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 September 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.

                                 119,266 shares
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES          September 30,    December 31,
CONSOLIDATED BALANCE SHEETS                                    1998            1997     
                                                           -------------    ------------
(Dollars in thousands except per share data)                (Unaudited)
<S>                                                          <C>            <C>         
ASSETS
Cash and due from banks ................................     $  27,530      $  28,381   
Federal funds sold .....................................        17,950         10,240   
Investment securities:
Held-to-maturity,  at amortized cost (fair value
  $78,159 and $57,294, respectively) ...................        76,714         56,281   
Available-for-sale, at fair value (amortized
  cost $90,919 and $100,978 respectively) ..............        76,714        123,852   
Loans ..................................................       367,266        349,353   
Less allowance for loan losses .........................        (6,156)        (5,971)  
                                                                                        

Net loans ..............................................       361,110        343,382   
Premises and equipment .................................        18,573         18,157   
Intangible assets ......................................         5,440          5,506   
Accrued interest receivable ............................         5,690          4,205   
Other assets ...........................................         1,487            748   
                                                             ---------      ---------   
              Total assets .............................     $ 623,750      $ 590,752   
                                                             =========      =========   
                                                                                        
LIABILITIES
Deposits:
     Noninterest-bearing ...............................     $  71,704      $  66,565   
     Interest-bearing ..................................       455,967        446,763   
                                                             ---------      ---------   
Total deposits .........................................       527,671        513,328   
                                                             ---------      ---------   

Short-term borrowings ..................................         7,217          6,826   
Long-term obligations ..................................        23,000          4,750   
Accrued interest payable ...............................         4,793          4,394   
Other liabilities ......................................         4,941          6,470   
                                                             ---------      ---------        
          Total liabilities ............................       567,622        535,768   
                                                             ---------      ---------   
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES          September 30,    December 31,
CONSOLIDATED BALANCE SHEETS (continued)                        1998            1997     
                                                           -------------    ------------
(Dollars in thousands except per share data)                (Unaudited)
<S>                                                          <C>            <C>         
SHAREHOLDERS' EQUITY
Series B non-cumulative preferred stock, no par value;
      408,728 shares authorized; 404,094  and 404,946
      shares  issued  and  outstanding  at  September
      30, 1998  and  December 31, 1997 .................         1,972          1,976   
Series C non-cumulative preferred stock, no par value;
      43,631 shares authorized; 42,923 and  43,631
      shares  issued and outstanding at September 30,
      1998 and December 31, 1997 .......................           575            578   
Common stock, $5 par value; 158,485 shares authorized;
      119,266 and 119,918 shares issued and outstanding
      at September 30, 1998 and December 31, 5967 ......           596            600   
Surplus ................................................        10,000         10,000   
Retained earnings ......................................        30,883         26,733   
Unrealized gain on securities available-for-sale,
      net of taxes .....................................        12,102         15,097   
                                                             ---------      ---------   
        Total shareholders' equity .....................        56,128         54,984   
                                                             ---------      ---------              

              Total liabilities and shareholders' equity     $ 623,750      $ 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         Nine Months Ended 
                                                         September 30,              September 30,       
                                                     1998            1997        1998          1997     
                                                     ----            ----        ----          ----     
                                                                       
(Dollars in thousands except share and per share data)
<S>                                                <C>           <C>           <C>           <C>        
Interest income:
Loans .......................................      $  7,956      $  7,637      $ 23,256      $ 21,734   
Investment securities:
    U. S. Government ........................         1,774         1,586         5,243         4,764   
    State, county and municipal .............           433           479         1,365         1,581   
    Other ...................................            42           218           588           602   
                                                   --------      --------      --------      --------   
 
            Total investment securities
            interest income .................         2,249         2,283         7,196         6,947   
Federal funds sold ..........................           310            69           657           274   
                                                   --------      --------      --------      --------   

Total interest income .......................        10,515         9,989        31,109        28,955   

Interest expense:
       Deposits .............................         4,688         4,649        14,047        13,506   
       Short-term borrowings ................            82           105           223           229   
                                                                                                        
       Long-term obligations ................           316            91           787           211   
                                                   --------      --------      --------      --------   

            Total interest expense ..........         5,086         4,845        15,057        13,946   
                                                   --------      --------      --------      --------   

            Net interest income .............         5,429         5,144        16,052        15,009   
      Provision for loan losses .............            20          --             140            60   
                                                   --------      --------      --------      --------   
            Net interest income after
            provision for loan losses .......         5,409         5,144        15,912        14,949   

Noninterest income:
     Investment securities gains, net .......          --               1         1,788         3,535   
     Service charges on deposit accounts ....           802           768         2,387         2,093   
     Other service charges and fees .........           302           213           830           637   
     Insurance commissions ..................            18            23            55            70   
     Gain on sale of loans ..................            38            31            10            25   
     Other ..................................           232           130           474           255   
                                                   --------      --------      --------      --------   

            Total noninterest income ........         1,392         1,166         5,544         6,615   

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES         (Unaudited)                (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (continued)         Three Months Ended         Nine Months Ended 
                                                         September 30,              September 30,       
                                                     1998            1997        1998          1997     
                                                     ----            ----        ----          ----     
                                                                       
(Dollars in thousands except share and per share data)
<S>                                                <C>           <C>           <C>           <C>        
Noninterest expense:
      Personnel .............................         2,415         2,280         7,134         6,532   
      Data processing .......................           513           411         1,411         1,229   
      Intangibles amortization ..............           375           461         1,162         1,306   
      Occupancy .............................           390           351         1,140         1,012   
      Furniture and equipment ...............           375           373         1,103         1,141   
      FDIC insurance assessment .............            12            28            87            83   
      Charitable contributions ..............          --               1             1         4,075   
      Other .................................         1,038           969         2,981         2,640   
                                                   --------      --------      --------      --------   

             Total noninterest expense ......         5,118         4,874        15,019        18,018   
                                                   --------      --------      --------      --------   

Income before income taxes ..................         1,683         1,436         6,437         3,546   
Income taxes ................................           470            30         1,730           240   
                                                   --------      --------      --------      --------   

            Net income ......................      $  1,213      $  1,406      $  4,707      $  3,306   
                                                   ========      ========      ========      ========   
 
Per share information:
   Net income applicable to common shares ...      $   9.27      $  10.87      $  36.76      $  25.05   
   Cash dividends declared on common shares .          0.38          0.38          1.13          1.12   
   Weighted average common shares outstanding       119,794       119,918       119,855       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)
                                                             Nine months ended September 30, 
(Thousands)                                                         1998          1997       
                                                                  --------      --------     
<S>                                                               <C>           <C>          
OPERATING ACTIVITIES:
Net income ..................................................     $  4,707      $  3,306     
Adjustments to reconcile net income to net cash
      provided by operating activities:
            Provision for loan losses .......................          140            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)           (6)    
            Loss on sale and abandonment of premises
               and equipment ................................           28           112     
            Gain on sale of loans ...........................          (10)          (25)    
            Net accretion of discounts on investments .......          (53)          (66)    
            Amortization of intangibles .....................        1,162         1,306     
            Depreciation ....................................        1,029           762     
            Net increase in accrued interest receivable .....       (1,485)       (1,119)    
            Net increase in accrued interest payable ........          399         1,397     
            Net increase in other assets ....................       (1,279)       (3,127)    
            Net increase (decrease) in other liabilities ....         (120)          600     
                                                                   -------      --------     

NET CASH PROVIDED BY OPERATING ACTIVITIES ...................        2,730         3,742     
                                                                   -------      --------     

INVESTING ACTIVITIES:
      Proceeds from maturities and issuer calls of
               investment securities available-for-sale .....       25,625         9,105     
      Proceeds from maturities and issuer calls of
               investment securities held-to-maturity .......        4,678        35,610     
      Proceeds from sales of investment securities
               availab1e-for-sale ...........................        1,976          --       
      Purchases of investment securities held-to-maturity ...      (21,804)      (26,114)    
      Purchases of investment securities available-for-sale .      (14,420)      (13,364)    
      Net increase in loans .................................       (1,477)      (35,291)    
      Additions to premises and equipment ...................       (1,194)       (3,531)    
      Net cash (paid) received for bank and branches acquired       (6,050)       17,996     
                                                                   -------      --------     

NET CASH USED IN INVESTING ACTIVITIES .......................      (12,666)      (15,589)    
                                                                   -------      --------     
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN BANCSHARES (N.C.), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                                                                       (Unaudited)
                                                             Nine months ended September 30, 
(Thousands)                                                         1998          1997       
                                                                  --------      --------     
<S>                                                               <C>           <C>          
FINANCING ACTIVITIES:
     Net (increase) decrease in demand and interest
               bearing and deposits .........................        1,500        (8,224)    
     Net (decrease) increase in time deposits ...............       (2,778)       14,880     
     Proceeds from issuance of long-term obligations ........       23,000         5,000     
     Payments of long-term obligations ......................       (4,750)       (1,200)    
     Net proceeds of short-term borrowings ..................          391         2,036     
     Cash dividends paid ....................................         (436)         (436)    
     Purchase and retirement of stock .......................         (132)          (16)    
                                                                   -------      --------     

NET CASH PROVIDED BY FINANCING ACTIVITIES ...................       16,795        12,040     
                                                                   -------      --------     

NET INCREASE IN CASH EQUIVALENTS ............................     $  6,859      $    193     
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR ..........       38,621        32,465     
                                                                   -------      --------     

CASH AND CASH EQUIVALENTS AT THE END OF PERIOD ..............     $ 45,480      $ 32,658     
                                                                   =======      ========     

SUPPLEMENTAL DISCLOSURES OF CASH PAID
DURING THE PERIOD FOR:

     Interest ...............................................     $ 14,658      $ 12,549     
     Income taxes ...........................................     $  2,386      $    899     
                                                                   =======      ========     

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
 AND FINANCING ACTIVITIES:
Change in unrealized gain on securities
             available-for-sale .............................     $ (2,995)     $  3,338     
                                                                   =======      ========     
</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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

(Dollars in thousands except per share data)
                                              Preferred Stock             Common  Stock                          
                                  ------------------------------------- -----------------
                                        Series B            Series C                                             
                                  -------------------  ----------------                                 Retained 
                                    Shares    Amount    Shares   Amount   Shares    Amount    Surplus   Earnings 
                                  ---------  --------  -------  ------- ---------  -------    --------   --------
<S>                                <C>        <C>      <C>        <C>    <C>        <C>      <C>        <C>      
Balance, December 31, 1996         407,752    $1,986   43,631     $578   119,918    $600     $10,000    $20,718  

Net income                                                                                                3,306  

Retirement of stock                 (1,408)       (6)                                                       (10) 

Cash dividends:
  Common stock ($1.12 per share)                                                                           (134) 

  Preferred B ($.67 per share)                                                                             (273) 

  Preferred C ($.67 per share)                                                                              (29) 

Change in unrealized gain on
  securities available-for-sale,
  net of taxes                                                                                                   
                                   =======    ======   ======     ====   =======    ====     =======    =======  
Balance, September 30, 1997        406,344    $1,980   43,631     $578   119,918    $600     $10,000    $23,578  
                                   =======    ======   ======     ====   =======    ====     =======    =======  


Balance, December 31, 1997         404,946    $1,976   43,631     $578   119,918    $600     $10,000    $26,733  

Net income                                                                                                4,707  

Retirement of stock                   (852)       (4)    (708)      (3)     (652)     (4)                  (121) 

Cash dividends:
  Common stock ($1.13 per share)                                                                           (135) 

  Preferred B ($.66 per share)                                                                             (272) 

  Preferred C ($.66 per share)                                                                              (29) 

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

                                   =======    ======   ======     ====   =======    ====     =======    =======  
Balance, September 30, 1998        404,094    $1,972   42,923     $575   119,266    $596     $10,000    $30,883  
                                   =======    ======   ======     ====   =======    ====     =======    =======  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                          Unrealized                      
                                           gain on                         
                                          securities                       
                                          available-         Total           
                                           for-sale,     Shareholders'     
                                         net of taxes       Equity           
                                         ------------       ------           
<S>                                         <C>            <C>             
Balance, December 31, 1996                  $10,896        $44,778         
                                                                           
Net income                                                   3,306         
                                                                           
Retirement of stock                                            (16)        
                                                                           
Cash dividends:                                                            
  Common stock ($1.12 per share)                              (134)        
                                                                           
  Preferred B ($.67 per share)                                (273)        
                                                                           
  Preferred C ($.67 per share)                                 (29)        
                                                                           
Change in unrealized gain on                                               
  securities available-for-sale,                                           
  net of taxes                                3,338          3,338         
                                                                           
                                            =======        =======       
Balance, September 30, 1997                 $14,234        $50,970         
                                            =======        =======         
                                                                           
                                                      
Balance, December 31, 1997                  $15,097        $54,984         
                                                                           
Net income                                                   4,707         
                                                                           
Retirement of stock                                           (132)        
                                                                           
Cash dividends:                                                            
  Common stock ($1.13 per share)                              (135)        
                                                                           
  Preferred B ($.66 per share)                                (272)        
                                                                           
  Preferred C ($.66 per share)                                 (29)        
                                                                           
Change in unrealized gain on                                               
  securities available-for-sale,                                           
  net of taxes                               (2,995)        (2,995)        
                                                                           
                                            =======        =======        
Balance, September 30, 1998                 $12,102        $56,128         
                                            =======        =======   
</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 January 29, 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 nine months ended September 30, 1998,  BancShares acquired the rights
to service over $50.0  million in mortgage  loans from an affiliate  institution
for which  BancShares  recorded over $500,000 in mortgage  servicing rights (see
note 8). At September 30, 1998, unamortized MSR's were $699,000. At December 31,
1997,  unamortized  MSR's were  $137,000.  There was no valuation  allowance for
MSR's at September 30, 1998 or at December 31, 1997.
<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                       September  30, 1998                           December 31, 1997
                                       ---------------------------------------------  --------------------------------------------
(In thousands)                                      Gross       Gross     Estimated                 Gross      Gross    Estimated
                                       Amortized  Unrealized  Unrealized    Fair       Amortized  Unrealized Unrealized  Market
                                         Cost       Gains      Losses       Value       Cost        Gains     Losses      Value
                                       ---------- ----------  ----------  ----------  ----------  ---------- ---------- ----------
<S>                                      <C>            <C>          <C>    <C>         <C>             <C>  <C>          <C>    
    SECURITIES HELD-TO-MATURITY:
         U.  S. Government               $57,473        528          (1)    $58,000     $33,969         122  $      -     $34,091
         Obligations of states
             and political subdivisions   19,141        916                  20,057      22,212         890                23,102
         Corporate debenture                 100          2           -         102         100           1                   101
                                       ---------- ==========  ----------  ----------  ----------  ---------- ---------- ----------
                                          76,714      1,446          (1)     78,159      56,281       1,013          -     57,294
                                       ========== ==========  ==========  ==========  ==========  ========== ========== ==========

    SECURITIES AVAILABLE-FOR-SALE:
         U.  S. Government                69,977        573          (6)     70,544      82,471         130         (9)    82,592
         Marketable equity securities     10,536     17,106                  27,642       8,119      22,183         (8)    30,294
         Obligations of states
            and political subdivisions     8,540        630           -       9,170       8,411         527         -       8,938
        Mortgage-backed securities         1,866         34           -       1,900       1,977          51      -          2,028
                                       ---------- ----------  ----------  ----------  ----------  ---------- ---------- ----------
                                          90,919     18,343          (6)    109,256     100,978      22,891        (17)   123,852
                                       ========== ==========  ==========  ==========  ==========  ========== ========== ==========

         Totals                         $167,633    $19,789         ($7)   $187,415    $157,259     $23,904       ($17)  $181,146
                                       ========== ==========  ==========  ==========  ==========  ========== ========== ==========

</TABLE>
<PAGE>
Note 3.  LOANS
<TABLE>
<CAPTION>

      (Dollars in thousands)                 September 30,      December 31,      
                                                  1998             1997      
                                               --------          --------         
<S>                                            <C>               <C>              
Commercial, financial and agricultural ...     $ 90,108          $ 84,281         
Real estate:                                                                      
      Construction .......................        5,300             5,209         
       Mortgage:                                                                  
            One to four family residential      113,923           106,444         
            Commercial ...................       59,738            58,056         
            Equityline ...................       30,265            27,759         
            Other ........................       26,863            27,868         
Consumer .................................       36,223            35,780         
Lease financing ..........................        4,846             3,956         
                                               --------          --------         
                                                                                  
  Total loans ............................     $367,266          $349,353         
                                               ========          ========         
                                                                                  
Loans held for sale ......................     $  3,958          $  3,019         
Loans serviced for others ................     $158,889          $ 78,426         
                                                                
</TABLE>

Note 4.  ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>

      (Dollars in thousands)
                                     Nine Months Ended September 30,           
                                     ------------------------------- 
                                             1998         1997       
                                           -------      --------     
<S>                                        <C>          <C>             
Balance at beginning of year ....          $ 5,971      $ 6,163         
  Allowance from bank acquisition              269         --        
  Provision for loan losses .....              140           60      
  Loans charged off .............             (294)        (261)     
  Loan recoveries ...............               70          151        
                                           -------      -------      
                                                                     
Balance at end of the period ....          $ 6,156      $ 6,113      
                                           =======      =======                                    
                                                                           
</TABLE>
<PAGE> 
Note 5.  PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>

      (Dollars in thousands)
                                September 30,   December 31, 
                                    1998           1997      
                                   --------      --------    

<S>                                <C>           <C>         
Land .........................     $  3,719      $  3,377    
Buildings and improvements ...       14,713        14,292    
Furniture and equipment ......        6,590         6,387    
Construction-in-progress .....          306            90    
                                   --------      --------    

                                     25,328        24,146    

Less: accumulated depreciation       (6,755)       (5,989)   
                                   --------      --------    

                                   $ 18,573      $ 18,157    
                                   ========      ========                                        
</TABLE>
 
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.  Since  BancShares had no potentially
dilutive  securities  during 1998 or 1997, the  computation of basic and diluted
earnings per share is the same.

<TABLE>
<CAPTION>

Note 6. EARNINGS PER COMMON SHARE                                                                        
      (Dollars in thousands)          Three Months Ended September 30,   Nine Months Ended September 30, 
                                      --------------------------------   ------------------------------- 
                                              1998          1997                 1998           1997         
<S>                                        <C>            <C>                 <C>            <C>             
Net income ...........................     $   1,213      $   1,406           $   4,707      $   3,306       
  Less preferred dividends ...........     ($    103)     ($    102)          ($    301)     ($    302)      
                                           ---------      ---------           ---------      ---------       
                                                                                                             
Net income applicable to common shares     $   1,110      $   1,304           $   4,406      $   3,004       
                                           =========      =========           =========      =========       
                                                                                                             
Weighted average common shares                                                                               
  outstanding during the period ......       119,794        119,918             119,855        119,918       
                                           =========      =========           =========      =========       
</TABLE>                                                                     
<PAGE>
Note 7. Comprehensive Income

In June 1997, the Financial Accounting Standards Board ("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 nine months ended  September  30, 1998  comprehensive  income,  which
consists of net income plus changes in net unrealized  gains and losses,  net of
applicable tax effects, was $1.7 million. During the nine months ended September
30, 1997, comprehensive income was 6.6 million.


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 September
30,  1998,   beneficially   owned  32,294  shares,  or  27.08%,  of  BancShares'
outstanding common stock and 22,171 shares, or 5.49%, of BancShares' outstanding
Series B preferred stock. At the same date, the second  significant  shareholder
beneficially  owned 27,577 shares, or 23.12%, of BancShares'  outstanding common
stock, and 17,205 shares, or 4.26%, of BancShares' Series B preferred stock. The
above  totals  include  17,205  Series B preferred  shares,  or 4.26%,  that are
considered to be beneficially owned by both of the shareholders and,  therefore,
are included in each of their totals.

These two significant  shareholders are directors and executive  officers of the
Corporation  and at  September  30,  1998,  the  first  significant  shareholder
beneficially owned 2,536,759 shares, or 28.49%, of the Corporation's outstanding
Class A common  stock and the second  significant  shareholder  owned  1,554,290
shares,  or 17.45%,  of the  Corporation's  outstanding Class A common stock. At
September 30, 1998, the first significant shareholder beneficially owned 635,792
shares, or 38.84%, of the Corporation's outstanding Class B common stock and the
second  significant   shareholder  owned  190,271  shares,  or  11.06%,  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  October  1998,
BancShares  acquired the Gates,  North Carolina office of First-Citizens  Bank &
Trust Company containing approximately $5.3 million in deposits.
<PAGE>
The following table lists the various charges paid to the Corporation during the
nine months ended:
<TABLE>
<CAPTION>
     (Dollars in thousands)
                                                      Nine Months Ended September 30,  
                                                      ------------------------------- 
                                                            1998            1997       
                                                        -----------   ------------     
<S>                                                         <C>            <C>         
    Data and item processing                                $1,720         $1,355      
    Forms, supplies and equipment                              180            133      
    Trustee for employee benefit plans                          56             48      
    Consulting fees                                             58             57      
    Trust investment services                                   15             17      
    Internal auditing services                                   1             41      
    Other services                                              66             61      
                                                            ------         ------      
                                                            $2,096         $1,712      
                                                           =======         ======      
</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  $8.6  million at  September  30, 1998 and $10.1  million at
December 31, 1997.

During the nine months ended September 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 $15.6  million,  purchased  $16.7  million of loans and
recorded $362,000 in intangible assets.


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  - NINE  MONTHS  ENDED  SEPTEMBER  30,  1998 VS.  NINE  MONTHS  ENDED
SEPTEMBER 30, 1997


INTRODUCTION

In the first nine months of 1998,  the net income of BancShares  increased  $1.4
million  from $3.3  million in the first nine months of 1997 to $4.7  million in
the first nine months of 1998,  an increase of 42.38%.  This  increase  resulted
primarily  from  the  sale  of  available-for-sale  securities,  resulting  in a
realized gain of $1.8 million.  In 1997 the realized  gains from the donation of
available-for-sale  securities were more than offset by the related contribution
expense. No similar contribution was made in the nine months ended September 30,
1998. 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 nine months ended September
30, 1998.

Per share net income  available  to common  shares for the first nine  months of
1998 was  $36.76,  an increase of $11.71,  or 46.75%,  from $25.05 in 1997.  The
return on average equity increased to 14.59%, for the period ended September 30,
1998,  from  10.40% for the period  ended  September  30, 1997 and the return on
average assets increased to 1.28%, for the period ended September 30, 1998, from
0.85% for the period ended September 30, 1997.

At September 30, 1998, BancShares' assets totaled $623.8 million, an increase of
$33.0 million,  or 5.59%, from the $590.8 million reported at December 31, 1997.
During this nine month period, net loans increased $17.7 million, or 5.16%, from
$343.4  million to $361.1  million.  During the nine months ended  September 30,
1998 investment  securities increased $5.8 million, or 3.24% from $180.1 million
at December 31, 1997 to $186.0  million at September  30, 1998.  Total  deposits
increased  $14.4  million,  or 2.79% from $513.3 million at December 31, 1997 to
$527.7 million at September 30, 1998. The above increases  resulted  principally
from the 1998 acquisitions discussed below.

ACQUISITIONS

In May 1997  Southern  acquired  $11.9  million  of the  deposits  of the Aurora
office,  $4.1 million of the deposits of the Hamilton office and $5.1 million of
the  deposits  of the  Aulander  office  of a North  Carolina  commercial  bank.
Southern purchased  $852,000 of the loans of the Aurora office,  $412,000 of the
loans of the Hamilton  office and $180,000 of the loans of the Aulander  office.
Southern  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.

In May 1998,  Southern  acquired $16.7 million of the loans and $15.6 million of
the  deposits of Enfield  Savings Bank  ("ESB").  Southern  recorded  intangible
assets of $362,000 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 nine months ended  September 30, 1998 to the nine months
ended September 30, 1997 are accordingly impacted by the above transactions.
<PAGE>
INTEREST INCOME

Interest and fees on loans increased $1.6 million,  or 7.00%, from $21.7 million
for the nine  months  ended  September  30,  1997 to $23.3  million for the nine
months ended September 30, 1998. This increase was due to increased loan volume.
Average loans for the nine months ended  September 30, 1998 were $361.0 million,
an increase of 6.99% from $337.4  million for the prior year nine month  period.
The yield on the loan portfolio was 8.56% in the nine months ended September 30,
1997 and 8.53% in the nine months ended September 30, 1998.

Interest  income  from  investment  securities,  including  U. S.  Treasury  and
Government  obligations,  obligations of state and county subdivisions and other
securities  increased  $249,000 or 3.58%,  from $6.9  million in the nine months
ended  September 30, 1997 to $7.2 million in the nine months ended September 30,
1998.  This increase was due to an increase in the volume of average  investment
securities  for the nine months ended  September  30, 1998 to $160.1  million as
compared to $150.1  million for the same 1997  period.  The yield on  investment
securities  was 5.98% for the  nine-month  period ended  September  30, 1997 and
5.90% for the nine-month period ended September 30, 1998.

Interest  income on federal  funds sold  increased  $383,000  or  139.78%,  from
$274,000 for the nine months ended  September  30, 1997 to $657,000 for the nine
months ended September 30, 1998. This increase in income resulted primarily from
an  increase  in the average  federal  funds sold to $15.8  million for the nine
months  ended  September  30, 1998 from an average of $6.9  million for the nine
months ended  September 30, 1997.  Average  federal funds sold yields were 5.48%
for the nine months ended September 30, 1998 down from 5.65% for the nine months
ended September 30, 1997.

Total interest income increased $2.1 million,  or 7.44%,  from $29.0 million for
the nine months ended  September  30, 1997 to $31.1  million for the nine months
ended  September  30, 1998.  This  increase was  primarily  the result of volume
increases  that more than  offset a 13 basis point  decrease in average  earning
asset yields.

Average  earning  asset  yields for the nine  months  ended  September  30, 1998
decreased to 7.66% from the 7.79% yield on average  earning  assets for the nine
months ended September 30, 1997.  Average  earning assets  increased from $494.4
million in the nine months  ended  September  30, 1997 to $536.9  million in the
period ended  September  30, 1998.  This $42.5  million  increase in the average
earning assets resulted primarily from the acquisitions discussed above.

INTEREST EXPENSE

Total interest  expense  increased $1.2 million or 7.97%,  from $13.9 million in
the nine months ended  September  30, 1997 to $15.1  million for the nine months
ended  September  30,  1998.  The  principal  reason for this  increase  was the
acquisitions  discussed  above.  BancShares'  total cost of funds decreased from
4.22% for the nine months ended  September 30, 1997 to 4.11% for the nine months
ended September 30, 1998.  Average interest bearing deposits were $459.3 million
in the nine months ended  September  30, 1998, an increase of $29.2 million from
the $430.1  million  average in the nine months ending  September 30, 1997.  The
increase  in  interest-bearing  liabilities  was  primarily  the  result  of the
afore-mentioned  acquisitions  and the June 1998  issuance  of $23.0  million of
capital  securities  discussed above.  BancShares  recorded $632,000 of interest
expense in the nine months ended  September 30, 1998 related to the newly issued
capital securities.
<PAGE>
NET INTEREST INCOME

Net interest income increased $1.1 million or 6.95%,  from $15.0 million for the
nine months ended  September 30, 1997 to $16.1 million for the nine months ended
September  30,  1998.  This  increase  was  primarily  due to the  impact of the
acquisitions discussed above.

The net interest  spread for the nine months ended September 30, 1998 was 3.55%,
an increase of 5 basis points from the 3.50%  interest  spread at September  30,
1997.

ASSET QUALITY AND PROVISION FOR LOAN LOSSES

For the nine months ended  September 30, 1998  management  recorded  $140,000 as
provision for loan losses.  Management made a $60,000  addition to the provision
for loan losses for the nine months ended September 30, 1997.

During the first  nine  months of 1998  management  charged-off  loans  totaling
$294,000 and received  recoveries of $70,000,  resulting in net  charge-offs  of
$224,000. During the same period in 1997, $261,000 in loans were charged-off and
recoveries of $151,000 were received,  resulting in net charge-offs of $110,000.
The following table presents comparative Asset Quality ratios of the company:
<TABLE>
<CAPTION>

                                                 September 30,    December 31, 
                                                     1998           1997       
                                                     ----          -----       
<S>                                                  <C>           <C>         
Ratio of annualized net loans charged off
          to average loans ..............            0.06%         0.07%       
                                                                               
Allowance for loan losses                                                      
           to loans .....................            1.68%         1.71%       
                                                                               
Non-performing loans                                                           
            to loans ....................            0.40%         0.20%       
                                                                               
Non-performing loans and assets                                                
            to total assets .............            0.24%         0.13%       
                                                                               
Allowance for loan losses                                                      
            to non-performing loans .....          419.35%       857.90%       
                                                                                                
 </TABLE>

The ratio of annualized net charge-offs to average loans  outstanding  decreased
to 0.06% for the nine months  ended  September  30, 1998 from 0.07% for the year
ended  December 31, 1997.  The  allowance for loan losses  represented  1.68% of
loans at September 30, 1998. The allowance for loan losses  represented 1.71% of
loans at December 31, 1997. Loans increased $17.9 million, or 5.13%, from $349.4
million at December 31, 1997 to $367.3 million at September 30, 1998.

The ratio of nonperforming loans to loans, net of unearned income increased from
0.20% at December 31, 1997 to 0.40% at September 30, 1998.  Nonperforming  loans
and assets to total assets  increased to 0.24% at September  30, 1998 from 0.13%
at December 31,  1997.  The  allowance  for loan losses to  nonperforming  loans
represented  419.35% of  nonperforming  loans at September  30, 1998, a decrease
<PAGE>
from the 857.90% at December 31, 1997. The above  performance  declines resulted
primarily from an increase in nonperforming loans to $1,468,000 at September 30,
1998 from $696,000 at December 31, 1997.  The  nonperforming  loans at September
30, 1998 included $150,000 of nonaccrual loans,  $1,318,000 of accruing loans 90
days or more past due and no  restructured  loans.  BancShares  had  $81,000  of
assets  classified  as other real estate at September 30, 1998.  BancShares  had
$48,000 of assets classified as other real estate at December 31, 1997.

Management  considers  the  September  30, 1998  allowance for loan losses to be
adequate  to cover  the  losses  and risks  inherent  in the loan  portfolio  at
September  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 $150,000 at September 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 nine  months  ended  September  30,  1998 as compared to the prior year nine
months.  During the nine months ended  September 30, 1997,  BancShares  realized
securities  gains of $3.5 million  arising from the charitable  contribution  of
marketable equity  securities.  During the nine months ended September 30, 1998,
securities  gains  arising  from the sale of  investment  securities  were  $1.8
million.

Income from service charges on deposit accounts, other service charges and fees,
insurance  commissions and other noninterest income not detailed above increased
$676,000 or 21.95%,  from $3.1 million for the nine months ended  September  30,
1997 to $3.8 million for the nine months ended September 30, 1998 principally as
a result of increased  deposit  volume arising from the  acquisitions  discussed
above.

NONINTEREST EXPENSE

BancShares had a decrease in charitable contribution expense of $4.1 million for
the nine months ended  September  30, 1998, as compared to the nine months ended
September  30,  1997,   principally  related  to  the  1997   available-for-sale
securities donation discussed above.
<PAGE>
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 $1.1 million or
7.70%,  from $13.9 million in the nine months ended  September 30, 1997 to $15.0
million in the nine months ended September 30, 1998.

This increase was primarily due to an increase in personnel expense of $602,000,
or 9.22%,  from $6.5 million at September  30, 1997 to $7.1 million at September
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 nine months ended  September 30, 1998,  BancShares had income tax expense
of $1.7  million,  an increase of $1.5 million  from  $240,000 in the prior year
period.  The majority of this increase is due to the low 1997 effective tax rate
that  resulted  from  the  1997   charitable   donation  of   available-for-sale
securities.  The resulting  effective tax rate based on the accrual for the nine
months ended September 30, 1998 was 26.88%.  The effective tax rate for the nine
months ended  September  30, 1997 was 6.77%.  The  effective tax rate in 1998 of
26.88% 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 - THIRD QUARTER OF 1998 VS. THIRD QUARTER OF 1997


INTRODUCTION

In the third quarter of 1998,  the net income of BancShares  decreased  $193,000
from $1.4  million  in the third  quarter  of 1997 to $1.2  million in the third
quarter of 1998, a decrease of 13.73%.  One branch acquisition in 1998 and three
1997 branch  acquisitions  resulted in  increased  net  interest  income for the
quarter ended September 30, 1998,  increased  noninterest  income in the quarter
ended  September  30, 1998,  and increased  personnel  expense and other related
operating expenses in the quarter ended September 30, 1998.

The tax benefits of the 1997 first quarter  contribution  of  available-for-sale
securities  continued to result in significantly  lower income taxes on the 1997
third quarter income before income taxes. This effect was partially offset by an
increase in net income resulting from the 1998 and 1997 branch acquisitions.

Net income  available to common  shares per share for the third  quarter of 1998
was $9.27 per common share, a decrease of $1.60, or 14.72%,  from $10.87 for the
1997 third quarter.

INTEREST INCOME

Interest and fees on loans increased  $319,000,  or 4.18%, from $7.6 million for
the  quarter  ended  September  30, 1997 to $8.0  million for the quarter  ended
September  30, 1998.  This  increase was due to increased  loan volume.  Average
loans for the quarter ended September 30, 1998 were $369.8 million,  an increase
of 4.85% from $352.7  million for the prior year quarter.  The yield on the loan
portfolio  was 8.58% in the quarter  ended  September  30, 1997 and 8.45% in the
quarter ended September 30, 1998.

Interest  income  from  investment  securities,  including  U. S.  Treasury  and
Government  obligations,  obligations of state and county subdivisions and other
securities  decreased $34,000,  or 1.49%, from $2.3 million in the quarter ended
September 30, 1997 to $2.2 million in the quarter ended September 30, 1998. This
decrease was due to a decrease in the yield of the investment portfolio to 5.80%
for the  quarter  ended  September  30,  1998 from 5.91% for the  quarter  ended
September  30, 1997 that more than offset the  increase in the volume of average
investment securities for the quarter ended September 30, 1998 to $160.8 million
as compared to $146.5 million for the quarter ended September 30, 1997.

Interest  income on federal  funds sold  increased  $241,000,  or 349.28%,  from
$69,000 for the quarter  ended  September  30, 1997 to $310,000  for the quarter
ended September 30, 1998.  This increase in income  resulted  primarily from the
increase  in the  average  federal  funds sold to $21.7  million for the quarter
ended  September 30, 1998 from $4.9 million for the quarter ended  September 30,
1997.  Average  federal  funds  sold  yields  were 5.63% for the  quarter  ended
September 30, 1998 and 5.79% for the quarter ended September 30, 1997.

Total interest income increased  $526,000,  or 5.27%, from $10.0 million for the
quarter  ended  September  30,  1997 to  $10.5  million  for the  quarter  ended
September 30, 1998.  This increase was the result of volume  increases more than
offsetting a decrease in average interest earning asset yields. Average interest
earning asset yields for the quarter ended September 30, 1998 decreased to 7.57%
from the 7.77% yield on average  earning assets for the quarter ended  September
30, 1997.  Average  earning assets  increased from $504.1 million in the quarter
ended  September 30, 1997 to $552.3  million in the quarter ended  September 30,
1998.  This $48.2  million  increase  in the  average  earning  assets  resulted
primarily from the acquisitions discussed above.
<PAGE>
INTEREST EXPENSE

Total interest  expense  increased  $241,000 or 4.97%,  from $4.8 million in the
quarter ended September 30, 1997 to $5.1 million for the quarter ended September
30, 1998. The principal reason for the increase was the  acquisitions  discussed
above.  BancShares'  total cost of funds  decreased  from 4.24% for the  quarter
ended  September  30, 1997 to 4.12% for the quarter  ended  September  30, 1998.
Average  interest  bearing  deposits  were $453.7  million in the quarter  ended
September 30, 1998, an increase of $16.7 million from the $437.0  million in the
quarter ended September 30, 1997. The increase in  interest-bearing  liabilities
was primarily the result of the 1997 and 1998 branch  purchases  discussed above
and the issuance of $23.0 million of capital securities in June 1998. BancShares
recorded  $474,000 of interest  expense in the quarter ended  September 30, 1998
related to the capital securities.

NET INTEREST INCOME

Net interest  income  increased  $285,000,  or 5.54%,  from $5.1 million for the
quarter ended September 30, 1997 to $5.4 million for the quarter ended September
30, 1998. This increase was primarily due to the increased  earning asset volume
resulting from the acquisitions discussed above.

The net interest  spread for the quarter ended  September 30, 1998 was 3.45%,  a
decrease of 8 basis points from the 3.53% interest  spread for the quarter ended
September 30, 1997.

ASSET QUALITY AND PROVISION FOR LOAN LOSSES

For the  quarter  ended  September  30,  1998  management  recorded  $20,000  as
provision for loan losses. Management made no addition to the provision for loan
losses for the quarter  ended  September  30, 1997.  During the third quarter of
1998 Southern had net  charge-offs  of $157,000.  During the same period in 1997
net charge-offs were $36,000.

NONINTEREST INCOME

Income from service charges on deposit accounts, other service charges and fees,
insurance  commissions  and other  noninterest  income  increased  $226,000,  or
19.38%,  from $1.2  million for the  quarter  ended  September  30, 1997 to $1.4
million for the quarter ended September 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 $244,000,  or 5.01%, from $4.9 million in the quarter
ended  September  30, 1997 to $5.1 million in the quarter  ended  September  30,
1998.

This increase was primarily due to an increase in personnel expense of $135,000,
or 5.92%,  from $2.3  million for the quarter  ended  September  30 1997 to $2.4
million,  for the quarter  ended  September  30, 1998 and  increased  occupancy,
furniture and equipment expense and other volume related expenses resulting from
the branch acquisitions discussed above.
<PAGE>
INCOME TAXES

In the quarter  ended  September 30, 1998  BancShares  had income tax expense of
$470,000,  an increase of $440,000,  or  1,466.7%,  from $30,000 for the quarter
ended September 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 effective tax rate for the quarter ended
September  30, 1998 was 27.93%.  The  resulting  effective tax rate based on the
accruals for the quarter  ended in September  1997 was 2.09%.  The effective tax
rate in 1998 of  27.93 %  differs  from the  federal  statutory  rate of  35.00%
primarily due to tax exempt income as previously discussed.

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 nine months ended September 30, 1997,  BancShares  borrowed an additional
$5.0 million and  contributed  it as capital to Southern  which improved each of
Southern's capital ratios.

In June  1998,  the Trust  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.  Capital Securities of $13.1 million 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 September 30, 1998 was 8.36%. 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 September 30, 1998,  Southern's Total RBC
ratio was 17.39%.  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.
<PAGE>
The  unrealized  gains on securities  available for sale,  net of taxes of $12.1
million at September 30, 1998, and $15.1 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:

<TABLE>
<CAPTION>
                                       September 30,    December 31,    
                                            1998            1997        
                                        ------------    ------------    
                                            (Dollars in thousands)

<S>                                       <C>           <C>             
Risk-based capital:
Tier 1 capital                           $  49,318      $  33,999       
Total capital                               53,295         37,876       
Risk-adjusted assets                       306,444        295,654       
Average tangible assets                    590,266        564,633       
                                                                        
Tier 1 capital ratio  (1)                    16.09%         11.50%      
Total capital ratio  (1)                     17.39%         12.81%      
Leverage capital ratio  (1)                   8.36%          6.02%      
</TABLE>

(1)    These  ratios  exceed  the  minimum  ratios  required  for a  bank  to be
       classified as "well capitalized" as defined by the FDIC.
  
 

At September 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 30.86% at September 30, 1998 and
37.15% at December 31, 1997.
<PAGE>
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, 1998 and for the nine months ended September 30, 1997.  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 September  30, 1998 jumbo time deposits  represented  10.91% of total
deposits.  At December 31, 1997 jumbo time deposits  represented 10.33% 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
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.
<PAGE>
In October 1998, the FASB issued Statement 134,  "Accounting for Mortgage-Backed
Securities  Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking  Enterprise." This statement allows mortgage banking firms to
account for certain  securities and other interests  retained after securitizing
mortgage  loans that were held for sale based on the intent and  ability to hold
or sell such  investments.  This  statement  is  effective  for the first fiscal
quarter  beginning  after  December  15,  1998.  BancShares  plans to adopt this
statement on January 1, 1999 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.

Year 2000 Issue

Introduction

The  year  2000  issue  confronting  BancShares  and its  suppliers,  customers,
customers'  suppliers  and  competitors  centers on the  inability  of  computer
systems to recognize the year 2000. Many existing  computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these  programs and computers  will  recognize "00" as the year 1900 rather than
the year 2000. These problems may also arise from other sources as well, such as
the use of special codes and  conventions  in software that make use of the date
field.

Awareness

Financial  institution  regulators recently have increased their focus upon Year
2000 compliance issues and have issued guidance concerning the  responsibilities
of  senior  management  and  directors.   The  Federal  Financial   Institutions
Examination Council ("FFIEC") has issued several interagency  statements on year
2000.

These statements require financial  institutions to, among other things, examine
the year 2000 implications of their reliance on vendors and with respect to data
exchange  and the  potential  impact of the year 2000 issue on their  customers,
suppliers and borrowers.  These statements also require each federally regulated
financial  institution  to survey its  exposure,  measure its risk and prepare a
plan to address the year 2000 issue. In addition, the federal banking regulators
have issued safety and soundness guidelines to be followed by insured depository
institutions,  such as the Bank, to assure resolution of any year 2000 problems.
The  federal  banking   agencies  have  asserted  that  year  2000  testing  and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's failure to address appropriately the year
2000 issue could result in  supervisory  action,  including the reduction of the
institution's  supervisory  ratings,  the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
<PAGE>
Risks

Like most  financial  service  providers,  BancShares  and its operations may be
significantly  affected  by  the  year  2000  issue  due to  its  dependence  on
information  technology and date-sensitive  data. Computer hardware and software
and other equipment,  both within and outside  BancShares'  direct control,  and
third parties with whom BancShares  electronically  or operationally  interfaces
(including  without limitation its customers and third party vendors) are likely
to be  affected.  If computer  systems  are not  modified in order to be able to
identify  the  year  2000,  many  computer  applications  could  fail or  create
erroneous  results.  As a result,  many  calculations  which  rely on date field
information,  such  as  interest,  payment  or due  dates  and  other  operating
functions,  could  generate  results  which  are  significantly  misstated,  and
BancShares  could  experience  an  inability  to process  transactions,  prepare
statements or engage in similar  normal  business  activities.  Likewise,  under
certain circumstances, a failure to adequately address the year 2000 issue could
adversely  affect the viability of  BancShares'  suppliers and creditors and the
creditworthiness of its borrowers.  Thus, if not adequately addressed,  the year
2000  issue  could  result  in  a  significant  adverse  impact  on  BancShares'
operations and, in turn, its financial condition and results of operations.

State of Readiness

During  October  1997,  BancShares  developed  its plan to address the year 2000
issue.  A  substantial  portion of  BancShares'  data  processing  functions are
performed  by  First-Citizens  Bank & Trust  Company  ("FCB")  on its  mainframe
systems and/or on systems supported by FCB, which also provides similar services
to several  other  financial  institutions.  See "Related  Parties."  Therefore,
BancShares'  plan  for  addressing  the  year  2000  issue  divides  information
technology  systems ("IT Systems") into groups which include (i) FCB's mainframe
systems  used  for  processing  BancShares'  data  ("Group  A  Systems"),   (ii)
BancShares'   non-mainframe  systems  which  are  supported  by  FCB  ("Group  B
Systems"),  and  (iii)  BancShares'  separate  non-mainframe  systems  ("Group C
Systems").  BancShares' year 2000 plan also addresses non-information technology
systems  ("Non-IT  Systems").  As to  Group  A  Systems  and  Group  B  Systems,
BancShares'  year 2000 plan  necessarily is designed to be  implemented  jointly
with FCB.  FCB has  retained an outside  consultant  to plan and direct its year
2000 compliance efforts,  and BancShares  participates in a committee made up of
representatives  of the consultant,  FCB and each of the financial  institutions
for  which  FCB  provides  data  processing   services.   This  committee  meets
periodically  to  monitor  the  status  of FCB's  compliance  efforts.  Periodic
progress reports are made to BancShares' Board of Directors.

The following paragraphs summarize the phases of BancShares' year 2000 plan:

Assessment Phase

During the assessment  phase, a year 2000 corporate  inventory and business risk
assessment was made (jointly with FCB in the case of Group A Systems and Group B
Systems,  and  separately in the case of Group C Systems and Non-IT  Systems) to
quantify the extent of BancShares'  year 2000 exposure and identify systems that
required  remediation.  Each Group B and C  application  or system was given two
separate  codes; a Priority Code and a Status Code. The Priority Code quantifies
the importance of each asset to BancShares'  daily  operations.  The Status Code
represents  the  current  claim of  compliance  by the asset's  vendor.  Used in
concert,  these  codes  prioritize  the  remediation,  testing  and  contingency
planning processes. This phase is complete.
<PAGE>
Remediation and Testing Phase

With  respect to IT  Systems,  this phase  contemplates  the  implementation  of
modifications,  upgrades or system  replacements  determined  to be necessary to
achieve year 2000 compliance and the testing of modified or upgraded  systems to
determine their  functionality and operating  capability.  As to Group A Systems
and Group B Systems,  FCB's outside  consultant is responsible for  coordinating
necessary modifications, upgrades or replacements. This phase has been completed
for all Group A Systems and is  scheduled  to be  completed by December 31, 1998
for higher priority Group B Systems, and during the first and second quarters of
1999 for remaining Group B Systems. As to Group C Systems,  BancShares' staff is
coordinating  remediation  (which,  in most cases,  entails the  installation of
upgrades provided by outside vendors) and testing. This phase has been completed
for substantially  all systems,  with completion of this phase scheduled for the
fourth quarter of 1998.

Validation Phase

The validation phase contemplates  testing, in an isolated  environment,  of the
ability  of  new  and  modified  systems,  which  have  been  determined  to  be
functional, to accurately process date sensitive data beginning January 1, 2000.
Validation  testing on Group A Systems and Group B Systems is being conducted by
FCB's outside  consultant  and is expected to be completed by December 31, 1998.
BancShares' staff is conducting  validation  testing on Group C Systems which is
expected to be substantially  completed by December 31, 1998 on most systems and
during the first quarter of 1999 in the case of certain systems.

Implementation Phase

Under  BancShares'  plan, once new and modified  systems,  that require testing,
have  been  tested  for  functionality,  they are  being  put  into  production.
BancShares'  target  is to  have  substantially  completed  the  validation  and
implementation  phases with respect to substantially all systems by December 31,
1998.

Non-IT Systems, Third Party Service Providers and Loan Customers

Activities  under  BancShares'  plan with respect to Non-IT  Systems  (including
security  systems,   office  equipment,   etc.)  primarily  involve  identifying
potential year 2000 problems and insuring that outside vendors provide necessary
upgrades  or  replacements.  Each  system  has been  assigned  to an  officer of
BancShares  whose  responsibility  it is to communicate  with the vendor of that
system and  coordinate  remediation.  As needed,  Validation  testing for Non-IT
Systems is planned for the first quarter of 1999.

During  early  1998,  BancShares  identified  those  borrowing  customers  whose
existing  aggregate  borrowings  from  BancShares met certain  criteria based on
aggregate  credit  exposure,  loan  collateral,  and whose  businesses were of a
nature that they could be adversely  affected by the year 2000 issue.  A meeting
was held individually with each such borrowing customer to assess the customer's
plan for and progress toward addressing the year 2000 issue.  Follow-up meetings
are being held with each  customer  whose  assessment  indicated  a higher  than
typical level of risk.  With respect to new and renewed loans,  an assessment of
year 2000 risk and steps  being  taken by the  customer to address the year 2000
issue have been made a part of the credit approval process.
<PAGE>
Costs

BancShares is expensing all costs  associated  with required  system  changes as
those costs are incurred, and such costs are being funded through operating cash
flows.  Because a substantial  portion of BancShares' data processing  functions
are performed by FCB on its  mainframe  systems  and/or on systems  supported by
FCB,  FCB is  bearing a  substantial  portion  of the  expenses  related  to the
remediation  and  testing of systems  that  affect  BancShares.  BancShares  has
budgeted $200,000 for its separate year 2000 project expenses. Expenses actually
incurred  through  September  30, 1998 were not  material.  BancShares  does not
expect  significant  increases in future data processing  costs relating to year
2000 compliance.

Contingency Plans

During  the  assessment  phase,  BancShares  began  to  identify  a  back-up  or
contingency  plan for  systems or non-IT  assets  which may be  affected by year
2000.  Virtually  all of  BancShares'  systems  are  dependent  upon third party
vendors or service providers,  therefore,  contingency plans include selecting a
new vendor or service  provider and  converting to their system.  In the event a
current  vendor's system fails during the validation  phase and it is determined
that the vendor is unable or unwilling to correct the failure,  BancShares  will
convert  to a new  system.  In each  case,  realistic  trigger  dates  have been
established  to  allow  for  orderly  and  successful  conversions.  Preliminary
Contingency  plans for  system  failures  on or after  January 1, 2000 have been
developed.  These plans will be refined when the  validation  and testing phases
are complete.

Other matters

In October 1998,  BancShares  acquired the Gates,  North Carolina  office of FCB
containing  $5.3  million  in  deposits  (see  note 8 of notes  to  consolidated
financial statements). In December 1998, BancShares plans to acquire, subject to
regulatory  approval,  the Red  Springs,  North  Carolina  office of First Union
National Bank containing approximately $17.0 million in deposits. BancShares has
received regulatory approval to open de novo branches in three 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.

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: November 10, 1998                      ----------------------
                                              John C. Pegram, Jr., President


                                              /s/David A. Bean
Dated: November 10, 1998                      ----------------
                                              David A. Bean,
                                              Secretary/Treasurer