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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarter ended September 30, 2005



Commission File No. 0-10852



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SOUTHERN BANCSHARES (N.C.), INC.

(Exact name of registrant as specified in its charter)



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



|                                                 |  |           
|------------------------------------------------ |  | ----------
|121 East Main Street Mount Olive, North Carolina |  | 28365     
|(Address of Principal Executive offices)         |  | (Zip Code)



Registrants
Telephone Number, including Area Code: (919) 658-7000



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



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



Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



Indicate the number of shares outstanding of
the Registrants common stock as of the latest practicable date.



108,920 shares



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Part I  FINANCIAL INFORMATION



Item 1  Financial Statements.



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

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except for per share data)



|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                                                                                                    |  | (Unaudited)September 30,2005 |           |   | December 31,2004* |  
|ASSETS                                                                                                                                                                                                                                              |  |                              |           |   |                   |   |           |  
|Cash and due from banks                                                                                                                                                                                                                             |  | $                            | 49,958    |   |                   | $ | 22,283    |  
|Overnight funds sold                                                                                                                                                                                                                                |  |                              | 19,526    |   |                   |   | 35,872    |  
|Investment securities:                                                                                                                                                                                                                              |  |                              |           |   |                   |   |           |  
|Available-for-sale, at fair value (amortized cost of $47,556 and $43,600, respectively)                                                                                                                                                             |  |                              | 82,130    |   |                   |   | 74,903    |  
|Held-to-maturity, at amortized cost (fair value of $198,819 and $236,172, respectively)                                                                                                                                                             |  |                              | 199,605   |   |                   |   | 236,609   |  
|Loans                                                                                                                                                                                                                                               |  |                              | 690,734   |   |                   |   | 639,311   |  
|Loans held for sale                                                                                                                                                                                                                                 |  |                              | 8,082     |   |                   |   | 4,880     |  
|Less allowance for loan losses                                                                                                                                                                                                                      |  |                              | (11,012   | ) |                   |   | (10,259   | )
|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  
|Net loans                                                                                                                                                                                                                                           |  |                              | 687,804   |   |                   |   | 633,932   |  
|Accrued interest receivable                                                                                                                                                                                                                         |  |                              | 6,523     |   |                   |   | 4,929     |  
|Premises and equipment                                                                                                                                                                                                                              |  |                              | 34,640    |   |                   |   | 34,513    |  
|Goodwill                                                                                                                                                                                                                                            |  |                              | 7,712     |   |                   |   | 7,712     |  
|Other intangible assets                                                                                                                                                                                                                             |  |                              | 2,634     |   |                   |   | 3,687     |  
|Other assets                                                                                                                                                                                                                                        |  |                              | 2,859     |   |                   |   | 3,010     |  
|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  
|Total assets                                                                                                                                                                                                                                        |  | $                            | 1,093,391 |   |                   | $ | 1,057,450 |  
|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  
|LIABILITIES                                                                                                                                                                                                                                         |  |                              |           |   |                   |   |           |  
|Deposits:                                                                                                                                                                                                                                           |  |                              |           |   |                   |   |           |  
|Noninterest-bearing                                                                                                                                                                                                                                 |  | $                            | 197,501   |   |                   | $ | 183,762   |  
|Interest-bearing                                                                                                                                                                                                                                    |  |                              | 732,860   |   |                   |   | 726,760   |  
|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  
|Total deposits                                                                                                                                                                                                                                      |  |                              | 930,361   |   |                   |   | 910,522   |  
|Accrued interest payable                                                                                                                                                                                                                            |  |                              | 2,272     |   |                   |   | 1,447     |  
|Short-term borrowings                                                                                                                                                                                                                               |  |                              | 21,097    |   |                   |   | 16,017    |  
|Long-term obligations                                                                                                                                                                                                                               |  |                              | 23,711    |   |                   |   | 23,711    |  
|Other liabilities                                                                                                                                                                                                                                   |  |                              | 11,593    |   |                   |   | 9,735     |  
|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                                                                                                   |  |                              | 989,034   |   |                   |   | 961,432   |  
|SHAREHOLDERS EQUITY                                                                                                                                                                                                                                |  |                              |           |   |                   |   |           |  
|Series B non-cumulative preferred stock, no par value; $3,506 liquidation value at both September 30, 2005 and December 31, 2004,
408,728 shares authorized; 350,593 shares issued and outstanding at both September 30, 2005 and December 31, 2004 |  |                              | 1,753     |   |                   |   | 1,753     |  
|Series C non-cumulative preferred stock, no par value; $397 liquidation value at both September 30, 2005 and December 31, 2004; 43,631 shares
authorized; 39,657 shares issued and outstanding at both September 30, 2005 and December 31, 2004     |  |                              | 525       |   |                   |   | 525       |  
|Common stock, $5 par value; 158,485 shares authorized; 108,920 and 110,126 shares issued and outstanding at September 30, 2005 and
December 31, 2004, respectively                                                                                  |  |                              | 545       |   |                   |   | 551       |  
|Surplus                                                                                                                                                                                                                                             |  |                              | 10,000    |   |                   |   | 10,000    |  
|Retained earnings                                                                                                                                                                                                                                   |  |                              | 70,536    |   |                   |   | 64,528    |  
|Accumulated other comprehensive income                                                                                                                                                                                                              |  |                              | 20,998    |   |                   |   | 18,661    |  
|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  
|Total shareholders equity                                                                                                                                                                                                                          |  |                              | 104,357   |   |                   |   | 96,018    |  
|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                                          |  | $                            | 1,093,391 |   |                   | $ | 1,057,450 |  
|                                                                                                                                                                                                                                                    |  |                              |           |   |                   |   |           |  

---

|* | Derived from audited consolidated financial statements
|- | ------------------------------------------------------



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



2



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

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



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



|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                   |  | (Unaudited)                     |        
|                                                                   |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                   |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|Interest income:                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loans                                                              |  | $                               | 12,024  |   |                                | $ | 9,575   |      |  | $ | 33,134  |   |  | $ | 28,339  |  
|Investment securities:                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|U. S. Government                                                   |  |                                 | 1,280   |   |                                |   | 819     |      |  |   | 3,608   |   |  |   | 2,482   |  
|State, county and municipal                                        |  |                                 | 217     |   |                                |   | 275     |      |  |   | 826     |   |  |   | 792     |  
|Other                                                              |  |                                 | 498     |   |                                |   | 428     |      |  |   | 1,533   |   |  |   | 1,390   |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total investment securities interest income                        |  |                                 | 1,995   |   |                                |   | 1,522   |      |  |   | 5,967   |   |  |   | 4,664   |  
|Overnight funds sold                                               |  |                                 | 169     |   |                                |   | 128     |      |  |   | 445     |   |  |   | 335     |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total interest income                                              |  |                                 | 14,188  |   |                                |   | 11,225  |      |  |   | 39,546  |   |  |   | 33,338  |  
|Interest expense:                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Deposits                                                           |  |                                 | 3,689   |   |                                |   | 2,558   |      |  |   | 9,681   |   |  |   | 7,491   |  
|Short-term borrowings                                              |  |                                 | 135     |   |                                |   | 42      |      |  |   | 313     |   |  |   | 92      |  
|Long-term obligations                                              |  |                                 | 400     |   |                                |   | 473     |      |  |   | 1,297   |   |  |   | 1,422   |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total interest expense                                             |  |                                 | 4,224   |   |                                |   | 3,073   |      |  |   | 11,291  |   |  |   | 9,005   |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net interest income                                                |  |                                 | 9,964   |   |                                |   | 8,152   |      |  |   | 28,255  |   |  |   | 24,333  |  
|Provision for loan losses                                          |  |                                 | 300     |   |                                |   | 300     |      |  |   | 900     |   |  |   | 900     |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net interest income after provision for loan losses                |  |                                 | 9,664   |   |                                |   | 7,852   |      |  |   | 27,355  |   |  |   | 23,433  |  
|Noninterest income:                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Service charges on deposit accounts                                |  |                                 | 1,769   |   |                                |   | 1,835   |      |  |   | 5,152   |   |  |   | 5,322   |  
|Other service charges and fees                                     |  |                                 | 716     |   |                                |   | 600     |      |  |   | 2,088   |   |  |   | 1,824   |  
|Gain on sale of loans                                              |  |                                 | 236     |   |                                |   | 138     |      |  |   | 605     |   |  |   | 497     |  
|Investment securities gain, net                                    |  |                                 | 93      |   |                                |   |        |      |  |   | 1,009   |   |  |   | 3       |  
|Other                                                              |  |                                 | 150     |   |                                |   | 153     |      |  |   | 401     |   |  |   | 414     |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total noninterest income                                           |  |                                 | 2,964   |   |                                |   | 2,726   |      |  |   | 9,255   |   |  |   | 8,060   |  
|                                                                   |  |                                 |         |  
|Noninterest expense:                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Personnel                                                          |  |                                 | 4,825   |   |                                |   | 4,695   |      |  |   | 14,532  |   |  |   | 13,930  |  
|Data processing                                                    |  |                                 | 889     |   |                                |   | 906     |      |  |   | 2,761   |   |  |   | 2,673   |  
|Occupancy                                                          |  |                                 | 904     |   |                                |   | 902     |      |  |   | 2,689   |   |  |   | 2,644   |  
|Furniture and equipment                                            |  |                                 | 517     |   |                                |   | 501     |      |  |   | 1,503   |   |  |   | 1,528   |  
|Intangibles amortization                                           |  |                                 | 289     |   |                                |   | 361     |      |  |   | 946     |   |  |   | 1,127   |  
|Professional fees                                                  |  |                                 | 179     |   |                                |   | 203     |      |  |   | 515     |   |  |   | 676     |  
|Other                                                              |  |                                 | 1,197   |   |                                |   | 1,005   |      |  |   | 3,396   |   |  |   | 3,156   |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total noninterest expense                                          |  |                                 | 8,800   |   |                                |   | 8,573   |      |  |   | 26,342  |   |  |   | 25,734  |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income before income taxes.                                        |  |                                 | 3,828   |   |                                |   | 2,005   |      |  |   | 10,268  |   |  |   | 5,759   |  
|Income taxes                                                       |  |                                 | 1,280   |   |                                |   | 560     |      |  |   | 3,270   |   |  |   | 1,560   |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                         |  |                                 | 2,548   |   |                                |   | 1,445   |      |  |   | 6,998   |   |  |   | 4,199   |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Other comprehensive income, net of tax:                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Unrealized gains (losses) arising during period                    |  |                                 | 5,867   |   |                                |   | 110     |      |  |   | 4,812   |   |  |   | (613    | )
|Less: tax effect                                                   |  |                                 | (2,262  | ) |                                |   | (42     | )    |  |   | (1,855  | ) |  |   | 237     |  
|Less: Reclassification adjustment for gains included in net income |  |                                 | (93     | ) |                                |   |        |      |  |   | (1,009  | ) |  |   | (1      | )
|Less: tax effect                                                   |  |                                 | 36      |   |                                |   |        |      |  |   | 389     |   |  |   |        |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total other comprehensive income (loss)                            |  |                                 | 3,548   |   |                                |   | 68      |      |  |   | 2,337   |   |  |   | (377    | )
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income                                               |  | $                               | 6,096   |   |                                | $ | 1,513   |      |  | $ | 9,335   |   |  | $ | 3,822   |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Per share information:                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income per common share                                        |  | $                               | 22.56   |   |                                | $ | 12.25   |      |  | $ | 61.65   |   |  | $ | 35.43   |  
|Cash dividends declared on common shares                           |  |                                 | 0.40    |   |                                |   | 0.40    |      |  |   | 1.20    |   |  |   | 1.20    |  
|Weighted average common shares outstanding                         |  |                                 | 108,920 |   |                                |   | 110,701 |      |  |   | 109,268 |   |  |   | 111,043 |  
|                                                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



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



3



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

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004



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



(Unaudited)



|                                                             |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------ |  | --------------- | - | ------------ | -------- | ----- | ------- | ------ | ---------------- | ------ | - | ------------------------------------- |  | ------- | -------------------------- |  | - | --- | - |  | - | ------ |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                             |  | Preferred Stock |   | Common Stock |          |       | Surplus |        | RetainedEarnings |        |   | AccumulatedOtherCompre-hensive Income |  |         | Total Shareholders Equity | 
|                                                             |  | Series B        |   |              | Series C |       |         |        |                  |       
|                                                             |  | Shares          |   |              | Amount   |       |         | Shares |                  | Amount |   | Shares                                |  |         | Amount                     |  |   |     |   | 
|BALANCE, DECEMBER 31, 2003                                   |  | 358,316         |   |              | $        | 1,745 |         |        | 39,657           |        | $ | 552                                   |  | 111,530 |                            |  | $ | 558 |   |  | $ | 10,000 |  | $ | 59,919 |   |  | $ | 15,744 |   |  | $ | 88,518  |  
|                                                             |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                   |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   | 4,199  |   |  |   |       |   |  |   | 4,199   |  
|Purchase and retirement of stock                             |  | (6,255          | ) |              |          | (30   | )       |        |                 |        |   |                                      |  | (914    | )                          |  |   | (5  | ) |  |   |       |  |   | (425   | ) |  |   |       |   |  |   | (460    | )
|Cash dividends:                                              |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  
|Common stock ($1.20 per share)                               |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   | (133   | ) |  |   |       |   |  |   | (133    | )
|Preferred B ($.67 per share)                                 |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   | (238   | ) |  |   |       |   |  |   | (238    | )
|Preferred C ($.67 per share)                                 |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   | (27    | ) |  |   |       |   |  |   | (27     | )
|Unrealized gain on securities available-for-sale, net of tax |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   |       |   |  |   | (377   | ) |  |   | (377    | )
|                                                             |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  
|BALANCE, SEPTEMBER 30, 2004                                  |  | 352,061         |   |              | $        | 1,715 |         |        | 39,657           |        | $ | 552                                   |  | 110,616 |                            |  | $ | 553 |   |  | $ | 10,000 |  | $ | 63,295 |   |  | $ | 15,367 |   |  | $ | 91,482  |  
|                                                             |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  
|BALANCE, DECEMBER 31, 2004                                   |  | 350,593         |   |              | $        | 1,753 |         |        | 39,657           |        | $ | 525                                   |  | 110,126 |                            |  | $ | 551 |   |  | $ | 10,000 |  | $ | 64,528 |   |  | $ | 18,661 |   |  | $ | 96,018  |  
|                                                             |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                   |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   | 6,998  |   |  |   |       |   |  |   | 6,998   |  
|Purchase, retirement and reclass of stock                    |  |                |   |              |          |      |         |        |                 |        |   |                                      |  | (1,206  | )                          |  |   | (6  | ) |  |   |       |  |   | (597   | ) |  |   |       |   |  |   | (603    | )
|Cash dividends:                                              |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  
|Common stock ($1.20 per share)                               |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   | (131   | ) |  |   |       |   |  |   | (131    | )
|Preferred B ($.67 per share)                                 |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   | (235   | ) |  |   |       |   |  |   | (235    | )
|Preferred C ($.67 per share)                                 |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   | (27    | ) |  |   |       |   |  |   | (27     | )
|Unrealized gain on securities available-for-sale, net of tax |  |                |   |              |          |      |         |        |                 |        |   |                                      |  |        |                            |  |   |    |   |  |   |       |  |   |       |   |  |   | 2,337  |   |  |   | 2,337   |  
|                                                             |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  
|BALANCE, SEPTEMBER 30, 2005                                  |  | 350,593         |   |              | $        | 1,753 |         |        | 39,657           |        | $ | 525                                   |  | 108,920 |                            |  | $ | 545 |   |  | $ | 10,000 |  | $ | 70,536 |   |  | $ | 20,998 |   |  | $ | 104,357 |  
|                                                             |  |                 |   |              |          |       |         |        |                  |        |   |                                       |  |         |                            |  |   |     |   |  |   |        |  |   |        |   |  |   |        |   |  |   |         |  



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



4



---

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

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                         |  |                                           |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | (Unaudited)Nine Months EndedSeptember 30, |        
|                                                                                         | 
|(In thousands)                                                                           |  | 2005                                      |         |   | 2004 |  
|OPERATING ACTIVITIES:                                                                    |  |                                           |         |   |      |   |         |  
|Net income                                                                               |  | $                                         | 6,998   |   |      | $ | 4,199   |  
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |                                           |         |   |      |   |         |  
|Provision for loan losses                                                                |  |                                           | 900     |   |      |   | 900     |  
|Gains on sales, donations and issuer calls of securities                                 |  |                                           | (1,009  | ) |      |   | (3      | )
|Loss (gain) on sale and abandonment of premises and equipment                            |  |                                           | 7       |   |      |   | (5      | )
|Gain on sale of foreclosed assets                                                        |  |                                           | (11     | ) |      |   |        |  
|Gain on sale of loans                                                                    |  |                                           | (605    | ) |      |   | (497    | )
|Net amortization of premiums on investments                                              |  |                                           | 73      |   |      |   | 548     |  
|Amortization of intangibles and mortgage servicing rights                                |  |                                           | 1,178   |   |      |   | 1,127   |  
|Depreciation                                                                             |  |                                           | 2,000   |   |      |   | 2,087   |  
|Proceeds from sales of loans held for sale                                               |  |                                           | 58,244  |   |      |   | 28,019  |  
|Origination of loans held for sale                                                       |  |                                           | (66,188 | ) |      |   |        |  
|Net (increase) decrease in intangible assets                                             |  |                                           | (125    | ) |      |   | 77      |  
|Net increase in accrued interest receivable                                              |  |                                           | (1,594  | ) |      |   | (497    | )
|Net increase (decrease) in accrued interest payable                                      |  |                                           | 825     |   |      |   | (36     | )
|Net increase in other assets                                                             |  |                                           | (886    | ) |      |   | (1,075  | )
|Net increase (decrease) in other liabilities                                             |  |                                           | 1,858   |   |      |   | (120    | )
|                                                                                         |  |                                           |         |   |      |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                |  |                                           | 1,665   |   |      |   | 34,724  |  
|                                                                                         |  |                                           |         |   |      |   |         |  
|INVESTING ACTIVITIES:                                                                    |  |                                           |         |   |      |   |         |  
|Proceeds from maturities and issuer calls of investment securities available-for-sale    |  |                                           | 7,878   |   |      |   | 43,839  |  
|Proceeds from maturities and issuer calls of investment securities held-to-maturity      |  |                                           | 86,894  |   |      |   | 28,970  |  
|Proceeds from sales of investment securities available-for-sale                          |  |                                           | 1,119   |   |      |   |        |  
|Purchases of investment securities held-to-maturity                                      |  |                                           | (46,310 | ) |      |   | (92,590 | )
|Purchases of investment securities available-for-sale                                    |  |                                           | (16,531 | ) |      |   | (10,583 | )
|Net cash received for branches acquired                                                  |  |                                           |        |   |      |   | 14,551  |  
|Net increase in loans                                                                    |  |                                           | (45,175 | ) |      |   | (33,906 | )
|Purchases of premises and equipment                                                      |  |                                           | (2,134  | ) |      |   | (1,539  | )
|                                                                                         |  |                                           |         |   |      |   |         |  
|NET CASH USED BY INVESTING ACTIVITIES                                                    |  |                                           | (14,259 | ) |      |   | (51,258 | )
|                                                                                         |  |                                           |         |   |      |   |         |  
|FINANCING ACTIVITIES:                                                                    |  |                                           |         |   |      |   |         |  
|Net increase in demand and interest-bearing demand deposits                              |  |                                           | 6,255   |   |      |   | 8,004   |  
|Net increase (decrease) in time deposits                                                 |  |                                           | 13,584  |   |      |   | (4,904  | )
|Net proceeds of short-term borrowed funds                                                |  |                                           | 5,080   |   |      |   | 1,795   |  
|Cash dividends paid                                                                      |  |                                           | (393    | ) |      |   | (398    | )
|Purchase and retirement of stock                                                         |  |                                           | (603    | ) |      |   | (460    | )
|                                                                                         |  |                                           |         |   |      |   |         |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                |  |                                           | 23,923  |   |      |   | 4,037   |  
|                                                                                         |  |                                           |         |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |  |                                           | 11,329  |   |      |   | (12,497 | )
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR                                       |  |                                           | 58,155  |   |      |   | 84,572  |  
|                                                                                         |  |                                           |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT THE END OF PERIOD                                           |  | $                                         | 69,484  |   |      | $ | 72,075  |  
|                                                                                         |  |                                           |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE YEAR FOR:                               |  |                                           |         |   |      |   |         |  
|Interest                                                                                 |  | $                                         | 10,466  |   |      | $ | 7,618   |  
|Income taxes                                                                             |  | $                                         | 2,893   |   |      | $ | 1,319   |  
|                                                                                         |  |                                          
|SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:                  |  |                                           |         |   |      |   |         |  
|Unrealized gains on available-for-sale securities, net of tax                            |  | $                                         | 2,337   |   |      | $ | (377    | )
|Foreclosed loans transferred to other real estate                                        |  | $                                         | 1,064   |   |      | $ | 780     |  



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



5



---

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

Notes to Consolidated Financial Statements



Note 1. Summary of Significant Accounting Policies



Basis of Financial Statement Presentation



Southern BancShares (N. C.), Inc. (BancShares) is the holding company for Southern Bank and Trust Company
(Southern), which operates 53 banking offices in eastern North Carolina, Southern Capital Trust II, a wholly-owned finance subsidiary, and Southern Bank Community Development, LLC, a wholly owned subsidiary for the construction or
rehabilitation of low to moderate income residential or commercial properties primarily in rural Eastern North Carolina markets served by Southern. Southern, which began operations January 29, 1901, has a wholly-owned subsidiary, Goshen, Inc.
whose insurance agency operations complement the operations of its parent. BancShares and Southern are headquartered in Mount Olive, North Carolina. BancShares has no foreign operations and BancShares customers are principally located in
eastern North Carolina.



The consolidated financial statements in this report
are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the quarters presented have been included.



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. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ from those estimates. The results presented are for the nine months ended September 30, 2005 and may not be indicative
of results for the full year of 2005. The statements should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2004, incorporated by reference in the 2004 Annual Report on
Form 10-K.



Principles of Consolidation



The consolidated financial statements include the accounts of BancShares and
its wholly-owned subsidiaries, Southern and Southern Bank Community Development, LLC. The statements also include the accounts of Goshen, Inc., a wholly-owned subsidiary of Southern. BancShares financial resources are primarily provided by
dividends from Southern. All significant intercompany balances have been eliminated in consolidation.



Cash and Cash Equivalents



For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks and overnight funds sold.



Goodwill and Other Intangible Assets



Intangible assets are composed primarily of goodwill, core deposit premiums and mortgage
servicing rights. Core deposit premiums are generally amortized on an accelerated basis, over a period of 5 to 10 years as determined by independent third parties based on studies, and the useful lives are periodically reviewed for reasonableness.
Mortgage servicing rights (MSR) represent the estimated value of the right to service mortgage loans for others. Capitalization of MSR occurs when the underlying loans are sold. Capitalized MSR are amortized into income over the
projected servicing life of the underlying loans. Capitalized MSR are periodically reviewed for impairment. The net MSR balances were $753,000 and $861,000 at September 30, 2005 and December 31, 2004, respectively. No valuation allowance
for impairment was required at September 30, 2005 or at December 31, 2004.



6



---

The following is a summary of the gross carrying amounts and accumulated amortization of amortized intangible assets as
of September 30, 2005 and December 31, 2004:



(Dollars in thousands)



|                               |  |                      |        |                         |   |                      |  |                         |        |  |   |       
|------------------------------ |  | -------------------- | ------ | ----------------------- | - | -------------------- |  | ----------------------- | ------ |  | - | ------
|                               |  | September 30, 2005   |        | December 31, 2004      
|                               |  | Gross CarryingAmount |        | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets:   |  |                      |        |                         |   |                      |  |                         |        |  |   |       
|Branch acquisitions            |  | $                    | 14,691 |                         | $ | 12,833               |  | $                       | 14,691 |  | $ | 11,888
|Mortgage servicing rights      |  |                      | 2,735  |                         |   | 1,982                |  |                         | 2,610  |  |   | 1,749 
|                               |  |                      |        |                         |   |                      |  |                         |        |  |   |       
|Totals                         |  | $                    | 17,426 |                         | $ | 14,815               |  | $                       | 17,301 |  | $ | 13,637
|                               |  |                      |        |                         |   |                      |  |                         |        |  |   |       
|Unamortized intangible assets: |  |                      |        |                         |   |                      |  |                         |        |  |   |       
|Goodwill                       |  | $                    | 7,712  |                         |   |                     |  | $                       | 7,712  |  |   |      
|Pension                        |  | $                    | 23     |                         |   |                     |  | $                       | 23     |  |   |      



Southern issues standby letters of
credit whereby Southern guarantees performance if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. The maximum potential
amount of undiscounted future payments related to standby letters of credit at September 30, 2005 is $5.9 million. At September 30, 2005, BancShares has recorded no liability for the current carrying amount of the obligation to perform as
a guarantor, as such amounts are deemed immaterial.



Accounting Matters



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



In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires
that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The
provisions of this Statement are effective for the first interim reporting period of the first fiscal year that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending March 31,
2006. The Company does not have a stock option plan and adoption of SFAS No. 123(R) will not have any effect on the consolidated financial statements.



Reclassifications



Certain 2005 year-to-date and quarter-to-date balances have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net
income or shareholders equity as previously reported.



7



---

Note 2. Investment Securities



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



(Dollars in thousands)



|                                                 |  |                    |         |                      |   |                  |  |   |            |   |                    |   |                      |  |                  |         |  |            |        |  |   |        |   |  |   |        
|------------------------------------------------ |  | ------------------ | ------- | -------------------- | - | ---------------- |  | - | ---------- | - | ------------------ | - | -------------------- |  | ---------------- | ------- |  | ---------- | ------ |  | - | ------ | - |  | - | -------
|                                                 |  | September 30, 2005 |         | December 31, 2004   
|                                                 |  | GrossAmortizedCost |         | GrossUnrealizedGains |   | UnrealizedLosses |  |   | Fair Value |   | GrossAmortizedCost |   | GrossUnrealizedGains |  | UnrealizedLosses |         |  | Fair Value
|SECURITIES HELD-TO-MATURITY:                     |  |                    |         |                      |   |                  |  |   |            |   |                    |   |                      |  |                  |         |  |            |        |  |   |        |   |  |   |        
|U. S. Treasuries                                 |  | $                  | 184,878 |                      | $ | 54               |  | $ | (1,542     | ) |                    | $ | 183,390              |  | $                | 185,798 |  | $          |       |  | $ | (1,235 | ) |  | $ | 184,563
|U. S. Agencies                                   |  |                    |        |                      |   |                 |  |   |           |   |                    |   |                     |  |                  | 15,018  |  |            |       |  |   | (46    | ) |  |   | 14,972 
|Obligations of states and political subdivisions |  |                    | 14,727  |                      |   | 702              |  |   |           |   |                    |   | 15,429               |  |                  | 35,793  |  |            | 857    |  |   | (13    | ) |  |   | 36,637 
|                                                 |  |                    |         |                      |   |                  |  |   |            |   |                    |   |                      |  |                  |         |  |            |        |  |   |        |   |  |   |        
|                                                 |  | $                  | 199,605 |                      | $ | 756              |  | $ | (1,542     | ) |                    | $ | 198,819              |  | $                | 236,609 |  | $          | 857    |  | $ | (1,294 | ) |  | $ | 236,172
|                                                 |  |                    |         |                      |   |                  |  |   |            |   |                    |   |                      |  |                  |         |  |            |        |  |   |        |   |  |   |        
|SECURITIES AVAILABLE-FOR-SALE:                   |  |                    |         |                      |   |                  |  |   |            |   |                    |   |                      |  |                  |         |  |            |        |  |   |        |   |  |   |        
|U. S. Treasuries                                 |  | $                  | 4,990   |                      | $ |                 |  | $ | (56        | ) |                    | $ | 4,934                |  | $                |        |  | $          |       |  | $ |       |   |  | $ |       
|U. S. Agencies                                   |  |                    |        |                      |   |                 |  |   |           |   |                    |   |                     |  |                  | 6,001   |  |            |       |  |   | (7     | ) |  |   | 5,994  
|Marketable equity securities                     |  |                    | 33,912  |                      |   | 34,471           |  |   | (133       | ) |                    |   | 68,250               |  |                  | 26,766  |  |            | 30,991 |  |   | (143   | ) |  |   | 57,614 
|Obligations of states and political subdivisions |  |                    | 5,055   |                      |   | 196              |  |   | (49        | ) |                    |   | 5,202                |  |                  | 6,401   |  |            | 238    |  |   |       |   |  |   | 6,639  
|Mortgage-backed securities                       |  |                    | 3,599   |                      |   | 163              |  |   | (18        | ) |                    |   | 3,744                |  |                  | 4,432   |  |            | 224    |  |   |       |   |  |   | 4,656  
|                                                 |  |                    |         |                      |   |                  |  |   |            |   |                    |   |                      |  |                  |         |  |            |        |  |   |        |   |  |   |        
|                                                 |  | $                  | 47,556  |                      | $ | 34,830           |  | $ | (256       | ) |                    | $ | 82,130               |  | $                | 43,600  |  | $          | 31,453 |  | $ | (150   | ) |  | $ | 74,903 
|                                                 |  |                    |         |                      |   |                  |  |   |            |   |                    |   |                      |  |                  |         |  |            |        |  |   |        |   |  |   |        
|TOTALS                                           |  | $                  | 247,161 |                      | $ | 35,586           |  | $ | (1,798     | ) |                    | $ | 280,949              |  | $                | 280,209 |  | $          | 32,310 |  | $ | (1,444 | ) |  | $ | 311,075
|                                                 |  |                    |         |                      |   |                  |  |   |            |   |                    |   |                      |  |                  |         |  |            |        |  |   |        |   |  |   |        



Securities with a carrying value of
$105,372 were pledged at September 30, 2005 to secure public deposits and for other purposes as required by law and contractual arrangement.



Temporarily Impaired Securities Losses At September 30, 2005:



|                                                 |  |                                      |       |                                      |   |                  |  |            |     |                  |   |            |  |   |       |  |   |        
|------------------------------------------------ |  | ------------------------------------ | ----- | ------------------------------------ | - | ---------------- |  | ---------- | --- | ---------------- | - | ---------- |  | - | ----- |  | - | -------
|                                                 |  | Securities Owned Less Than 12 Months |       | Securities Owned 12 Months Or Longer |   | Total           
|                                                 |  | UnrealizedLosses                     |       | FairValue                            |   | UnrealizedLosses |  | Fair Value |     | UnrealizedLosses |   | Fair Value
|U. S. Treasuries                                 |  | $                                    | 1,014 |                                      | $ | 88,091           |  | $          | 584 |                  | $ | 100,234    |  | $ | 1,598 |  | $ | 188,325
|Mortgage-backed securities                       |  |                                      |      |                                      |   |                 |  |            | 18  |                  |   | 1,250      |  |   | 18    |  |   | 1,250  
|Obligations of states and political subdivisions |  |                                      |      |                                      |   |                 |  |            | 49  |                  |   | 5,523      |  |   | 49    |  |   | 5,523  
|                                                 |  |                                      |       |                                      |   |                  |  |            |     |                  |   |            |  |   |       |  |   |        
|Subtotal, debt securities                        |  |                                      | 1,014 |                                      |   | 88,091           |  |            | 651 |                  |   | 107,007    |  |   | 1,665 |  |   | 195,098
|Marketable equity securities                     |  |                                      | 80    |                                      |   | 5,973            |  |            | 53  |                  |   | 2,134      |  |   | 133   |  |   | 8,107  
|                                                 |  |                                      |       |                                      |   |                  |  |            |     |                  |   |            |  |   |       |  |   |        
|Total temporarily impaired securities            |  | $                                    | 1,094 |                                      | $ | 94,064           |  | $          | 704 |                  | $ | 109,141    |  | $ | 1,798 |  | $ | 203,205
|                                                 |  |                                      |       |                                      |   |                  |  |            |     |                  |   |            |  |   |       |  |   |        



The above securities losses were
considered temporary losses at September 30, 2005 principally resulting from the continued relatively low interest rate market managed by the Federal Reserve during 2004 and 2005. The losses were principally in twelve U. S. Government
investments with less than two years until maturity.



Temporarily Impaired Securities Losses At December 31, 2004:



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



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



8



---

Note 3. Allowance for Loan Losses



(Dollars in thousands)



|                             |  |                                |        |   |      |   |        |  
|---------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                             |  | Nine Months EndedSeptember 30, |       
|                             |  | 2005                           |        |   | 2004 |  
|Balance at beginning of year |  | $                              | 10,259 |   |      | $ | 10,095 |  
|Provision for loan losses    |  |                                | 900    |   |      |   | 900    |  
|Loans charged off            |  |                                | (517   | ) |      |   | (704   | )
|Loan recoveries              |  |                                | 370    |   |      |   | 135    |  
|                             |  |                                |        |   |      |   |        |  
|Balance at end of the year   |  | $                              | 11,012 |   |      | $ | 10,426 |  
|                             |  |                                |        |   |      |   |        |  



Note
4. Earnings per Common Share



Earnings per common share are computed by
dividing income applicable to common shares by the weighted average number of common shares outstanding during the period. Income applicable to common shares represents net income reduced by dividends paid to preferred shareholders. Since BancShares
had no potentially dilutive securities during 2005 or 2004, the computation of basic and diluted earnings per share is the same. The following table presents the components of the earnings per share computations:



(Dollars in thousands)



|                                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                             |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                             |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|Net income                                                   |  | $                               | 2,548   |   |                                | $ | 1,445   |      |  | $ | 6,998   |   |  | $ | 4,199   |  
|Less: Preferred dividends                                    |  |                                 | (91     | ) |                                |   | (90     | )    |  |   | (262    | ) |  |   | (265    | )
|                                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net income applicable to common shares                       |  | $                               | 2,457   |   |                                | $ | 1,355   |      |  | $ | 6,736   |   |  | $ | 3,934   |  
|                                                             |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding during the period |  |                                 | 108,920 |   |                                |   | 110,701 |      |  |   | 109,268 |   |  |   | 111,043 |  



Note
5. Related Parties



BancShares has entered into various service contracts with
another bank holding company, First Citizens BancShares, Inc. (the Corporation) and its subsidiary First-Citizens Bank & Trust Company. The Corporation has two significant shareholders, who also are significant shareholders of
BancShares.



The first significant shareholder is a director of BancShares and,
at September 30, 2005, beneficially owned 32,751 shares, or 30.07%, of BancShares outstanding common stock and 4,966 shares, or 1.42%, of BancShares outstanding Series B preferred stock. At the same date, the second significant
shareholder beneficially owned 27,422 shares, or 25.18%, of BancShares outstanding common stock.



These two significant shareholders are directors and executive officers of the Corporation and at September 30, 2005, beneficially owned 2,550,765 shares, or 29.13%, and 1,390,274 shares, or 15.88%, of the
Corporations outstanding Class A common stock, and 668,777 shares, or 39.86%, and 209,022 shares, or 12.46%, of the Corporations outstanding Class B common stock. The above totals include 476,408 Class A common shares, or
5.44%, and 105,044 Class B Common shares, or 6.26%, that are considered to be beneficially owned by both of the shareholders and, therefore, are included in each of their totals.



BancShares is related through common ownership with Fidelity Bancshares NC Inc, (Fidelity) and Heritage BancShares, Inc.
(Heritage), in that the aforementioned two significant shareholders of BancShares and certain of their related parties are also significant shareholders of Fidelity and Heritage. Fidelity has contracted with BancShares for BancShares to
service, on Fidelitys behalf, $1.5 million of Fidelitys mortgage loans at September 30, 2005. BancShares provides underwriting and processing services for mortgage loans originated though Fidelity and Heritage.



9



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The following table lists the various charges paid to the Corporation during the three and nine months ended
September 30, 2005 and 2004 in accordance with the aforementioned service contracts:



(Dollars in thousands)



|                                   |  |                                 |       |                                |   |       |  |      |       |  |   |      
|---------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                   |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                   |  | 2005                            |       | 2004                           |   | 2005  |  | 2004
|Data and item processing           |  | $                               | 769   |                                | $ | 779   |  | $    | 2,353 |  | $ | 2,352
|Forms, supplies and equipment      |  |                                 | 248   |                                |   | 229   |  |      | 704   |  |   | 838  
|Internet banking                   |  |                                 | 46    |                                |   | 38    |  |      | 132   |  |   | 114  
|Consulting fees                    |  |                                 |       |                                |   | 24    |  |      | 27    |  |   | 72   
|Trustee for employee benefit plans |  |                                 | 19    |                                |   | 17    |  |      | 56    |  |   | 51   
|Other services                     |  |                                 | 24    |                                |   | 19    |  |      | 71    |  |   | 89   
|                                   |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Totals                             |  | $                               | 1,130 |                                | $ | 1,109 |  | $    | 3,388 |  | $ | 3,523
|                                   |  |                                 |       |                                |   |       |  |      |       |  |   |      



Note
6. Acquisitions



BancShares has consummated numerous bank branch acquisitions
in recent years. All of the acquisitions have been accounted for under the purchase method of accounting, with the results of operations not included in BancShares Consolidated Statements of Income until after the transaction date. The
proforma impact of the acquisitions as though they had been made at the beginning of the periods presented is not considered material to BancShares consolidated financial statements.



BancShares acquired two Capital Bank, Raleigh, North Carolina branches located in Seaboard,
North Carolina and Woodland, North Carolina on September 13, 2004. BancShares acquired deposits of $28.0 million, loans of $10.7 million and cash of $15.4 million. BancShares paid $1.9 million for the Seaboard and Woodland branch acquisitions.
There were no acquisitions during the nine months ended September 30, 2005.



Note 7. Retirement Plans



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



10



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The following sets forth pertinent information regarding the components of net periodic
benefit pension plan costs:



Components of
net periodic benefit cost:



(Dollars in
thousands)



|                                 |  |                  |      |   |      |   |      |  
|-------------------------------- |  | ---------------- | ---- | - | ---- | - | ---- | -
|                                 |  | Pension Benefits |     
|Three months ended September 30: |  | 2005             |      |   | 2004 |  
|Service cost                     |  | $                | 218  |   |      | $ | 224  |  
|Interest cost                    |  |                  | 266  |   |      |   | 270  |  
|Expected return on assets        |  |                  | (294 | ) |      |   | (248 | )
|                                 |  |                  |      |   |      |   |      |  
|                                 |  |                  | 190  |   |      |   | 246  |  
|                                 |  |                  |      |   |      |   |      |  
|Amortization cost:               |  |                  |      |   |      |   |      |  
|Prior service cost               |  |                  | 1    |   |      |   | 2    |  
|Net loss                         |  |                  | 77   |   |      |   | 78   |  
|                                 |  |                  |      |   |      |   |      |  
|Total amortizations              |  |                  | 78   |   |      |   | 80   |  
|                                 |  |                  |      |   |      |   |      |  
|Net periodic benefit cost        |  | $                | 268  |   |      | $ | 326  |  
|                                 |  |                  |      |   |      |   |      |  
|                                 | 
|                                 |  | Pension Benefits |     
|Nine months ended September 30:  |  | 2005             |      |   | 2004 |  
|Service cost                     |  | $                | 714  |   |      | $ | 673  |  
|Interest cost                    |  |                  | 854  |   |      |   | 810  |  
|Expected return on assets        |  |                  | (842 | ) |      |   | (735 | )
|                                 |  |                  |      |   |      |   |      |  
|                                 |  |                  | 726  |   |      |   | 748  |  
|                                 |  |                  |      |   |      |   |      |  
|Amortization cost:               |  |                  |      |   |      |   |      |  
|Prior service cost               |  |                  | 5    |   |      |   | 6    |  
|Net loss                         |  |                  | 257  |   |      |   | 234  |  
|                                 |  |                  |      |   |      |   |      |  
|Total amortizations              |  |                  | 262  |   |      |   | 240  |  
|                                 |  |                  |      |   |      |   |      |  
|Net periodic benefit cost        |  | $                | 988  |   |      | $ | 988  |  
|                                 |  |                  |      |   |      |   |      |  



The
expected long-term rate of return on plan assets is 8.50% for 2005.



Employer Contributions



BancShares 2004
consolidated financial statements disclosed that it expected to contribute $1.0 million to its pension plan in 2005. As of September 30, 2005, $1.4 million has been contributed. BancShares does not expect to make any additional contributions in
2005.



11



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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations.



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



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - NINE MONTHS ENDED 2005 VS. NINE MONTHS ENDED 2004



INTRODUCTION



This discussion provides information concerning changes in the consolidated financial condition and results of operations of Southern BancShares (N.C.), Inc.
(BancShares) and its subsidiary, Southern Bank and Trust Company (Southern). The comments are intended to supplement, and should be reviewed in conjunction with, the consolidated financial statements, related notes and
selected financial data presented elsewhere herein. The comments should also be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2004, incorporated by reference in the 2004
Annual Report on Form 10-K.



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



Numerous factors influence customer demand
for Southerns deposit and loan products including the overall economy within Southerns eastern North Carolina markets and the level of financial services competition within those markets. During the majority of 2005 and 2004, general
economic uncertainty and relatively low interest rates managed by the Federal Reserve significantly impacted customer demand for both deposit and loan products. The low interest rate market caused some customers, anticipating increases in rates, to
choose shorter term deposit products including short-term certificates of deposit, transaction, savings and money market accounts. The low interest rate market provided many customers with an opportunity to refinance existing loans at much lower
rates, provided some customers the ability to reduce their overall loan requirements and provided some customers an opportunity to increase their loan balances at much lower interest rates.



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



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



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



12



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



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



The net income of BancShares increased approximately $2.8 million from $4.2 million in the
first nine months of 2004 to $7.0 million in the first nine months of 2005, an increase of 66.66%. This increase resulted primarily from a $3.9 million before tax increase in net interest income and a increase of $1.1 million in net gains on sales
of loans and available-for-sale investments. The opening of a new branch in May 2004 and the acquisition of two branches in September 2004 resulted in increased net interest income, increased noninterest income, increased personnel expense and
increased operating expenses for the nine months ended September 30, 2005.



Per share net income available to common shares for the first nine months of 2005 was $61.65, an increase of $26.22, or 74.01%, from $35.43 for the first nine months of 2004. The annualized return on average equity increased to 9.83%, for
the period ended September 30, 2005, from 6.19% for the period ended September 30, 2004.



BancShares total assets at September 30, 2005 have increased $35.9 million, or 3.40% from December 30, 2004. BancShares assets totaled $1.09 billion at September 30, 2005 compared to $1.06 billion
at December 31, 2004. During this nine month period, cash and due from banks increased $27.7 million, or 124.20% from $22.3 million to $50.0 million. Overnight funds sold decreased $16.3 million, or 45.57% from $35.9 million to $19.5 million.
Loans, excluding loans held for sale, increased $51.4 million, or 8.04%, from $639.3 million to $690.7 million. Investment securities decreased $29.8 million, or 9.56% from $311.5 million at December 31, 2004 to $281.7 million at
September 30, 2005. Total deposits increased $19.8 million, or 2.18% from $910.5 million at December 31, 2004 to $930.4 million at September 30, 2005.



CRITICAL ACCOUNTING POLICIES



BancShares significant accounting policies are set forth in note 1 of the consolidated financial statements in the annual report on
Form 10-K. Of these significant accounting policies, BancShares considers its policy regarding the allowance for loan losses to be its single critical accounting policy, because it requires managements most subjective and complex judgments. In
addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. BancShares has developed appropriate policies and procedures for assessing
the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio.



BancShares assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of
information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning BancShares allowance for loan losses and related matters, see
ASSET QUALITY AND PROVISION FOR LOAN LOSSES.



13



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ACQUISITIONS, NEW OFFICES AND CONSOLIDATIONS



BancShares did not acquire any additional locations in the nine months ended
September 30, 2005. On May 10, 2004 BancShares opened a de novo branch in Manteo, North Carolina to expand the Kill Devil Hills financial services market. On September 13, 2004, BancShares acquired an existing branch in Seaboard,
North Carolina and an existing branch in Woodland, North Carolina from Capital Bank. These two branch acquisitions expanded BancShares northeastern North Carolina market service area into Northampton County. The two 2004 Capital Bank Northampton
County branch acquisitions added $28.0 million of deposits, $10.7 million of loans and $15.4 million of cash. BancShares paid $1.9 million for the Seaboard and Woodland branch acquisitions.



Applications have been approved to open de novo Southern branches in Red Oak, North Carolina
and Winterville, North Carolina. The Winterville branch and the Red Oak branch are expected to open in the second quarter of 2006.



Franchise expansion has also contributed to growth in noninterest income, but has also resulted in large increases in noninterest expenses, especially personnel-related
costs, occupancy expenses, equipment expenses and intangible asset amortization expenses.



Management continues to look for growth opportunities offered though existing branch acquisition opportunities and to plan for de novo expansion within its eastern North Carolina markets. The acquisition of existing
branches from other financial institutions results in the payment of acquisition premiums which are allocated to non-earning assets or charged to operating earnings over time.



INTEREST INCOME



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



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



During the remaining quarter of 2005 and into 2006, management anticipates increased
commercial loan growth opportunities due to the continued relatively low interest rate environment and an expected continued slow improvement in the eastern North Carolina economy. Market interest rates are expected to continue to slowly increase
during the remainder of 2005 and into 2006. Loan demand among retail customers has shifted to open-end credit products such as equity line loans. Growth in equity line loans is also expected during the remainder of 2005 and into 2006.



To minimize the potential adverse impact of interest rate fluctuations, management monitors
the maturity and repricing distribution of the loan portfolio. BancShares offers variable rate loan products and fixed rate callable loans to reduce interest rate risk.



14



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Interest and fees on loans increased $4.8 million, or 16.92%, from $28.3 million for the nine months ended
September 30, 2004 to $33.1 million for the nine months ended September 30, 2005. This increase resulted from both increased loan portfolio balances and increased loan yields. Average loans for the nine months ended September 30, 2005
were $662.2 million, an increase of $29.5 million, or 4.66%, from $632.7 million for the prior year period. This increase in average loans was principally the result of a slowly improving eastern North Carolina economy, the opening of a de novo
branch in May 2004 and two branch acquisitions in September 2004. The yield on the loan portfolio increased to 6.69% for the nine months ended September 30, 2005 from 5.99% for the nine months ended September 30, 2004.



As a result of the continued generally slow recovery of the eastern North Carolina economy,
2005 loan production opportunities have continued to be relatively limited in several of Southerns markets. As a result of the deposit growth in Southerns existing markets, the 2004 Seaboard and Woodland acquisitions, improving loan
demand and the relatively low interest rate market management by the Federal Reserve, management has made investments in primarily two-year maturity or less, held-to-maturity, U. S. Treasury securities.



Management continues to maintain a portfolio of securities with relatively short maturities
and call dates, consistent with BancShares focus on liquidity. The weighted average investment maturity at September 30, 2005 was 16.8 months compared to 18.5 months at December 31, 2004. Investment securities available for sale
include marketable equity securities that are recorded at their fair value, with the unrealized net gain or loss included as a component of shareholders equity, net of deferred taxes.



Interest income from investment securities, including U. S. Treasury and Government Agency
obligations, obligations of state and county subdivisions and other securities increased $1.3 million or 27.94%, from $4.7 million in the nine months ended September 30, 2004 to $6.0 million in the nine months ended September 30, 2005.
This increase was due to both an increase in average investment securities and an increase in yields for the nine months ended September 30, 2005. The average investment securities for the nine months ended September 30, 2005 was $269.2
million as compared to $240.7 million for the same 2004 period. The increase in volume principally resulted from the average level of deposits being greater than the average level of loans for the de novo branch in Manteo, North Carolina, opened in
May 2004, and the September 2004 acquisitions of existing branches in Seaboard, North Carolina and Woodland, North Carolina from Capital Bank. The yield on investment securities was 2.96% for the nine-month period ended September 30, 2005 and
2.59% for the nine-month period ended September 30, 2004.



Interest income
on overnight funds sold increased $110,000, or 32.84%, from $335,000 for the nine months ended September 30, 2004 to $445,000 for the nine months ended September 30, 2005. This increase in income resulted from a decrease in the average
overnight funds sold to $20.7 million for the nine months ended September 30, 2005 from an average of $43.6 million for the nine months ended September 30, 2004 more than offset by an increase in the average overnight funds sold yields
from 1.01% for the nine months ended September 30, 2004, to 2.84% for the nine months ended September 30, 2005.



Total interest income increased $6.2 million, or 18.62%, from $33.3 million for the nine months ended September 30, 2004 to $39.5 million for the nine months ended
September 30, 2005. This increase was the result of both an increase of $35.1 million in average earning assets and a 69 basis point increase in average earning asset yields.



Average earning asset yields for the nine months ended September 30, 2005 increased to 5.55% from the 4.86% yield on average earning
assets for the nine months ended September 30, 2004 primarily as a result of the overall increase in market rates managed by the Federal Reserve. Average earning assets increased from $917.0 million in the nine months ended September 30,
2004 to $952.1 million in the nine months ended September 30, 2005. This $35.1 million increase in the average earning assets resulted primarily from growth within the existing branches, the opening of the de novo branch and the acquisitions
discussed above.



15



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INTEREST EXPENSE



Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Southerns primary
funding source is deposits. Other short-term funding sources include commercial repurchase agreements and a borrowing line of credit from First-Citizens Bank & Trust Company. Long-term borrowings also provide additional capital under
guidelines established by the Federal Reserve.



During the quarter ended
March 31, 2004, the year ended December 31, 2004 and the quarter ended March 31, 2005, BancShares had long-term obligations including 8.25% junior subordinated debentures totaling $23.7 million issued to Southern Capital Trust I with
a maturity date of 2028. Southern Capital Trust I was a wholly-owned finance subsidiary of BancShares. During the second quarter of 2005, in order to lower BancShares annual interest costs by approximately $308,000, Southern Capital Trust I redeemed
the $23.7 million of 8.25% long-term obligations of Southern Capital Trust I. Southern Capital Trust II was then formed as a wholly-owned finance subsidiary of BancShares and issued $23.7 million of 6.95% long-term obligations. The $23.7 million of
6.95% long-term obligations qualify as Tier 1 Capital for BancShares, are redeemable in whole or in part after April 28, 2010 and mature in 2035. BancShares fully and unconditionally guarantees the repayment of the $23.7 million 6.95% trust
preferred securities.



BancShares has historically avoided excessive reliance
on time deposit accounts with balances in excess of $100,000. At September 30, 2005, the time deposits greater than $100,000 were 13.81% of total deposits, compared to 13.76% of September 30, 2004 total deposits.



Total interest expense increased $2.3 million, or 25.39%, from $9.0 million in the nine
months ended September 30, 2004 to $11.3 million for the nine months ended September 30, 2005. BancShares total cost of funds increased from 1.60% for the nine months ended September 30, 2004 to 1.97% for the nine months ended
September 30, 2005 as a result of the overall increase in market rates. Average interest-bearing deposits were $724.2 million in the nine months ended September 30, 2005, an increase of $11.9 million from the $712.3 million average in the
nine months ending September 30, 2004. The increase in interest-bearing deposits was primarily the result of growth within the existing branches, the opening of the de novo branch and the acquisitions discussed above.



NET INTEREST INCOME



A principal objective of BancShares asset/liability function is to manage interest
rate risk or the exposure to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that protect against wide interest rate fluctuations,
thereby limiting, to the extent possible, the ultimate interest rate exposure. As a result of the relatively slowly improving eastern North Carolina economy, consumer concerns over the improving economys impact on the equity markets and the
Federal Reserve continuing to manage relatively low interest rates, many consumers have moved cash into the shorter maturity deposit products of the Bank.



Net interest income before provision for loan losses was $28.3 million for the nine months ended September 30, 2005 and $24.3 million for the nine months ended
September 30, 2004.



The interest rate spread for the nine months ended
September 30, 2005 was 3.60%, an increase of 34 basis points from the 3.26% interest rate spread for the nine months ended September 30, 2004. The increase in the interest rate spread was primarily due to the average rate on
interest-bearing liabilities repricing upward at a slower rate than the upward repricing of interest-earning assets.



16



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ASSET QUALITY AND PROVISION FOR LOAN LOSSES



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



Management evaluates the risk
characteristics of the loan portfolio under current economic conditions, reviews the financial condition of borrowers, estimates the fair market value of the loan collateral and considers any other pertinent factors to estimate current credit
losses. Southern provides an allowance for loan losses on a reserve basis and includes in operating expenses a provision for loan losses determined by management. The allowance is reduced by charge-offs and increased by subsequent recoveries.
Managements periodic evaluation of the adequacy of the allowance is based on Southerns past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect borrowers experience, the estimated
value of any underlying collateral, current economic conditions and other risk factors. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and in
consideration of the current economic environment. While management uses the best information available to make evaluations, future adjustments may be necessary.



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



During the first nine months of 2005, management charged-off loans totaling
$517,000 and received recoveries of $370,000, resulting in net charge-offs of $147,000. During the same period in 2004, $704,000 in loans were charged-off and recoveries of $135,000 were received, resulting in net charge-offs of $569,000. As a
result of the slowly improving eastern North Carolina economy, Southern has experienced a $422,000, or 74.17%, decrease in net loan charge-offs for the nine months ended September 30, 2005 compared to the nine months ended September 30,
2004. In consideration of the overall potential impact of decreased year-to-date net loan charge-offs, a higher than normal increase in average loans and an increase in the Banks watch list loans, management recorded $900,000 as a provision
for loan losses for the nine months ended September 30, 2005. For the nine months ended September 30, 2004 management also recorded a $900,000 provision for loan losses. The ratio of annualized net charge-offs to average loans decreased
from 0.16% for the year ended December 31, 2004 to an annualized 0.03% for the nine months ended September 30, 2005. The September 30, 2005 allowance for loan losses increased $753,000 from December 31, 2004.



The following table presents comparative Asset Quality ratios of BancShares at or for the
nine months ended September 30, or the twelve months ended December 31:



|                                                                 |  |                   |   |  |                  |   |  |                   |  
|---------------------------------------------------------------- |  | ----------------- | - |  | ---------------- | - |  | ----------------- | -
|                                                                 |  | September 30,2005 |   |  | December 31,2004 |   |  | September 30,2004 |  
|Ratio of annualized net loans charged off to average loans       |  | 0.03              | % |  | 0.16             | % |  | 0.12              | %
|Allowance for loan losses to loans excluding loans held-for sale |  | 1.59              | % |  | 1.60             | % |  | 1.64              | %
|Non-performing loans to loans excluding loans held-for-sale      |  | 0.51              | % |  | 0.26             | % |  | 0.39              | %
|Non-performing loans and assets to total assets                  |  | 0.40              | % |  | 0.21             | % |  | 0.35              | %
|Allowance for loan losses to non-performing loans                |  | 313.64            | % |  | 616.53           | % |  | 422.11            | %



17



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The allowance for loan losses represented 1.59% of loans, excluding loans held-for-sale, at September 30, 2005
compared to 1.60% of loans, excluding loans held-for-sale, at December 31, 2004. The ratio of the allowance for loan losses to loans, net of loans held-for-sale, was impacted by managements decision to add to the provision for loan losses
due to the continued weakness in the economy, a decrease in impaired loans, an increase in the mortgage loan portfolio and an increase in foreclosed other real estate. Loans, net of loans held-for-sale, increased $51.4 million, or 8.04% from $639.3
million at December 31, 2004 to $690.7 million at September 30, 2005.



The ratio of nonperforming loans to loans, net of loans held-for-sale, increased from 0.26% at December 31, 2004 to 0.51% at September 30, 2005. Nonperforming loans and assets to total assets increased to 0.40% at
September 30, 2005 from 0.21% at December 31, 2004. The allowance for loan losses represented 313.64% of nonperforming loans at September 30, 2005, a decrease from the 616.53% at December 31, 2004.



Performance declines resulted primarily from increased nonperforming loans of $3.5 million at
September 30, 2005 compared to $1.7 million at December 31, 2004. The nonperforming loans at September 30, 2005 included $245,000 of nonaccrual loans, $3.3 million of accruing loans 90 days or more past due and no restructured loans.
BancShares had $860,000 of assets classified as other real estate at September 30, 2005. BancShares had $525,000 of assets classified as other real estate at December 31, 2004.



Management considers the September 30, 2005 allowance for loan losses to be adequate to cover the losses and risks inherent in the loan
portfolio at September 30, 2005 and will continue to monitor its portfolio and to adjust the relative level of the allowance as needed. BancShares had impaired loans of $17,000 at September 30, 2005 compared to $832,000 at
December 31, 2004. No additional allowances for loan losses were required for these impaired loans.



Management actively maintains a current loan watch list and knows of no other loans which are material and (i) represent or result from trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.



NONINTEREST
INCOME



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



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



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



18



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Income from other service charges and fees includes mortgage loan commitment fees, mortgage loan servicing fees,
automated teller machine fees, check cashing fees and other miscellaneous nondeposit-related customer service fees. Increases in this category of noninterest income are primarily the result of customer account growth within the existing branches,
the opening of new branches and the acquisitions of existing branches from other financial institutions.



Southern sells mortgage loan production into the secondary mortgage markets and retains servicing on the majority of loans sold. The resulting interest rate market managed by the Federal Reserve and the timing of
interest rate changes within the market directly impacts the level of gains or losses that are realized on mortgage loans sold. Gain on sale of mortgage loans increased $108,000 for the nine months ended September 30, 2005 from $497,000 in the
nine months ended September 30, 2004 as a result of both increased mortgage loan production and increased sales of mortgage loans into the secondary market.



During the nine months ended September 30, 2005, BancShares realized a $1.2 million increase in noninterest income primarily as a
result of a $1.1 million before tax increase in gains on sale of loans and investment securities in the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004.



Service charges on deposit accounts for the nine months ended September 30, 2005
decreased $170,000 and other service charges and fees for the nine months ended September 30, 2005 increased $264,000 over the nine months ended September 30, 2004 primarily as a result of growth within the existing branches, the opening
of the de novo branch and the acquisitions discussed above.



NONINTEREST EXPENSE



The primary noninterest
expenses are personnel salaries and benefits, occupancy and equipment costs related to branch offices and data processing costs. Noninterest expenses also include the expensing of intangibles amortization resulting from the acquisition of existing
branch locations from other financial institutions.



Noninterest expense
increased $608,000 or 2.36%, from $25.7 million in the nine months ended September 30, 2004 to $26.3 million in the nine months ended September 30, 2005.



This increase was primarily due to an increase in personnel expense of $602,000, or 4.32%, from $13.9 million at September 30, 2004 to
$14.5 million at September 30, 2005 and increased occupancy, data processing and other expenses resulting principally from the existing branches, the de novo branch addition and the branch acquisitions discussed above.



INCOME TAXES



In the nine months ended September 30, 2005, BancShares recorded income tax expense of
$3.3 million. In the nine months ended September 30, 2004, BancShares recorded income tax expense of $1.6 million. The resulting effective tax rate for the nine months ended September 30, 2005 was 31.85%. The effective tax rate for the
nine months ended September 30, 2004 was 27.09%. The estimated effective tax rate was higher in 2005 due to a decrease in tax-exempt income in 2005 as a percentage of total income before taxes for 2005. The effective tax rates in 2005 of 31.85%
and in 2004 of 27.09% differ from the federal statutory rate of 34.00% primarily due to tax exempt income.



19



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



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 THIRD QUARTER OF 2005 VS. THIRD QUARTER OF 2004



INTRODUCTION



In the three months ended September 30, 2005, the
net income of BancShares increased $1.1 million from $1.4 million in the three months ended September 30, 2004 to $2.5 million in the three months ended September 30, 2005, an increase of 76.33%. The increase in net income for the quarter
ended September 30, 2005 is attributed principally to a $1.8 million increase in before tax net interest income and a before tax $191,000 increase in gains on sales of loans and available-for-sale investment securities.



Per share net income available to common shares for the three months ended September 30,
2005 was $22.56, an increase of $10.31, or 84.16%, from $12.25 for the three months ended September 30, 2004.



ACQUISITIONS



BancShares had no acquisitions in the quarter ended September 30, 2005. BancShares acquired a Seaboard, North Carolina branch and a Woodland, North Carolina branch
from Capital Bank of Raleigh, North Carolina on September 13, 2004. Deposit growth of $28.0 million, loan growth of $10.7 million, additional cash of $15.4 million and intangible assets of $1.9 million resulted from this acquisition.



INTEREST INCOME



Interest and fees on loans increased $2.4 million or 25.58% to $12.0 million for the quarter
ended September 30, 2005 from $9.6 million for the quarter ended September 30, 2004. This increase was due to both increased loan balances and higher loan portfolio yields. Average loans for the quarter ended September 30, 2005 were
$688.2 million, an increase of 7.75% from $638.7 million for the prior year quarter. The yield on the loan portfolio was 6.93% for the three months ended September 30, 2005 and 5.95% for the three months ended September 30, 2004 primarily
as a result of increases in market rates.



Interest income from investment
securities, including U. S. Treasury and Government Agency obligations, obligations of state and county subdivisions and other securities increased $473,000, or 31.08%, from $1.5 million in the three months ended September 30, 2004 to $2.0
million in the three months ended September 30, 2005. This increase was primarily due to both an increase in the average investment portfolio and increased yields. Average investment securities for the quarter ended September 30, 2005
increased to $285.1 million as compared to $246.9 million for the same 2004 quarter. The yield on investment securities was 3.12% for the quarter ended September 30, 2005 and 2.44% for the quarter ended September 30, 2004.



Interest income on overnight funds sold increased $41,000, or 32.03%, from $128,000 for the
quarter ended September 30, 2004 to $169,000 for the quarter ended September 30, 2005. This increase in income resulted from a decrease in volume more than offset by an increase in yield. The average overnight funds sold was $20.5 million
for the quarter ended September 30, 2005 compared to an average of $37.3 million for the quarter ended September 30, 2004. Average overnight funds sold yields were 3.21% for the quarter ended September 30, 2005 an increase from 1.34%
for the quarter ended September 30, 2004 primarily as a result of increased market rates.



Total interest income increased $3.0 million, or 26.40%, from $11.2 million for the quarter ended September 30, 2004 to $14.2 million for the quarter ended September 30, 2005. This increase was primarily the
result of an increase in the yields on average earning assets resulting primarily from the overall higher market interest rates during the quarter ended September 30, 2005.



20



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Average earning asset yields for the quarter ended September 30, 2005 increased to 5.85% from the 4.83% yield on
average earning assets for the quarter ended September 30, 2004. Average earning assets increased from $923.0 million in the quarter ended September 30, 2004 to $962.3 million in the quarter ended September 30, 2005.



INTEREST EXPENSE



Total interest expense increased $1.2 million from $3.1 million for the three months ended
September 30, 2004 to $4.2 million for the three months ended September 30, 2005. Interest expense increased as a result of both increased balances and increased costs of deposits and short-term borrowings.



Interest-bearing liability rates for the quarter ended September 30, 2005 increased to
2.03% from the 1.62% cost for the quarter ended September 30, 2004. Average interest-bearing liabilities increased from $754.6 million in the quarter ended September 30, 2004 to $770.1 million in the quarter ended September 30, 2005.



NET INTEREST INCOME



Net interest income before provision for loan losses was $8.2 million for the three months
ended September 30, 2004 and $10.0 million for the three months ended September 30, 2005.



The interest rate spread for the quarter ended September 30, 2005 was 3.68%, an increase of 47 basis points from the 3.21% interest rate spread for the quarter ended September 30, 2004. The increase in the
interest rate spread was primarily due to the average rate on interest-bearing liabilities repricing upward at a slower rate than the average yield on interest-earning assets.



ASSET QUALITY AND PROVISION FOR LOAN LOSSES



For the three months ended September 30, 2005, management recorded $300,000 as a provision for loan losses. Management also made a
$300,000 provision for loan losses for the quarter ended September 30, 2004. BancShares recorded the 2005 provision for loan losses after consideration of the overall potential impact of higher than normal loan growth, the overall continued
relative weakness of the eastern North Carolina economy and decreased net charge-offs for the quarter ended September 30, 2005.



During the three months ended September 30, 2005, $133,000 in loans were charged-off and recoveries of $53,000 were received, resulting in net charge-offs of $80,000
for the three months ended September 30, 2005. During the three months ended September 30, 2004 management charged-off loans totaling $200,000 and received recoveries of $34,000, resulting in $166,000 of net charge-offs for the three
months ended September 30, 2004.



NONINTEREST INCOME



During the three months ended September 30,
2005, BancShares noninterest income increased $238,000 principally as a result of increased gains on sales of loans and available-for-sale-securities. Service charges on deposit accounts for the three months ended September 30, 2005
decreased $66,000 and other service charges and fees for the three months ended September 30, 2005 increased $116,000 over the three months ended September 30, 2004 primarily as a result of growth within the existing branches, the opening
of the de novo branch and the acquisitions discussed above.



21



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NONINTEREST EXPENSE



Noninterest expense including personnel, occupancy, furniture and equipment, data processing, FDIC insurance, state assessments, printing,
supplies and other expenses, increased $227,000 or 2.65%, from $8.6 million in the three months ended September 30, 2004 to $8.8 million in the three months ended September 30, 2005.



This increase was primarily due to increased personnel and other expenses resulting
principally from the growth within the existing branches, the addition of de novo branch and the branch acquisitions discussed above.



INCOME TAXES



In the three months ended September 30, 2005, BancShares had income tax expense of $1.3 million, an increase of $720,000 from $560,000 in the prior year quarter.
This increase is due to increased earnings and an increase in the estimated effective tax rate for the quarter ended September 30, 2005 to 33.44% compared to 27.93% for the quarter ended September 30, 2004. The effective tax rates for the
quarters ended September 30, 2005 of 33.44% and September 30, 2004 of 27.93% differ from the federal statutory rate of 34.00% primarily due to the relative proportion of tax exempt income.



SHAREHOLDERS EQUITY AND CAPITAL ADEQUACY



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



The Federal Reserve Board, which regulates
BancShares, and the Federal Deposit Insurance Corporation, which regulates Southern, have established minimum capital guidelines for the institutions they supervise.



Regulatory guidelines define minimum requirements for BancShares and Southerns leverage capital ratios. Leverage capital equals total
equity less goodwill and certain other intangibles and is measured relative to total adjusted assets as defined by regulatory guidelines. According to these guidelines, Southerns leverage capital ratio at September 30, 2005 was 7.93%. At
December 31, 2004, Southerns leverage capital ratio was 7.39%. Both of these ratios exceed the minimum threshold designated as well capitalized by the FDIC. According to these guidelines, BancSharess leverage capital
ratio at September 30, 2005 was 9.34%. At December 31, 2004, BancSharess leverage capital ratio was 8.72%. Both of these ratios exceed the minimum threshold designated as well capitalized by the Federal Reserve.



BancShares and Southern are also required to meet minimum requirements for
Risk Based Capital (RBC). BancShares and Southerns assets, including loan commitments and other off-balance sheet items, are weighted according to regulatory guidelines for the risk considered inherent in each asset. At
September 30, 2005, Southerns Total RBC ratio was 13.64%. At December 31, 2004 Southerns RBC ratio was 13.45%. Both of these ratios exceed the minimum threshold designated as well capitalized by the FDIC. At
September 30, 2005, BancShares Total RBC ratio was 16.56%. At December 31, 2004 BancShares RBC ratio was 16.39%. Both of these ratios exceed the minimum threshold designated as well capitalized by the Federal
Reserve.



The regulatory capital ratios above reflect increases in assets and
liabilities from acquisitions for BancShares and Southrern. Each acquisition has resulted in BancShares and Southern recording intangible assets in their consolidated financial statements, which are deducted from total equity in the above ratio
calculations.



22



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Accumulated other comprehensive income was $21.0 million at September 30, 2005 compared to $18.7 million at
December 31, 2004. Although a part of total shareholders equity, accumulated other comprehensive income is not included in the calculation of either the RBC or leverage capital ratios pursuant to regulatory definitions of these capital
requirements. The following table presents capital adequacy calculations and ratios of BancShares and Southern:



BancShares:



|                                                 |  |        |         |       |                                      |   |        |                                                                        |        |  |      |        |  |       |        |  |       |  
|------------------------------------------------ |  | ------ | ------- | ----- | ------------------------------------ | - | ------ | ---------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                                 |  | Actual |         |       | Minimum for capital adequacypurposes |   |        | Minimum to be well capitalized under promptcorrective actionprovisions |       
|As of September 30, 2005: (Dollars in
thousands) |  | Amount |         | Ratio |                                      |   | Amount |                                                                        | Ratio  |  |      | Amount |  | Ratio |       
|Total capital (to risk-weighted assets)          |  | $      | 120,920 |       | 16.56                                | % |        | $                                                                      | 58,429 |  | 8.00 | %      |  | $     | 73,036 |  | 10.00 | %
|Tier 1 Capital (to risk-weighted assets)         |  | $      | 96,511  |       | 13.21                                | % |        | $                                                                      | 29,214 |  | 4.00 | %      |  | $     | 43,821 |  | 6.00  | %
|Tier 1 capital (to average assets)               |  | $      | 96,511  |       | 9.34                                 | % |        | $                                                                      | 41,348 |  | 4.00 | %      |  | $     | 51,685 |  | 5.00  | %
|                                                 |  |        |        
|                                                 |  | Actual |         |       | Minimum for capital adequacypurposes |   |        | Minimum to be well capitalized under promptcorrective actionprovisions |       
|As of December 31, 2004: (Dollars in
thousands)  |  | Amount |         | Ratio |                                      |   | Amount |                                                                        | Ratio  |  |      | Amount |  | Ratio |       
|Total capital (to risk-weighted assets)          |  | $      | 111,466 |       | 16.39                                | % |        | $                                                                      | 54,420 |  | 8.00 | %      |  | $     | 68,025 |  | 10.00 | %
|Tier 1 Capital (to risk-weighted assets)         |  | $      | 89,561  |       | 13.17                                | % |        | $                                                                      | 27,210 |  | 4.00 | %      |  | $     | 40,815 |  | 6.00  | %
|Tier 1 capital (to average assets)               |  | $      | 89,561  |       | 8.72                                 | % |        | $                                                                      | 41,094 |  | 4.00 | %      |  | $     | 51,368 |  | 5.00  | %
|                                                 |  |        |         |      
|Southern:                                        |  |        |         |       |                                      |   |        |                                                                        |        |  |      |        |  |      
|                                                 |  |        |        
|                                                 |  | Actual |         |       | Minimum for capital adequacypurposes |   |        | Minimum to bewell capitalizedunder promptcorrective actionprovisions   |       
|As of September 30, 2005: (Dollars in
thousands) |  | Amount |         | Ratio |                                      |   | Amount |                                                                        | Ratio  |  |      | Amount |  | Ratio |       
|Total capital (to risk-weighted assets)          |  | $      | 96,481  |       | 13.64                                | % |        | $                                                                      | 56,606 |  | 8.00 | %      |  | $     | 70,758 |  | 10.00 | %
|Tier 1 Capital (to risk-weighted assets)         |  | $      | 80,849  |       | 11.43                                | % |        | $                                                                      | 28,303 |  | 4.00 | %      |  | $     | 42,455 |  | 6.00  | %
|Tier 1 capital (to average assets)               |  | $      | 80,849  |       | 7.93                                 | % |        | $                                                                      | 40,787 |  | 4.00 | %      |  | $     | 50,984 |  | 5.00  | %
|                                                 |  |        |        
|                                                 |  | Actual |         |       | Minimum for capital adequacypurposes |   |        | Minimum to be well capitalized under promptcorrective actionprovisions |       
|As of December 31, 2004:(Dollars in thousands)   |  | Amount |         | Ratio |                                      |   | Amount |                                                                        | Ratio  |  |      | Amount |  | Ratio |       
|Total capital (to risk-weighted assets)          |  | $      | 88,796  |       | 13.45                                | % |        | $                                                                      | 52,834 |  | 8.00 | %      |  | $     | 66,043 |  | 10.00 | %
|Tier 1 Capital (to risk-weighted assets)         |  | $      | 74,762  |       | 11.32                                | % |        | $                                                                      | 26,417 |  | 4.00 | %      |  | $     | 39,626 |  | 6.00  | %
|Tier 1 capital (to average assets)               |  | $      | 74,762  |       | 7.39                                 | % |        | $                                                                      | 40,461 |  | 4.00 | %      |  | $     | 50,576 |  | 5.00  | %



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ISSUER REPURCHASES OF EQUITY SECURITIES



Pursuant to the general authority given each year by BancShares Board of Directors,
not pursuant to a formal repurchase plan or program, BancShares is authorized to repurchase shares of its capital stock from time to time in unsolicited private transactions and/or on the open market. Purchases are subject to various conditions,
including price and volume limitations and compliance with applicable law. No purchases of capital stock were made during the three months ending September 30, 2005.



Under similar authority during the nine months ended September 30, 2005, BancShares repurchased an aggregate of 1,206 shares of Common
Stock in unsolicited private transactions. Under similar authority during the nine months ended September 30, 2004, BancShares repurchased an aggregate of 6,255 shares of Series B Preferred Stock and 914 shares of Common Stock in unsolicited
private transactions.



LIQUIDITY



Liquidity refers to the ability of Southern 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 experiences help management anticipate cyclical demands and amounts of cash required. These obligations can be met by existing cash reserves or funds from maturing loans and investments, but in the normal course of business are met
by deposit growth.



In assessing liquidity, many relevant factors are
considered, including stability of deposits, quality of assets, economy of the markets served, business concentrations, competition and BancShares overall financial condition. BancShares liquid assets include cash and due from banks,
overnight funds sold and investment securities available-for-sale. The liquidity ratio, which is defined as cash plus short term available-for-sale securities divided by deposits plus short term liabilities, was 24.28% at September 30, 2005 and
26.57% at December 31, 2004.



The Statement of Cash Flows discloses the
principal sources and uses of cash from operating, investing and financing activities for the nine months ended September 30, 2005 and for the nine months ended September 30, 2004. Southern has no brokered deposits. Jumbo time deposits are
considered to include all time deposits of $100,000 or more. Almost all jumbo time deposit customers have other relationships with Southern, including savings, demand and other time deposits, and in some cases, loans. At September 30, 2005
jumbo time deposits represented 13.81% of total deposits. At December 31, 2004 jumbo time deposits represented 13.07% of total deposits.



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



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.



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CONTRACTUAL OBLIGATIONS



As of September 30, 2005

|(Dollars | in thousands)
|-------- | -------------



|                              |  |                        |         |           |   |           |  |             |        |       |   |        |  |   |        
|----------------------------- |  | ---------------------- | ------- | --------- | - | --------- |  | ----------- | ------ | ----- | - | ------ |  | - | -------
|                              |  | Payments due by period
|                              |  | Less than1 year        |         | 1-3 years |   | 4-5 years |  | Over 5years |        | Total
|Deposits                      |  | $                      | 772,327 |           | $ | 127,652   |  | $           | 30,382 |       | $ |       |  | $ | 930,361
|Short-term borrowings         |  |                        | 21,097  |           |   |          |  |             |       |       |   |       |  |   | 21,097 
|Long-term obligations         |  |                        |        |           |   |          |  |             |       |       |   | 23,711 |  |   | 23,711 
|Lease obligations             |  |                        | 64      |           |   | 157       |  |             | 23     |       |   |       |  |   | 244    
|                              |  |                        |         |           |   |           |  |             |        |       |   |        |  |   |        
|Total contractual obligations |  | $                      | 793,488 |           | $ | 127,809   |  | $           | 30,405 |       | $ | 23,711 |  | $ | 975,413
|                              |  |                        |         |           |   |           |  |             |        |       |   |        |  |   |        



RECENT DEVELOPMENTS AND OTHER MATTERS



BancShares has begun the
process of voluntary de-registration of Southern BancShares from the SEC. De-registration will be accomplished by a cash-out merger and will require the reduction of the number of record holders of both the common stock and the Series B Preferred
stock. A special meeting of BancShares shareholders will be held prior to year-end 2005 to vote on the cash-out merger which will result in the payment of $780.00 per share to common shareholders of less than 35 common shares and $14.85 per
share to Series B Preferred shareholders of less than 400 Series B Preferred shares. A definitive proxy statement, to be sent to BancShares shareholders, is under review by the SEC.



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.



COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK



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



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



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



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



Collateral held varies but may include trade
accounts receivable, property, plant, and equipment and income-producing commercial properties.



25



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Standby letters of credit are commitments issued by Southern to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Outstanding standby letters of credit at both September 30, 2005 and December 31, 2004 were $5.9 million.
Outstanding commitments to lend at September 30, 2005 were $210.8 million compared to $182.1 million at December 31, 2004. Undisbursed advances on customer lines of credit were $72.3 million at September 30, 2005 compared to $64.3
million at December 31, 2004. Outstanding standby letters of credit and commitments to lend at September 30, 2005 generally expire within one year, whereas commitments associated with undisbursed advances on customer lines of credit at
September 30, 2005 generally expire within one to five years.



At
September 30, 2005, commitments to sell loans amounted to $14.3 million. At December 31, 2004, commitments to sell loans amounted to $11.5 million.



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



Southern grants agribusiness, commercial and consumer loans to customers primarily in eastern
North Carolina. Although Southern has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the agricultural industry.



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



REGULATORY MATTERS



The Sarbanes-Oxley Act of 2002 (the S-O Act) is significant federal legislation that was signed into law on July 30, 2002
that addresses accounting, corporate governance and disclosure issues relating to public companies. Some of the provisions of the S-O Act became effective immediately, while others are still in the process of being implemented. In general, the S-O
Act mandated important new corporate governance, financial reporting and disclosure requirements intended to enhance the accuracy and transparency of public companies reported financial results.



The S-O Act established new responsibilities for corporate Chief Executive Officers and Chief
Financial Officers, Boards of Directors and Audit Committees of the Boards of Directors in the financial reporting process. The S-O Act also created a new regulatory body to oversee outside auditors of public companies. The economic and operational
effects of the S-O Act on public companies, including BancShares, have been, and will continue to be, significant in terms of the increased time, resources and operating costs associated with complying with the new law. Because the S-O Act, for the
most part, applies equally to large and small public companies, it will continue to present BancShares with particular challenges. Increased audit fees and compliance costs associated with compliance with the S-O Act could have a negative effect on
operating results of BancShares.



FORWARD-LOOKING STATEMENTS



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



26



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Item 3  Quantitative and Qualitative Disclosures About Market Risk:



Market risk reflects the risk of economic loss resulting from adverse changes
in market price and interest rates. This risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods. BancShares market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. The structure of BancShares loan and deposit portfolios is such that a significant increase in market rates may adversely impact net interest income. Historical prepayment experience is
considered as well as managements expectations based on the interest rate environment as of September 30, 2005. Management seeks to manage this risk through the use of shorter term maturities. The composition and size of the investment
portfolio is managed so as to reduce the interest rate risk in the deposit and loan portfolios while at the same time maximizing the yield generated from the investment 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 September 30, 2005. The expected maturity categories take into consideration historical prepayment experience as well as managements expectations based on the interest rate environment as of September 30, 2005.
For core deposits without contractual maturity (i.e., interest bearing checking, savings and money market accounts), the table presents principal cash flows as maturing in 2005 since they are subject to immediate repricing. Weighted average variable
rates in future periods are based on the implied forward rates in the yield curve as of September 30, 2005.



|                                      |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|------------------------------------- | ---- | --------------------- | ------- | ---- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | ---------- |  | - | ------ | - |  | ---------- | ------ | - |  | - | ------- | - |  | - | -------
|(Dollars in thousands)                |      | Maturing September 30
|                                      | 2006 |                       |         | 2007 |  |   | 2008   |   |  | 2009 |        |   | 2010 |   |        | Thereafter |  |   | Total  |   |  | Fair Value
|Assets                                |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Loans                                 |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|Fixed rate                            |      | $                     | 61,809  |      |  | $ | 57,991 |   |  | $    | 51,868 |   |      | $ | 26,948 |            |  | $ | 21,093 |   |  | $          | 47,951 |   |  | $ | 267,660 |   |  | $ | 251,048
|Average rate (%)                      |      |                       | 6.96    | %    |  |   | 6.75   | % |  |      | 6.79   | % |      |   | 6.61   | %          |  |   | 6.67   | % |  |            | 6.54   | % |  |   | 6.75    | % |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Variable rate                         |      | $                     | 233,457 |      |  | $ | 61,570 |   |  | $    | 49,281 |   |      | $ | 37,978 |            |  | $ | 24,666 |   |  | $          | 24,204 |   |  | $ | 431,156 |   |  | $ | 431,156
|Average rate (%)                      |      |                       | 7.12    | %    |  |   | 6.94   | % |  |      | 6.81   | % |      |   | 6.92   | %          |  |   | 6.96   | % |  |            | 7.03   | % |  |   | 7.03    | % |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Investment Securities                 |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|Fixed rate                            |      | $                     | 112,264 |      |  | $ | 84,549 |   |  | $    | 670    |   |      | $ | 2,389  |            |  | $ | 1,828  |   |  | $          | 45,461 |   |  | $ | 247,161 |   |  | $ | 280,949
|Average rate (%)                      |      |                       | 2.24    | %    |  |   | 3.42   | % |  |      | 7.89   | % |      |   | 7.31   | %          |  |   | 5.84   | % |  |            | 5.36   | % |  |   | 3.31    | % |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Liabilities                           |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Savings and interest bearing checking |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|Fixed rate                            |      | $                     | 322,052 |      |  |   |       |   |  |      |       |   |      |   |       |            |  |   |       |   |  |            |       |   |  | $ | 322,052 |   |  | $ | 322,052
|Average rate (%)                      |      |                       | 0.82    | %    |  |   |       |   |  |      |       |   |      |   |       |            |  |   |       |   |  |            |       |   |  |   | 0.82    | % |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Certificates of deposit               |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|Fixed rate                            |      | $                     | 249,261 |      |  | $ | 98,735 |   |  | $    | 27,522 |   |      | $ | 30,382 |            |  |   |       |   |  |            |       |   |  | $ | 405,900 |   |  | $ | 382,754
|Average rate (%)                      |      |                       | 2.79    | %    |  |   | 3.58   | % |  |      | 3.40   | % |      |   | 3.72   | %          |  |   |       |   |  |            |       |   |  |   | 3.10    | % |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Variable rate                         |      | $                     | 3,513   |      |  | $ | 1,395  |   |  |      |       |   |      |   |       |            |  |   |       |   |  |            |       |   |  | $ | 4,908   |   |  | $ | 4,908  
|Average rate (%)                      |      |                       | 1.79    | %    |  |   | 2.03   | % |  |      |       |   |      |   |       |            |  |   |       |   |  |            |       |   |  |   | 1.86    | % |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Short-term borrowings                 |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|Variable rate                         |      | $                     | 21,097  |      |  |   |       |   |  |      |       |   |      |   |       |            |  |   |       |   |  |            |       |   |  | $ | 21,097  |   |  | $ | 21,097 
|Average rate (%)                      |      |                       | 2.73    | %    |  |   |       |   |  |      |       |   |      |   |       |            |  |   |       |   |  |            |       |   |  |   | 2.73    | % |  |   |        
|                                      |      |                       |         |      |  |   |        |  
|Long-term debt                        |      |                       |         |      |  |   |        |   |  |      |        |   |      |   |        |            |  |   |        |   |  |            |        |   |  |   |         |   |  |   |        
|Fixed rate                            |      |                       |        |      |  |   |       |   |  |      |       |   |      |   |       |            |  |   |       |   |  | $          | 23,711 |   |  | $ | 23,711  |   |  | $ | 23,711 
|Average rate (%)                      |      |                       |        |      |  |   |       |   |  |      |       |   |      |   |       |            |  |   |       |   |  |            | 6.95   | % |  |   | 6.95    | % |  |   |        



27



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A principal objective of BancShares asset/liability function is to manage interest rate risk or the exposure to
changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby limiting, to the
extent possible, the ultimate interest rate exposure. The table below provides BancShares interest-sensitivity position as of September 30, 2005, which reflected a one year negative interest-sensitivity gap of $168.9 million. As a result
of this one year negative gap, increases in interest rates could have an unfavorable impact on net interest income. This type of gap measurement considers non-maturity interest-bearing deposits as repricing immediately when interest rates change.



One measure of the impact of BancShares interest-sensitivity negative
gap is to model the impact of an immediate 100 basis point rate increase or decrease on net interest income while considering non-maturity interest-bearing deposits as repricing immediately. The results of this, non-maturity immediately repricing,
type of gap analysis at September 30, 2005 is shown in the table below.



BancShares also utilizes a funds management model that considers that non-maturity interest-bearing deposits also reprice over time, not immediately. This funds management model indicates that at September 30, 2005, BancShares could
realize an $1.1 million decrease in net interest income if an immediate 100 basis point rate decrease were to occur. This funds management model indicates that, at September 30, 2005, BancShares could realize a $955,000 increase in net interest
income if an immediate 100 basis point rate increase were to occur.



INTEREST-SENSITIVITY ANALYSIS



|                                    |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          
|----------------------------------- | ------------------ | ------------------ | -------- | ------------------- |  | - | -------------------- | - |  | ----------------------------- | -------- | ----- |  | - | ------- |  | - | ---------
|(Dollars in thousands)              |                    | September 30, 2005
|                                    | 1-90 DaysSensitive |                    |          | 91-180DaysSensitive |  |   | 181-365DaysSensitive |   |  | Non-RateSensitive& Over 1Year |          | Total
|Interest Earning Assets:            |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          
|                                    |                    |                    |          |                     | 
|Loans                               |                    | $                  | 157,857  |                     |  | $ | 57,905               |   |  | $                             | 79,504   |       |  | $ | 403,550 |  | $ | 698,816  
|Investment securities               |                    |                    | 42,164   |                     |  |   | 21,458               |   |  |                               | 48,642   |       |  |   | 169,471 |  |   | 281,735  
|Temporary investments               |                    |                    | 19,526   |                     |  |   |                     |   |  |                               |         |       |  |   |        |  |   | 19,526   
|                                    |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          
|Total earning assets                |                    | $                  | 219,547  |                     |  | $ | 79,363               |   |  | $                             | 128,146  |       |  | $ | 573,021 |  | $ | 1,000,077
|                                    |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          
|Interest-Bearing Liabilities:       |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          
|Savings and core time deposits      |                    | $                  | 395,167  |                     |  | $ | 45,003               |   |  | $                             | 52,213   |       |  | $ | 111,977 |  | $ | 604,360  
|Time deposits of $100,000 and more  |                    |                    | 32,680   |                     |  |   | 22,549               |   |  |                               | 27,214   |       |  |   | 46,057  |  |   | 128,500  
|Short-term borrowings               |                    |                    | 21,097   |                     |  |   |                     |   |  |                               |         |       |  |   |        |  |   | 21,097   
|Long-term obligations               |                    |                    |         |                     |  |   |                     |   |  |                               |         |       |  |   | 23,711  |  |   | 23,711   
|                                    |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          
|Total interest bearing liabilities  |                    | $                  | 448,944  |                     |  | $ | 67,552               |   |  | $                             | 79,427   |       |  | $ | 181,745 |  | $ | 777,668  
|                                    |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          
|Interest sensitivity gap            |                    | $                  | (229,397 | )                   |  | $ | 11,811               |   |  | $                             | 48,719   |       |  | $ | 391,276 |  | $ | 222,409  
|                                    |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          
|Cumulative interest sensitivity gap |                    | $                  | (229,397 | )                   |  | $ | (217,586             | ) |  | $                             | (168,867 | )     |  | $ | 222,409 |  | $ | 222,409  
|                                    |                    |                    |          |                     |  |   |                      |   |  |                               |          |       |  |   |         |  |   |          



It should be noted that this analysis
reflects BancShares interest sensitivity as of a single point in time and may not reflect the effects of repricings of assets and liabilities in various interest rate environments.



28



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Item 4  Controls and Procedures:



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



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



Part II  OTHER INFORMATION



Item 6. Exhibits



The following exhibits are filed or furnished with this Report:



|     |  |                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of BancShares Chief Executive Officer pursuant to Rule 13a-14(a)                                      
|     | 
|31.2 |  | Certification of BancShares Chief Financial Officer pursuant to Rule 13a-14(a)                                      
|     | 
|32   |  | Certification of BancShares Chief Executive Officer and Chief Financial Officer pursuant to 18 U. S. C. Section 1350



29



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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.



|                     |                      |                                                             
|-------------------- | -------------------- | ------------------------------------------------------------
|                     |                      | SOUTHERN BANCSHARES (N.C.), INC.                            
|                     |                     
|November 7, 2005Date |                      | /s/ John C. Pegram, Jr.                                     
|                     | John C. Pegram, Jr.,
|                     |                      | Chairman of the Board, President and Chief Executive Officer
|                     |                     
|November 7, 2005Date |                      | /s/ David A. Bean                                           
|                     | David A. Bean,      
|                     |                      | Secretary, Treasurer and Chief Financial Officer            



30



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EXHIBIT INDEX



|              |  |                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                              
|31.1          |  | Certification of BancShares Chief Executive Officer pursuant to Rule 13a-14(a)                                      
|              | 
|31.2          |  | Certification of BancShares Chief Financial Officer pursuant to Rule 13a-14(a)                                      
|              | 
|32            |  | Certification of BancShares Chief Executive Officer and Chief Financial Officer pursuant to 18 U. S. C. Section 1350



31