitalized, whereas those related to holding
              the property are expensed.

        (I)   MEMBERSHIP/INVESTMENT IN FEDERAL HOME LOAN BANK OF ATLANTA STOCK

              The Company is a member of the Federal Home Loan Bank of Atlanta
              ("FHLB"). Membership provides the Company with the ability to draw
              $118,000,000 of advances from the FHLB, subject to a signed
              blanket collateral agreement. No advances were drawn by the
              Company in 2001 or 2000.

              As a requirement for membership, the Company invests in stock of
              the FHLB in the amount of 1% of its outstanding residential loans
              or 5% of its outstanding advances from the FHLB, whichever is
              greater. Such stock is pledged as collateral for any FHLB advances
              drawn by the Company. At December 31, 2001 and 2000, the Company
              owned 23,094 and 21,697 shares of the FHLB's $100 par value
              capital stock, respectively. No ready market exists for such
              stock, which is carried at cost.

        (J)   PREMISES AND EQUIPMENT

              Premises and equipment are stated at cost less accumulated
              depreciation. Depreciation is computed using an accelerated method
              based on the estimated useful lives of assets. Useful lives range
              from 5 to 31.5 years for premises and from 3 to 10 years for
              equipment and fixtures. Expenditures for repairs and maintenance
              are charged to expense as incurred. Upon retirement or other
              disposition of the assets, the cost and the related accumulated
              depreciation are removed from the accounts and any gains or losses
              are included in income. Premises and equipment are periodically
              reviewed for impairment. In the event the Company determines that
              the carrying value of such assets are more than the undiscounted
              cash flows related to the operations associated with properties,
              the Company estimates and records an impairment loss. Such losses
              are measured based on the estimated fair value of the properties.

        (K)   INTANGIBLE ASSETS

              Intangible assets are composed primarily of goodwill and core
              deposit premiums. Amortization of goodwill and core deposit
              premiums is computed using the straight-line method based on the
              estimated useful lives of the assets (current useful lives are 15
              years). The lives of the assets are estimated by management at the
              time the assets are acquired using information available at that
              time and are subject to re-evaluation as new information becomes
              available.

                                      39

<PAGE>

              In July 2001, the FASB issued Statement of Financial Accounting
              Standards No. 141 (Statement 141), "Business Combinations", and
              Statement of Financial Accounting Standards No. 142 (Statement
              142), "Goodwill and Other Intangible Assets". Statement 141
              requires that the purchase method of accounting be used for all
              business combinations initiated after June 30, 2001. Statement 141
              also specifies criteria which must be met for intangible assets
              acquired in a purchase method business combination to be
              recognized and reported apart from goodwill. Statement 142 will
              require that goodwill and intangible assets with indefinite useful
              lives no longer be amortized, but instead tested for impairment at
              least annually in accordance with the provisions of Statement 142.
              Statement 142 will also require that identifiable intangible
              assets with definite useful lives be amortized over their
              respective estimated useful lives to their estimated residual
              values, and reviewed for impairment in accordance with Statement
              121, "Accounting for the Impairment of Long-Lived Assets and for
              Long-Lived Assets to Be Disposed Of".

              The Company was required to adopt the provisions of Statement 141
              (as well as certain provisions of Statement 142) as of June 30,
              2001 and will fully adopt Statement 142 effective January 1, 2002.
              Any goodwill and any intangible assets determined to have an
              indefinite useful life that are acquired in a purchase business
              combination completed after June 30, 2001 will not be amortized,
              but will continue to be evaluated for impairment in accordance
              with the appropriate accounting literature issued prior to
              Statement 142. Goodwill and intangible assets acquired in business
              combinations completed before July 1, 2001 continued to be
              amortized in 2001 prior to the adoption of Statement 142 on
              January 1, 2002.

              Statement 141 requires, upon adoption of Statement 142, that the
              Company evaluate its existing intangible assets and goodwill that
              were acquired in a prior purchase business combination, and to
              make any necessary reclassifications in order to conform with the
              new criteria in Statement 141 for recognition apart from goodwill.
              Upon adoption of Statement 142, the Company will be required to
              reassess the useful lives and residual values of all identifiable
              intangible assets acquired in purchase business combinations, and
              make any necessary adjustments by the end of the first interim
              period after adoption. In addition, any intangible asset
              classified as goodwill under Statement 142 will be subjected to a
              transitional impairment test during the first six months of 2002
              based on the level of goodwill as of January 1, 2002. Any
              impairment losses identified as a result of this transitional
              impairment test will be recognized in the 2002 statement of income
              as the effect of a change in accounting principle.

              As of December 31, 2001, the Company had intangible assets
              totaling $17,311,000. Management has evaluated the Company's
              existing intangible assets and goodwill as of January 1, 2002 and
              will make appropriate reclassifications in future periods in order
              to conform to the new criteria in Statement 141 for recognition
              apart from goodwill, as further described below.
              The Company has determined that upon adoption of Statement 142 on
              January 1, 2002, the Company had $744,000 of goodwill that will no
              longer be amortized beginning in 2002. The amortization expense
              associated with this goodwill during the years ended December 31,
              2001, 2000 and 1999 was $77,000 per year. In accordance with
              Statement 142, the Company will perform a transitional impairment
              test of this goodwill in the first six months of 2002, and will
              perform an annual impairment test of the goodwill in 2002 and
              thereafter.

              The remaining intangible assets, totaling $16,567,000 at December
              31, 2001, relate to acquisitions of branches that are being
              accounted for in accordance with Statement of Financial Accounting
              Standards No. 72 (Statement 72), "Accounting for Certain
              Acquisitions of Banking and Thrift Institutions." Statement 72,
              which was not amended by Statement 142, requires that identified
              intangible assets and unidentified intangible assets associated
              with certain acquisitions of branches be amortized into expense.
              Accordingly, these intangible assets will continue to be amortized
              over their useful lives (15 years). Management periodically
              reviews the useful lives of these assets and would adjust them
              downward where appropriate. The amortization expense associated
              with these branches was $1,412,000, $1,044,000, and $847,000 for
              the years ended December 31, 2001, 2000 and 1999, respectively.

                                      40

<PAGE>
        (L)   INCOME TAXES

              Income tax expense is based on consolidated net income and
              generally differs from income taxes paid due to deferred income
              taxes and benefits arising from income and expenses being
              recognized in different periods for financial and income tax
              reporting. The Company 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 the Company's assets
              and liabilities at enacted rates expected to be in effect when
              such amounts are recovered or settled. The Bank and its
              subsidiaries are included in the consolidated federal return filed
              by the Company. Each subsidiary pays its allocation of federal
              income taxes or receives a payment to the extent that tax benefits
              are realized. The Company and its subsidiaries each file separate
              state income tax returns.

        (M)   NET INCOME PER SHARE

              Net income per share is computed based on the weighted average
              number of common shares outstanding during the year. The Company
              had no potentially dilutive securities for any of the periods
              presented.

       (N)    SEGMENT REPORTING

              In June 1997, the FASB issued SFAS No. 131, "Disclosures about
              Segments of an Enterprise and Related Information." SFAS No. 131
              requires that public business enterprises report certain
              information about operating segments in a complete set 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 statement has no effect on the
              Company's consolidated financial statements as the Company's only
              operating segment is commercial banking.

                                      41

<PAGE>

       (O)    NEW ACCOUNTING STANDARDS

              In June 1998, the Financial Accounting Standard Board (the "FASB")
              issued Statement of Financial Accounting Standard ("SFAS") No.
              133, "Accounting for Derivative Instruments and Hedging
              Activities". This statement establishes accounting and reporting
              standards for derivative instruments, including certain derivative
              instruments embedded in other contracts, and for hedging
              activities. It requires that an entity recognize all derivatives
              as either assets or liabilities in the balance sheet and measure
              those instruments at fair value. The accounting for changes in the
              fair value of a derivative depends on the intended use of the
              derivative and the resulting designation. This statement, as
              amended by SFAS No. 137 and SFAS No. 138, is effective for all
              fiscal quarters of fiscal years beginning after June 15, 2000.
              Earlier application of all provisions of this statement is
              encouraged. The Company adopted this statement on January 1, 2001,
              with no material effect on its consolidated financial statements.

              In September 2000, FASB issued SFAS No. 140 "Accounting for
              Transfers and Servicing of Financial Assets and Extinguishments
              of Liabilities, a replacement of FASB Statement No. 125,
              Accounting for Transfers and Servicing of Financial Assets and
              Extinguishments of Liabilities.  Statement No. 140 revises the
              standards for accounting for securitization and other transfers
              of financial assets and collateral and requires certain
              disclosures, but carries over most of the provisions of Statement
              No. 125 without reconsideration.  Statement No.  140 also is
              effective for transfers of financial assets occurring after March
              31, 2001; it is applied prospectively.  Statement No. 140 also is
              effective for recognition and reclassification of collateral and
              for disclosures relating to securization transactions and
              collateral in financial statements for fiscal years ended after
              December 15, 2000.  The Company adopted the required provisions
              of SFAS No. 140 on April 1, 2001 and December 31, 2000,
              respectively.  The adoption of SFAS No. 140 had no material
              impact on the Company's consolidated financial statements.

       (P)    RECLASSIFICATIONS

              Certain amounts in the 2000 and 1999 consolidated financial
              statements of the Company have been reclassified to conform with
              the 2001 presentation. These reclassifications had no impact on
              net income or stockholders' equity of the Company

(2)    ACQUISITIONS OF BRANCHES

       On February 23, 2001, the Company purchased three branches from First
       Union National Bank. Assets and deposits acquired were $5,819,000 and
       $49,492,000, respectively. An intangible asset of approximately
       $6,023,000 resulted from this purchase.

       On August 22, 1999, the Company purchased seven branches from
       First-Citizens Bank & Trust Company ("FCB"), a related party (see note
       15). Assets and deposits acquired were $29,120,000 and $99,573,000,
       respectively. An intangible asset of approximately $4,427,000 resulted
       from this purchase.

                                      42

<PAGE>

(3)    INVESTMENT SECURITIES

       The amortized cost and estimated fair values of investment securities at
       December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                      2001
                                   --------------------------------------------------------------------------
                                                           Gross              Gross             Estimated
                                      Amortized          unrealized         unrealized            fair
                                         cost               gains             losses              value
                                   ----------------    ---------------    ---------------    ----------------
<S>                              <C>                   <C>                <C>                <C>
Available for sale:
 Marketable equity securities    $     3,633,777          7,962,158                 --          11,595,935
                                   ================    ===============    ===============    ================

Held to maturity:
  U.S. Agency                         90,399,469            950,119                 --          91,349,588
  U.S. Treasury                       35,046,698            106,427                 --          35,153,125
                                   ----------------    ---------------    ---------------    ----------------

                                 $   125,446,167          1,056,546                 --         126,502,713
                                   ================    ===============    ===============    ================
</TABLE>

<TABLE>
<CAPTION>
                                                                      2000
                                   --------------------------------------------------------------------------
                                                           Gross              Gross             Estimated
                                      Amortized          unrealized         unrealized            fair
                                        cost               gains              losses              value
                                   ----------------    ---------------    ---------------    ----------------

<S>                              <C>                      <C>                 <C>              <C>
Available for sale:
 Marketable equity securities    $     2,644,600          6,154,480                 --           8,799,080
                                   ================    ===============    ===============    ================

Held to maturity:
 U.S. Agency                          92,939,755             98,656           (288,336)         92,750,075
 U.S. Treasury                        49,965,037            137,084            (55,246)         50,046,875
                                   ----------------    ---------------    ---------------    ----------------

                                 $   142,904,792            235,740           (343,582)        142,796,950
                                   ================    ===============    ===============    ================
</TABLE>

                                      43

<PAGE>

       The amortized cost and estimated fair value of debt securities at
       December 31, 2001 by contractual maturities are as follows:

                                             Amortized             Estimated
                                               cost                fair value
                                          ----------------     ----------------

Due in one year or less:
 U.S. Treasury                          $       35,046,698           35,153,125
 U.S. Agency                                    75,347,106           75,928,125
Due after one year through five years:
 U.S. Agency                                    15,044,686           15,412,500
Due after ten years:
 U.S. Agency                                         7,677                8,963
                                          ----------------     ----------------

                                        $      125,446,167          126,502,713
                                          ================     ================

       During the first quarter of 2001, the Company recognized a securities
       gain of $458,395. This gain was recognized as a result of a business
       combination involving a company in which BancShares had an equity
       interest. During the second quarter of 2001, BancShares recognized a
       securities gain of $43,083 when the equity interest received in the
       business combination was sold.

       In addition, during 2001, the Company recognized gross realized losses of
       $15,337 from sales of other investment securities.

       There were no sales of investment securities during 2000 or 1999.

       Investment securities with an amortized cost of approximately $76,891,000
       and $85,281,000 were pledged to secure public deposits at December 31,
       2001 and 2000, respectively. See note 7.

                                      44

<PAGE>

(4)    LOANS AND ALLOWANCE FOR LOAN LOSSES

       Major classifications of loans as of December 31, 2001 and 2000 are
       summarized as follows:

                                             2001                   2000
                                     -------------------    -------------------

Loans secured by real estate:
  Construction                     $      109,452,372            100,727,225
  Single-family residential               164,748,104            150,163,631
  Equity lines of credit                   81,995,522             80,765,988
  Farmland                                  6,175,707              4,950,429
  Commercial                              140,637,253             89,657,350
Commercial                                121,620,972            139,598,634
Consumer                                   35,142,333             39,123,853
Agricultural                                4,560,013              4,697,313
Other                                       4,651,879              5,133,049
                                     -------------------    -------------------

                                          668,984,155            614,817,472
Allowance for loan losses                  (9,312,384)            (7,297,833)
                                     -------------------    -------------------

                                   $      659,671,771            607,519,639
                                     ===================    ===================

       There were no loans designated as held for sale at December 31, 2001 and
       2000.

       The Company offers loans to its officers, directors, and employees for
       the financing of their personal residences and for other personal
       purposes. These loans are made in the ordinary course of business and are
       made on substantially the same terms prevailing at the time as comparable
       transactions with other persons. Management does not believe these loans
       involve more than the normal risk of collectibility or present other
       unfavorable features.

       The following is a reconciliation of aggregate loans outstanding to
       executive officers, directors, and their immediate families for the years
       ended December 31, 2001 and 2000:

                                                2001               2000
                                     -------------------    -------------------
Balance at beginning of year       $        5,662,749              5,504,778
New loans                                      80,376                774,890
Principal repayments                         (780,620)              (616,919)
                                     -------------------    -------------------

Balance at end of year             $        4,962,505              5,662,749
                                     ===================    ===================

                                      45

<PAGE>

       A summary of the allowance for loan losses for the years ended December
       31, 2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                         2001              2000               1999
                                                    --------------    ---------------    --------------

<S>                                               <C>                 <C>                <C>
Balance at beginning of year                      $    7,297,833         5,141,647          4,601,000
Provision for loan losses                              3,000,000         2,625,000          1,200,000
Charge-offs                                           (2,016,848)      (1,488,940)        (1,633,754)
Recoveries                                             1,031,399         1,020,126            694,401
Allowance for loan losses on purchased loans                  --                --            280,000
                                                    --------------    ---------------    --------------

Balance at end of year                            $    9,312,384         7,297,833          5,141,647
                                                    ==============    ===============    ==============
</TABLE>

       At December 31, 2001 and 2000, the Company had no nonaccrual loans and no
       accruing loans ninety days or more past due. In addition, at and during
       the years ended December 31, 2001 and 2000, the Company had no impaired
       loans. As of December 31, 2001 and 2000, the balance of other real estate
       acquired through foreclosure was $15,000 and $75,000, respectively.

(5)    PREMISES AND EQUIPMENT

       Premises and equipment at December 31, 2001 and 2000 are as follows:

                                                      2001              2000
                                              --------------    ---------------

Land                                        $     10,905,167        10,826,463
Building and improvements                         30,033,687        28,154,397
Furniture and equipment                           10,402,712         9,358,994
                                              --------------    ---------------

                                                  51,341,566        48,339,854
Less accumulated depreciation                    (15,766,124)      (13,590,201)
                                              --------------    ---------------

Premises and equipment, net                 $     35,575,442        34,749,653
                                              ==============    ===============

       In April 2001, the Company analyzed the results of operations for two
       branches through the first three months taking into consideration recent
       economic conditions and the performance of these branches during the
       first quarter. The Company concluded that the carrying value of these
       branches was impaired and therefore recorded an impairment loss of
       $304,656 to reduce the carrying value of these branches to fair value.
       The fixed assets consisted primarily of leasehold improvements, which
       were deemed to have very minimal fair value. This impairment charge was
       recognized in the first quarter and the branches were considered assets
       to be held and used. In late April 2001, the Company approved the closing
       of the two branches in the second and third quarters of 2001. The Company
       recorded an additional charge of $173,000 in the second quarter which is
       primarily related to the remaining lease payments and costs to close
       these branches. During the third quarter of 2001 management revised its
       estimate of closing costs and recorded a recovery of $7,232.

(6)    DEPOSITS

       At December 31, 2001 and 2000, time deposits of $100,000 or more amounted
       to approximately $96,912,000 and $80,919,000, respectively. For the years
       ended December 31, 2001, 2000 and 1999, interest expense on time deposits
       of $100,000 or more amounted to approximately $3,951,000, $4,491,000 and
       $3,401,000, respectively.

                                      46

<PAGE>

       Time deposit accounts as of December 31, 2001, mature in the following
       years and approximate amounts: 2002 - $324,481,000; 2003 - $56,732,000;
       2004 - $11,202,000; and thereafter $13,836,000.

(7)    SHORT-TERM BORROWINGS

       Short-term borrowings at December 31, 2001 and 2000 consist of the
       following:

                                                      2001            2000
                                                  -------------   -------------

Securities sold under agreements to repurchase  $  23,461,000      23,066,000
Treasury tax and loan deposits                      3,611,692       3,575,586
                                                  -------------   -------------

                                                $  27,072,692      26,641,586
                                                  =============   =============

       Information concerning securities sold under agreements to repurchase is
       summarized as follows:

                                                    2001               2000
                                             ---------------    ---------------
Average rate during year                              2.74%             4.34%

Average balance during year                $     23,192,981        20,429,842

Maximum month-end balance during year      $     25,078,000        23,205,000

       These borrowings have maturities of less than 90 days. Securities sold
       under agreements to repurchase represent transactions whereby the Bank
       sells investment securities to certain of its commercial customers on an
       overnight basis and repurchases such securities the next day. At December
       31, 2001, $28,510,945 of investment securities were pledged for
       repurchase agreements. The securities collateralizing the repurchase
       agreements have been delivered to a third party custodian for
       safekeeping.

(8)    LONG-TERM BORROWINGS

       The $23,000,000 long-term obligations at December 31, 2001 are Capital
       Trust Securities of the Trust which were issued during 1999. These
       long-term obligations, which qualify as Tier 1 Capital for the Company,
       bear interest at 8.50% and mature in 2029. The Company may redeem the
       long-term obligations in whole or in part on or after June 30, 2004. The
       sole asset of the Trust is $23,711,000 of 8.50% Junior Subordinated
       Debentures of the Company due 2029. Considered together, the undertakings
       constitute a full and unconditional guarantee by the Company of the
       Trust's obligations under the Capital Securities.

                                      47

<PAGE>

(9)    Income Taxes

       The components of income taxes for the years ended December 31, 2001,
2000 and 1999 are as follows:

                                 2001               2000              1999
                            --------------    ---------------    --------------
Current:
 Federal                  $    4,821,406          5,012,050         4,531,557
 State                           610,598            620,221           518,152
                            --------------    ---------------    --------------

                               5,432,004          5,632,271         5,049,709
                            --------------    ---------------    --------------
Deferred:
 Federal                        (956,777)          (850,184)         (489,703)
 State                          (196,949)          (165,520)          (91,834)
                            --------------    ---------------    --------------

                              (1,153,726)        (1,015,704)         (581,537)
                            --------------    ---------------    --------------

                          $    4,278,278          4,616,567         4,468,172
                            ==============    ===============    ==============

       The reconciliation of expected income tax expense at the statutory
       federal rate with income tax expense for the years ended December 31,
       2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                    2001               2000               1999
                                              --------------    ---------------    --------------

<S>                                         <C>                 <C>                <C>
Expected income tax expense at statutory
 rate (35%)                                 $    4,086,234          4,451,236         4,236,687
Increase (decrease) in income tax expense
  resulting from:
     State taxes, net                              268,872            295,555           277,107
     Tax exempt income                             (73,861)           (14,592)           (1,494)
     Other, net                                     (2,967)          (115,632)          (44,128)
                                              --------------    ---------------    --------------

                                            $    4,278,278          4,616,567         4,468,172
                                              ==============    ===============    ==============
</TABLE>

                                      48

<PAGE>

       The deferred tax components at December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                 2001                 2000
                                                            ---------------    -----------------

<S>                                                       <C>                  <C>
Deferred tax assets:
  Allowance for loan losses                               $    3,676,995             2,881,549
  Deferred compensation                                          405,913               382,982
  Depreciation                                                   360,235               255,485
  Pension costs                                                  209,802               105,117
  Other                                                           81,111                53,191
                                                            ---------------    -----------------

      Total gross deferred tax assets                          4,734,056             3,678,324

  Valuation allowance                                             (8,018)               (4,590)
                                                            ---------------    -----------------

      Total net deferred tax assets                            4,726,038             3,673,734
                                                            ---------------    -----------------

Deferred tax liabilities:
  Bond accretion                                                 (41,867)             (146,710)
  Amortization of intangibles                                    (30,862)              (27,441)
  Unrealized gains on available for sale securities           (3,145,052)           (2,465,865)
                                                            ---------------    -----------------

      Total gross deferred tax liabilities                    (3,217,781)           (2,640,016)
                                                            ---------------    -----------------

      Net deferred tax asset                              $    1,508,257             1,033,718
                                                            ===============    =================
</TABLE>

       A valuation allowance for deferred tax assets of $8,018 and $4,590 was
       required as of December 31, 2001 and 2000, respectively. Management has
       determined that it is more likely than not that the net deferred tax
       asset can be realized.

(10)   EMPLOYEE BENEFIT PLANS

       CAPITAL ACCUMULATION PLAN

       The Company has a profit sharing 401(k) plan (the "Plan") for all full
       time employees with at least one year of service, which covers
       substantially all employees. Under the Plan, employees may contribute up
       to an annual maximum as determined under the Internal Revenue Code, not
       to exceed 16% of the participant's compensation. The Company matches 100%
       of such contributions for the first three percent of the participant's
       contributions and 50% of the next three percent. Further, the Company may
       make additional contributions on a discretionary basis. The Plan provides
       that employees' contributions are 100% vested at all times and the
       Company's contributions are 100% vested after five years of service. The
       Company incurred $373,211, $327,201 and $282,848 of expense related to
       the Plan for the years ended December 31, 2001, 2000 and 1999,
       respectively. The majority of the Plan's assets are held by a related
       party as trustee. See note 15 for additional information.

                                      49

<PAGE>

Pension Plan

The Company has a noncontributory, defined benefit pension plan ("Retirement
Plan") which covers substantially all full-time employees. The Company's funding
policy is based on actuarially calculated amounts to fund normal pension cost
and any unfunded accrued liability. The Retirement Plan utilizes the projected
unit credit actuarial cost method.

The following table reconciles the beginning and ending balance of the
Retirement Plan's benefit obligation, as computed by the Company's independent
actuarial consultants as of December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                            2001             2000              1999
                                                        -----------      -----------       -----------
 <S>                                                    <C>              <C>               <C>
 Net benefit obligation at beginning of year            $ 7,789,643        6,519,278         6,655,456
 Service cost                                               357,145          303,114           264,659
 Interest cost                                              560,778          531,945           459,402
 Actuarial loss (gain)                                       38,765          687,186          (642,010)
 Gross benefits paid                                       (276,309)        (251,880)         (218,229)
                                                        -----------      -----------       -----------
 Net benefit obligation at end of year                  $ 8,470,022        7,789,643         6,519,278
                                                        ===========      ===========       ===========
</TABLE>

The following table reconciles the beginning and ending balances of the
Retirement Plan's assets as of December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                            2001             2000              1999
                                                        -----------      -----------       -----------
 <S>                                                    <C>              <C>               <C>
 Fair value of plan assets at beginning of year         $ 8,358,015        8,718,547         8,415,415
 Actual return (loss) on plan assets                       (158,099)        (108,652)          521,361
 Benefits paid                                             (276,309)        (251,880)         (218,229)
                                                        -----------      -----------       -----------
 Fair value of plan assets at end of year               $ 7,923,607        8,358,015         8,718,547
                                                        ===========      ===========       ===========

</TABLE>

The following table presents information regarding the funded status of the
Retirement Plan as of December 31, 2001 and 2000:

                                                         2001          2000
                                                      ---------      ---------

 Funded (unfunded) status at the end of year          $(546,415)       568,372
 Unrecognized net actuarial (gain) loss                  13,520       (790,908)
 Unrecognized prior service cost                         38,348         47,908
 Unrecognized transition asset                          (36,799)       (91,972)
                                                      ---------      ---------
 Net liability recognized at end of year              $(531,346)      (266,600)
                                                      =========      =========

                                       50

<PAGE>

       The following table presents the components of net periodic benefit cost
       for the years ended December 31, 2001, 2000 and 1999:

                                   2001              2000             1999
                               -------------   ---------------   --------------

Service cost                 $     357,145           303,114          264,659
Interest cost                      560,778           531,945          459,402
Expected return on assets         (607,564)         (571,548)        (495,008)
Amortization of:
 Transition asset                  (55,173)          (55,173)         (55,173)
 Prior service cost                  9,560             9,560            9,560
 Actuarial loss                         --                --           11,219
                               -------------   ---------------   --------------

Net periodic benefit cost    $     264,746           217,898          194,659
                               =============   ===============   ==============

       Actuarial assumptions used to determine the Retirement Plan's funded
       status were as follows:

                                               2001         2000         1999
                                           ----------   ----------   ----------

Discount rate                                 7.00%        7.25%        7.50%
Rate of  increase in compensation levels      4.75%        4.75%        4.75%
Expected long-term rate of return on
  assets                                      8.50%        8.50%        8.50%

       The majority of the Retirement Plan's assets are held by a related party
       who serves as trustee. See note 15 for additional information.

       EMPLOYEE DEATH BENEFIT AND POST-RETIREMENT NON-COMPETITION AND
       CONSULTATION AGREEMENTS

       The Company has in place Employee Death Benefit and Post-Retirement
       Non-Competition and Consultation Agreements (the "Agreements") covering
       two of its executive officers. The Agreements provide for certain
       benefits to be paid to the executive officers upon either their
       retirement (as defined in the Agreements) or their death. The Company's
       accrual (included in other liabilities) for these future benefits was
       approximately $1,028,000 and $970,000 at December 31, 2001 and 2000,
       respectively.

(11)   REGULATORY RESTRICTIONS

       The Company is regulated by the Board of Governors of the Federal Reserve
       System ("FRB"). The Bank is regulated by the Federal Deposit Insurance
       Corporation ("FDIC") and the State of North Carolina Office of the
       Commissioner of Banks.

                                       51

<PAGE>

       Subject to applicable law, the Boards of Directors of the Company and the
       Bank may each provide for the payment of dividends. Future declarations
       of cash dividends, if any, by the Company may depend upon dividend
       payments by the Bank to the Company. The Bank, as a North Carolina
       banking corporation, may pay dividends only out of undivided profits as
       determined pursuant to North Carolina General Statutes Section 53-87.
       However, regulatory authorities may limit payment of dividends by any
       bank when it is determined that such a limitation is in the public
       interest and is necessary to ensure the financial soundness of the bank.

       Under regulations of the Federal Reserve, banking affiliates are required
       to maintain certain average reserve balances which include both cash on
       hand and deposits with the Federal Reserve. These deposits are included
       in cash and cash equivalents in the accompanying balance sheets. At
       December 31, 2001 and 2000 the Bank was required to maintain such
       balances at $14,415,000 and $12,039,000, respectively.

       The Company and the Bank are subject to various regulatory capital
       requirements administered by federal and state banking agencies. Failure
       to meet minimum capital requirements can initiate certain mandatory, and
       possibly additional discretionary, actions by regulators that, if
       undertaken, could have a direct material effect on the Company's
       consolidated financial statements. Quantitative measures established by
       regulation to ensure capital adequacy require the Company and the Bank to
       maintain minimum amounts and ratios, as set forth in the table below.
       Management believes, as of December 31, 2001, that the Company and the
       Bank meet all capital adequacy requirements to which they are subject.

       As of December 31, 2001, the Bank was considered to be "well capitalized"
       under FDIC standards. To be categorized as well capitalized the Bank must
       maintain minimum amounts and ratios, as set forth in the tables below.
       There are no conditions or events since December 31, 2001 that management
       believes have changed the category of the Bank.

       The actual capital amounts and ratios for the Company are presented in
       the table below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                             For
                                                                            capital
                                                                           adequacy
                                                Amount        Rate         purposes
                                             -----------   ----------   --------------
<S>                                        <C>             <C>          <C>
As of December 31, 2001:
------------------------
Total Capital (to Risk  Weighted Assets)   $     98,245      14.03%        ****8.00%
Tier 1 Capital (to Risk Weighted Assets)         85,902      12.27%        ****4.00%
Tier 1 Capital (to Average Assets)               85,902       8.99%        ****3.00%

As of December 31, 2000:
------------------------
Total Capital (to Risk  Weighted Assets)   $     94,114      13.29%        ****8.00%
Tier 1 Capital (to Risk Weighted Assets)         84,047      11.87%        ****4.00%
Tier 1 Capital (to Average Assets)               84,047       9.72%        ****3.00%
</TABLE>

**** represents greater than and equal to

                                       52

<PAGE>

       The actual capital amounts and ratios for the Bank are presented in the
       table below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                               To be well
                                                                                 For        capitalized under
                                                                               capital           Prompt
                                                                              adequacy         Corrective
                                                 Amount          Rate         purposes      Action provisions
                                                ----------    ----------                  --------------------
<S>                                           <C>             <C>            <C>          <C>
As of December 31, 2001:
------------------------
Total Capital (to Risk  Weighted Assets)      $   87,404        12.55%       ****8.00%         ****10.00%
Tier 1 Capital (to Risk Weighted Assets)          78,691        11.30%       ****4.00%          ****6.00%
Tier 1 Capital (to Average Assets)                78,691         8.27%       ****3.00%          ****5.00%

As of December 31, 2000:
------------------------
Total Capital (to Risk  Weighted Assets)      $   85,944        12.31%       ****8.00%         ****10.00%
Tier 1 Capital (to Risk Weighted Assets)          78,646        11.26%       ****4.00%          ****6.00%
Tier 1 Capital (to Average Assets)                78,646         9.17%       ****3.00%          ****5.00%
</TABLE>

**** represents greater than and equal to

 (12)   COMMITMENTS AND CONTINGENCIES

       The Company is a party to financial instruments with off-balance sheet
       risk in the normal course of business to meet the financing needs of its
       customers. These financial instruments include commitments to extend
       credit, lines of credit and standby letters of credit. These instruments
       involve elements of credit risk in excess of amounts recognized in the
       accompanying consolidated financial statements.

       The Company's risk of loss in the event of nonperformance by the other
       party to the commitment to extend credit, line of credit or standby
       letter of credit is represented by the contractual amount of these
       instruments. The Company uses the same credit policies on the borrower in
       making commitments under such instruments as it does for on-balance sheet
       instruments. The amount of collateral obtained, if any, is based on
       management's credit evaluation of the borrower. Collateral held varies,
       but may include accounts receivable, inventory, real estate and time
       deposits with financial institutions. Since many of the commitments are
       expected to expire without being drawn upon, the total commitment amounts
       do not necessarily represent future cash requirements.

       As of December 31, 2001 and 2000, outstanding financial instruments whose
       contract amounts represent credit risk were as follows:

<TABLE>
<CAPTION>
                                                                               2001                2000
                                                                         -----------------    ----------------

<S>                                                                    <C>                       <C>
Outstanding commitments to lend, unfunded loans
  and lines of credit                                                  $     221,656,178         213,329,957
                                                                         =================    ================

Standby and commercial letters of credit                               $       3,275,000           2,142,718
                                                                         =================    ================
</TABLE>

       The Company's lending is concentrated primarily in central North Carolina
       and the surrounding communities in which it operates. Credit has been
       extended to certain of the Company's customers through multiple lending
       transactions; however, there is no concentration to any single customer
       or industry.

(13)   FAIR VALUE OF FINANCIAL INSTRUMENTS

       SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
       (SFAS No. 107), requires the disclosure of estimated fair values for
       financial instruments. Quoted market prices, if available, are utilized
       as an estimate of the fair value of financial instruments. Because no
       quoted market prices exist for

                                       53

<PAGE>

       a significant part of the Company's financial instruments, the fair
       value of such instruments has been derived based on management's
       assumptions with respect to future economic conditions, the amount and
       timing of future cash flows and estimated discount rates. Different
       assumptions could significantly affect these estimates. Accordingly, the
       net realizable value could be materially different from the estimates
       presented below. In addition, the estimates are only indicative of
       individual financial instruments' values and should not be considered an
       indication of the fair value of the Company taken as a whole. The
       following methods and assumptions were used to estimate the fair value of
       each class of financial instrument:

       CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS IN OTHER BANKS, AND
       OVERNIGHT FUNDS SOLD

       The carrying amounts of cash and due from banks, interest bearing
       deposits in other banks and overnight funds sold are equal to the fair
       value due to the liquid 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 investment securities.

       LOANS RECEIVABLE

       For variable-rate loans that reprice frequently and with no significant
       credit risk, fair values are based on carrying values. The fair values of
       fixed rate loans are estimated by discounting the future cash flows using
       the current rates at which loans with similar terms would be made to
       borrowers with similar credit ratings and for the same remaining
       maturities. The Company has assigned no fair value to off-balance sheet
       financial instruments since they are short term in nature and subject to
       immediate repricing.

       DEPOSITS

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

       SHORT-TERM BORROWINGS

       The carrying amounts of short-term borrowings approximate fair values due
       to the fact these borrowings mature within 90 days.

       LONG-TERM BORROWINGS

       The fair value of long-term borrowings is the fair value at the last
       trade date of the respective years.

                                       54

<PAGE>

       ACCRUED INTEREST RECEIVABLE AND PAYABLE

       The carrying amount of accrued interest approximates fair value due to
       its short-term nature.

       The following table presents information for financial assets and
       liabilities as of December 31, 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                          2001                                      2000
                                           --------------------------------------    -------------------------------
                                                                   Estimated                            Estimated
                                              Carrying               fair              Carrying             fair
                                                value               value                value             value
                                           ----------------    ------------------    -------------     -------------
<S>                                      <C>                   <C>                   <C>               <C>
Financial assets:
  Cash and due from banks
   and interest bearing deposits
   in other banks                        $      74,980               74,980              62,836            62,836
  Overnight funds sold                          51,200               51,200              28,850            28,850
  Investment securities
    available for sale                          11,596               11,596               8,799             8,799
  Investment securities held
    to maturity                                125,446              126,503             142,905           142,797
  Federal Home Loan Bank of
    Atlanta stock                                2,309                2,309               2,170             2,170
  Accrued interest receivable                    5,453                5,453               5,962             5,962
  Loans, net                                   659,672              661,911             607,520           606,519

Financial liabilities:
  Deposits                               $     841,435              847,349             772,520           773,721
  Short-term borrowings                         27,073               27,073              26,642            26,642
  Long-term borrowings                          23,000               23,115              23,000            19,849
  Accrued interest payable                       6,258                6,258               6,306             6,306
</TABLE>

                                       55

<PAGE>

(14)   PARENT COMPANY FINANCIAL DATA

       The Company's principal assets are its investments in the Bank and the
       Trust. Condensed financial statements for the parent company as of
       December 31, 2001 and 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                              CONDENSED BALANCE SHEETS                                       2001           2000
                                                                                        ------------    -------------

                                       Assets

<S>                                                                                   <C>             <C>
Cash                                                                                  $      2,239    $       1,033
Investments                                                                                 11,596            8,799
Investment in subsidiaries                                                                  96,773           92,228
Other assets                                                                                 1,433            1,723
                                                                                        ------------    -------------
   Total assets                                                                       $    112,041          103,783
                                                                                        ============    =============

                           Liabilities and Shareholders' Equity

Other liabilities                                                                              154               93
Long-term borrowings                                                                        23,711           23,711
Deferred tax liability                                                                       3,146            2,466
Shareholders' equity                                                                        85,030           77,513
                                                                                        ------------    -------------
   Total liabilities and shareholders' equity                                         $    112,041    $     103,783
                                                                                        ============    =============
</TABLE>

<TABLE>
<CAPTION>
                    CONDENSED STATEMENTS OF INCOME                           2001          2000            1999
                                                                         ------------     ------------    -----------

<S>                                                                    <C>             <C>              <C>
Dividends from bank subsidiary                                         $      3,875    $       2,875    $       920
Other dividends                                                                 138              126            153
Gain on exchange of marketable equity securities                                458               --             --
Gain on sale of marketable equity securities                                     28               --             --
Interest expense on long-term borrowings                                    (2,015)          (2,015)        (1,097)
Miscellaneous expenses                                                        (160)            (169)          (109)
Income tax benefit                                                              527              691            353
                                                                         ------------     ------------    -----------
Income before equity in undistributed earnings
   of  subsidiaries                                                           2,851            1,508            220

Equity in undistributed earnings of  subsidiaries                             4,546            6,593          7,417
                                                                         ------------     ------------    -----------

   Net income                                                          $      7,397    $       8,101    $     7,637
                                                                         ============     ============    ===========
</TABLE>

                                       56

<PAGE>

<TABLE>
<CAPTION>
                    CONDENSED STATEMENTS OF CASH FLOWS                       2001              2000            1999
                                                                         ------------     -------------     -----------

<S>                                                                    <C>             <C>               <C>
Cash flows from operating activities:
 Net income                                                            $      7,397    $       8,101     $     7,637
 Equity in undistributed earnings of subsidiaries                            (4,546)          (6,593)         (7,417)
 Increase in other liabilities                                                   61              457              --
 Decrease (increase) in other assets                                            290             (617)         (1,428)
                                                                         ------------     -------------     -----------

  Net cash provided (used) by operating activities                            3,202            1,348          (1,208)
                                                                         ------------     -------------     -----------

Cash flows from investing activities:
 Capital investment in subsidiary (Trust)                                       --                --            (711)
 Capital investment in subsidiary (Bank)                                        --                --         (20,000)
 Purchase of held to maturity investments                                     (988)               --              --
                                                                         ------------     -------------     -----------

  Net cash used by investing activities                                       (988)               --         (20,711)
                                                                         ------------     -------------     -----------

Cash flows from financing activities:
 Increase in long-term borrowings                                               --                --          23,711
 Dividends paid                                                               (898)             (900)           (905)
 Purchase and retirement of common stock                                      (110)             (250)           (480)
                                                                         ------------     -------------     -----------

  Net cash (used) provided in financing activities                          (1,008)           (1,150)         22,326
                                                                         ------------     -------------     -----------

   Net increase in cash and cash equivalents                                  1,206              198             407

Cash and cash equivalents at beginning of year                                1,033              835             428
                                                                         ------------     -------------     -----------

Cash and cash equivalents at end of year                               $      2,239    $       1,033     $       835
                                                                         ============     =============     ===========

Supplemental disclosure of non-cash investing and financing
 activities:
    Unrealized gains (losses) on available for sale securities,
     net of tax effects of $679, $383 and ($694)                       $      1,128    $         667     $    (1,165)
                                                                         ============     =============     ===========
</TABLE>

(15)   RELATED PARTIES

       The Company has entered into various service contracts with another bank
       holding company and its subsidiary (the "Corporation"). The Corporation
       has two significant shareholders, who are also significant shareholders
       of the Company. At December 31, 2001, the first significant shareholder
       beneficially owned 11,155 shares, or 39.81 percent, of the Company's
       outstanding common stock. At the same date, the second significant
       shareholder beneficially owned 1,696 shares, or 6.05 percent, of the
       Company's outstanding common stock.

       These two significant shareholders are directors and executive officers
       of the Corporation and at December 31, 2001, beneficially owned 2,524,210
       shares, or 28.67 percent, and 1,421,621 shares, or 16.15 percent,
       respectively, of the Corporation's outstanding Class A common stock, and
       649,188 shares, or 38.35 percent, and 199,052 shares, or 11.76 percent,
       respectively, of the Corporation's outstanding Class B common stock. The
       above totals include 472,855 Class A common shares, or 5.37 percent, and
       104,644 Class B common shares, or 6.18 percent, 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 FCB.

                                       57

<PAGE>

       The following are expenses paid by the Company to the Corporation:

                                    2001             2000              1999
                              ---------------  ---------------  ---------------
Data and items processing   $     3,042,000        2,549,000        1,925,000
Trustee fees                         72,000           82,000           84,000
Other                               611,000          447,000        1,027,000
                              ---------------  ---------------  ---------------

                            $     3,725,000        3,078,000        3,036,000
                              ===============  ===============  ===============

       The Company also has a correspondent relationship with the Corporation.
       Correspondent account balances with the Corporation included in cash and
       due from banks and overnight funds sold totaled $41,448,498 and
       $50,450,392 at December 31, 2001 and 2000, respectively.

       BancShares is related through common ownership with Southern Bank and
       Trust Co. ("Southern") in that the aforementioned two significant
       shareholders of BancShares and certain of their related parties are also
       significant shareholders of Southern. BancShares has contracted with
       Southern to service on its behalf $6.3 million of BancShares' mortgage
       loans.

       See note 2 for a discussion of certain acquisitions of branches from FCB.

                                       58

<PAGE>

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

The following table lists BancShares' current directors and executive officers.

<TABLE>
<CAPTION>
                                    Position(s)
                                   with Fidelity        Year first                 Principal occupation and
   Name and age                    and the Bank        elected/(1)/                   business experience
---------------------            ----------------      -----------                    -------------------

<S>                              <C>                   <C>            <C>
F. Ray Allen                         Director             1992        President, Uwharrie Lumber Company, Troy, NC
    (42)                                                              (hardwood lumber manufacturer)

Haywood A. Lane, Jr.               Vice Chairman          1979        Officer and Director of Fidelity and the Bank
    (65)

D. Gary McRae                        Director             1999        President, Director, and Chief Executive
    (51)                                                              Officer, McRae Industries, Inc.; President, New
                                                                      South Realty; President, McRae Office Solutions,
                                                                      Inc.; President, Compsee, Inc.; President
                                                                      Rae-Print, Inc.; Chairman & CEO, American West
                                                                      Trading Co.; Chairman, Footwear Division;
                                                                      President & CEO American Mortgage & Investment
                                                                      Co.

Wallace H. Mitchell                  Director             1968        Retired; Partner, Mitchell Farms; former
    (74)                                                              Secretary-Treasurer and General Manager,
                                                                      Mitchell Chevrolet Company, Fuquay-Varina, NC
                                                                      (automobile dealership)

Sam C. Riddle, Jr.                   Director             1979        Owner and former President, Riddle Equipment
    (74)                                                              Company, Inc., Carthage, NC (farm equipment
                                                                      dealer)

David E. Royal                    Executive Vice          2002        Officer and Director of Fidelity and the Bank
    (48)                             President

Ernest W. Whitley, Jr.             President /(2)/        2002        Officer and Director of Fidelity and the Bank
    (54)

Billy T. Woodard                   Chairman and           1970        Officer and Director of Fidelity and the Bank
    (71)                          Chief Executive
                                      Officer
</TABLE>

/(1)/    Each individual currently serves as a director of both BancShares and
         the Bank. "First elected" indicates the year in which each individual
         first became a director of BancShares or, if before Fidelity's
         organization in 1987, a director of the Bank.
/(2)/    Mr. Whitley was elected President of Fidelity and the Bank effective
         January 1, 2002.

                                       59

<PAGE>

The following table lists BancShares' current executive officers.

<TABLE>
<CAPTION>
                                 Position(s)
                              with BancShares             First                     Business experience for
   Name and age                 and the Bank             elected                        past five years
----------------------  ---------------------------  --------------   --------------------------------------------------
<S>                     <C>                          <C>              <C>
  Billy T. Woodard        Chief Executive Officer         1970         Officer and Director of BancShares and the Bank
       (71)                 and Chairman of the
                             Board of Directors

Haywood A. Lane, Jr.       President and Director         1979         Officer and Director of BancShares and the Bank
       (65)
</TABLE>

ITEM 11 - EXECUTIVE COMPENSATION

Officer Compensation. The following table shows the cash and certain other
compensation paid to or deferred by certain executive officers of BancShares for
the years indicated. BancShares' executive officers also serve, and are
compensated, as officers of the Bank, and they receive no salaries or other
separate or additional compensation from BancShares for their services as
executive officers of BancShares.

                           SUMMARY COMPENSATION TABLE
                           --------------------------

<TABLE>
<CAPTION>
                                                                      Annual compensation
                                                    --------------------------------------
             Name and                                                                Other annual            All other
         principal position              Year        Salary/(1)/         Bonus       compensation/(2)/     compensation/(3)/
---------------------------             -----        ----------         ------       ---------------       ---------------
<S>                                     <C>          <C>                <C>          <C>                   <C>
Billy T. Woodard                         2001          $261,000           $-0-                $2,400                $7,890
Chairman and
  Chief Executive Officer

                                         2000           247,000            -0-                 2,400                 8,028


                                         1999           233,000            -0-                 2,400                 7,573

Haywood A. Lane, Jr.                     2001           218,000            -0-                 2,400                 7,975
President

                                         2000           204,000            -0-                 2,400                 7,950

                                         1999           190,000            -0-                 2,400                 7,125
</TABLE>

-------------------------------

/(1)/    Includes amounts of salary deferred at the election of each named
         officer pursuant to the Bank's Section 401(k) salary deferral plan.
/(2)/    Consists entirely of directors' fees received by each named officer.
/(3)/    Consists entirely of the Bank's contributions on behalf of each named
         officer to the Bank's Section 401(k) salary deferral plan.

POST-RETIREMENT NONCOMPETITION AND CONSULTATION AGREEMENTS

During 1986, the Bank entered into Post-Retirement Noncompetition and
Consultation Agreements with Billy T. Woodard and Haywood A. Lane, Jr. Those
Agreements, as since amended during 1996 and 1999, provide that upon the
officers' retirement from full-time employment with the Bank, they will serve as
consultants to the Bank and receive monthly payments ($8,738 for Mr. Woodard and
$7,125 for Mr. Lane) for a period of ten years. In the event of the officers'
death prior to the expiration of the ten-year payment period, remaining monthly
payments will be paid to the officers' designated beneficiaries or estates. If
the officers die prior to retirement, their designated beneficiaries or estates
will receive those payments for a period of ten years.

                                       60

<PAGE>

PENSION PLAN

The following table shows, for various numbers of years of service and levels of
compensation, the estimated annual benefits payable to a participant at normal
retirement age under the Bank's qualified defined benefit pension plan (the
"Pension Plan") based on federal tax laws currently in effect.

<TABLE>
<CAPTION>
                                                            Years of service
     Final                    ---------------------------------------------------------------------------------
   average
compensation                     10 years               20 years               30 years                40 years
------------                    ---------              ---------              ---------               ---------

<S>                             <C>                    <C>                    <C>                     <C>
   $  50,000..........                  $  6,831               $ 13,662               $ 20,494               $  26,909

      75,000..........                    11,456                 22,912                 34,369                  44,597

     100,000..........                    16,081                 32,162                 48,244                  62,284

     125,000..........                    20,706                 41,412                 62,119                  79,972

     150,000..........                    25,331                 50,662                 75,994                  97,659

     175,000..........                    29,956                 59,912                 89,869                 115,347

     200,000..........                    31,425                 62,850                 94,275                 120,964

     225,000..........                    31,425                 62,850                 94,275                 120,964

     250,000..........                    31,425                 62,850                 94,275                 120,964
</TABLE>

         Benefits shown in the table are computed as straight life annuities
beginning at age 65 and are not subject to a deduction for Social Security
benefits or any other offset amounts. Those benefits will be actuarially
increased or decreased if benefit payments begin after or before age 65. A
participant's annual compensation covered by the Pension Plan includes base
salary, bonuses, overtime pay (including amounts deferred pursuant to the Bank's
Section 401(k) salary deferral plan), and a participant's benefits are based on
his or her "final average compensation," which is the participant's highest
average covered compensation for five consecutive years during his or her last
ten complete calendar years as a Pension Plan participant. However, under
current tax laws, $170,000 is the maximum amount of annual compensation for 2001
that can be included for purposes of calculating a participant's final average
compensation, and the maximum annual benefit that may be paid to a retiring
participant is $135,000. In the case of participants who begin receiving
benefits before or after that age, the maximum benefit amount is actuarially
adjusted. The maximum years of credited service which may be counted in
calculating benefits under the Pension Plan is 40 years.

         The estimated years of service and the estimated final average
compensation as of December 31, 2001, for each of the named executive officers
in the Summary Compensation Table above are as follows: Billy T. Woodard - 40
years and $164,000; and Haywood A. Lane, Jr. - 39 years and $163,000.

Compensation of Directors. Each director of BancShares and the Bank (with the
exception to directors who also are employees) currently receives a fee of $600
for attendance at each meeting of BancShares' or the Bank's Board of Directors,
and members of the Executive Committee of the Board of Directors (with the
exception to directors who also are employees) receive a fee of $500 for
attendance at each meeting of the Committee. No fees are paid to any directors
for attendance at any other committee meetings.

Directors are reimbursed for expenses of travel to and from all meetings. Only
one fee is paid for joint meetings of the Boards of BancShares and the Bank and
for any committee meetings held on the same day as a meeting of one of the
Boards.

                                      61

<PAGE>

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Principal Shareholders. As of March 15, 2002, persons known to BancShares to own
beneficially or of record more than 5% of BancShares' voting securities were as
follows:

                                                 Amount and
                                                 nature of
              Name and address                   beneficial          Percentage
            of beneficial owner                ownership /(1)/        of class
----------------------------------------     -------------------    -----------

Frank B. Holding, Sr.                            11,155 /(2)/            39.82%
Smithfield, North Carolina

Lewis R. Holding                                  1,696 /(3)/             6.05%
Lyford Cay, Bahamas

North State Trustees (4)                          9,847/(4)/             35.15%
Charlotte, North Carolina

----------
/(1)/    Except as otherwise noted, each named  individual  exercises sole
         voting and investment  power with respect to all shares.
/(2)/    Includes 3,978 shares held by Mr. F. Holding's adult children and with
         respect to which  shares he  disclaims beneficial ownership.
/(3)/    Includes an aggregate of 1,696 shares held by or in trust for Mr. L.
         Holding's adult daughter and with respect to which shares he disclaims
         beneficial ownership. Of the listed shares, an aggregate of 1,645
         shares also are shown as beneficially owned by North State Trustees.
/(4)/    Consists of shares held by three irrevocable grantor trusts (the "1976
         Trust," the "1979 Trust," and the "1990 Trust") with respect to which
         Carmen Holding Ames currently is the sole beneficiary. Ms. Ames has
         sole power to direct the voting, and shared power (with the six
         trustees) to direct the disposition, of 345 shares held by the 1976
         Trust and the 1,300 shares held by the 1979 Trust. The written
         agreement pertaining to the 1990 Trust provides that, in connection
         with their voting of 8,202 shares held by the trust, the trustees will
         consult with the then current beneficiaries who are at least 40 years
         of age, but that the trustees will not be bound by the voting
         preference of any such beneficiary. Of the listed shares, an aggregate
         of 1,645 shares also are shown as beneficially owned by Mr. L. Holding.

Management Ownership. The beneficial ownership of BancShares' voting securities
as of March 15, 2001, by its current directors individually, and by all current
directors and executive officers as a group, was as follows:

                                                Amount and
             Name and address               nature of beneficial     Percentage
          of beneficial owner                 ownership/(1)/          of class
-----------------------------                 -------------          ---------

F. Ray Allen
Biscoe, NC................................          102 /(2)/          .36%

Haywood A. Lane, Jr.
Raleigh, NC...............................          135                .48%

D. Gary McRae
Mount Gilead, NC..........................           10                .04%

Wallace H. Mitchell
Fuquay-Varina, NC.........................          100                .36%

Sam C. Riddle, Jr.
Carthage, NC..............................           87 /(3)/          .31%

David E. Royal
Gastonia, NC .............................           42                .15%

Ernest W. Whitley, Jr.

                                      62

<PAGE>

Cary, NC .................................           69                .25%

Billy T. Woodard
Fuquay-Varina, NC.........................          522 /(4)/         1.86%

All current directors and executive
  officers as a group (6 persons).........          956               3.41%

-------------------------

/(1)/    Except as otherwise noted, to the best of our knowledge each named
         beneficial owner exercises sole voting and investment power with
         respect to all shares.
/(2)/    Includes 40 shares held by Mr. Allen jointly with his spouse and 40
         shares held by a corporation of which he may be deemed to be a control
         person, and with respect to which shares Mr. Allen may be deemed to
         exercise shared voting and investment power.
/(3)/    Includes 22 shares held by Mr. Riddle's spouse and with respect to
         which shares he may be deemed to exercise shared voting and investment
         power.
/(4)/    Includes 259 shares held by Mr. Woodard's spouse and with respect to
         which shares he may be deemed to exercise shared voting and investment
         power.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Bank has had, and expects to have in the future, banking transactions in the
ordinary course of business with certain of our and the Bank's the directors,
executive officers and principal shareholders and their associates. Loans
included in those transactions during 2001 were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and those loans did not involve
more than the normal risk of collectibility or present other unfavorable
features. See Note 4 of notes to consolidated financial statements included in
Item 8.

The Bank is party to a contract with First-Citizens Bank and Trust Company,
(FCB) pursuant to which FCB provides to the Bank and BancShares various data and
item processing services, securities portfolio management services, management
consulting services and trustee services for the Bank's pension plan and Section
401(k) plan. The Bank also purchases business forms, equipment and supplies,
together with certain other services, through FCB. Aggregate fees paid by the
Bank to FCB for all such services during 2001 totaled approximately $3.7
million. The following are fees paid by BancShares to FCB:

                                      2001            2000             1999
                                --------------- ---------------- --------------
Data and items processing     $     3,042,000      2,549,000        1,925,000
Trustee fees                           72,000         82,000           84,000
Other                                 611,000        447,000        1,027,000
                                --------------- ---------------- --------------
                              $     3,725,000      3,078,000        3,036,000
                                =============== ================ ==============

The Company also has a correspondent relationship with the FCB. Correspondent
account balances with FCB included in cash and due from banks and federal funds
sold totaled $41,448,498 and $50,450,392 at December 31, 2001 and 2000,
respectively.

The Bank's relationship with FCB under the agreement will continue during 2002.
Frank B. Holding and Lewis R. Holding, principal shareholders of BancShares, are
directors, executive officers and principal shareholders of First Citizens
BancShares, Inc., the bank holding company for FCB.

The Bank's contract with FCB was negotiated at arms-length and was approved by
BancShares' Board of Directors. Based on its comparison in previous years of the
terms of the contract with terms available to it from other providers of the
services being obtained from FCB, management of the Bank believes the terms of
its contract with FCB, including prices, are no less favorable to the Bank than
could be obtained from an unrelated provider.

BancShares is related through common ownership with Southern Bank and Trust Co.
("Southern") in that the aforementioned two significant shareholders of
BancShares and certain of their related parties are also significant
shareholders of Southern. BancShares has contracted with Southern to service on
its behalf $6.3 million of BancShares' mortgage loans.

See note 2 to BancShares' consolidated financial statements for a discussion of
certain acquisitions of branches from FCB.

                                      63

<PAGE>

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K

(a)
1.       The following consolidated financial statements of Fidelity BancShares
         (N.C.), Inc. and subsidiaries, and Independent Auditors' Report
         thereon, are included in Item 8 of this Report.

         Independent Auditors' Report
         Consolidated Balance Sheets as of December 31, 2001 and 2000
         Consolidated Statements of Income for each of the years
                  in the three year period ended December 31, 2001
         Consolidated Statements of Changes in Shareholders' Equity for each
                  of the years in the three year period ended December 31, 2001
         Consolidated Statements of Cash Flows for each of the years in the
                  three year period ended December 31, 2001
         Notes to Consolidated Financial Statements

2.       Financial statement schedules are omitted because of the absence of
         conditions under which they are required or because the required
         information is contained in the consolidated financial statements or
         related notes thereto which are included in Item 8 of this Report.

3.  Exhibits
         The following exhibits are filed or incorporated herewith as part of
         this report on Form 10-K:

3.1      BancShares' Certificate of Incorporation (incorporated herein by
         reference to Exhibit 3.1 of BancShares' Registration Statement No.
         333-62225 filed with the SEC on August 26, 1998)
3.2      BancShares'  By-laws  (incorporated  herein by reference to Exhibit 3.2
         of BancShares' Registration  Statement No. 333-62225 filed with the SEC
         on August 26, 1998)
4.1      Initial Trust Agreement of FIDBANK Capital Trust I, as amended
         (incorporated  herein by reference to Exhibit 4.1 of BancShares'
         Registration Statement No. 333-62225 filed with the SEC on August 26,
         1998)
4.2      Certificate  of Trust of FIDBANK  Capital Trust I (incorporated herein
         by reference to Exhibit 4.2 of  BancShares' Registration Statement No.
         333-62225 filed with the SEC on August 26, 1998)
4.3      Form of Amended and  Restated  Trust  Agreement  of FIDBANK  Capital
         Trust I (incorporated  herein by reference to Exhibit 4.3 of
         BancShares' Amendment No. 3 to  Registration  Statement No. 333-62225
         filed with the SEC on May 25, 1999)
4.4      Form of Capital  Security  Certificate for FIDBANK Capital Trust
         I(incorporated  herein by reference to Exhibit 4.4 of BancShares'
         Amendment No. 3 to Registration Statement No. 333-62225 filed with the
         SEC on May 25, 1999)
4.5      Form of Guarantee  Agreement  (incorporated  herein by reference to
         Exhibit 4.5 of  BancShares'  Amendment  No. 3 to Registration
         Statement No. 333-62225 filed with the SEC on May 25, 1999)
4.6      Form of Junior Subordinated Indenture between BancShares and Bankers
         Trust Company, as Debenture Trustee  (incorporated  herein by reference
         to Exhibit 4.6 of BancShares' Amendment No. 3 to Registration Statement
         No. 333-62225 filed with the SEC on May 25, 1999)
4.7      Form of Junior  Subordinated  Debenture  (incorporated  herein by
         reference to Exhibit 4.7 of BancShares' Amendment No. 3 to Registration
         Statement No. 333-62225 filed with the SEC on May 25, 1999)
*10.1    Employee Death Benefit and Post-Retirement Noncompetition and
         Consultation Agreement between Billy T. Woodard and The Fidelity  Bank
         (incorporated  by  reference  to Exhibit 10.1 of  BancShares'
         Registration Statement No. 333-62225 filed with the SEC on August 26,
         1998)
*10.2    First Amendment to Employee Death Benefit and Post-Retirement
         Noncompetition and Consultation  Agreement between Billy T. Woodard and
         The Fidelity Bank (incorporated by reference to Exhibit 10.2 of
         BancShares' Registration Statement No. 333-62225 filed with the SEC on
         August 26,1998)
*10.3    Employee Death Benefit and Post-Retirement Noncompetition and
         Consultation Agreement between  Haywood A. Lane, Jr., and The Fidelity
         Bank (incorporated by reference to Exhibit 10.3 of BancShares'
         Registration Statement No. 333-62225 filed with the SEC on August 26,
         1998)
*10.4    First Amendment to Employee Death Benefit and Post-Retirement
         Noncompetition and Consultation Agreement  between  Haywood A. Lane,
         Jr.,  and The  Fidelity  Bank  (incorporated  by  reference to Exhibit
        10.4 of BancShares' Registration Statement No. 333-62225 filed with the
        SEC on August 26, 1998)
*10.6    Second Amendment to Employee Death Benefit and  Post-Retirement
         Noncompetition  and Consultation  Agreement between Billy T. Woodard
         and The Fidelity Bank (incorporated by reference to Exhibit 10.6 of
         BancShares'  Amendment No. 2 to Registration Statement No. 333-62225
         filed with the SEC on April 23, 1999)
*10.7    Second Amendment to Employee Death Benefit and Post-Retirement
         Noncompetition and Consultation Agreement  between  Haywood A. Lane,
         Jr.,  and The  Fidelity  Bank  (incorporated  by  reference to Exhibit
         10.7 of BancShares' Amendment No. 2 to Registration Statement No.
         333-62225 filed with the SEC on April 23, 1999)
21.1     List of subsidiaries  (incorporated  herein by reference to Exhibit
         21.1 of BancShares'  Registration  Statement No. 333-62225 filed with
         the SEC on August 26, 1998)
----------

*   Denotes a management contract or compensatory contract or arrangement.

(b) Reports on Form 8-K.  During the fourth quarter of 2001 BancShares filed
    no Form 8-K Current Reports.
----------

                                      64

<PAGE>

                                                              SIGNATURES

     In accordance with 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.

                                        FIDELITY BANCSHARES (N.C.), INC.

Dated:  March 28, 2002                  By: /s/ Billy T. Woodard
                                            ------------------------------------
                                            Billy T. Woodard
                                            Chairman and Chief Executive Officer

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         Signature                                 Title                             Date
-----------------------------       -------------------------------------       --------------
<S>                                 <C>                                         <C>
/s/ Billy T. Woodard
-----------------------------       Chairman and Chief Executive Officer        March 28, 2002
Billy T. Woodard                    (principal executive officer)


/s/ Mary W. Willis
-----------------------------       Chief Financial Officer and Treasurer       March 28, 2002
Mary W. Willis                      (principal financial and accounting
                                    Officer)

/s/ Haywood A. Lane, Jr.
-----------------------------       Vice Chairman and Director                  March 28, 2002
Haywood A. Lane, Jr.


/s/ Ernest W. Whitley
-----------------------------       President and Director                      March 28, 2002
Ernest W. Whitley


/s/ David E. Royal
-----------------------------       Executive Vice President and Director       March 28, 2002
David E. Royal


/s/ F. Ray Allen
-----------------------------       Director                                    March 28, 2002
F. Ray Allen


/s/ D. Gary McRae
-----------------------------       Director                                    March 28, 2002
D. Gary McRae


Wallace H. Mitchell
-----------------------------       Director                                    March 28, 2002
Wallace H. Mitchell


Sam C. Riddle, Jr.
-----------------------------       Director                                    March 28, 2002
Sam C. Riddle, Jr.
</TABLE>

                                       65





<PAGE>

                                  EXHIBIT INDEX

3.1      BancShares' Certificate of Incorporation (incorporated herein by
         reference to Exhibit 3.1 of BancShares' Registration Statement No.
         333-62225 filed with the SEC on August 26, 1998)

3.2      BancShares' By-laws (incorporated herein by reference to Exhibit 3.2 of
         BancShares' Registration Statement No. 333-62225 filed with the SEC on
         August 26, 1998)

4.1      Initial Trust Agreement of FIDBANK Capital Trust I, as amended
         (incorporated herein by reference to Exhibit 4.1 of BancShares'
         Registration Statement No. 333-62225 filed with the SEC on August 26,
         1998)

4.2      Certificate of Trust of FIDBANK Capital Trust I (incorporated herein by
         reference to Exhibit 4.2 of BancShares' Registration Statement No.
         333-62225 filed with the SEC on August 26, 1998)

4.3      Form of Amended and Restated Trust Agreement of FIDBANK Capital Trust I
         (incorporated herein by reference to Exhibit 4.3 of BancShares'
         Amendment No. 3 to Registration Statement No. 333-62225 filed with the
         SEC on May 25, 1999)

4.4      Form of Capital Security Certificate for FIDBANK Capital Trust I
         (incorporated herein by reference to Exhibit 4.4 of BancShares'
         Amendment No. 3 to Registration Statement No. 333-62225 filed with the
         SEC on May 25, 1999)

4.5      Form of Guarantee Agreement (incorporated herein by reference to
         Exhibit 4.5 of BancShares' Amendment No. 3 to Registration Statement
         No. 333-62225 filed with the SEC on May 25, 1999)

4.6      Form of Junior Subordinated Indenture between BancShares and Bankers
         Trust Company, as Debenture Trustee (incorporated herein by reference
         to Exhibit 4.6 of BancShares' Amendment No. 3 to Registration Statement
         No. 333-62225 filed with the SEC on May 25, 1999)

4.7      Form of Junior Subordinated Debenture (incorporated herein by reference
         to Exhibit 4.7 of BancShares' Amendment No. 3 to Registration Statement
         No. 333-62225 filed with the SEC on May 25, 1999)

*10.1    Employee Death Benefit and Post-Retirement Noncompetition and
         Consultation Agreement between Billy T. Woodard and The Fidelity Bank
         (incorporated by reference to Exhibit 10.1 of BancShares' Registration
         Statement No. 333-62225 filed with the SEC on August 26, 1998)

*10.2    First Amendment to Employee Death Benefit and Post-Retirement
         Noncompetition and Consultation Agreement between Billy T. Woodard and
         The Fidelity Bank (incorporated by reference to Exhibit 10.2 of
         BancShares' Registration Statement No. 333-62225 filed with the SEC on
         August 26, 1998)


*10.3    Employee Death Benefit and Post-Retirement Noncompetition and
         Consultation Agreement between Haywood A. Lane, Jr., and The Fidelity
         Bank (incorporated by reference to Exhibit 10.3 of BancShares'
         Registration Statement No. 333-62225 filed with the SEC on August 26,
         1998)

*10.4    First Amendment to Employee Death Benefit and Post-Retirement
         Noncompetition and Consultation Agreement between Haywood A. Lane, Jr.,
         and The Fidelity Bank (incorporated by reference to Exhibit 10.4 of
         BancShares' Registration Statement No. 333-62225 filed with the SEC on
         August 26, 1998)

*10.6    Second Amendment to Employee Death Benefit and Post-Retirement
         Noncompetition and Consultation Agreement between Billy T. Woodard and
         The Fidelity Bank (incorporated by reference to Exhibit 10.6 of
         BancShares' Amendment No. 2 to Registration Statement No. 333-62225
         filed with the SEC on April 23, 1999)

*10.7    Second Amendment to Employee Death Benefit and Post-Retirement
         Noncompetition and Consultation Agreement between Haywood A. Lane, Jr.,
         and The Fidelity Bank (incorporated by reference to Exhibit 10.7 of
         BancShares' Amendment No. 2 to Registration Statement No. 333-62225
         filed with the SEC on April 23, 1999)

21.1     List of subsidiaries (incorporated herein by reference to Exhibit 21.1
         of BancShares' Registration Statement No. 333-62225 filed with the SEC
         on August 26, 1998)

----------

* Denotes a management contract or compensatory contract or arrangement.

----------

                                       66