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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM
10-K

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Annual Report Pursuant to Section 13 or 15(d) ofThe Securities Exchange Act
of 1934

For the year ended December 31, 2002

Commission
File Number: 001-15089

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Fidelity BancShares (N.C.), Inc.

(Exact name of Registrant as specified in its charter)

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

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

(919) 552-2242(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 I8.50% 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 o

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrants most recently completed second fiscal quarter was $24,235,000. (There is no established
market, published quotes or reported prices for the Registrants common equity. The market value of shares held by non-affiliates has been calculated based on prices known to management of the Registrant in privately negotiated
transactions.)

Common Stock - $25 Par Value, - 28,011 shares(Number of shares outstanding, by class, as of March 24,
2003)

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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. 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. The proceeds from that sale, together with the proceeds from the Trusts sale of all its common securities to BancShares, were used to purchase an aggregate of $23.7 million in junior subordinated debentures issued by BancShares. The
debentures call for interest payable quarterly at an annual rate 8.50%, with principal payable in full in 2029. Subject to certain limitations, BancShares has fully and unconditionally guaranteed the Trusts obligations under the Capital
Securities.

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.)

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 62 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. Additionally, during 1999, 2000 and 2001, the Bank opened 22de novobranch 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.



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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 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, 2002, the Bank employed 392 full-time employees and 22 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, 2002 the Bank maintained 62 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.



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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

There is no established trading market, published quotes or reported prices for BancShares common stock.
All sales of the stock are in privately negotiated transactions between individual holders. On March 14, 2003, there were 125 record holders of BancShares common stock.

The per share cash dividends paid by BancShares during each quarterly period during 2002 and 2001 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 27, 2003, payable March 31, 2003, to holders of record as of March 1, 2003. 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, 2002, 2001, 2000, 1999 and 1998. The data has been derived from BancShares audited consolidated financial statements. The consolidated financial statements as of December 31, 2002 and 2001 and for each of the years in the three year period
ended December 31, 2002, 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





|                                                    |  | As of and for the year ended December 31,                |       
|--------------------------------------------------- |  | -------------------------------------------------------- | ------
|                                                    |  |                                                          |       
|                                                    |  | 2002                                                     |       
|                                                    |  |                                                          |       
|                                                    |  | (Dollars in thousands, except per share data and ratios) |       
|Summary of Operations                               |  |                                                          |       
|Interest income                                     |  | $                                                        | 55,728
|Interest expense                                    |  | 18,840                                                   |       
|                                                    |  |                                                          |       
|Net interest income                                 |  | 36,888                                                   |       
|Provision for loan losses                           |  | 3,225                                                    |       
|                                                    |  |                                                          |       
|Net interest income after provision for loan losses |  | 33,663                                                   |       
|Noninterest income                                  |  | 10,433                                                   |       
|Noninterest expense                                 |  | 31,138                                                   |       
|                                                    |  |                                                          |       
|Net income before income taxes                      |  | 12,958                                                   |       
|Income taxes                                        |  |                                                          | 4,768 
|                                                    |  |                                                          |       



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|Net income                                                            |  | $        | 8,190     |          | $ | 7,397    |   | $        | 8,101   |          | $ | 7,637   |  | $ | 7,649   | 
|--------------------------------------------------------------------- |  | -------- | --------- | -------- | - | -------- | - | -------- | ------- | -------- | - | ------- |  | - | ------- | 
|                                                                      |  |          |           |          |   |          |   |          |         |          |   |         |  |   |         | 
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|Selected Period-End Balances                                          |  |          |           |          |   |          |   |          |         |          |  
|Total assets                                                          |  | $        | 1,012,724 |          | $ | 984,719  |   | $        | 907,670 |          | $ | 839,088 |  | $ | 694,134 | 
|Investment securities and overnight funds sold                        |  | 156,398  |           | 188,242  |   | 180,554  |   | 165,356  |         | 186,804  |  
|Loans, gross                                                          |  | 729,101  |           | 668,984  |   | 614,817  |   | 551,148  |         | 439,208  |  
|Interest earning assets                                               |  | 920,074  |           | 887,998  |   | 824,720  |   | 759,311  |         | 627,874  |  
|Deposits                                                              |  | 869,333  |           | 841,435  |   | 772,520  |   | 716,014  |         | 609,646  |  
|Long-term obligations                                                 |  | 23,000   |           | 23,000   |   | 23,000   |   | 23,000   |         |         |  
|Interest bearing liabilities                                          |  | 757,991  |           | 750,543  |   | 711,971  |   | 658,212  |         | 533,380  |  
|Shareholders equity                                                  |  | 92,336   |           | 85,030   |   | 77,513   |   | 69,895   |         | 64,808   |  
|Common shares outstanding                                             |  | 28,011   |           | 28,026   |   | 28,070   |   | 28,170   |         | 28,410   |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|Selected Average Balances                                             |  |          |           |          |   |          |   |          |         |          |  
|Total assets                                                          |  | $        | 984,319   |          | $ | 949,158  |   | $        | 853,293 |          | $ | 753,286 |  | $ | 610,306 | 
|Investment securities and overnight funds sold                        |  | 171,720  |           | 190,488  |   | 171,074  |   | 166,835  |         | 156,254  |  
|Loans, gross                                                          |  | 703,631  |           | 637,682  |   | 587,468  |   | 493,023  |         | 390,162  |  
|Interest earning assets                                               |  | 902,177  |           | 864,572  |   | 774,422  |   | 686,557  |         | 559,348  |  
|Deposits                                                              |  | 843,162  |           | 808,227  |   | 726,126  |   | 647,566  |         | 528,672  |  
|Long-term obligations                                                 |  | 23,000   |           | 23,000   |   | 23,000   |   | 12,603   |         |         |  
|Interest bearing liabilities                                          |  | 743,419  |           | 731,661  |   | 664,215  |   | 584,675  |         | 465,999  |  
|Shareholders equity                                                  |  | 89,360   |           | 82,263   |   | 73,577   |   | 66,804   |         | 61,870   |  
|Common shares outstanding                                             |  | 28,014   |           | 28,049   |   | 28,132   |   | 28,279   |         | 28,410   |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|Profitability Ratios                                                  |  |          |           |          |   |          |   |          |         |          |  
|Return on average total assets                                        |  | 0.83     | %         | 0.78     | % | 0.95     | % | 1.01     | %       | 1.25     | %
|Return on average shareholders equity                                |  | 9.16     |           | 8.99     |   | 11.01    |   | 11.43    |         | 12.36    |  
|Dividend payout ratio (1)                                             |  | 10.95    |           | 12.13    |   | 11.11    |   | 11.85    |         | 11.88    |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|Liquidity and Capital Ratios                                          |  |          |           |          |   |          |   |          |         |          |  
|Average loans to average deposits                                     |  | 83.45    | %         | 78.90    | % | 80.90    | % | 76.13    | %       | 73.80    | %
|Average shareholders equity to average total assets                  |  | 9.08     |           | 8.67     |   | 8.62     |   | 8.87     |         | 10.14    |  
|Tier 1 capital ratio (2)                                              |  | 12.52    |           | 12.19    |   | 11.87    |   | 12.06    |         | 10.30    |  
|Total capital ratio (2)                                               |  | 14.26    |           | 13.95    |   | 13.29    |   | 13.34    |         | 11.87    |  
|Leverage capital ratio (2)                                            |  | 9.46     |           | 8.99     |   | 9.72     |   | 9.12     |         | 7.65     |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|Per Share of Common Stock                                             |  |          |           |          |   |          |   |          |         |          |  
|Net income (3)                                                        |  | $        | 292.34    |          | $ | 263.71   |   | $        | 287.97  |          | $ | 270.05  |  | $ | 269.25  | 
|Cash dividends                                                        |  | 32.00    |           | 32.00    |   | 32.00    |   | 32.00    |         | 32.00    |  
|Book value (4)                                                        |  | 3,296.41 |           | 3,033.98 |   | 2,761.41 |   | 2,481.17 |         | 2,281.17 |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  
|Asset Quality Ratios                                                  |  |          |           |          |   |          |   |          |         |          |  
|Nonperforming assets to total gross loans and other real estate owned |  | 0.13     | %         | 0.00     | % | 0.01     | % | 0.02     | %       | 0.03     | %
|Net charge-offs to average loans                                      |  | 0.10     |           | 0.15     |   | 0.08     |   | 0.19     |         | 0.04     |  
|Total allowance for loan losses to total loans                        |  | 1.62     |           | 1.39     |   | 1.19     |   | 0.93     |         | 1.05     |  
|                                                                      |  |          |           |          |   |          |   |          |         |          |  

(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.



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(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 2002, 2001, and
2000. 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.

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, seeASSET QUALITY.

Acquisitions

On February 11, 2003 the Company entered into an agreement to purchase four branches from First Citizens
Bank & Trust Company, a related party (see Note 16 to the consolidated financial statements). Assets and deposits to be acquired are $30,687,000 and $116,158,000, respectively. An intangible asset of approximately $9,216,000 would result from
this purchase. This purchase is subject to applicable regulatory approval. The purchase is expected to close in the second quarter of 2003.

2002
Acquisitions.BancShares made no acquisitions during 2002. There were no de novo branches opened in 2002.

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)          |  |               |                 |     |               |        |                  |       
|------------------------------- |  | ------------- | --------------- | --- | ------------- | ------ | ---------------- | ------
|Acquisitions                    |  |               | TransactionDate |     | LoansAcquired |        | DepositsAcquired |       
|                                |  |               |                 |     |               |        |                  |       
|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  |                  | $     
|                                |  |               |                 |     |               |        |                  |       



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There were three de novo branch openings in 2001.

2000
Acquisitions.BancShares made no acquisitions during 2000. There were three de novo branch openings in 2000.

Results of Operations

Net Income. For 2002, net income of $8.2 million represented a 10.72% increase from 2001 net income of $7.4 million. BancShares experienced an
increase in noninterest income during 2002 due to an increased volume of service charges. In addition, there was a decrease in noninterest expense. Noninterest expense decreased due to an impairment loss of $471,000 on the closing of 2 branch
offices in 2001 compared to an impairment loss of $143,000 in 2002 from the closing of one branch. Also, in 2001, amortization of goodwill was $1,489,000 compared with $308,000 in 2002. In addition, noninterest expense was favorably impacted by a
decrease in other noninterest expense due to lower consulting, legal and other professional fees in 2002.

Net income of $7.4 million in 2001 represented an
8.7% decrease from 2000 net income of $8.1 million. BancShares experienced a strong increase in noninterest income during 2001, which was hampered by an increase in noninterest expense due to increased consulting, legal, and other professional fees.

Net income per share for 2002 was $292.34 compared to $263.71 for 2001; the increase is attributable to increased earnings, as well as decreased average
shares outstanding due to the repurchase by BancShares of 15 shares of common stock.

Net income per share was $24.26 less in 2001 than the $287.97 recognized
for 2000. The decrease in net income per share during 2001 was attributable to decreased earnings, slightly offset by decreased average shares outstanding due to BancShares repurchase of 44 shares of common stock during 2001.

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
2002, 2001, and 2000. The average prime rate, as set by the Federal Reserve, was 4.67%, 6.91% and 9.23%, for the years ended December 31, 2002, 2001, and 2000, respectively.

In 2002, net interest income was $36.9 million compared to $36.6 million in 2001, an increase of $246,000 or 0.67%. 2001 net interest income was $68,000 or .19% greater than 2000 net interest income of $36.6 million. In
2002 and 2001 the amount of increase in net interest income was very small due to the low interest rates in 2002 and the Federal Reserve reducing interest rates eleven times in 2001. Because 60.0% of BancShares loans are tied to prime, the
decline in interest rates has reduced interest income. The increase in net interest income in 2002 and 2001 was attributable to decreased interest expense on deposits and short-term borrowings. In 2002, interest income declined $10.4 million or
15.76% compared to that of 2001. During 2001 interest income declined $892,000 or 1.33% compared to $11.7 million or 21.1% in 2000. Interest expense decreased $10.7 million or 36.2% in year 2002. Interest expense was $18.8 million in 2002, $29.5
million in 2001 and $30.5 million in 2000. In 2002 the bank experienced higher volumes of interest bearing liabilities, but dramatic decreases in interest rates contributed to the lower interest expense. The decrease in interest expense in 2001 was
also due to interest rate decreases eleven times during the year, although there were higher volumes of interest bearing liabilities. In 2000, the increase was attributable to higher volumes of interest bearing liabilities and the increasing rate
environment. The rates paid on interest bearing liabilities were 2.53%, 4.03%, and 4.59% in 2002, 2001, and 2000, respectively.

Loans produced the largest
component of interest income, amounting to $50.8 million in 2002, $56.1 million in 2001, and $56.4 million in 2000. This represented a decrease of $5.3 million or 9.39% in 2002 and a decrease of $369,000 or .65% in 2001. During 2002 and 2001,
average loans outstanding increased $65.9 million or 10.34% and $50.2 million or 8.55%, respectively. In both years, loan growth within the existing branches andde novobranch openings contributed to
the increase in average loans. Average yields on loans during 2002, 2001 and 2000 were 7.23%, 8.81%, and 9.63% respectively. The decrease in the 2002 average yield was due to a lower average prime rate during 2002 compared to 2001.



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Likewise, the decrease in the 2001 average yield on loans was due to the decrease in the average
prime rate during 2001 compared to 2000.

Earnings from investments and overnight funds sold provided the remainder of interest income, contributing $4.9
million in 2002, $10.1 million in 2001, and $10.6 million in 2000. Average balances and yields on these securities are shown in Table I. Average interest bearing cash balances during 2002 and 2001 were $24.4 and $34.1 million, which earned an
average rate of 1.58% and 3.86%, respectively.

As noted above, total 2002 interest expense decreased 36.17% below that of 2001, which decreased 3.15%
compared to 2000. The principal component of BancShares interest expense is interest paid on deposits, which totaled $16.6 million in 2002, $26.8 million in 2001, and $27.5 million in 2000. Average interest bearing deposit balances for 2002,
2001, and 2000, were $698.6 million, $683.2 million, and $618.6 million, respectively. This represents an increase of 2.3% in 2002 and 10.4% in 2001 over the prior years due tode novobranch openings
and growth within the existing branch network. Additionally, the growth during 2001 was partially attributable to the acquisition of branches. Included in the interest expense is interest expense of $2.0 million resulting from the $23.0 million
Capital Trust Securities issued by the Trust during 1999 (see note 9 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 2002 and 2001 was $23 million. The average rate paid on the obligations was 8.50% in 2002 and 2001.

BancShares interest rate spread was 3.65%, 3.63%, and 4.09% on a tax equivalent basis in 2002, 2001, and 2000, 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 $3.2 million, $3.0 million and $2.6 million in 2002, 2001, and 2000, respectively. The
provision for loan losses increased primarily due to increased loan balances, increased bankruptcies and the impact of a declining economy as well as growth within the existing branch network. In addition, in 2002 the provision was increased due to
the credit review of some large loan relationships which revealed increased delinquencies and bankruptcy filings and deterioration in credit quality and thus the credit score was changed and an increased provision was needed. Also, the credit card
portfolio was reviewed through Equifax for credit scoring and it was determined that a higher reserve percentage was needed. As noted above, average loans grew $65.9 million or 10.34% in 2002 compared to $50.2 million or 8.55% in 2001. During 2002
and 2001, BancShares noted a softening in its market area, with increases in unemployment and increases in bankruptcies. In addition, many of BancShares loan originations occurred in new markets through de novo branches where management
concluded there is greater risk that loan underwriting quality may not be up to BancShares standards as in existing markets. These conditions contributed to the increase in the provision for loan losses 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 $483,000 in 2002 over 2001 and increased $2.8 million in 2001 compared to
2000. Total noninterest income was $10.4 million in 2002, $9.9 million in 2001, and $7.2 million in 2000. The increase in 2002 in noninterest income is attributable to growth in fee-earning transaction accounts, increased volume of 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 which was introduced in 2000, and increased volume
of NSF fees. A loss on marketable equity securities offset some of the increase in noninterest income in 2002. The 2001 increase in noninterest income compared to 2000 is also attributable to growth in deposit accounts, a new overdraft checking
product which was introduced in 2000, and increased NSF fee income as well as a gain on exchange and subsequent sale of a marketable equity security in 2001.

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 $31.1 million in 2002, $31.9 million in 2001, and $28.4 million in 2000. Control of noninterest expense is an important aspect in managing net income.
Acquisition



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of branches during 2001 and 1999 should enhance future operating results of BancShares; however,
earnings were reduced in 2001 and 2000 as BancShares amortized intangibles resulting from these acquisitions.

The most significant element of BancShares
noninterest expense is personnel costs. Salaries and benefits represented 57.0%, 52.5%, and 53.7%, of total noninterest expense during 2002, 2001, and 2000, respectively. Salaries and benefits increased by $986,000 or 5.89% in 2002 and $1.5 million
or 9.86% in 2001. The primary causes of these increases are the opening of threede novobranches and the acquisition of three branches in 2001, as well as the opening of threede
novobranches in 2000.

Occupancy and equipment expenses increased from $4.8 million in 2000 to $5.0 million in 2001 and remained at
$5.0 million in 2002. The increase of $191,000 in 2001 was attributable to acquired branches and thede novobranch openings noted above, of which there were none in 2002.

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 $3.2 million, $3.0 million, and $2.5 million in 2002, 2001, and 2000, respectively. These increases were due to the addition of acquired andde novobranches as well
as growth in the loan and deposit base in the existing branch network, as noted above. As discussed in note 16 to the consolidated financial statements, BancShares data processing services are provided by a related party. SeeRELATED PARTY TRANSACTIONS.

Amortization of intangibles during 2002 decreased $1.2 million to $308,000 compared to $1.5 million
for 2001. Amortization of intangibles was $1.1 million in 2000. The increase in amortization of intangibles during 2001 was attributable to the acquisition of three branches in the first quarter of 2001. Intangibles from this acquisition amounted to
$6.0 million (see notes 2 to BancShares consolidated financial statements). In 2002, the decrease in amortization of intangibles was related to the adoption of SFAS No. 147 (see Note 1 (o), New Accounting Standards) which resulted in
BancShares discontinuing amortization of a significant portion of its intangible assets.

During 2002, BancShares analyzed the operations of one branch since
its inception in 1999 and determined that the loss experience would not turn around in the near future. The Board of Directors of BancShares approved to close this branch and at June 30, 2002, BancShares has accrued disposition costs which include
$103,000 for losses on fixed assets, $20,000 for lease cancellation fees, and $20,000 for costs to close the branch. During the third quarter of 2002, BancShares closed the branch with no material adjustments being made to the accrued impairment
costs. During 2001, BancShares analyzed the results of operations of two branches through the first three months of 2001 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 $470,740 to reduce the carrying value of these branches to fair value.

Other miscellaneous operating expenses were $4.8 million, $5.3 million, and $4.7 million in 2002, 2001, and 2000, respectively. The decrease in 2002 was mainly the result of decreased consulting fees as well as decreased legal and
professional fees in 2002 as there were no acquisitions in the current year. The increase in 2001 was 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 novobranch openings and growth within the existing branch network.

Income Taxes. In 2002, 2001, and 2000, BancShares had taxable income for book purposes that resulted in income tax expense of $4.8 million, $4.3 million, and $4.6 million, respectively. The resulting effective income
tax rates for the years ended December 31, 2002, 2001, and 2000 were 36.8%, 36.6%, and 36.3%, 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
2002 were $902.2 million, an increase of $37.6 million or 4.35% over 2001s interest earning assets of $864.6 million. During 2001, average interest earning assets increased $90.2 million or 11.64% from the 2000 average of $774.4 million.
Increases during both years resulted fromde novobranch openings and growth within the existing branch network. Further, in 2001, growth in average balances was partially attributable to the 2001
acquisition of branches noted above.



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Average noninterest earning assets during 2002 were $82.1
million compared to $84.6 million in 2001, a decrease of 2.89%. During 2001, an increase of $5.7 million or 7.25% occurred compared to the 2000 average of $78.9 million. The 2002 decrease was primarily due to decreased intangible assets and
decreased accrued interest receivable. The 2001 increase was primarily due to increases in cash, fixed assets and intangible assets resulting from the acquired branches orde novobranch openings. The
average balances of noninterest earning assets are shown in Table I.

Return on average total assets for 2002 was 0.83%, compared to 0.78% and 0.95% in 2001
and 2000, respectively. The increase for 2002 was the result of increased earnings due to increased fee income and decreased amortization of intangibles. 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 an impairment loss on closing 2 in-store branches. Changes in the composition of average balances are shown in
Table I and Table II.

Return on average equity for 2002 was 9.16%, compared to 8.99% and 11.01% in 2001 and 2000, respectively. In 2002, the increase was due to increased
earnings and was offset by increased average equity. In 2001, the decline was due to decreased earnings coupled with increased average equity due to 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 2002 were $743.4 million, an increase of 1.6% from the 2001 average of $731.7 million, which was 10.2% higher than that of 2000, $664.2 million. BancShares principal interest bearing
liabilities are interest bearing deposits. Interest bearing deposits represented $698.7 million, $683.2 million, and $618.6 million of average interest bearing liabilities in 2002, 2001, and 2000, respectively. Short-term borrowings and long-term
borrowings represent the remaining balances. The cost of total interest bearing liabilities was 2.53%, 4.03%, and 4.59% in 2002, 2001, and 2000, respectively.

Average noninterest bearing liabilities during 2002 were $151.5 million, an increase of $16.3 million or 12.1% over the 2001 average of $135.2 million. During 2001, the average noninterest bearing liabilities increased $19.7 million or 17.08%
over the 2000 average of $115.5 million. Noninterest bearing demand deposits are the principal noninterest bearing liability. Increases in noninterest bearing demand deposit balances are attributable to acquired branches,de
novobranch openings and expansion within the existing branch network. See Table I.

Loans. As of December
31, 2002, loans, net of the allowance for loan losses, totaled $717.3 million compared to $659.7 million and $607.5 million at year-end 2001 and 2000, respectively. The increase was attributable to normal loan growth from the existing branch network
andde novobranch openings in 2001 and 2000 as well as decreased interest rates in 2002. 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. Commercial real estate secured loans have increased from the prior year. Due to the weakening economy,
the Bank is seeking sounder collateral such as real estate instead of accounts receivable or equipment which is also leading to the decrease in commercial and industrial non-real estate secured loans. The Bank feels the commercial real estate as
collateral has less credit risk. With the furniture and textile manufacturing in a downturn, there has been less equipment financing and more real estate secured loans. In addition, the Bank has refinanced some real estate credit from other
institutions and made some non-owner occupied loans such as for hotels as they feel this is safer collateral.

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 2002, 68.2% of the loan portfolio was due to mature or
would be available for interest rate repricing in 2003. See Table IX.

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





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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, 2002, 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 $4.9 million for the net unrealized gain related to these available for sale securities. 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. BancShares does not maintain a trading account.

BancShares routinely reviews its
investment securities to identify any declines in market value that are considered other than temporary. This process involves obtaining a current understanding of the overall financial condition of the issuer and the reasons for any deterioration
in value, reviewing the length of time the fair value has been below cost, and considering the degree to which fair value is below cost. To the extent management concludes that declines in fair values of investment securities are other than
temporary, BancShares records a charge to earnings and reduces the cost basis of the investment security. During 2002, BancShares recorded other than temporary impairment losses of $96,487 and recorded no such losses during 2001 or 2000. There can
be no assurance that additional other than temporary impairment losses will not occur in future periods.

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, 2002 and 2001, outstanding financial instruments whose contract amounts represent credit risk were as follows:



|                                                                    |  | 2002 |             | 2001 | 
|------------------------------------------------------------------- |  | ---- | ----------- | ---- | 
|                                                                    |  |      |             |      | 
|                                                                    |  |      |             |      | 
|Outstanding commitments to lend, unfunded loans and lines of credit |  | $    | 231,232,246 |      | 
|                                                                    |  |      |             |      | 
|                                                                    |  |      |             |      | 
|Standby letters of credit                                           |  | $    | 3,781,003   |      | 
|                                                                    |  |      |             |      | 

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.



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BancShares and the Bank are defendants in certain claims and legal actions
arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated operations, liquidity or
financial position of BancShares or the Bank.

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. BancShares customers are generally impacted by local and national economic conditions, as increases in unemployment levels, bankruptcy filings, and other key economic
factors can directly or indirectly impact their ability to perform in accordance with the loan terms. In 2002, BancShares charged-off loans net of recoveries of $699,000. This represents a decrease of $286,000 from 2001 net charge-offs of $985,000.
The 2001 net charge-offs of $985,000 were an increase of $516,000 from 2000 net charge-offs of $469,000. This increase is partially attributable to the impact of a decline in economic conditions in BancShares market areas. The percentage of
charge-offs (net of recoveries) to average outstanding loans was 0.10% in 2002, 0.15% in 2001, and 0.08% in 2000. See Table V.

The ratio of total
non-performing assets to total loans plus other real estate was 0.13% and 0.00% at December 31, 2002 and 2001, respectively. Assets classified as other real estate were $220,000 and $15,000 at December 31, 2002 and 2001, 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.

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, 2002 the
Bank had $724,000 of impaired loans, all of which were on nonaccrual status. At December 31, 2001, the Bank did not have any nonaccrual loans, nor did the Bank have any restructured or impaired loans. At December 31, 2002 and 2001, the bank had
$424,000 and $625,000 accruing loans 90 days or more past due.

The allowance for loan losses represented 1.62% and 1.39% of loans outstanding at year end
2002 and 2001, respectively. The allowance for loan losses increased primarily due to increased loan balances, increased bankruptcies and the impact of a declining economy as well as growth within the existing branch network. In addition, in 2002
the provision was increased due to the credit review of some large loan relationships which revealed increased delinquencies and bankruptcy filings and thus the credit score was changed and an increased provision was needed. Also, the credit card
portfolio was reviewed through Equifax for credit scoring and it was determined that a higher reserve percentage was needed. During 2002 and 2001, BancShares noted a softening in its market area, with increases in unemployment and increases in
bankruptcies. These conditions contributed to the increase in the provision for loan losses 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. This increased allocation contributed to the increase in the percentage of allowance for loan losses to total loans from 1.39% at December 31, 2001 to 1.62% at December 31, 2002. The
Banks provision for loan losses charged against earnings was $3,225,000, $3,000,000, and $2,625,000, in 2002, 2001, and 2000, respectively. The increase in the provision for loan losses in 2002 and 2001 was primarily attributable to loan
growth in both years, and the origination of loans in acquired branches during 2001, as well as





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the impact of the matters discussed above. In addition, many of BancShares loan originations occurred in new markets through de novo branches where
management concluded there is greater risk that loan underwriting quality may not be up to BancShares standards as in existing markets.

Management
considers the December 31, 2002 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.

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 BancShares. At December 31, 2002, the first significant shareholder beneficially owned 11,155 shares, or 39.82 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, 2002, beneficially owned 2,529,519 shares, or 28.61 percent, and 1,384,121 shares, or 15.74 percent, respectively, of the Corporations
outstanding Class A common stock, and 650,958 shares, or 38.73 percent, and 199,052 shares, or 11.81 percent, respectively, of the Corporations outstanding Class B common stock. The above totals include 472,855 Class A common shares, or 5.38
percent, and 104,644 Class B common shares, or 6.23 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.

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:



|                          |  | 2002    |           | 2001    |           | 2000      |          
|------------------------- |  | ------- | --------- | ------- | --------- | --------- | ---------
|                          |  |         |           |         |           |           |          
|                          |  |         |           |         |           |           |          
|Data and items processing |  | $       | 3,245,000 |         | 3,042,000 |           | 2,549,000
|Trustee fees              |  | 60,000  |           | 72,000  |           | 82,000    |          
|Other                     |  | 283,000 |           | 611,000 |           | 447,000   |          
|                          |  |         |           |         |           |           |          
|                          |  |         |           |         |           |           |          
|                          |  | $       | 3,588,000 |         |           | 3,725,000 |          
|                          |  |         |           |         |           |           |          



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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 $38,454,633 and $41,448,498 at December 31, 2002 and 2001, 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 $4.1 million of BancShares mortgage loans.

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 17.97% of deposits at December 31, 2002, a decrease from 22.19% at December 31, 2001.

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 17.52% at December 31, 2002, compared to 21.49% at December 31, 2001. In addition, the Bank has a $121
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 was due to the increases in deposits
to fund the loans made.

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 78.64% and 88.00% of the total investment securities
portfolio at December 31, 2002 and 2001, respectively.

In addition, BancShares held marketable equity securities with fair values of $11.5 million and $11.6
million at December 31, 2002 and 2001, 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 2002, 2001, and 2000. In 2002, BancShares operating activities provided cash
flows of $13.1 million. Net income of $8.2 million, adjusted for non-cash operating activities, provided the majority of cash generated from operations. Investing activities, including lending, used $31.0 million of BancShares cash flow. Loans
originated, net, of principal collected, used $61.2 million. Securities purchases used $211.4 million, and expenditures for premises and equipment utilized $2.1 million of BancShares cash flow. The cash outflows from these investing activities
were offset by $243.0 million of cash received from investment maturities. Net additional cash inflows of $22.5 million resulted from financing activities, principally from deposit inflows of $27.9 million.

In 2001, BancShares operating activities provided cash flows of $14.5 million. Net income of $7.4 million, adjusted for non-cash operating activities, provided the majority of cash generated
from operations. Investing activities,





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including lending, provided $1.1 million of BancShares cash flow. Loans originated, net of principal collected, used $51.7 million. Securities
purchases used $131.7 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.

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, 2002 and 2001, jumbo CDs represented 11.27% and 11.52% 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.

As of December 31, 2002



|                                   |                 | Payments due by period(dollars in thousands) |          
|---------------------------------- | --------------- | -------------------------------------------- | ---------
|                                   |                 |                                             
|                                   | Less than1 year |                                              | 1-3 years
|                                   |                 |                                              |          
|Deposits                           | $               | 759,975                                      |          
|Short-term borrowings              |                 | 22,591                                       |          
|Long-term obligations              |                 |                                             |          
|Lease obligations                  |                 | 326                                          |          
|                                   |                 |                                              |          
|Total contractual cash obligations | $               | 782,892                                      |          
|                                   |                 |                                              |          

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.

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, 2002. 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, 2002. 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 2003 since they are subject to immediate repricing.



|                                       |  | Maturing in period ended December 31, |   |           |   |           |  
|-------------------------------------- |  | ------------------------------------- | - | --------- | - | --------- | -
|                                       |  |                                       |   |           |   |           |  
|                                       |  | 2003                                  |   | 2004      |   | 2005      |  
|                                       |  |                                       |   |           |   |           |  
|                                       |  | (Dollars in thousands)                |  
|                                       |  |                                       |   |           |   |           |  
|Assets                                 |  |                                       |   |           |   |           |  
|Loans:                                 |  |                                       |   |           |   |           |  
|Fixed rate                             |  | $   84,422                            |   | $  93,468 |   | $  81,091 |  
|Average rate (%)                       |  | 8.71                                  | % | 8.02      | % | 7.94      | %
|                                       |  |                                       |   |           |   |           |  
|Variable rate                          |  | $ 212,673                             |   | $  41,111 |   | $  53,750 |  
|Average rate (%)                       |  | 5.12                                  | % | 4.95      | % | 5.09      | %
|Investment securities (1):             |  |                                       |   |           |   |           |  
|Fixed rate                             |  | $   73,988                            |   | $  20,092 |   |          |  
|Average rate (%)                       |  | 2.82                                  | % | 3.11      | % |          |  
|Liabilities                            |  |                                       |   |           |   |           |  
|Savings and interest bearing checking: |  |                                       |   |           |   |           |  
|Fixed rate                             |  | $ 318,460                             |   |          |   |          |  
|Average rate (%)                       |  | 0.75                                  | % |          |   |          |  
|Certificates of deposit:               |  |                                       |   |           |   |           |  
|Fixed rate                             |  | $ 284,582                             |   | $  66,996 |   | $  23,426 |  
|Average rate (%)                       |  | 2.55                                  | % | 3.60      | % | 4.93      | %
|Short-term obligations:                |  |                                       |   |           |   |           |  
|Variable rate                          |  | $   22,591                            |   |          |   |          |  
|Average rate (%)                       |  | 1.09                                  | % |          |   |          |  
|Long-term obligations:                 |  |                                       |   |           |   |           |  
|Fixed rate                             |  |                                      |   |          |   |          |  
|Average rate (%)                       |  |                                      |   |          |   |          |  

(1)Marketable equity securities with a book value of approximately $3,468,000 and a fair value of approximately $11,513,000 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.

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, 2002, BancShares had a positive one year cumulative gap position of 23.51% and a positive total cumulative gap position of 17.62%. BancShares has
interest earning assets of $654.0 million maturing or repricing within one year and interest bearing liabilities of $437.6 million repricing within one year. BancShares experienced growth in loans offset by a decrease in investments with maturities
of one year or less and a decrease in deposits and short-term borrowings with 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, 2002, BancShares Leverage Capital Ratio (as defined herein) was 9.46%, as
compared to 8.99% and 9.72%, respectively, at year-end 2001 and 2000. 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, 2002 was 12.52% compared to ratios of 12.19% and 11.87% for 2001 and 2000, 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, 2002, BancShares Total Capital Ratio
was 14.26%. The Total Capital Ratios for 2001 and 2000 were 13.95% and 13.29%, respectively.

As of December 31, 2002, the Banks Leverage Capital Ratio
(as defined above) was 8.74%, which, along with 8.30% and 9.17% as of December 31, 2001 and 2000, 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, 2002 was 11.52%, which, along with 11.30% and 11.26% as of December 31, 2001 and 2000, respectively, represents a well-capitalized institution under FDIC standards (one whose ratio exceeds 6%). As of December 31,
2002, the Banks Total Capital Ratio (as defined above) was 12.78%. The Total Capital ratios for 2001 and 2000 were 12.55% and 12.31%, 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.

BancShares primary source of new capital is earnings. In 2002, equity capital increased through retention of earnings by $7.3 million,
compared to $6.5 and $7.2 million in 2001 and 2000, respectively. At December 31, 2002, shareholders equity totaled $92.3 million, compared to $85.0 million in 2001. Shareholders equity at December 31, 2002 and 2001 included, as
discussed above, $4.9 million and $4.8 million, respectively, of net unrealized securities gains on available for sale securities.

The ratio of average
shareholders equity to average total assets was 9.08% in 2002, 8.67% in 2001, and 8.62% in 2000.

Retention of sufficient earnings to maintain an
adequate capital position that provides BancShares with expansion capabilities is an important factor in determining dividends. During 2002, BancShares paid $896,000 in dividends, versus $898,000 and $900,000 in 2001 and 2000, respectively. As a
percentage of net income, dividends were 10.95% in 2002, 12.13% in 2001, and 11.11% in 2000. The decrease in dividends paid in 2002 compared to 2001 and 2001 compared to 2000 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. BancShares adopted this statement on January 1, 2001, with no material effect on its
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 requires 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 also
requires 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.

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.
The Company does not expect adoption of this statement to have a material effect on its consolidated financial statements.

In October 2001, the 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.
The adoption of SFAS No. 144 had no material impact on BancShares consolidated financial statements.

In October 2002, the FASB issued Statement of
Financial Accounting Standards No. 147 (Statement 147), Acquisitions of Certain Financial Institutions, which brings all business combinations involving financial institutions, except mutuals, into the scope of Statement 141, Business
Combinations. Statement 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in
accordance with Statement 141 and the related intangibles accounted for in accordance with Statement 142, Goodwill and Other Intangible Assets. Statement 147 removes such acquisitions from the scope of Statement 72, which was adopted in February
1983 to address financial institutions acquisitions during a period when many of such acquisitions involved troubled institutions. Statement 147 also amends Statement 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions. Statement 147 was generally effective immediately upon issuance and provides guidance with respect to amortization and
impairment of intangibles recognized in connection with acquisitions previously within the scope of Statement 72. BancShares adopted Statement 147 during the fourth quarter of 2002, but effective January 1, 2002. BancShares restated its previously
issued 2002 interim consolidated financial statements (including separate quarterly





---

results) to remove the effects of amortization of intangibles previously recorded under Statement 72 in the first three quarters of the 2002 fiscal year.
(See Notes 1(k) and 6 to the consolidated financial statements).

In December 2002, the Financial Accounting Standard Board (the FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock- Based
Compensation. Statement No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement
is effective for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002 with early application encouraged. BancShares does not expect to be impacted by this Statement, as there currently are no stock
options.

In November 2002, the Financial Accounting Standards Board issued Financial Interpretation No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees.
FIN 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, such as the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of
this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as
part of a transaction with multiple elements. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The initial recognition and measurement provisions are effective for all guarantees
within the scope of FIN 45 issued or modified after December 31, 2002. BancShares issues standby letters of credit whereby BancShares guarantees performance if a specified triggering event or condition occurs. The guarantees generally mature within
one year and may be automatically renewed depending on the terms of the guarantee and credit worthiness of the customer. See note 13. The adoption of recognition provisions is not expected to be material to BancShares financial
statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51
(FIN 46). FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. FIN 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and
to variable interest entities obtained after January 31, 2003. The application of FIN 46 is not expected to have an impact on BancShares 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.





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Statistical Information

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

Table I.Average Balance Sheet Items and Net Interest
DifferentialAverage Balances and Average Rates Earned and Paid



|                                                |  | Year ended December 31,                    |        
|----------------------------------------------- |  | ------------------------------------------ | -------
|                                                |  |                                            |        
|                                                |  | 2002                                       |        
|                                                |  |                                            |        
|                                                |  | AverageBalance                             |        
|                                                |  |                                            |        
|                                                |  | (Dollars in thousands, taxable-equivalent) |        
|Assets                                          |  |                                            |        
|Interest earning assets:                        |  |                                            |        
|Loans (1) (2)                                   |  | $                                          | 703,631
|Taxable investment securities                   |  | 116,274                                    |        
|Non taxable investment securities (2)           |  |                                           |        
|Overnight funds sold                            |  | 43,252                                     |        
|Other investments                               |  | 14,627                                     |        
|Interest bearing deposits in other banks        |  | 24,392                                     |        
|                                                |  |                                            |        
|Total interest earning assets                   |  | $                                          | 902,176
|                                                |  |                                            |        
|Noninterest earning assets:                     |  |                                            |        
|Cash and due from banks                         |  | 35,388                                     |        
|Premises and equipment                          |  | 35,124                                     |        
|Other assets                                    |  | 21,922                                     |        
|Reserve for loan losses                         |  | (10,291                                    | )      
|                                                |  |                                            |        
|Total assets                                    |  | $                                          | 984,319
|                                                |  |                                            |        
|Liabilities & Equity                            |  |                                            |        
|Interest bearing liabilities:                   |  |                                            |        
|Demand deposits                                 |  | $                                          | 107,860
|Savings deposits                                |  | 195,509                                    |        
|Time deposits                                   |  | 395,375                                    |        
|                                                |  | 21,675                                     |        
|Long-term borrowings                            |  | 23,000                                     |        
|                                                |  |                                            |        
|                                                |  |                                            |        
|Total interest bearing liabilities              |  | $                                          | 743,419
|                                                |  |                                            |        
|Noninterest bearing liabilities:                |  |                                            |        
|Demand deposits                                 |  | 144,417                                    |        
|Other liabilities                               |  | 7,123                                      |        
|Shareholders equity                            |  | 89,360                                     |        
|                                                |  |                                            |        
|Total liabilities and equity                    |  | $                                          | 984,319
|                                                |  |                                            |        
|Interest rate spread (4)                        |  |                                            |        
|                                                |  |                                            |        
|Net interest income and net interest margin (5) |  |                                            |        
|                                                |  |                                            |        

(1)Average balances include non-accrual loans.

(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
2002, 2001, and 2000. The taxable equivalent adjustment was approximately $61,000, $87,000, and $145,000 for the years 2002, 2001 and 2000, 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.





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Table II.Average Balance Sheet Items and Net Interest DifferentialAnalysis of Changes in
Interest Differential



|                                         |  | 2002                             |       | 2001                             |  
|---------------------------------------- |  | -------------------------------- | ----- | -------------------------------- | -
|                                         |  |                                  |       |                                  |  
|                                         |  | Change from previousyear due to: |       | Change from previousyear due to: |  
|                                         |  |                                  |       |                                  |  
|                                         |  | Volume                           |       | Yield/Rate                       |  
|                                         |  |                                  |       |                                  |  
|                                         |  |                                  |       |                                  |  
|                                         |  |                                  |       |                                  |  
|Assets                                   |  |                                  |       |                                  |  
|Interest earning assets:                 |  |                                  |       |                                  |  
|Loans                                    |  | $                                | 5,289 |                                  | $
|Taxable investment securities            |  | (688                             | )     | (2,528                           | )
|Non taxable investment securities        |  |                                 |       |                                 |  
|Overnight funds sold                     |  | (81                              | )     | (908                             | )
|Other investments                        |  | 24                               |       | (53                              | )
|Interest bearing balances in other banks |  | (265                             | )     | (666                             | )
|                                         |  |                                  |       |                                  |  
|Total interest earning assets            |  | $                                | 4,279 |                                  | $
|                                         |  |                                  |       |                                  |  
|                                         |  |                                  |       |                                  |  
|Liabilities                              |  |                                  |       |                                  |  
|Interest bearing liabilities:            |  |                                  |       |                                  |  
|Demand deposits                          |  | (36                              | )     | (375                             | )
|Savings deposits                         |  | 467                              |       | (1,771                           | )
|Time deposits                            |  | (452                             | )     | (8,041                           | )
|Short-term borrowings                    |  | (74                              | )     | (392                             | )
|Long-term borrowings                     |  |                                 |       |                                 |  
|                                         |  |                                  |       |                                  |  
|Total interest bearing liabilities       |  | $                                | (95   | )                                | $
|                                         |  |                                  |       |                                  |  
|Change in net interest income            |  | $                                | 4,374 |                                  | $
|                                         |  |                                  |       |                                  |  

______________

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 2002, 2001, and 2000. The taxable equivalent adjustment was approximately $61,000, $87,000, and $145,000 for the years 2002, 2001 and 2000, respectively. The variance due to rate and volume is allocated equally between the
changes in volume and rate.



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Table III. Investment Portfolio

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



|                                           |  | December 31,           |        
|------------------------------------------ |  | ---------------------- | -------
|                                           |  |                        |        
|                                           |  | 2002                   |        
|                                           |  |                        |        
|                                           |  | (Dollars in thousands) |        
|                                           |  |                        |        
|U.S. Treasury and U.S. Government agencies |  | $                      | 94,086 
|Marketable equity securities               |  | 11,513                 |        
|                                           |  |                        |        
|Total                                      |  | $                      | 105,599
|                                           |  |                        |        

The following table sets forth the maturities of
investment securities at December 31, 2002 and the weighted average yields of such securities. (Note that nontaxable investment securities have not been adjusted to a tax equivalent basis).



|                                           |  | Within One Year        |        | Maturing After OneBut Within Five Years |      | After Ten Years |  
|------------------------------------------ |  | ---------------------- | ------ | --------------------------------------- | ---- | --------------- | -
|                                           |  |                        |        |                                         |      |                 |  
|                                           |  | Amount                 |        | Yield                                   |      | Amount          |  
|                                           |  |                        |        |                                         |      |                 |  
|                                           |  | (Dollars in thousands) |       
|                                           |  |                        |        |                                         |      |                 |  
|U.S. Treasury and U.S. Government agencies |  | $                      | 73,988 |                                         | 2.82 | %               | $
|Other (1)                                  |  | 11,513                 |        | 4.29                                    |      |                |  
|                                           |  |                        |        |                                         |      |                 |  
|Total                                      |  | $                      | 85,501 |                                         | 2.89 | %               | $
|                                           |  |                        |        |                                         |      |                 |  

(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:



|                                  |  | December 31,           |        
|--------------------------------- |  | ---------------------- | -------
|                                  |  |                        |        
|                                  |  | 2002                   |        
|                                  |  |                        |        
|                                  |  | (Dollars in thousands) |        
|Real estate:                      |  |                        |        
|Construction and land development |  | $                      | 124,395
|Mortgage:                         |  |                        |        
|One to four family residential    |  | 175,016                |        
|Commercial                        |  | 190,858                |        
|Equity lines of credit            |  | 90,643                 |        
|Farmland                          |  | 7,170                  |        
|Commercial and industrial         |  | 97,301                 |        
|Consumer                          |  | 35,326                 |        
|Agricultural                      |  | 3,874                  |        
|Other                             |  | 4,518                  |        
|                                  |  |                        |        
|Total                             |  | 729,101                |        
|Less allowance for loan losses    |  | (11,838                | )      
|                                  |  |                        |        
|Net loans                         |  | $                      | 717,263
|                                  |  |                        |        



---

The following table identifies the maturities of all loans as of December 31, 2002, and addresses the sensitivity of these loans to
changes in interest rates.

Loan Sensitivity



|                                                |  | December 31, 2002      |        
|----------------------------------------------- |  | ---------------------- | -------
|                                                |  |                        |        
|                                                |  | Within OneYear         |        
|                                                |  |                        |        
|                                                |  | (Dollars in thousands) |        
|                                                |  |                        |        
|Real estate - construction and land development |  | $                      | 124,395
|Commercial and industrial                       |  | 39,648                 |        
|Other                                           |  | 133,052                |        
|                                                |  |                        |        
|                                                |  | $                      | 297,095
|                                                |  |                        |        
|                                                |  |                        |        
|Loans maturing after one year with:             |  |                        |        
|Fixed interest rates                            |  |                        |        
|Floating or adjustable rates                    |  |                        |        
|                                                |  |                        |        
|                                                |  |                        |        
|                                                |  |                        |        

Nonperforming Assets

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



|                                                                                            |  | December 31,           |        
|------------------------------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                                            |  |                        |        
|                                                                                            |  | 2002                   |        
|                                                                                            |  |                        |        
|                                                                                            |  | (Dollars in thousands) |        
|Nonaccrual loans                                                                            |  | $                      | 724    
|Restructured loans                                                                          |  |                       |        
|                                                                                            |  |                        |        
|Total nonperforming loans                                                                   |  | 724                    |        
|Other real estate                                                                           |  | 220                    |        
|                                                                                            |  |                        |        
|Total nonperforming assets                                                                  |  | $                      | 944    
|                                                                                            |  |                        |        
|                                                                                            |  |                        |        
|Accruing loans 90 days or more past due                                                     |  | $                      | 424    
|Loans at December 31                                                                        |  | $                      | 729,101
|Ratio of nonperforming assets to total loans plus other real estate                         |  | 0.13                   | %      
|Interest income that would have been earned on nonperforming loans had they been
performing |  | $                      | 4      
|Interest income earned on nonperforming loans                                               |  | $                      | 41     



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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, 2002:



|                                                      |  | December 31,           |        
|----------------------------------------------------- |  | ---------------------- | -------
|                                                      |  |                        |        
|                                                      |  | 2002                   |        
|                                                      |  |                        |        
|                                                      |  | (Dollars in thousands) |        
|Allowance for loan losses -beginning of year          |  | $                      | 9,312  
|Charge-offs:                                          |  |                        |        
|Commercial and industrial                             |  | 745                    |        
|Real estate:                                          |  |                        |        
|Construction and land development                     |  |                       |        
|Mortgage:                                             |  |                        |        
|One to four family                                    |  | 678                    |        
|Commercial                                            |  | 595                    |        
|Equity lines of credit                                |  |                       |        
|Farmland                                              |  |                       |        
|Consumer                                              |  | 333                    |        
|                                                      |  |                        |        
|Total charge-offs                                     |  | 2,351                  |        
|                                                      |  |                        |        
|Recoveries:                                           |  |                        |        
|Commercial and industrial                             |  | 293                    |        
|Real estate:                                          |  |                        |        
|Construction and land development                     |  | 89                     |        
|Mortgage:                                             |  |                        |        
|One to four family                                    |  | 570                    |        
|Commercial                                            |  | 466                    |        
|Equity lines of credit                                |  |                       |        
|Farmland                                              |  |                       |        
|Consumer                                              |  | 234                    |        
|                                                      |  |                        |        
|Total recoveries                                      |  | 1,652                  |        
|                                                      |  |                        |        
|Net charge-offs                                       |  | 699                    |        
|Provision for loan losses                             |  | 3,225                  |        
|Addition due to acquired branches                     |  |                       |        
|                                                      |  |                        |        
|Allowance for loan losses - end of year               |  | $                      | 11,838 
|                                                      |  |                        |        
|Average loans outstanding during the year             |  | $                      | 703,631
|                                                      |  |                        |        
|Ratio of net charge-offs to average loans outstanding |  |                        | 0.10   
|                                                      |  |                        |        



---

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:



|                   |  | December 31,           |       
|------------------ |  | ---------------------- | ------
|                   |  |                        |       
|                   |  | 2002                   |       
|                   |  |                        |       
|                   |  | Amount                 |       
|                   |  |                        |       
|                   |  | (Dollars in thousands) |       
|Real estate:       |  |                        |       
|Construction and   |  |                        |       
|land development   |  | $                      | 2,300 
|Mortgage:          |  |                        |       
|One to four family |  |                        |       
|residential        |  | 2,141                  |       
|Commercial         |  | 2,245                  |       
|Equity lines of    |  |                        |       
|credit             |  | 595                    |       
|Commercial,        |  |                        |       
|Industrial and     |  |                        |       
|agricultural       |  | 3,605                  |       
|Consumer           |  | 769                    |       
|Other              |  | 167                    |       
|Unallocated        |  | 16                     |       
|                   |  |                        |       
|Total              |  | $                      | 11,838
|                   |  |                        |       



---

Table VI. Deposits

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



|                            |  | 2002                   |         | 2001         |  | 2000           |  
|--------------------------- |  | ---------------------- | ------- | ------------ |  | -------------- | -
|                            |  |                        |         |              |  |                |  
|                            |  | AverageBalance         |         | AverageRates |  | AverageBalance |  
|                            |  |                        |         |              |  |                |  
|                            |  | (Dollars in thousands) |        
|                            |  |                        |         |              |  |                |  
|Non-interest bearing demand |  | $                      | 144,417 |              |  |               | %
|Interest bearing demand     |  | 107,860                |         | 0.31         |  | 105,342        |  
|Savings                     |  | 195,509                |         | 1.46         |  | 172,220        |  
|Time deposits               |  | 395,376                |         | 3.40         |  | 405,625        |  
|                            |  |                        |         |              |  |                |  
|Total deposits              |  | $                      | 843,162 |              |  |                |  
|                            |  |                        |         |              |  |                |  

Maturities of time certificates of deposit of
$100,000 or more at December 31, 2002 are summarized as follows (dollars in thousands):



|Maturity category:                    |  |        |       
|------------------------------------- |  | ------ | ------
|Three months or less                  |  | $      | 25,985
|Over three through six months         |  | 39,343 |       
|Over six months through twelve months |  | 27,179 |       
|Over one year                         |  | 5,449  |       
|                                      |  |        |       
|                                      |  | $      | 97,956
|                                      |  |        |       

Table VII. Return on Equity and Assets

The following table presents certain ratios of BancShares:



|                                                     |  | Year ended December 31, |  
|---------------------------------------------------- |  | ----------------------- | -
|                                                     |  |                         |  
|                                                     |  | 2002                    |  
|                                                     |  |                         |  
|Return on average assets                             |  | 0.83                    | %
|Return on average equity                             |  | 9.16                    |  
|Dividend payout ratio                                |  | 10.95                   |  
|Average shareholders equity to average total assets |  | 9.08                    |  

Table VIII. Capital Adequacy

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



|                           |  | December 31,           |       
|-------------------------- |  | ---------------------- | ------
|                           |  |                        |       
|                           |  | 2002                   |       
|                           |  |                        |       
|                           |  | (Dollars in thousands) |       
|Total shareholders equity |  | $                      | 92,336
|Leverage capital           |  | 93,466                 |       
|Tier I capital             |  | 93,466                 |       
|Total capital              |  | 106,445                |       
|                           |  |                        |       
|Leverage capital ratio (1) |  | 9.46                   | %     
|Tier I capital ratio       |  | 12.52                  |       
|Total capital ratio (2)    |  |                        | 14.26 

______________

(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.





---

Table IX. Interest Rate Sensitivity Analysis



|                                                                     |  | December 31, 2002      |        
|-------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                     |  |                        |        
|                                                                     |  | 1-30DaysSensitive      |        
|                                                                     |  |                        |        
|                                                                     |  | (Dollars in thousands) |        
|Assets:                                                              |  |                        |        
|Loans                                                                |  | $                      | 413,812
|Investment securities                                                |  | 24,982                 |        
|Overnight funds sold                                                 |  | 50,800                 |        
|Other                                                                |  |                       |        
|Interest bearing deposits in other banks                             |  | 32,107                 |        
|                                                                     |  |                        |        
|Total interest earning assets                                        |  | $                      | 521,701
|                                                                     |  |                        |        
|                                                                     |  |                        |        
|Liabilities:                                                         |  |                        |        
|Savings and checking with interest                                   |  | $                      |       
|Money market savings                                                 |  | 130,464                |        
|Time deposits                                                        |  | 50,902                 |        
|Short-term borrowings                                                |  | 22,591                 |        
|Long-term borrowings                                                 |  |                       |        
|                                                                     |  |                        |        
|Total interest bearing liabilities                                   |  | $                      | 203,957
|                                                                     |  |                        |        
|Interest sensitivity gap                                             |  | $                      | 317,744
|                                                                     |  |                        |        
|                                                                     |  |                        |        
|Cumulative interest sensitivity gap                                  |  | $                      | 317,744
|Cumulative interest sensitivity gap to total interest earning assets |  | 34.53                  | %      

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



|                                      |  | 2002                   |        | 2001 |      | 2000   |  
|------------------------------------- |  | ---------------------- | ------ | ---- | ---- | ------ | -
|                                      |  |                        |        |      |      |        |  
|                                      |  | Amount                 |        | Rate |      | Amount |  
|                                      |  |                        |        |      |      |        |  
|                                      |  | (Dollars in thousands) |       
|                                      |  |                        |        |      |      |        |  
|Federal funds purchased               |  |                        |        |      |      |        |  
|At December 31                        |  | $                      |       |      |     | %      | $
|Average during year                   |  |                       |        |     |      |       |  
|Maximum month end balance during year |  |                       |        |      |      |       |  
|                                      |  |                        |        |      |      |        |  
|Repurchase agreements                 |  |                        |        |      |      |        |  
|At December 31                        |  | $                      | 18,979 |      | 1.12 | %      | $
|Average during year                   |  | 19,626                 |        | 1.11 |      | 23,193 |  
|Maximum month end balance during year |  | 23,342                 |        |      |      | 25,078 |  





---



|US Treasury tax and loan accounts:    |  |   |       |  |      |   |   |       |  |      |   |   |      
|------------------------------------- |  | - | ----- |  | ---- | - | - | ----- |  | ---- | - | - | -----
|At December 31                        |  | $ | 3,612 |  | 0.99 | % | $ | 3,612 |  | 1.40 | % | $ | 3,576
|Average during year                   |  |   | 2,049 |  | 1.28 |   |   | 2,281 |  | 3.33 |   |   | 2,126
|Maximum month end balance during year |  |   | 3,612 |  |      |   |   | 3,612 |  |      |   |   | 3,614

Table XI. Selected Quarterly
Data



|                                                    |  | 2002                                          |        | 2001  |  
|--------------------------------------------------- |  | --------------------------------------------- | ------ | ----- | -
|                                                    |  |                                               |        |       |  
|                                                    |  | Fourth                                        |        | Third |  
|                                                    |  |                                               |        |       |  
|                                                    |  | (Dollars in thousands, except per share data) |       
|SUMMARY OF OPERATIONS                               |  |                                               |        |       |  
|Interest income                                     |  | $                                             | 13,693 |       | $
|Interest expense                                    |  | 4,344                                         |        | 4,562 |  
|                                                    |  |                                               |        |       |  
|Net interest income                                 |  | 9,349                                         |        | 9,408 |  
|Provision for loan losses                           |  | 1,225                                         |        | 550   |  
|                                                    |  |                                               |        |       |  
|Net interest income after provision for loan losses |  | 8,124                                         |        | 8,858 |  
|Noninterest income                                  |  | 2,823                                         |        | 2,588 |  
|Noninterest expense (1)                             |  | 7,716                                         |        | 7,665 |  
|                                                    |  |                                               |        |       |  
|Net income before income taxes                      |  | 3,231                                         |        | 3,781 |  
|Income taxes                                        |  | 1,253                                         |        | 1,389 |  
|                                                    |  |                                               |        |       |  
|Net income                                          |  | $                                             | 1,978  |       | $
|                                                    |  |                                               |        |       |  
|PER SHARE OF STOCK                                  |  |                                               |        |       |  
|Net income per common share                         |  | $                                             | 70.60  |       | $
|Cash dividends  per common share                   |  | 8.00                                          |        | 8.00  |  

(1)Quarterly data has been restated to reflect the adoption of Statement 147 for 2002 (see note 1(o) of the consolidated financial
statements).

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, 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.

ITEM 8  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





---

Independent Auditors Report

The Board of
DirectorsFidelity 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, and on October 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions.






Raleigh, North CarolinaFebruary 14, 2003





---

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

Consolidated Balance Sheets

December 31, 2002 and 2001



|                                                                                        |  | 2002        |               | 2001        |  
|--------------------------------------------------------------------------------------- |  | ----------- | ------------- | ----------- | -
|                                                                                        |  |             |               |             |  
|Assets                                                                                  |  |             |               |             |  
|Cash and due from banks                                                                 |  | $           | 47,809,871    |             |  
|Interest bearing deposits in other banks                                                |  | 32,106,848  |               | 28,462,716  |  
|Overnight funds sold                                                                    |  | 50,800,000  |               | 51,200,000  |  
|                                                                                        |  |             |               |             |  
|Total cash and cash equivalents                                                         |  | 130,716,719 |               | 126,180,114 |  
|                                                                                        |  |             |               |             |  
|Investment securities:                                                                  |  |             |               |             |  
|Held to maturity (estimated fair value of $94,622,654 in 2002 and
$126,502,713 in 2001) |  | 94,085,650  |               | 125,446,167 |  
|Available for sale (cost of $3,468,310 in 2002 and $3,633,777 in 2001 )                 |  | 11,512,609  |               | 11,595,935  |  
|                                                                                        |  |             |               |             |  
|Total investment securities                                                             |  | 105,598,259 |               | 137,042,102 |  
|                                                                                        |  |             |               |             |  
|Loans                                                                                   |  | 729,101,387 |               | 668,984,155 |  
|Allowance for loan losses                                                               |  | (11,838,076 | )             | (9,312,384  | )
|                                                                                        |  |             |               |             |  
|Loans, net                                                                              |  | 717,263,311 |               | 659,671,771 |  
|                                                                                        |  |             |               |             |  
|Federal Home Loan Bank of Atlanta stock, at cost                                        |  | 2,467,600   |               | 2,309,400   |  
|Premises and equipment, net                                                             |  | 34,590,338  |               | 35,575,442  |  
|Accrued interest receivable                                                             |  | 3,588,368   |               | 5,453,035   |  
|Intangible assets                                                                       |  | 17,002,830  |               | 17,311,024  |  
|Other assets                                                                            |  | 1,496,949   |               | 1,176,004   |  
|                                                                                        |  |             |               |             |  
|Total assets                                                                            |  | $           | 1,012,724,374 |             |  
|                                                                                        |  |             |               |             |  
|Liabilities and Shareholders' Equity                                                    |  |             |               |             |  
|                                                                                        |  |             |               |             |  
|Deposits:                                                                               |  |             |               |             |  
|Noninterest-bearing demand deposits                                                     |  | 156,932,202 |               | 140,965,066 |  
|Savings and interest-bearing deposits                                                   |  | 318,460,309 |               | 294,219,134 |  
|Time deposits                                                                           |  | 393,940,013 |               | 406,251,104 |  
|                                                                                        |  |             |               |             |  
|Total deposits                                                                          |  | 869,332,524 |               | 841,435,304 |  
|                                                                                        |  |             |               |             |  
|Short-term borrowings                                                                   |  | 22,591,378  |               | 27,072,692  |  
|Long-term borrowings                                                                    |  | 23,000,000  |               | 23,000,000  |  
|Accrued interest payable                                                                |  | 3,515,541   |               | 6,257,923   |  
|Other liabilities                                                                       |  | 1,949,293   |               | 1,922,588   |  
|                                                                                        |  |             |               |             |  
|Total liabilities                                                                       |  |             | 920,388,736   |             |  
|                                                                                        |  |             |               |             |  
|                                                                                        |  |             |               |             |  
|Shareholders' equity:                                                                   |  |             |               |             |  
|Common stock ($25 par value; 29,200 shares authorized;                                  |  |             |               |             |  
|28,011 and 28,026 shares issued and outstanding in 2002                                 |  |             |               |             |  
|and 2001, respectively)                                                                 |  | 700,275     |               | 700,650     |  
|Surplus                                                                                 |  | 6,163,380   |               | 6,166,681   |  
|Accumulated other comprehensive income                                                  |  | 4,866,801   |               | 4,817,106   |  
|Retained earnings                                                                       |  | 80,605,182  |               | 73,345,948  |  
|                                                                                        |  |             |               |             |  
|Total shareholders' equity                                                              |  | 92,335,638  |               | 85,030,385  |  
|                                                                                        |  |             |               |             |  
|Total liabilities and shareholders' equity                                              |  | $           | 1,012,724,374 |             |  
|                                                                                        |  |             |               |             |  

See accompanying notes to consolidated financial
statements.



---

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

Consolidated Statements of Income

Years ended December 31, 2002, 2001 and 2000



|                                                    |  | 2002       |            | 2001       |           | 2000       |          
|--------------------------------------------------- |  | ---------- | ---------- | ---------- | --------- | ---------- | ---------
|                                                    |  |            |            |            |           |            |          
|Interest income:                                    |  |            |            |            |           |            |          
|Interest and fees on loans                          |  | $          | 50,816,802 |            |           | 56,080,065 |          
|Interest and dividends on investment securities:    |  |            |            |            |           |            |          
|Non taxable interest income                         |  |           |            |           |           | 50,588     |          
|Taxable interest                                    |  | 3,956,116  |            | 8,102,521  |           | 9,420,583  |          
|Dividend income                                     |  | 270,312    |            | 300,291    |           | 293,792    |          
|Interest on overnight funds sold                    |  | 684,413    |            | 1,672,926  |           | 833,781    |          
|                                                    |  |            |            |            |           |            |          
|Total interest income                               |  | 55,727,643 |            | 66,155,803 |           | 67,047,358 |          
|                                                    |  |            |            |            |           |            |          
|                                                    |  |            |            |            |           |            |          
|Interest expense:                                   |  |            |            |            |           |            |          
|Deposits                                            |  | 16,639,887 |            | 26,848,493 |           | 27,499,766 |          
|Short-term borrowings                               |  | 244,688    |            | 710,484    |           | 1,019,244  |          
|Long-term borrowings                                |  | 1,955,000  |            | 1,955,000  |           | 1,955,000  |          
|                                                    |  |            |            |            |           |            |          
|Total interest expense                              |  | 18,839,575 |            | 29,513,977 |           | 30,474,010 |          
|                                                    |  |            |            |            |           |            |          
|Net interest income                                 |  | 36,888,068 |            | 36,641,826 |           | 36,573,348 |          
|Provision for loan losses                           |  | 3,225,000  |            | 3,000,000  |           | 2,625,000  |          
|                                                    |  |            |            |            |           |            |          
|Net interest income after provision for loan losses |  | 33,663,068 |            | 33,641,826 |           | 33,948,348 |          
|                                                    |  |            |            |            |           |            |          
|                                                    |  |            |            |            |           |            |          
|Noninterest income:                                 |  |            |            |            |           |            |          
|Service charges on deposit accounts                 |  | 6,593,139  |            | 6,171,758  |           | 4,202,024  |          
|Other service charges and fees                      |  | 3,659,772  |            | 3,191,263  |           | 2,478,240  |          
|Other income                                        |  | 353,431    |            | 100,621    |           | 485,743    |          
|Gain (loss) on marketable equity securities         |  | (173,476   | )          | 486,141    |           |           |          
|                                                    |  |            |            |            |           |            |          
|Total noninterest income                            |  | 10,432,866 |            | 9,949,783  |           | 7,166,007  |          
|                                                    |  |            |            |            |           |            |          
|                                                    |  |            |            |            |           |            |          
|Noninterest expenses:                               |  |            |            |            |           |            |          
|Salaries and employee benefits                      |  | 17,735,152 |            | 16,749,395 |           | 15,245,959 |          
|Occupancy and equipment                             |  | 4,970,808  |            | 4,958,703  |           | 4,767,258  |          
|Data processing                                     |  | 3,201,274  |            | 2,978,869  |           | 2,549,314  |          
|Amortization of intangibles                         |  | 308,194    |            | 1,488,690  |           | 1,121,078  |          
|Other expense                                       |  | 4,779,021  |            | 5,270,257  |           | 4,712,929  |          
|Impairment loss on fixed assets                     |  | 143,368    |            | 470,740    |           |           |          
|                                                    |  |            |            |            |           |            |          
|Total noninterest expense                           |  | 31,137,817 |            | 31,916,654 |           | 28,396,538 |          
|                                                    |  |            |            |            |           |            |          
|Net income before income taxes                      |  | 12,958,117 |            | 11,674,955 |           | 12,717,817 |          
|                                                    |  |            |            |            |           |            |          
|Income tax expense                                  |  | 4,768,587  |            | 4,278,278  |           | 4,616,567  |          
|                                                    |  |            |            |            |           |            |          
|Net income                                          |  | $          | 8,189,530  |            | 7,396,677 |            | 8,101,250
|                                                    |  |            |            |            |           |            |          
|                                                    |  |            |            |            |           |            |          
|Per share information:                              |  |            |            |            |           |            |          
|Net income                                          |  | $          | 292.34     |            | 263.71    |            | 287.97   
|Cash dividends declared                             |  | $          | 32.00      |            | 32.00     |            | 32.00    
|Weighted average shares outstanding                 |  |            | 28,014     |            |           | 28,049     |          

See accompanying notes to
consolidated financial statements.



---

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

Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income

Years ended December 31, 2002, 2001 and
2000



|                                                                                     |  | Common stock |        |         |   |           |   |                                     |           |                  |   |                     |          
|------------------------------------------------------------------------------------ |  | ------------ | ------ | ------- | - | --------- | - | ----------------------------------- | --------- | ---------------- | - | ------------------- | ---------
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          
|                                                                                     |  | Shares       |        | Amount  |   | Surplus   |   | Accumulatedothercomprehensiveincome |           | Retainedearnings |   | Comprehensiveincome |          
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          
|Balance December 31, 1999                                                            |  |              | 28,170 |         | $ | 704,250   |   |                                     | 6,198,366 |                  |   | 3,021,971           |          
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          
|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       |   |                     |          
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          
|Net income for 2002                                                                  |  |             |        |        |   |          |   |                                    |           | 8,189,530        |   | 8,189,530           |          
|Cash dividends ($32.00 per share)                                                    |  |             |        |        |   |          |   |                                    |           | (896,472         | ) |                    |          
|Purchase and retirement of common stock                                              |  | (15          | )      | (375    | ) | (3,301    | ) |                                    |           | (33,824          | ) |                    |          
|Unrealized gain on securities, available for sale, net of
deferred taxes of $32,447  |  |             |        |        |   |          |   | 49,695                              |           |                 |   | 49,695              |          
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          
|Comprehensive income                                                                 |  |              |        |         |   |           |   |                                     |           |                  |   | $                   | 8,239,225
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          
|Balance December 31, 2002                                                            |  |              | 28,011 |         | $ | 700,275   |   |                                     | 6,163,380 |                  |   | 4,866,801           |          
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          
|                                                                                     |  |              |        |         |   |           |   |                                     |           |                  |   |                     |          

See accompanying notes to consolidated financial statements.



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

Consolidated Statements of Cash Flows

Years ended December 31, 2002, 2001 and 2000



|                                                                                                                               |  | 2002         |             | 2001         |             | 2000        |           
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------- | ------------ | ----------- | ----------- | ----------
|                                                                                                                               |  |              |             |              |             |             |           
|Cash flows from operating activities:                                                                                          |  |              |             |              |             |             |           
|Net income                                                                                                                     |  | $            | 8,189,530   |              | 7,396,677   |             | 8,101,250 
|Adjustments to reconcile net income to net cash provided by operating
activities:                                              |  |              |             |              |             |             |           
|Depreciation and amortization                                                                                                  |  | 2,821,207    |             | 4,075,445    |             | 3,658,864   |           
|(Accretion) amortization on investment securities                                                                              |  | (293,346     | )           | 133,119      |             | (246,358    | )         
|(Gain) loss on disposition or abandonment of premises and equipment                                                            |  | (180,137     | )           | 661          |             | (16,260     | )         
|Impairment loss on premises and equipment                                                                                      |  | 143,368      |             | 470,740      |             |            |           
|Provision for loan losses                                                                                                      |  | 3,225,000    |             | 3,000,000    |             | 2,625,000   |           
|Origination of loans held for sale                                                                                             |  |             |             | (5,972,250   | )           | (3,508,450  | )         
|Proceeds from sales of loans held for sale                                                                                     |  |             |             | 6,004,882    |             | 3,555,810   |           
|Gain on sales of loans held for sale                                                                                           |  |             |             | (32,632      | )           | (47,360     | )         
|Gain on exchange of marketable equity securities                                                                               |  |             |             | (458,395     | )           |            |           
|Loss (gain) on sale of marketable equity securities                                                                            |  | 76,989       |             | (27,746      | )           |            |           
|Impairment loss on marketable equity securities                                                                                |  | 96,487       |             |             |             |            |           
|(Gain) loss on other real estate                                                                                               |  | (17,788      | )           | 31,481       |             | 138,235     |           
|Deferred income taxes                                                                                                          |  | (773,844     | )           | (1,153,726   | )           | (1,015,704  | )         
|Decrease (increase) in accrued interest receivable                                                                             |  | 1,864,667    |             | 508,732      |             | (1,137,500  | )         
|(Increase) decrease in other assets, net                                                                                       |  | (83,157      | )           | 1,020,529    |             | 748,045     |           
|Increase (decrease) in other liabilities, net                                                                                  |  | 768,102      |             | (446,564     | )           | (154,486    | )         
|(Decrease) increase in accrued interest payable                                                                                |  | (2,742,382   | )           | (48,258      | )           | 1,576,396   |           
|                                                                                                                               |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Net cash provided by operating activities                                                                                      |  | 13,094,696   |             | 14,502,695   |             | 14,277,482  |           
|                                                                                                                               |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Cash flows from investing activities:                                                                                          |  |              |             |              |             |             |           
|Purchase of securities held to maturity                                                                                        |  | (211,347,637 | )           | (130,675,124 | )           | (39,653,069 | )         
|Purchase of securities available for sale                                                                                      |  | (67,069      | )           | (1,000,000   | )           |            |           
|Proceeds from sale of securities available for sale                                                                            |  | 59,061       |             | 496,964      |             |            |           
|Proceeds from maturities and issuer calls of securities held to maturity                                                       |  | 243,001,500  |             | 148,000,630  |             | 32,001,079  |           
|Proceeds from sales of other real estate owned                                                                                 |  | 490,400      |             | 443,519      |             |            |           
|Purchase of FHLB of Atlanta stock                                                                                              |  | (158,200     | )           | (139,700     | )           | (110,400    | )         
|Net increase in loans                                                                                                          |  | (61,226,940  | )           | (51,690,926  | )           | (64,276,382 | )         
|Purchases of premises and equipment                                                                                            |  | (2,091,140   | )           | (2,991,518   | )           | (4,436,232  | )         
|Proceeds from sales of premises and equipment                                                                                  |  | 300,000      |             |             |             |            |           
|Net cash received on purchases of branches                                                                                     |  |             |             | 38,694,109   |             |            |           
|                                                                                                                               |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Net cash (used) provided by investing activities                                                                               |  | (31,040,025  | )           | 1,137,954    |             | (76,475,004 | )         
|                                                                                                                               |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Cash flows from financing activities:                                                                                          |  |              |             |              |             |             |           
|Net increase in deposits                                                                                                       |  | 27,897,220   |             | 19,429,944   |             | 56,506,319  |           
|Net (decrease) increase in short-term borrowings                                                                               |  | (4,481,314   | )           | 431,106      |             | 3,669,035   |           
|Cash dividends paid                                                                                                            |  | (896,472     | )           | (897,552     | )           | (899,824    | )         
|Purchase and retirement of common stock                                                                                        |  | (37,500      | )           | (110,000     | )           | (250,000    | )         
|                                                                                                                               |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Net cash provided by financing activities                                                                                      |  | 22,481,934   |             | 18,853,498   |             | 59,025,530  |           
|                                                                                                                               |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Net increase (decrease) in cash and cash equivalents                                                                           |  | 4,536,605    |             | 34,494,147   |             | (3,171,992  | )         
|Cash and cash equivalents at beginning of year                                                                                 |  | 126,180,114  |             | 91,685,967   |             | 94,857,959  |           
|                                                                                                                               |  |              |             |              |             |             |           
|Cash and cash equivalents at end of year                                                                                       |  | $            | 130,716,719 |              | 126,180,114 |             | 91,685,967
|                                                                                                                               |  |              |             |              |             |             |           
|Supplemental disclosures of cash flow information:                                                                             |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Cash paid during the year for interest                                                                                         |  | $            | 21,581,957  |              | 29,562,235  |             | 28,897,614
|                                                                                                                               |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Cash paid during the year for income taxes                                                                                     |  | $            | 5,558,395   |              | 5,162,160   |             | 5,823,064 
|                                                                                                                               |  |              |             |              |             |             |           
|Supplemental disclosure of noncash financing and investing activities:                                                         |  |              |             |              |             |             |           
|Unrealized gains on available-for-sale securities, net of deferred tax
effects of $32,447, $679,187 and $383,184, respectively |  | $            | 49,695      |              | 1,128,491   |             | 666,644   
|                                                                                                                               |  |              |             |              |             |             |           
|                                                                                                                               |  |              |             |              |             |             |           
|Transfer of foreclosed loans to other real estate                                                                              |  | $            | 710,400     |              | 415,000     |             | 187,861   
|                                                                                                                               |  |              |             |              |             |             |           

See accompanying notes to consolidated financial
statements.



---

(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-two 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 nondeposit 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.

(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 may also be 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.



---

A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.

(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 (as determined by the contractual terms of the note). 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.

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.

(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 $121,000,000 of advances from the FHLB, subject to a signed blanket collateral agreement. No advances were drawn by the Company in 2002 or 2001.

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, 2002 and 2001, the Company owned 24,676 and 23,094 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. Effective January 1, 2002, goodwill is no longer amortized. Prior to that time goodwill was amortized over a period of
approximately 15 years. Core deposit premiums are generally amortized using the straight-line method over a period of 15 years and the useful lives are periodically reviewed for reasonableness.

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 requires 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 also requires 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.
Statement 121 was subsequently superseded by Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. BancShares adopted the provisions of Statement 141 as of
June 30, 2001 and fully adopted Statement 142 as of January 1, 2002. Accordingly, goodwill ceased being amortized on January 1, 2002. There were no acquisitions between July 1, 2001 and December 31, 2001.

Statement 141 requires, upon adoption of Statement 142, that BancShares evaluate its existing intangible assets and goodwill that were acquired in prior purchase business
combinations, 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 reassessed the useful lives and residual
values of all identifiable intangible assets acquired in purchase business combinations, and as a result was not required to make any necessary amortization period adjustments. In addition, any intangible assets classified as goodwill under
Statement 142 were subjected to a transitional impairment test during the first six months of 2002 based on the level of goodwill as of January 1, 2002. Goodwill as of January 1, 2002 was tested during the first six months of 2002. As
a result of this testing, no impairment charges were recorded.





---

In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147 (Statement 147), Acquisitions of
Certain Financial Institutions, which addresses the financial accounting and reporting for the acquisition of all or part of a financial institution. This standard removes certain acquisitions of financial institutions from the scope of
Statement of Financial Accounting Standards No. 72 (Statement 72). This statement requires financial institutions to reclassify goodwill, which was created from a qualified business acquisition, from Statement 72 goodwill to goodwill
subject to the provisions of Statement 142. The reclassified goodwill will no longer be amortized but will be subject to an annual impairment test, pursuant to Statement 142. Statement 147 required BancShares to retroactively restate
its previously issued 2002 interim financial statements, to reverse Statement 72 goodwill amortization expense recorded in the first three quarters of the 2002 fiscal year, the year in which BancShares adopted Statement 142. BancShares
adopted Statement 147 on October 1, 2002. BancShares had $14.0 million of Statement 72 goodwill which was reclassified and will no longer be amortized. This resulted in the reversal of $854,000 ($538,000 or $19.20 earnings per
share, after-tax) of amortization expense for the nine months ended September 30, 2002. In accordance with Statement 147, BancShares performed a transitional impairment test of this goodwill in the fourth quarter of 2002. As a result of
this testing, no impairment charges were recorded. BancShares will perform an annual impairment test of the goodwill in 2003 and thereafter.

See Note 6 for
additional information concerning the adoption of these new accounting standards.

(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.

(o)New Accounting Standards

In June 1998, the Financial
Accounting Standard Board (the FASB) issued Statement of Financial Accounting Standards (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 July 2001, the FASB issued Statement 141, Business Combinations, and 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 requires 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 also requires 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. See Notes 1(k) and 6.

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 the Company 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. The Company 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. The Company does not expect adoption of this statement to have a material effect on its
consolidated financial statements.

In October 2001, the 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. The adoption of SFAS No. 144 had no material impact on the Companys consolidated
financial statements.

In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147 (Statement 147), Acquisitions of Certain
Financial Institutions, which brings all business combinations involving financial institutions, except mutuals, into the scope of Statement 141. Statement 147 requires that all acquisitions of financial institutions that meet the definition
of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with Statement 141 and the related intangibles accounted for in accordance with Statement 142,
Goodwill and Other Intangible Assets. Statement 147 removes such acquisitions from the scope of Statement 72, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions
involved troubled institutions. Statement 147 also amends Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial
institutions. Statement 147 was generally effective immediately upon issuance and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of Statement 72.
BancShares adopted Statement 147 during the fourth quarter of 2002, but effective January 1, 2002. BancShares restated its previously issued 2002 interim consolidated financial statements (including separate quarterly results) to remove the effects
of amortization of intangibles previously recorded under Statement 72 in the first three quarters of the 2002 fiscal year. (See Notes 1(k) and 6)

In December
2002, the Financial Accounting Standard Board (the FASB) issued Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of
FASB Statement No. 123, Accounting for Stock- Based Compensation. Statement No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the





---



disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement is effective for fiscal years ending
after December 15, 2002 and for interim periods beginning after December 15, 2002 with early application encouraged. The Company does not expect to be impacted by this Statement, as there currently are no stock options outstanding.

In November 2002, the Financial Accounting Standards Board issued Financial Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 requires the
guarantor to recognize a liability for the non-contingent component of the guarantee, such as the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is
the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple elements. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The initial recognition and measurement provisions are effective for all guarantees within the
scope of FIN 45 issued or modified after December 31, 2002. BancShares issues standby letters of credit whereby BancShares guarantees performance if a specified triggering event or condition occurs. The guarantees generally mature within one year
and may be automatically renewed depending on the terms of the guarantee and the credit-worthiness of the customer. See note 13.

(p)Reclassifications

Certain amounts in the 2001 and 2000
consolidated financial statements of the Company have been reclassified to conform with the 2002 presentation. These reclassifications had no impact on net income or shareholders equity of the Company.

(2)Acquisitions of Branches

On
February 11, 2003 the Company entered into an agreement to purchase four branches from First-Citizens Bank & Trust Company, a related party (see Note 16). Assets and deposits to be acquired are $30,687,000 (unaudited) and $116,158,000
(unaudited), respectively. An intangible asset of approximately $9,216,000 (unaudited) would result from this purchase. This purchase is subject to applicable regulatory approval. The purchase is expected to close in the second quarter of 2003.

The Company had no acquisitions of branches in 2002.

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. The
proforma combined results of operations, assuming these acquisitions had occurred at the beginning of 2001 is not considered material.

The Company had no
acquisitions of branches in 2000.





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(3)Investment Securities

The amortized cost and estimated fair values of investment securities at December 31, 2002 and 2001 are as follows:



|                             |  | 2002          |           
|---------------------------- |  | ------------- | ----------
|                             |  |               |           
|                             |  | Amortizedcost |           
|                             |  |               |           
|                             |  |               |           
|Available for sale:          |  |               |           
|Marketable equity securities |  | $             | 3,468,310 
|                             |  |               |           
|Held to maturity:            |  |               |           
|U.S. Agency                  |  | 59,103,775    |           
|U.S. Treasury                |  | 34,981,875    |           
|                             |  |               |           
|                             |  | $             | 94,085,650
|                             |  |               |           



|                             |  | 2001          |            
|---------------------------- |  | ------------- | -----------
|                             |  |               |            
|                             |  | Amortizedcost |            
|                             |  |               |            
|                             |  |               |            
|Available for sale:          |  |               |            
|Marketable equity securities |  | $             | 3,633,777  
|                             |  |               |            
|Held to maturity:            |  |               |            
|U.S. Agency                  |  | 90,399,469    |            
|U.S. Treasury                |  | 35,046,698    |            
|                             |  |               |            
|                             |  | $             | 125,446,167
|                             |  |               |            

The amortized cost and estimated fair value of
debt securities at December 31, 2002 by contractual maturities are as follows:



|                                       |  | Amortizedcost |            | Estimatedfairvalue |           
|-------------------------------------- |  | ------------- | ---------- | ------------------ | ----------
|                                       |  |               |            |                    |           
|                                       |  |               |            |                    |           
|Due in one year or less:               |  |               |            |                    |           
|U.S. Treasury                          |  | $             | 19,988,054 |                    | 19,990,625
|U.S. Agency                            |  | 24,999,475    |            | 25,073,125         |           
|Due after one year through five years: |  |               |            |                    |           
|U.S. Treasury                          |  | 14,993,821    |            | 15,285,938         |           
|U.S. Agency                            |  | 34,098,123    |            | 34,265,624         |           
|Due after ten years:                   |  |               |            |                    |           
|U.S. Agency                            |  | 6,177         |            | 7,342              |           
|                                       |  |               |            |                    |           
|                                       |  |               |            |                    |           
|                                       |  | $             | 94,085,650 |                    |           
|                                       |  |               |            |                    |           

During the third and fourth quarters of 2002,
BancShares wrote down the carrying value of certain available for sale equity securities to their current market value and recognized a loss of $96,487. This was a result of unrealized losses that were deemed to be other than temporary.

In addition, during 2002, BancShares recognized gross realized losses of $76,989 from sales of other investment securities.

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.

Investment securities with an amortized cost of approximately $80,095,000 and $76,891,000 were pledged to secure public deposits at December 31, 2002 and 2001,
respectively. See note 7.

(4)Loans and Allowance for Loan Losses

Major classifications of loans as of December 31, 2002 and 2001 are summarized as follows:



|                              |  | 2002        |             | 2001        |            
|----------------------------- |  | ----------- | ----------- | ----------- | -----------
|                              |  |             |             |             |            
|                              |  |             |             |             |            
|Loans secured by real estate: |  |             |             |             |            
|Construction                  |  | $           | 124,394,955 |             | 109,452,372
|Single-family residential     |  | 175,016,491 |             | 164,748,104 |            
|Equity lines of credit        |  | 90,642,838  |             | 81,995,522  |            
|Farmland                      |  | 7,170,168   |             | 6,175,707   |            
|Commercial                    |  | 190,857,716 |             | 140,637,253 |            
|Commercial                    |  | 97,301,328  |             | 121,620,972 |            
|Consumer                      |  | 35,325,845  |             | 35,142,333  |            
|Agricultural                  |  | 3,873,712   |             | 4,560,013   |            
|Other                         |  | 4,518,334   |             | 4,651,879   |            
|                              |  |             |             |             |            
|                              |  |             |             |             |            
|                              |  | 729,101,387 |             | 668,984,155 |            
|                              |  |             |             |             |            
|Allowance for loan losses     |  | (11,838,076 | )           | (9,312,384  | )          
|                              |  |             |             |             |            
|                              |  |             |             |             |            
|                              |  | $           | 717,263,311 |             | 659,671,771
|                              |  |             |             |             |            

There were no loans designated as held for sale at
December 31, 2002 and 2001.

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, 2002 and 2001:



|                             |  | 2002     |           | 2001     |          
|---------------------------- |  | -------- | --------- | -------- | ---------
|                             |  |          |           |          |          
|                             |  |          |           |          |          
|Balance at beginning of year |  | $        | 4,962,505 |          | 5,662,749
|New loans                    |  | 202,961  |           | 80,376   |          
|Principal repayments         |  | (563,632 | )         | (780,620 | )        
|                             |  |          |           |          |          
|                             |  |          |           |          |          
|Balance at end of year       |  | $        | 4,601,834 |          |          
|                             |  |          |           |          |          

A summary of the allowance for loan losses for the
years ended December 31, 2002, 2001, and 2000 is as follows:



|                             |  | 2002      |            | 2001      |  | 2000       |  
|---------------------------- |  | --------- | ---------- | --------- |  | ---------- | -
|                             |  |           |            |           |  |            |  
|                             |  |           |            |           |  |            |  
|Balance at beginning
of year |  | $         | 9,312,384  |           |  | 7,297,833  |  
|Provision for loan losses    |  | 3,225,000 |            | 3,000,000 |  | 2,625,000  |  
|Charge-offs                  |  |           | (2,351,664 | )         |  | (2,016,848 | )
|Recoveries                   |  |           | 1,652,356  |           |  | 1,031,399  |  



---



|                       |  |   |            |  |  |           |  |  |           | 
|---------------------- |  | - | ---------- |  |  | --------- |  |  | --------- | 
|                       |  |   |            |  |  |           |  |  |           | 
|Balance at end of year |  | $ | 11,838,076 |  |  | 9,312,384 |  |  | 7,297,833 | 
|                       |  |   |            |  |  |           |  |  |           | 

At December 31, 2002, the Company had $724,000
of impaired loans (all of which are on nonaccrual status) and $424,000 of accruing loans ninety days or more past due. In 2001, the Company had no nonaccrual loans or impaired loans and $625,000 of accruing loans ninety days or more past due. The
interest that was earned on nonaccrual loans in 2002 was $41,000. The interest that would have been earned on these loans had they been performing was $4,000. As of December 31, 2002 and 2001, the balance of other real estate acquired through
foreclosure was $220,000 and $15,000, respectively.

(5)Premises and
Equipment

Premises and equipment at December 31, 2002 and 2001 are as follows:



|                              |  | 2002        |            | 2001        |           
|----------------------------- |  | ----------- | ---------- | ----------- | ----------
|                              |  |             |            |             |           
|                              |  |             |            |             |           
|Land                          |  | $           | 10,817,698 |             | 10,905,167
|Building and improvements     |  | 30,718,727  |            | 30,033,687  |           
|Furniture and equipment       |  | 11,017,374  |            | 10,402,712  |           
|                              |  |             |            |             |           
|                              |  |             |            |             |           
|                              |  | 52,553,799  |            | 51,341,566  |           
|                              |  |             |            |             |           
|Less accumulated depreciation |  | (17,963,461 | )          | (15,766,124 | )         
|                              |  |             |            |             |           
|                              |  |             |            |             |           
|Premises and equipment, net   |  | $           | 34,590,338 |             |           
|                              |  |             |            |             |           

In May 2002, the Company elected to close one
branch. The Company analyzed the results of operations of the branch since its inception in 1999 and determined that the loss experience would not turn around in the near future. At June 30, 2002, the Company had accrued impairment losses of
approximately $143,000 including $103,000 for losses on fixed assets, $20,000 for lease cancellation fees, and $20,000 for costs to close the branch. During the third quarter of 2002, the Company closed the branch with no material adjustments being
made to the accrued impairment costs.

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 $304,000 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 $7,000.

(6)Goodwill and Intangibles

The
following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets as of December 31, 2002 and 2001 and the carrying amount of unamortized intangible assets as of December 31, 2002 and 2001.





---



|                               |  | December 31, 2002    |        | December 31, 2001       |      
|------------------------------ |  | -------------------- | ------ | ----------------------- | -----
|                               |  |                      |        |                         |      
|(Dollars in thousands)         |  | Gross CarryingAmount |        | AccumulatedAmortization |      
|                               |  |                      |        |                         |      
|Amortized intangible assets:   |  |                      |        |                         |      
|Branch acquisitions            |  | $                    | 4,626  |                         | 2,319
|                               |  |                      |        |                         |      
|                               |  |                      |        |                         |      
|Unamortized intangible assets: |  |                      |        |                         |      
|Goodwill                       |  | $                    | 14,696 |                         |     
|                               |  |                      |        |                         |      

The scheduled amortization expense for intangible assets for the years
ended December 31, 2003, 2004, 2005, 2006, 2007 and thereafter is as follows:



|(Dollars in thousands) |  |     | ScheduledAmortizationExpense | 
|---------------------- |  | --- | ---------------------------- | 
|                       |  |     |                              | 
|2003                   |  | $   | 308                          | 
|2004                   |  | 308 |                             
|2005                   |  | 308 |                             
|2006                   |  | 308 |                             
|2007                   |  | 308 |                             
|2008 and after         |  | 767 |                             
|                       |  |     |                             
|Total                  |  | $   | 2,307                        | 
|                       |  |     |                              | 

The following table presents the adjusted effect on net income and on
basic net income per share excluding the amortization of goodwill for the years ended December 31, 2002, 2001 and 2000:



|(Dollars in thousands, exceptper share data) |      | For the years ended December 31, |       
|-------------------------------------------- | ---- | -------------------------------- | ------
|                                             |      |                                 
|                                             | 2002 |                                  | 2001  
|                                             |      |                                  |       
|Net income                                   |      | $                                | 8,190 
|Add back: Goodwill amortization              |      | $                                |      
|                                             |      |                                  |       
|Adjusted net income                          |      | $                                | 8,190 
|                                             |      |                                  |       
|                                             |      |                                  |       
|Net income per share:                        |      |                                  |       
|As reported                                  |      | $                                | 292.34
|Goodwill amortization                        |      | $                                |      
|                                             |      |                                  |       
|Adjusted net income per share                |      | $                                | 292.34
|                                             |      |                                  |       



---

(7)Deposits

At December 31, 2002 and 2001, time deposits of $100,000 or more amounted to approximately $97,956,000 and $96,912,000, respectively.
For the years ended December 31, 2002, 2001, and 2000, interest expense on time deposits of $100,000 or more amounted to approximately $3,521,000, $3,951,000, and $4,491,000, respectively.

Time deposit accounts as of December 31, 2002, mature in the following years and approximate amounts: 2003  $284,582,000; 2004  $66,996,000; 2005  $23,426,000, and thereafter
$18,936,000.

(8)Short-Term
Borrowings

Short-term borrowings at December 31, 2002 and 2001 consist of the following:



|                                               |  | 2002      |            | 2001      |           
|---------------------------------------------- |  | --------- | ---------- | --------- | ----------
|                                               |  |           |            |           |           
|Securities sold under agreements to repurchase |  | $         | 18,979,000 |           | 23,461,000
|Treasury tax and loan deposits                 |  | 3,612,378 |            | 3,611,692 |           
|                                               |  |           |            |           |           
|                                               |  |           |            |           |           
|                                               |  | $         | 22,591,378 |           | 27,072,692
|                                               |  |           |            |           |           

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



|                                      |  | 2002 |            | 2001 |  
|------------------------------------- |  | ---- | ---------- | ---- | -
|                                      |  |      |            |      |  
|Average rate during year              |  | 1.11 | %          | 2.74 | %
|                                      |  |      |            |      |  
|Average balance during year           |  | $    | 19,626,438 |      |  
|                                      |  |      |            |      |  
|Maximum month-end balance during year |  |      | 23,342,000 |      |  

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, 2002, $28,498,123 of investment securities were pledged for repurchase agreements. The securities collateralizing the repurchase agreements have been delivered to a third party custodian for safekeeping.

(9)Long-Term Borrowings

The $23,000,000 long-term obligations at December 31, 2002 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.





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(10)Income Taxes

The components of income taxes for the years ended December 31, 2002, 2001, and 2000 are as follows:



|          |  | 2002      |           | 2001       |           | 2000       |          
|--------- |  | --------- | --------- | ---------- | --------- | ---------- | ---------
|          |  |           |           |            |           |            |          
|Current:  |  |           |           |            |           |            |          
|Federal   |  | $         | 4,659,433 |            | 4,821,406 |            | 5,012,050
|State     |  | 882,998   |           | 610,598    |           | 620,221    |          
|          |  |           |           |            |           |            |          
|          |  |           |           |            |           |            |          
|          |  | 5,542,431 |           | 5,432,004  |           | 5,632,271  |          
|          |  |           |           |            |           |            |          
|          |  |           |           |            |           |            |          
|Deferred: |  |           |           |            |           |            |          
|Federal   |  | (634,065  | )         | (956,777   | )         | (850,184   | )        
|State     |  | (139,779  | )         | (196,949   | )         | (165,520   | )        
|          |  |           |           |            |           |            |          
|          |  |           |           |            |           |            |          
|          |  | (773,844  | )         | (1,153,726 | )         | (1,015,704 | )        
|          |  |           |           |            |           |            |          
|          |  |           |           |            |           |            |          
|          |  | $         | 4,768,587 |            |           | 4,278,278  |          
|          |  |           |           |            |           |            |          

The reconciliation of expected income tax expense at
the statutory federal rate with income tax expense for the years ended December 31, 2002, 2001, and 2000 is as follows:



|                                                          |  | 2002     |           | 2001    |           | 2000     |          
|--------------------------------------------------------- |  | -------- | --------- | ------- | --------- | -------- | ---------
|                                                          |  |          |           |         |           |          |          
|                                                          |  |          |           |         |           |          |          
|Expected income tax expense at statutory rate (35%)       |  | $        | 4,535,341 |         | 4,086,234 |          | 4,451,236
|Increase (decrease) in income tax expense resulting from: |  |          |           |         |           |          |          
|State taxes, net                                          |  | 483,092  |           | 268,872 |           | 295,555  |          
|Tax exempt income                                         |  | (63,367  | )         | (73,861 | )         | (14,592  | )        
|Other, net                                                |  | (186,479 | )         | (2,967  | )         | (115,632 | )        
|                                                          |  |          |           |         |           |          |          
|                                                          |  |          |           |         |           |          |          
|                                                          |  | $        | 4,768,587 |         | 4,278,278 |          | 4,616,567
|                                                          |  |          |           |         |           |          |          

The deferred tax components at December 31,
2002 and 2001 are as follows:



|                                                  |  | 2002       |           | 2001       |          
|------------------------------------------------- |  | ---------- | --------- | ---------- | ---------
|                                                  |  |            |           |            |          
|                                                  |  |            |           |            |          
|Deferred tax assets:                              |  |            |           |            |          
|Allowance for loan losses                         |  | $          | 4,674,264 |            | 3,676,995
|Deferred compensation                             |  | 401,970    |           | 405,913    |          
|Depreciation                                      |  | 391,613    |           | 364,028    |          
|Pension costs                                     |  | 394,460    |           | 209,802    |          
|Other                                             |  | 148,121    |           | 81,111     |          
|                                                  |  |            |           |            |          
|                                                  |  |            |           |            |          
|Total gross deferred tax assets                   |  | 6,010,428  |           | 4,737,849  |          
|                                                  |  |            |           |            |          
|Valuation allowance                               |  | (15,774    | )         | (8,018     | )        
|                                                  |  |            |           |            |          
|                                                  |  |            |           |            |          
|Total net deferred tax assets                     |  | 5,994,654  |           | 4,729,831  |          
|                                                  |  |            |           |            |          
|                                                  |  |            |           |            |          
|Deferred tax liabilities:                         |  |            |           |            |          
|Bond accretion                                    |  | (80,312    | )         | (41,867    | )        
|Amortization of intangibles                       |  | (483,396   | )         | (30,862    | )        
|Unrealized gains on available for sale securities |  | (3,177,499 | )         | (3,145,052 | )        
|                                                  |  |            |           |            |          
|                                                  |  |            |           |            |          
|Total gross deferred tax liabilities              |  | (3,741,207 | )         | (3,217,781 | )        
|                                                  |  |            |           |            |          
|                                                  |  |            |           |            |          
|Net deferred tax asset                            |  | $          | 2,253,447 |            |          
|                                                  |  |            |           |            |          

A portion of the change in the deferred
tax assets relates to unrealized gains and losses on securities available for sale. The related current period deferred tax expense of approximately $32,447 as of December 31, 2002 has been recorded directly to shareholders equity. A valuation
allowance for deferred tax assets of $15,774 and $8,018 was required as





---

of December 31, 2002 and 2001, respectively. Management has recorded this valuation allowance to reduce the deferred tax assets to the
level for which it has determined that they are more likely than not to be realized.

(11)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 3% of the participants contributions and 50% of the next 3%. 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 $392,217,
$378,627, and $330,519 of expense related to the Plan for the years ended December 31, 2002, 2001, and 2000, respectively. The majority of the Plans assets are held by a related party as trustee. See note 16 for additional
information.

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, 2002 and 2001:



|                                            |  | 2002      |            | 2001     |          
|------------------------------------------- |  | --------- | ---------- | -------- | ---------
|                                            |  |           |            |          |          
|                                            |  |           |            |          |          
|Net benefit obligation at beginning of year |  | $         | 8,470,022  |          | 7,789,643
|Service cost                                |  | 470,937   |            | 357,145  |          
|Interest cost                               |  | 648,241   |            | 560,778  |          
|Actuarial loss                              |  | 1,270,456 |            | 38,765   |          
|Transfers from affiliated banks             |  | 493,366   |            |         |          
|Gross benefits paid                         |  | (341,716  | )          | (276,309 | )        
|                                            |  |           |            |          |          
|Net benefit obligation at end of year       |  | $         | 11,011,306 |          | 8,470,022
|                                            |  |           |            |          |          

The following table reconciles the beginning and ending
balances of the Retirement Plans assets as of December 31, 2002 and 2001:



|                                               |  | 2002     |           | 2001     |          
|---------------------------------------------- |  | -------- | --------- | -------- | ---------
|                                               |  |          |           |          |          
|                                               |  |          |           |          |          
|Fair value of plan assets at beginning of year |  | $        | 7,923,607 |          | 8,358,015
|Actual loss on plan assets                     |  | (523,473 | )         | (158,099 | )        
|Transfers from affiliated banks                |  | 567,315  |           |         |          
|Benefits paid                                  |  | (341,716 | )         | (276,309 | )        
|                                               |  |          |           |          |          
|Fair value of plan assets at end of year       |  | $        | 7,625,733 |          | 7,923,607
|                                               |  |          |           |          |          

The following table presents information regarding
the funded status of the Retirement Plan as of December 31, 2002 and 2001:

|                                   |  | 2002 |            | 2001 |         
|---------------------------------- |  | ---- | ---------- | ---- | --------
|                                   |  |      |            |      |         
|                                   |  |      |            |      |         
|Unfunded status at the end of year |  | $    | (3,385,573 | )    | (546,415





---

|                                        |  |        |           |         |         
|--------------------------------------- |  | ------ | --------- | ------- | --------
|Unrecognized net actuarial loss         |  | $      | 2,357,772 |         | 13,520  
|Unrecognized prior service cost         |  | 28,788 |           | 38,348  |         
|Unrecognized transition asset           |  |       |           | (36,799 | )       
|                                        |  |        |           |         |         
|Net liability recognized at end of year |  | $      | (999,013  | )       | (531,346
|                                        |  |        |           |         |         

The following table presents the components of net
periodic benefit cost for the years ended December 31, 2002, 2001, and 2000:



|                          |  | 2002     |         | 2001     |         | 2000     |        
|------------------------- |  | -------- | ------- | -------- | ------- | -------- | -------
|                          |  |          |         |          |         |          |        
|                          |  |          |         |          |         |          |        
|Service cost              |  | $        | 470,937 |          | 357,145 |          | 303,114
|Interest cost             |  | 648,241  |         | 560,778  |         | 531,945  |        
|Expected return on assets |  | (624,702 | )       | (607,564 | )       | (571,548 | )      
|Amortization of:          |  |          |         |          |         |          |        
|Transition asset          |  | (36,799  | )       | (55,173  | )       | (55,173  | )      
|Prior service cost        |  | 9,560    |         | 9,560    |         | 9,560    |        
|Actuarial loss            |  | 430      |         |         |         |         |        
|                          |  |          |         |          |         |          |        
|                          |  |          |         |          |         |          |        
|Net periodic benefit cost |  | $        | 467,667 |          | 264,746 |          | 217,898
|                          |  |          |         |          |         |          |        

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



|                                            |  | 2002 |   | 2001 |   | 2000 |  
|------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                            |  |      |   |      |   |      |  
|                                            |  |      |   |      |   |      |  
|Discount rate                               |  | 6.50 | % | 7.00 | % | 7.25 | %
|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 16 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 $1,018,000 and $1,028,000 at December 31, 2002 and 2001, respectively.

(12)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.

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, 2002 and 2001 the Bank was required to maintain such balances at
$16,541,000 and $14,415,000, 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,
2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2002, 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, 2002 that
management believes have changed the category of the Bank.

A cash dividend of $8.00 per share was declared by the Board of Directors on January 27, 2003,
payable March 31, 2003, to holders of record as of March 1, 2003.

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



|                                         |  | Amount |         | Rate  |       | For capitaladequacypurposes |       
|---------------------------------------- |  | ------ | ------- | ----- | ----- | --------------------------- | ------
|                                         |  |        |         |       |       |                             |       
|                                         |  |        |         |       |       |                             |       
|As of December 31, 2002:                 |  |        |         |       |       |                             |       
|Total Capital (to Risk Weighted Assets)  |  | $      | 106,445 |       | 14.26 | %                           | >=8.00
|Tier 1 Capital (to Risk Weighted Assets) |  | 93,466 |         | 12.52 | %     | >=4.00                      | %     
|Tier 1 Capital (to Average Assets)       |  | 93,466 |         | 9.46  | %     | >=3.00                      | %     
|                                         |  |        |         |       |       |                             |       
|As of December 31, 2001:                 |  |        |         |       |       |                             |       
|Total Capital (to Risk Weighted Assets)  |  | $      | 98,300  |       | 13.95 | %                           | >=8.00
|Tier 1 Capital (to Risk Weighted Assets) |  | 85,902 |         | 12.19 | %     | >=4.00                      | %     
|Tier 1 Capital (to Average Assets)       |  | 85,902 |         | 8.99  | %     | >=3.00                      | %     

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



|                                         |  | Amount |        | Rate  |       | For capitaladequacypurposes |        | To be wellcapitalizedunderpromptcorrectiveactionprovisions |        
|---------------------------------------- |  | ------ | ------ | ----- | ----- | --------------------------- | ------ | ---------------------------------------------------------- | -------
|                                         |  |        |        |       |       |                             |        |                                                            |        
|                                         |  |        |        |       |       |                             |        |                                                            |        
|As of December 31, 2002:                 |  |        |        |       |       |                             |        |                                                            |        
|Total Capital (to Risk Weighted Assets)  |  | $      | 94,939 |       | 12.78 | %                           | >=8.00 | %                                                          | >=10.00
|Tier 1 Capital (to Risk Weighted Assets) |  | 85,620 |        | 11.52 | %     | >=4.00                      | %      | >=6.00                                                     | %      
|Tier 1 Capital (to Average Assets)       |  | 85,620 |        | 8.74  | %     | >=3.00                      | %      | >=5.00                                                     | %      
|                                         |  |        |        |       |       |                             |        |                                                            |        
|As of December 31, 2001:                 |  |        |        |       |       |                             |        |                                                            |        
|Total Capital (to Risk Weighted Assets)  |  | $      | 87,301 |       | 12.55 | %                           | >=8.00 | %                                                          | >=10.00
|Tier 1 Capital (to Risk Weighted Assets) |  | 78,598 |        | 11.30 | %     | >=4.00                      | %      | >=6.00                                                     | %      





---



|Tier 1 Capital (to Average Assets) |  | 78,598 |  | 8.30 | % | >=3.00 | % | >=5.00 | %
|---------------------------------- |  | ------ |  | ---- | - | ------ | - | ------ | -

(13)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, 2002 and 2001, outstanding financial instruments whose contract amounts represent credit risk were as follows:



|                                                                    |  | 2002 |             | 2001 |            
|------------------------------------------------------------------- |  | ---- | ----------- | ---- | -----------
|                                                                    |  |      |             |      |            
|                                                                    |  |      |             |      |            
|Outstanding commitments to lend, unfunded loans and lines of credit |  | $    | 231,232,246 |      | 221,656,178
|Standby letters of credit                                           |  | $    | 3,781,003   |      | 3,274,892  

The maximum potential amount of undiscounted
future payments related to standby letters of credit at December 31, 2002 is $3,781,003. At December 31, 2002, BancShares has recorded no liability for the current carrying amount of the obligation to perform as a guarantor and no contingent
liability is considered necessary, as such amounts are deemed immaterial.

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.

BancShares and the Bank are defendants in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated operations, liquidity or financial position of BancShares or the Bank.

(14)Fair Value of Financial Instruments

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, 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 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.

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, 2002 and 2001 (in thousands):



|                                                                     |  | 2002          |         | 2001               | 
|-------------------------------------------------------------------- |  | ------------- | ------- | ------------------ | 
|                                                                     |  |               |         |                    | 
|                                                                     |  | Carryingvalue |         | Estimatedfairvalue | 
|                                                                     |  |               |         |                    | 
|                                                                     |  |               |         |                    | 
|Financial assets:                                                    |  |               |         |                    | 
|Cash and due from banks and interest bearing deposits in other banks |  | $             | 79,917  |                    | 
|Overnight funds sold                                                 |  | 50,800        |         | 50,800             | 
|Investment securities                                                |  |               |         |                    | 
|available for sale                                                   |  | 11,513        |         | 11,513             | 
|Investment securities held to maturity                               |  | 94,086        |         | 94,623             | 
|Federal Home Loan Bank of                                            |  |               |         |                    | 
|Atlanta stock                                                        |  | 2,468         |         | 2,468              | 
|Accrued interest receivable                                          |  | 3,588         |         | 3,588              | 
|Loans, net                                                           |  |               | 717,263 |                    | 



---



|                         |  |        |         |        |  |         |  |        |        
|------------------------ |  | ------ | ------- | ------ |  | ------- |  | ------ | -------
|Financial liabilities:   |  |        |         |        |  |         |  |        |        
|Deposits                 |  | $      | 869,333 |        |  | 875,546 |  |        | 841,435
|Short-term borrowings    |  | 22,591 |         | 22,591 |  | 27,073  |  | 27,073 |        
|Long-term borrowings     |  | 23,000 |         | 23,230 |  | 23,000  |  | 23,115 |        
|Accrued interest payable |  |        | 3,516   |        |  | 3,516   |  |        | 6,258  

(15)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, 2002 and 2001 are as follows (in thousands):

CONDENSED
BALANCE SHEETS



|                                           |  | 2002    |         | 2001   | 
|------------------------------------------ |  | ------- | ------- | ------ | 
|                                           |  |         |         |        | 
|Assets                                     |  |         |         |        | 
|Cash                                       |  | $       | 2,836   |        | 
|Investments                                |  | 11,513  |         | 11,596 | 
|Investment in subsidiaries                 |  | 103,547 |         | 96,773 | 
|Other assets                               |  | 1,543   |         | 1,433  | 
|                                           |  |         |         |        | 
|Total assets                               |  | $       | 119,439 |        | 
|                                           |  |         |         |        | 
|                                           |  |         |         |        | 
|Liabilities and Shareholders
Equity       |  |         |         |        | 
|Other liabilities                          |  | $       | 214     |        | 
|Long-term borrowings                       |  | 23,711  |         | 23,711 | 
|Deferred tax liability                     |  | 3,178   |         | 3,146  | 
|Shareholders equity                       |  | 92,336  |         | 85,030 | 
|                                           |  |         |         |        | 
|Total liabilities and shareholders equity |  | $       | 119,439 |        | 
|                                           |  |         |         |        | 

CONDENSED STATEMENTS OF INCOME



|                                                               |  | 2002   |       | 2001   |   | 2000   |  
|-------------------------------------------------------------- |  | ------ | ----- | ------ | - | ------ | -
|                                                               |  |        |       |        |   |        |  
|                                                               |  |        |       |        |   |        |  
|Dividends from bank subsidiary                                 |  | $      | 2,875 |        |   | 3,875  |  
|Other dividends                                                |  | 149    |       | 138    |   | 126    |  
|Gain on exchange of marketable equity securities               |  |       |       | 458    |   |       |  
|(Loss) gain on marketable equity securities                    |  | (173   | )     | 28     |   |       |  
|Interest expense on long-term borrowings                       |  | (2,015 | )     | (2,015 | ) | (2,015 | )
|Miscellaneous expenses                                         |  | (172   | )     | (160   | ) | (169   | )
|Income tax benefit                                             |  | 752    |       | 527    |   | 691    |  
|                                                               |  |        |       |        |   |        |  
|                                                               |  |        |       |        |   |        |  
|Income before equity in undistributed earnings of subsidiaries |  | 1,416  |       | 2,851  |   | 1,508  |  
|                                                               |  |        |       |        |   |        |  
|Equity in undistributed earnings of subsidiaries               |  | 6,774  |       | 4,546  |   | 6,593  |  
|                                                               |  |        |       |        |   |        |  
|                                                               |  |        |       |        |   |        |  
|Net income                                                     |  | $      | 8,190 |        |   | 7,397  |  
|                                                               |  |        |       |        |   |        |  



---

CONDENSED STATEMENTS OF CASH FLOWS



|                                                                                             |  | 2002   |       | 2001   |   | 2000   |  
|-------------------------------------------------------------------------------------------- |  | ------ | ----- | ------ | - | ------ | -
|                                                                                             |  |        |       |        |   |        |  
|Cash flows from operating activities:                                                        |  |        |       |        |   |        |  
|Net income                                                                                   |  | $      | 8,190 |        | $ | 7,397  |  
|Equity in undistributed earnings of subsidiaries                                             |  | (6,774 | )     | (4,546 | ) | (6,593 | )
|Loss on sale of assets                                                                       |  | 77     |       |       |   |       |  
|Loss on impairment of assets                                                                 |  | 96     |       |       |   |       |  
|Increase in other liabilities                                                                |  | 60     |       | 61     |   | 457    |  
|Decrease (increase) in other assets                                                          |  | (110   | )     | 290    |   | (617   | )
|                                                                                             |  |        |       |        |   |        |  
|                                                                                             |  |        |       |        |   |        |  
|Net cash provided by operating activities                                                    |  | 1,539  |       | 3,202  |   | 1,348  |  
|                                                                                             |  |        |       |        |   |        |  
|                                                                                             |  |        |       |        |   |        |  
|Cash flows from investing activities:                                                        |  |        |       |        |   |        |  
|Purchases of investments                                                                     |  | (67    | )     | (988   | ) |       |  
|Sales of investments                                                                         |  | 59     |       |       |   |       |  
|                                                                                             |  |        |       |        |   |        |  
|                                                                                             |  |        |       |        |   |        |  
|Net cash used by investing activities                                                        |  | (8     | )     | (988   | ) |       |  
|                                                                                             |  |        |       |        |   |        |  
|                                                                                             |  |        |       |        |   |        |  
|Cash flows from financing activities:                                                        |  |        |       |        |   |        |  
|Dividends paid                                                                               |  | (896   | )     | (898   | ) | (900   | )
|Purchase and retirement of common stock                                                      |  | (38    | )     | (110   | ) | (250   | )
|                                                                                             |  |        |       |        |   |        |  
|                                                                                             |  |        |       |        |   |        |  
|Net cash used in financing activities                                                        |  | (934   | )     | (1,008 | ) | (1,150 | )
|                                                                                             |  |        |       |        |   |        |  
|                                                                                             |  |        |       |        |   |        |  
|Net increase in cash and cash equivalents                                                    |  | 597    |       | 1,206  |   | 198    |  
|                                                                                             |  |        |       |        |   |        |  
|Cash and cash equivalents at beginning of year                                               |  | 2,239  |       | 1,033  |   | 835    |  
|                                                                                             |  |        |       |        |   |        |  
|                                                                                             |  |        |       |        |   |        |  
|Cash and cash equivalents at end of year                                                     |  | $      | 2,836 |        | $ | 2,239  |  
|                                                                                             |  |        |       |        |   |        |  
|                                                                                             |  |        |       |        |   |        |  
|Supplemental disclosure of noncash investing and financing activities:                       |  |        |       |        |   |        |  
|Unrealized gains on available for sale securities, net of tax effects of $32,
$679, and $383 |  | $      | 50    |        | $ | 1,128  |  

(16)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, 2002, the first significant shareholder beneficially owned
11,155 shares, or 39.82%, of the Companys outstanding common stock. At the same date, the second significant shareholder beneficially owned 1,696 shares, or 6.05%, of the Companys outstanding common stock.

These two significant shareholders are directors and executive officers of the Corporation and at December 31, 2002, beneficially owned 2,529,519 shares, or 28.61%, and
1,384,121 shares, or 15.74%, respectively, of the Corporations outstanding Class A common stock, and 650,958 shares, or 38.73%, and 199,052 shares, or 11.81%, respectively, of the Corporations outstanding Class B common stock. The above
totals include 472,855 Class A common shares, or 5.38%, and 104,644 Class B common shares, or 6.23%, that are considered to be beneficially owned by both of the shareholders





---

and, therefore, are included in each of their totals. A subsidiary of the Corporation is First-Citizens Bank & Trust Company
(FCB).

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 2002 totaled approximately $3.6 million.

The following are fees paid by BancShares to FCB:



|                          |  | 2002    |           | 2001    |           | 2000      |          
|------------------------- |  | ------- | --------- | ------- | --------- | --------- | ---------
|                          |  |         |           |         |           |           |          
|                          |  |         |           |         |           |           |          
|Data and items processing |  | $       | 3,245,000 |         | 3,042,000 |           | 2,549,000
|Trustee fees              |  | 60,000  |           | 72,000  |           | 82,000    |          
|Other                     |  | 283,000 |           | 611,000 |           | 447,000   |          
|                          |  |         |           |         |           |           |          
|                          |  |         |           |         |           |           |          
|                          |  | $       | 3,588,000 |         |           | 3,725,000 |          
|                          |  |         |           |         |           |           |          

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 $38,454,633 and $41,448,498 at December 31, 2002 and 2001, 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 $4.1 million of BancShares mortgage loans.

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 REGISTRANT

The following table lists BancShares and the Banks current directors.



|Name and age             |  | Position(s)with usand the
Bank |  | Year firstSelected (1) | Principal occupation andbusiness
experience                                 | 
|------------------------ |  | ------------------------------ |  | ---------------------- | --------------------------------------------------------------------------- | 
|                         |  |                                |  |                        |                                                                             | 
|F. Ray Allen(43)         |  | Director                       |  | 1992                   | President, Uwharrie Lumber Company, Troy, NC (hardwood lumber manufacturer) | 
|                         |  |                                |  |                        |                                                                             | 
|Haywood A. Lane, Jr.(66) |  | Vice Chairman                  |  | 1979                   | President of Fidelity Bancshares (N.C.), Inc. and The Fidelity Bank         | 
|                         |  |                                |  |                        |                                                                             | 
|D. Gary McRae            |  | Director                       |  | 1999                   | President, and Chief Executive Officer, McRae                               | 



---



|(52)                       |  |                                     |  |      | Industries, Inc.; President, New South Realty; President, McRae Office Solutions, Inc.; President, Compsee, Inc.; Chairman and
Chief Executive Officer, Dan Post Boot Co.; Chairman, Footwear Division; President and Chief Executive Officer, American Mortgage & Investment Co. | 
|-------------------------- |  | ----------------------------------- |  | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                           |  |                                     |  |      |                                                                                                                                                                                                                                                                                   | 
|Wallace H. Mitchell(75)    |  | Director                            |  | 1968 | Retired; Partner, Mitchell Farms; former Secretary-Treasurer and General Manager, Mitchell Chevrolet Company, Fuquay-Varina, NC
(automobile dealership)                                                                                                                           | 
|                           |  |                                     |  |      |                                                                                                                                                                                                                                                                                   | 
|Sam C. Riddle, Jr.(75)     |  | Director                            |  | 1979 | Owner and former President, Riddle Equipment Company, Inc., Carthage, NC (farm equipment dealer)                                                                                                                                                                                  | 
|                           |  |                                     |  |      |                                                                                                                                                                                                                                                                                   | 
|David E. Royal(49)         |  | Executive Vice President            |  | 2002 | Executive officer of the Bank                                                                                                                                                                                                                                                     | 
|                           |  |                                     |  |      |                                                                                                                                                                                                                                                                                   | 
|Ernest W. Whitley, Jr.(55) |  | President (2)                       |  | 2002 | Executive officer of the Bank                                                                                                                                                                                                                                                     | 
|                           |  |                                     |  |      |                                                                                                                                                                                                                                                                                   | 
|Billy T. Woodard(72)       |  | Chairman andChief Executive Officer |  | 1970 | Executive officer of the Bank                                                                                                                                                                                                                                                     | 

(1)Year first elected indicates the year in which each individual became our director or, if prior to our reorganization in
1987, a director of the Bank.

(2)Mr. Whitley, who
was elected our and the Banks President effective January 1, 2002, previously served as Executive Vice President of the Bank.

The following are BancShares current
executive officers.

Billy T. Woodard (age 72) serves as our Chief Executive Officer and Chairman of the Board of Directors (since 1979). He is also a Director of BancShares and
the Bank (since 1970). He previously served as President of BancShares and the Bank (1977-1997).

Haywood A. Lane, Jr. (age 66) serves as our Vice Chairman (since 2001) and is a
Director of BancShares and the Bank (since 1979). He previously served as President of BancShares and the Bank (1997-2001).

Ernest W. Whitley, Jr. (age 55) serves as our
President (since 2001). He previously served as Executive Vice President (2001) and as a City Executive of the Bank (1987-2001).

David E. Royal (age 49) serves as our Executive
Vice President (since 2002). He previously served as a Regional Supervisor of the Bank (1990-2001).



---

ITEM 11  EXECUTIVE COMPENSATION

Cash 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



|                                                    |      | Annual compensation |         |            |         |       |      
|--------------------------------------------------- | ---- | ------------------- | ------- | ---------- | ------- | ----- | -----
|                                                    |      |                     |         |            |         |       |      
|Name andprincipal position                          |      | Year                |         | Salary (1) |         | Bonus |      
|                                                    |      |                     |         |            |         |       |      
|Billy T. WoodardChairman andChief Executive Officer |      | 2002                |         | $          | 273,840 |       | $    
|                                                    | 2001 |                     | 261,000 |            | -0-     |       | 2,400
|                                                    | 2000 |                     | 247,000 |            | -0-     |       | 2,400
|Haywood A. Lane, Jr.Vice Chairman                   |      | 2002                |         | $          | 229,120 |       | $    
|                                                    | 2001 |                     | 218,000 |            | -0-     |       | 2,400
|                                                    | 2000 |                     | 204,000 |            | -0-     |       | 2,400
|Ernest W. Whitley, Jr.President                     |      | 2002                |         | $          | 221,084 |       | $    
|                                                    | 2001 |                     | 161,619 |            | 25,000  |       | -0-  
|                                                    | 2000 |                     | 137,500 |            | 25,000  |       | -0-  
|David E. RoyalExecutive Vice President              |      | 2002                |         | $          | 194,578 |       | $    
|                                                    | 2001 |                     | 155,154 |            | 25,000  |       | -0-  
|                                                    | 2000 |                     | 137,500 |            | 25,000  |       | -0-  

______________

(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. The 2002 amounts for
Mr. Woodard and Mr. Lane consist entirely of the Banks contributions to the Banks Section 401(k) plan for their respective accounts. The 2002 amounts for Mr. Whitley and Mr. Royal consist of $8,500 and $8,275,
respectively, in contributions made by the Bank to the Section 401(k) plan for their accounts, and $7,964 and $6,156, respectively, for the Banks portion of premiums paid for life insurance policies purchased to fund supplemental retirement
benefits for them.



---

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.



|                          |  | Years of service |       
|------------------------- |  | ---------------- | ------
|                          |  |                  |       
|Final Averagecompensation |  | 10 years         |       
|                          |  |                  |       
|$  50,000                 |  | $                | 6,686 
|75,000                    |  | 11,311           |       
|100,000                   |  | 15,936           |       
|125,000                   |  | 20,561           |       
|150,000                   |  | 25,186           |       
|175,000                   |  | 29,256           |       
|200,000                   |  | 29,256           |       
|225,000                   |  | 29,256           |       
|250,000                   |  | 29,256           |       
|300,000                   |  | 29,256           |       
|350,000                   |  |                  | 29,256

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, $200,000 is the maximum amount of annual compensation for 2003 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 $160,000. 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,
2002, for each of the named executive officers in the Summary Compensation Table above were as follows: Billy T. Woodard - 40 years and $172,000; and Haywood A. Lane, Jr. - 40 years and $172,000; Ernest W. Whitley, Jr.  33
years and $160,990; and David E. Royal  28 years and $157,900.

Post-Retirement Consultation Agreements; Supplemental Retirement Benefits

The Bank is party to agreements with Billy T. Woodard and Haywood A. Lane, Jr. which 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 over a ten-year payment period.

As a supplement to their benefits under the Banks Pension Plan, Ernest W. Whitley, Jr. and David E. Royal will receive monthly payments following their retirements from the cash values
of life insurance policies maintained by them and the Bank. The officers and the Bank each pay a portion of the premiums on the policies. The amounts of their monthly payments will vary depending on the amounts of the accumulated cash values of
their respective policies at the time they retire and the numbers of years for which they wish to receive benefits, so those amounts currently are not known. In the event either of the officers dies prior to his retirement, portions of the death
benefits under his policy will be paid to his beneficiary or estate and to the Bank. Following retirement, all death benefits under the policies will be payable to the officers beneficiaries or estates.



---

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.

ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Principal Shareholders

As of March 15, 2003, persons known to BancShares to own beneficially or of record more
than 5% of BancShares voting securities were as follows:



|Name and addressof beneficial owner |  | Amount andnature ofbeneficialownership (1) |  | Percentageof 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, to the best of our knowledge each named individual exercises sole voting and investment power with respect to all shares.

(2)Includes 3,988 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, 2003, by its current
directors individually, and by all current directors and executive officers as a group, was as follows:



|Name and addressof beneficial owner                                |  | Amount andnature of beneficialownership(1) |  | Percentageof class | 
|------------------------------------------------------------------ |  | ------------------------------------------ |  | ------------------ | 
|                                                                   |  |                                            |  |                    | 
|F. Ray AllenBiscoe, NC                                             |  | 102(2)                                     |  | .36%               | 
|                                                                   |  |                                            |  |                    | 
|Haywood A. Lane, Jr.Raleigh, NC                                    |  | 143                                        |  | .51%               | 
|                                                                   |  |                                            |  |                    | 
|D. Gary McRaeMount Gilead, NC                                      |  | 10                                         |  | .04%               | 
|                                                                   |  |                                            |  |                    | 
|Wallace H. MitchellFuquay-Varina, NC                               |  | 100                                        |  | .36%               | 
|                                                                   |  |                                            |  |                    | 
|Sam C. Riddle, Jr.Carthage, NC                                     |  | 87(3)                                      |  | .31%               | 
|                                                                   |  |                                            |  |                    | 
|David E. RoyalGastonia, NC                                         |  | 42                                         |  | .15%               | 
|                                                                   |  |                                            |  |                    | 
|Ernest W. Whitley, Jr.Cary, NC                                     |  | 69                                         |  | .25%               | 
|                                                                   |  |                                            |  |                    | 
|Billy T. WoodardFuquay-Varina, NC                                  |  | 750(4)                                     |  | 2.68%              | 
|                                                                   |  |                                            |  |                    | 
|All current directors and executiveofficers as a group (8 persons) |  | 1,303                                      |  | 4.65%              | 

_______________

(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 a control person, and with respect to which shares Mr. Allen may be considered 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 considered 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 considered 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 2002 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 2002 totaled approximately $3.6 million. The following are fees paid by BancShares to FCB:



---



|                          |  | 2002    |           | 2001    |           | 2000      |          
|------------------------- |  | ------- | --------- | ------- | --------- | --------- | ---------
|                          |  |         |           |         |           |           |          
|                          |  |         |           |         |           |           |          
|Data and items processing |  | $       | 3,245,000 |         | 3,042,000 |           | 2,549,000
|Trustee fees              |  | 60,000  |           | 72,000  |           | 82,000    |          
|Other                     |  | 283,000 |           | 611,000 |           | 447,000   |          
|                          |  |         |           |         |           |           |          
|                          |  | $       | 3,588,000 |         |           | 3,725,000 |          
|                          |  |         |           |         |           |           |          

The Banks relationship with FCB under the agreement will continue
during 2003. 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.

The Company also has a correspondent relationship with FCB. Correspondent account balances with FCB included in cash and due from banks and federal funds sold totaled
$38,454,633 and $41,448,498 at December 31, 2002 and 2001, respectively.

ITEM 14.CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing of this
report, an evaluation was carried out under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of
our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation,
there were no significant changes in the Companys internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material
weaknesses.

PART IV

ITEM 15  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, 2002 and 2001Consolidated Statements of Income for each of the yearsin the three year period ended December 31, 2002Consolidated Statements of Changes in Shareholders Equity for eachof
the years in the three year period ended December 31, 2002Consolidated Statements of Cash Flows for each of the years in thethree year period ended December 31,
2002

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)                   
|      |                                                                                                                                                                                                                                                                                                                     
|*10.5 | 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 10.5 of BancShares Amendment No. 2 to Registration Statement No. 333-62225 filed with the SEC on April 23, 1999)     
|      |                                                                                                                                                                                                                                                                                                                     
|*10.6 | 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 10.6 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 2002 BancShares filed
no Form 8-K Current Reports.

______________



---

SIGNATURES

Pursuant to the requirements
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 24, 2003 |  | By:                             
|                      |  |                                 
|                      |  |                                 

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.

|Signature               |  | Title                                                                             |  | Date          
|----------------------- |  | --------------------------------------------------------------------------------- |  | --------------
|                        |  |                                                                                   |  |               
|/s/ Billy T. Woodward   |  | Chairman and Chief Executive Officer(principal executive officer)                 |  | March 24, 2003
|                       
|Billy T. Woodard       
|                        |  |                                                                                   |  |               
|/s/ Mary W. Willis      |  | Chief Financial Officer and Treasurer(principal financial and accounting Officer) |  | March 24, 2003
|                       
|Mary W. Willis         
|                        |  |                                                                                   |  |               
|/s/ Haywood A. Lane     |  | Vice Chairman and Director                                                        |  | March 24, 2003
|                       
|Haywood A. Lane, Jr.   
|                        |  |                                                                                   |  |               
|/s/ Ernest W. Whitley   |  | President and Director                                                            |  | March 24, 2003
|                       
|Ernest W. Whitley      
|                        |  |                                                                                   |  |               
|/s/ David E. Royal      |  | Executive Vice President and Director                                             |  | March 24, 2003
|                       
|David E. Royal         
|                        |  |                                                                                   |  |               
|/s/ F. Ray Allen        |  | Director                                                                          |  | March 24, 2003
|                       
|F. Ray Allen           
|                        |  |                                                                                   |  |               
|/s/ D. Gary McRae       |  | Director                                                                          |  | March 24, 2003
|                       
|D. Gary McRae          
|                        |  |                                                                                   |  |               
|/s/ Wallace H. Mitchell |  | Director                                                                          |  | March 24, 2003
|                       
|Wallace H. Mitchell    
|                        |  |                                                                                   |  |               
|/s/ Sam C. Riddle, Jr.  |  | Director                                                                          |  | March 24, 2003
|                       
|Sam C. Riddle, Jr.     
|                        |  |                                                                                   |  |               





---

CERTIFICATION

I, Billy T. Woodard,
certify that:

1)I have reviewed this annual
report on Form 10-K of Fidelity BancShares (N.C), Inc.;

2)Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3)Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4)The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a.Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual report is being prepared;

b.Evaluated the effectiveness of the registrants disclosures controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and

c.Presented in
this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5)The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions);

a.All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and

6)The
registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                     |  |    
|-------------------- |  | ---
|Date: March 24, 2003 |  | By:
|                     |  |    
|                     |  |    





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CERTIFICATION

I, Mary W. Willis, certify
that:

1)I have reviewed this annual report on
Form 10-K of Fidelity BancShares (N.C), Inc.;

2)Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;

3)Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4)The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a.Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual report is being prepared;

b.Evaluated the effectiveness of the registrants disclosures controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
Evaluation Date); and

c.Presented in
this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5)The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions);

a.All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and

6)The
registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                     |  |    
|-------------------- |  | ---
|Date: March 24, 2003 |  | By:
|                     |  |    
|                     |  |    





---

CERTIFICATION(Pursuant to 18 U.S.C. Section 1350)

The undersigned hereby certifies that (i) the foregoing Annual Report on Form 10-K filed by Fidelity BancShares (N.C.), Inc. (the Company) for the year ended December 31, 2002, fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



|    |                                                             |  |  | 
|--- | ----------------------------------------------------------- |  |  | 
|By: | /s/ BILLYT.WOODARD                                          |  |  | 
|    |                                                             |  |  | 
|    | Date: March 24, 2003Billy T. WoodardChief Executive
Officer |  |  | 



|   |                                                                         |  |  | 
|-- | ----------------------------------------------------------------------- |  |  | 
|By | /s/ MARYW.WILLIS                                                        |  |  | 
|   |                                                                         |  |  | 
|   | Date: March 24, 2003Mary W. WillisChief Financial Officer and
Treasurer |  |  | 





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EXHIBIT INDEX

3.1BancShares 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)

3.2BancShares 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)

4.1Initial 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)

4.2Certificate 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)

4.3Form 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)

4.4Form 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)

4.5Form 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)

4.6Form 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)

4.7Form 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)

*10.1Employee 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)

*10.2First 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)

*10.3Employee 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)

*10.4First 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)

*10.5Second 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 10.5 of BancShares Amendment No. 2 to Registration Statement No.
333-62225 filed with the SEC on April 23, 1999)

*10.6Second 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 10.6 of BancShares Amendment No. 2 to Registration Statement No. 333-62225
filed with the SEC on April 23, 1999)

21.1List 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.

__________