SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                    FORM 10-Q

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 1998.                 Commission File No. 0-10852

                        SOUTHERN BANCSHARES (N.C.), INC.
             (Exact name of registrant as specified in its charter)

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


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 the number of shares outstanding of the Registrant's common stock as of
the close of the period covered by this report.

                                 119,796 shares

<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES                                           June 30,    December 31,
CONSOLIDATED BALANCE SHEETS                                                                  1998           1997
                                                                                          ---------      ---------
(Dollars in thousands except per share data)                                              (Unaudited)

ASSETS
<S>                                                                                       <C>            <C>      
Cash and due from banks .............................................................     $  31,378      $  28,381
Federal funds sold ..................................................................        11,375         10,240
Investment securities:
Held-to-maturity,  at amorttized cost (fair value $70,027 and $57,294, respectively)         69,105         56,281
Available-for-sale, at fair value (amortized cost $92,477 and $100,978, respectively)       112,583        123,852
Loans ...............................................................................       374,875        349,353
Less allowance for loan losses ......................................................        (6,293)        (5,971)
                                                                                          ---------      ---------  

Net loans ...........................................................................       368,582        343,382
Premises and equipment ..............................................................        18,022         18,157
Intangible assets ...................................................................         5,266          5,506
Accrued interest receivable .........................................................         4,630          4,205
Other assets ........................................................................         1,419            748
                                                                                          ---------      ---------  
              Total assets ..........................................................     $ 622,360      $ 590,752
                                                                                          =========      =========  
LIABILITIES
Deposits:
     Noninterest-bearing ............................................................     $  68,275      $  66,565
     Interest-bearing ...............................................................       456,591        446,763
                                                                                          ---------      ---------  
Total deposits ......................................................................       524,866        513,328

Long-term obligations ...............................................................        23,000          4,750
Short-term borrowings ...............................................................         7,123          6,826
Accrued interest payable ............................................................         4,530          4,394
Other liabilities ...................................................................         6,792          6,470
                                                                                          ---------      ---------          
          Total liabilities .........................................................       566,311        535,768
                                                                                          ---------      ---------              
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock,  no  par value; 408,728 shares
      authorized;  404,586 and 404,946 shares issued and outstanding at June 30,
      1998 and December 31, 1997, respectively .......................................        1,974          1,976
Series C non-cumulative preferred stock, no par value; 43,631 shares authorized and
      43,631 shares  issued and outstanding at June 30, 1998 and December 31, 1997
Common  stock, $5 par  value; 158,485  shares authorized and 119,796 and 119,918
       shares  issued  and  outstanding  at June 30, 1998 and  December 31, 1997,
       respectively .................................................................           599            600
Surplus .............................................................................        10,000         10,000
Retained earnings ...................................................................        29,916         26,733
Unrealized gain on securities available-for-sale, net of tax ........................        12,982         15,097
                                                                                          ---------      ---------   
        Total shareholders' equity ..................................................        56,049         54,984
                                                                                          ---------      ---------   

              Total liabilities and shareholders' equity ............................     $ 622,360      $ 590,752
                                                                                          =========      ========= 
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES                                   (Unaudited)                 (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME                                            Three Months Ended June 30,   Six Months Ended June 30,
                                                                                 1998           1997          1998          1997
                                                                              ---------      ---------     ---------      ---------
(Dollars in thousands except share and per share data)
<S>                                                                           <C>            <C>           <C>            <C>      
Interest income:
Loans ....................................................................    $   7,768      $   7,191     $  15,300      $  14,097
Investment securities:
    U. S. Government .....................................................        1,734          1,590         3,469          3,178
    State, county and municipal ..........................................          451            569           932          1,102
    Other ................................................................          385            266           546            384
                                                                              ---------      ---------     ---------      ---------

            Total investment securities interest income ..................        2,570          2,425         4,947          4,664
Federal funds sold .......................................................          163             95           347            205
                                                                              ---------      ---------     ---------      ---------

Total interest income ....................................................       10,501          9,711        20,594         18,966

Interest expense:
       Deposits ..........................................................        4,703          4,548         9,359          8,857
       Long-term obligations .............................................          395            118           471            120
       Short-term borrowings .............................................           71             72           141            124
                                                                              ---------      ---------     ---------      ---------


             Total interest expense ......................................        5,169          4,738         9,971          9,101
                                                                              ---------      ---------     ---------      ---------

                     Net interest income .................................        5,332          4,973        10,623          9,865
      Provision for loan losses ..........................................           60           --             120             60
                                                                              ---------      ---------     ---------      ---------

                     Net interest income after provision for loan losses .        5,272          4,973        10,503          9,805

Noninterest income:
     Investment securities gains, net ....................................         --             --           1,788          3,534
     Service charges on deposit accounts .................................          823            677         1,585          1,325
     Other service charges and fees ......................................          282            216           528            424
     Insurance commissions ...............................................           18             30            37             47
     Gain (loss) on sale of loans ........................................          (29)             4           (28)            (6)
     Other ...............................................................          125             52           242            125
                                                                              ---------      ---------     ---------      ---------

           Total noninterest income ......................................        1,219            979         4,152          5,449
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES                                   (Unaudited)                 (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME                                            Three Months Ended June 30,   Six Months Ended June 30,
                                                                                 1998           1997          1998          1997
                                                                              ---------      ---------     ---------      ---------
(Dollars in thousands except share and per share data)
<S>                                                                           <C>            <C>           <C>            <C>      
Noninterest expense:
      Personnel ..........................................................        2,434          2,164         4,719          4,252
      Data processing ....................................................          466            465           898            818
      Intangibles amortization ...........................................          403            443           787            845
      Occupancy ..........................................................          372            336           750            661
      Furniture and equipment ............................................          396            384           728            768
      FDIC insurance assessment ..........................................           38             28            75             55
      Charitable contributions ...........................................            1              2             1          4,074
      Other ..............................................................        1,003            857         1,943          1,671
                                                                              ---------      ---------     ---------      ---------

             Total noninterest expense ...................................        5,113          4,679         9,901         13,144
                                                                              ---------      ---------     ---------      ---------

Income before income taxes ...............................................        1,378          1,273         4,754          2,110
Income taxes .............................................................          451            130         1,260            210
                                                                              ---------      ---------     ---------      ---------

                       Net income ........................................    $     927      $   1,143     $   3,494      $   1,900
                                                                              =========      =========     =========      =========

Per share information:
   Net income applicable to common shares ................................    $    6.91      $    8.71     $   27.49      $   14.19
   Cash dividends declared on common shares ..............................         0.37           0.37          0.75           0.74
   Weighted average common shares outstanding ............................      119,855        119,918       119,886        119,918
                                                                              =========      =========     =========      =========

</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                                     (Unaudited)
                                                                                              Six months ended June 30,
(Thousands)                                                                                       1998          1997
                                                                                                --------     --------- 
<S>                                                                                             <C>           <C>     
OPERATING ACTIVITIES:
Net income ................................................................................     $  3,494      $  1,900
Adjustments to reconcile net income to net cash
      provided by operating activities:
            Provision for loan losses .....................................................          120            60
            Contribution expense for donation of marketable equity securities .............         --           4,071
            Gain on contribution of marketable equity securities ..........................         --          (3,529)
            Gains on sales and issuer calls of securities .................................       (1,788)           (5)
            Loss on sale and abandonment of premises and equipment ........................           34            32
            Loss on sale of loans .........................................................           28             6
            Net accretion of discounts on investments .....................................          (39)          (44)
            Amortization of intangibles ...................................................          708           845
            Depreciation ..................................................................          673           486
            Net increase in accrued interest receivable ...................................         (425)         (527)
            Net increase in accrued interest payable ......................................          136         1,360
            Net (increase) decrease in other assets .......................................         (478)        1,794
            Net increase (decrease) in other liabilities ..................................          104          (456)
                                                                                                --------      --------

NET CASH PROVIDED BY OPERATING ACTIVITIES .................................................        2,567         5,993
                                                                                                --------      --------

INVESTING ACTIVITIES:
      Proceeds from maturities and issuer calls of investment securities available-for-sale       23,360         3,105
      Proceeds from maturities and issuer calls of investment securities held-to-maturity .        3,906        26,177
      Proceeds from sales of investment securities available-for-sale .....................        1,976          --
      Purchases of investment securities held-to-maturity .................................      (16,064)      (17,764)
      Purchases of investment securities available-for-sale ...............................      (10,433)      (12,264)
      Net increase in loans ...............................................................       (8,957)      (27,700)
      Additions to premises and equipment .................................................         (303)       (2,700)
      Net cash (paid) received for bank and branches acquired .............................       (6,070)       19,730
                                                                                                --------      --------

NET CASH USED IN INVESTING ACTIVITIES .....................................................      (12,585)      (11,416)
                                                                                                --------      --------
FINANCING ACTIVITIES:
     Net decrease in demand and interest bearing demand deposits ..........................       (3,985)      (14,195)
     Net (decrease) increase in time deposits .............................................          (98)       16,469
     Proceeds of long-term obligations ....................................................       23,000         5,000
     Payments of long-term obligations ....................................................       (4,750)         (750)
     Net proceeds of short-term borrowings ................................................          297         1,668
     Cash dividends paid ..................................................................         (289)         (287)
     Purchase and retirement of stock .....................................................          (25)          (15)
                                                                                                --------      --------

NET CASH PROVIDED BY FINANCING ACTIVITIES .................................................       14,150         7,890
                                                                                                --------      --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                                     (Unaudited)
                                                                                              Six months ended June 30,
(Thousands)                                                                                       1998          1997
                                                                                                --------     --------- 
<S>                                                                                             <C>           <C>     
NET INCREASE IN CASH EQUIVALENTS ..........................................................     $  4,132      $  2,467
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR ........................................       38,621        32,465
                                                                                                --------      --------

CASH AND CASH EQUIVALENTS AT THE END OF PERIOD ............................................     $ 42,753      $ 34,932
                                                                                                ========      ========

SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE PERIOD FOR:

     Interest .............................................................................     $  9,835      $  7,740
     Income taxes .........................................................................     $  1,335      $    799
                                                                                                ========      ========

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain (loss) on securities available-for-sale, net of taxes .....................     $ (2,115)     $    644
                                                                                                ========      ========

</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES  (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997

(Dollars in thousands except per share data)
                                                                                                                              
                                                    Preferred Stock                           Common  Stock 
                                      --------------------------------------------      ----------------------
                                            Series B              Series C                                                   
                                      -------------------     --------------------
                                       Shares      Amount      Shares      Amount        Shares         Amount       Surplus 
                                       ------      ------      ------      ------        ------         ------       ------- 
 <S>                                   <C>        <C>           <C>        <C>            <C>          <C>           <C>       
Balance, December 31, 1996 .....      407,752    $  1,986      43,631     $    578       119,918      $    600      $ 10,000  

Net income .....................                                                                                              

Retirement of stock ............       (1,408)         (6)                                                                    

Cash dividends:
  Common stock ($.74 per share)                                                                                               

  Preferred B  ($.44 per  share)                                                                                              

  Preferred C  ($.44 per share)                                                                                               

Change in unrealized gain on
  securities available-for-sale,
  net of taxes .................                                                                                              

                                     ========    ========      ======     ========      ========      ========      ========  
Balance, June 30, 1997 .........      406,344    $  1,980      43,631     $    578       119,918      $    600      $ 10,000  
                                     ========    ========      ======     ========      ========      ========      ========  

Balance, December 31, 1997 .....      404,946    $  1,976      43,631     $    578       119,918      $    600      $ 10,000  

Net income .....................                                                                                              

Retirement of stock ............         (360)         (2)                                  (122)           (1)               

Cash dividends:
  Common stock ($.75 per share)                                                                                               

  Preferred B  ($.44 per share)                                                                                               

  Preferred C  ($.44 per share)                                                                                               

Change in unrealized gain on
  securities available-for-sale,
  net of taxes .................                                                                                              

                                     ========    ========      ======     ========      ========      ========      ========  
Balance, June 30, 1998 .........      404,586    $  1,974      43,631     $    578       119,796      $    599      $ 10,000  
                                     ========    ========      ======     ========      ========      ========      ========  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                  Unrealized                                  
                                                   gain on                                    
                                                  securities                               
                                                   available-          Total            
                                        Retained    for-sale,      Shareholders'     
                                        Earnings   net of taxes       Equity             
                                        --------   ------------       ------             
<S>                                      <C>           <C>           <C>                 
Balance, December 31, 1996 .....         $ 20,718      $ 10,896      $ 44,778            
                                                                                      
Net income .....................            1,900                       1,900                         
                                                                                      
Retirement of stock ............               (9)                        (15)        
                                                                                      
Cash dividends:                                                                       
  Common stock ($.74 per share)               (89)                        (89)                        
                                                                                      
  Preferred B  ($.44 per  share)             (179)                       (179)                        
                                                                                      
  Preferred C  ($.44 per share)              (19)                         (19)                         
                                                                                      
Change in unrealized gain on                                                          
  securities available-for-sale,                                                      
  net of taxes .................                            644           644                         
                                                                                      
                                         ========      ========      ========         
Balance, June 30, 1997 .........         $ 22,322      $ 11,540      $ 47,020         
                                         ========      ========      ========         
                                                                                      
Balance, December 31, 1997 .....         $ 26,733      $ 15,097      $ 54,984         
                                                                                      
Net income .....................            3,494                       3,494                         
                                                                                      
Retirement of stock ............              (22)                        (25)                        
                                                                                      
Cash dividends:                                                                       
  Common stock ($.75 per share)               (91)                        (91)                           
                                                                                      
  Preferred B  ($.44 per share)              (179)                       (179)                      
                                                                                      
  Preferred C  ($.44 per share)               (19)                        (19)                          
                                                                                      
Change in unrealized gain on                                                          
  securities available-for-sale,                                                      
  net of taxes .................                         (2,115)       (2,115)                         
                                                                                      
                                         ========      ========      ========         
Balance, June 30, 1998 .........         $ 29,916      $ 12,982      $ 56,049         
                                         ========      ========      ======== 
        
</TABLE>
     The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
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 43 banking offices
in eastern  North  Carolina,  and  Southern  Capital  Trust I (the  "Trust"),  a
statutory  business trust that issued $23.0 million of 8.25% Capital  Securities
("the Capital Securities") in June 1998 maturing in 2028. Southern,  which began
operations in January, 1901, has a wholly-owned  subsidiary,  Goshen, Inc. which
acts as agent for credit life and credit accident and health  insurance  written
in  connection  with  loans  made  by  Southern.  BancShares  and  Southern  are
headquartered in Mount Olive, North Carolina.

The  consolidated  financial  statements  in this report are  unaudited.  In the
opinion of  management,  all  adjustments  (none of which were other than normal
accruals)  necessary  for a fair  presentation  of the  financial  position  and
results of operations for the periods presented have been included.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  liabilities at the date of the financial statements and the reported
amounts of revenues and expenses  during the reporting  period.  Actual  results
could differ from those estimates.

The most  significant  estimates  made by BancShares in the  preparation  of its
consolidated  financial  statements are the  determination  of the allowance for
loan losses,  the valuation of other real estate,  the  valuation  allowance for
deferred tax assets and fair value  estimates  for  financial  instruments.  The
statements  should  be read  in  conjunction  with  the  consolidated  financial
statements  and  accompanying  notes  for the  year  ended  December  31,  1997,
incorporated by reference in the 1997 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 the Trust.  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 and
due form banks and federal funds sold.  Federal funds are purchased and sold for
one day periods.


Reclassifications

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

The estimated value of the right to service  mortgage loans for others ("MSR's")
is  included  in  other  assets  on  BancShares'   consolidated  balance  sheet.
Capitalization  of the  MSR's  occurs  when  the  underlying  loans  are sold or
securitized  or when rights to service  mortgage loans from others are acquired.
Capitalized MSR's are amortized against income over the projected servicing life
of the  underlying  loans.  Capitalized  MSR's  are  periodically  reviewed  for
impairment  based on the excess of the carrying amount of such rights over their
fair value.

For purposes of measuring  impairment,  capitalized  MSR's are stratified on the
basis of one or more of the predominant risk  characteristics  of the underlying
loans, including loan type, term, interest rate and origination date. Fair value
is estimated  using current  commitment  prices from investors or current quoted
market prices to sell similar products.

During the six months  ended June 30,  1998,  BancShares  acquired the rights to
service $51 million in mortgage loans from an affiliate institution (see note 8)
for  $522,000.  At June 30, 1998 and December 31, 1997,  unamortized  MSR's were
$482,000 and $137,000  respectively.  There was no valuation allowance for MSR's
at June 30, 1998 or December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
Notes to consolidated financial statements
Dollars in thousands except share and per share data)



Note 2. Investment securities                      June  30, 1998                           December 31, 1997
                                        ---------------------------------------  --------------------------------------------
(In thousands)                                          Gross          Gross        Estimated                     Gross  
                                        Amortized     Unrealized    Unrealized        Fair       Amortized     Unrealized
                                           Cost         Gains          Losses         Value          Cost         Gains  
                                        ---------     ---------      ---------      ---------     ----------    ---------      
<S>                                     <C>                 <C>            <C>      <C>           <C>                 <C>
SECURITIES HELD-TO-MATURITY:
     U.  S. Government ............     $  49,468           118            (27)     $  49,559     $  33,969           122
     Obligations of states
         and political subdivisions        19,537           831         20,368         22,212           890        23,102
     Corporate securities .........           100          --             --              100           100             1
                                        ---------     =========      ---------      ---------     ---------     ---------
                                           69,105           949            (27)        70,027        56,281         1,013
                                        =========     =========      =========      =========     =========     =========

SECURITIES AVAILABLE-FOR-SALE:
     U.  S. Government ............        71,473           143             (3)        71,613        82,471           130
     Marketable equity securities .        10,080        19,447         29,527          8,119        22,183            (8)
     Obligations of states
        and political subdivisions          9,036           486             (1)         9,521         8,411           527
    Mortgage-backed securities ....         1,888            43             (9)         1,922         1,977            51
                                        ---------     ---------      ---------      ---------     ---------     ---------
                                           92,477        20,119            (13)       112,583       100,978        22,891
                                        =========     =========      =========      =========     =========     =========

     Totals .......................     $ 161,582     $  21,068      ($     40)     $ 182,610     $ 157,259     $  23,904
                                        =========     =========      =========      =========     =========     =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                            Gross      Estimated     
                                         Unrealized      Market        
                                           Losses        Value       
                                         ----------    ---------  

<S>                                     <C>            <C>      
SECURITIES HELD-TO-MATURITY:
     U.  S. Government ............     $    --        $  34,091
     Obligations of states
         and political subdivisions
     Corporate securities .........           101
                                        ---------      ---------
                                             --           57,294
                                        =========      =========

SECURITIES AVAILABLE-FOR-SALE:
     U.  S. Government ............            (9)        82,592
     Marketable equity securities .        30,294
     Obligations of states
        and political subdivisions           --            8,938
    Mortgage-backed securities ....          --            2,028
                                        ---------      ---------
                                              (17)       123,852
                                        =========      =========

     Totals .......................     ($     17)     $ 181,146
                                        =========      =========

</TABLE>
<PAGE>
Note 3.  LOANS

      (Dollars in thousands)                             June 30,   December 31,
                                                           1998           1997
                                                         --------       --------
 Commercial, financial and agricultural ...........       $ 92,040      $ 84,281
Real estate:
      Construction ...............................          4,263          5,209
       Mortgage:
            One to four family residential .......        116,936        106,444
            Commercial ...........................         60,928         58,056
            Equityline ...........................         30,580         27,759
            Other ................................         26,110         27,868
Consumer .........................................         35,075         35,780
Lease financing ..................................          4,646          3,956
                                                         --------       --------

  Total loans ....................................       $370,578       $349,353
                                                         ========       ========

Loans held for sale ..............................       $  4,247       $  3,019
Loans serviced for others ........................       $141,026       $ 78,426

 
Note 4.  ALLOWANCE FOR LOAN LOSSES
          (Dollars in thousands)
                                                       Six Months Ended June 30,
                                                      --------------------------
                                                         1998             1997
                                                       --------         --------

    Balance at beginning of year .............         $ 5,971          $ 6,163
      Allowance from bank acquisition ........             269             --
      Provision for loan losses ..............             120               60
      Loans charged off ......................            (119)            (178)
      Loan recoveries ........................              52              104
                                                       -------          -------

    Balance at end of the period .............         $ 6,293          $ 6,149
                                                       =======          =======

Note 5.    PREMISES AND EQUIPMENT (Dollars in thousands)
                                                     June 30,      December 31,
                                                       1998            1997
                                                     --------          ---------

Land .......................................         $  3,425          $  3,377
Buildings and improvements .................           14,446            14,292
Furniture and equipment ....................            6,523             6,387
Construction-in-progress ...................              136                90
                                                     --------          --------

                                                       24,530            24,146

Less: accumulated depreciation .............           (6,508)           (5,989)
                                                     --------          --------

                                                     $ 18,022          $ 18,157
                                                     ========          ========
<PAGE>
Note 6. 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. BancShares had no potentially dilutive
securities  during 1998 or 1997, so there is no difference in the computation of
basic and diluted earnings per share for the periods presented.

<TABLE>
<CAPTION>

      (Dollars in thousands)              Three Months Ended June 30,    Six Months Ended June 30,
                                           -------------------------     ------------------------  
                                              1998           1997            1998          1997
                                           ---------      ---------      ---------      ---------
<S>                                        <C>            <C>            <C>            <C>      
Net income ...........................     $     927      $   1,143      $   3,494      $   1,900
  Less preferred dividends ...........     ($     99)     ($     98)     ($    198)     ($    198)
                                           ---------      ---------      ---------      ---------

Net income applicable to common shares     $     828      $   1,045      $   3,296      $   1,702
                                           =========      =========      =========      =========

Weighted average common shares
  outstanding during the period ......       119,855        119,918        119,886        119,918
                                           =========      =========      =========      =========

</TABLE>

Note 7. Comprehensive Income

In June 1997, the FASB issued Statement 130, "Reporting  Comprehensive  Income".
Statement 130 establishes  standards for reporting and display of  comprehensive
income and its components in a full set of general purpose financial statements.
Accordingly, BancShares adopted Statement 130 in 1998.

During the six months ended June 30, 1998 and 1997,  comprehensive income, which
consisted of net income and changes in net unrealized  gains and losses,  net of
applicable tax effects, amounted to $1.4 million and 2.5 million respectively.

Note 8. Related Parties

BancShares has entered into various service  contracts with another bank holding
company  and  its  subsidiary  (the  "Corporation").  The  Corporation  has  two
significant shareholders, who also are significant shareholders of BancShares.

The first  significant  shareholder is a director of BancShares and, at June 30,
1998,  beneficially  owned 32,294 shares, or 26.96%, of BancShares'  outstanding
common stock and 22,171 shares,  or 5.47%, of BancShares'  outstanding  Series B
preferred  stock.  At  the  same  date,  the  second   significant   shareholder
beneficially  owned 27,577 shares, or 23.02%, of BancShares'  outstanding common
stock, and 17,205 shares, or 4.25%, of BancShares' Series B preferred stock. The
above  totals  include  17,205  Series B preferred  shares,  or 4.25%,  that are
considered to be beneficially owned by both of the shareholders and,  therefore,
are included in each of their totals.
<PAGE>
These two significant  shareholders are directors and executive  officers of the
Corporation  and at June 30,  1998,  beneficially  owned  2,556,234  shares,  or
28.70%,  and 1,556,415  shares,  or 17.56%,  respectively,  of the Corporation's
outstanding  Class A common stock,  and 639,471 shares,  or 37.17%,  and 160,049
shares, or 9.30%, respectively,  of the Corporation's outstanding Class B common
stock.  The above totals include  540,170 Class A common shares,  or 6.07%,  and
110,668 Class B Common shares, or 6.43 %, that are considered to be beneficially
owned by both of the shareholders and, therefore,  are included in each of their
totals. A subsidiary of the Corporation is  First-Citizens  Bank & Trust Company
("First  Citizens").  Southern  sold a branch to First  Citizens  in the  second
quarter of 1998.  In the last  quarter of 1998,  BancShares  expects to acquire,
subject  to  regulatory   approval,   the  Gates,   North  Carolina   office  of
First-Citizens  Bank & Trust Company  containing  approximately  $5.0 million in
deposits.

The following table lists the various charges paid to the Corporation during the
six months ended:
<TABLE>
<CAPTION>
     (Dollars in thousands)
                                                       Six Months Ended June 30,
                                                       -------------------------
                                                          1998            1997
                                                         ------          ------ 
<S>                                                      <C>             <C>   
Data and item processing .......................         $1,087          $  867
Forms, supplies and equipment ..................            155              93
Trustee for employee benefit plans .............             36              31
Consulting fees ................................             38              38
Trust investment services ......................             10              11
Internal auditing services .....................              1              40
Other services .................................             46              42
                                                         ------          ------

                                                         $1,373          $1,122
                                                         ======          ======

</TABLE>


Data and item processing expenses include courier services,  proof and encoding,
microfilming,  check storage,  statement  rendering and item  processing  forms.
BancShares  also  has  a  correspondent   relationship   with  the  Corporation.
Correspondent  account  balances with the  Corporation  included in cash and due
from banks  totaled $6.5 million at June 30, 1998 and $10.1  million at December
31, 1997.

During the six months  ended June 30,  1998,  BancShares  acquired the rights to
service  mortgage  loans,  as  discussed  in note 1  above,  from  an  affiliate
institution  which  shares  the  same  two  significant   shareholders  as  both
BancShares and the Corporation.

Note 9. Acquisitions

Effective May 15, 1998,  Southern acquired one banking office of Enfield Savings
Bank, SSB,  ("ESB"),  a state-chartered  savings bank  headquartered in Enfield,
North Carolina. In connection with that transaction,  Southern assumed aggregate
deposit liabilities of approximately  $15.6 million and purchased  approximately
$16.4 million of loans.
<PAGE>
Note 10.  Trust Preferred Offering

On June 10,  1998  Southern  Capital  Trust I,  (the  "Trust"),  a  wholly-owned
statutory  business trust of  BancShares,  issued $23.0 million of 8.25% Capital
Securities  maturing in 2028. The Trust  invested the $23.0 million  proceeds in
Junior Subordinated  Debentures issued by BancShares (the "Junior  Debentures"),
which upon  consolidation  of BancShares is eliminated.  The Junior  Debentures,
with a maturity of 2028,  are the primary  assets of the Trust.  With respect to
the Capital Securities,  BancShares  irrevocably and unconditionally  guarantees
the Trust's  obligations.  A portion of the Capital  Securities  are included in
Tier I capital for regulatory capital adequacy requirements.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF  FINANCIAL  
CONDITION  AND RESULTS OF  OPERATIONS - SIX
MONTHS ENDED 1998 VS. SIX MONTHS ENDED 1997


INTRODUCTION

In the first six months of 1998,  the net income of  BancShares  increased  $1.6
million from $1.9 million in the first six months of 1997 to $3.5 million in the
first six  months  of 1998,  an  increase  of  83.89%.  This  increase  resulted
primarily from a 1997 charitable contribution expense of $4.1 million related to
the contribution of marketable  securities to a charitable foundation in the six
months ended June 30, 1997.  This expense was partially  offset by the resulting
reduction  in income tax  expense of  approximately  $350,000  arising  from the
charitable  contribution  and the  related  securities  gain  of  $3.5  million.
Additionally   in  the  six  months   ended  June  30,  1998   BancShares   sold
available-for-sale  securities resulting in a realized gain of $1.8 million. One
branch  acquisition in May 1998,  three branch  acquisitions in May 1997 and the
opening of a new branch in September  1997  resulted in  increased  net interest
income,  increased other noninterest income and increased  personnel expense and
other related operating expenses for the six months ended June 30, 1998.

Losses on the sales of mortgage loans held-for-sale increased $22,000 in the six
months  ended June 30, 1998  compared to the six months  ended June 30,  1997. A
donation  of  available-for-sale  securities  in the  first  six  months of 1997
resulted in a significant increase in charitable contributions expense which was
more than offset by the  resulting  investment  securities  gains and  resulting
reduction in income taxes.

Per share net income available to common shares for the first six months of 1998
was $27.49,  an increase of $13.30,  or 93.73 %, from $14.19 in 1997. The return
on average equity increased to 16.58%,  for the period ended June 30, 1998, from
9.37% for the  period  ended  June 30,  1997 and the  return on  average  assets
increased  to 1.36%,  for the  period  ended June 30,  1998,  from 0.75% for the
period ended June 30, 1997.

At June 30, 1998,  BancShares'  assets  totaled $622.4  million,  an increase of
$31.6 million,  or 5.35%, from the $590.8 million reported at December 31, 1997.
During this six month period, net loans increased $25.2 million,  or 7.34%, from
$343.4  million to $368.6  million.  During the six months  ended June 30,  1998
investment  securities  increased $1.6 million,  or 0.86% from $180.1 million at
December 31, 1997 to $181.7 million at June 30, 1998.  Total deposits  increased
$11.5  million,  or 2.25% from  $513.3  million at  December  31, 1997 to $524.9
million at June 30, 1998. The above increases resulted principally from the 1998
acquisitions discussed below.

ACQUISITIONS

Southern acquired $11.9 million, $4.1 million and $5.1 million, respectively, of
the deposits of the Aurora,  Hamilton and Aulander  offices of a North  Carolina
commercial bank in May 1997. Southern purchased $852,000,  $412,000 and $180,000
of the loans of the respective  branches and paid a premium of $1.3 million,  or
approximately  6.03%,  for the deposits of the three branches.  This acquisition
was accounted for as a purchase, and, therefore, the results of operations prior
to the purchase are not included in the consolidated financial statements.
<PAGE>
In May 1998,  Southern  acquired $16.7 million of the loans and $15.6 million of
the  deposits  of  ESB.  Southern  recorded  goodwill  of  $468,000  for the ESB
acquisition.  This acquisition was accounted for as a purchase,  and, therefore,
the  results  of  operations  prior  to the  purchase  are not  included  in the
consolidated financial statements.

The  comparisons  of the six months  ended June 30, 1998 to the six months ended
June 30, 1997 are accordingly impacted by the above transactions.


INTEREST INCOME

Interest and fees on loans increased $1.2 million,  or 8.53%, from $14.1 million
for the six months ended June 30, 1997 to $15.3 million for the six months ended
June 30, 1998. This increase was due to increased loan volume. Average loans for
the six months  ended June 30,  1998 were $361.4  million,  an increase of 9.58%
from $329.8  million for the prior year six month period.  The yield on the loan
portfolio  was 8.77% in the six months  ended June 30, 1997 and 8.46% in the six
months ended June 30, 1998.

Interest  income  from  investment  securities,  including  U. S.  Treasury  and
Government  obligations,  obligations of state and county subdivisions and other
securities  increased  $283,000  or 6.07%,  from $4.7  million in the six months
ended June 30, 1997 to $4.9 million in the six months ended June 30, 1998.  This
increase was due to an increase in the volume of average  investment  securities
for the six months  ended June 30, 1998 to $159.8  million as compared to $151.8
million for the same 1997 period.  The yield on investment  securities was 5.99%
for the six-month  period ended June 30, 1997 and 5.94% in the six-month  period
ended June 30, 1998.

Interest  income on  federal  funds sold  increased  $142,000  or  69.27%,  from
$205,000  for the six months  ended June 30, 1997 to $347,000 for the six months
ended June 30, 1998. This increase in income resulted primarily from an increase
in the average federal funds sold to $12.9 million for the six months ended June
30, 1998 from an average of $7.9 million for the six months ended June 30, 1997.
Average  federal  funds sold yields were 5.43% for the six months ended June 30,
1998 up from 5.24% for the six months ended June 30, 1997.

Total interest income increased $1.6 million,  or 8.58%,  from $19.0 million for
the six months  ended June 30, 1997 to $20.6  million  for the six months  ended
June 30, 1998.  This increase was primarily the result of volume  increases that
more than offset an overall decrease in average earning asset yields.

Average earning asset yields for the six months ended June 30, 1998 decreased to
7.63% from the 7.85% yield on average  earning  assets for the six months  ended
June 30, 1997.  Average earning assets  increased from $489.4 million in the six
months ended June 30, 1997 to $534.1  million in the period ended June 30, 1998.
This $44.7 million  increase in the average  earning assets  resulted  primarily
from the acquisitions discussed above.


INTEREST EXPENSE

Total interest expense increased $870,000 or 9.56%, from $9.1 million in the six
months  ended June 30, 1997 to $10.0  million for the six months  ended June 30,
1998.  The  principal  reason for this increase was the  acquisitions  discussed
above.  BancShares' total cost of funds decreased from 4.20% at June 30, 1997 to
<PAGE>
4.18% at June 30, 1998. Average interest bearing deposits were $453.5 million in
the six months ended June 30, 1998, an increase of $26.3 million from the $427.2
million  average  in the six  months  ending  June 30,  1997.  The  increase  in
interest-bearing  liabilities  was primarily the result of the branch  purchases
discussed  above.  BancShares  recorded  $158,000 of interest expense in the six
months  ended June 30,  1998  related  to the newly  issued  capital  securities
discussed above.


NET INTEREST INCOME

Net interest income increased  $758,000 or 7.68%,  from $9.9 million for the six
months  ended June 30, 1997 to $10.6  million for the six months  ended June 30,
1998.  This  increase  was  primarily  due to  the  impact  of the  acquisitions
discussed   above,   which   increased   interest   earning   assets  more  than
interest-bearing liabilities.

The net  interest  margin at June 30,  1998 was 3.45%,  a  decrease  of 20 basis
points from the 3.65% interest margin at June 30, 1997.


ASSET QUALITY AND PROVISION FOR LOAN LOSSES

For the six months  ended June 30, 1998  management  added  $120,000 as a volume
related  addition to the  provision for loan losses.  Management  made a $60,000
addition  to the  provision  for loan  losses for the six months  ended June 30,
1997.

During  the  first six  months of 1998  management  charged-off  loans  totaling
$119,000 and received  recoveries of $52,000,  resulting in net  charge-offs  of
$67,000.  During the same period in 1997, $178,000 in loans were charged-off and
recoveries of $104,000 were received,  resulting in net  charge-offs of $74,000.
The following table presents comparative Asset Quality ratios of the company:
<TABLE>
<CAPTION>
                                                              June 30,     December 31,
                                                                1998           1997
                                                                ----           ----
<S>                                                            <C>            <C> 
Ratio of annualized net loans charged off
          to average loans .......................             0.04%          0.07%

Allowance for loan losses
           to loans ..............................             1.68%          1.71%

Non-performing loans
            to loans .............................             0.22%          0.20%

Non-performing loans and assets
            to total assets ......................             0.14%          0.13%

Allowance for loan losses
            to non-performing loans ..............           772.15%        857.90%
</TABLE>
<PAGE>
The ratio of net annualized  charge-offs to average loans outstanding  decreased
to 0.04% for the six months  ended  June 30,  1998 from 0.07% for the year ended
December 31, 1997  primarily  due to increased  loans.  The  allowance  for loan
losses represented 1.68% and 1.71% of loans, net of unearned income, at June 30,
1998 and December 31, 1997,  respectively.  Loans  increased  $21.2 million,  or
6.08%, from December 31, 1997 to June 30, 1998.

The ratio of nonperforming loans to loans, net of unearned income increased from
0.20% at December  31, 1997 to 0.22% at June 30, 1998.  Nonperforming  loans and
assets  to total  assets  increased  to 0.14% at June  30,  1998  from  0.13% at
December  31,  1997.  The  allowance  for loan  losses  to  nonperforming  loans
represented 772.15% of nonperforming loans at June 30, 1998, a decrease from the
857.90% at December 31, 1997. The above performance  declines resulted primarily
from an  increase  in  nonperforming  loans to  $815,000  at June 30,  1998 from
$696,000 at December 31, 1997. The nonperforming loans at June 30, 1998 included
$105,000 of nonaccrual  loans,  $666,000 of accruing  loans 90 days or more past
due and  $44,000  of  restructured  loans.  BancShares  had  $81,000  of  assets
classified  as other  real  estate at June 30,  1998.  BancShares  had no assets
classified  as other real  estate at June 30,  1997.  BancShares  had $48,000 of
assets classified as other real estate at December 31, 1997.

Management  considers the June 30, 1998  allowance  for loan losses  adequate to
cover the losses and risks  inherent in the loan  portfolio at June 30, 1998 and
will continue to monitor its  portfolio and to adjust the relative  level of the
allowance as needed.  BancShares' impaired loans were approximately  $105,000 at
June 30, 1998.

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.

Management  believes  it  has  established  the  allowance  in  accordance  with
generally  accepted  accounting  principles and in  consideration of the current
economic  environment.  While management uses the best information  available to
make  evaluations,  future  adjustments  may be  necessary if economic and other
conditions differ substantially from the assumptions used.

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


NONINTEREST INCOME

BancShares had a decrease of $1.7 million in net investment securities gains for
the six months  ended June 30,  1998 as  compared  to the prior year six months,
principally  related to the 1997  donation  and 1998 sale of  available-for-sale
securities discussed above.

BancShares had losses on the sale of mortgage loans of $28,000 in the six months
ended June 30, 1998 compared to $6,000 in losses on the sales of mortgage  loans
in the six months ended June 30, 1997.
<PAGE>
Income from service charges on deposit accounts, other service charges and fees,
insurance  commissions and other noninterest income not detailed above increased
$471,000 or 24.52%,  from $1.9 million for the six months ended June 30, 1997 to
$2.4 million for the six months ended June 30, 1998  principally  as a result of
the acquisitions discussed above.


NONINTEREST EXPENSE

BancShares had a decrease in charitable contribution expense of $4.1 million for
the six months ended June 30, 1998, as compared to the six months ended June 30,
1997,  principally  related to the 1997  available-for-sale  securities donation
discussed above.

Noninterest  expense,  other than  contribution  expense,  including  personnel,
occupancy,  furniture and equipment,  data processing,  FDIC insurance and state
assessments,  printing and supplies and other  expenses,  increased  $830,000 or
9.15%,  from $9.1  million in the six months ended June 30, 1997 to $9.9 million
in the six months ended June 30, 1998.

This increase was primarily due to an increase in personnel expense of $467,000,
or 10.98%,  from $4.3  million at June 30 1997 to $4.7  million at June 30, 1998
and  increased  occupancy,  furniture  and  equipment  expense and other  volume
related expenses resulting from the branch acquisitions in May 1997 and May 1998
and the September 1997 opening of the new branch discussed above.


INCOME TAXES

In the six months ended June 30, 1998  BancShares had income tax expense of $1.3
million,  an increase of $1.1  million  from  $210,000 in the prior year period.
This increase was due both to increased profitability resulting from the sale of
the  available-for-sale  securities  discussed above and the  non-recurring  tax
benefits in 1997 of the  charitable  donation  in the six months  ended June 30,
1997. The resulting effective tax rates based on the accruals for the six months
ended in June 1998 and 1997 were 26.50% and 9.95%,  respectively.  The effective
tax rate in 1998 of 26.50 % differs  from the federal  statutory  rate of 35.00%
primarily due to tax exempt income.
<PAGE>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - SECOND
QUARTER OF 1998 VS. SECOND QUARTER OF 1997


INTRODUCTION

In the second quarter of 1998, the net income of BancShares  decreased  $216,000
from $1.1  million  in the  second  quarter  of 1997 to  $927,000  in the second
quarter of 1998, a decrease of 18.90%.  One branch acquisition in 1998 and three
1997 branch  acquisitions  resulted in  increased  net  interest  income for the
quarter ended June 30, 1998,  increased  noninterest income in the quarter ended
June 30, 1998,  and  increased  personnel  expense and other  related  operating
expenses  in the  quarter  ended June 30,  1998.  Gains on the sales of mortgage
loans  held-for-sale  in the  quarter  ended June 30, 1997 were  $4,000.  In the
quarter  ended June 30 1998  losses of  $29,000  were  realized  on the sales of
mortgage loans held-for-sale.

The tax benefits of the 1997 first quarter  contribution  of  available-for-sale
securities  resulted  in  significantly  lower  income  taxes on the 1997 second
quarter income before income taxes.

Net income  available to common shares per share for the second  quarter of 1998
was $6.91 per common share, a decrease of $1.80,  or 20.67%,  from $8.71 for the
1997 second quarter.


ACQUISITIONS

In May 1998 Southern  acquired  $15.6  million of the deposits of ESB.  Southern
purchased  $16.7  million of the loans of ESB.  Southern  recorded  goodwill  of
$468,000  for  ESB.  This  acquisition  was  accounted  for as a  purchase,  and
therefore,  the results of operations  prior to the purchase are not included in
the consolidated financial statements.

Southern  acquired $11.9 million,  $4.1 million and $5.1 million of the deposits
of the Aurora, Hamilton and Aulander offices of Wachovia Bank of North Carolina,
N.A. in May 1997.  Southern  purchased  $852,000,  $412,000  and $180,000 of the
loans of the respective  branches and paid a total premium of approximately $1.3
million,  or approximately  6.03%, for the deposits of the three branches.  This
acquisition  was accounted  for as a purchase,  and,  therefore,  the results of
operations prior to the purchase are not included in the financial statements.

The  following  comparisons  of the  quarter  ended June 30, 1998 to the quarter
ended June 30, 1997 are accordingly impacted by the above transactions.


INTEREST INCOME

Interest and fees on loans increased  $577,000,  or 8.02%, from $7.2 million for
the quarter  ended June 30, 1997 to $7.8 million for the quarter  ended June 30,
1998.  This  increase was due to increased  loan volume.  Average  loans for the
quarter  ended June 30,  1998 were  $361.4  million,  an  increase of 7.40% from
$336.5  million for the prior year quarter.  The yield on the loan portfolio was
8.63% in the quarter ended June 30, 1997 and 8.54% in the quarter ended June 30,
1998.
<PAGE>
Interest  income  from  investment  securities,  including  U. S.  Treasury  and
Government  obligations,  obligations of state and county subdivisions and other
securities increased $145,000,  or 5.98%, from $2.4 million in the quarter ended
June 30, 1997 to $2.6 million in the quarter ended June 30, 1998.  This increase
was due to a slight  increase in the yield of the investment  portfolio to 5.89%
for the quarter  ended June 30,  1998 from 5.87% for the quarter  ended June 30,
1997  combined with an increase in the volume of average  investment  securities
for the  quarter  ended June 30,  1998 to $158.4  million as  compared to $153.9
million for the quarter ended June 30, 1997.

Interest income on federal funds sold increased $68,000, or 71.58%, from $95,000
for the quarter  ended June 30, 1997 to $163,000 for the quarter  ended June 30,
1998.  This  increase  in income  resulted  primarily  from the  increase in the
average  federal funds sold to $12.1 million for the quarter ended June 30, 1998
from $7.2 million for the quarter  ended June 30, 1997.  Average  federal  funds
sold  yields  were 5.40% for the  quarter  ended June 30, 1998 and 5.34% for the
quarter ended June 30, 1997.

Total interest income increased  $790,000,  or 8.14%,  from $9.7 million for the
quarter  ended June 30, 1997 to $10.5  million  for the  quarter  ended June 30,
1998.  This increase was the result of volume  increases more than  offsetting a
slight  overall  decrease in average  earning  asset  interest  yields.  Average
earning asset  interest  yields for the quarter ended June 30, 1998 decreased to
7.68% from the 7.73% yield on average  earning assets for the quarter ended June
30, 1997.  Average  earning assets  increased from $497.5 million in the quarter
ended June 30, 1997 to $545.6  million in the quarter ended June 30, 1998.  This
$48.1 million increase in the average earning assets resulted primarily from the
acquisitions discussed above.


INTEREST EXPENSE

Total interest  expense  increased  $431,000 or 9.10%,  from $4.7 million in the
quarter ended June 30, 1997 to $5.2 million for the quarter ended June 30, 1998.
The  principal  reason for the increase was the  acquisitions  discussed  above.
BancShares'  total cost of funds decreased from 4.23% for the quarter ended June
30, 1997 to 4.17% for the quarter ended June 30, 1998.  Average interest bearing
deposits were $453.8  million in the quarter ended June 30, 1998, an increase of
$20.8 million from the $433.0  million in the quarter  ended June 30, 1997.  The
increase in  interest-bearing  liabilities  was primarily the result of the 1997
and 1998 branch  purchases  discussed  above.  BancShares  recorded  $158,000 of
interest  expense  in the  quarter  ended  June 30,  1998  related  to the Trust
discussed above.


NET INTEREST INCOME

Net interest  income  increased  $359,000,  or 7.22%,  from $5.0 million for the
quarter ended June 30, 1997 to $5.3 million for the quarter ended June 30, 1998.
This increase was primarily due to the increased  earning asset volume resulting
from the acquisitions discussed above.

The net  interest  margin  for the  quarter  ended June 30,  1998 was 3.51%,  an
increase of 1 basis point from the 3.50%  interest  margin for the quarter ended
June 30, 1997.
<PAGE>
ASSET QUALITY AND PROVISION FOR LOAN LOSSES

For the quarter ended June 30, 1998 management added $60,000 as a volume related
addition to the  provision for loan losses.  Management  made no addition to the
provision for loan losses for the quarter ended June 30, 1997. During the second
quarter of 1998 Southern had net charge-offs of $52,000.  During the same period
in 1997 net charge-offs were $97,000.


NONINTEREST INCOME

BancShares  had losses on the sale of  mortgage  loans of $29,000 in the quarter
ended June 30, 1998  compared to $4,000 in gains on the sales of mortgage  loans
in the quarter ended June 30, 1997.

Income from service charges on deposit accounts, other service charges and fees,
insurance  commissions and other noninterest income not detailed above increased
$273,000,  or 28.00%,  from $1.0 million for the quarter  ended June 30, 1997 to
$1.2 million for the quarter ended June 30, 1998.


NONINTEREST EXPENSE

Noninterest  expense including  personnel,  occupancy,  furniture and equipment,
data processing, FDIC insurance and state assessments, printing and supplies and
other expenses,  increased $434,000,  or 9.28%, from $4.7 million in the quarter
ended June 30, 1997 to $5.1 million in the quarter ended June 30, 1998.

This increase was primarily due to an increase in personnel expense of $270,000,
or 12.48%, from $2.2 million for the quarter ended June 30 1997 to $2.4 million,
for the  quarter  ended June 30, 1998 and  increased  occupancy,  furniture  and
equipment  expense and other volume related  expenses  resulting from the branch
acquisitions discussed above.


INCOME TAXES

In the  quarter  ended  June 30,  1998  BancShares  had  income  tax  expense of
$451,000,  an increase of $321,000,  or 246.92%,  from  $130,000 for the quarter
ended June 30, 1997. This increase was due to non-recurring tax benefits in 1997
resulting  from the  donation  of  available-for-sale  securities  in the  first
quarter of 1997 discussed above. The resulting  effective tax rates based on the
accruals  for the  quarter  ended in June 1998 and 1997 were  32.73% and 10.21%,
respectively. The effective tax rate in 1998 of 32.73 % differs from the federal
statutory rate of 35.00% primarily due to tax exempt income.


SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY

Sufficient  levels of capital are necessary to sustain growth and absorb losses.
To this end, 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.

In the six months ended June 30, 1997,  BancShares  borrowed an additional  $5.0
million  and  contributed  it as  capital to  Southern  which  improved  each of
Southern's capital ratios.
<PAGE>
In June 1998, the Trust issued $23.0 million of 8.25% Capital Securities in June
1998 maturing in 2028. The Trust  invested the $23.0 million  proceeds in Junior
Subordinated  Debentures issued by BancShares (the "Junior  Debentures"),  which
upon consolidation of BancShares is eliminated.  The Junior  Debentures,  with a
maturity  of 2028,  are the  primary  assets of the Trust.  With  respect to the
Capital Securities,  BancShares  irrevocably and unconditionally  guarantees the
Trust's obligations.  A portion of the Capital Securities are included in Tier I
capital for regulatory capital adequacy requirements.

In June 1998,  BancShares  paid off the remaining  balance of the $5.0 long-term
obligation  discussed above,  $4.3 million,  and contributed an additional $12.0
million in capital to Southern  which also improved  each of Southern's  capital
ratios.

Regulatory  guidelines  define  minimum  requirements  for  Southern's  leverage
capital  ratio.  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 June 30, 1998 was 8.32%.  At  December  31,  1997,  Southern's
leverage  capital  ratio was 6.02%.  Both of these  ratios are greater  than the
level designated as "well capitalized" by the FDIC.

Southern is also  required to meet minimum  requirements  for Risk Based Capital
("RBC").  Southern's  assets,  including loan commitments and other  off-balance
sheet  items,  are  weighted  according  to  federal  guidelines  for  the  risk
considered inherent in each asset. At June 30, 1998,  Southern's Total RBC ratio
was 15.94%. At December 31, 1997 the RBC ratio was 12.81%.  Both of these ratios
are greater than the level designated as "well capitalized" by the FDIC.

The regulatory  capital ratios reflect  increases in assets and liabilities from
the  acquisitions  Southern  has made.  Each of the  acquisitions  required  the
payment of a premium for the deposits received.  Each of these premiums resulted
in increased  intangible assets on BancShares'  financial  statements,  which is
deducted from total equity in the ratio calculations.

The unrealized gains on securities  available for sale at June 30, 1998 of $20.1
million  and $22.9  million  at  December  31,  1997,  although  a part of total
shareholders'  equity,  are 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 Southern:
                     
                                        June 30,        December 31,
                                         1998              1997
                                      ----------        ---------- 
      (Dollars in thousands)

Risk-based capital:
Tier 1 capital ...............        $  47,560         $  33,999
Total capital ................           51,780            37,876
Risk-adjusted assets .........          324,923           295,654
Average tangible assets ......          571,885           564,633

Tier 1 capital ratio (1) .....           14.64%           11.50%
Total capital ratio  (1) .....           15.94%           12.81%
Leverage capital ratio  (1) ..            8.32%            6.02%
-------------

(1)    These  ratios  exceed  the  minimum  ratios  required  for a  bank  to be
       classified as "well capitalized" as defined by the FDIC.
<PAGE>
At June 30, 1998 and December 31, 1997,  BancShares was also in compliance  with
its regulatory  capital  requirements  and all of its regulatory  capital ratios
exceeded the minimum ratios required by the regulators to be classified as "well
capitalized".


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,  federal
funds sold and investment  securities  available-for-sale.  The liquidity ratio,
which is defined as net cash plus short term and marketable  securities  divided
by net  deposits  and short term  liabilities,  was 29.46% at June 30,  1998 and
37.15% at December 31, 1997.

The Statement of Cash Flows  discloses  the  principal  sources and uses of cash
from operating, investing and financing activities for the six months ended June
30, 1998 and 1997, respectively. BancShares has no brokered deposits. Jumbo time
deposits  are  considered  to include  all time  deposits  of  $100,000 or more.
BancShares has never  aggressively bid on these deposits.  Almost all jumbo time
deposit customers have other  relationships  with Southern,  including  savings,
demand and other time deposits,  and in some cases,  loans. At June 30, 1998 and
at  December  31,  1997  jumbo time  deposits  represented  11.13%  and  10.33%,
respectively, 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.


ACCOUNTING AND OTHER MATTERS

In June 1997, the FASB issued Statement 130,  "Reporting  Comprehensive  Income"
("Statement 130"). Statement 130 establishes standards for reporting and display
of  comprehensive  income and its  components  in a full set of  general-purpose
financial  statements.  It does not address issues of recognition or measurement
for comprehensive income and its components. The provisions of Statement 130 are
effective for fiscal years beginning after December 31, 1997. BancShares adopted
this statement for its annual financial statements beginning in fiscal 1998.


In June 1997, the FASB issued Statement 131,  "Disclosures  about Segments of an
Enterprise and Related  Information"  ("Statement 131").  Statement 131 requires
that public  business  enterprises  report certain  information  about operating
segments in complete sets of financial  statements  issued to  shareholders.  It
<PAGE>
also requires that public business  enterprises report certain information about
their  products and  services,  the  geographic  areas in which they operate and
their major customers.  The provisions of Statement 131 are effective for fiscal
years beginning after December 31, 1997.  Adoption of this  pronouncement is not
expected  to  have a  material  effect  on  BancShares'  consolidated  financial
statements.

In February 1998, the FASB issued Statement 132,  "Employers'  Disclosures about
Pensions and other  Postretirement  Benefits." This statement  standardizes  the
disclosure  requirements  of pensions and other  postretirement  benefits.  This
statement does not change any  measurement or recognition  provisions,  and thus
will not materially  impact  BancShares  net income,  but will result in altered
disclosures relating to pension obligations.

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

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

In 1997  BancShares  developed  a plan to deal with the "Year  2000  issue"  and
contracted  with an industry  consultant  to review its overall  exposure to the
Year 2000 issue. The year 2000 issue relates to computer  programs written using
two digits rather than four to define the applicable year. The total cost of the
Year 2000  conversion  project for BancShares is estimated to be $200,000 and is
being funded through operating cash flows.

BancShares is expensing all costs  associated with the required  systems changes
as the costs are incurred.  As of December 31, 1997,  excluding personnel costs,
$3,000  had been  expensed.  As of June 30,  1998,  excluding  personnel  costs,
$11,000 additional had been expensed.

As discussed above in Note 8, Related Parties, BancShares utilizes the mainframe
system of a related bank holding company and its subsidiary (the  "Corporation")
for most of its mission-critical applications. These systems are currently being
remediated,  replaced  or  retired  as  part  of  the  Corporation's  Year  2000
compliance program. BancShares is closely monitoring the Corporation's progress.
Based on discussions with management of the Corporation,  BancShares  management
does not expect  significant  increases in future data processing costs relating
to Year 2000 compliance.
<PAGE>
In the  last  quarter  of  1998,  BancShares  expects  to  acquire,  subject  to
regulatory  approval,  the Gates, North Carolina office of First-Citizens Bank &
Trust Company  containing  approximately $5.0 million in deposits (see note 8 of
notes to consolidated financial statements).  BancShares has received regulatory
approval to open de novo  branches in two new eastern  North  Carolina  markets.
These offices are planned to open in 1999.

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.

<PAGE>

                                   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.


                                               /s/John C. Pegram, Jr.
Dated: August 11, 1998                         ---------------------- 
                                               John C. Pegram, Jr., President


                                               /s/David A. Bean
Dated: August 11, 1998                         ----------------
                                               David  A. Bean,
                                               Secretary/Treasurer